1. Internal Controls 101 RDML K. Taylor | DHS CFO Brief | 25 JAN 2010 Assistant Commandant For Resources

2. 1 Internal Controls Overview What are Internal Controls? Requirements for Internals Controls Responsibility for Internal Controls COMDT’s Annual Assurance Statement

3. Assistant Commandant For Resources 2 Examples of Internal Controls Checklists Reconciliations Inventories Segregation of Duties Reviews / Approvals Policy **Note: Internal Controls must be documented through policy and procedures

4. Assistant Commandant For Resources 3 Requirements for Internal Controls Federal Managers Financial Integrity Act of 1982 (FMFIA) OMB Circular A-123 Management Responsibility for Internal Controls DHS Financial Accountability Act of 2004

5. Assistant Commandant For Resources 4 The Five Standards of Internal Controls

6. Assistant Commandant For Resources 5 Internal Control Standards Defined: Control environment(values, ethics, integrity, commitment to competence) Risk assessment(inherent and direct) Control activities(policies and procedures) Information and communication (people, processes and technology) Monitoring(management, internal auditors, EMC- ICARB, SAT, etc.)

7. Assistant Commandant For Resources 6 Benefits of Internal Controls Minimizes risks Provides more reliable information Allows for more timely reporting Highlights deficiencies in processes Reduces audit effort and cost Improves support for budget requests “Better controls – not more controls”

8. Assistant Commandant For Resources 7 Concepts of Risks Risk: the chance of something happening that will have an impact on objectives. It is measured in terms of consequences and likelihood. Impact/Consequence: the outcome of an event expressed qualitatively or quantitatively – being a loss, injury, disadvantage, or gain. Likelihood: a description of a probability or frequency. Control Adequacy: How strong is the control compared to the risk? Residual Risk: Risk can never be reduced to zero, but strong controls reduce the likelihood and impact to an acceptable level

9. Assistant Commandant For Resources 8 Three Important Questions Related to Risks and Controls Have I identified my risks? Do my controls cover my risks? Are my controls in place and working?

10. Assistant Commandant For Resources 9 An Effective Internal Control Program provides reasonable assurances that: Policies are followed and objectives are met Programs achieve intended results Resource use is consistent with laws, regulations and policies Assets safeguarded against waste, fraud, abuse and mismanagement Reliable information obtained, maintained, reported, and used for decision making IT systems conform to established standards.

11. Assistant Commandant For Resources 10 Responsibility for Internal Controls Those Charged With Governance: is defined as: “the person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting and disclosure process.” Governance is a collective responsibility meaning that everyone in an organization has some responsibility for Internal Control; however, MANAGEMENT is responsible.

12. Assistant Commandant For Resources 11 Annual Assurance Statement Provides DHS with assurances that internal controls have been assessed/tested and the identifies any Material Weaknesses and Reportable Conditions noted. Submitted to DHS 30 Sep Four Required Separate Assurances –Internal Controls Over Financial Reporting –Section 2 – Operations and Compliance with Laws and Regulations –Section 4 – Conformance with System standards –Reports Consolidation – Performance data

13. Assistant Commandant For Resources 12 The Bottom Line! “The proper stewardship of Federal resources is an essential responsibility of agency managers and staff. Federal employees must ensure that federal programs operate and federal resources are used efficiently to achieve desired objectives. Resources must operate and resources must be used consistent with agency mission, in compliance with laws and regulations, and with minimal potential for waste, fraud, and mismanagement.” (OMB Circular No. A-123)