“…Because I’ve Always Done It That Way!”
School Advisor , 2006 Issue No. 2

The Importance of Evaluating Internal Controls

Many of you may have heard the following story. A husband watches his wife prepare a ham for that night’s dinner. She carefully cuts off both ends before placing the ham in the pan. “Why do you do that?” he asks. His wife shrugs, “That’s how my mom always did it.”

Still curious, he calls his mother-in-law and asks the same question, “Why do you always cut the ends off of a ham before placing it in the pan?” Her answer is the same as her daughter’s, “It’s the way my mom always did it.”

Finally, he calls his wife’s grandmother. “When you baked a ham, why did you always cut off the ends?”

The grandmother chuckles, “Because it wouldn’t fit in the pan any other way!”

And so it goes. In many school districts, a vast majority of procedures have been in place for quite some time — 5, 10, maybe even 20 years — and the propensity to continue “business as usual” is common. After all, there were good reasons why those procedures were developed. But no matter how much we resist, the business climate changes. Technology changes. And it’s important for districts to keep up.

According to the Association of Certified Fraud Examiners’ 2004 Report to the Nation on Occupational Fraud and Abuse, the most cost-effective way to deal with fraud is to prevent it. Because once a fraud has occurred, it is unlikely that the funds will be recovered, in their entirety, if at all. This is why it’s so important to conduct a periodic assessment of your accounting functions to ensure that proper internal controls are in place.

For example, consider the following questions:

• Does one person handle the entire accounts payable function, including setting up vendors?
• Are signature stamps used by someone other than the authorized signer?
• Are receipts for special activity funds deposited and controlled by each activity group?
• Is sufficient documentation submitted by those involved in special activity funds?
• Are a significant amount of manual checks written by the district?

A “yes” answer to any one of these questions may indicate an internal control weakness. And these are but a few questions. Many more questions should become apparent when a proper assessment of internal controls of any accounting function is performed.

The University of California School of Business1 offers this list as the key general principles of a successful internal controls program:

• Separation of Duties – Duties divided so that no one person has complete control over a key function or activity.
• Authorization and Approval – Proposed transactions are authorized when consistent with policy and funds are available.
• Custodial and Security Arrangements – Responsibility for custody of assets is separated from the related record keeping.
• Review and Reconciliation – Records are examined and reconciled to determine that the transactions were properly processed and approved.
• Physical Controls – Equipment, inventories, cash, and other assets are secured physically, counted periodically, and compared with amounts shown on control records.
• Training and Supervision – Well-trained and supervised employees help ensure that control processes function properly.
• Documentation – Well- documented policies and procedures promote employee understanding of job duties and help ensure continuity during employee absences or turnover.
• Cost/Benefit – Costs associated with control processes should not exceed expected benefits.

In conclusion, remember that just because you’ve been operating a particular way for years doesn’t necessarily mean it’s the right way to operate today. Conducting a periodic assessment of your accounting functions will ensure that proper internal controls are in place. For more information, please contact Michelle McHale at 616.643.4059.

¹“Internal Control Guidelines.” The University of California, Santa Barbara.