PublicationDate: 7/1/95 ChapterNumber: 5 ChapterTitle: Accounting Procedures for Title IV Programs SectionNumber: 4 SectionTitle: Internal Control: Checks and Balances PageNumbers: 192-202 5.4 Internal Control: Checks and Balances ((Minimum requirements)) To participate in federally funded student financial aid programs, an institution must be able to demonstrate that adequate checks and balances are in place in its system of internal control. A system of internal control should, at a minimum, include: - separating the functions of authorizing and disbursing Title IV program funds; - taking a trial balance (to determine whether accounts are in balance); - reconciling cash (a reconciliation between book and bank balances for cash); and - reconciling federal funds (a reconciliation between bank accounts and federally reported balances for cash). ((Separation of functions)) According to regulations, institutions must separate the functions of authorizing payment of and disbursing Title IV funds. Separation of functions is a fundamental control concept in financial aid administration. The financial aid administrator (or office) is charged with the responsibility for authorizing disbursement by awarding aid through the need analysis and packaging processes. The awarded- aid information is then turned over to a business officer (or office) who, in turn, is responsible for disbursing the aid by applying it to institutional charges and/or delivering it to students. A further control in the system is the requirement that the institution maintain documentation to show that aid was appropriately applied to institutional charges and that remaining aid was delivered to the student. ((Regular reconciling activities)) To be effective, taking a trial balance and reconciling cash should be performed at least monthly. Reconciling federal funds should be performed no less frequently than quarterly in conjunction with preparing the Federal Cash Transaction Report--Status of Federal Cash (ED/PMS 272 Report). All Federal Work-Study, Federal Perkins Loan, and Federal Direct Loan accounts are required to be reconciled monthly. There should be a segregation of functions that provides that the person within the institution who reconciles cash and reconciles federal funds does not also receive cash or perform disbursement functions. The person performing reconciliations should receive bank statements, Direct Loan reconciliation reports, and ED/PMS 272 Reports directly from the respective sources. Supervisory approval of the completed reconciliations should be obtained and evidenced on the forms. The institution should use its internal or external auditors to periodically verify that the systems of checks and balances have been properly designed and are being followed routinely. 5.4.1 Trial Balance A trial balance is the confirmation of the equality of debit and credit balances. A trial balance for federal student financial aid programs is a confirmation that accounts receivable, program expenditures, and the cash balance equal the amount authorized. A trial balance worksheet for federal student financial aid programs appears on pages 198-9. 5.4.2 Reconciliation of Cash Because cash is more susceptible to manipulation than other assets, multiple checks and balances are necessary for effective internal control of cash. ((Bank statements)) Reconciliation of cash is a confirmation that the cash amount shown in accounting records is in agreement with the amount reflected in the bank statement. Differences between accounting records and the bank statement balance can be caused by timing variances, errors, or unrecorded entries. The results of the reconciliation process can lead to adjusting entries for: - bank service charges; - non-sufficient funds (NSF) checks; - debit and/or credit memoranda; and - error corrections. Reconciliation also provides a means for identifying and correcting bank errors. The person performing the reconciliation should be trained to recognize and report: ((Possible sources of errors)) - delays in deposit; - checks outstanding for long periods of time; - irregularities in transfers and adjustments; and - deviations with cancelled checks (payee, signature, or endorsement). The prompt and thorough performance of cash reconciliation duties enhances the system of internal control. On page 200, there is a worksheet that can be used to reconcile cash for federal student financial aid programs. If an institution maintains separate bank accounts for each program, this process should be performed for each program. 5.4.3 Reconciliation of Federal Funds Reconciliation of federal funds is a balancing of funds received from the beginning of a school's participation in a program to the totals currently recorded in the institution's accounts. In addition, the reconciliation process should include a year's determination to check agreement of reported expenditures among the trial balance report, ED/PMS 272 Report, Institutional Payment Summary, FISAP, Federal Direct Loan reconciliation report, and the audit report. Differences among these records should be resolved. One of the purposes of an audit is to check that all reconciliations have been performed. Institutions should not view the audit as a time to perform reconciliations. The form on page 201 can be used for reconciliation of federal funds. 5.4.3.1 Monthly Direct Loan Reconciliation ((Reconciliation period)) When an institution initially signs up to participate in the William D. Ford Federal Direct Loan Program (Direct Loan Program), a decision must be made as to the "as-of-date" each month that the institution will use to reconcile loan records with the Direct Loan Servicing Center (Servicing Center). Reconciliation must be performed each month using the same "as-of-date." In the Direct Loan Program, there are two types of transactions to be reconciled: - cash transactions and - loan transactions that affect cash. ((Cash reconciliation)) The first is the cash transaction. The institution must reconcile cash drawdowns and returns of excess cash with the Servicing Center. The reconciliation requires that the institution's financial accounting system and other systems, such as the student account receivable system, financial aid system, and the Direct Loan system, all be reconciled. ((Loan record reconciliation)) The second is loan transactions that have affected cash disbursements, cancellations, and adjustments that are matched with the Servicing Center. The loan transaction process is actually a data-verifying and editing process, primarily between the school's Direct Loan system and Servicing Center records. This process matches disbursements, adjustments, and cancellations to Servicing Center files. ((Unreconciled records)) *26* The institution receives a monthly report from the Servicing Center indicating which loans are reconciled and which loans are not reconciled. The report provides error messages indicating the reason the loan records are not reconciled. A loan must be "booked" (the Servicing Center must have received an origination record, promissory note, and a first disbursement record) to be reconciled. If a loan is not "booked," it will not reconcile. Normally, unreconciled items result from timing errors, such as a batch of loan data that was not included in a month-end close or a batch of loan data that was shipped to the Servicing Center at the end of the month and rejected. The institution's reports from the Direct Loan software and Servicing Center reports are used to compare the data in the two systems. 5.4.4 Other Checks and Balances There are a number of other types of checks and balances that can be built into a system for administering student financial aid. Some important types are: - input controls, - subsidiary records reconciliation, and - a clear audit trail. ((Input controls)) INPUT CONTROLS: As input transactions are being entered into a school's financial aid system, a record of the number of entries and the dollar amount of entries should be recorded. This type of batch control is necessary whether manual or automated systems are involved. After all updates for a processing cycle have been completed, the updated totals should be checked to ensure that all batches (entries) have been entered. This type of control serves two purposes: It ensures that batches are not lost, and it provides control against unauthorized transactions being entered into the system. ((Subsidiary records reconciliation)) SUBSIDIARY RECORDS RECONCILIATION: All accounts should be backed up by subsidiary ledger detail. Although taking a trial balance can be used to ensure that all accounts balance in the aggregate, it does not guarantee that there is sufficient evidence that subsidiary records exist to support the totals in each account. Errors can exist when changes or corrections are made to control accounts without corresponding adjustments being made to subsidiary records. Reconciliations between accounts and subsidiary records detail should be performed at least monthly and should be conducted on a more frequent basis during periods of high transaction volume. As mentioned earlier, most Title IV programs require monthly reconciliations. ((Clear audit trail)) CLEAR AUDIT TRAIL: A key element in any system of checks and balances is maintaining a clear (easily followed) audit trail. Records of all transactions entered into the system must be maintained. Adequate documentation requires proper approval of all transactions, a record of who was responsible for entering the transaction, when the transaction was prepared and posted, and a complete record of the transaction itself. [[The sample documents on pages 198-201 are currently unavailable for viewing. Please reference your paper document for additional information.]] *26* Refer to the April 1995 Direct Loan Reconciliation Guide for further details on monthly Direct Loan reconciliation. |