I wrote in the two prior “Risky Business” posts about why the management area of Internal Control is so important and outlined the five main Internal Control components.  To briefly recap, here is an excellent summary of what Internal Control is all about:

Internal controls are systematic safeguards that are a continuous built-in component of operations, reviews, and reports. Collectively, internal controls are the policies, actions and activities that provide reasonable assurance that assets and resources are protected from loss, waste or abuse; operations are efficient and effective; financial reports are accurate and reliable; and business practices are in compliance with applicable laws, regulations, and judiciary policies.[i]

When Internal Control is considered, we often automatically think of financial management.  In light of that, let’s walk through the main Internal Control components using Financial Controls as an example to show, in a practical way, the broad scope of Internal Control.

Risk Assessment in the following areas are essential:

  1. Budget (the entire cycle)
  2. Procurement of goods & accountable property
  3. Receipt of cash and other financial instruments
  4. Banking (cash, funds held in trust)
  5. Case-related management/financial orders/obligations
  6. Payments and disbursements (to litigants, jurors, vendors, travel reimbursements, etc.)
  7. Financial accounting and reporting
  8. Payroll (including time & attendance)

A detailed analysis and awareness of the organization’s vulnerabilities in each area should be part of the overall Internal Control environment.  One great way to do this is to use a checklist or questionnaire to guide the analysis.[ii]  The goal is to identify possible exposures to loss, waste, abuse, and even criminal activity (such as theft).  To realize the importance of this step, go back and read the list of internal control failures in the first Risky Business post (https://courtleader.net/2019/02/13/risky-business-part-one-who-needs-internal-control-everyone-does/).  None of us wants these things to happen in our organizations!  Once vulnerabilities are identified, the next step is to design and implement steps to prevent them from occurring.

Control Activities is the label given to efforts to eliminate vulnerabilities and prevent failures.  There are a wide range of daily to periodic actions involving manual and automated systems.  These actions involve internal and external actors.  Examples include (this is not intended to be a comprehensive list; see reference materials in the forthcoming Part 4 of the “Risky Business” posts):

  1. Robust backup of functions and data, whether conducted by staff or automated systems.
  2. Daily, weekly, monthly, quarterly, and annual reports on activities and the status of funds.
  3. Linkage of case and financial system records; this not only is efficient, but also improves data accuracy.
  4. Separation of duties so that no person has control over related financial functions. For example, the same person must not be involved in cash receipting and bank deposits, or the ordering and receiving of accountable property.
  5. Physical security of the premises, offices, and individual records.
  6. A Continuity of Operations Plan (COOP) which thoroughly covers financial functions.
  7. Routine internal and external financial audits.

It is very important to document all control activities in a financial controls manual.  Such a manual  provides a reference guide and should be used to train staff.  The manual needs to be reviewed and updated on an annual basis to ensure currency.  At the end of this post I have copied the table of contents from one court’s manual.  As you will see, the scope of financial controls manuals is very wide and detailed.

Information and Communication about the organization’s financial controls ensures that everyone is aware of their obligations and responsibilities for sound financial management.  As noted above, training of staff is essential.  Reports and data outputs must be routinely generated, reviewed, and acted upon as necessary.  A transparent and accountable organization also makes non-confidential information available to the public, funding authorities, etc.  A sound records system that documents financial activity also prepares the organization for audits as well as substantiating and defending management decisions.

Monitoring is the final main Internal Control component.  It is critical to measure how well the organization’s financial controls are working.  Baseline standards must be set to enable an evaluation of the effectiveness of the design and operation of financial controls.  If a gap between actual performance and baseline standards is found, corrective action needs to be taken to remedy the situation.  This can be done by  resetting the financial system design or taking action to improve operational effectiveness.  Monitoring also extends to the individual performance appraisals of staff members whose reviews include financial system related duties.

Monitoring must be done on a timely basis to enable prompt analysis and follow up. This often means the real-time collection of data and report publication.  Automated systems should be set up to provide staff and management with such information as needed.  Organizations should not wait until formal audits are performed to monitor financial system performance.

As we have seen, financial controls are quite complex and span almost every aspect of operations.  This description of financial controls is a great example of only one main area of Internal Control.  The same principles and components apply across all control areas.

In the next Risky Business post I will outline good resources one can access to understand and implement excellent Internal Control systems in the courts.  Meanwhile, please submit any questions and comments, which are always appreciated.

[i] Management Oversight and Stewardship Handbook, Administrative Office of the United States Courts, p.7 (2003).

[ii] For example, the U.S. federal courts use a “District Court Questionnaire,” copy available.

Table of contents from a court Financial Controls Manual (copy of the Manual available):

  1. Introduction
    • Reporting Allegations of Fraud, Waste, Abuse or Mismanagement of Resources
    • 2 Periodic Evaluation of Internal Control Procedures
    • Budget Management Organization and Plan
    • Management Authority and Fiduciary Responsibility
      • Assumption of Responsibility for Duties of Clerk
    • Chief Judge
    • Delegations, Appointments and Assignments
    • Cashier Appointment, Restrictions and Requirements
      • Appointment
      • Restrictions
      • Requirements
  1. Monies Received; Cashier Responsibilities
    • Remittances
      • Mail Remittances
      • CM/ECF Remittances Paid Using Pay.gov
      • Customer Service Counter Remittances
    • Acceptance Determination
      • Checks
      • Currency
      • Credit Card Payments
    • Cashier Action on Funds Determined to be Unacceptable
      • Contact Customer for Same-day Resolution of Problem
      • Counterfeit Currency
      • Suspicious Credit Cards
    • Funds Collection Safeguards
      • Safeguarding of Collections
      • Emergency After-hours Filings
      • Checks Not Cashed; No Change Made
      • Cash Collections in Excess of $1,000
      • Emergency Storage of Un-Receipted Funds
      • Shortages and Overages
      • Restricted Access to Cashiers Individual Closeout Audit Report
      • Responsibility for Daily Receipt Reports
    • Receipts and Collection Transactions
      • Preparation of Receipts, Generally
      • Processing Transactions Separately
      • Receipts for Mail Remittances
    • Installment Payments
    • Fee Waivers
    • Voids
      • Void Documentation
      • Adjustment of Remittance List
  1. Monies Received; Financial Section Responsibilities
    • Collection Reconciliation
      • Shortages
      • Overages
      • Reconciliation Recordkeeping
      • Securing Collections After Reconciliation
      • Verification of Mail Remittances
    • Accounting for Installment Payments
      • Record of Payments
      • Monitoring Payments and Follow-Through
    • Credit Card Chargebacks
    • Deposit of Collections
      • Data Uploaded to JFinSys
      • Checks Copied; Funds Deposited
      • Deposit Verified
      • Agreement of Totals Confirmed
    • Combination Safe
      • Access
      • Maintained Locked; Contents
    • Receipt of Funds Deposited With Court
      • Collateral Requirements
      • Recordkeeping for Funds Deposited With the Court
      • Maintenance of Documents for Funds Deposited With the Court
    • Monies Due the Court from Employees
    • Financial Reports
      • Daily Receipt Report and Cash Receipts Journal
      • Trustee and Deposit Fund Control Balance Verification
      • Unclaimed Funds Balance Verification
      • Deposits Verification
      • Statement of Accountability
      • Adjustments Between Funds
      • Monthly AO 183 Reports
      • Maintenance and Disposal of Financial Records and Documents
  1. Decentralized Budget and Control of Appropriated Funds
    • Fund Control
    • Chief Judge/Unit Executive Quarterly Budget Review
    • Budget Committee
    • Reprogramming Actions
  2. Monies Disbursed
    • Disbursement of Funds Deposited With the Court
      • Disbursement Authority
    • Disbursement of Appropriated Funds
      • Preparation and Processing of Payments
      • Maintenance of Payment Documents and Invoices
      • Examination of Payment Documents
      • Issuance of Interim Salary Checks
    • Notices Sent Through the BNC
      • Weekly Reconciliation
      • Monthly Reconciliation
  1. Travel
    • Travel in General
    • Reimbursable Expenses
    • Government-Issued Travel Credit Cards
    • Centrally Billed Account (CBA)
  2. Procurement of Goods and Services
    • Contracting Officer Certification Program (COCP)
    • Acquisition of Goods and Services
      • Solicitation of Bids
      • Documentation of Bids
      • Documentation of Purchases
      • Authority to Sign Purchase Orders
      • GSA Certification Requirements for Reimbursable Work Authorizations (RWAs)
      • Government Purchase Cards
    • Receipt of Property
  3. Property Management
    • Acquisition of Property
    • Identification of Property
    • Maintenance of Property
    • Physical Sightings
    • Property Passes
    • Disposal of Property
      • Documentation of Disposal
      • Verification of Documentation and Property
      • Inventory Update
  1. Case Records Management
    • Filings Pre-2004
    • Filings in 2004 and Later
    • Paper Documents and Audio Files Ordered Sealed
    • Electronic Records
      • Electronic Documents Ordered Sealed
  1. Payroll Reporting and Other Personnel Matters
    • Maintenance of and Access to Payroll, Time and Attendance, and Personnel Records
      • Retention of Paper Records
    • Pay Via Electronic Funds Transfer
    • Payroll Certifying Officer and Designation of Alternate; Revocation of Designation
    • Responsibilities of Leave-approving Officials, Timekeeper and Employees
    • Leave Policies
    • Leave Request and Time and Attendance Documentation
      • Automated Leave Accounting System
      • Record of Attendance and Leave; Approval
      • Leave Use Audit
    • Payroll Certification Control List
      • Reporting Absences Affecting Pay
      • Tracking Hours in Non-Pay Status
    • Authority to Electronically Approve Personnel Documents
      • Revocation of Authority to Electronically Approve Personnel Documents
    • Hiring Security Practices
  2. Physical Security
    • Building
      • Masters of Keys
      • Loan of Keys and Issuance of Temporary Building Badges to Non-Court Personnel
      • Postage Meter
    • Court-Controlled Space
    • Court-controlled Space Access Building Badges

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