Expert: Don Sadler - 12/27/2007

Question
Background:  I am Chairman of the Town Board of Finance in Ct..  This is an elected position but is also a volunteer position (non-paid).  It is a small town of 3000 people and once a year we are audited.  The BOF is very happy with the Auditors, who we appoint, as they are very helpful.  This year, we met with them last Friday, we again got the best possible rating but they had a suggestion and I do not know how to implement it.

The Town has a 1st Selectman and two Selectmen who are paid a nominal amount and are elected officials. The 1st Selectman has a Town Secretary who just about runs the town since she has been there a long time and is very trusted and efficient.  At the last election the Town Secretary was elected Town Treasurer (we got a legal opinion for the Town Attorney that there was not conflict in her running for office).  The Town Secretary gets and opens the mail, uses QuickBooks to keep track of the Budget and the General Fund and among other things makes out all the checks and they are signed by all 3 Selectmen.   The Treasurer does the deposits and keeps track of many funds outside of the General Fund.   

The Auditors suggested, as I hope you realize from the above background, that there be some kind of internal check on the deposits especially since one person is now doing the complete job.   This check should include money coming in and the reconciliation of accounts.  I can look at the reconciliation with no problem but we do not know how to go about setting up an internal check on deposits.  No one else at Town Hall will do the mail since it is “The secretary’s job”.  I am willing to put in some time there but can not figure out how to do this efficiently.   The auditors have no real problem with what is happening but we all can see that there is a potential for problems.

Can you suggest some type of internal control that could be set in place?  

Thank you and if you need more information on how the Town works I will be happy to supply it.

Barbara


Answer
First, I am sure you realize that your auditors probably know specifically what internal controls they have in mind but they cannot tell you without jeopardizing their independence.  That is to say that if they told you what controls to implement, they would later be auditing themselves (if they were the audit firm appointed to perform the audit).  Nonetheless, it would be useful if you could persuade them to tell you what they have in mind.

Failing that, here are some thoughts.  Their concern with internal controls is based on a segregation (or separation) of duties issue.  Generally, there are different people involved in receiving, recording, and depositing monies.  Likewise, there are different people who approve payments, create, and sign checks.  Similarly, different people would post these against the AR or GL.

Most banks will perform a lockbox service for a fee.  I'm sure that if checks are coming from predictable sources, such as inter-government entities or property tax bills, that these sources could be directed to send remittances directly to the bank.  Then the bank would provide the deposit detail and the funds could be applied appropriately by the Treasurer.

Alternately, if the sources of funds also provide a periodic statement of funds sent, that could be audited against, reconciliations against those would provide assurance of completeness of deposits.  This is more detailed than simply reconciliation against the bank statement.  These reconciliations should be periodically reviewed by someone independent.  I think the key is to first know more about the sources of funds and the opportunities for independent validation of the amounts that those sources may be willing to provide.

Certainly, a few incoming checks may be mailed directly even if a lockbox is set up, and some funds may not be originated from a source that can be validated externally, but perhaps you can get a very large percentage covered and reduce risk to an acceptable level.

The lock box concept is very practical and most banks offer this as part of their business banking portfolio.

For example, here is an interesting ad from a Wisconsin bank.

http://www.northshorebank.com/Business/CashManagement/CustomRetailWholesaleLockb...

Also, here are a couple of Connecticut banks offering this service – I’m sure any bank will have it, however.

http://www.fsbct.com/business_businessbanking.htm

http://www.castlebankandtrust.com/

I hope this was of some help to you. Sorry but the holidays delayed my response.