Internal Accounting Control Procedures Manual for Michigan Townships

1. Using the State’s Accounting Procedures Manual and the Uniform Chart of AccountsPresented toMichigan Townships AssociationAnnual Educational ConferenceJanuary, 2015David R. Williamson, CPA, PartnerPSLZ, LLPPlymouth, Michigan734-453-8770david@pslz.com

2. Special Thanks To Providers of Some of the Materials • Michigan Department of Treasury Local Audit and Finance • American Institute of Certified Public Accountants • Prentice Hall Professional Business Publications, Arens/Elder/Beasly • Presentation to LCPA Baton Rouge Chapter, Suzanne Elliott, May 29, 2007

3. Accounting Procedures Manual • Published by the Department of Treasury in 2007 • Townships and other local units of government required to follow • Each Chapter is divided into three sections: • “Concept” Statements • Required Procedures • Best Practices

4. Internal accounting control is a series of procedures designed to promote and protect sound practices, both general and financial. Internal control procedures will significantly increase the likelihood that: financial information is reliable assets and records of the organization are not stolen or misused the organization’s policies are followed government regulations are met Chapter 1-Internal Accounting Control

5. Control environment-setting the “tone at the top” of the organization, meaning the integrity, ethical values, and competence of the entity’s people Risk Assessment-Identify areas where errors or irregularities can occur Cash Receipts Cash Disbursements Payroll Fixed Assets/Inventory Developing an Internal Accounting Control System

6. Control environment-setting the “tone at the top” of the organization, meaning the integrity, ethical values, and competence of the entity’s people Risk Assessment-Identify areas where errors or irregularities can occur Cash Receipts Cash Disbursements Payroll Fixed Assets/Inventory Developing an Internal Accounting Control System

7. Control activities. -Policies and procedures that help ensure that directives are carried out. These include activities such as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets, and segregation of duties. Information and communication- Components that address the need in the organization to identify, capture, and communicate information to the right people to enable them to carry out their responsibilities. Information systems within the organization are key to this element of internal control. Developing an Internal Accounting Control System

8. Monitoring- The activity undertaken by management and others in the organization with regard to the internal control system. It is key that internal control deficiencies reported to the township board. These components are linked together, thus forming an integrated system that can react dynamically to changing conditions. Developing an Internal Accounting Control System

9. Whose responsibility is it to design and maintain internal control? • According to Michigan Law, and professional auditing Literature, this responsibility lies with the Township. • Management, Other Personnel, and “Those Charged With Governance” (The Township Board) are required to design, monitor, adjust, and maintain the system of accounting control

10. Financial Policies-Chapter 2 • Adopt required policies- • Electronic Transactions • Credit Card • Investment • Others • Build on required with optional policies • Purchasing • Travel • Ethics/Conflicts of Interest

11. Electronic Payments Permissible Under Michigan Law • PA 738 of 2002 (MCL 124.301) requires the governing body of all local units of government to approve a resolution authorizing payments of “automated clearing house (ACH) transactions,” which is a way to process electronic payments or receipts to external parties. The act requires the resolution the following: • an ACH policy; • designation of electronic transfer officer; • documentation of payments, and • The establishment of internal controls system.

12. Internal Controls/Fraud Protection • Prior to commencing electronic payments and receipts, townships should work with their banks, data processing professionals and auditors to ensure that the township is protected from fraud. • A recent study conducted by the Government Finance Officers Association showed that governments are using the ACH system more frequently to accomplish vendor payments, payroll, and intergovernmental payments (e.g. property tax disbursements), and accept payments, but lag in implementing fraud protection.

13. Internal Control Suggestions • Use ACH Filters and Blocks-in the GFOA study, only 34% of the governments use ACH filters and blocks. These tools would allow the township to “block” all ACH transactions in specified accounts, or “filter” the ACH transactions to allow payments and receipts from authorized sources only. • Use separate ACH bank account-only 24% of the governments surveyed in the GFOA study use separate bank accounts.

14. GFOA Recommendations • Enhancing computer virus protections • Passwords for initiating transactions • Periodic internal control reviews that address control, data confidentiality, data integrity, and other general computer security controls • Written agreements with financial institutions covering ACH transactions • Dollar limits for authorized personnel, and dual passwords required for dollars above a specific limit. • Dual controls to establish repetitive transactions, and non repetitive payments • Reconcile ACH transactions or accounts daily-person other than originating party

15. Credit Card Policies-Requirements • Use must be in compliance with PA 266 of 1995, which also requires the township board to adopt a resolution and adoption of a credit card policy that indicates responsibility for the cards use, and monitoring and oversight. • credit cards can only be used for official township business. • persons using the card are responsible for protection and custody of the cards. • persons using the card must return it immediately after termination of employment.

16. Credit Card Policies-Requirements -Continued • requires adoption of a system of internal controls monitoring use • approval of credit card bills prior to payment. • timing of payments on the card (no later than 60 days from statement date) • disciplinary actions for failure to follow policy

17. Investment Policies • Required by PA 20, of 1943, as amended-MCL 129.91, Townships should review their policies (required since 1997) to ensure they address: • Credit Risk-The risk that the issuer will not pay off on the investment when it matures.   • Third Party Risk-Risk of fraud in connection with the physical existence of the securities being purchased.

18. Investment Policies-Continued • Interest Rate Risk-The risk that a change in interest rates will cause an investment to decline in value. •  Maturity Risk-Cash may be tied up for a long time, and the townships must pay a penalty or suffer decrease in value if the investment is cashed in early. •  Opportunity Risk-Risk that interest rates will rise during an investment’s term, and the township will have foregone the higher return.

19. Purchasing Policies-help insure that purchases of goods and services provide the best value for the township and that vendors are treated equally. • Most communities have several different methods used to select vendors: • competitive bidding • quotations • small purchase orders (blankets)

20. Policy Development Challenges • Townships must weigh the costs of developing bid specs, and administration, with the benefits of the competitive bidding through a formalized process. • Many communities have a high dollar threshold for purchasing through competitive bids, or RFP (request for proposals), a mid term policy for other purchases (quotes), and a small purchase policy, where department heads and employees can accomplish small purchases through “blanket orders”.

21. Other Challenges to Policy Development • Procurement standards for purchases of goods and services for state and federal grants usually require adherence to Office of Management and Budgeting (OMB) standards. • Centralized or Decentralized Systems?

22. a copy of the form used to request reimbursement list of supporting documents to attach to the form the timeline to submit the reimbursement request; we recommend 30 days after travel a list of when prior authorizations are needed the reimbursement rates for mileage, hotel stays, meals and airfare. Many travel policies specify maximum amounts for meals, airfare or other items. Other “Optional” Policies-Travel Elements to Consider:

23. Chapter 3-Bank Accounts and Reconciliation • All Funds can be ‘pooled’ except those that specifically are required to have separate funds: • Debt Service-State says SAD’s can be pooled with other SAD’s and GO Unlimited Bond DSF can be pooled with other GO Unlimited . • Property Tax Collection

24. Cash Account Recommendations • Separate Depository Accounts From Disbursing Accounts-GFOA Recommendation-creates a ‘fire-wall’ around the Township’s largest cash deposit. • Pooling Depository Accounts Will Reduce Bank Fees, However State Law will Require Certain Accounts to Be Separately Maintained-Tax Collection, Debt Service.

25. Recommended Cash Disbursement Accounts • Accounts Payable (small dollar limited individual transactions) • Accounts Payable Larger transactions • EFT Account (Should be reconciled daily) • Payroll Account • Property Taxes

26. General Fund Fire Fund Water & Sewer The depository account would have ACH and Debit Blocks-transfers only Depository ACH Accounts Payable Payroll ACH filters for authorized vendors only ACH blocks ACH filter- direct deposits and tax payment

27. Key Control Activity for Most Township is the Bank Reconciliation • Challenges: • Frequently prepared late (why would the State put on the APR otherwise) • Not Reconciled to the General Ledger • Reconciled by the custodian of the accounts-ideally this should be someone independent of the process

28. Should be (ideally) performed by someone NOT involved in cash receipts or disbursements. Involves comparison of information coming from the bank to the books of the township, specifically the general ledger account(s) Cash in the Bank. Often, “reconciliation” process involves only the Treasurer’s check register. In this case problems often arise as the township’s books are not reconciled to the outside source (bank)-this also results in poor segregation of duties. Bank Reconciliation

29. Monthly bank statement is a listing of all the deposits, checks, other debits and credits which cleared the bank. General ledger shows all cash received and paid within the month. Neither balance is “correct” without adjustment for timing differences, know as reconciling items. Bank Reconciliation Specifics

30. The purpose is to start with each balance (book and bank) and work towards the “true” balance. Bank adjustments Deposits in transits-should be deposits within the last few days of the month. Outstanding Checks-checks written but not cleared-watch for old outstanding items. Bank Errors-rare these days but they happen! Bank Reconciliation Steps

31. Book balance adjustments are generally for items that cleared without information. NSF deposits Bank service charges Book Errors Good communication between Clerk and Treasurer can minimize these reconciliation adjustments. Book adjustments generally require adjusting journal entries to “fix” the error. Bank Reconciliation Steps

32. Checks should be reconciled to cancelled checks clearing the account, not to the listing on the statement.It is important to review the checks clearing for agreement to date, amount, payee and endorsement. All unusual items should be followed up; e.g. check clears for the correct amount; but payees are different. Deposits in transit should not be outstanding for more than a few days. Bank Reconciliation Steps

33. Review bank reconciliation example on worksheet. Very important the Clerk and Treasurer reconcile the general ledger bank balance to the Treasurer’s cash records. Key element of control-Treasurer should insist on getting a copy of the bank reconciliation, along with the cancelled checks, and bank statements to facilitate reconciliation. Bank Reconciliation-Final Step

37. Township Treasurer must complete a formal receipt for all revenues coming into the Township. This can be accomplished by: Computerized point of sales systems Cash registers Manual three part receipts Cash Receipting (Chapter 4)Michigan Law Requires:

39. USE AUTOMATED PROCESSES TO RECONCILE CASH RECIEPTS • BS&A Has An Automated Processes To Batch Deposit Entries in the Same Way the Treasurer Batches Deposits. • Quick Book Users? Have To Do ‘Work Arounds”

48. Property Tax Fund • Books should be maintained by both clerk and treasurer. • Treasurer’s records tracks monies collected and disbursed by tax roll, usually totaled by deposit, by month. • Clerk should post General Ledger by month.

49. Tax Collections • The treasurer must maintain a Tax Collection Receipts Journal of the property tax collections. At least one entry per day for the total amount collected must be made. If desired, the treasurer may enter each individual tax receipt in the journal, however, it is not mandatory. The form of the journal may vary, but it must provide for an immediate determination of the amount collected for each tax collected • Note BSA Equalizer provides reports that meet this purpose

50. Property Tax Manual Receipts