BASIC ELEMENTS OF AN EFFECTIVE FINANCIAL …

1 BASIC ELEMENTS OF AN EFFECTIVE FINANCIAL MANAGEMENT SYSTEMBASIC ELEMENTS OF AN EFFECTIVE FINANCIAL MANAGEMENT SYSTEMMay 1994 IntroductionAgencies are required to have an EFFECTIVE FINANCIAL management system as a condition of receiving federal funds. Federal and state rules and regulations establish several criteria that the FINANCIAL systems of agencies receiving funds must meet. These criteria can be grouped in several different ways. However, we have chosen to rely heavily on the Federal "Common Rule," which broadly establishes standards for FINANCIAL management which are applicable to most grants, and we have identified seven essential ELEMENTS to an EFFECTIVE FINANCIAL management system.

2 They are:l FINANCIAL Reporting l accounting Records and Source Documentation l Internal Control l Budget Control l Allowable Cost l Cash Management l Compliance 1. FINANCIAL ReportingAccurate, current, and complete disclosure of the FINANCIAL results of financially assisted activities must be made in accordance with the FINANCIAL reporting requirements of the grant or subgrant. FINANCIAL reporting requirements stem from a variety of sources, and FINANCIAL reports serve many purposes. For example, they serve as tools for use by managers to control their organizations and to monitor the extent to which management's objectives are being achieved.

3 They also provide information to external parties on an organization's FINANCIAL operations and compliance with a variety of requirements. a. Each agency may require its own system of FINANCIAL reports designed to assist the agency and itsgoverning board in controlling and monitoring its operations to insure that the objectivesestablished for the agency by top management are being The individual contracts under which an agency receives funding may impose additionalfinancial reporting requirements upon the agency receiving Federal regulations establishing the administrative requirements for grants require a variety ofBASIC ELEMENTS OF AN EFFECTIVE

4 FINANCIAL MANAGEMENT SYSTEM expenditure reports which serve as a basis for reimbursement. d. Audit requirements imposed as a condition of funding require the organizations receiving fundsto have audits. The audit reports reflect the FINANCIAL condition of the organization and the resultsof operations and also include reports on the organization's internal control structure andcompliance with applicable laws, rules, and accounting Records and Source DocumentationGrantees and sub-grantees must maintain records which adequately identify the source and application of funds provided for financially assisted activities.

5 These records must contain information pertaining to grant or subgrant awards and authorizations, obligations, unobligated balances, assets, liabilities, outlays or expenditures, and income. accounting records must be supported by such source documentation as cancelled checks, paid bills, payrolls, time and attendance records, contract and subcontract award documents, any FINANCIAL management system, a variety of accounting and other records is required in order to adequately provide a picture of the FINANCIAL condition and results of operations of the organization.

6 Several issues related to accounting records and source documentation are discussed in Chapter ( accounting Records and Source Documentation) of this manual. These issues include criteria for documents and records, record retention requirements, and principles for accounting records related to the administration of FINANCIAL assistance independent auditor will examine and test accounting records and source documentation as a part of the audit in order to substantiate the information that appears in the FINANCIAL statements.

7 In an audit involving FINANCIAL assistance, expenditures and other transactions that are not supported by adequate documentation may result in questioned and/or disallowed costs, which the grantee may have to pay back to the granting a granting agency, DHSS reserves the right to examine/audit an agency's accounting records and source documentation. 3. Internal ControlEffective control and accountability must be maintained for all grant and subgrant cash, real and personal property, and other assets. Grantees and subgrantees must adequately safeguard all such property and must assure that it is used solely for authorized is responsible for establishing and maintaining an EFFECTIVE system of internal control.

8 An entity's internal control structure consists of the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved. An internal control structure is comprised of three ELEMENTS : BASIC ELEMENTS OF AN EFFECTIVE FINANCIAL MANAGEMENT "control environment." Management philosophy and operating style, an entity'sorganizational structure, and the methods of assigning authority and responsibility can contributeto whether or not an agency has an EFFECTIVE system of internal controls.

9 The combined effect ofthese and other factors constitute an entity's control accounting system. The accounting system consists of the methods and records established toidentify, assemble, analyze, classify, record, and report an entity's transactions and to maintainaccountability for the related assets and procedures. Control procedures are those policies and procedures, in addition to thecontrol environment and accounting system, that management has established to providereasonable assurance that specific entity objectives will be topic of internal controls covers a wide area.

10 Thus, a more in-depth treatment of internal controls is provided in Chapter (Internal Control) of this Budget ControlActual expenditures or outlays must be compared with budgeted amounts for each grant or subgrant. FINANCIAL information must be related to performance or productivity data, including the development of unit cost information whenever appropriate or specifically required in the grant or subgrant agreement. If unit cost data are required, estimates based on available documentation will be accepted whenever possible.