5.70 Role of a Board of Directors in Internal Control. following headline and ar

Question

5.70 Role of a Board of Directors in Internal Control. following headline and article: "Audit Results: Airport executives from Kentucky racked up $500K in lavish expenses, concert tickets, and even gentlemen's club tabs" Assume that the local newspaper just ran the LEXINGTON, Ky. (AP)-A small commercial airport in Kentucky-and the taxpayers who support it-picked up top executives' tabs in recent years for Hannah Montana concert tickets, Nintendo Wii video game bundles and evena $4,400 gentlemen club check, according to a state auditor's report. The report released Wednesday outlines indulgences ranging from pricey electronics and exercise equipment to lavish meals and champagne. In three years, officials tallied more than $500,000 in questionable personal expenses. Page 217 [Author's note: General fund expenses were approximately $10,000,000 annu Kentucky Auditor Crit Luallen said the former executive director at Lexington's Blue Grass Airport created a culture of wasteful spending so vast, employees sometimes were paid twice for the same expense and used airport credit cards as if they were personal checkbooks I don't think we have ever seen an audit where so many different individuals involved in the management of a public agency ab arrogance used the trust with such and lack of ethical standards," she said Luallen says she has forwarded the case to the Kentucky attorney general, the U.S attorney's office, and the FBI. Although the audit only covered the past three years, it does refer to one of the more glaring examples reported by the Herald-Leader: a $4,400 charge Michael Gobb and two other directors incurred at a Dallas strip club in 2004 The charge, which appeared on the credit card statement of the airport's director of planning, was listed as going to Millennium Restaurant. The word "marketing" was handwritten next to the amount. The Associated Press obtained that receipt and others through an open records request. The audit found that airport employees also used the coffers for tuxedos and other expensive clothing; more than 400 DVDs-many of them currently missing-for the internal airport library; $14,000 in holiday hams given out as gifts; and $7,400 for a NASCAR driving experience excursion for staff described as "team building." More than 92 percent of the things Gobb charged to his airport card lacked proper documentation, Luallen said. While Luallen acknowledged that Gobb was responsible for the free-spending culture, she said the board and its public accounting firm should have supervised the airport more closely Source: Excerpted from Ky. Airport Execs Racked Up Lavish Expenses, Jeffrey McMurray, Associated Press, February 26, 2009 Required

Explanation / Answer

a. The board of directors can use a review of budget to actual expenditures to control and monitor the necessity and reasonableness of cost. A written policy should be developed requiring the board chair to review the expenditures incurred by the executive director. An annual formal orientation for new and returning Board of members coducted by the Board Attorney would ensure that there is an understanding of their purpose and responsibilities.

b. The board should implement an organizational structure that will allow them to receive and investigate anonymous concerns from its employees, vendors and the general public. The board should also consider the creation of an internal audit function to report directly to the board. The board should require details related to travel, entertainment and marketing expenditures so that they are more aware of the expensitures incurred through the use of credit cards or employee reimbursements. The board's policies should inform its employees of any law that protects them from retaliation for reporting violations to certain authorities. The board should ensure its meeting mintues adequately reflect all official board actions and a detailed reporting of its subcommittee meetings. The mintues should contain detailed discussion of costs related to significant events and its administrative activities, as well as any discussion among its members relating to budgetary issues or concerns. The board should also ensure strict adherence to laws on closed sessions. The board should plan and coordinate necessary travel trips in advance and incorporate the costs withi the 'Training and Travel' annual budget calculations. Any additional travel needs should be discussed at the board meeting so that the boards approval will be documented. Each type of benefit provided to an employee should be clearly identified by the board.

c. No the external auditors should not be expected to detect such abuses.

d. The following are the ways to control the use of credit cards:

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