In late September 2015 the long-tenured Treasurer of local fire department resigned shortly after a local newspaper reported about a combined investigation by the State Police and the county DA into the loss of up to $5 million of fire department funds. The department’s Board of Fire Commissioners made a public statement when the story came out, that “this past Summer the Board of Fire Commissioners … noted serious discrepancies in financial reporting. The discrepancies noted were between the Treasurer’s monthly financial reports and the annual audit of department finances.” [Note: it really isn’t necessary to bring further publicity by naming the department].
Without pre-judging – though it may be safe to say that the fire department might not have had adequate internal controls over its finances – it is appropriate to make some observations on financial accountability of volunteer fire and EMS departments which operate under the New York Not-Profit Corporation Law.
The New York State Attorney General’s Office has given guidance to not-for-profits, including volunteer fire departments (Internal Controls and Financial Accountability for Not-for-Profit Boards, www.oag.state.ny.us/charities/charities.html). The AG notes that “whatever their mission or size, all organizations should have policies and procedures established so that (1) boards and officers understand their fiduciary responsibilities, (2) assets are managed properly and (3) the charitable purposes of the organization are carried out. A failure to meet these obligations is a breach of fiduciary duty and can result in financial and other liability for the board of directors and the officers. Effective internal controls will help to protect an organization’s assets and assist in their proper management.”
Obviously, every fire department should have procedures to monitor and record assets received, held and expended. These include, as applicable to the department:
- Preparing an annual income and expense budget and periodic reports – at least quarterly, preferably monthly – comparing actual receipts and expenditures to the budget.
- Establishing procedures to ensure that no single individual is responsible for receiving, recording and depositing funds or writing and signing checks.
- Ensuring that grants and contributions received are properly recorded, accountings required as a condition of any grant are completed, and restrictions on the use of funds are obeyed.
- Verifying, recording and monitoring all expenditures, including payment of invoices, petty cash and other expenditures.
- Creating an appropriate records retention policy.
- Providing for regular oversight by an audit committee or, if there is no audit committee, by the executive committee or by the board of directors itself.
- Providing a mechanism for reporting to the audit committee or the board of allegations of fraud or financial improprieties.
- Ensuring that timely and appropriate financial reports are distributed to all directors and officers and reviewed by them, as well as the executive officers.
- Developing a prudent investment strategy and providing proper oversight of the investment assets.
- Complying with governmental and other reporting requirements, including watchdog agencies.
An audit committee of the board, or the board acting in an audit function, is crucial to the governance of any not-for-profit, and a fire department is no exception.
The role of the audit committee is to implement and monitor the internal control structure and to take steps that insure that the possible risks of mistake, fraud or embezzlement are mitigated. It also must (a) ensure that proper federal and state tax filings are completed, (b) understand the department’s internal controls and have policies in place and update them as needed, (c) periodically review the organization’s insurance coverage, (d) identify and monitor related party transactions and review the conflict of interest, ethics and related party disclosure policies periodically and update as needed, and (e) monitor any legal matters that could impact the financial health and reporting of the organization.
It would be good to have controls in place before the State Comptroller’s Office calls, and performs an audit. Which it does on a periodic and seemingly random basis. The Comptroller’s audit reports of fire districts and departments are published at http://www.osc.state.ny.us/localgov/audits/firedists/. The Comptroller identifies areas where fire department officials can improve their operations and provides guidance and services that will assist them in making improvements. The basic question it asks is, “are Department controls adequate to ensure that financial activity is properly recorded and reported and that Department funds are safeguarded?”
It would best if Department audit procedures were in effect and followed prior to a visit from the Comptroller, and of course prior to any event which prompt the type of statement issued by the Board of Fire Commissioners.
