Are Your Cumulative Funds in Good Standing?
May 1, 2015
January 5, 2017
“How do I know I can trust all these people?” A newly-elected official once asked us that question. He inherited a staff from his electoral opponent, the former office holder. He wanted continuity of operations, so he did not want to fire everyone. He knew, these people from his time on the fiscal body. Basically, 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 stealing money. Often they have been on the job ten, twenty years. Everyone was shocked, especially the boss. Accountants have devised ways to provide reasonable assurance that assets are safeguarded. It is the duty of public administrators to 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 BANK TO MAIL THE PRIMARY BANK STATEMENT TO THE BOOKKEEPER OR ANYONE IN THE ACCOUNTING DEPARTMENT This rule is violated 99% of the time, but to the peril of public officials everywhere. It is natural for the bookkeeper to arrange for the bank statement mailed to his own 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 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 notices 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 other responsible official should contact the bank directly and ask for all banks statements and bank notices to be sent to himself. Copies may be sent to the bookkeeper or accounting department. 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 and bank notice himself, look for anything unusual, and then hand deliver the documents to the bookkeeper. The official need not reconcile the account or do any accounting work himself, just look at the statement and notices. The review need 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 officials 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 were audited. 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 Board of Accounts’ 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. If you have questions or would like further information about additional appropriations and transfers, please contact us at: Revised 12/20/16 ************* If you have questions or would like further information, please contact us at to learn more. 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 © 2021 C. L. Coonrod & Company, CPA P.C.