Fall River Line Pier, Inc. - Finding 3

Fall River Line Pier, Inc. Did Not Accurately Record Check Numbers for 33 Transactions.

Overview

We identified 33 instances of check numbers that were missing or recorded incorrectly within QuickBooks. Our analysis of accounts payable data revealed the following:

• FRLP did not record the check numbers for 11 nonpayroll expenditures, totaling $75,926.
• FRLP recorded incorrect check numbers in the QuickBooks check register for 22 nonpayroll expenditures, totaling $20,639.

Missing and incorrect check numbers increase the risk of financial misstatements, inadequate reconciliation processes, and difficulties in detecting unauthorized or potentially fraudulent transactions.

Authoritative Guidance

The [Massachusetts] Attorney General’s Guide for Board Members of Charitable Organizations states,

IV. PAY CLOSE ATTENTION TO FINANCIAL MATTERS

As a board member you have primary responsibility for making sure that the charity is financially accountable, that it is not allowing charitable assets to be used inappropriately or diverted to private interests, that it has mechanisms in place to keep it fiscally sound, and that it is properly using any restricted fund it may have.

THIS MEANS: . . .

The board should be sure that the charity has adequate internal accounting systems and controls.

We believe these to be best practices that FRLP should follow.

Reasons for Issue

FRLP did not have written policies and procedures specifying a review of QuickBooks check registry information, specifically comparing the check numbers against QuickBooks records. We did not identify a control, such as a secondary review that could have identified incorrect check numbers during the reconciliation process. We learned that FRLP did not have an internal control plan and did not perform a risk assessment over financials. There was no segregation of duties, as a single member of the consulting firm handled all accounts payable, accounts receivable, and account reconciliations, increasing operational risks and reducing control over business processes.

Recommendations

1. FRLP should design and implement internal controls over expenditures, receivables, and the account reconciliation process. Specifically, the following should be considered in this design:
   1. Including segregation of duties for financial processes would reduce the potential risk of fraud and error.
   2. Including monitoring controls would allow FRLP to ensure that all checks are accurately recorded and reconciled.
2. Given that FRLP has outsourced its financial administration to its consulting firm, FRLP should require in any of its contracts with outsourced financial managers that sufficient segregation of duties be provided.
3. FRLP should review its QuickBooks data to ensure that there are no additional instances of inaccurate or missing information related to its financial transactions.

Auditee’s Response

It should be noted that during the audit time frame, FRLP processed an estimated 900 paper and electronic checks. The Fall River Line Pier, Inc. did not accurately record check numbers for 33 transactions or 3.7% of all checks. This is largely due to technology errors that occurred during an upgrade to the computer system and transition from a desktop QuickBooks program to an upgraded online version of QuickBooks. During these upgrades there were instances where checks were misprinted and needed to be handwritten. While the changes in the check numbers were not noted in the system, the accounts were accurately reconciled with vendor names and amounts. Check numbers are primarily utilized for convenience of the financial team and do not affect the validity of payments. Further, no misappropriation of funds was identified in the audit further confirming that was merely a technological error. Again, because this was a largely technological error related to a transition of computer equipment and programs, it is not anticipated that such issues would occur in the future.

Auditor’s Reply

In its response, FRLP explained that the identified 33 instances of check numbers that were missing or recorded incorrectly within QuickBooks were due to a technological error that occurred during a computer system upgrade and transition from a desktop version of QuickBooks to an online version. FRLP acknowledged that the check numbers were not recorded in the system but stated that the accounts were accurately reconciled using vendor names and amounts.

An open question remains as to why FRLP did not correct the error if it was performing reconciliations of the data. FRLP stated that check numbers are used primarily for the convenience of the financial team. We would argue, however, that the purpose of annotating the correct check numbers serves more purpose than just convenience. For example, check numbers are used to identify specific checks issued when performing a reconciliation. Check numbers are also used to identify outstanding checks or for the purpose of placing a stop payment on a specific check. Finally, check numbers can be used to assist in identifying potentially fraudulent activities. If FRLP was aware that there was an error with check numbers, then it had an obligation to correct the error as soon as possible.

FRLP also did not address the lack of a segregation of duties. A lone individual should not be performing accounts payable and performing an account reconciliation. A segregation of these duties would help to ensure that any potentially fraudulent activity is identified as quickly as possible. In this instance, segregation of duties may have helped FRLP more clearly see the importance of this issue and address it. Instead, FRLP relied on institutional memory, which exposes it to significant vulnerabilities, as FRLP itself has experienced in recent years, given the significant turnover it reported to us.

Date published:	April 16, 2025