Internal Controls in Financial Matters
Internal Controls in Financial Matters
September 27, 1989
TO: STATE AGENCIES ADMINISTERING CHILD SUPPORT ENFORCEMENT PLANS UNDER TITLE IV-D OF THE SOCIAL SECURITY ACT.
SUBJECT:Internal Controls In Financial Matters
BACKGROUND:Audits of State IV-D agencies indicate a number of problems in the cash handling and internal controls used to safeguard program funds. Left uncorrected, these problems present an opportunity for mishandling, misappropriation, and theft.
REFERENCE:45 CFR 302.19 / 302.20 / 302.34 / Part 304 / 304.50
ATTACHMENT:The attached questions summarize problems cited frequently in internal control audits together with recommend management actions.
INQUIRIES TO:OCSE Area Audit Office Supervisors
OCSE Regional Representatives (for waiver regarding separation of cash handling and accounting requirements)
Robert C. Harris
Associate Deputy Director
Office of Child Support Enforcement
INTRODUCTION: Security of program funds is integral to the operation of a fiscally sound Child Support Enforcement (CSE) program. Procedures and mechanisms used to safeguard such funds are based on generally accepted business and accounting practices. These "internal controls" are necessary to ensure financial integrity in the handling of Child Support collections.
As a part of its ongoing effort to improve financial management in Child Support agencies, the Office of Child Support Enforcement (OCSE) initiated a series of Internal Control Audits from 1987 to 1989. Conducted by a private accounting firm, these audits of State and local offices critically examined cash handling and accounting practices of CSE agencies. A number of problems in the handling of collections are documented in the audit findings. Similar problems have also been disclosed in OCSE's Program Results /
Performance Measurement audits. Most often, these problems are the result of failure to follow good business practices and have relatively simple solutions. If left uncorrected however, they present an opportunity for theft, misappropriation, and fraudulent use of IV-D program funds.
The following questions and recommendations highlight problems in internal controls identified by recent audits.
WHY SHOULD COLLECTIONS BE DEPOSITED IN INTEREST-BEARING ACCOUNTS?
DISCUSSION:Many CSE programs continue to deposit collections in non interest-bearing accounts. Sound management practices emphasize the investment of funds into interest-bearing accounts coupled with the timely disbursement of collections to the intended recipients. Even funds held for a short period of time can generate a substantial amount of interest income over the long run. The interest generated helps to offset State and Federal funding and reduce program costs. This, in turn, frees up funds for other programmatic purposes.
While use of an interest-bearing account is not mandatory, there are very few situations where alternative arrangements can be justified. Future audits will continue to strongly recommend the investment of idle funds into interest-bearing accounts, again consistent with prompt disbursement of collections to custodial parents.
RECOMMENDATION:Talk with your jurisdictions' financial officers to find the banking arrangement that will give your program the greatest benefit.
REFERENCE:45 CFR 304.50(b)
WHEN MUST I DEDUCT INTEREST EARNED ON PROGRAM ACCOUNTS FROM PROGRAM EXPENDITURES?
DISCUSSION: All interest earned on program accounts must be offset against program expenditures. Interest earned on program accounts is often lumped together with other State or local earnings. Irrespective, Child Support Enforcement Agency funds deposited in State or local accounts must have interest accounted for and offset against CSE expenditures according to the methodology set forth in OCSE-AT-89-l6. Interest must be accounted for and claimed from the date of deposit until the date of disbursement.
RECOMMENDATION: Examine accounting practices to ensure that they meet the requirements of federal policy.
REFERENCE: 45 CFR 304.50 (b) and OCSE-AT-89-16
WHAT ABOUT FEES COLLECTED BY STATE CSE PROGRAMS? MUST THEY ALL BE OFFSET AGAINST PROGRAM EXPENDITURES?
DISCUSSION:Although most States have procedures for offsetting fees, many do not follow through. Some States offset application fees but not other fees collected. Federal regulations on this matter are clear. Any and all fees collected under the Title IV-D State plan are treated the same as interest earned and MUST be offset against program expenditures. This includes late fees, tax offset fees, FPLS fees, and clerk of court fees.
RECOMMENDATION: Ensure all appropriate fees are offset from program expenditures in practice as well as in theory.
REFERENCE: 45 CFR 304.50 (a)
HOW DO INTERNAL CONTROL REQUIREMENTS AFFECT COOPERATIVE AGREEMENTS WITH OTHER AGENCIES?
DISCUSSION:Cooperative agreements between Child Support Enforcement agencies and other organizations (e.g., district attorneys, clerks of court, and other law enforcement officials) are widespread. Such agreements commit the parties involved to provide certain information or services upon request. Yet, these agreements often fail to specifically include all CSE program regulations, may not point out the responsibility to meet these requirements, and/or are not adequately monitored by the State CSE agency. Regulations which must be included in cooperative agreements include bonding of employees, separation of cash handling and accounting, and treatment of program income. Without complete information about CSE regulations, other agencies may fail to comply with these regulations. If disclosed during an audit, such a failure would be attributed to the CSE agency.
RECOMMENDATION: Review cooperative agreements, especially in light of the final rule on provisions that must be contained in all cooperative agreements published in the Federal Register on July 19, 1989.
REFERENCE:45 CFR 302.19 / 302.20 / 302.34 / 304.50
WHAT SAFEGUARDS ARE NECESSARY TO ENSURE THE PROPER HANDLING
OF CHECKS AND OTHER NEGOTIABLE INSTRUMENTS?
DISCUSSION:Blank checks, check writing equipment, and pre-numbered receipts should be treated as cash and therefore be locked up when not in authorized use. Checks received for collections should be restrictively endorsed to a specific account on the day they are received to prevent loss or fraudulent use.
RECOMMENDATION: Review current procedures for the handling of checks and receipts.
HOW OFTEN SHOULD COLLECTIONS BE DEPOSITED?
DISCUSSION:Good accounting principles dictate the daily deposit of all funds to safeguard against theft or misappropriation. Most States which have chosen an alternate plan do so for the sake of convenience. Any benefit gained by convenience is more than offset by the potential for loss. Daily deposits will also generate increased interest earnings in the long run.
RECOMMENDATION: Deposit of all funds on a daily basis is a primary safeguard against fraud or theft. Let the bank do the job of protecting your collections.
WHAT DO I DO WITH POSTDATED CHECKS?
DISCUSSION: Postdated checks present a unique situation to the agency and bank alike. If your bank will accept postdated checks then the best policy is to deposit them on the day of receipt with other checks. If your bank will not accept them, you should restrictively endorse postdated checks, maintain a tickler file of check dates, and hold them in your safe until the due date.
RECOMMENDATION:Restrictively endorse postdated checks upon receipt. Deposit them as soon as your bank allows.
WHAT SPECIAL PRECAUTIONS SHOULD BE TAKEN WHEN DEPOSITING COLLECTIONS?
DISCUSSION:Collections enroute to deposit are easy targets for theft. Proper security procedures such as use of an armed guard or two depositors reduce the possibility of a loss.
Another alternative may be the use of a Post Office lockbox in conjunction with a bank collection system. This provides an extra dimension in security by removing the CSE office from contact with collections and payments. Obligors mail child support payments to a designated deposit box at the Post Office. The CSE agency contracts with a bank to pick up collections, process payments, and even generate checks to Child Support clients.
REFERENCE: OCSE TEMPO #16 "Lockbox and Bank Collection System"
RECOMMENDATION: Always use an armed guard or two depositors to accompany collections to the bank. Examine the use of a lockbox / bank collection system.
WHY MUST CASH HANDLING AND ACCOUNTING FUNCTIONS BE
SEGREGATED? DOESN'T THAT JUST MAKE THE SYSTEM MORE COMPLEX AND LABOR INTENSIVE?
DISCUSSION:Some CSE programs audited use one person to receive, record, and deposit checks. Good business and accounting practice as well as Federal regulation prohibits such actions unless a specific waiver has been granted by the appropriate OCSE regional office. Such waivers are only available for sparsely populated areas. An office practice which allows one person to perform several successive and related functions opens the agency to potential theft.
RECOMMENDATION:Verify that those who open mail, post program collections, and prepare bank deposits do not have physical access to those funds. Set up a system of cross checks to verify continued separation of cash handling and accounting. Seek a waiver when the circumstances warrant such an action.
REFERENCE: 45 CFR 302.20
WHAT IS THE PROPER RELATIONSHIP OF BANK STATEMENT TO ACCOUNT LEDGER?
DISCUSSION:Neither bank statement nor account ledger should be used to the exclusion of the other. Bank statements must be regularly balanced with account ledgers to ensure the proper posting of all deposits and charges. Accounts in some CSE programs audited had thousands of dollars in errors due to bank miscalculation. This could have been easily detected by a simple reconciliation of bank statement to ledger.
RECOMMENDATION:Verify that account ledgers are cross-checked regularly.
WHY GO THROUGH THE INCONVENIENCE OF LOCKING AND UNLOCKING SAFES AND CASH DRAWERS SO OFTEN?
DISCUSSION: Many of the State and local programs audited failed to keep safes and cash drawers locked when not attended. An unlocked safe or cash drawer is inviting theft and misappropriation. Locking may seem to be a tedious inconvenience at the time. However, it is a sure deterrent to theft from both inside and outside the organization. Keeping the safe or cash box locked makes a clear statement that office management is serious about proper controls and safeguarding CSE funds.
RECOMMENDATION:Take the time to lock up whenever you are not using a safe or cash drawer. Make sure that your safe / cash box is located in a secure area, away from outside doors, elevators, etc.
WHAT SHOULD BE DONE WITH UNIDENTIFIABLE AND UNDISTRIBUTABLE COLLECTIONS?
DISCUSSION: Unidentifiable and undistributable funds are recognized as an area of difficulty for even the most efficient Child Support Enforcement program. The amount of effort required discourages some agencies from action. As a result, large sums of money may accumulate in program accounts. This money is a real loss to the intended recipients as well as a potential source of misappropriation. Unidentified and undistributed funds can be lost in the system where they are easy targets for fraud from within an organization.
The primary objective is to identify and distribute all collections within a reasonable time frame. Only those collections which cannot be processed to the custodial parent or appropriately returned to the obligor should be placed in State CSE accounts. These accounts should be strictly monitored and regularly disbursed according to State accounting practices.
RECOMMENDATION:Make your first priority to quickly identify and distribute collections. Identify and take all feasible steps to reduce the number of unidentified collections. Ensure that these funds are not left open to theft or misappropriation.