MRSC has joined with Toni Nelson, Small Cities Specialist, State Auditor's Office, Tracey Dunlap, Director of Finance & Administration at the City of Kirkland, and Mike Bailey, Administrator of Finance and Information Services, City of Renton, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*

Why Internal Controls are Everyone’s Job

June 2008

By Tracey Dunlap, Director of Finance & Administration, City of Kirkland

The audit world is changing and we as governments are beginning to feel the full impacts of events that occurred in the private sector over the last decade (think Enron, MCI, etc.). In the April Finance Advisor, we learned about the new Statement on Auditing Standards SAS 112 entitled “Communicating Internal Control Related Matters Identified in an Audit” and its relationship to financial reporting. This article expands on the topic of internal controls and the role they play in government organizations.

The implementation of SAS 112 has resulted in a substantial increase in the number of findings that begin with “The [City] does not have adequate internal controls…”. In reading those findings (if you haven’t seen the SAO’s new subscription service, check it out), it reinforced for me the importance of internal controls within government organizations and that everyone in the organization has a role to play.

The Government Finance Officers Association (GFOA) “Blue Book” defines an “internal control framework” as an: “Integrated set of policies and procedures designed to assist management to achieve its goals and objectives.” What are management’s objectives? In this context, they include:

• Operate effectively and efficiently,
• Provide reliable financial reporting, and
• Comply with applicable laws and regulations.

So what does this really mean? Most people think of internal controls as finance’s responsibility, but in reality, their success depends on everyone playing their role. It starts with all employees familiarizing themselves with the agencies policies and procedures, including financial, administrative, and legal requirements, and following them. Periodic training, including refreshers, on policies and procedures can be helpful, as well as using the Internet to communicate changes and reminders to staff.

Management’s role is multi-faceted. The chief executive’s recognition of the importance of internal controls and visible support for their implementation and enforcement is key. This support needs to pass down through department directors and managers. At Kirkland, we have instituted a monthly agenda item at the Directors’ meeting to review “internal control practices”, to make sure everyone is on the same page on selected issues. Remember, when a department director or manager signs off on a claim for expense or other approval, they are taking responsibility that they have checked that it conforms with applicable policies and procedures.

Finally, elected officials have an important role, which is becoming more clearly defined through the implementation of Statement of Auditing Standards SAS 114, “The Auditor’s Communication With Those Charged With Governance”. The SAS defines those charged with governance as “Those with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity” and defines management as “those who are responsible for achieving the objectives of the enterprise and who have the authority to establish policies and make decisions by which those objectives are to be pursued”. A good practice regardless of the requirements is to keep your elected officials informed and involved about internal control matters all year long (not just during the audit). One way that Kirkland keeps them involved is to include an item periodically on the Council Finance Subcommittee agenda to discuss the audit and other internal control issues. Overall, the objective of all of the communication techniques is to keep the topic on everyone’s radar.

Finally, the role of finance has many elements, including development of policies and their implementation and enforcement. However, finance professionals are not the only ones tasked with making sure the City has adequate internal controls. City clerks, legal counsel, and others also have obligations to ensure compliance. So next time that your finance folks ask you for your detailed receipts, or your City Clerk follows up on a public disclosure response, or your City attorney reminds you of applicable laws, remember that they are doing it to protect you, your agency, and ultimately the public.

Toni Nelson is the "Small Cities Specialist" for the Washington State Auditor's Office, providing both on and off site financial training and assistance to smaller cities and towns throughout the state. Ms. Nelson has been working with the Auditors office for 6 years and prior to that was the Clerk/Treasurer for a small town for 9 years. She has co-authored the "Small Cities Manual" a detailed reference guide for new clerk/treasurers on governmental accounting procedures and presents numerous training workshops throughout the state for AWC, WFOA, WMTA, WMCA and local/regional organizations such as EWFOA and SCWMCA. Ms. Nelson is also a member of and conference track coordinator for the WFOA Education Committee.

Mike Bailey is currently the Administrator of Finance and Information Services for the city of Renton. Previously, he worked as the Director of Finance for the city of Lynnwood for six years. Mr. Bailey also served as president of the Washington Finance Officers Association and is the Vice Chair of the GFOA Budget Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey co-founded the annual Budget and Fiscal Management Workshops held each summer. Mr. Bailey conducts numerous workshops and has authored various articles on local government finance, including Effective Budgeting in Washington State Cities published by the Association of Washington Cities.

Tracey Dunlap, P.E. is the Director of Finance & Administration at the City of Kirkland. Prior to joining Kirkland in 2006, she was a principal and shareholder in FCS Group, a regional financial and management consulting firm (14 years). An industrial engineer registered in the state of Washington, she has worked with jurisdictions throughout the Northwest to develop and implement cost recovery and fee strategies, set utility rates, and improve organizational efficiency and effectiveness. Tracey's experience also includes working for a large defense contractor (5 years) and a major financial institution (3 years). She has presented on a wide array of topics for organizations including WFOA, APWA, APA, WABO, and AWC.

*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.