2012 Independent Auditor’s Report of Carlton County Finances– How well is Taxpayer Funds Safeguarded?
By Marvin PIRILA
An audit by the state auditor’s office of Carlton County financial reporting procedures revealed several areas of concern, ranging from minor to severe. What should be of concern to many is that many of these problems have existed for a very long time, and some have already cost them dearly. The State Auditor’s office shared the following excerpts in its analysis of the 2012 financial reports for Carlton County. Emphasis, via underlining and bold print, as well as comments in brackets, has been added to highlight certain areas of the report.
Segregation of Duties
Several of Carlton County’s departments that collect fees lack proper segregation of the accounting functions necessary to ensure adequate internal accounting control. Generally, one staff person is responsible for billing, collecting, depositing, and recording receipts as well as reconciling bank accounts.
The small size and available staffing within some departments of Carlton County limits the internal control that management can design and implement into the organization.
Without proper segregation of duties, opportunities for errors or fraudulent activities to occur are created and may not be detected in a timely manner. [This was the case in the landfill scam that cost the county up to $1 million]
This condition is not unusual for an organization the size of Carlton County, where, because of staffing limitations, it is impractical to achieve a desirable level of segregation of duties. Management has identified departments where inadequate segregation of duties issues exists. Management has determined that, given limited resources, it is not feasible to achieve the desired level of segregation of duties in these departments.
Management should be continually aware that segregation of duties is not adequate from an internal control point of view. We recommend the County Board of Commissioners be aware that limited staffing causes inherent risks in safeguarding the County’s assets and the proper reporting of its financial activity. We recommend the Board of Commissioners continue to implement oversight procedures and monitor those procedures to determine if they are still effective internal controls.
Jail Canteen Account
The County Sheriff operates a canteen fund to purchase and sell items used by the prisoners in the jail in accordance with Minnesota Department of Corrections Rule No. 2911.4800. Revenues received from the sale of items and all purchases of goods for resale are handled through a separate checking account. Profits from the canteen operation are turned over to the County and recorded on the County’s general ledger system.
The activity of the Sheriff’s canteen fund is not fully accounted for on the general ledger of Carlton County. Profits are turned over to the County, but the remainder of the activity is not accounted for in the County’s general ledger.
Canteen fund activity is not being properly recorded in the accounting records of Carlton County. This condition results in a potential weakness in internal control over accounting for revenues and expenditures of the County’s canteen fund. The recording of these funds on the County’s general ledger system would not preclude the County Board from using the profits of the canteen fund for the benefit of the inmates.
The canteen fund has been in operation for many years. It was originally established as a separate fund and has continued to operate in that manner. It is unknown how the original start-up inventory was funded.
The Auditor recommended the full operations of the jail canteen fund be recorded on the County’s general ledger system. This would include depositing all money received from sales and making all purchases with County warrants. If the County Board consents, these funds may be dedicated and used for the benefit of inmates.
Audit standards define a material weakness as a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the County’s financial statements will not be prevented, or detected and corrected, on a timely basis.
The audit identified material adjustments that resulted in significant changes to the County’s financial statements. The County provides cash basis financial statements and prepares some of the modified accrual information necessary to adjust the cash basis financial statements to the modified accrual basis.
The inability to make accrual adjustments or to detect significant misstatements in the financial statements increases the likelihood that the financial statements would not be fairly presented.
Audit adjustments were necessary to record additional receivables found during the audit, adjust components of fund balance, adjust state-aid highway allotments, and make reclassification entries as necessary. Audit adjustments were also necessary to adjust modified accrual financial statements to the accrual basis for the government-wide financial statements.
County staff did not have the time to prepare all of the information necessary to provide accurate financial statements.
The auditor recommend that County staff review the trial balances and journal entries in detail to ensure they have an understanding of all audit adjustments made so that, in future audits, this information can be prepared by the County.
Carlton County limits access to the journal entry function on the Integrated Financial System (IFS) to select County employees. The ability to make journal entries on the IFS general ledger is a powerful function. It allows those employees with access to the journal entry function to make changes to the general ledger system. To prevent abuse of this function, it should be limited to those employees who have a logical need for this access. A procedure for review and approval of the journal entries made should also be in place.
Journal entries made by employees are not reviewed or approved by anyone else.
Carlton County seldom uses journal entries for making adjustments to the financial records. Adjustments are posted to the general ledger as negative receipts and disbursements where corrections are required. Journal entries are generally used only in unusual circumstances and in financial closing procedures.
The lack of a review and approval process for journal entries exposes the County to potential for errors or fraudulent activities to occur and remain undetected.
The County has not developed procedures for review and approval of journal entries.
Accounting Policies and Procedures Manual
All governments should document their accounting policies and procedures. Although other methods might suffice, this documentation is traditionally in the form of an accounting policies and procedures manual. This manual should document the accounting policies and procedures that make up the County’s internal control system.
The County does not have a current and comprehensive accounting policies and procedures manual.
An accounting policies and procedures manual will enhance employees’ understanding of their role and function in the internal control system, establish responsibilities, provide guidance for employees, improve efficiency and consistency of transaction processing, and improve compliance with established policies. It can also help to prevent deterioration of key elements in the County’s internal control system and can help to avoid circumvention of County policies.
In lieu of formal written accounting policies and procedures, informal practices and procedures can become unwritten standards that can have unintended consequences. Without a concisely written, comprehensive policies and procedures manual clearly identifying County policies and procedures required to be followed, potential misunderstandings or abusive practices may occur.
Carlton County has never formalized its policies and procedures in a comprehensive manual.
Computer Risk Management
The County has internal controls in place for its computer system. However, the County has not developed a formal plan to identify and manage risks associated with its computer system.
A well-developed formal plan of risk identification can assist management and governance in identifying potential risks and develop plans to mitigate or eliminate those risks.
Unanticipated risks may present themselves that County management and governance could potentially be unprepared to respond to in a timely and effective manner.
The County has not taken steps to implement a formal plan to identify potential risks that could negatively affect internal controls operating over County computer operations.
Approval of Time Sheets
Management is responsible for establishing and maintaining internal control. A basic internal control to help ensure the accurate reporting of payroll transactions in the County’s financial records is employee and supervisor signatures on time reports attesting to the validity of time reported as worked.
The Auditor’s Office noted two instances where supervisors approved their own time report.
Two of 40 transactions tested did not have appropriate approval.
Unapproved time reports can result in time reporting errors and/or payment of fraudulent claims of hours actually worked.
The County does not have a policy or procedure addressing who should be approving supervisors’ time reports.
Other Postemployment Benefits (OPEB)
GASB issued Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, which provides the accounting and reporting standards for OPEB offered to retirees. GASB Statement 45 was applicable to Carlton County for the year ended December 31, 2008.
GASB Statement 45 has not yet been implemented by Carlton County as required. The County has not undergone an actuarial study to determine its OPEB liability. The County has not reported its OPEB liability or the change to the net OPEB obligation in the governmental activities. [Nothing done to fix the issue in four years]
Preparation of the Schedule of Expenditures of Federal Awards
The Office of Management and Budget’s (OMB) Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, Auditee Responsibilities, Subpart C.300(a) and (d) requires, “The auditee shall identify, in its accounts, all Federal awards received and expended and the Federal programs under which they were received. Federal program and award identification shall include, as applicable, the Catalogue of Federal Domestic Assistance (CFDA) title and number, award number and year, name of the Federal agency, and name of the pass-through entity. The auditee shall prepare appropriate financial statements, including the Schedule of Expenditures of Federal Awards (SEFA) in accordance with subpart C.310.”
The County did not adequately present a properly prepared SEFA identifying all federal programs and amounts expended, federal grantor agencies, pass-through agencies, and CFDA titles and numbers as required under OMB Circular A-133.
In 2012, the County expended $6,108,076 in federal awards. A properly prepared SEFA allows external auditors to correctly identify major federal programs subject to audit.
The inability to identify and track federal expenditures or to detect significant misstatements in the SEFA increases the likelihood that the federal expenditures would not be fairly reported and is an indication of a deficiency in internal control.
The County does not have adequate procedures in place to identify, classify, and track federal awards for reporting on the SEFA or in the financial statements.
The State Auditor recommended County management develop a system with written procedures that will allow staff to correctly identify and classify all federal financial assistance received and expended…
Assessing and Monitoring Internal Controls - Landfill Transfer Station
Management is responsible for the County’s internal control over the security of its assets.
Carlton County operates a landfill transfer station site in which one employee had control over cash collections, receipting, custody, and reconciling daily receipts to collections. This concentration of incompatible functions in one employee created a lack of segregation of duties necessary to ensure adequate internal accounting control. Rotation of employees/duties occurred only as needed to staff the facility when the regular employee was unavailable, and there was only limited oversight over landfill transfer station transactions, thus exposing County assets to risk of loss.
The County had previously determined that it was not cost effective to rotate personnel in this area. The County chose to have a single employee at the transfer station responsible for collecting receipts, recording the transaction through a cash register, balancing daily receipts to collections by preparing a report reconciling each day’s receipts to the total of cash register tape transactions, and preparing a daily deposit.
The result was that cash collections were exposed to the risk of theft.
After considering the staffing resources of the department, the former Zoning Officer did not implement the option of rotating personnel/duties on a regular basis. Also, the practice of surprise cash counts was performed only on a limited basis.
Timeliness of Preparation of Financial Statements
Certain information needed for financial reporting was not prepared by County staff in advance of the audit. Although County staff attempted to provide information as timely as possible during the audit, there were delays in obtaining information requested. With the exception of the Health and Human Services Fund, various work papers and schedules necessary to support the County’s conversion of its cash basis general ledger to modified accrual and the preparation of the related trial balances and financial statements were provided for audit as they became available between September 9 and October 31, 2013.
Preparation of information included in the County’s financial statements is performed by the County Auditor/Treasurer’s Office. That information is to be provided to the Office of the State Auditor in the time, form, and manner to finalize the audit in order to meet the County’s September 30 single audit deadline.
There were delays in completing the County’s financial statements within a reasonable amount of time. The delays occurred because certain financial information necessary for the County’s financial statements was not completed prior to the audit.
FINDINGS AND QUESTIONED COSTS FOR FEDERAL AWARD PROGRAMS
ITEM ARISING THIS YEAR
-Program: U.S. Department of Homeland Security’s Disaster Grants - Public Assistance
-(Presidentially Declared Disasters) (CFDA #97.036)
-Pass-Through Agency: Minnesota Department of Public Safety
-The Disaster Grants - Public Assistance (Presidentially Declared Disasters)
-Program awards funding on a reimbursement basis. The 2012 OMB Circular A-133
-Compliance Supplement, Part 3 C., Cash Management, states that, when entities are funded on a reimbursement basis, the costs for which reimbursement was requested should be paid prior to the date of the reimbursement request.
-The County requested reimbursement for costs in Project Worksheets which had not already been paid by the County in the amount of $59,150.
Of the five Project Worksheets submitted requesting reimbursements, two had requests for costs incurred, but not paid as of the date signed by the applicant. The County sent supporting documentation to the Minnesota Department of Public Safety for the claim, but the actual invoices were either paid by the County after the date of request or had not been paid as of September 2013.
These actions led to noncompliance with federal cash management requirements for a reimbursement grant program. Failure or lack of an internal control designed to ensure compliance with federal cash management procedures.
In one instance, the County thought all invoices reported were paid prior to submission of the Project Worksheet requesting reimbursement. In the other instance, the County stated the vendor said to pay them once the County received the funding from the state and federal government. The County staff were not aware that all costs needed to be paid prior to requesting reimbursement and thought the costs just needed to be incurred.
PREVIOUSLY REPORTED ITEMS NOT RESOLVED
Electronic Funds Transfer Policy
The County Board is required by Minn. Stat. § 385.071 to establish policies and procedures for investment and expenditure transactions via electronic funds transfers.
The County Board has not established written policies and procedures regarding the use of electronic funds transfers. The County Auditor has developed a draft policy, but it has not yet been approved by the County Board. The County is not in compliance with Minn. Stat. § 385.071.
The Minnesota Unclaimed Property Law requires that uncashed vendor or refund checks be reported to the state after three years. The reporting requirements for unclaimed property and its payment to the Commissioner of the Minnesota Department of Commerce are detailed in Minn. Stat. §§ 345.38-.43.
The County Auditor/Treasurer has established a system for keeping track of checks to be reported to the Commissioner. However, the County Auditor/Treasurer has not filed any unclaimed property reports with the state or turned over any money to the state. The Unclaimed Property funds file was not updated for any potential 2011 and 2012 cancelled warrants at the time of the audit. The review of the County’s documentation of unclaimed checks reveals the amount of unclaimed checks not turned over to the state is approximately $51,684 as of
December 31, 2010. [This money must be turned over so the rightful owners have a chance to reclaim it.]
Any person who willfully refuses to pay or deliver abandoned property to the Commissioner under Minn. Stat. § 345.55 shall be guilty of a gross misdemeanor.
County staff are responsible for keeping an updated current file of unclaimed property. The County Auditor/Treasurer is responsible to file required reports with the Commissioner of the Department of Commerce and turn over any unclaimed property after three years. County staff had not updated the unclaimed property file for 2011 and 2012, and the County continues to not comply with this legal requirement.
Counties are required by Minn. Stat. § 471.661 to “have on record a policy that controls travel outside of the state of Minnesota for . . . elected officials.” The policy must be approved by a recorded vote and specify when travel outside of the state is appropriate, applicable expense limits, and procedures for approved travel. Id.
The County Board does not have a formal written travel policy. The County has set meal and mileage allowances by various Board resolutions; however, no detailed guidance is available on travel expenses. Travel claims are submitted on the County’s regular voucher form as there is no separate travel claim form. Department heads approve their own travel claims.
A formal travel policy should clarify the County Board’s position regarding travel expenses and would result in uniform treatment of travel claims. The policy could include which expenses are reimbursable, prohibited, who is authorized to approve travel expenses, and what type of documentation is required to support expenses.
Internal controls over travel claim transactions are weak without a standard governing approval, processing, and payment of all types of travel claims incurred by County staff. Also, without a separate travel claim form, it is more difficult to ensure that the type of expense, governmental purpose, documentation, and approval are appropriate.
A draft travel policy exists, but as of yet has not been formally approved by the County Board. The County lacks a formal, comprehensive accounting policies and procedures manual that could incorporate a uniform travel policy.
Publication of Financial Statements
The County is required by Minn. Stat. § 375.17 to annually publish its financial statements.
The County Auditor/Treasurer did not publish the financial statements for 2012.
Financial statements have not been published as required under Minn. Stat. § 375.17 for the years 2003 through 2012. [Ten (10) straight years of noncompliance with Minn. Stat. § 375.17]
The County’s Response: As required by MS 375.17, the Carlton County Auditor will ensure that the financial statements for 2003 through 2012 are published in the county’s legal newspaper.
Collateral assignments are required by Minn. Stat. § 118A.03, subd. 4, to be in writing and provide, upon default, that a depository shall release collateral pledged to the government entity on demand.
Carlton County has deposits with Wells Fargo Bank. To secure these deposits, Wells Fargo has pledged collateral to Carlton County. The most current pledge agreement on file is dated 2003. The Wells Fargo pledge agreement does not contain the language required by Minn. Stat. § 118A.03, subd. 4, that, “upon default, the financial institution shall release to the government entity on demand, free of exchange or any other charges, the collateral pledged.”
Current collateral assignments are advisable to ensure that proper statutory language is included in the collateral assignments so that the County’s interests are properly protected. The collateral assignments should also be approved by the bank’s board of directors or loan committee in order to be enforceable. See 12 U.S.C. § 1823(e).
The current depository pledge agreement with Wells Fargo Bank does not conform to the requirements of Minn. Stat. § 118A.03, subd. 4.
PREVIOUSLY REPORTED ITEMS NOT RESOLVED
The County Board should approve a formal budget policy. All budget transfers or amendments that require Board approval under the written policy should be approved by the Board. Approval should be documented in a manner that allows the original Board-approved budget to be reconciled to the final amended budget used for reporting purposes. The minutes should include the amounts of any transfers or budget changes in addition to the explanation for the change. All Board-approved budget amendments should be input in the general ledger system.
The County Board does not have a formal written budget policy.
Under past practice, it has been the informal policy of the Board to approve all line-item budget changes and all budget amendments. These changes do not get reflected in an amended budget in the County’s general ledger.
The County Board approves amendments and grants in the Board minutes, but generally does not identify dollar amounts. The original budget is not updated in the general ledger for approved changes, so a final amended budget is not available from the system.
The original budget is not easily reconcilable to an amended final budget.
The approved budget is the legal spending authority of the County. Lack of a procedure to update the general ledger with budget modifications can result in noncompliance with the authorized spending budget for a fiscal period.
The County is operating under an informal past budgeting practice. A budget policy has been drafted; however, it has not been formally approved by the County Board.
The State Auditors recommended the Board establish a written budget policy that indicates the level of budgetary control at which Board approval is required for any budget transfers or amendments, any exceptions to the general policy which would not require Board approval, and the budgetary basis on which the budget is adopted.
Disaster Recovery Plan
To effectively deal with a disaster affecting computer operations, the County should have a complete, current, and detailed disaster recovery plan in effect. Formalized procedures should be documented in the plan for the restoration of critical systems, retention and restoration of data, and identification of key personnel.
The County has a disaster recovery plan in the event of a disaster involving its computer system. Since the plan was written, new computer systems and software have been implemented that make the disaster recovery plan outdated.
With the increased importance of, and reliance on, data processing in the day-to-day operations of the County, an outdated or incomplete disaster recovery plan could delay the County’s return to normal operations after a disaster.
Relying on an outdated disaster recovery plan exposes the County to potential risk to its critical IT systems and data. The plan has not been updated since 1993.
Contract Change Orders
The County should develop a policy to identify when change orders on contracts should be brought before the County Board for approval.
In a prior audit, the County had an overrun of $107,475 on the Law Enforcement Center remodeling that had to be absorbed by the General Fund. Change orders on this contract had been approved by the project architects and the project manager; however, they had not been approved by the County Board.
The County Board does not have a clear policy as to whether all contract change orders are to be approved by the Board. The County has a draft policy, but it has not yet been approved by the County Board.
It is important that the Board issue a policy identifying which change orders must be approved by the County Board when they involve the use of County resources to fund any project overruns.
Independent Auditor’s Report; Rebecca Otto, State Auditor
We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Carlton County as of and for the year ended December 31, 2012, and the related notes to the financial statements, which collectively comprise the County’s basic financial statements, and have issued our report thereon dated February 14, 2014. We have issued an adverse opinion on the government-wide financial statements because Carlton County has reported neither capital assets nor other postemployment benefits (OPEB) obligations in the Statement of Net Position and has reported neither the related depreciation nor the net OPEB obligation change in the Statement of Activities, as required by generally accepted accounting principles. Also, capital expenditures have not been eliminated from the Statement of Activities.
REBECCA OTTO -- GREG HIERLINGER, CPA
STATE AUDITOR DEPUTY STATE AUDITOR
February 14, 2014