Written by: Curtis Coonrod
“How do I know I can trust all these people?” A newly-elected official once asked us that question. He inherited staff from his electoral opponent, the former officeholder. He wanted continuity of operations, so he did not want to fire everyone. He knew these people from his time on the fiscal body. Essentially, he trusted them, but he did not hire them. He did not want any of them to get him into trouble.
Here was our advice: Even if you think you know people, you don’t. Besides, public office is a public trust. Your job is not simply to trust people you know but to put in place sound security systems to safeguard public assets.
Think back on news articles about government clerks diverting money. Often they have been on the job for ten or twenty years. Everyone was shocked, especially the boss. Accountants have devised ways to provide reasonable assurance that assets are safeguarded. Public administrators must put such systems in place. They need not be time-consuming and costly. The best controls are the ones that are simple and employ common sense. We plan to provide a series of suggestions that will be practical for all Indiana local governments, starting with the simplest rule we can offer.
SAFEGUARDING PUBLIC ASSETS, RULE NUMBER ONE: NEVER ALLOW THE ACCOUNTING DEPARTMENT TO HAVE SOLE ACCESS TO THE MONTHLY BANK STATEMENT AND/OR THE BANK WEBSITE. It is natural for the chief accountant or bookkeeper to arrange for the bank statement mailed to his attention at the address of his own office. It is a matter of convenience, and usually, no one else cares. The bookkeeper receives the statement, opens it, and he or a subordinate reconciles it. Unfortunately, the result is a loss of control by higher-ranking officials over public cash accounts. Even if someone else is supposed to review the bookkeeper’s work, that seldom happens in practice.
WHAT PROBLEMS CAN RESULT? The simplest way for a person in the accounting department to divert funds is to divert deposits or divert checks. If no one else sees the bank statement, it is unlikely the diversion will be noticed. Not all errors are intentional. If the bookkeeper makes mistakes or falls behind, and fails to keep accounts in balance, the first evidence may be noticed from the bank. If the bookkeeper is the only person to see these, they may not be shared with officials higher up.
WHAT IS THE SOLUTION? The elected official or another responsible official should contact the bank directly and ask for the primary bank statements and all bank notices to be sent to himself. Copies and web access may be granted to the accountant or bookkeeper for their use. The official’s copy should be sent to a separate address or post office box that the bookkeeper cannot easily access. Use a home address if necessary. The responsible official should open each bank statement (or the bank website) and bank notice himself, looking for anything unusual. The official need not reconcile the account or do any accounting work himself, just look at the statements and notices. The review should only take five or ten minutes, but it will do a world of good. What items would be unusual?
Here are examples:
• Notices for overdrafts or other penalties
• Payments to vendors or employees whose names you don’t recognize
• Payments to employees you thought were terminated
• Checks in amounts that seem too high
• Checks to vendors when you don’t recall owing the money
• Endorsements on checks that don’t look genuine
• Failure to make tax withholding payments or other regular payments known to be due each month
• Electronic transfers you don’t recognize
• Balances that seem too low
• Unusual payments to taxing authorities, possibly representing tax penalties
WHAT ARE THE BENEFITS?
• The review tends to keep honest people honest and makes it more likely any problems will be reported in advance
• If there are errors, the review makes it more likely the responsible official will identify them
• The review gives the responsible official a better understanding of the transactions being made in his name
• The review tells the accounting department that the responsible official cares about what they do, and is watching
WHAT IF YOU HAVE ALREADY BEEN AUDITED? It is a fallacy to assume that a successful audit proves you do not have a problem. Think again about the horror stories you have heard and read about, involving clerks who were skimming money for years from public funds. All of these units had been audited and the problems were overlooked. If the audit played a role at all, it may only have been to publicize what had been found by other means. Unfortunately, it is not the auditors’ job to tell you how to avoid future problems, only to report problems after they have been discovered.
Stay subscribed to our series, and we will continue to send practical ideas on this and other topics of interest to Indiana local officials.
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This article is intended to provide information of general interest to local government officials in Indiana. The information is not guaranteed to be applicable or appropriate in particular circumstances. Local officials should consult competent professionals before acting on any information contained in this article. We are not attorneys. The advice of a legal nature should be sought only from qualified attorneys.
We inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for (I) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
Copyright © 2017 C. L. Coonrod & Company, CPA P.C.