- Segregation of Duties
- Delegation of Authority
- Purchasing Card Monitoring
- Cash Controls
- Policies and Procedures
- Business Purpose Documentation
- Approval of Time Cards
- Performing Annual Performance Evaluations
- Petty Cash Accounts
Segregation of Duties
Segregation of duties is a key internal control intended to minimize the occurrence of errors or fraud by ensuring that no employee has the ability to both perpetrate and conceal errors or fraud in the normal course of their duties. Generally, the primary incompatible duties that need to be segregated are:
- Authorization or approval
- Custody of assets
- Recording transactions
- Reconciliation/Control Activity
Some examples of incompatible duties are:
- Authorizing a transaction, receiving and maintaining custody of the asset that resulted from the transaction
- Receiving funds (checks or cash) and approving write-off of receivables
- Reconciling bank statements/accounts and booking entries to general ledger
- Depositing cash and reconciling bank statements
- Approving time cards and having custody of pay checks
If internal control is to be effective, there needs to be an adequate division of responsibilities among those who perform accounting procedures or control activities and those who handle assets. Ideally, separate employees will perform each of the four major duties. In general, the flow of transaction processing and related activities should be designed so that the work of one individual is either independent of, or serves to check on, the work of another. Such arrangements reduce the risk of undetected error and limit opportunities to misappropriate assets or conceal intentional misstatements in the financial statements.
When duties cannot be sufficiently segregated due to the small size of a unit, it is important that mitigating controls, such as a detailed supervisory review of the activities, be put in place to reduce risks.
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Delegation of Authority
In today's busy and dynamic environment it is impossible for one individual to perform all the duties and tasks that are required to achieve the University's objectives. To meet the needs of their customers, managers delegate authority to staff so that decisions and related actions can occur in a timely manner. Delegation of Authority (DOA) is the formal process in which one person delegates the authority and responsibility to another person to carry out specific activities. Typically a manager will delegate to a subordinate a certain authority for a specific transaction (e.g. approve reimbursements up to $500). However the person who delegated the work remains accountable for the outcome of the delegated work. If DOA is done properly the University can save time and money while building the skills of its workforce. Managers should develop a framework in which they document the types of transactions and related dollar thresholds in which they delegate their authority to another individual. This documentation needs to be maintained as personnel change within their unit. It should include at a minimum: specified time period not greater than one year, name of the individual and title, type of transactions and related dollar limits, and scope of authority. Managers need to ensure that individuals who received delegated authority have been properly trained and are well versed in University policies that govern the authority delegated. At least annually, the DOA framework needs to be reviewed for appropriateness to ensure University objectives are being achieved while limiting risk to an acceptable level.
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Purchasing Card Monitoring
The key control to ensuring the effectiveness of your unit's Purchasing Card Program is a strong supervisory review and approval process. Purchasing Card Roles & Responsibilities require that transaction approvers confirm cardholder transactions for legitimacy and compliance with University policies. This is most readily achieved through a monthly supervisory review of cardholders' Statement of Account and supporting documentation and evidenced by the reviewer's signature.
Perform the monthly supervisory review to:
- Ensure that adequate receipts are present and match all purchases shown on the cardholders' monthly statement.
- If supporting documentation is not provided, request the cardholder to provide it or obtain a copy from the vendor.
- Validate the business appropriateness of items purchased.
- If questionable transactions are identified, contact the cardholder for an explanation of the transaction.
- Validate the explanation with other departmental personnel, if possible (e.g. the explanation provided was that the item was purchased at the request of Dr. Smith).
- If the cardholder is not able to appropriately support or explain a questionable transaction, contact the Senior Business Officer (or their designee) and the Purchasing Card Administrator.
- Ensure that Purchasing policies are being followed:
- Transactions are not split to avoid single transaction limits
- Items purchased do not include restricted commodities or were not acquired through restricted suppliers
- The Purchasing Card was the appropriate buying method for the transaction (refer to the Buying Decision Chart and BEN Financials Commodity Matrix).
- Sign and date the monthly statement to document that the review has taken place.
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Any unit collecting or maintaining cash needs to ensure that collections are sufficiently safeguarded. “Cash” for purposes of controls discussion includes currency, coins, checks, money orders, and gift certificates/cards. Types of cash typically on hand include cash receipts, petty cash accounts, and change funds. The following principles of good cash handling will be discussed in greater detail: Segregation of duties, Security, Reconciliation, Management Review, Documentation.
Segregation of Duties: Cash handling duties can be divided into four stages: receiving, depositing, recording, and reconciling. Ideally, all four stages would be performed by different individuals. The purpose of this segregation of duties is to minimize the opportunity for an employee to misappropriate funds and avoid detection. In a smaller department, it may not be feasible to fully segregate all of the cash-related duties. In these circumstances, the department may rely on compensating controls to mitigate the risk that cash is misappropriated (e.g., increased monitoring).
Security: Keep all cash in a safe until it is deposited. For areas with regular cash receipts, a drop safe is recommended to limit access to the contents of the safe. Regardless of the type of safe used, limit access to supervisory and authorized personnel only. Locate the safe where it is continually visible by departmental employees but out of public sight. Change the combination of the safe on a regular basis (e.g. annually) and when an employee who knows the combination to the safe leaves the unit. If cash boxes are used ensure that they can be locked, are fire resistant, are not easily movable or concealable, and access is limited to the person collecting the cash. Cash boxes cannot be shared amongst employees as accountability for the cash will be diminished and management will not be able to readily assign responsibility for shortages to the appropriate employee. If large sums of money are being collected and/or cash is collected in a high traffic area, consider installing a camera and alarm system.
Reconciliation & Documentation: Cash collections must be reconciled on a daily basis to the cash register/point of sale system to ensure the completeness of receipts. On a monthly basis, an employee who does not collect funds must reconcile deposit tickets to general ledger accounts to ensure that all amounts were properly deposited and reconcile general ledger balances to bank records to ensure that deposits were appropriately credited by the bank. See below for additional information on documenting reconciliations.
Record keeping requirements exist throughout the cash collections process. A record of cash collected must be maintained by the employee responsible for accepting the cash. This could be in the form of a cash register tape, a revenue log, a pre-numbered receipts book, etc. This record will be compared to the actual cash on hand during the daily balancing of the register or cash box. Records of deposits made must be documented and retained to assist in the performance of reconciliations. Reconciliations between book and bank balances must be performed on a monthly basis and documentation that the reconciliation was performed, that reconciling items were investigated and resolved must be retained.
Management Review: Supervisors should initial and date all reconciliations to demonstrate that they were reviewed and approved.
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Policies and Procedures
In accordance with University Policy 2701 – Internal Control Policy management is responsible for establishing, maintaining and promoting effective business practices and effective internal controls. The development of written departmental policies and procedures are an effective way to maintain a strong system of internal controls. Use documented policies and procedures to clearly delineate the control activities performed throughout the unit's various business processes. These will aid in the orientation of new employees, help ensure business continuity in the event of turnover, and help ensure compliance with applicable laws and regulations.
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Business Purpose Documentation
All expenditures are expected to be made for ordinary, reasonable, and actual business-related activities in furtherance of University and Health System missions. Additionally, Penn receives significant funding from federal sponsors and other sources that carry substantial fiduciary responsibilities. Failure to require supporting documentation evidencing business purpose to internal reviewers can result in inappropriate expenditures going undetected. Failure to provide supporting documentation with business purposes to external reviewers could result in disallowances, fines, penalties which have financial and reputational impacts for the University.
An adequate business purpose should describe the reason why the transaction occurred as opposed to only restating the item purchased. For example, “Freezer” would not be a sufficient business purpose explanation. An appropriate explanation could be: “Freezer for storage of research samples in Dr. Smith's lab.” Business purpose explanations should be sufficiently detailed to allow the reviewer, whether s/he be an internal supervisor, a federal auditor, an IRS agent, etc., to establish that the transaction was for the sole benefit and use of the University in accordance with its non-taxable mission.
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Approval of Time Cards
In order to ensure the propriety of submitted hours, employee time cards/records are to be approved by their supervisor as certification that the hours/work were actually performed as reported. If feasible, overtime should be approved in advance. Supervisors should sign or initial and date the timecards to document their review and approval. Do no return approved timecards to employees for delivery to the timekeeper for input. This provides individuals with the opportunity to alter an already approved timecard and receive inappropriate additional pay.
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Performing Annual Performance Evaluations
Performance evaluations are valuable tools that provide staff members with feedback on their performance and accomplishments for the previous year. They also assist staff members in understanding their job responsibilities and supervisor's performance expectations. Evaluations are expected to be fair, representative of actual performance, written, and performed on an annual basis. Failure to provide documented evaluations could complicate later disciplinary processes.
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Petty Cash Accounts
Petty Cash is easily misappropriated if business processes and internal controls are not established and enforced. The following controls and concepts will help you ensure that your petty cash accounts are appropriately used and safeguarded:
- Do not allow the use of petty cash for operating purposes including the payment of invoices or miscellaneous amounts, to pay salaries or wages, or to make advances or loans to staff.
- Allow only the established custodian to access the funds. If that individual is not available for an extended period, contact the Office of the Treasurer to transition responsibility to someone else.
- Require receipts/documentation for all petty cash reimbursements.
- Require that petty cash vouchers be approved by the requesting employee's supervisor or another appropriate individual familiar with activity that resulted in the original expenditure.
- Safeguard petty cash fund through the use of lockable cash boxes and secure the boxes in a locked cabinets drawer or safe when not in use by the custodian.
- During the supervisory review and approval of the replenishment request, ensure that receipts are included and appear appropriate.
- Perform periodic surprise cash counts by an administrative business officer or designee (other than the custodian). The Petty Cash Count form can be used to facilitate and document the surprise counts.
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