School officials must make practical business decisions concerning the design and implementation of internal controls. No organization has enough resources to afford an absolute perfect level of internal control. So management must make smart and prudent investments to achieve a desired level of diminished risk. In other words, there is a balance of costs and benefits that must be weighed by management. Viewing internal controls in the context of potential consequences if adequate levels of control are not installed helps put this topic in a more concrete perspective.
Consequences that may be considered by management in evaluating the balance of costs and benefits in the design and implementation of internal controls include:
- Safety – The importance of student and staff safety cannot be overstated.
- Health – The importance of student and staff health are self-explanatory.
- Academic performance – Internal control issues may have consequences that directly and indirectly affect student academic performance. For example, control issues that are associated with high operating costs in student support service areas will result in reduced resources available for the instructional classroom and various academic programs.
- Monetary – There are direct and indirect monetary-related consequences related to many internal control issues. An example of a direct consequence is the misappropriation of funds or assets. An example of an indirect consequence is a decline in financial strength, which may result from any one of many factors that persist over time.
- Data quality issues – This consequence can result in the loss of local, state and federal funds. This consequence will also adversely affect various decision-making processes.
- Governance – This consequence may be associated with an ineffective governance component that may also be associated with a poor working relationship between the board and administration, in addition to frequent board meetings.
- Compliance – There are various levels of regulatory sanctions that may be applied by local, state and/or federal agencies against the district depending upon the degree of failure to adhere to law, rules, regulations and/or policies. In the most extreme case, this can mean refunding up to the entire amount of grant funds received or reductions applied to future grant funding. Compliance-related consequences are often associated with high legal bills.
- Accreditation - There are various levels of accreditation sanctions that will be applied against the district. The level of the sanction will depend upon the degree of low academic performance and/or failure to properly manage and administer the local school system in accordance with local, state and federal law, rule, regulations and/or policies. In the most extreme case, a lowered accreditation status may lead to eventual closure of the school system.
- Reputation or image – Every school system has competition and may experience a potential decline in student enrollment or lower enrollment growth, and loss of revenues when students transfer to other school systems, in addition to choices to enroll in private schools or choose homeschooling. Competition also results in the loss of teachers and other staff to other public school systems. Students and parents enjoy a high-level of school choice. Up to 30% of students in certain geographic areas are enrolled in school districts other than their district of residence.
One next step is to consider use a matrix analysis to quantify and weight potential consequences listed above in addition to others that are important to the local school district. In the context of certain compliance- or accreditation-related controls, there may be no tolerance for acceptable risks, such as security mechanisms over standardized test questions and student answers prior to, during and after the test days. Every district is different. It is management’s responsibility to exercise appropriate discretion in making decisions regarding the balance of incremental costs and benefits, and most importantly factor the unique context of the school system in reference to certain locally defined priorities.