Establishing Internal Control Standards and Establishing a Materiality Threshold

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CITY OF SOUTH BEND, INDIANA COMPONENT TWO: RISK ASSESSMENT Principle 6: Management defines objectives clearly to enable the identification of risks and risk tolerances. Through the creation of standard operating procedures and accurate organizational reporting charts, management conveys and identifies objectives, missions, policies, and risk tolerances to employees. The Finance Department will lead a risk analysis of three major areas: 1. The effectiveness and efficiency of operations. 2. The reliability of reporting for internal and external use. 3. Compliance with applicable laws and regulations. For each category, the Finance Department will define objectives in specific measurable terms in order to enable the design of internal control for related risk, increase understanding at all levels, assess performance, identify what is to be achieved, who is to achieve it, how it will be achieved, when it will be achieved and incorporate external requirements. Principle 7: Management identifies, analyzes, and responds to risks related to achieving the defined objectives. The Finance Department will identify, analyze and respond to the risks identified in Principle 6 by determining: 1. How likely is the risk to occur? 2. How will it impact the objective? 3. Is the risk based on complex or unusual transactions? 4. Is the risk based on fraud? Once each risk has been identified and analyzed, the Finance Department will work with Department Heads to determine how to respond to each risk with a specific solution and action. Principle 8: Management considers the potential for fraud when identifying, analyzing, and responding to risks. Management is committed to fraud prevention by utilizing a "trust but verify" approach. The potential for fraud, misappropriation, and outright theft are contemplated as controls are designed for various City divisions. Fraud responses will include statutorily required responses to fraud, including, but not limited to Ind. Code § 5 -11 -1 -27(1) relating to the Report of Misappropriation of Funds to State Board of Accounts (SBOA) and Prosecuting Attorney and Ind. Code § 5 -11 -1 -270) relating to the Report of Material Variances, Losses, Shortages or Thefts to the SBOA. For reporting to the State Board of Accounts and the City of South Bend Common Council, the City shall utilize a materiality threshold of $10,000 for cash and $10,000 for assets other than cash. All instances of suspected employee theft must be immediately reported to the State Board of Accounts and the City of South Bend Common Council regardless of the dollar amount. There is no materiality threshold for employee theft. Significant variances less than $10,000 will be investigated internally by the staff of the City of South Bend. Internal Controls Policy Pursuant to I.C. 5- 11 -1 -27 4