Chapter 3.3: Financial Systems and Internal Control - Part 2

3.3.6 Delegations – who is allowed to do what?

A delegation is a formal tool used to communicate the authority and responsibility that is being vested in an individual or group. Providing delegations to school employees is one of the key ways in which boards carry out their responsibilities for governing schools. By setting appropriate delegations the board communicates its views about school management to staff. For example, a board may delegate to the principal authority to make all staff appointments within the existing school structure. However, the board may retain the right to approve or veto any appointments to newly established positions.

Delegations are given only by board resolution, with the nature and conditions of the delegation to be specified in writing and provided by notice to the delegated person or persons as specified in s66 of the Education Act 1989. By formalising the delegation process (recording it in writing) the Board reduces the risk of:

• overlooked tasks because ‘everybody thought someone else was doing it’
• duplicated tasks because several people thought they were responsible
• conflicts between people or groups because they feel they are uncertain who should be doing what.

3.3.7 Financial records

Section 168 of the Crown Entities Act 2004 requires school boards of trustees to ensure that accounting records:

• correctly record and explain the transactions of the school; and
• will at any time enable the financial position of the school to be determined with reasonable accuracy; and
• will enable the trustees to make certain that the financial statements of the school
• comply with generally accepted accounting practice
• include any other information or explanations needed to fairly reflect the school’s financial operations and financial position; and
• include the forecast financial statements prepared at the start of the financial year, for comparison with the actual financial statements
• will enable the financial statements of the school to be readily and properly audited.

The accounting records must be in written form or in a manner in which they are easily accessible and convertible into written form.

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3.3.8 Fraud

Fraud refers to an intentional act by one or more individuals among management, employees, or third parties intended to deceive others.  Fraud may involve:

• manipulation, falsification or alteration of records or documents
• suppression or omission of the effects of transactions from records or documents
• recording of transactions without substance
• misapplication of accounting policies
• misrepresentations in a financial report
• misappropriation (theft) of assets.

The ministry policy is to refer all prima facie cases of fraud to the appropriate authorities for consideration of prosecution. Schools are expected to adopt the same policy.

The school board and management are responsible for the prevention and detection of fraud and error, which is done through the implementation and continued operation of adequate internal control systems. These systems reduce but do not eliminate the possibility of fraud and error.

Boards should note that it is not the responsibility of auditors to detect or prevent fraud. In the course of their work, auditors may uncover evidence of fraud and, if that is the case, they bring this evidence to the attention of the board. It remains the responsibility of the board and Principal for the prevention, detection and reporting of fraud.

Practical steps to protect the school

Remember that most fraud is opportunistic. Generally, fraud is committed when an individual is presented with an opportunity to commit that fraud.

For example, when a school employee holds a school credit card and that same employee is responsible for checking, approving and paying the credit card bills, an opportunity exists for them to use the credit card for personal purchases without anyone else noticing. By ensuring that an independent person reviews all credit card purchases, the opportunity for fraud is reduced.

Practical steps that staff and the board can take to protect the school are:

• remain sceptical. It is better to ask questions and follow up where necessary than to suffer loss
• educate all concerned of the risk of fraud. The more people who are aware of the risk, the harder most frauds become
• revisit your financial controls whenever changes occur. You must ensure the controls in place in your school are appropriate to the systems you operate. Where possible, make sure that more than one person is involved in any financial process
• seek independent assistance. A review of your systems and controls by an independent, expert third party can be highly beneficial
• if you do find fraud, take action. Taking appropriate legal action against a fraudster does two things. It prevents the fraudster from taking advantage of another school and it sends a clear message to all that fraud will not be tolerated.

If you suspect fraud in your school, then immediately seek appropriate advice from an expert, such as your liability insurer, the Ministry of Education Financial Advisor, an auditor or forensic accountant with fraud investigation experience or a solicitor who has taken fraud cases. This is important because if the correct process is not followed, it is easy to destroy the chance of recovery of funds. If the person you suspect of fraud is an employee, contact your NZSTA industrial advisor, or another advisor approved by your liability insurer, for advice on how to handle the issue appropriately.

No single control will protect against fraud. Instead, a full and varied set of systems and controls provides the best chance of fraud protection.

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3.3.9 Fundraising cash

Schools undertake a variety of fundraising activities, sometimes using associated groups to organise the activities. Careful controls on cash in and out should be agreed before the fundraising activity starts. For example, a cash ‘float’ may be required at the beginning of the activity to provide change for cash purchases etc. The source of those cash funds should be carefully recorded and all cash received counted by two people before banking.

One system for reducing cash handling at school fairs is to sell tickets equivalent to cash that can be ‘spent’ at booths and stalls around the fair. That keeps cash at the ticket booth, where there should always be two people monitoring cash in and tickets out.

Cash should not be provided to any third party who is not directly associated with the school and its board. This includes the PTA and any external persons or businesses on site. They must be responsible for obtaining their own cash.

Note that state integrated schools should refer to the Ministry of Education webpage for fundraising advice.

3.3.10 Funds held for International Students

In certain circumstances, schools may look after international students’ personal funds and ‘drip-feed’ this money to the student over the year. However, there are other options available, such as bank accounts with restrictions on access.

Whatever the legal arrangement, any school looking after funds for international students needs to regard itself as being in a fiduciary relationship with the student. Therefore, the school must behave in an exemplary manner with regard to the use of the funds.

For example, schools should deposit the private funds held on behalf of students into a bank account separate to the school’s main bank account – schools are holding funds on trust and have a very high duty of care. Interest earned on the funds must be returned to the students rather than being treated as a windfall by the school. Schools should have written agreements with the students and/or their parents/guardians to outline the circumstances in which the funds can be used or accessed and by whom.

Schools should not act as financial guarantors for international students since this places school resources at risk. Moreover, while boards have very wide powers, they are only allowed to commit school funds in pursuit of school goals as outlined in their charters and according to the National Administration Guidelines (NAGs).

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3.3.11 Gifts

A board of trustees should be cautious when giving and receiving gifts. This is a sensitive area of expenditure where perception is important. Generosity should be tempered with probity for prudent management of school finances. Decisions should be made carefully, taking into account the purpose and value of the gift. If the board has any doubt about the appropriateness of a gift they should seek independent advice (eg, from a lawyer, NZ School Trustees Association or their regional Financial Advisor in the Ministry of Education).

Gift policies generally require that all gifts given and received by school employees and trustees are recorded. This ensures transparency in school operations and also provides protection for employees in the event of allegations being made about that employee. Gift policies also reduce a school’s exposure to the risk of fraud and any obligation to the giver.

Giving gifts

Gifts given in recognition of employment or services rendered by employees (including payments made when employees retire, compassionate grants and bonus payments), may conflict with the terms of collective agreements and require concurrence ie, approval from the Secretary for Education (refer to the collective agreements and the Funding, Staffing and Allowances handbook).

The board may wish to express their thanks to parents or other community members who donate services to the school by way of a small gift. It may also be appropriate for employees travelling overseas to give a small gift to their hosts.

Factors that the board may wish to consider would include the value of gifts, frequency of gifts, perception issues, personal links between staff/trustees and receivers of gifts.

Receiving gifts

Gifts to boards of trustees

Section 68 of the Education Act allows a board to accept or decline any gift of money or property. Where a board accepts the gift of an item that it could not acquire on its own behalf (for example, real property or securities that are not authorised by the Act or by approvals given by the Ministers of Education and Finance) the Act allows the board to continue to hold that gift for a period that is reasonable in the circumstances. In these circumstances boards wishing to retain the gift are advised to seek approval within 12 months of receiving it. If approval is not forthcoming then the board must return the gift.

In some circumstances, a board may receive a gift or bequest where, as a condition of the gift or bequest, the board must continue to hold a security in its current form. This form of gift or bequest is common in schools where the donor or testator determines that the school should continue to hold the security and fund activities or prizes from any return on that security. In these circumstances the acceptance of a conditional gift or bequest creates a trust and section 161(2) of the Crown Entities Act exempts the board from the requirement to hold only authorised securities. The board may, therefore, continue to hold the gifted or bequeathed security in perpetuity without need to seek approval.

Gifts to school employees

School employees should consider the appropriateness of the gift offered.

It may be appropriate for a teacher to accept a small gift from the parents of a student who has shown great improvements under that teacher’s guidance. A cash gift to a teacher by the parents of a student under threat of suspension or stand-down is clearly inappropriate. It could lead to a feeling of obligation to the giver, or even to allegations of bribery or graft.

Similarly, a principal or trustee accepting a gift from a construction firm when the school is about to tender a construction project would not be appropriate as it would give rise to a conflict of interest.

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3.3.12 Guarantees and indemnities

A guarantee or indemnity is an undertaking to do something that has a financial and often long-term consequence. Examples where schools may give a guarantee or indemnity without the prior approval of the Minister of Finance and Minister of Education are limited to:

• an agreement to perform functions for another school (for example, a board may undertake to perform the functions of a lead school in an administration cluster, a schooling improvement cluster or an RTLB cluster)
• an indemnity relating to and contained in a loan agreement lawfully entered into by the board as borrower
• a contract to lease, or a lease of, real property entered into by the board as lessee or tenant
• a contract (including a deed) executed by the board to settle litigation brought against it by a third party
• a contract of hire executed by the board in the ordinary course of its operations
• a contract of insurance entered into by the board as the insured party in the ordinary course of its operations
• a contract for the sale and purchase of goods entered into by the board in the ordinary course of its operations
• a contract for the procurement of services entered into by the board in the ordinary course of its operations
• a contract for the purchase of an intangible (including intellectual property or a license of intellectual property) entered into by the board in the ordinary course of its operations.

Except as outlined above, a school must not give a guarantee to, or indemnify another person without the express prior approval of the Minister of Finance and the Minister of Education.

Schools should not act as financial guarantors for international students. 

Sometimes when a school sets up a trading account with a new supplier the supplier may ask for a personal guarantee from the Principal. Under no circumstances should a Principal (or anyone) sign a personal guarantee on behalf of the school. The school is a Crown entity, not a company, and therefore the Principal is not in a position to give personal guarantees. The supplier should provide an account application form for a non-profit organisation, trust, incorporated society or similar entity, which will not require a personal guarantee.

How to get approval for guarantees or indemnities

Regulation 14 of the Crown Entities (Financial Powers) Regulations 2005 allows boards to authorise guarantees and indemnities that arise in the ordinary course of a school's operations. If a board enters into a guarantee or indemnity not provided for in the regulations and does not obtain prior ministerial approval then that board is deemed to be in breach of the Education Act 1989 and retrospective approval cannot be given.

Requests for approval to provide guarantees or indemnities beyond those provided for in the Crown Entities (Financial Powers) Regulations 2005 are unlikely to be approved unless the board can clearly demonstrate that the proposal is financially prudent and the business purpose is consistent with its strategic direction and objectives as per its charter.

The application should include:

• Any business reasons for providing the guarantee or indemnity
• Any risks and benefits expected to accrue to the board if they provide the guarantee or indemnity
• Any negative implications that may accrue to the board if the guarantee or indemnity is not approved
• The maximum value and term of the proposed guarantee or indemnity
• Details of any interest a board trustee may have, and the extent and/or financial value of that interest
• Any credit rating or other financial risk information relating to the proposed guarantee or indemnity
• Current year-to-date financial information for the school
• A copy of the board’s financial plan, which demonstrates the school’s ability to meet its financial obligations and the proposed guarantee or indemnity should the guarantee or indemnity be called upon
• A copy of the board’s minutes showing its resolution that the proposed guarantee or indemnity is necessary to achieve the board’s aims, as set out in the school charter
• Any wider educational considerations that should be considered in reviewing the application.

If approval is granted the following conditions will apply:

• The approval is from the date of the decision and is not retrospective.
• The approval is for the proposed guarantee or indemnity only.

The request should be sent to the Ministry of Education National Office, attention Senior Implementation Advisor, Schools and Student Support, PO Box 1666, Wellington.

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3.3.13 Internal control

Internal control refers to the set of policies, procedures and systems an organisation uses to safeguard its resources. These can range from requiring two signatures on a cheque to having a computerised purchasing and accounting system that separates the ordering, approving, receipting of and payment for purchases.

No organisation can completely guard against fraud and theft. However, a combination of internal controls will help to prevent it.

If you would like to know more about effective internal control contact your local Ministry of Education Financial Advisor, your school’s accounting service provider or your auditor.

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3.3.14 Inventory/stock

Many schools or associated entities operate trading activities of some sort eg, canteen, uniform sales or stationery.

There should be documented systems for recording purchasing, receiving, paying for supplies, sales, income received and banking that include segregation of duties and cross checking. One key control is a physical count of all stock with a reconciliation against records of items received and sold. A uniform shop may require a stocktake once a month or each quarter; a canteen may require a daily stocktake.

All receipts and all payments made by cheque should be banked. Purchases must not be made from cash receipts but should be made through cheque, or for small value items, through the petty cash payments process..

A regular comparison of income against cost of goods sold should show a predictable pattern. Unusual variances should be investigated, especially if the operation is making a loss.

3.3.15 Large or long-term financial commitments

A school board of trustees needs to take significant care when making decisions about large purchases or long-term financial commitments. Decisions made now may impact a school’s financial situation for many years.

The table below includes some of the things that should be considered when making decisions about spending a lot of money and before signing long-term contracts.

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3.3.16 Loans to staff

In terms of the Education Act a loan made by a school to a member of staff is illegal unless prior approval has been received from the Minister of Education.

Note: there are occasions where the board may need to make what is sometimes referred to as an ‘advance’ to staff because of an error in payroll processing.  These payments need to be clearly described as payments for arrears of pay, not payments for advances of pay (which would be effectively a loan). Payroll will not make rolling deductions.

3.3.17 Petty cash

Petty cash is used to make small purchases or reimbursements in cash for items such as stamps, office supplies, milk etc. The board or senior management should develop a policy of how much money should be available in cash and a maximum expenditure that can be paid with petty cash – this can be included within the school’s cash management policy.

For example, they may establish a petty cash fund of $200 and have a policy that says payments for items costing over $20 must be made by cheque rather than reimbursed through petty cash. The fund should be enough to cover petty cash expenditures for about a month. If it is too small it will have to be constantly replenished and if it is too large cash will be held on hand that could be more safely kept in the bank.

The petty cash fund should be kept in a locked box or drawer. Auditors recommend that only one person, called the custodian, have access to this cash and that person be responsible for all petty cash activity. To disburse petty cash funds, the school will need to document each transaction, using receipts and petty cash vouchers and determine who in the school can approve petty cash top-up payments.

Establishing a petty cash fund

Once the board has determined (with staff input) how large a fund is needed, write a cheque to the petty cash custodian (not to cash) to establish the petty cash fund. For example, if you have a $100 petty cash fund and Mary Robinson is the petty cash custodian, write a cheque for $100, payable to Mary Robinson, Petty Cash Custodian. Mary then cashes the cheque and places the money in a locked box or drawer.

Operating a petty cash fund

To reimburse someone (in this example, John Roberts) for a small purchase, Mary should obtain proof of purchase from John, ie, a receipt. John must complete a petty cash voucher, detailing the nature and reason for the purchase. After the voucher has been approved by the appropriate person, John is reimbursed for his expenditure. Most stationery stores sell pads of petty cash vouchers if you do not want to design your own.

In some cases, the school may permit an advance from petty cash to cover an upcoming purchase. For example, if the office manager is going to the post office to mail an overnight package, they may get approval to take $20 from the petty cash fund with the stipulation that he or she return with a receipt and change. In this case, the office manager completes a voucher for a $20 advance, approved by a designated staff member. When the office manager returns they complete an accurate voucher for the final postage amount, attach the receipt and return the change to the custodian.

Once the fund is substantially depleted, the petty cash custodian adds up the vouchers and assigns them into appropriate categories (e.g., postage, office supplies). The total of receipts plus cash available must equal $100 in order to prove that all money has been accounted for. When the account has been balanced, a cheque is written (in accordance with the cheque authorisation procedure established for all disbursements,) again payable to the petty cash custodian, for the exact amount of the vouchers/receipts, bringing the fund back to its original balance of $100.

Therefore, in the example described above, Mary totals the receipts in the petty cash box and determines that they fall into the following categories:

In addition, Mary confirms there is $29.05 in cash remaining in the petty cash box. A cheque for exactly $70.95 is written, payable to Mary Robinson, Petty Cash Custodian, to bring the fund back to $100. This method of maintaining a constant amount in petty cash through a combination of cash and receipts is called an imprest system. The petty cash vouchers should be stapled to the summary of expenses prepared by Mary and filed away so they are not reimbursed a second time.

When entering this transaction into the accounting system, the petty cash cheque can be split between the expenses incurred or coded to ‘petty cash’ and recoded by journal.

Petty cash internal controls checklist

The following questions reflect common internal accounting controls related to petty cash. You may wish to use this list to review your own internal accounting controls and determine which areas require further action.

• Is an imprest petty cash fund maintained for payment of small, incidental expenses?
• Is there a limit to the amount that can be reimbursed by the petty cash fund?
• Is supporting documentation required for all petty cash disbursements?
• Is a petty cash voucher filled out with supporting documentation, name of person being reimbursed and proper authorisation?
• Is access to petty cash limited to one person who is the fund custodian?
• Are unannounced counts of petty cash made by someone within the school other than the fund custodian?