Discuss recommendations.

Recommended Controls

Authorization Controls

List of recommended procedures

Segregation of Functions

List of recommended procedures

Supervision

List of recommended procedures

Accounting Records

List of recommended procedures

Access Controls

List of recommended procedures

Independent Verification

List of recommended procedures

WHOS IN CONTROL OF THE ARK?

Sara Green released her seat belt and reached into the back seat of her car for the list of audit and control questions she had prepared for the director of the Ark Preschool. She paused, listening to the sounds of childrens laughter, before closing the car door and walking into the building. Saras two children had attended the Ark Preschool and she stood for a moment in the hallway as memories washed over her. Sara remembered Thanksgiving dinners with her children dressed in grocery bag costumes of Native Americans and Pilgrims, Mothers Day teas with cookies made by children and teachers, and the annual fall festivals. Startled from her reverie by slamming doors, Sara made her way to the preschool office.

Sara entered a tiny office crammed with three desks, computers, boxes, and supplies, and was surprised to see three middle-aged women waiting anxiously for her. After clearing papers from the only empty seat, Sara greeted the preschool director, the education administrator, and the office assistant. The director and administrator run the preschool on a daily basis handling tuition receipts, bill payments, crying children, worried parents and tired teachers. The part-time office assistant, a former engineer, primarily records transactions into a Quicken system and reconciles bank statements. Sara had asked to meet with the administrator to ask a few questions about organizational goals and accounting processes at the preschool, but all three wanted to take part in the conversation.

Sara settled into her chair and pulled out her list of questions. After briefly explaining the importance of internal control, she asked the staff about preschool operating, reporting and compliance objectives. They responded that operating objectives of the Ark Preschool include financial solvency, sufficient cash when needed, reduction of waste, effective scheduling of teachers to minimize overtime, and protection of preschool equipment from theft. Their financial reporting objectives include monthly budget updates, timely reconciliation of bank accounts, and reliable annual reports to Cornerstone Church. The most important compliance objective is adherence to wage and labor laws, federal and state income reporting regulations, and state preschool licensing requirements.

Sara listened carefully as the administrator answered questions with the director and assistant adding their comments. Ringing telephones and teachers clocking out at the end of the day interrupted the interview, but Sara quickly realized all three administrators were clearly invested in the preschool and were eager to explain how it worked. She leaned forward and started taking notes.

Child Care in the United States

By the early 2010s, childcare had grown to be a $47 billion industry in the United States alone (IBISWorld 2012). In 2012, 65% of women with children aged three to five worked outside of the home, requiring assistance with child care (U.S. Census Bureau 2012). A patchwork of parents, family members, nonrelatives in the home, and external providers take care of children under school-age. Most home-based providers care for the children of no more than two families and are located in private homes. Day care centers generally care for 50 to 100 children, and are either for-profit corporations or not-for-profits sponsored by churches, community centers, parent cooperatives or Head Start (Laughlin 2013).

State and local regulations ensure facilities are safe, supervision is adequate and children are protected. Safety inspections are common, but the greatest regulatory issue for most childcare facilities is the maintenance of adequate ratios of children to staff members. While regulations vary across the United States, all states place limits on the number of children under the supervision of each caregiver. For example, Californias Title 22 (1998) requires that a single caregiver attend to no more than four infants, six toddlers from 18 to 30 months, or twelve children between age two and kindergarten. Staffing is a major issue for most preschools and it is difficult to attract caregivers who are both qualified and willing to work long hours for modest pay. Over 441,000 individuals were employed as preschool teachers in 2014, the average annual pay was $32,040, and most jobs required an associates degree (Bureau of Labor Statistics 2014). Jobs are expected to grow by 6.7% over the period from 2014 through 2024.

The Ark Preschool

The Ark Preschool is a not-for-profit preschool operating as an outreach ministry of the Cornerstone Church. It opened in 1985 when the first director saw a need for quality childcare in the community. Over time, the school adapted to meet the needs of both families who were members of the church and families in the community, and expanded operations to provide full-day childcare from infancy to school age. As an outreach ministry of the church, the preschools purpose is to provide quality care and early education in a loving environment, and the preschool prides itself on its family feel. In its first ten years, the preschool was indeed a close-knit family with the director employing four of her daughters as teachers.

The preschool has employed several directors since 1985, but the mission has remained the same: to celebrate the spirit and encourage the development of each child. A day at the preschool includes story time, alphabet and counting games, outdoor play, nature walks, water play, crafts for small motor skills, music and singing. At any time, between 60 and 75 children are enrolled at the preschool either as full-time or part-time students. Annual tuition has grown to $709,596 in 2015, an average of $59,000 per month. Expenses in 2015 total $708,459, with the preschool operating essentially in a break-even mode. The largest expenditures are for payroll and employee benefits, but the preschool also pays $3,200 per month for space shared with the church. Current tuition rates are reported in Table 1.

As is true of many not-for-profit organizations and small businesses, the Ark Preschool maintains a small administrative staff. In addition to the director and education administrator, the preschool employs 15 part-time and full-time teachers, a resource specialist, and a part-time office assistant. Both the director and administrator have early childhood education credentials and serve as substitute teachers when needed.

Linda Gonzalez, the preschool director, is responsible for the overall management of the school, including teacher hiring and training, program planning, community relations and coordination with the sponsoring church. Linda meets quarterly with the preschool advisory board, comprised of five parents of preschool children, one of which is also a church member. Linda is directly responsible to the senior minister of the Cornerstone Church and its Staff-Parish Committee.

The education administrator, Stacey Okada, assists the director in daily activities and is responsible for general financial oversight, reviewing and approving financial expenditures, deposits, and the transfer of funds between checking and savings accounts. The preschool recently hired Gloria Lloyd, the mother of several former students, to handle record-keeping activities and bookkeeping on a part-time basis.

Sara Green

Sara began her career as a CPA in a small regional accounting firm. After several years, she returned to graduate school for an advanced degree and currently teaches accounting at a local university. Although she no longer practices as a CPA, Sara keeps her license active by completing 40 continuing education units each year. Her children attended the Ark Preschool when they were younger, and her family are members of Cornerstone Church. Sara also served on the church finance committee for five years, but resigned when her evening teaching responsibilities interfered with committee meetings.

Ken Robinson, a retiree with little finance experience who served as church treasurer, asked Sara to perform the annual review of the church and preschool financial records. Knowing the demands of performing an audit and the demands on her time, Sara hesitated to agree to perform the pro bono review. Ken told Sara that the new computerized bookkeeping system makes things much easier and offered to help her as much as needed. Ken assured Sara that what was needed was more a review than an audit and gave her guidelines detailed in Table 2.

From her experience on the church finance committee, Sara knew the amount of work required to complete the review would depend on the control system present in the preschool. While the church had improved its control processes over time by segregating responsibilities, requiring documentation for expenditures and implementing strict budget controls, Sara was unsure if similar improvements were implemented at the preschool.

The Review

Sara began by examining preschool financial statements from the previous year, and read brief comments by a lay-member of the church mentioning control weaknesses. Sara pulled out her notes from the interview with Linda, Stacey and Gloria, hoping to determine the type and effectiveness of controls at the preschool and the level of review she would need to perform. The preschool staff answered her questions together, generally agreeing with each others responses, but sometimes correcting each other. A summary of the interview is detailed in Table 3.

Concerned with interview responses and overlapping responsibilities among preschool staff, Sara drew up flowcharts of preschool cash receipt and disbursement processes detailed in Exhibits 1 and 2. Making a mental note of these concerns, Sara examined three sets of payroll records. She was relieved that the preschool had outsourced the preparation of payroll to a payroll-processing firm. She recalculated hours worked, compared her totals to payroll summaries submitted to the processor, traced hours calculated to processor reports, and reviewed changes to withholdings and pay rates for three sample pay periods. While there were several miscalculations of hours worked, most of them a half-hour or less, Sara was happy to see that payroll summaries generally were accurate. This was an improvement over prior years.

Sara turned to reconciliations of bank statements, which Gloria completed on a monthly basis. Using bank statements and the preschool check register, Sara reconciled the December 31, 2015 cash account and found it agreed with Glorias reconciliation. Beginning with the January statement and the computer ledgers, she matched bank disbursements with amounts recorded on the preschool records and supporting documentation. She knew the preschool had entered into automatic payments for recurring disbursements for advertising with Yelp, an online publisher of crowd-sourced business reviews, but frowned when she saw several ATM payments lacking any documentation. Sara listed general principles for achieving internal control over cash for a small organization:

No employee should handle a transaction from beginning to end.

Separate cash handling from record keeping.

Centralize cash handling as much as possible.

Record cash receipts on a timely basis.

Make deposits daily.

Encourage parents to receive receipts.

Make all expenditures by check or electronic funds transfer.

An employee not handling cash should prepare monthly bank reconciliations.

An appropriate administrator should review the reconciliations monthly.

Compare cash receipts and disbursements to forecasted amounts and budgets.

Sara sat back in her chair and thought about the children, teachers and parents at the preschool as well as the congregation at Cornerstone Church. She had read news reports of other schools using state funds for employee vacations, mortgage payments and shopping sprees. She believed the director and office staff were caring people, but was concerned with the lack of control procedures. Sara was reasonably confident that no fraudulent activity had taken place at the preschool, but knew additional controls needed to be implemented.