Monday, August 1, 2011

When Are Internal Controls Sufficient?

If a public agency has internal controls in place to manage the procurement and contracting process, but an employee makes a mistake, are the internal controls really sufficient?  

This question is at the center of an audit finding recently issued by the Washington State Auditor's Office.

Payrolls Not Collected on Federally Funded Project:  The City of Auburn was criticized with an audit finding for their failure to collect weekly certified payroll reports from contractors and subcontractors on a federally funded public works project.  The audit noted that, even though the City has a checklist for managing federally funded projects (including the requirement to collect payrolls), the employee responsible for compliance was not aware that the project was federally funded, and thus did not collect certified payroll reports.  Click here to read the audit finding.

City Challenged Audit Finding:  The City challenged the audit finding that the internal "control was not effective or functioning as designed."  The City noted that the error of using the wrong checklist and contract for non-federally funded projects was an isolated error, and that the dollars represented in the finding constituted less than 1% of the $3.6 million in federally funded projects.

Auditor's Response:  The auditor acknowledged that it was a "one-time error," but reaffirmed the audit finding.  While the City has checklists for federally funded and non-federally funded projects, apparently there were insufficient internal controls to identify when each checklist should be applied.

Effective Internal Controls:  Mistakes and errors clearly occur everyday.  The challenge in developing internal controls for procurement and contracting is to set up the system in such a way as to minimize or prevent such errors from occurring.  This is done by establishing clear and systematic processes that don't leave tasks up to the memory of individuals.  Public agencies should build into their policies, procedures, checklists, approval documents, and other forms the necessary information to help decrease the risk of non-compliance with requirements.
Mike Purdy's Public Contracting Blog 
© 2011 by Michael E. Purdy Associates, LLC

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