If libraries have control weaknesses, they’re commonly found in one of four areas: the financial control system itself (or lack thereof), the range of job duties for the bookkeeper, the extent of the director’s authority, and the degree to which the board is involved. Let’s examine each of these in greater detail.
Common Weaknesses in Your Library ’ s Internal Control System:
How to Recognize and Correct Them
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There’s a Bad Financial Control System or None at All
Everything that we discuss in this book is predicated on having a func- tioning set of financial records. Functioningin this case can be defined as financial statements that are both accurate and timely. The library’s transactions are entered within a reasonable period after they occur and are entered correctly. Unfortunately, many libraries have little or no fi- nancial control other than their checkbook. They share this characteristic with many other businesses, but as we’ve seen, the magnitude of library budgets makes this a significant risk.
Library management and the board should jointly undertake the task of ensuring that the library has adequate financial records. Both groups will be using the records, and having two sets of eyes oversee their cre- ation helps ensure high quality. In addition to creating the system, both groups need to ensure that it’s used correctly. Often, good systems are created but become ineffective due to lax management and oversight.
The Bookkeeper (or Someone Else) Has Too Many Interlocking Job Duties
In most libraries, the bookkeeper has the primary responsibility for han- dling financial matters. The bookkeeper may, in fact, have the only re- sponsibility. As such, it’s important to make sure that this person doesn’t acquire too many interlocking duties. As we discussed in chapter 2, the same person shouldn’t be responsible for authorizing purchases, certifying them, and authorizing payment. The problem in many libraries is that the bookkeeper has grown into the position. She or he, and certainly other li- brary managers, may not even be aware of the situation or realize that it’s a potential risk. The problem may be further complicated because no one in the library generally pays enough attention to its finances.
Often, simply examining the bookkeeper’s job duties is enough to discover the interlocking jobs. A complete segregation of duties may be beyond the capabilities of some smaller libraries, but job rotation and in- creased oversight by the board and the director can usually compensate.
The Director Has Too Much Power
In chapter 1, we noted that financial control in libraries is often in the hands of a single individual, usually the director, who isn’t subject to standard financial controls found in for-profit companies. Library directors hold an unusual position that they share with other nonprofit directors.
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They act as sole proprietors in organizations that they don’t actually own. This can have significant implications for internal controls.
In many small firms, the owner (sole proprietor) oversees every as- pect of the business. This can include ordering inventory, approving pay- ments, and writing checks. There is significant efficiency in carrying out business this way, particularly in businesses with only a few employees.
The downside to this efficiency is that, in theory, it violates the classic segregation of duties that we discussed in chapter 2. However, sole pro- prietors compensate for the lack of segregation because they don’t op- erate against their own interests. In other words, they don’t defraud the firm because it’s in their own interest to keep it successful. They act as their own internal control.
The problem that many nonprofits face is that they look like sole proprietorships but aren’t. There may be entirely creditable reasons for the resemblance: the director is the only professional or full-time em- ployee or both in some libraries, the library has developed and grown as the result of the director’s vision and entrepreneurial spirit, or there simply wasn’t anyone else interested in doing the work. Whatever the reason, it isn’t in the best interest of good internal control to allow the director to have too many interlocking duties. At a minimum, it’s usually a good idea not to allow check-signing authority to reside with the di- rector; it’s more appropriate for the board to sign checks based on sup- porting evidence from the library. That doesn’t prevent more elaborate frauds from occurring, but if the board is doing its job, fraud becomes much more difficult.
Ideally, the same segregation of duties used for the accounting, cus- tody, and execution of transactions should be maintained in constructing the director’s job duties. Many directors don’t perform all the financial management in a library. The job is more commonly performed by a bookkeeper or financial manager, so the specific segregation is more use- fully applied to directors’ job duties. It is useful to watch more closely in cases of management overrides of internal controls. The best internal con- trols become useless if upper management can render them inoperable.
The Board Isn’t Doing Its Job
Many nonprofit organizations, including public libraries, divide the re- sponsibilities of management between an executive officer and a board of directors. The exact division of responsibility varies considerably among organizations, but in financial matters the board of directors is typically responsible for raising funds and approving expenditures. In
34 COMMONWEAKNESSES
practice, this usually means that the director or another employee under his or her direction writes checks for expenses then passes them on to the board for review, approval, and, ultimately, signing.
In most organizations with boards of directors, several board mem- bers have check-signing powers. In fact, in most cases, two or more sig- natures are needed for the check. Usually, the signing members are pre- sented with a pile of checks that require their signatures. In theory, each check should have accompanying documentation (e.g., signed purchase orders, invoices, receipts) that indicates it was a legitimate, approved ex- pense. The signator(s) should then review each individual item to make sure the documentation is in order before signing the check. If the infor- mation is insufficient, the signators do not sign and instead request better documentation. That’s the theory, but here’s what often happens. Some- one places a huge pile of checks in front of the board member, who signs them without actually looking at the amounts, documentation, or recipi- ents of the checks. Worse, the board member may actually pre-sign blank checks for the convenience of the office staff. It doesn’t take much thought to realize that if this is the extent of oversight, then embezzling money becomes appallingly easy, and that’s essentially what happens in many cases of library embezzlement.
How do board members help embezzlement to occur? Unfortunately, many of the worst lapses in oversight arise out of a genuine desire for co- operation between boards and administrators, or at least a misunder- standing of the duties of board members. Many library boards regularly abdicate their responsibilities for exercising financial control by pre- signing checks or by approving payments for expenses without reviewing the supporting documentation. In some cases, the lapse of responsibility may be the result of negligence or inattention on the part of board mem- bers. More often, board members are ignorant concerning their duties or the risks involved with approving expenses without reviewing the docu- mentation. All the board members interviewed in the study stated that they did not understand that embezzlement could have happened, that they had the ability to prevent or reduce its occurrence, and that they would have been more vigilant had they understood the process better (Snyder and Hersberger 1997).
As we noted in chapter 1, the consistency of this response may reflect the need of some board members to excuse their role in embezzlement.
But it is consistent with the finding that most board members have no professional training or experience with finance prior to their appoint- ment, nor is there any evidence that financial expertise is considered a necessary or desirable skill for a board member. In addition, library
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board members usually receive little or no training concerning their fi- nancial responsibilities.
Even if trustees are interested in matters of financial control, there is often little guidance available to them. The standard reference and train- ing materials for trustees such as the ALA Trustee Association mono- graphs deal mainly with budgetary and fund-raising duties and condense financial control into a single paragraph.
A second, related problem is that board members often simply do not consider the possibility of financial misconduct by a library director or another board member. As one board member put it, “We trusted the director or we wouldn’t have hired her in the first place. Besides, what do I know about accounting?” Another observed, “Who do you think trains board members in their duties? The librarian they’re supervising.”