(A) (1) Overview.
(a) Effective July 1, 2015, Indiana enacted IC 5-11-1-27 which requires each political subdivision in Indiana, including the City of Peru, Indiana (the "city"), to establish and maintain a system of internal controls to promote governmental accountability and transparency. The purpose of the internal control process is to provide reasonable assurance that the mission and objectives of the city will be achieved, and that public funds and property are properly accounted for.
(b) Internal controls are not separate systems of the city or an isolated activity; rather, internal controls are an integral part of each activity used to guide the city. The purpose of internal control includes the reduction of risk associated with fraud as well as the safeguarding of city resources against loss due to waste, abuse, mismanagement or errors. Internal control processes provide a check and balance system over operations, promoting operational effectiveness and overall efficiency. A system of sufficient internal control produces reliable financial and management data, ensures accuracy and timeliness in reporting, and promotes compliance with applicable laws. This internal control policy is intended to meet the compliance requirements defined by the State Board of Accounts under IC 5-11-1-27(e) for the city.
(c) Controls are put in place to detect or prevent errors and fraud. An ERROR is an unintentional mistake that has the potential to affect the financial statements and FRAUD is the intentional misuse or misappropriation of city assets.
(d) Enforcement, maintenance and ongoing evaluation of the city's internal control policy shall be the responsibility of the city's Internal Control Oversight Committee (the "Oversight Committee") which shall consist of the Mayor, the Clerk-Treasurer and one member of the City Council (the "Council") selected by the Council. The Oversight Committee shall have the duties and responsibilities set forth in this Policy including the ongoing evaluation of the city's internal controls.
(e) The evaluation of internal controls includes identifying the framework used by the Oversight Committee to determine the effectiveness of internal controls.
(2) Objectives of internal control.
(a) The three objectives of internal controls are to ensure: (1) the effectiveness and efficiency of operations, (2) the reliability of financial reporting, and (3) compliance with applicable laws and regulations. The safeguarding of city funds and assets is a subset of each of these objectives.
(b) Continuous monitoring and testing is needed to help identify poorly designed or ineffective internal controls. The Oversight Committee shall be responsible for communicating the objectives of internal control to all personnel of the city with access to public funds, the training of such personnel and ensuring that the city is committed to sustaining an effective internal control environment.
(3) Components of internal controls. The five components of internal controls include: (1) the control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring of the controls. Each of these components is discussed further below.
(4) Control environment. The control environment includes the organizational structure, the control framework, the city's policies and procedures and internal and external influences. The tone set by the oversight Committee and the Council determines the attitude toward the controls implemented by the city.
(a) Organizational structure.
1. The Council, as the city's legislative body, is responsible for adopting internal control policies.
2. The Oversight Committee has primary responsibility for enforcement, maintenance and ongoing evaluation of the policies. The Clerk-Treasurer, as the city's Fiscal Officer, shall have primary responsibility for implementing the controls and certifying the training of all appropriate personnel.
(b) Control framework. Elements of a control framework include the following:
1. Segregation of duties to help ensure the reliability of the city's internal controls, i.e., one person should not have access to all stages of a process. If proper segregation is not in place, situations may arise where errors, irregularities or fraud may occur and remain undetected.
2. Due to the small number of city employees, segregation is difficult and compensating procedures should be explored.
3. Integrity and competence of personnel performing the duties are key to achieving the desired controls. This includes hiring the proper people and continually training personnel. It is important to ensure that employees who perform financial tasks have the knowledge and skill to perform their duties.
4. Communication by the Oversight Committee of the controls and each employee's responsibilities are as important as ensuring employees know how to communicate irregularities that may arise.
5. Proper supervision of employees is also needed to ensure proper execution of control activities. This will be the primary responsibility of the Mayor and the Clerk-Treasurer.
(c) City's policies and procedures. The city's internal control policies set the overall direction of the city with respect to financial integrity. Procedures for all areas of financial preparation, reporting, operations, maintenance, personnel and payroll are required. These policies and procedures will become the basis for the determination of compliance with internal control policies.
(5) Oversight Committee’s risk assessment. The Oversight Committee shall conduct an assessment of risks relevant to the city’s financial statements and practices. This includes the identification of potential risks, the analysis of the potential impact of those risks on the ability to property report the city’s financial statements and the overall management of financial loss risks. Items to consider in risk assessment include, but are not limited to:
(a) The hiring of new personnel or the assignment of new duties to existing personnel.
(b) How a change in accounting information system impacts existing controls and how effectively the training of personnel on any new system is conducted.
(c) Changes in regulations and laws that may affect the control environment.
(d) Securing records appropriately.
(e) Limiting access to computer and data files.
(f) Segregation of duties relating to financial matters.
(g) Timely recordation of transactions.
(h) Assuring that cash is deposited timely.
(i) Physically safeguarding and accounting for valuable assets.
(j) Assuring financial transactions are performed only by authorized personnel.
(k) Reconciliations are property and promptly completed.
(l) Occurrences of management override of established controls are limited.
(m) Minimizing opportunities for fraud and unintentional error.
(6) Control activities. CONTROL ACTIVITIES include the policies and procedures that are in place to achieve the controls desired. Documentation of the control activities is vital to the overall control environment. These activities include, but are not limited to:
(a) Segregation of duties where possible.
(b) Timely transaction recording.
(c) Timely cash deposits.
(d) Physically safeguarding valuable assets.
(e) Assuring financial transactions are performed by authorized personnel only.
(f) Assuring reconciliations are properly and promptly completed.
(g) Documenting reported variances, actions taken in response thereto, and recommended changes to internal controls.
(7) Information and communication.
(a) The Oversight Committee shall determine if the financial communication and information systems utilized in the city are adequate and relevant for their intended purpose and shall make any recommended changes to the Council for action.
(b) The Oversight Committee is responsible for communicating the controls of the city to city employees and also the responsibilities of each employees in the control system.
(c) The Oversight Committee is also charged with reviewing information, however generated, that may indicate a flaw in the controls that may impede the detection of errors in a timely fashion.
(8) Monitoring. The Oversight Committee is also charged with reviewing internal controls on an ongoing basis.Monitoring can include responding to the recommendation of the State Board of Accounts in
changes in the controls and reviewing correspondence from outside sources such as banks and vendors for unusual items. Employees should understand the control activities and their responsibilities in those activities.
(a) Ongoing evaluation of controls.
1. City controls shall be evaluated at least annually by the Oversight Committee and at any other time that circumstances dictate. Evaluations shall be reported to the Council along with any recommended revisions to control policies. Evaluation should also occur every time one of the following conditions exist:
A. Change in personnel performing a control function.
B. Change in accounting or payroll systems.
C. Change in applicable law or regulations.
2. As controls are evaluated a determination should be made that designates the control as either "effective" or "ineffective" at achieving the proposed control. Controls are effective
when then would be no material weaknesses in internal controls involved in financial reporting. Ineffective controls would be those where at least one material weakness exists. If a control is determined to be ineffective, then the control deficiency needs to be evaluated and revised.
(b) Control deficiencies. A control deficiency exists when the design or operation of a control does not allow the Oversight Committee to prevent or detect misstatements on a timely basis. A design deficiency exists when a necessary control is missing or is not designed to enable the control objective to be met. An operational deficiency exists when a control is designed properly, but does not operate as designed or the person performing the control is not qualified to perform the control. A deficiency may exist that is unavoidable (e.g., segregation of duties in a small office). For these deficiencies, compensating procedures shall be put in place by the Council.
(c) Limitations on effectiveness of controls. The city should understand that potential fraud could exist and not be detected timely in at least the following circumstances: (1) when the city has poorly designed or operated internal controls, (2) when there are too many management overrides of established controls, and (3) when there is collusion between employees or between an employee and a third party.
(9) Review of city processes.
(a) When reviewing control processes in the city, the Oversight Committee should consider incorporating the "5 Ws".
1. Who performs each activity? Who receives the outcome of the activities?
2. What activities are performed? What forms and reports are used? What computer systems and files are used?
3. When are activities performed? What is the sequence of activities? What is the timing of the activities? What is the frequency of the activities?
4. Where are activities performed?
5. Why are activities performed (i.e., what risks are controlled)?
(b) The Oversight Committee should also consider whether any changes to the process will increase the efficiency of the process or firm up the controls.
(10) Communicating staff members' roles. The Mayor and Clerk-Treasurer will establish a procedure to ensure that all employees who are charged with a control understand the importance of the control and their role in the control environment. Controls that are not performed with an understanding of the purpose of the control will not be effective. A review of the controls and the staff members' role in the controls should be conducted at least annually and anytime there is a change in the control, personnel, or the laws and regulations affecting the control. Documentation of these reviews should be maintained by the Clerk-Treasurer.
(11) Staff members' selection and training. With respect to internal control monitoring delegated to an employee, the Clerk-Treasurer shall ensure professional and educational reference checks are made prior to hiring a new employee to verify the proposed employee is competent to implement the delegated internal controls. The Clerk-Treasurer shall ensure that employees responsible for implementing internal controls receive routine training on the city's applicable internal control procedures and that certifications of training are obtained and maintained for inspection.
(12) Known or suspected theft. In accordance with the provisions of IC 5-11-1-27(l), if any public official has actual knowledge of or reasonable cause to believe that there has been a theft or misappropriation of public funds, immediate notice of such known or suspected misappropriation shall be given to the State Board of Accounts and the Marion County Prosecutor's office. There is no minimum level of materiality for this reporting. Any city personnel with knowledge or suspicion of such theft or misappropriation should immediately notify any member of the city Oversight Committee to report such activity so that it may be investigated, confirmed and reported. Reports of suspected theft or misappropriation will be investigated confidentially. Any confirmed or suspected theft or misappropriation will be reported to the appropriate authorities by a designee of the Oversight Committee.
(13) Statement regarding ethical conduct. It is the policy of the city that each city employee, each city elected official, and others affiliated with the city conduct themselves in the highest ethical and honest manner when handling, dispensing, or accounting for public funds and property. The funds and property of the city are taxpayer generated and are entrusted to the city for the purpose of providing public services in and near the city. The city Oversight Committee expects each individual affiliated with the city to handle city funds and property with the highest public interest in mind. Instances of intentional violation of this expectation will be dealt with through the city's disciplinary process and can result in discipline up to and including immediate dismissal from employment.
(B) Cash and deposits internal controls.
(1) General. The city collects cash and checks for numerous purposes including salvage titles, park shelter rentals, local ordinance fees and permits. The purpose of this control is to assure accurate accounting and deposit for all cash received by city personnel.
(2) Process.
(a) Only the-Clerk-Treasurer, or Deputy Clerk shall receive, deposit and account for cash (including checks and money orders) received by the city. For all funds received in the office of Clerk- Treasurer, and when funds are required to be received by other city personnel (such as the Chief of Police for salvage titles), the recipient shall immediately issue a numbered receipt for all payments received and shall immediately enter the amount in a receipts register. Receipts shall be sequentially pre-numbered and shall be issued for all money collected. Receipts shall indicate the type of payment received (e.g., cash, check, check number, etc.). Any such cash received should be deposited with the office of the Clerk-Treasurer the same business day unless received after hours, and in such event shall be deposited in the Clerk-Treasurer's office no later than the next business day, along with a copy of the receipt issued. All receipt books shall be in a form approved by the State Board of Accounts and the Clerk-Treasurer shall maintain a log of all receipt books issued which shall be retained for inspection and audit.
(b) All funds received shall be deposited in the city's depository by the Clerk-Treasurer or Deputy Clerk-Treasurer no later than the next business day as required by IC 5-13-6-1(d) unless such funds on hand do not exceed $500. When funds on hand exceed $500, such funds shall be deposited the next business day as required by IC 5-13-6-1(g). All amounts on-hand shall be deposited on the last working day of a fiscal period regardless of any dollar or time threshold. The deposit slip shall be completed by the Clerk-Treasurer or Deputy Clerk-Treasurer and reviewed and initialed by the other. All deposit slips and the cash receipts ledger shall be maintained in the office of Clerk-Treasurer for audit purposes.
(C) Purchasing internal controls.
(1) General. The city purchases office products, services and maintenance materials in the course of conducting its business. The purpose of this control is to assure accurate accounting and payment for all purchases made by city personnel and to limit the opportunity for personal use of city resources.
(2) Process.
(a) The Council authorizes the following procedures for purchases by the city. All purchasing for the city must be conducted only by the following personnel:
1. The Mayor;
2. The Clerk-Treasurer;.
3. Any authorized city personnel, only with approvals as provided herein.
(b) The Clerk-Treasurer shall have purchasing authority of up to $5,000 per single item or service expenditure. All such purchase authorizations shall be substantiated as set forth below. The Clerk-Treasurer shall additionally be responsible for approving any requests for expenditures within the Clerk-Treasurer's limits by the Mayor's office, the Maintenance Department, the Police Department (except as provided below) and other departments prior to such expenditure being made. The process is listed below:
1. Requested purchases under $500 shall be reasonably investigated to assure the best product is selected with respect to quality, necessity, and price and such recommendations shall be given to the Clerk-Treasurer for approval.
2. A receipt shall accompany the completion of the purchase and all paperwork shall be returned to the Clerk-Treasurer's office.
3. The Clerk-Treasurer shall record all such purchases in a purchase ledger.
A. All single-item or service purchases over $3,000, except for certain purchases by the Mayor, Chief of Police, or authorized city personnel, as provided below, shall require prior authorization and approval by the Board of Public Works and Safety, which shall review each such request and act thereon, either recommending such approval or disallowing the request.
B. For items or service expenditures the Mayor shall have purchasing authority of up to $1,000 per single item or service expenditure and the Chief of Police shall have purchasing authority of up to $7,500 per single item or service expenditure. For any amount over $500, a preapproval is issued by the Clerk-Treasurer prior to the purchase. Upon completion of the purchase, all paperwork shall be returned to the Clerk-Treasurer's office and the Clerk-Treasurer shall record all such purchases in a purchase ledger. Any single-item or service purchases over $7,500 by the Police Chief ($500 by the Mayor) shall require prior authorization and approval by the Board of Public Works and Safety, which shall review each such request and act thereon, either recommending such approval or disallowing the request.
(c) The city is sales tax-exempt and therefore all purchases are not subject to sales tax. However, as required by law, a tax-exempt certificate shall be presented to the vendor prior to the purchase.
These forms can be obtained from the Clerk-Treasurer's office. If not obtained before the purchase, the purchasing personnel can be held responsible for any sales taxes incurred.
(d) Supporting documentation such as receipts, cancelled checks, tickets, invoices, bills, contracts, and other pertinent records must be maintained by the Clerk-Treasurer and available for audit to provide supporting information for the validity and accountability of monies disbursed. Payments without supporting documentation may be the personal obligation of the responsible official or employee.
(e) Any employee making a purchase that does not receive the proper pre-approval consistent with this policy may be held responsible for the total amount without reimbursement. "House Account" purchases at local hardware store or other vendors are not allowed without the prior authorization of the Clerk-Treasurer if under $500 or by the Board of Public Works and Safety if in excess thereof.
(f) The Clerk-Treasurer shall be responsible for final review of all claims submitted for payment.
(g) Any single item purchase over $5,000 that meets the description of a fixed asset as described in the fixed asset policy shall be recorded on the General Fixed Asset Account Group Form by the Clerk-Treasurer.
(2) Credit card purchases.
(a) The Clerk-Treasurer is the officer designated by the city to administer use of all city credit cards. City credit cards may only be utilized by elected officials or approved city personnel for appropriate city purposes, which includes attendance at appropriate conferences and occasional and reasonable entertainment of city personnel or vendors.
(b) Credit card purchases shall be documented in the same fashion as other purchases. Supporting documents including paid bills and receipts must be submitted with the credit card when returned to the Clerk-Treasurer's office. Additionally, any interest or penalty incurred due to the late filing or furnishing of documentation by an employee may be the responsibility, of that employee.
(c) The Clerk-Treasurer, or account receivable/payable Deputy Clerk, shall reconcile credit card statements to the credit card monthly prior to including the credit card payment disbursal on the monthly claim form.
(3) Purchasing limits. Purchasing processes and subsequent spending limits for the city are as follows:
$0 - $5,000 | Clerk-Treasurer can approve. |
$0 - $1,000 | Mayor can approve from his or her budget in General Fund. |
$0 - $7,500 | Chief of Police can approve from his budget in the General Fund, Public Safety Fund and Law Enforcement Continuing Education Fund. |
Board of Public Works and Safety approves all claims | |
$50,001 - $150,000 | "Invitation to Quote" letter must be sent to at least three persons known to deal in the lines or classes of supplies or equipment being purchased. The invitations to quote must be sent at least seven days before the time fixed for receiving quotes for the supplies or equipment to be purchased. If a satisfactory quote is received, the Board of Public Works and Safety may award the purchase to the lowest responsible and responsive offeror provided no more than $100,000 of city funds will be expended on the project. |
$150,000 and up | Formal bid process following state guidelines with final approval by the Council after recommendation by the Board of Public Works and Safety if more than $100,000 of city funds will be expended and/or the contract exceeds $500,000. |
(d) Reporting and materiality. It is the policy of the city that any erroneous or irregular variances, losses or shortages, discovered in the purchasing process shall be reported to the State Board of Accounts and other appropriate officials in accordance with the city's Statement Regarding Materiality and Reporting.
(D) Payroll internal controls.
(1) General. Payroll is one of the city's largest expenditures and must be carefully controlled. The purpose of this control is to assure accurate accounting and payment for all payroll to city personnel by the Clerk-Treasurer, and Payroll Deputy-Clerk.
(2) Process.
(a) The payroll process shall be monitored and routinely verified by the Clerk-Treasurer or her Payroll Deputy/Clerk. Specific verification activities should be conducted at least annually and include the following:
1. Reviewing for fictitious employees.
2. Confirming employees' county of residence.
3. Reviewing improper alterations of payroll amounts.
4. Verifying that proper tax deductions are taken.
5. Confirming employees' additional withholding authorizations are on file.
6. Spot checking time sheets and tracing to payroll records in order to verify the proper
recording of employee hours.
7. Verifying the accuracy of individual pay rates by obtaining and reviewing city records.
8. Reviewing the adequacy of internal controls relating to the incurrence of overtime and spot checking for accuracy.
9. Determining if proper payroll forms exist such as W-4s and I-9s.
(b) Access to payroll computer applications shall be appropriately controlled by user logins and passwords. Payroll computer applications shall be limited to Clerk-Treasurer and Deputy Clerk-
Treasurer.
(3) Reporting. It is the policy of the city that any erroneous or irregular variances, losses or shortages, discovered in the payroll process shall be reported State Board of Accounts and other appropriate officials in accordance with the city's Statement Regarding Materiality and Reporting.
(Ord. 9-2021, passed 4-6-21)