MUNICIPAL ACCOUNTING

Importance of Internal Control *

The importance of internal control in a small municipality is as great as for a large city. Often times this is overlooked with a resulting looseness that makes the cost of auditing for the small municipality out of proportion to that of the large. The rudiments of internal control should be maintained regardless of the size of the municipality. In designing a system of internal control it must be always borne in mind that the objective of any manipulation of accounts is in the final analysis, cash; consequently, the prime objective of all systems of internal control must be to safeguard cash and bank accounts. In addition, in a municipality, supply and fixed asset accounts should also be equally controlled.

Internal control in a municipal accounting system is represented by those devices and procedures and forms included in the accounting system, which assure the governing officials and the public of the accuracy and the authenticity of the transactions recorded.

Good internal control procedures are of necessity linked closely with good accounting control and accounting procedures. Most embezzlements occur because of a breakdown or lack of adequate internal and accounting control. It is the opinion of the writers that such a failure is not necessarily or always a condemnation of the system in use, but is certainly an indictment that should cause the system to be inspected for the determination of flaws and the correction thereof. In evaluating and setting up a system of internal control the cost of the operation must be considered, for it is usually not advisable to spend dollars to safeguard pennies.

In a very large city a complete system of internal control is possible. Such a system would include a complete organizational chart which would deny to any individual complete control over any transaction. Such an arrangement of divided responsibility assures a more adequate degree of control over the individual's work. As the size of the operation decreases, the application of internal control procedures usually are more and more limited. Even in the smallest organizations many elements of internal control are available to assist in the evaluation of the reliability of records and the accuracy of the transactions.

Internal control should provide for a means of audit of receipt of cash at the source. This is generally done by the use of pre-numbered receipts, machine certification of proof of payment, other machine control of transactions—remittance control—and the issuance of original documents, licenses, etc., by an office other than the office which received payment and is accomplished by the submission of proof of payment to the office issuing the document.

Disbursements should also be controlled at the origin through proper purchase order procedures, vouchering for payment, proof of receipt of services and material, legislative review and authorization for payments, and budgetary control procedures. Under no circumstance should a transaction begin and end in the same office.

Disbursements of municipal funds in Illinois are, in general, protected on an internal control basis by procedures set forth in state statutes. It is required that all expenditures be approved by the governing body, and that disbursements for those expenditures be made only upon warrants signed by the Mayor or Village President, countersigned by the Clerk or Comptroller, and disbursed by the Treasurer. Proof of receipt of material can best be accomplished by requiring that the vendor's invoice for materials or services be supported by a receiving report signed by the individual in the municipal employment responsible for receiving the material. This does not of necessity entail a receiving station, but could be accomplished by providing that a designated employee in each department could sign such a receiving report.

Self-determination of accountability is a cardinal violation of the principles of internal control; therefore, any adequate system of internal control should provide that no individual keep the entire record of a transaction.

Internal control also extends to property and supply accounts and it is recommended that plant ledgers be installed by all municipalities to account for units for the purpose of property control. This will be the subject of a bulletin to be issued at a later date.

In the final analysis, the independent auditor must place substantial reliance on internal control or examine the accounts of the municipality in far greater detail than would be required if an adequate system of internal control was in use. We recommend that you request your independent accountant to study and evaluate your system of internal control and to make recommendations which should lead to further improvement.

* Editor's Note: This is the first of a series of periodic bulletins Issued by the Municipal Audits Division in the office of State Auditor Elbert S. Smith which will be published from time to time in The Review. These informative articles should prove of interest to all municipal officials.

Page 28 / Illinois Municipal Review / February 1958