A Team Approach to Internal Audit - PowerPoint Presentation

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A Team Approach to Internal Audit

VACo Fall ConferenceNovember 14, 2011Vivian Calkins-McGettigan, MBA, CPA, CIA, CFE, CPFO Chief Internal Auditor

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With the Appropriate Structure and Tone from the Top Internal Audit can have a Very Positive Impact

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Objectives for Session

Learn how:A Collaborative Internal Audit Function will Improve Communications,Help to Detect and Deter Fraud, Waste and Abuse, Protect Public Assets and Increase Citizen Confidence.

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Why Have an Internal Audit Function?

Assesses the ethical climate and the effectiveness and efficiency of operations and serves as an organization’s safety net for compliance with rules, regulations, and overall best business practices4

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Protecting Public Confidence

We have all seen the Headlines? P-Cards Misused for Personal ItemsProperty MissingTrusted Employee Embezzles FundsAvoid the HeadlinesPubic Perception Weighted Heavily Negative Stories

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How Do you think Fraud Uncovered?

External AuditorsInternal Auditor Management ProcessesBy AccidentAnother Employee Turns them In6

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Detection of Fraud Schemes

Initial Detection of Occupational Frauds©2010 Association of Certified Fraud Examiners, Inc.7

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Establishing Our Anti-Fraud Program

Association of Certified Fraud Examiners, Inc (ACFE)2010 Report to the Nations on Occupational, Fraud and Abuse1843 Fraud Cases (106 Nations)Survey Results and Recommendations8

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ACFE Survey

Government was on the list of most commonly victimizedAnti-fraud controls appear to help reduce the cost and duration of occupational fraud schemes. 85% of fraudsters had never been previously charged or convicted for a fraud-related offense.Fraud perpetrators often display warning signs. Most common:Living beyond their means (43% of cases) Experiencing financial difficulties (36% of cases).

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©2010 Association of Certified Fraud Examiners, Inc.

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How do Internal and External Auditors Differ?

External Auditors – primary mission – provide independent opinion on financial statementsInternal Auditors – concerned with all aspects of the organization – both financial and operational Internal Auditors are Part of the Organization10

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Enhancing our Anti-Fraud Program

Focus on Deterring Fraud11

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Fraud Hotline Available To PWCS Employees and Citizens

Goal – persuading individuals not to commit fraud because of the likelihood of detection & punishmentResponsible for Achieving this Goal – EveryoneMost Fraud is Detected from Tips (40%)Perception of Getting Caught – Keeps most People Honest

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Fraud Reporting

Anonymous HotlineInternal Audit Website – Fraud FormsEmailsOffice Visits (Secret Meetings)Reports to Finance & Risk Management13

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Our Favorite

“The Angry Red Crayon Message”Hotline - Increase Employees Perception of Fairness14

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Cost of Delaying Finding Fraud

According to the 2010 Report to the Nations, where a fraud hotline was in place, the average duration of a fraud scheme was reduced by 7 months and the median loss was reduced by 59%.What does that mean?

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Transparency to Citizens

Demonstrating Fiscal Stewardship of Public Funds and Resources to Enhance Public Trust16

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Transparency to Citizens

Fraud Hotline (Internal and External)Web site (Internal Audit)Audit AgendaAudit MinutesAudit PlansPresentationsStatus Reports17

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Enhancing Our Anti-Fraud Program

Creating an Office of Internal AuditAnonymous Fraud HotlineSurprise AuditsLearning from Prior Fraud Incidents and applying the knowledge to improve processesEducating Employees (identifying red flags, importance of controls, tone from the top = zero tolerance for fraud)

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Creating an Office of Internal Audit

Independence & Reporting Structure Are the Keys19

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Getting Started

The Office of Internal Audit shall adhere to the Institute of Internal Auditors’ International Standards and Code of EthicsCreate Charter & PoliciesOffice of Internal AuditReporting, Investigating and Prosecuting Fraud, Embezzlement, and Other Financial Irregularities20

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Reporting Structure is Key?

Reports to:Board of Supervisors?Reports to County Administrator?Division in Finance?Dual Reporting (Internal Audit Committee)?21

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Reporting StructureCreate Office of Internal AuditIndependent and Objective AssuranceReports to Internal Audit Committee

2 – 3 Board Members

County Administrator or Designee

Make sure Alternates are Appointed

Dual Structure is Ideal – (Provides Independence with Enhanced Relationship with Management) - based on

Institute of Internal Auditors Guidance

(Standard 1100 Interpretation, Practice Advisory 1110-1)

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What Can you Do as Elected and Appointed Officials?

Establish Tone from the TopCooperative approachZero tolerance Fraud

Encourage Collaboration

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Not a “Gotcha”

Initial Audits Focused on Global Areas Why is there Non-compliance Emphasis on:TrainingPolicy changesDeveloping formsProviding guidance 24

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Once the Structure is Established

What to Expect the First Year PWCS Case Study25

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Focus of First Year’s Audit PlanBased on Risk Assessment

AuditsFood Service AuditsProcurement CardsSchool AuditsDrivers Education FeesSACCOther

Booster Clubs Guidelines

Preparing Training Materials

New Systems

Fraud Deterrence

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How did we get to the End Results?

Let’s Step Back in Time and Frame the EnvironmentMuch of What we Learned Applies to All Governments

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Where is Prince William County Schools?

Suburbs of Washington D.C.Economy is Driven by Federal Government PresenceHistorically Low Unemployment Rate28

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Who are We?

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Population 400,000

Students 81,000

Employees 15,000

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Community Focused on Families and Children

42% Households (Parents with Children) compared to 30% nation-wide11th Highest Median Household Income in U.S.2010 – 100 Best Communities for Young People30

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Why the Emphasis on Internal Controls

Fast Growth2 to 5 New Schools each Year for Last 10 yearsDoubled Schools in 15 years (92 Schools) 45 largest School Division in U.S.Slower Growth in Control Positions New SAS SuiteHigh Citizen ExpectationsHighly Decentralized

Recession

Potential increase for Fraud

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Impact of 1,000 Additional Students

SpaceOne Elementary School - $24 million = 40 trailersStaffing40 ES teachers or 50 HS teachersSchool administration – 1 Principal, 1.66 Assistant PrincipalSupport staff – custodial, clerical, securityTransportation of 700 students10 buses - $1 million

10 drivers

0.6 mechanics

Operating costs (fuel); bus maintenance

Central Support

(less support)

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How have we Addressed these Challenges?

New Office of Internal Audit 2010Collaborative Approach – Internal Audit and Management Team Approach to Enhancing Internal ControlsInternal Audit Observes (In Schools Daily)Brings back real world (Internal Audit & Finance)Finance develops policies

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Developing the Audit Universe

(First Step - Risk Assessment)35

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Developing the Audit Universe

Outstanding Support has been provided to Internal Audit from ManagementCooperative Approach – Impressive Engagement and ContributionsPWC Schools Internal Audit CommitteeJoint County/Schools Internal Audit CommitteeSchool Board, Superintendent, Deputy, Associates, Directors MeetingsFocus Group Meetings (Principals/Bookkeepers, Food Service)

In-service Meetings

Department and School Staff Meetings

Meetings are Ongoing (Transportation)

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Focus Group Meetings

8 Principal/Bookkeeper TeamsSelected by Level Associate Superintendents Based on Strong Working Relationship with Financial ManagementFood Services – 20 managers, cashiers and area managersObserved Processes at (elementary, middle & high) prior to meetingEnergetic group – overwhelming response

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Principal/Bookkeeper Focus Group Meeting

Overview and Objectives of Meeting2. Short Skit - Can you find the Five potential problems?3. Participation Exercise – Teams - Brainstorming4. Current Audit Universe 5. Group to Prioritize Top 10 List 6. Suggestions on controls that may be too tight or cumbersome

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Share Outcome of Meeting with Principals/Bookkeepers

Impressive High Level of Engagement Outstanding Feedback on Current Processes Top 11 Riskiest Items for Audit PlanThey requested similar forums to get together and discuss common concerns and unify requests for changes39

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Top Issues

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A

B

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Top Eleven

Vote = Top Risk

Vote = Second Risk

Payroll:

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Extra pays, SWAP, Comp Time, Overtime and Supplements

 

 

 

No online payroll approvals

 

 

 

Archaic Software - payroll

 

 

 

 

 

 

 

Cash accountability (Pictures, Book Fairs, etc.)

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Refunding of cash

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Booster, PTA clubs (use of funds, accountability)

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Division-wide mandates needed

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Standard Forms (online)

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Credit Card use (forms)

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Financial Guidelines Manual (online)

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Collection of driver education (centralization)

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Banking

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Dual enrollment collection - how do we manage this?

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Shaping Audit Universe Roundtable Exercise

150 Bookkeepers and Finance staff8 -10 people per tableRating top risks provided additional risksBookkeepers from initial meeting were champions for larger meeting100% participation 41

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Enhancing our Anti-Fraud Program

Surprise AuditsFocus on Deterring Fraud42

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Removing the Mystery out of Surprise Audits

May visit you anytime during office hoursMay observe after school activities involving cash collections (share with your school personnel)Welcome opportunity to meet with your school to discuss audits in advance to remove mysteryVisited several schools back to back43

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Surprise Audits

Findings are Shared with Finance Internal Audit is Not the Enforcer (maintaining Independence)44

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Allegations and Surprise Audits

Outlet for Employees to anonymously Share ConcernsTeam Approach to Follow-upAggressive followed up on reportsOutcomes generically shared with employeesPolicy and Procedure Changes consideredQuarterly Meeting (Finance, Internal Audit and Risk Management)45

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Surprises for Us

Real World doesn’t always match best practices and policiesTremendous knowledge learned from observations – which will shape policy and procedure changes46

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Knowledge Gained from Initial Audits

Increased Time Developing Training MaterialsMaximize Communications – Share Information with Larger Groups (User Groups, EEE Conference)Common Audit FindingsHow to Avoid FindingsUpdate on ICAC Projects Providing Increased Efficiencies and Improved Processes

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Internal Control Advisory Council

Championed by Senior StaffSteering CommitteeMany SubcommitteeEmpowering Employees = FairnessCreating Forms, Policy Changes48

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Initial Projects

43 - Audit Findings – All communicated6 - Common Findings (Develop Forms & Instructions)2 - Require Policy Changes as most managers can’t be in compliance (Real World)Nightly depositsBooster Club AuditsFinance Presents to Internal Audit Committee – Link showing collaborative approach

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Mentor Program

Example: over 125 BookkeepersMore Experienced Employees are Teamed with New Employees51

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Business Process Redesign (BPR)

ERP ImplementationHired implementation to perform BPREfficienciesService improvementsInternal controlHuman Resources and Finance 52

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Our Most Significant Risks

Payroll ProcessProcurement CardsProperty Assets (new easy-to-walk technology) (Grants)Keeping Policies Current – Rapidly Changing WorldRisks Related to Fraud53

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Real World Example Small Equipment (Tablet PCs)

Challenges for All OrganizationsReview P-Cards for Sexy ItemsProperty Asset Controls – Audit Reveals that Small Electronic Items are at Risk ($10 million is significant)Ensure Policies Match Real WorldRisk of Theft

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What is a COW?

First School Inventory had:Cow 1Cow 2Cow 3Cow 4Cow 5 Cow 6

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Is it this?

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Or This?

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Real World Example Continued

Imagine entering a middle school1600 students (ages 12-14)All standardized tests are on computers 180 laptops (30 per COW)End of day – computers are stored in COWSShuffled like 8 decks of cards58

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Real Example Continued

Inventory Tags with Line of Sight ReadersDifficult to find Non-stationary AssetsOld Days Technology was Wired to the WallFrequent Missing InventoryAdd GPS Apps to Tablets 59

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Summary – Practical Approaches

Create a Fraud HotlineSurprise AuditsPeriodically Report Findings and Outcomes4. Empower Employee to Find Solutions5. Fair Actions – Reduces Rationalization

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Summary – Practical Approaches

Create Mentor Program Focus on the Future61

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How does an Internal Audit Function:

Help detect and deter fraud waste and abuseHelp protect public resourcesImprove public confidence

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Leadership Perceptive

Establish Independent Office of Internal AuditEstablish Reporting Structure (Dual Reporting Relationship is Ideal)Set Tone from the TopEncourage CollaborationEncourage Transparency63

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Contact Us

Vivian Calkins-McGettigan, MBA, CPA, CIA, CFE, CPFOChief Internal AuditorPrince William County Public SchoolsP.O. Box 389Manassas, Va. 20108

703-791-8991

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