Local Government Finance Office Management and Internal Controls During COVID-19

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Kara Millonzi

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When a local government is functioning normally, there are a number of statutory and regulatory duties that it’s finance office must carry out. Further, there are numerous internal control processes and practices that local finance professionals follow in order to safeguard the financial assets of the unit. We are now in a pandemic. Many local governments are going to have to make adjustments to these processes and practices to continue to carry out essential duties, with a remote and potentially depleted workforce, while still implementing some controls to protect their assets. This post addresses pertinent considerations for local finance officers as they implement these changes. The post will be updated as units share their strategies. There will be a Zoom Call for all NC local government finance professionals to discuss these and other issues on Wednesday, March 25, 2020, at 1pm.

The following are items that local government finance offices should consider in adapting to working during the pandemic.

Identify Essential vs. Nonessential Duties

If you have not already done so, a local unit’s finance officer should determine which finance duties (and which personnel) are absolutely required to support the local unit’s essential functions. Some normal finance office activities, processes, and projects will be suspended as the local government, itself, pivots to meeting the community’s essential needs. Finance will need to coordinate with the manager/administrator, governing board, and other departments in the unit to make these determinations. At the same time, there may be new essential finance activities, processes, and projects to support the local government’s community response. For example, the finance office may need to implement new federal FMLA and sick leave requirements, document expenditures for potential FEMA reimbursement, and manage payments for new community support programs.

Streamline Processes and Procedures

Normal finance office processes are designed for normal work environments. These processes likely will need to be modified to better fit a remote personnel model. This will be particularly important if the state or local government requires people to effectively shelter in place. Units should limit processes where staff need to be physically present at the office or processes that require two or more people to be physically present with each other to perform. Think creatively and recognize that make-shift processes are not going to be perfect. Strive to make things as simple as possible, while maintaining vital protections against fraud and mistake. (Your unit’s auditor may be a helpful resource in thinking through process changes.)

The following are specific statutory functions that a finance office must carry out, with some suggested considerations for modification. Note that before adopting any of these alternatives a finance professional needs to weigh the benefits in supporting modified operations and protecting staff with the potentially increased burden on other local government departments and, importantly, on the unit’s citizens and customers. Particularly with revenue collections, a unit does not want to make payment processes too burdensome so as to discourage citizen compliance. A finance officer should also consult with the manager and unit’s attorney before making any changes to statutorily required duties.

Receiving Revenues and Daily Deposits

Here are some ideas for modifying how money comes into the unit and is processed.

Reduce cash (and even check) collections to the extent possible. With the exception of property taxes, a local unit may mandate that all payments to the unit be made by check, credit card, debit card, or other electronic funds transfer. (A local government must continue to accept cash payments for property taxes.)

Incentivize electronic payments by eliminating processing fees. A local unit that charges a convenience fee for certain payment transactions may temporarily cease assessing the fee to encourage electronic payments. Similarly, if a local unit contracts with a third-party vendor to process credit/debit card payments, the local government may pay the vendor directly for the administrative fees that are normally passed onto the customers.

Establish remote secure payment stations in the community. To reduce staffing needs and to encourage social distancing, a local unit could install secure payment stations in the community. A unit may also contract with a local bank or other agency to collect payments on behalf of the local government. Or it may contract with a licensed cash collection service.

Limit hours that the finance office is open to the public and adopt social distancing practices within the office. Set up payment and customer service stations that limit direct contact among individuals to the extent possible. Tape off areas that are at least 6 feet apart if you expect lines of people to form. Limit the number of people who can be in the office at any one time. Rotate staff to accommodate their family responsibilities.

Modify daily deposit State law requires that a local government deposit all monies (cash, checks, money orders, etc.) collected or received by an officer or employee of the unit daily with the finance officer, in one or more official depositories, or with a properly licensed and recognized cash collection service. The governing board may waive the daily deposit requirement for amounts up to $500. See G.S. 159-32. As stated above, if the local government has not already done so, contract with a licensed cash collection service to process remote collections. If this is not feasible, consider allowing any department that collects monies to deposit them directly into the bank, to avoid extra processing through finance. The law allows this as long as a duplicate deposit receipt is sent to finance. (And even this can be accomplished remotely by having the depositor scan or take a picture of the receipt and email it to finance.) Ask whether your bank allows remote (digital) deposits of checks. Note also that if a unit limits its finance office hours to a few days a week, it may be possible to interpret the daily deposit requirement to only be triggered when finance personnel are physically in the office to receive the monies.

Use video technology. To the extent that a local unit normally has two or more employees oversee a transaction for internal control purposes, for example counting money or signing off on a collection receipt, consider using video technology (Zoom, Skype, FaceTime, etc.) to allow employees to monitor processes that are performed by a single individual either onsite or remotely. This can be accomplished with most people’s smart phones, tablets, laptops, or desktop computers. Consider recording the transactions to keep a visual record.

Expenditure Approvals and Preaudit

Here are some ideas about how to modify processes related to approving and preauditing expenditures.

Reduce unnecessary purchases and other expenditures. As the local government focuses only on essential services, this should help finance reduce the number of expenditures that need to be processed.

Modify PO thresholds. A local unit may consider temporarily modifying its PO thresholds to reduce the transactions that must flow through finance. Of course, the finance officer should still ensure proper checks are in place to minimize unauthorized transactions.

Modify preaudit process. Before any employee or official of a local government may incur any financial obligation of the unit, the finance officer or a board appointed deputy finance officer must perform the preaudit process. See S. 159-28. That means that before any goods are ordered or any contracts/agreements that will require the local government to pay money are executed, they must be preaudited. The requirement applies no matter the amount of money involved. (Click here and here to learn more about the preaudit process.) As local units home in on essential services, finance professionals should identify the most likely types of purchases and contracts and develop modified preaudit processes to facilitate remote execution. A finance officer may consider asking the governing board to deputize department heads and others in order to decentralize performance of the preaudit processes. The finance officer can then establish and monitor processes to be performed by the deputies in the field. Finance may also issue blanket POs to local vendors and preaudit the maximum limits of the POs. If the local government uses credit cards or p-cards, it could set the monetary limits on the cards on a monthly basis and then preaudit and encumber the maximum monthly amounts. Finance could also empower department heads and others to track their own budget appropriations and encumbrances. This can be done by granting access to the unit’s central accounting system, or by setting up simple spreadsheets that allow tracking outside the system, with periodic reconciliations by finance staff. At a minimum, the finance officer could establish limits on when (non-emergency) expenditures will be approved, such as once or twice a week. And, if at all possible, the finance officer should modify the preaudit process so that it can be done electronically. That may require creating an image of the preaudit certification that can be affixed to documents and signed digitally, rather than using a physical stamp.

Establish remote encumbrance processes. Units that do not use digital accounting and encumbrance systems, should consider how manual systems can be converted to electronic ones, even using just email, Word, and/or Excel.

Use video technology. As with revenue collections, to the extent that a local unit normally has two or more employees oversee a transaction for internal control purposes, consider using video technology (Zoom, Skype, FaceTime, etc.) to allow employees to monitor processes that are performed by a single individual either onsite or remotely. This can be accomplished with most people’s smart phones, tablets, laptops, or desktop computers. Consider recording the transactions to keep a visual record.

Disbursements & Payroll

Make all (or at least most) disbursements electronically. If you have not already done so, check with the unit’s bank about electronic payment options. Communicate with vendors and even citizens to set up electronic payments.

Modify check writing/signing practices. Some units will have to continue manually writing/signing checks. This process is an essential duty that generally must be performed in the office. (I do not recommend that local units allow employees to take blank checks home.) Finance should devise a process that reduces or eliminates the need for multiple people to process the checks at the same time but maintains some important controls. As suggested above, the unit might employ video technology to allow one or more employees to monitor the check issuance process. Alternatively, one employee or official could write and sign the checks one day, while another employee or official reviews the checks and co-signs them a few days later. Yet another employee or official could then reconcile the payments with invoices and the bank statement. It will take some planning, but units may be able to space out the timing of these transactions to maximize social distancing and minimize potential exposure to COVID-19. Note that the finance officer or board appointed deputy finance officer must perform the disbursement process before any payments are processed.

Dual signatures. State law requires that all disbursements by check or draft be signed by two people: (1) the finance officer or board appointed deputy finance officer and (2) another board-designated employee or official of the unit. See G.S. 159-25(b). The law allows the governing board to waive this requirement, but only if there are sufficient other internal controls. (I do not recommend that a board waive the dual signature requirement unless there really are strong internal controls in place for disbursements.) Finance may wish to ask the governing board to approve additional deputy finance officers and additional co-signers, to account for potential staff absences. Make sure the bank has updated information on who has authority to sign checks and otherwise authorize disbursements, too.

Payroll. Processing payroll is an essential function of the finance department. Finance professionals need to figure out how timecards will be completed and collected. If it is now a manual process, for example through use of a time stamp machine, how can it temporarily be converted into a decentralized digital process? Once again, a unit could strategically deploy technology. If feasible, employees could log in to a centralized system as they start and end their workdays. If not, a unit could have employees send emails or texts to their supervisors to serve as the time stamps. Or employees could email pictures of their completed hard-copy time sheets. Supervisors can then keep track of hours and submit summaries to finance for payroll purposes. A finance officer should work with the manager/administrator and human resources personnel to figure out the best system. For many units, the actual payments are processed electronically through the creation of imprest accounts with the bank. These units will just have to ensure that remote personnel can access the system for appropriate sign-offs. For units that manually cut checks, see advice above about modifying these processes.

Document Processes, Train Staff, and Rotate Duties

Finance offices need to prepare to work remotely and with less staff. Personnel may become sick or be required to care for children or sick family members at any time. And there is risk that many employees will become sick at once. (See my colleague Diane Juffras’s post on new FMLA and emergency sick leave provisions.) The situation is obviously very difficult. However, with some planning, flexibility, and creativity, a local government can develop temporary policies and practices to accommodate most contingencies.

Some local governments have adopted the generalist model, where many employees are able to perform each finance task. If possible, other units should attempt to replicate this model by training at least a few employees to perform each essential task. This may need to be done remotely to comply with social distancing recommendations. Establishing a cross-functional finance team will also help finance offices set up a reasonable segregation and rotation of duties model during the pandemic, even if it is not as robust as usual. Units with the capacity to do so, should consider forming finance teams that rotate in and out of various duties. Teams could alternate by week, and importantly could be available to interchange personnel if members of other teams become unavailable. For small units and for situations in which only one person can perform an essential finance task, the individual should carefully document how the task is performed in writing so that it could be done by another employee or official in an emergency. Small units will have to consider training non-finance personnel (and even governing board members) on essential finance tasks so that they could substitute if the need arises.

Meet Remote IT Needs and Ensure Cyber Security

As finance office employees set up to work remotely, perhaps for a month or more, it is important to take precautions to ensure the security of financial information and the integrity of financial processes. My colleague, Shannon Tufts, has compiled a resource page on working remotely here. Units also need to consider how to protect confidential records and information.

Communicate and Collaborate

Finance offices need to make a lot of changes and adopt contingency plans fast. The keys to doing it effectively are likely communication and collaboration. Finance professionals should work with the manager/administrator, governing board, and others in the unit to determine essential government functions and figure out how finance will be able to support these during the pandemic.

Finance officers should communicate with finance staff members often to keep everyone informed of potentially rapidly changing policies and processes and to ensure that all staff have the supplies and support they need to do their jobs effectively. Consider setting up daily communications/check-ins and weekly conference calls to keep everyone in the loop and on the same page.

And the finance office should communicate clearly and concisely with the public about changes to collections and customer service processes.

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