Internal Controls for County Federations Jean Prichard, Partner, CPA, CA, CFP, Licensed Public Accountant – BDO Guelph Client name - Event - Presentation title

What are internal controls? 2 | BDO Seminar for OFA 2 | Presentation title

Internal Controls in County Federations What are Internal Controls? Accounting term A system of mechanisms, rules and procedures implemented by an organization to ensure the integrity of financial and accounting information What is the problem we are trying to solve? Lots of variations in how financial management is done at County Federations Hard for new participants to learn system in some cases (Training) For very small Federations, there may be almost no system Some Federations have accumulated a lot of reserve funds – even more need for good reporting to show fiduciary duty being met

Internal Controls in County Federations What are Internal Controls? Examples are: Dual signatures on cheques Regular financial reporting in a prescribed format Review of information by someone other than the person who prepared it There are many possible internal controls. These are just some examples

Why do we need internal controls? 5 | BDO Seminar for OFA 5 | Presentation title

Internal Controls in County Federations The Purpose of Internal Controls Safeguard assets Ensure financial reporting is reliable Transparency is key Transparency example – what if more than one family member jointly managing funds What if two family members have signing authority (one paid, one not, both volunteer, options)

Internal Controls in County Federations The Purpose of Internal Controls Promote operational efficiency Enable membership to feel confident in the organization – enhance reputation Protect those who are handling the money and finances

Internal Controls in County Federations Key Problem Areas Difficulty achieving segregation of duties in the finance area Big picture – for many small or medium sized NPO there are some key challenges

Internal Controls in County Federations Key Problem Areas Difficulty achieving segregation of duties in the finance area For example, the same person enters expenses in the accounting system, then issues cheques, then does the bank reconciliation

Internal Controls in County Federations Key Problem Areas Lack of a documented manual or description of procedures to be followed Makes it hard for someone new coming in or if something happens to a member OFA wil be following up with questions and suggestions to help provide sample documents, checklists and updated policies as well as training.

Internal Controls in County Federations Key Problem Areas Board members unfamiliar or uncomfortable supervising staff (if any) Board members may not be sure what they are “allowed” to say or ask in terms of questioning or checking on financial reporting details

Internal Controls in County Federations Key Problem Areas Board members unfamiliar or uncomfortable supervising management (if any) Board members may not feel comfortable interpreting financial information and knowing what questions to ask

Internal Controls in County Federations Key Problem Areas Board members unfamiliar or uncomfortable supervising management (if any) Board members may not feel comfortable interpreting financial information and knowing what questions to ask Board members unfamiliar with fiduciary responsibilities For example, board members should be ensuring that, if there are employees, the proper source deductions have been remitted to CRA for payroll – they can be held personally responsible.

Internal Controls in County Federations Key Problem Areas Board members unfamiliar with fiduciary responsibilities Board members can be held personally liable for CRA remittances and reporting (e.g. T4A’s) For example, board members should be ensuring that, if there are employees, the proper source deductions have been remitted to CRA for payroll – they can be held personally responsible.**NB more slides discussing this in the afternoon – HR topic

Day to Day Operating Controls Let’s break this down into a few key operating controls. These are not in order of importance. 15 | Presentation title 15 | BDO Seminar for OFA

Internal Controls in County Organizations Specific Areas to Review Cheque signing procedures and authority Handling of cash Authorization of payroll Handling of petty cash

Internal Controls in County Organizations Specific Areas to Review Use of corporate credit cards Review and approval of expense reports Use of Online payments Financial reporting and budgeting

Things do not happen. Things are made to happen. SOLUTIONS Things do not happen. Things are made to happen. John F. Kennedy Section divider The section divider slide is an effective way of breaking up your presentation into chapters. Five section dividers have been included in this template. Section divider slides are for this use ONLY and should never be adapted to create additional slide types or styles. Note: This slide does not exist as a ‘slide master’. Therefore it is recommended that you copy and paste this slide into your presentation. 18 | BDO Seminar for OFA

Cheque Signing Authority Problems: Single signer creates risk of unauthorized payments Recommendations Second signing authority especially over a dollar threshold Even better – second signing required on all cheques Need to ensure Bank is apprised of proper signing authorities on a timely basis It’s ok to have 2 of: two staff, two board, one of each etc – as long as it’s 2 signatures

Cheque Signing Authority Problems: Cheque signers not reviewing supporting documentation Recommendations Ensure documentation of invoice package by cheque signers

Cheque Signing Authority Problems: Different person (from cheque writer) not reviewing bank statements and bank reconciliations on a timely basis Recommendations Establish a protocol by which someone else (treasurer, other board member) reviews bank statements and reconciliations on a timely basis

Cheque Signing Authority Problems: Different person (from cheque writer) not reviewing bank statements and bank reconciliations on a timely basis Recommendations Establish a protocol by which someone else (treasurer, other board member) reviews bank statements and reconciliations on a timely basis If automatic payments happening, this procedures provides a control e.g. auto pay of Hydro, phone etc – want someone else reviewing these withdrawals Also Board motion would be prudent

Cheque Signing Authority Problems: Different person (from cheque writer) not reviewing bank statements and bank reconciliations on a timely basis Recommendations Board agenda – Treasurer’s report – standard item: Review Financial Statements Review Bank statement Review Bank reconciliation Review budget to actual comparison e.g. suggestion for Board agenda

Cheque Signing Authority Problems: Cheque Signing Stamp Recommendations These are not recommended: Too hard to safeguard!

Other Bank Account Issues Problems: Debit Card with full banking privileges Recommendations These are not recommended: Too hard to safeguard! Protection is important for organization AND for cash handlers – Cash collected is precious

Handling of Cash Risk of misappropriation of cash Recommendations Problem: Risk of misappropriation of cash Recommendations Minimize cash transactions (credit cards, debit, online) Have multiple individuals involved in counting and approving cash transactions Multiple sign offs of cash counting

Payroll Authorization Problems: Only one person involved in payroll transactions Creating false employees or inappropriate payments Errors in payroll processing Recommendations Signed approval of payroll reports by senior management or Board member Review of payroll amounts and bank statement withdrawals Use of standard forms or online approvals

Payroll Authorization Problems: Only one person involved in payroll transactions Creating false employees or inappropriate payments Errors in payroll processing Recommendations If staff are on salary, then a payment schedule could be set for January 1 of each year Timesheets recommended

Payroll Authorization Problems: Only one person involved in payroll transactions Creating false employees or inappropriate payments Errors in payroll processing Recommendations If changes are made to pay – should be noted in Board minutes and budget effect noted as well Could be done “in camera”

Petty Cash Problems: Lack of a clear process – expense tracking not done properly, possible misappropriation of cash Recommendations Use an approved reporting format Regular review (by Board or other employee) before funds are replenished

Use of Credit Cards by Federations Problems: Lack of supporting documentation – Personal Expenses Recommendations Review who is authorized for cards Individual receipts reviewed by senior management or board members (not just the statement) Board of Director review (for small entities)

Use of Credit Cards owned by Federations Problems: Credit card processing at fundraising events (for incoming revenues) Recommendations Process payments at time of event Consider having local directors incur then claim back their own costs – many corporations and not for profits are going to this model (i.e. no corporately owned cards)

Review and Approval of Expense Reports Problems: Errors in expense reports – mileage or meal allowances Personal expenses claimed in reports Recommendations Supporting information must be provided Approval by senior management or Board Use of standard forms or online approvals

Use of Online Payments Unauthorized or fraudulent purchases Problems: Unauthorized or fraudulent purchases Payments can be overlooked Recommendations Control access to online payments and develop organization policies Consider online banking approval process – dual approvals should be required Review of bank reconciliations, bank statements and monthly online reports by someone else

Financial Reporting to Board of Directors Problems: Board unable to make informed decisions using up to date information Recommendations Full financial statements should be reviewed in detail by Board at least quarterly

Financial Reporting to Board of Directors Problems: Board unable to make informed decisions using up to date information Recommendations Full financial statements should be reviewed in detail by Board at least quarterly If not feasible (Board) – consider Finance Committee or Executive It’s good to have a Treasurer appointed – helps staff and Board

Financial Reporting to Board of Directors Problems: Board unable to make informed decisions using up to date information Recommendations Full financial statements should be reviewed in detail by Board at least quarterly At a minimum – Balance Sheet and Income statement and Bank reconciliation Even better – add “budget to actual” comparison

Regular Financial Reporting to Board of Directors Problems: Board unable to make informed decisions using up to date information Recommendations For very small Federations, this may be difficult. Consider options such as: Hiring a part time bookkeeper to help – can be done inexpensively Training a volunteer to be able to execute at a basic reporting level

Budget Process Problems: Lack of a clear budget preparation and approval process can lead to difficulty controlling expenses Recommendations Depending on size of organization, process may be different Finance or Executive Committee to prepare, Board to approve Use for ongoing monitoring Budgets are a guide A budget is meant to be a guide. Ok to run a deficit if have reserve funds.

Reserve Funds How much is reasonable? Recommendations Problems: How much is reasonable? Recommendations 6 – 12 months of operating expenses is a guide If more – should have a plan/purpose Ok to use prior reserves to “balance” budget – “draw down from reserve” CRA can ask if they think you have too much!

Transparency What information should be accessible to members? Problems: What information should be accessible to members? Recommendations Members have a right to know how you are spending their money Also have a right to know the financial position of the Federation – bank account balances, reserves, income and expenses Ok to use prior reserves to “balance” budget – “draw down from reserve”

Annual Financial Reporting Problems: Need to report to members at least annually Recommendations Consider having a Public Accountant prepare formal financial statements – different levels of scrutiny available

Annual Financial Reporting Problems: Need to report to members at least annually Recommendations Audit Review Notice to Reader Explain assurance provided and costs

Annual Financial Reporting Problems: Need to report to members at least annually Recommendations Under proposed Ontario rules for corporations (which apply to Not for Profits as well) larger Federations may well require a Review engagement report or even an Audit New rules will not apply to Federations who are not incorporated

Questions?