Presented By Paul E. Glick Glick Consulting Group Email pglick@mindspring

1. Evaluating A Government’s Internal Controls and a Review of How Fraud Relates to Internal Controls Presented By Paul E. Glick Glick Consulting Group Email pglick@mindspring.com

2. THE AGENDA • Introduction and Overview • What Are Internal Controls • Management’s Objectives and Responsibilities • Who Is Responsible for Internal Controls? • What Types of Public Sector Fraud Exists?

3. The Agenda • Where is the Independent Auditor? • Internal Control Environment • Risk Assessment • Control Activities • Information and Communication (Step 4) • Monitoring

4. The Agenda • Evaluation Controls Over Accounting And Financial Reporting • Other Internal Control Pitfalls

5. Seminar Objectives • Review The Framework And Concepts Of Internal Controls • Relate These Concepts To Financial Cycles (I.E., The Real World) • Understand Who Might Be “Ripping Us Off”

6. Factors Affecting our Current Environment

7. Factors Affecting our Current Environment • Global financial crisis • Uncertainty in unexpected places (Municipal Bond Ratings) • Increased regulation and oversight (Tax Reform, ARRA) leading to diminished control over revenues • Smaller staff due to budget cuts

8. Factors Affecting our Current Environment • Trends in the Audit Community • SAS 115 (documentation of internal controls and communication with those in governance) • Risk Assessments • Fraud Risks • Oversight at the Federal Level • Transparency • COSO

9. Factors Affecting our Current Environment • Governments are being asked to do more with less • Money and human resources

10. The Nature of Fraud Industry • Fraud Can Be Explained By Three Key Factors: • A Supply Of Motivated Offenders • The Availability Of Suitable Targets • The Absence Of Capable Guardians Or A Control System To “Mind The Store”

11. The Nature of Fraud Industry • The Opportunity To Commit & Conceal Fraud Is The Only Element Over Which You Have Significant Control. • What Are Some Of The Warning Signs? • What Can We Do About It?

12. A Survey Of Folks Regarding Fraud • 31% of All Americans are Dishonest • Another 40% are Situationally Honest (i.e., they will be honest if it pays to be honest and dishonest if it pays to be dishonest) • $200 Billion Employee Fraud Cost per Year Compared to $11 Billion from Violent Crime • In Banks, 95% of Losses are from Employees and 5% are Caused by Bank Robberies • In Retail, 70% of Losses are from Employees and 5% are Caused by Shoplifters and Customers

13. Fraud and Abuse in The U.S. • U.S. Cost About $990 Billion A Year • Government And Public Administration Have A Median Loss Of $93,000 Per Fraud Scheme • Average Organization Loses 7% Of Revenue • 12% Of Cases In A Study Were Frauds That Occurred In Government • Street Crime Only Costs The U.S. $4 Billion Annually

14. The Facts • Fraud Schemes Frequently Continue For Years Before They Are Detected • The Typical Fraud In The Study Lasted 2 Years From The Time It Began Until It Was Discovered • Frauds Are Much More Likely To Be Detected By A Tip Than By Audits, Controls Or Any Other Means • Lack Of Adequate Internal Controls Was Most Commonly Cited As The Factor That Allowed Fraud To Occur • Occupational Fraudsters Are Generally First-time Offenders

15. What Is Fraud? • It’s When Folks Are Ripping Off The Government In Lots Of Different Ways • Fraud Is Like A Four Letter Word • Just Ignore It And It Will Go Away • It Will Never Happen To Us

16. Common Myths About Fraud • Most Folks Will Not Commit Fraud • Fraud Is Not Material • Most Fraud Goes Undetected • Fraud Is Well Concealed • Prosecuting Will Deter Others

17. Potential Cost Of Fraud • Lose The Confidence In The Government • Loss To The Reputation Of Innocent Third Parties (I.E., The Remaining Staff) • Cost To The Perpetrator • The Public Loss

18. Potential Cost Of Fraud • Diversion Of Public Resources From Intended Purpose • Loss Of Money, Assets And Time • Embarrassment, Guilt, Humiliation And Shame • Subsequent Management Decisions Are Reviewed Under A Microscope • Any Investigation Turns The Government Or Agency Inside Out

19. Personal Rip Offs For Glick • Send Banking Information • Bank of America • Wachovia Bank • TCF Bank • HSBC Bank • Catawba Valley Bank • Regions Bank • Bank of the West • Washington Mutual • Bank Financial • Huntington Bank • Smith Barney

20. Personal Rip Offs For Glick • Frank Senger - $20.5 Million • Chief AdeniranAderogba - $10 Million • Dr SikasUsman - 30% of $45.8 Million • Dr.AhmedKassim- $10.5 Million • Miss Caroline Williams – 30% Of $16.5 Million • Mr Jack Chow – No Amount • Jim Mcconville - $20 Million British Pounds

21. Personal Rip Offs For Glick • Richard H Mason – 10% On All Payments Made • Mr. Brendon Hopkins – 30% Of $26.5 Million British Pounds (Twice) • Mr. Mark Johnson – Lottery - $2.5 Million British Pounds • Mr.Carlos Moreno – 50% Of $34.5 Million • Miss Joyce Awuse - $5.5 Million • Irs - $109.30 • Dr Dansuki Dan - $25.5 Million

22. Session 2 What Are Internal Controls

23. What Are Internal Controls? • To put it simply, internal controls are an exercise of common sense. You are practicing good internal controls when you? • Balance your checkbook • Keep your ATM/debit card pin number separate from your card • Keep copies of your tax return • Compare your monthly credit card statement to the credit card receipts • Lock your car doors

24. What Are Internal Controls? • Internal Control Is A Process, Affected By Management And Other Personnel, Designed To Provide Reasonable Assurance Regarding The Achievement Of Objectives In The Following Categories: • Effectiveness And Efficiency Of Operations • Reliability Of Financial Reporting • Compliance With Laws And Regulations

25. What Are Internal Controls? • Internal Control Consists Of Five Interrelated Components That Affect Each Of The Three Categories

26. What Are Internal Controls? • Internal control is a process. It is a means to an end, not an end itself. • Internal control is effected by people. • It’s not merely policy manuals and forms, but people functioning at every level of the institution.

27. Limitations on Internal Controls • Considerations Of Costs Will Prevent Management From Ever Installing A “Perfect System” • Controls Are Potentially Subject To “Management Override” • Risk Of Collusion

28. Applying the COSOFramework • Committee of Sponsoring Organizations of the Treadway Commission • www.coso.org

29. Who Are The Organizations • American Accounting Association • American Institute of Certified Public Accountants • Financial Executives International • Institute of Management Accountants • The Institute of Internal Auditors

30. COSO Internal Control – Integrated Framework • Established A Common Definition Of Internal Control • Provides A Standard Against Which A Government Can Assess Their Control Systems And Determine How To Make Improvements

31. Internal Control Components • Control Environment • Risk Assessment • Control Activities • Information and Communication • Monitoring

32. Internal Control Components • Internal Control Components Interact With: • Operations • Financial Reporting • Compliance

33. Evaluating Internal Controls • Often, Evaluations Are Piecemeal Approaches To The Task • Internal Controls Are Not Isolated And Are Related To One Another

34. Internal Controls Are Actually: • A Coordinated Set Of Policies And Procedures That Reflect A Comprehensive Strategy For Achieving Management’s Objectives

35. Assessing The Internal Control Framework • Provides A Favorable Control Environment. • Continually Assesses Risk. • Establishes And Maintains Effective Control- Related Policies And Procedures. • Effectively Communicates Information. • Monitors The Effectiveness Of Control Policies And Procedures And The Resolution Of Potential Problems Identified By Controls.

36. A Basic Rule • More Is Not Better • The Cost Of Excessive Or Redundant Controls Could Exceed The Benefits • Employees May View Controls As Unnecessary “Red Tape”

37. Why Are Internal Controls So Important? • Because The Prevention Of Fraud Is Critical And Costs Are High

38. Session 3 MANAGEMENT’S OBJECTIVES AND RESPONSIBILITIES

39. MANAGEMENT’S RESPONSIBILITIES AND THE INTERNAL CONTROL FRAMEWORK • EFFECTIVENESS • EFFICIENCY • COMPLIANCE • FINANCIAL REPORTING

40. EFFECTIVENESS • DETERMINES WHETHER THE GOVERNMENT AND ITS DEPARTMENTS ARE MEETING THEIR OBJECTIVES • GOALS AND OBJECTIVES IDENTIFIED IN BUDGETARY PROCESS • FOCUSES ON RESULTS RATHER THAN EFFORTS • INCLUDE OUTPUTS - HOW MUCH OF GOODS AND SERVICES ARE PROVIDED • INCLUDE OUTCOMES - WHAT IS THE QUALITY OF GOODS OR SERVICES TO BE PROVIDED

41. EFFICIENCY • MAKING OPTIMAL USE OF THE RESOURCES MADE AVAILABLE • OBTAINING DESIRED RESULTS WITH THE LEAST EXPENDITURE OF RESOURCES • MEASURES COSTS (I.E., EFFORT) TO RESULTS (I.E., EFFECTIVENESS)

42. COMPLIANCE • ANNUAL APPROPRIATED BUDGET • GRANTOR REQUIREMENTS • STATE OVERSIGHT REQUIREMENTS • IRS REQUIREMENTS • BOND COVENANTS • LOCAL LAWS AND REGULATIONS

43. FINANCIAL REPORTING • INTERNAL FINANCIAL REPORTING • EXTERNAL FINANCIAL REPORTING • - SPECIAL PURPOSE • - GENERAL PURPOSE • - CAFR

44. Session 4 Who Is Responsible For Internal Controls?

45. Who is Responsible for Internal Controls? • Everyone has a part in the internal control system. • The roles vary depending upon what level of responsibility and the nature of involvement by the individual.

46. Who is Responsible for Internal Controls? • Managers and supervisors are responsible for ensuring that internal controls are established and functioning to achieve the mission and objectives of their unit. • Each employee within an area should be made aware of proper internal control procedures associated with their specific job function.

47. Is This Just A Problem For The Finance Office? • Most Folks Think This Is Finance’s Problem • But Not Really • However, We Are Emphasizing the Finance Department In This Seminar

48. Management’s Responsibilities And The Internal Control Framework • Any Entity, Be It A Government, A Business Or A Nonprofit Organization, Exists To Achieve Some Purpose • It Is The Role Of Management To Provide The Leadership Needed For An Entity To Realize That Purpose

49. Management’s Responsibilities And The Internal Control Framework • Furthermore, Management Is Not Free Simply To Act In Any Way It Might Choose To Achieve The Entity's Goals • Management's Options And Actions Are Circumscribed By Constraints And Expectations, Both Implicit And Explicit.

50. Responsibility For Internal Controls • Management Is Primarily Responsible For The Effectiveness Of Internal Controls, Like Any Other Aspects of Performance • A Side Note - Authority And Responsibility Should Not Be Separated