NUMBER THREE IN A SERIES: HOW TO BE ASSURED THE MONEY IS GOING WHERE IT OUGHT TO GO

NUMBER TWO IN A SERIES: GHOST EMPLOYEES YOU DIDN’T KNOW YOU HAD
January 5, 2017
Rainy Day Fund Balances for Indiana Cities
April 15, 2019

It seems every few months we read about a government clerk who has siphoned off thousands of dollars. We shake our heads and ask ourselves how could that be allowed to happen, but, be honest, how do you know it is not happening right now in your own unit of government?

You may answer that you know and trust your people. But the people you read about were also trusted employees until they were caught. Sadly, trust is not an accounting control.

Sometimes the auditors make these discoveries, but not often. A smart crook will always leave behind convincing documents for audit purposes. Usually, when a person is caught, it is a result of an anonymous tip, a mistake on the part of the perpetrator, or a simple confession by someone in too deep.

Besides, if the auditors catch the problem that means it is too late to avoid it. The black mark will affect the public’s perception of the perpetrator and the government unit. Much better to avoid these problems before the auditors arrive.

Fortunately, accountants have developed standard procedures for providing reasonable assurance, in advance, that disbursements are authorized and properly recorded. The following principal applies to all disbursements of funds.

SAFEGUARDING PUBLIC ASSETS, RULE NUMBER TWO*:

    THE PERSON WHO ACCOUNTS FOR AN ASSET SHOULD NOT BE THE SAME PERSON WHO HANDLES THE ASSET.

For example, the person who receives the invoices and enters them into the accounting system should not be the person who prints or mails the checks. If the same person performs all of these functions, that person can control any disbursement and how it will appear in the reports. If a disbursement is misdirected, you may have no way to know.

And, don’t forget the payee name trick: Even if a person is not able to print or mail a check, he or she can control the disbursement via access to the list of payees that are allowed to be printed on the check. Any person involved in handling invoices – even someone outside the accounting department — can create a fake invoice and arrange for a check to be made payable to a fake name with a false address. Consequently, it is important not only to have an independent person print and mail the checks, but also to have a separate person with exclusive access to the list of approved payees that can be printed on a check.
Here are some specific recommendations:

    1. Payee Master File

The accounts payable clerk should not routinely handle the verification and inputting of new payees into the accounting system.

Good internal control dictates that employees involved in the invoice approval function should not be able to modify the payee master file or to input payees names. Otherwise the lack of controls would allow payments to be made to unauthorized or unapproved payees.

Most accounting systems allow certain functions to be performed only at certain work stations or by certain users. All clerks should be locked out of the master payee file, except those authorized to add or modify payees.

We recommend that an employee other than the accounts payable clerk be responsible for verifying the existence of the payees, receiving and processingW-9 Forms, entering new payees into the accounting system, updating payee address records, and preparing 1099 Forms.

    2. Cash disbursements

The accounts payable clerk who records invoices should not routinely print and mail the checks. Good internal control dictates that these duties should be segregated to assure that payments made are the same as payments recorded on the accounting system.

We recommend that an employee other than the accounts payable clerk be responsible for the printing and mailing of checks. One way to help assure compliance is for the blank checks to be stored in a secure place available only to the person authorized to print and mail checks. Also, computer systems should be set up to allow certain users to enter invoices and others to print and mail (or transmit) payments.

    3. Creating payment vouchers for utilities and other payments split among departments

Typically, operating departments receive the original invoices, create and certify
payment vouchers, submit them to the accounting department for processing, and
later review reports from the accounting department to compare invoices to
the payments that were actually made. However, for items such as utilities that are
split among the departments, someone in the accounting department often handles the
creation and certification of payment vouchers.

The accounting department exists in part to provide a check and balance over other departments. The fact that individual departments receive and approve their own invoices, but must submit them to an independent accounting department for payment, provides a control over both offices. However, that control does not exist for transactions that are initiated within the accounting department.

For these transactions, it is preferred that a separate person, as opposed to the accounts payable clerk, receives the invoices, creates the vouchers, and authorizes the payment. Such a separation imposes a check and balance similar to that for transactions that are initiated by another department.

We recommend that the accounting department design staff assignments so that a person other than the accounts payable clerk is responsible for signing off on payment vouchers that, due to their nature, will not be approved by an operating department.

* RULE ONE: NEVER ALLOW THE BANK TO MAIL THE BANK STATEMENT TO THE BOOKKEEPER OR ANYONE IN THE ACCOUNTING DEPARTMENT

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: Coonrod@Coonrodcpa.com

Revised 01/03/17
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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. Advice of a legal nature should be sought only from qualified attorneys.
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