What is Management’s Attitude About Internal Control and Why Does It Matter?

 

By Bob Swetz
Controller Consultant | Tier One Services, LLC
As external auditors, accountants, and bookkeepers who are concerned about our clients, we need to be aware of management’s attitude towards internal controls.
So, what does that even mean, “Management’s Attitude?”
Let’s look at an analogy that many of us can relate to. Suppose a friend suggests that you should be more physically fit. He provides you with a detailed and customized workout routine that you are to perform 5 days a week. It’s a great plan and if followed will help you reach the goal of being fit.
Notice how I said, “the goal” and not “your goal.” You see, the problem is you aren’t too concerned about being physically fit, it’s just not something you care about right now and certainly not a priority for you. Given this set of circumstances, the chances of you doing the workout at all, let alone 5 days a week are slim, therefore the probability of you attaining the goal of physical fitness is also minute.
Why does management’s attitude about internal control matter?
Management’s attitude about internal control matters for a few reasons:
1.      Management’s attitude will most likely trickle down to the staff
2.      If management doesn’t care, the staff probably won’t care either
3.      Even if the staff does care, a poor attitude at the management level will tend to override the good controls that are in place (more on this is a future article)
4.      The best plan will fail if it is not properly implemented and monitored
Management having a poor attitude about internal controls doesn’t necessarily mean that management does not have integrity. It could be that they have too much on their plate to focus on internal control. As trusted business advisors, we may be able to fill a gap that management didn’t even know existed. It’s something to think about as we perform our day to day duties for our clients.
If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

An Introduction to Assessing Control Risk

By Bob Swetz
Controller Consultant | Tier One Services, LLC
All organizations, no matter the size, should have adequate internal controls. Internal controls are things like having multiple staff count cash so that no one person has sole access at any given time.
One thing that may be overlooked is establishing a process of assessing control risks on a regular basis.
What is Control Risk?
To put is simply, control risk is the risk that the internal controls in place will not meet the organization’s objectives. According to the AICPA AU-C Sec940.05, A Control Objective is “the aim or purpose of specified controls. Control objectives address the risks that the controls are intended to mitigate.” In the example above the control objective over counting cash may be to deter the risk of employee theft.
Risks can arise out of a given set of circumstances, or they can be inherent in the nature of the transaction or function.
How and When to Assess Internal Control Risk
How and when to assess internal control risk depends on the nature of the risk or a situation that may arise and cause an increase in risk that did not previously exist.
Let’s look at cash counting again. Because if it’s nature, cash is inherently risky. Assuming the organization’s cash inflows are consistent this risk could be assessed on an annual basis. The risk assessment would involve addressing the possible ways cash could be stolen and determining if the controls in place sufficiently address that risk.
Other types of risks may arise based on circumstance. For example, one of the church’s weekly cash counters just filed for bankruptcy. That situation would give rise to the need for risk assessment at that time, not merely at the end of the year. In this case, the church’s management should consider whether the situation creates additional risk in the cash counting function. A simple way to do this is to list all the possible ways cash could be stolen and whether the controls currently in place (given the situational change) still reduce the risk of employee theft to a reasonably low level.
These are just a few simple examples but should be enough to get you started in developing a plan for risk assessment that makes sense for your organization.
If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

What Level of Internal Controls Does Your Organization Need If You Don’t Have an Audit?

By Bob Swetz
Controller Consultant | Tier One Services, LLC

I get the feeling that most organizations think that maintaining proper internal controls and accounting procedures only serve to please the auditors. That attitude couldn’t be further from the truth.
Proper internal controls and accounting procedures are necessary in any organization to protect the organization, its assets, its leaders and employees.

According to the PCAOB AU Section 319…
Internal control is a process—effected by an entity’s board of directors, management, and other personnel—designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (a) reliability of financial reporting, (b) effectiveness and efficiency of operations, and (c) compliance with applicable laws and regulations.

Note that nothing in that definition states that controls are for the benefit of the auditor.

A Quick Example…

Proper internal controls over the cash disbursements function are intended to prevent fraudulent payments. If the controls and procedures are followed properly they will protect the organization from theft and the employee from being accused of theft. It works both ways.

A Final Thought…

Adequate internal controls are important for every organization, not just the ones that have someone looking over their shoulder.

If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

Should Your Organization Be Using Purchase Orders?

By Bob Swetz
Controller Consultant | Tier One Services, LLC

From my experience as an auditor, I have found that purchase orders and their purpose are misunderstood by many organizations.

There are 2 common reasons organizations might want to use purchase orders

1. To obtain proper authorization for purchases

2. To control and track inventory in the organization’s accounting system

If your organization is using purchase orders for the first reason, for authorization, then I recommend a careful review of the purchasing process to ensure that their use is meeting your organization’s objectives. In short, purchase orders should be prepared by the requesting employee and reviewed and signed by at least 1 member of upper management, generally a department supervisor, before the purchase is made. Once a properly authorized purchase order is obtained it can be delivered to the vendor to initiate the actual purchase.

If purchase orders intended to meet the authorization objective are processed after-the-fact, then the objective has not been met.

If your organization is using purchase orders for the second reason, to control and track inventory only, then perhaps the authorization steps are not necessary. If that is the case you should keep a couple things in mind. First, there must be other authorization procedures in place in relation to the purchasing and cash disbursements function. Second, purchase orders should still be completed prior to making the actual purchase. When goods are physically received the items should be marked received in your accounting system and matched with the invoice.

If purchase orders intended to meet the inventory control objective are processed after-the-fact, then the objective has not been met.

The bottom line is that purchase orders can be an effective part of your organization’s purchasing and cash disbursements function when used properly and when prepared in advance of the actual purchase. Make sure to determine your objectives first and the rest should follow suit.

If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

How Does Receiving Grants Affect Internal Control?

By Bob Swetz

Controller Consultant | Tier One Services, LLC

Using proper internal accounting controls is important for any type of organization. However nonprofit and governmental entities that receive grant funding typically have at least one additional layer of controls to consider. These controls can be mandated at the Grantor, State or Federal level.

Grantor Level Requirements

If your organization does not fall under federal or state guidelines you may still be required to have specific procedures and controls in place that are stipulated by the grantor. It is extremely important to carefully review the grant documents to make sure your procedures are in compliance with the grant.

State Level Requirements

Some grants are funded with state money but do not fall under federal guidelines. In this case, it is important to understand the overall guidelines of the funding state department to ensure that your controls and procedures meet any specific requirements. As discussed above, you should also carefully review your grant documents to ensure compliance.

Federal Level Requirements

Organizations receiving more than $500,000 in federal funds are held to a completely different standard. If your organization falls into this category, you are not only required to have the proper internal accounting controls in place for audit purposes, but you must have controls in place to ensure compliance with federal laws and regulations related to the grant. Auditors will use the OMB Compliance Supplement for the appropriate CFDA# related to your federal grant, so it is important to be current with applicable laws and regulations.

At the end of the day, your organization needs to have good accounting controls in place that work for you. Just don’t forget that when you receive grants, others are watching.

If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

Q&A: Secure, Paperless Nonprofit Accounting

[1] When you have paper receipts do you scan them?
Hell no. They snap a picture of them with an app like Entryless or Expensify, where they get automatically classified and synced with the accounting system.

[2] How do you have staff code and authorize expenditures and keep that info with the digital receipt?
Staff don’t need to classify transactions. That’s the job of the Finance team. What the Finance team needs is a description of the expenditure and the grant it was for, if that applies.

Staff don’t authorize expenditures, either. That’s up to the ED, who sets policy and then reviews expenditures in the accounting system or an app. Some apps (like Bill.com) and some accounting systems (like Xero) have an Authorize button for bills.

[3] How do you store all these digital bits?
In the app and/or attached to the transaction itself in the accounting system.

[4] How do you pass on the receipt, coding, and authorization to the person signing checks?
In the app & accounting system. In Xero, for example, there is an in-program authorization button for payables.

[5] If there’s fancy software that does this all, what is it and how much does it cost?
It’s not fancy software. It’s cheap and zillions of people are using it. Times have changed. Thank goodness.
Check out Entryless ($22.49/mo), Xero ($30/mo for unlimited users), Bill.com ($19.95/mo).

[6] How much server space does 7 years of “paperwork” eat up?
Servers have evolved. First of all, in most cases you’re not using your own server but that of your cloud-based app, and (a) you don’t care how much space these documents take up, and (b) they’ve got such economies of scale that the space is dirt cheap. See pricing above.

But secondly, server space is cheaper now than it has ever been. So if you run out of space, you buy more. It’s not a big deal. Certainly cheaper than renting a bigger building to store more paper files, and because no one actually does that since that idea is ridiculous, I’ll mention that it’s still cheaper than renting a storage unit for your older paper files, which plenty of people do. And it’s less risky. Paper file can be so easily damaged. Flooding, fire, mold…stuff happens.

Two final points on questions that you didn’t ask:
[7] The risks are higher when everything is on paper:
[a] The savvy cloud-based providers have redundant servers in geographic locations with different natural disaster profiles (“we here at San Andreas Cloud Services store all of your data securely in a nearby warehouse!”)
[b] Paper is easily stolen, lost, or otherwise messed with. When everything is electronic, all you have to do is revoke access when an employee leaves, for example.
[c] You’re stuck with local auditors, whether or not they’re any good, whether or not they charge competitively, plus you have to pay more for all of the shlepping they have to do for the field work. Plus the audit takes longer. Which the Board really loves. Whee! Last year for a new client we cut the timeline from “year-end” to “board presentation of the financials” from 8 months to 4 months. So having everything available paperlessly gives you more leverage to shop around, and if you live in a major metropolitan area you can get an auditor in a lower COL area and pay less but without sacrificing the level of service.

[8] And lastly – this applies only to some organizations, but in those cases, the costs are outweighed by the revenues generated in the physical space that is now freed up. What does the org get to put there, in the entire office drowning in file cabinets? Another fundraising professional, perhaps?

Do You Import and Export QuickBooks Transactions?

Do You Import and Export QuickBooks Transactions?
By Bob Swetz
Controller Consultant | Tier One Services, LLC
Lately, I have been doing a lot of exporting data from one QuickBooks Desktop company and importing into another. Transferring complete and accurate data from Point A to Point B is critical to the integrity of your financial records. Here are some tips to help you complete this task with efficiency and accuracy.
Exporting Information from QuickBooks
There are 2 ways to export information from QuickBooks that have risen to the top as my favorites. First you can create a report and hit the Excel button to “Create a New Worksheet.” When using this method, I recommend selecting the last option to create a .csv file. It goes much quicker this way and you have fewer formatting issues to deal with. Although the file is more suited for import, you will still have to “play” with it so that it will be import-ready. For example, beware of any account numbers, items, zip codes and other number fields that may begin with zero. Chances are when you open the .csv file the zeros will be removed. There is a workaround for this, so feel free to get in touch if you have this issue.
The second method of export is a 3rd party app. I have really come to like Transaction Pro Exporter (TPE). TPE does a nice job of exporting all the information you will need in an import-ready format.
Importing Information to QuickBooks
There are multiple ways to get information into the new QuickBooks Desktop file, depending on the type of information that you’re moving. As with the exports, some importing can be done directly from within QuickBooks. In the Lists menu there is an option to Add/Edit Multiple List Entries. From here, you can import customers, vendors and various inventory items. Be careful though, because you may not be able to import all data fields using this method, so if you have a lot of attributes in each of those lists you may want to use another method. From the Accountant menu, which is not available in all versions, you can import transactions. By selecting Batch Enter Transactions, you can import checks, deposits, credit card transactions, bills and invoices. One thing I like about this method – especially for bills and invoices – is that you can import positive and negative transactions together and QuickBooks breaks them out for you.
Finally, you can import transactions and lists using a 3rd party app. For this I recommend Q2Q or Transaction Pro Importer (TPI). They both have their merits, but I would say Q2Q is better for less complex data. The drawback is you cannot manipulate the data before import, whereas with TPI you can make changes to the .csv or Excel file before you import which is sometimes necessary.
Do You Import and Export?
If you have questions or want to dig deeper, feel free to schedule a 15-minute troubleshooting session with me at http://bit.ly/Scheduling_Troubleshooting or connect with me on Facebook at https://www.facebook.com/bobswetzonline.

Attaching Receipts and Documents to the Transactions in the Accounting System

Consider:

  • the extent to which those records are organized and accessible outside of the accounting system
  • how much is at stake if a deduction is challenged
  • how easy it is to get the organization into an app like Entryless or Expensify or any one of a ton of others in which the spender snaps a photo of a receipt and sends it in for OCR and classification
  • the volume of transactions that could be material that could potentially be challenged, individually or taken as a whole
  • whether anyone is doing quality control on the data entry and needs quick access to the backup for classification
  • the likelihood of the organization to convert to a different accounting system
  • whether the organization has an annual independent audit

Our clients in the $1M-$10M range get us backup documentation for pretty much every transaction. And it comes in handy a LOT.

Why is Segregation of Duties Important in My Accounting Department?


Part 1 of 3
By Bob Swetz
Controller Consultant | Tier One Services, LLC
“Every business needs to be protected in order to survive and thrive.”

What is segregation of duties?
Segregation of duties is the concept of splitting key duties within the same accounting function among multiple personnel. For example, printing, checks and signing checks are in the same accounting function. Ideally, these duties should be performed by separate staff members.

Why is it important?
Allowing the same staff member to perform all or most of the duties in the same function creates an opportunity for that person to cover up improprieties. Let’s take the case referred to above and say that one staff accountant enters vendor bills, writes the checks for those bills, mails them and then to top it off does the bank reconciliation. That staff member could easily write checks to themselves, cash the checks and mark them as cleared in the bank reconciliation without anyone ever knowing about it.
It’s important to remember that controls such as adequate segregation of duties are not intended to point fingers or suggest someone is doing something wrong, they are just good business practice to safeguard the organization’s assets.

I have a small accounting department, so what can I do?
Creating and maintaining adequate segregation of duties is probably the most difficult control challenge a small organization faces. Check out how to face this challenge with a one-person accounting department in Part 2 of my series, How to Segregate Duties with Only One Accountant.

How to Consolidate Financial Statements from Multiple QuickBooks Files

 

Two ways to consolidate are:

EXCEL TRIAL BALANCES

[1] Export all trial balances to Excel, position them on the same tab but each below the previous one, tag add a column to tag each account with the entity name, combine the DR and CR into one DR (CR) column.
[2] Create your financial statements with your desired accounts and headings
[3] On your tab with the trial balances, create a column called Balance Sheet and assign a B/S account from your B/S page by linking to it…for all line items. Add another column for Income Statement Accounts.
Be sure to skip all intercompany accounts.
[4] On your financials, use the SUMIF function to pull from the columns on the T/B tab using your mapping.

Pros: You can easy-to-update, professional-looking consolidated financials.
Con: It takes a while to set up the first time.

 

QUICKBOOKS ENTERPRISE

[1] Make sure the Charts of Accounts are identical across all 3 entities for any accounts that you wish to consolidate. Account number, spelling, parent/sub status.
[2] Also make sure that any intercompany accounts are all on the same line, i.e. if you have an asset in one and a liability in the other, change one of them to an asset before consolidating.
[3] Use the tool in the Reports menu to consolidate.

Pro: Doesn’t take a lot of time.
Cons: You have to set up those intercompany accounts each time so they get zeroed out, and you end up with consolidated financials that are in Excel and are very cheesy-looking.