Finding Text
#2021-001 – Material Weakness - Segregation of Duties
Criteria
A good internal control structure consists of proper segregation of duties where no one person is involved in all aspects of a given transaction. This includes proper segregation of the following functions: authorization of transactions, custody of assets, and recordkeeping.
Condition
During the course of the audit, we noted improper segregation of duties over cash disbursements, payroll, and cash receipts:
Cash Disbursements:
During the year ended December 31, 2021, one individual had full signing authority on checks written from the Organization’s accounts, and also had full access to the check stock. Additionally, this individual was the one who authorized and regularly paid the expenses. This normally included making payments by cash. During the year ended December 31, 2021, the Organization did not have an accounting system in place nor were bank reconciliations performed.
Payroll:
During our audit, we noted that there is no documented approval of the hourly wages or salaries that are entered into the payroll spreadsheet used to generate payroll. We reviewed multiple timesheets that did not include a supervisor’s approval. We also noted that there was no review of the completed payroll registers.
Cash Receipts:
During our audit, we noted that the same individual opens the mail and regularly makes the deposits which could result in a misappropriation of funds, without a second level of review and reconciliation procedures between the cash received and the deposits made. We also noted that there are no procedures in place to reconcile the grant billing to the general ledger and the cash log to the bank records.
Cause
The Organization was unprepared for the sudden growth experienced when its grant funding increased, and did not properly implement internal controls to process its daily transactions.
Effect
Without proper segregation of duties over cash disbursements and receipts, funds could be misappropriated without detection by management or the Board. A lack of proper segregation over payroll controls could result in ghost employees on the Organization’s payroll or overpayment of hours and rates due to the lack of review and approval.
Questioned Costs
None
Perspective Information
During the audit we gained an understanding of the Organization’s internal controls through inquiry and observation and by examining one item from each of the three cycles: cash receipts, cash disbursements, and payroll.
Identification as a repeat finding
A similar issue was noted in prior year finding #2020-001.
Recommendation
We recommend that the Organization implement policies and procedures which ensure that no one individual is involved in all aspects of the cash receipts, disbursements and payroll processes. The Organization should review these processes and segregate duties as much as considered practical.
View of responsible officials and planned corrective action
In 2021 we were a small agency with minimal experience with federal and state grants. All our funding prior to this was private donations, fundraising and county funding. We grew very quickly in a short period of time. At the beginning of 2020, when we first received federal funding, we had six employees and have since grown to over 40 employees. Since the time of the audit, we have gained knowledge and have already made changes to better meet the needs of our grant providers and our organization. With the segregation of duties, we started out with just one person handling the billing and the Executive Director overseeing all fiscal aspects. In the beginning of 2023, we have added two staff that work directly with the fiscal department to help with the segregation of duties and to have improved checks and balances in this department.