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Using Internal Controls to Mitigate Risk in Higher Education

By Jonathan Miller, on August 22nd, 2023

Both the COVID-19 pandemic and the ensuing Great Resignation have significantly impacted the labor market. According to the U.S. Bureau of Statistics, quit rates peaked at 3% in November 2021. While the current quit rate has fallen to 2.4% as of June 2023, this issue should still be a top concern for most industries, including higher education.

  • A major aspect of employee turnover is risk mitigation and ensuring that data is protected throughout the employee resignation process. Now is the time for higher education institutions to strengthen their internal controls – thereby mitigating risk and increasing efficiency during turnover.

What are Internal Controls?

Internal controls are the policies and processes that have been put in place by an organization to ensure the integrity of financial information and prevent fraud. A good internal control system should have two different types of control activities – preventative and detective. Preventative controls aim to deter errors or fraud from happening, while detective controls aim to identify and correct errors of fraud after they have occurred.

 

Protecting Internal Controls Throughout Turnover

Before Turnover

Prior to turnover, it is imperative that institutions have well-documented systems and processes in place. This includes documenting each employee’s role, responsibilities, daily tasks, and the systems they have access to, as well as establishing each employee’s role for initiating, reviewing, and approving accounting functions. Additionally, organizations should strive to create a culture of development and advancement. This involves consistently providing opportunities for employees to take on additional responsibilities and introducing employees to new individuals and tasks. This helps ensure no one individual has too much power or responsibility within an organization – thereby leaving an un-fillable gap in their absence.

During Turnover

As turnover is occurring, institutions must work to document role responsibilities and transfer employee knowledge. When doing so, it is important to consider not just day-to-day activities but also any recurring projects, such as preparation for an audit or completion of Form 990. Another consideration during turnover is restricting the individual’s access to bank/investment accounts, accounting systems and buildings.

After Turnover

Following the exit of an employee, institutions should review the segregation of duties and identify any potential gaps or overlapping responsibilities – ensuring to separate authorization, custody, and recordkeeping.

Once an individual has been hired to replace the previous employee, institutions should provide comprehensive training and onboarding programs for new employees, particularly focusing on internal controls and compliance requirements.

Additionally, during periods of turnover, institutions should consider increasing supervision and oversight of key processes and activities. This ensures that controls are being followed correctly and any potential issues or errors are detected and addressed in a timely manner.

Communication and transparency are also key. Institutions should encourage employees to report any concerns of potential control deficiencies promptly and promote a culture of transparency and accountability to facilitate effective internal control practices.

Lastly, institutions should update control documentation and procedures as needed to reflect any organizational or personnel changes.

 

Evaluating and Improving Internal Controls

After internal controls have been established and are in effect, higher education institutions should conduct periodic assessments of internal controls to identify areas that require improvement or adjustments due to turnover or changes in the business environment. This process should include learning what a strong internal control environment looks like; interviewing management, employees, and governance; observing processes; process mapping; reviewing policies and procedures; identifying your monitoring controls; understanding accounting systems and controls; reviewing historical operational and financial performance indicators; and analyzing and assessing any learnings.

Once internal controls have been reviewed, institutions should consider opportunities to improve these controls for greater institutional resiliency. This might include identifying value adding and non-value adding activities and determining if there is an opportunity to increase the efficiency of non-value adding activities through automation and outsourcing.

Through understanding, evaluating, and strengthening internal controls, higher education institutions can better mitigate risk and increase efficiency in the transaction process during periods of high turnover within their organization.

If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to our experts to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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