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									                          Accountable Financial Management:
                          A Program Director’s Responsibilities

                                          Financial Management
                                            Intermediate Level


Presented by: Colleen B. Mendel, MA, MBA, MS
                     Executive Director
                     Training & Technical Assistance Services
                     Western Kentucky University
                     800-TTAS-4-TA (800-882-7482)
                     www.ttas.org


Workshop Objectives

$       To effectively link the financial management system to other Head Start/Early Head Start
        systems and services

$       To discuss the scope of internal controls and how they relate to responsible financial
        management

$       To identify, assess and manage risks which could impact the financial health of a local
        Head Start or Early Head Start program


Learning Outcomes

$       Improved ability to integrate financial management with other Head Start/Early Head
        Start systems and services

$       Intentional assessment of the standards of internal control as they relate to local program
        operations

$       Use of standards of internal control to strengthen program operations, reliability of
        financial reporting and overall compliance with laws and regulations

$       Ability to collect, compile, synthesize, integrate and use information to evaluate threats to
        a program’s ability to fulfill its mission and achieve its objectives

$       Use of specific tools to ameliorate risks facing Head Start and Early Head Start programs

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Accountable Financial Management:                                   Page 2
A Program Director’s Responsibilities


Workshop Outline

The Financial Management System

        Integrating Head Start Services with Financial Management
        Integrating Other Systems with Financial Management

Responsible Financial Management

        Internal Controls
        Risk Assessment

Applying the Techniques

        What’s in My In-Basket Today?

Focus on Learnings




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Page 3 of handouts: 2006 PRISM Framework


Landscape orientation, like next page




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                                                       4
                                                       INTEGRATING SYSTEMS




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                  Program          Planning      Communica-   Recordkeep-     Ongoing      Self-        Human       Fiscal       ERSEA
 SYSTEM                                                       ing/Reporting
                  Governance                     tion                         Monitoring   Assessment   Resources   Management

 Program
 Governance

 Planning


 Communica-
 tion

 Recordkeep-
 ing and
 Reporting
 Ongoing
 Monitoring

 Self-
 Assessment

 Human
 Resources

 Fiscal
 Management

 ERSEA




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                                      INTERNAL CONTROL

Quoted and adapted from: OMB Circular A-123, Management’s Responsibility for Internal
Control, II. Standards, IV. Assessing Internal Control and Appendix A: Internal Control over
Financial Reporting, III. Assessing Internal Control over Financial Reporting


STANDARDS FOR INTERNAL CONTROL

Internal control, in the broadest sense, includes the plan of organization, methods and procedures
adopted by management to meet its goals. Internal control includes processes for planning,
organizing, directing, controlling, and reporting on agency operations. The three objectives of
internal control are:

$                Effectiveness and efficiency of operations,
$                Reliability of financial reporting, and
$                Compliance with applicable laws and regulations.

The safeguarding of assets is a subset of all of these objectives. Internal control should be
designed to provide reasonable assurance regarding prevention of or prompt detection of
unauthorized acquisition, use or disposition of assets.

Management is responsible for developing and maintaining internal control activities that
comply with the following standards to meet the above objectives:

$                Control Environment,
$                Risk Assessment,
$                Control Activities,
$                Information and Communications, and
$                Monitoring

Control Environment

The control environment is the organizational structure and culture created by management and
employees to sustain organizational support for effective internal control. When designing,
evaluating or modifying the organizational structure, management must clearly demonstrate its
commitment to competence in the workplace. Within the organizational structure, management
must clearly: define areas of authority and responsibility; appropriately delegate the authority
and responsibility throughout the agency; establish a suitable hierarchy for reporting; support
appropriate human capital policies for hiring, training, evaluating, counseling, advancing,
compensating and disciplining personnel; and uphold the need for personnel to possess and
maintain the proper knowledge and skills to perform their assigned duties as well as understand
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the importance of maintaining effective internal control within the organization. The
organizational culture is also crucial within this standard. The culture should be defined by
management’s leadership in setting values of integrity and ethical behavior but is also affected
by the relationship between the organization and central oversight agencies and Congress.
Management’s philosophy and operational style will set the tone within the organization.
Management’s commitment to establishing and maintaining effective internal control should
cascade down and permeate the organization’s control environment which will aid in the
successful implementation of internal control systems.

Risk Assessment

Management should identify internal and external risks that may prevent the organization from
meeting its objectives. When identifying risks, management should take into account relevant
interactions within the organization as well as with outside organizations. Management should
also consider previous findings; e.g., auditor identified, internal management reviews, or
noncompliance with laws and regulations when identifying risks. Identified risks should then be
analyzed for their potential effect or impact on the agency.

Control Activities

Control activities include policies, procedures and mechanisms in place to help ensure that
agency objectives are met. Several examples include: proper segregation of duties (separate
personnel with authority to authorize a transaction, process the transaction, and review the
transaction); physical controls over assets (limited access to inventories or equipment); proper
authorization; and appropriate documentation and access to that documentation.

Internal control also needs to be in place over information systems – general and application
control. General control applies to all information systems such as the mainframe, network and
end-user environments, and includes agency-wide security program planning, management,
control over data center operations, system software acquisition and maintenance. Application
control should be designed to ensure that transactions are properly authorized and processed
accurately and that the data is valid and complete. Controls should be established at an
application’s interfaces to verify inputs and outputs, such as edit checks. General and application
control over information systems are interrelated, both are needed to ensure complete and
accurate information processing. Due to the rapid changes in information technology, controls
must also adjust to remain effective.

Information and Communications

Information should be communicated to relevant personnel at all levels within an organization.
The information should be relevant, reliable, and timely. It is also crucial that an agency
communicate with outside organizations as well, whether providing information or receiving it.
Examples include: receiving updated guidance from central oversight agencies; management
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communicating requirements to the operational staff; operational staff communicating with the
information systems staff to modify application software to extract data requested in the
guidance.

Monitoring

Monitoring the effectiveness of internal control should occur in the normal course of business. In
addition, periodic reviews, reconciliations or comparisons of data should be included as part of
the regular assigned duties of personnel. Periodic assessments should be integrated as part of
management’s continuous monitoring of internal control, which should be ingrained in the
agency’s operations. If an effective continuous monitoring program is in place, it can level the
resources needed to maintain effective internal controls throughout the year.

Deficiencies found in internal control should be reported to the appropriate personnel and
management responsible for that area. Deficiencies identified, whether through internal review
or by an external audit, should be evaluated and corrected. A systematic process should be in
place for addressing deficiencies.


ASSESSING INTERNAL CONTROL

Agency managers should continuously monitor and improve the effectiveness of internal control
associated with their programs. This continuous monitoring, and other periodic assessments,
should provide the basis for the agency head's annual assessment of and report on internal
control.

Agency management should determine the appropriate level of documentation needed to support
this assessment. Documentation should be appropriately detailed and organized and contain
sufficient information to support management’s assertion. Documentation should also include
appropriate representations from officials and personnel responsible for monitoring, improving
and assessing internal controls.

Sources of Information

The agency head's assessment of internal control can be performed using a variety of information
sources. Management has primary responsibility for assessing and monitoring controls, and
should use other sources as a supplement to -- not a replacement for -- its own judgment. Sources
of information include:

$                Management knowledge gained from the daily operation of agency programs and
                 systems.


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$                Management reviews conducted (i) expressly for the purpose of assessing internal
                 control, or (ii) for other purposes with an assessment of internal control as a by-
                 product of the review.
$                Reports, including audits, inspections, reviews, investigations, outcome of
                 complaints, or other products.
$                Program evaluations.

$                Audits of financial statements including: information revealed in preparing the
                 financial statements; the auditor's reports on the financial statements, internal
                 control, and compliance with laws and regulations; and any other materials
                 prepared relating to the statements.
$                Reviews of financial systems.
$                Annual evaluations and reports.
$                Annual performance plans and reports.
$                Other reviews or reports relating to agency operations.
$                Results from tests of key controls performed as part of the assessment of internal
                 control over financial reporting using items in Section II, Internal Controls and
                 Monitoring, of the 2006 Head Start Fiscal Checklist.

Use of a source of information should take into consideration whether the process included an
evaluation of internal control. Agency management should avoid duplicating reviews which
assess internal control, and should coordinate their efforts with other evaluations to the extent
practicable.

Identifying Deficiencies

Agency managers and staff should be encouraged to identify control deficiencies, as part of the
agency's commitment to recognizing and addressing management problems. Failing to report a
known reportable condition reflects adversely on the agency and places the agency’s operations
at risk. Agencies should carefully consider whether systemic weaknesses exist that adversely
affect internal control across organizational or program lines.


ASSESSING INTERNAL CONTROL OVER FINANCIAL REPORTING

Evaluate Internal Control at the Entity Level

Internal control at the entity level refers to those elements of the five components of internal
control that have an overarching or pervasive effect on the agency. Specific elements of internal
control that should be evaluated at this level are discussed below.




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Control Environment

The assessment should include obtaining a sufficient knowledge of the control environment to
understand management's attitude, awareness, and actions concerning the control environment.
The assessment should consider the collective effect on the control environment, since
management's strengths and weaknesses can have a pervasive effect on internal control. Specific
elements of the control environment that should be considered include:

$                Integrity and ethical standards
$                Commitment to competence
$                Management philosophy and operating style
$                Organizational structure
$                Assignment of authority and responsibility
$                Human resource policies and practices

Risk Assessment

The assessment should include obtaining sufficient knowledge of the agency's process on how
management considers risks relevant to financial reporting objectives and decides about actions
to address those risks. The assessment should determine how management identifies risks,
estimates the significance of risks, assesses the existence of risks in the current environment, and
relates them to financial reporting. The results of this assessment at the agency-wide level will
drive the extent of testing and review performed at the process, transaction, or application level.
Some significant circumstances or events that can affect risk include:

$                Complexity or magnitude of programs, operations, transactions, etc;
$                Accounting estimates;
$                Related party transactions;
$                Extent of manual processes or applications;
$                Decentralized versus centralized accounting and reporting functions;
$                Changes in operating environment;
$                New personnel or significant personnel changes;
$                New or revamped information systems;
$                Significant new or changed programs or operations;
$                New technology; and
$                New or amended laws, regulations, or accounting standards.

Control Activities

Control activities are the policies and procedures that help ensure that management directives are
carried out and that management's assertions in its financial reporting are valid. The assessment
should include obtaining an understanding of the control activities applicable at the entity level,
such as:
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$                Policies and procedures;
$                Management objectives (clearly written and communicated throughout the
                 agency);
$                Planning and reporting systems;
$                Analytical review and analysis;
$                Segregation of duties;
$                Safeguarding of records; and
$                Physical and access controls.

Information and Communication

The assessment should include obtaining an understanding of the information system(s) relevant
to financial reporting. Such an understanding should include:

$                The type and sufficiency of reports produced;
$                The manner in which information systems development is managed;
$                Disaster recovery;
$                Communication of employees' control related duties and responsibilities; and
$                How incoming external communication is handled.

Monitoring

The assessment should include obtaining an understanding of the major types of activities the
agency uses to monitor internal control over financial reporting, including the source of the
information related to those activities, and how those activities are used to initiate corrective
actions. Several examples include:

$                Self assessments by management;
$                Evaluations by the PRISM Review Team or external auditor; and
$                Direct testing.




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                          INTERNAL CONTROL WORKSHEET

Instructions: Think about the financial management system in your organization and apply the
five standards for internal control to your activities, policies, procedures and practices. Cite at
least one example for each standard.


Control Environment




Risk Assessment




Control Activities




Information and Communication




Monitoring




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               RISK IDENTIFICATION, ASSESSMENT AND MANAGEMENT


                                   Risk is any threat to your ability
                                   to fulfill your mission.



RISK IDENTIFICATION AND ASSESSMENT

The first step in managing risk is to identify it. What threatens an organization’s ability to fulfill
its mission? When managers identify risk, it is important to look both within and outside the
Head Start or Early Head Start program. A classic technique, SWOT Analysis, can be used as
one strategy to identify risks. The SWOT technique examines organizational Strengths and
Weaknesses and external Opportunities and Threats. This technique is often, either formally or
informally, part of Head Start’s assessment and monitoring processes. Risk managers:

$                use their intuition, professional experience and common sense to identify and
                 assess risks;
$                conduct thorough annual program self-assessments;
$                engage in ongoing monitoring; and
$                draw conclusions based on fact-based assessment.

However, the General Accounting Office chastises Head Start, saying that although Head Start
programs collect much information, they do not compile, synthesize and use it to assess risks and
identify improved processes.

Once managers have identified potential risks, they must assess their magnitude. To assess risks
to Head Start and Early Head Start, managers must examine the notion of uncertainty - the
inability to know in advance the exact likelihood or impact of future events. Evaluating these
two concepts - likelihood and impact - is a critical component in assessing the risk inherent in
any event. Is an event likely to occur and if it does, will it damage organizational performance or
reputation? To engage in effective risk management it is important first to organize the plethora
of information programs have from documents, experience, monitoring activities, etc., compile
it, synthesize it and use that information to mitigate threats to the agency’s ability to fulfill its
mission.

RISK MANAGEMENT

Risk management then is all about anticipating problems. Once managers have identified the
risks which face them and have assessed their seriousness, they must turn their attention to
managing as effectively as possible those risks which threaten the organization’s ability to fulfill
its mission. This process begins with establishing and reviewing goals and objectives, being
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clear about mission and direction, and understanding what it will take to achieve the program’s
purpose. It is a process by which Board members and managers provide reasonable assurance
that:

$                operations are effective and efficient;
$                financial reporting is reliable; and
$                the program is complying with laws and regulations.

                (Government Accounting Office, Standards for Internal Control in the Federal Government, November, 1999)

Risk management falls under the rubric of internal control, which undergirds the operations of
all successful organizations. Internal control = management control. Management control
includes managing risks.

Once risks have been identified and assessed, the risk management process identifies and
evaluates possible responses, evaluates options, and selects and executes the chosen response.
As managers evaluate their risk management options, it is important to consider the following:

$                the interrelationships among Head Start systems and services;
$                data sources;
$                timeliness and accuracy of data;
$                multiple sources of information;
$                back-up systems; and
$                checks and balances.

In thinking about responses to risks, it is useful to explore the different ways in which risk can be
managed. Different tools for risk management are appropriate for different types of risk. In
many cases, some combination of tools will be used. There are five tools which organizations
should consider as they identify and evaluate possible responses to any given risk:

$                Prevent it - determining the cause of an event and taking measures to ensure that
                 it does not occur or protect against it (e.g., sharing information, providing
                 training; instituting safety, security and other protective measures)
$                Eliminate it - recognizing that what is currently done is risky and stopping it
$                Avoid it - not putting yourself in the situation in the first place
$                Minimize it - diminishing the likelihood that something will occur or lessening its
                 impact if it happens (e.g., instituting rules, procedures, safety measures)
$                Insure it - purchasing an insurance policy to safeguard the agency, its assets, staff
                 and clients against injury, damage, or loss

Life and business are replete with risks. But good management identifies, assesses the impact
and likelihood of those risks, and uses the appropriate tool(s) to mitigate threats to an
organization’s ability to fulfill its mission and achieve its objectives.
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                           RISK MANAGEMENT WORKSHEET

Instructions: Think about the five tools for risk management. How do you use each one to
mitigate risks in the financial management system in your program/agency?


Prevent it




Eliminate it




Avoid it




Minimize it




Insure it




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                          Accountable Financial Management:
                          A Program Director’s Responsibilities

                                             In-Basket Activity


Instructions: On the following pages you will find items that might be in a director’s in-basket
(or in this day of electronic communication, many might be in your inbox or mailbox). As the
Head Start Director, review and evaluate this information within the context of risk management
and the standards of internal control. Note the issues and concerns that your review reveals,
indicate what management control or risk management strategies you would pursue to fulfill
your responsibilities in developing and maintaining an accountable financial management
system.


Program Facts

$       You are the Director of Blue Moon Head Start, one of several programs which operate
        under the auspices of Wansinna Lifetime Opportunity Corporation, a community action
        agency.

$       Financial operations of the agency are centralized, under the direction of the agency’s
        Fiscal Officer, Kevin Locke, CPA.

$       The agency has a negotiated indirect cost rate of 10% of salaries and wages.

$       Blue County Head Start serves 400 preschool age children.

$       The program’s year end date is December 31.




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                                         Blue Moon Head Start
                                        Monthly Financial Report
                                                  for
                                             October, 2005


    Cost Category     Budgeted          Monthly        Year-to-Date   Balance      Percent
                      Amount            Expenditure    Expenditure    Unspent      Unspent
    Personnel         $1,653,545        $150,000       $1,567,800     $ 85,756        5.2%

    Fringe Benefits       546,455          50,000        500,000       46,455         8.5

    Travel                 20,000           3,000         17,000          0           0.0

    Equipment              12,000             0           12,000          0           0.0

    Supplies               40,000             750         35,750        4,250       10.6

    Contractual1           56,000           4,600         46,800        9,200       16.4

    Construction           0                  0              0            0           0.0

    Other2                306,645          25,555        290,000       16,645         5.4

    Total Direct        2,634,645         233,905       2,469,350     165,295         6.3

    Indirect Cost         165,355          15,000        156,780        8,575         5.2

    TOTALS            $2,800,000        $248,905       $2,626,130     $173,870        6.2

    Non-Federal        $ 700,000           75,000        750,000       (50,000)    107.1


1
 Final payment of $2,000 was paid to Gemini Mental Health Services in October; contract
complete. An additional $1,000 a month is to be paid to Starburst Health Associates for the
services of the RD.
2
 All Other costs have been paid for the year with the exception of $1,645 remaining in rent for
Galaxy Center.

Respectfully submitted,

Chen-ru Ma, Fiscal Assistant
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When you go to your email, you find the following messages.


From: Kevin Locke, Fiscal Officer
Subject: Health Insurance
Date: Nov 28, 2005
To: Head Start Director

Just a reminder that, on top of the July health insurance premium increase of 10%, our Employee
Assistance Program took effect on October 1, 2005, and increases your fringe benefits cost by
about $750/month.

By the way, sorry that Chen-ru, my new assistant failed to get you a financial report for
September. It was her first month and she was just overwhelmed. She tells me that we’re caught
up now though.



From: Leona Starr, Education Manager
Subject: Managing Child Outcomes Training
Date: Nov 28, 2005
To: Head Start Director

I just received a wonderful flyer about a Head Start Child Outcomes Seminar in Orlando on Dec.
14-16. The registration fee is $500 and I expect that my travel expenses would be about $1,200.
I sure would like to go, and since we had that conflict with NAEYC, I haven’t had any other
professional development travel this year. Can you let me know right away? Thanks so much!




From: Skyla Schultz, HR Director
Subject: Position Vacancies
Date: Nov 28, 2005
To: Head Start Director

I have the report from the personnel committee and the personnel action form (PAF-4) that you
signed last week to fill the Operations Manager position, vacated by Estrella Ortiz on June 30th.
You neglected to note on the PAF-4 the date that you wanted Mr. Aquarius to start. Please let
me know and I’ll contact him to get the paperwork completed and get him on board.




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From: Virginia Luna, Health/Nutrition Specialist
Subject: In-Kind
Date: Nov 28, 2005
To: Head Start Director

Guess what! The Health Coordinator at Children’s Place Head Start told me that we could count
meals and snacks that parents provide at home to their children on weekends as part of our in-
kind. So I figured breakfast and lunch (no dinner, since that’s not part of our services) at the
USDA reimbursement rates for 16 meals a month (2 a day for Sat/Sun) and 8 snacks - - it’s
probably more than 8 really, but I wanted to be conservative. I started last quarter and, boy, has
that generated a ton of in-kind! Pretty cool, huh?!




From: UKLOTTERY
Subject: YOU ARE A WINNER
Date: @#$%^&*
To: Recipient

Congratulations! You may be a winner in the UKLOTTERY. To claim your prize of up to
$5,000,000, please send the following account information by return email and $500 processing
fee by check, cash or money order to the following address . . .




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                          Accountable Financial Management:
                          A Program Director’s Responsibilities

                                       Issues and Concerns
                         Internal Control and Risk Management Strategies


 Issues/Concerns                                       Strategies




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