KAREN E. RUSHING. FOLLOW UP of. Utilities Installment. Payment Program

Transcription

1 KAREN E. RUSHING Clerk of the Circuit Court and County Comptroller FOLLOW UP of Utilities Installment Payment Program Original Audit Report Issued September 30, 2013 Audit Services Karen E. Rushing Clerk of the Circuit Court and County Comptroller Jeanette L. Phillips, CPA, CGFO, CIG Director of Internal Audit and Office of the Inspector General Audit Team William Bousman Internal Auditor/Investigator September 2014

2 TABLE OF CONTENTS Page Summary and Results 3 Open Conditions and Pending Corrective Action 5 Closed Conditions and Follow-up Results 13 Appendix A Original Audit Report dated September 30,

3 Summary and Results Background The purpose of the September, 2013 audit of the Utilities Installment Payment Program was to determine if there is reasonable assurance that the program complies with applicable laws, resolutions, and County policies and procedures. Additionally, the audit addresses whether internal controls are in place to adequately mitigate risks related to the program. The original audit report concluded that the County appeared to understand their responsibilities related to the Utility Installment Payment Program. In addition, the department had made a significant effort to improve the controls surrounding the process. There were, however, Opportunities for Improvement detailed in the original audit report. Objectives The objectives of this follow-up audit were to evaluate the observations reported on the Utilities Installment Payment Program audit report, dated September, 2013 and subsequent corrective actions taken by responsible management. This was achieved by providing independent, objective analysis as well as reasonable assurance that the previous concerns have been addressed and appropriate corrective measures implemented. To meet the objectives of the follow-up audit, the following procedures were performed: Performed inquiries of County personnel; Obtained an understanding of changes made to the Utilities Installment Payment Program since the original audit report date; Reviewed documents relating to required loan documentation, delinquency, application of payments, loan closure, adjustments and reconciliations; Examined a sample of delinquent loans as of July 14, Of a total of 861 items, a judgmental sample of thirteen (13), was selected and tested; Evaluated internal controls in place related to the review and approval process of new loans, applications of payments, adjustments and loan closure; Evaluated the level of segregation of duties present over all process related to loans; Examined all adjustments during the month of May 2014; Page 3

4 Examined a sample of active loans for the period of November 1, 2013 through June 30, Of a total of 155, a random sample of nineteen (19) was selected and tested to ensure the required documentation was present; Examined a sample of closed loans for the period of November 1, 2013 through June 30, Of a total of 236, a random sample of nineteen (19) was selected and tested to ensure proof of final payment and that management approval was present prior to loan closure. Overall Results Based on the results of our follow-up audit procedures, responsible management has addressed and implemented corrective action on four of the eight conditions identified in the original audit report. However, responsible management has not completed corrective action on the remaining four conditions. These items are further described in this report and include: Condition A Policies and Procedures B Non-compliance with Proposed Policy Regarding Delinquent Loans C Definition of Delinquency D Lack of Segregation of Duties E Reconciliation to GL does not balance F Lack of Documentation for Loan Closure G Missing Documentation in Loan Files H Lack of Review and Approval Documentation for Adjustments Status Open/Pending Corrective Action Open/Pending Corrective Action Closed Closed Open/Pending Corrective Action Closed Open/Pending Corrective Action Closed Page 4

5 Open Conditions and Pending Corrective Action Four of the eight conditions identified in the original report remain open and continue to require management attention. A. Policies and Procedures There is no formal set of policies and procedures over the utility loans and its processes. Audit Observation, Original Report dated September, 2013: Currently the Utility Department has a proposed policy regarding the loan application and monitoring process. However, those policies have not been presented or approved by the Board of County Commissioners. Additionally, there is a lack of written procedures over the daily activity related to loans. Recommendations, Original Report dated September, 2013: 1. Finalize the proposed policies related to the utility loan program and request Board approval. The policy, at a minimum, should address program eligibility, application and payment rules, fees related to the loan, terms and conditions, delinquency, effects from refinancing and change of ownership, payments, loan amount thresholds, foreclosures and administration of the program. 2. Create written procedures for the loan processing function ensuring proper segregation of duties and appropriate review and approval authorizations. Procedures should address items such as the establishment of the loan, application of loan payments, adjustments to loans, processing of delinquency notices on overdue loans and processing loan closure. Current Status, Follow-Up Audit dated August 2014: The Public Utilities Department has revised their policies related to the Utility Installment Payment Program to address various areas related to the program. However, these policies had not yet been presented to the Board of County Commissioners as of the date of fieldwork. The department has developed written procedures for the establishment of the loan, application of loan payments, adjustments to loans and the loan closure process. However, during review of the procedures, the auditor identified that the procedures lacked designation of which position(s) are authorized to perform these tasks. This is Page 5

6 important because documenting authorized position(s) helps ensure that the proper segregation of duties is maintained. Written procedures for the processing of delinquency notices have not been developed. These procedures are required to help ensure the proper segregation of duties and continue to be recommended as originally stated. Management Action Plan: 1. Public Utilities presented the policies which were reviewed and approved by the Board of County Commissioners on September 23, Public Utilities staff will update the written procedures to reflect the staff positions that perform tasks to ensure segregation of duties. This is anticipated to be completed by October 31, Delinquent notices through the software program were issued on August 28, 2014, thereby automating the delinquent notice process. Written procedures for that process will be completed by October 31, Page 6

7 B. Non-Compliance with Proposed Policy Regarding Delinquent Loans Inconsistent application of delinquent loan proposed guidelines. Audit Observation, Original Report dated September, 2013: The Utility Department mails delinquent loan notices 6 months or 180 days from the day the loan payment is past due. However, management s guidelines indicate that a delinquent loan is any loan that is 4 months or 120 days past due or having an outstanding balance greater than $300 after 30 days. Recommendation, Original Report dated September, 2013: 3. Consistently comply with proposed policy. On a monthly basis, run a delinquent loan report and send a delinquent notice for any loan deemed delinquent. Implement a monitoring program to ensure consistency, thereby maximizing the attempt to collect past due amounts. Current Status, Follow-Up Audit dated August 2014: The policies and procedures relating to the Utility Installment Payment Program define a delinquent loan as loan charges unpaid after 90 days from the monthly statement due date. The Public Utilities Department runs a delinquent loan report on a monthly basis and reviews the report for accuracy. Delinquent loan notices are created for each confirmed delinquent loan and are sent to the loan holder and the tenant, if the property is tenant occupied. The Notice of Delinquent Loan language states if no action has been taken within 10 days of receipt of this notice, discontinuation of utility service will occur. The auditor found that the delinquent loan holders are allowed three (3) weeks to respond to the Notice of Delinquent Loan prior to the Public Utilities Department proceeding with discontinuance of service. We recommend that the policy regarding delinquency, the timeline stated within the Notice of Delinquent Loan letter and the time allowed before discontinuing utility services for delinquent accounts be consistently applied to all delinquent loan holders. The auditor selected a sample of thirteen (13) delinquent loans as of July 14, 2014 and reviewed each loan file for delinquent loan notices. During review of the delinquent loan files, two (2) of the thirteen (13), approximately 15%, indicated no record of a delinquent notice having been sent, yet the records showed the account was delinquent. The Public Utilities Department appears to have a monitoring program in place for delinquent loans. However, delinquent loan notices are not being mailed timely to every loan account that is deemed delinquent. The department should create written Page 7

8 procedures and a quality assurance process to address complete and timely activity. In addition, they should continue to work with the software vendor to maximize the use of technology and develop a more automated process. Management Action Plan: 1. As of August 28, 2014, a 90 day delinquent notice is being issued through the software system to all delinquent loans as defined by the County s policy. This eliminated the manual process and review of loans to generate a notice. Loans under the Office of Housing and Community Development (OHCD) are issued pursuant the OHCD Deferred Payment Assistance Program approved by the Board and will be excluded from the delinquency process as no payment is required for up to twenty (20) years. 2. Public Utilities will continue to develop policies and procedures to monitor delinquent loans. Written procedures and a quality assurance program will be developed by July 31, The proposed policy provides for the discontinuance of utility service to a property after providing a seven (7) day advance notice, however the process of service discontinuance has unique challenges that will need to be reviewed, documented and approved. Such instances include: Utility service cannot be discontinued or the discontinuance of service is very difficult due to field conditions; Service to be disconnected is provided to a sewer only connection; Utility service is provided by another utility; Utility service has already been discontinued (foreclosures, bank owned), therefore no further delinquency actions can occur. Written procedures for each of the above items and a quality assurance program will be developed by July 31, Page 8

9 E. Reconciliation to the General Ledger does not Balance Outstanding loan balances, payments applied, and adjustments do not balance to the general ledger. Audit Observations, Original Report dated September, 2013: A review of the loan reconciliation documents revealed that the reconciliation has been out of balance since October 2012 by approximately $6,700 and remains out of balance as of July Recommendation, Original Report dated September, 2013: 7. Identify the cause of the variance and a corrective measure. Implement a monthly reconciliation procedure requiring that all variances be rectified by the following month and require management sign-off and approval. Current Status, Follow-Up Audit dated August 2014: Written procedures for the reconciliation to the General Ledger have been drafted, but are not finalized. Additionally, during review of the procedures, the auditor identified that the procedures did not reflect the requirement for management sign-off and approval. This is important because the documentation of this requirement helps ensure that monthly reconciliations are properly monitored and evaluated. A review of the loan reconciliation documents for the eight (8) months between November 2013 and June 2014 revealed that a monthly reconciliation was performed for all months audited. However, one (1) of the eight (8) reconciliations did not have documented management sign-off and approval. Additionally, the reconciliation has been out of balance since October 2012 by approximately $6,700 and remains out of balance as of June Page 9

10 Management Action Plan: 1. Written procedures have been developed for the reconciliation process by the Office of Financial Management (OFM) and will be approved by January 30, The process will require the approval and sign off by OFM Management. Although a sign off by management is required, one month was missed after a revision was provided, however the initial reconciliation was approved. 2. Public Utilities and Office of Financial Management staff are meeting with the software vendor in September to review the current out-of-balance issue from October 2012 and determine a solution. The software vendor has reviewed the issue in the past but as the issue was related to a software programming problem they were unsure of a solution at that time. This is anticipated to be completed by February 27, Page 10

11 G. Missing Documentation in Loan Files Some active loan files are missing required documentation per proposed policy. Audit Observations, Original Report dated September, 2013: Selected a random sample of 95 active loans and reviewed each loan file. During review of the loan files, it was noted that some documentation that was required per the proposed policy was missing from several of the files. Of the 95 loan files tested, 25 were missing the application for service (water or sewer), 8 were missing proof of property ownership (could be tax collector receipt, listing of property information from the Property Appraiser or the Clerk of Circuit Courts records on the property) and 19 were missing proof of personal identification. Recommendation, Original Report dated September, 2013: 9. As part of the loan approval process, mandate that each loan file include all required documentation as prescribed in the proposed policy. Authorization for the loan should not be given without proper documentation. Current Status, Follow-Up Audit dated August 2014: Selected a random sample of nineteen (19) active loans between the dates of November 1, 2013 and June 30, 2014 and reviewed each loan file. The auditor found that some of the required documentation was missing from the files or incomplete. Of the nineteen (19) loan files tested, all loan files were lacking a documented review and approval process. Each signature on the loan checklist should include the date signed and the document must reflect management s approval signature and date. This is important because it helps to ensure that loan requirements and required documentation are met before creation of the loan. In addition to the lack of documented approvals, eight (8) of the nineteen (19) loans were missing proof of payment for the application fee. Two (2) loans were missing the application for service (water or sewer) or a required signature and two (2) were missing the Application for Installment Payment Plan or a required signature. Page 11

12 Management Action Plan: Public Utilities has revised its checklist and procedure to include the following for Public Utilities Installment Loans as of August 25, 2014: 1. A Manager/Supervisor approves each loan twice; once after closing and prior to data entry of the loan or utility account to ensure proper completion of required documents and signatures, and a second time after data entry of the loan; 2. A date field was added to the checklist for each employee that verifies the documents; 3. A copy of the proof of payment for the application fee is placed in the loan file (screen shot of payment on account, copy or receipt of payment, or screen shot of fee being billed); 4. Revised the policy to indicate items which may be optional (i.e. Application for Water and or Sewer Service is not required if the applicant is already a utility customer; no personal identification is required if the documents were not executed by a Public Utilities employee). These will be marked as not required on the checklist, if applicable. Page 12

13 Closed Conditions and Follow-up Results C. Definition of Delinquency The proposed policy and the loan software are not in agreement regarding the definition of a delinquent loan. Audit Observations, Original Report dated September, 2013: The software ages past due loans based on 30 days, 60 days, 90 days and 1+ year increments. However, the proposed policy states any loans unpaid after 120 days past the payment due date or having an outstanding balance greater than $300 after 30 days are delinquent. Recommendation, Original Report dated September, 2013: 4. Match the policy and system specifications to allow for proper decision making and reporting. 5. Modify the proposed policy to agree with software specifications or engage the software provider to provide accurate reporting in compliance with the policy. Current Status, Follow-Up Audit dated August 2014: The revised policies and procedures relating to the Utility Installment Payment Program define a delinquent loan as loan charges unpaid after 90 days from the monthly statement due date. This definition of delinquency is in agreement with the loan software delinquency specifications. The software ages past due loans based on 30 days, 60 days, 90 days and 150+ day increments, which is in compliance with the policies and procedures. Page 13

14 D. Lack of Segregation of Duties There is a lack of segregation of duties related to loan processing, particularly related to the creation of the loan, the application of payments, adjustments to loans and loan closure. Audit Observations, Original Report dated September, 2013: A random sample of active loans and loan closures, disclosed that the same employees who are authorized to create loans are also authorized to process loan adjustments and close loans. There is currently a review control in place for the creation and closure of loans; however the reviewer also has the capability to create, adjust and close loans without a secondary approval. Recommendation, Original Report dated September, 2013: 6. Recommend secondary approval for all activity related to loan processing. Options to consider include approval by means of daily reporting, transactional approval, or sampling based on identified thresholds. Corrective Action, Follow-Up Audit dated August 2014: Selected samples of new loans, applied payments and closed loans, testing nineteen (19) of 155, nine (9) of 2,260 and nineteen (19) of 236 respectively. In addition, sampled and tested six (6) adjustments that were performed during the month of May Testing indicated that secondary approval was present for loan processing and that the proper segregation of duties appears to be in place. Page 14

15 F. Lack of Documentation for Loan Closures There is a lack of proper documentation within the loan files regarding loan closures. Audit Observations, Original Report dated September, 2013: Selected a random sample of 77 closed loans from the past 24 months and reviewed each loan file. During review of the loan files it was noted that 5 of the 77 loans tested did not have documentation evidencing that the loan was fully paid prior to Release of Lien being authorized. Recommendation, Original Report dated September, 2013: 8. Prior to a Release of Lien being authorized by the designated individual, proper documentation should be presented to ensure the loan has been paid off. Documentation should include evidence from the system illustrating a zero balance as well as proof of final payment. Corrective Action, Follow-Up Audit dated August 2014: Selected and tested a random sample of nineteen (19) of 236 closed loans between the dates of November 1, 2013 and June 30, Testing indicated that all nineteen (19) selected loans retained evidence of a zero balance as well as proof of final payment prior to closure of the loans. Page 15

16 H. Lack of Review and Approval Documentation for Adjustments There is no documentation for the review and approval process related to adjustments. Audit Observations, Original Report dated September, 2013: It was noted through testing of May 2013 adjustments that there is no formal or written review and approval of adjustments to loan accounts. Recommendation, Original Report dated September, 2013: 10. Recommend a formal process (ie. a form) be created and used to document the reason for the adjustment, the employee performing the adjustment and the authorized individual reviewing and approving the adjustment. The form should be included with the documentation in the loan files. Corrective Action, Follow-Up Audit dated August 2014: Selected and tested a sample of all adjustments processed during May Testing indicated that all six (6) adjustments processed during the month of May 2014, included a documented review and approval of the adjustment(s) to the loan account. Page 16

17 Appendix A Original Audit Report Dated September 30, 2013 Summary and Results The Clerk of the Circuit Court and County Comptroller s Internal Audit Department has completed an audit of the Utilities Department Installment Payment Program. The audit was planned and conducted in accordance with Generally Accepted Government Auditing Standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The purpose of the audit was to review internal controls and compliance with applicable laws, regulations, policies and procedures. Background The mission of Utility Installment Payment Program is to assist new utility customers by providing financial assistance to allow payment-over-time for the cost of water and sewer capacity fees and line extension fees as required by Sarasota County Utilities. The financial assistance is provided prior to the connection of existing structures/properties currently utilizing onsite wells and/or septic systems to the County utility system including franchisees of the County. The program currently is servicing 2,700 active loans with an outstanding loan receivable general ledger balance as of July, 2013 of $6,971,208. On average, $78,000 in principal payments are received and paid each month. County Resolution provides the authority to the Board to impose fees related to new connections to the Utilities System including financing costs. The Resolution also outlines that financing is applicable to those that are to connect to the Utilities System as an individual customer. These customers have the option to finance the Capacity Fee and any applicable Line Extension Fee, as determined on a per equivalent dwelling unit basis. Financing is applicable for up to 100% of said fee s for up to 20 years. The interest rate is to be set no lower than 3% and is determined at the beginning of each fiscal year (October 1 st ) by taking the average of the monthly 20-year Constant Maturity Treasury Bond, as published by the Federal Reserve, for the previous April, May, and June. The rate is further adjusted less 100 basis points for residential single-family and multi-family property owners with 4 living units or less. Loans above $25,000 and up to $300,000 are approved by the County Administrator or his/her designee. Loans $25,000 or less are approved by the Utilities Department. Resolution outlines that all loan applications must be made by the property owner and must include proof of ownership, proper identification and completion of an agreement for a property lien. Additionally, the Utilities Department is operating under a proposed policy dated September 4, 2013 that requires further information be provided upon loan application and completion. Page 17

18 As of September 18, 2013, the portion of the $6.97 million in loans outstanding currently billed and due to the county is approximately $112,000. Of the $112,000, approximately $38,500 (34%) are considered current (have not yet reached the payment due date), approximately $12,000 (11%) are more than 30 days but less than 60 days past due, approximately $5,700 (5%) are more than 60 days but less than 90 days past due, approximately $25,100 (22%) are more than 90 days but less than 1 year (365 days) past due. The remaining amount, approximately $30,700 (28%) is past due by more than 1 year. AMOUNT AGING PERCENT $38,500 LESS THAN 30 DAYS 34% 12,000 BETWEEN 31 AND 60 DAYS 11% 5,700 BETWEEN 61 AND 90 DAYS 5% 25,100 BETWEEN 91 AND 365 DAYS 22% 30,700 OVER 1 YEAR 28% Of the $6.97 million in loans outstanding, $112,000 is due to the County Objectives, Scope and Methodology The objective of this audit was to determine if there is reasonable assurance that the Utility Installment Payment Program complies with applicable laws, resolutions, and County policies and procedures and that proper internal controls are in place to adequately mitigate risks related to the program. To meet the objectives of the audit, the following procedures were performed: Performed inquiries of County personnel; Reviewed documents relating to program eligibility, loan documentation, loan amounts, delinquency, application of payments, loan closure, adjustments and reconciliations; Obtained an understanding of the water and sewer utility loan program and its process ; Evaluated internal controls in place related to the review and approval process related to new loans, adjustments and loan closure; Evaluated the level of segregation of duties present over all process related to loans; Examined a sample of active loans, of a total of 2700 active loans, a random sample of 95 loans were selected and tested to ensure all required documentation was present in the files, loan payments were applied correctly and that the interest rate and terms that was applied to the loan complied with the applicable County Resolution; Page 18

19 Examined a sample of new loans within the past 24 months. Of a total of 549, a random sample of 83 was selected and tested to ensure all applicants met the required standards for eligibility; Examined a sample of loans closed within the past 24 months. Of a total of 895, a random sample of 90 was selected and tested to ensure the required documentation was present and all applicable signatures were on the loan closure forms; Identified opportunities for improvement. Synopsis Based on the procedures performed, the County appears to understand their responsibilities related to the Utility Installment Payment Program. Recently, the department has made a significant effort to improve the controls surrounding the process. There are, however, opportunities for improvement as detailed in the Opportunities for Improvement section of this report. Page 19

20 Opportunities for Improvement The audit identified certain policies, procedures and practices that could be improved. This audit was neither designed nor intended to be a detailed study of every relevant system, procedure or transaction. Accordingly, the Opportunities for Improvement presented in this report do not encompass all areas related to the Utility Installment Payment Program where improvements may be needed. Observations and recommendations were made in the following areas: A. Policies and Procedures B. Non-compliance with Proposed Policy Regarding Delinquent Loans C. Definition of Delinquency D. Lack of Segregation of Duties E. Reconciliation to GL does not balance F. Lack of Documentation for Loan Closure G. Missing Documentation in Loan Files H. Lack of Review and Approval Documentation for Adjustments A. Policies and Procedures There is no formal set of policies and procedures over the utility loans and its processes. Audit Observation: Currently the Utility Department has a proposed policy regarding the loan application and monitoring process. However, those policies have not been presented or approved by the Board of County Commissioners. Additionally, there is a lack of written procedures over the daily activity related to loans. Audit recommendations: 1. Finalize the proposed policies related to the utility loan program and request Board approval. The policy, at a minimum, should address program eligibility, application and payment rules, fees related to the loan, terms and conditions, delinquency, effects from refinancing and change of ownership, payments, loan amount thresholds, foreclosures and administration of the program. 2. Create written procedures for the loan processing function ensuring proper segregation of duties and appropriate review and approval authorizations. Procedures should address items such as the establishment of the loan, application of loan payments, adjustments to loans, processing of delinquency notices on overdue loans and processing loan closure. Page 20

21 Management Response A.1 Utilities Management agrees with this recommendation and has drafted a program policy for consideration and approval by the Board of County Commissioners. The current policy approved by the Board by Resolution , Exhibit D, includes eligibility, fee applicability, approvals, approval thresholds and interest rate calculations. The revised draft policy is currently being reviewed by management and staff of both Utilities and the Office of Financial Management. Included are sections related to eligibility, application, payments, fees, terms and conditions, delinquency, refinancing, change of ownership, foreclosures and administration of the program. A discussion item before the Board of County Commissioners is scheduled for January 28, 2014; therefore the implementation of the policy would occur soon thereafter. A.2 Utilities Management agrees with this recommendation and had previously identified 43 installment loan procedures to be documented. Of these, 25 are Utilities staff procedures and 17 are Office of Financial Management staff procedures. Sixteen of the 43 procedures have been drafted and four are completed. Proper segregation of duties, and appropriate review and approvals are being considered and documented for each procedure. It is proposed that all procedures will be drafted within 60 days from approval of the installment policy by the Board on or after January 28, Page 21

22 B. Non-Compliance with Proposed Policy Regarding Delinquent Loans Inconsistent application of delinquent loan proposed guidelines. Audit Observation: The Utility Department mails delinquent loan notices 6 months or 180 days from the day the loan payment is past due. However, management s guidelines indicate that a delinquent loan is any loan that is 4 months or 120 days past due or having an outstanding balance greater than $300 after 30 days. Audit Recommendation: 3. Consistently comply with proposed policy. On a monthly basis, run a delinquent loan report and send a delinquent notice for any loan deemed delinquent. Implement a monitoring program to ensure consistency, thereby maximizing the attempt to collect past due amounts. Management Response Utilities Management agrees with this recommendation. Due to software limitations, delinquency processing of loans has been done manually by Utilities staff using various system reports and manually generating notices to customers. The draft policy is recommending a 90-day delinquency process. Staff is also working with the software vendor, SunGard, to automate monthly delinquent notifications and create daily, weekly and monthly reports. Upon approval of the policy by the Board of County Commissioners on or after January 28, 2014, new delinquency procedures will be drafted, validated and implemented. Page 22

23 C. Definition of Delinquency The proposed policy and the loan software are not in agreement regarding the definition of a delinquent loan. Audit Observations: The software ages past due loans based on 30 days, 60 days, 90 days and 1+ year increments. However, the proposed policy states any loans unpaid after 120 days past the payment due date or having an outstanding balance greater than $300 after 30 days are delinquent. Audit Recommendation: 4. Match the policy and system specifications to allow for proper decision making and reporting. 5. Modify the proposed policy to agree with software specifications or engage the software provider to provide accurate reporting in compliance with the policy. Management Response Utilities Management agrees with this recommendation. The revised draft policy is recommending a 90-day delinquency process regardless of amount due. Reports are being developed to allow for proper decision making and reporting of delinquent accounts and that utilize current software system specifications. Upon approval of the policy by the Board of County Commissioners on or after January 28, 2014, new delinquency procedures will be drafted, validated and implemented. Page 23

24 D. Lack of Segregation of Duties There is a lack of segregation of duties related to loan processing, particularly related to the creation of the loan, the application of payments, adjustments to loans and loan closure. Audit Observations: A random sample of active loans and loan closures, disclosed that the same employees who are authorized to create loans are also authorized to process loan adjustments and close loans. There is currently a review control in place for the creation and closure of loans, however the reviewer also has the capability to create, adjust and close loans without a secondary approval. Audit Recommendation: 6. Recommend secondary approval for all activity related to loan processing. Options to consider include approval by means of daily reporting, transactional approval, or sampling based on identified thresholds. Management Response Management agrees with this recommendation and will be assigning portions of this process to representatives of Utilities and Office of Financial Management. Each section identified above will be addressed as a different bullet point: 1. The Creation of the loan the creation of the loan is assigned to a Permit Coordinator assigned to Utilities; the file and data entry is verified by an Administrative Specialist assigned to Utilities; and finally the file is reviewed by a Manager of Utilities. 2. The Application of Payments and Adjustments the original payment is posted by a Financial Specialist assigned to the Office of Financial Management; reapplication of payments as October 1, is reassigned to a Business Professional working for Utilities and a Fiscal Consultant working for the Office of Financial Management. 3. Loan closures A process for this activity will be in draft format by December 31, 2013 Page 24

25 E. Reconciliation to the General Ledger does not Balance Outstanding loan balances, payments applied, and adjustments do not balance to the general ledger. Audit Observations: A review of the loan reconciliation documents revealed that the reconciliation has been out of balance since October 2012 by approximately $6,700 and remains out of balance as of July Audit Recommendation: 7. Identify the cause of the variance and a corrective measure. Implement a monthly reconciliation procedure requiring that all variances be rectified by the following month and require management sign-off and approval. Management Response Management agrees with the recommendation and has identified the three accounts causing the variance between SunGard and the general ledger. Public Utilities and Office of Financial Management will work with SunGard and Enterprise Information Technology (EIT) to correct the variance issue. The correction of the variance will be a team effort and will be completed as soon as possible, while working within the timeframe of the vendor. A monthly reconciliation procedure will be documented requiring variances between IFAS and the SunGard product to be identified and reviewed by management. Documented processes will be drafted by December 31, Page 25

26 F. Lack of Documentation for Loan Closures There is a lack of proper documentation within the loan files regarding loan closures. Audit Observations: Selected a random sample of 77 closed loans from the past 24 months and reviewed each loan file. During review of the loan files it was noted that 5 of the 77 loans tested did not have documentation evidencing that the loan was fully paid prior to Release of Lien being authorized. Audit Recommendation: 8. Prior to a Release of Lien being authorized by the designated individual, proper documentation should be presented to ensure the loan has been paid off. Documentation should include evidence from the system illustrating a zero balance as well as proof of final payment. Management Response Utilities Management agrees with this recommendation and reports that this has already been implemented. The Utilities Financial Specialist currently provides the approving Utilities Manager a copy of the software system screen indicating the payment in full and a zero balance. Procedures are currently being drafted and should be completed by October 31, Page 26

27 G. Missing Documentation in Loan Files Some active loan files are missing required documentation per proposed policy. Audit Observations: Selected a random sample of 95 active loans and reviewed each loan file. During review of the loan files, it was noted that some documentation that was required per the proposed policy was missing from several of the files. Of the 95 loan files tested, 25 were missing the application for service (water or sewer), 8 were missing proof of property ownership (could be tax collector receipt, listing of property information from the Property Appraiser or the Clerk of Circuit Courts records on the property) and 19 were missing proof of personal identification. Audit Recommendation: 9. As part of the loan approval process, mandate that each loan file include all required documentation as prescribed in the proposed policy. Authorization for the loan should not be given without proper documentation. Management Response Utilities Management agrees with this recommendation and has already created a draft checklist that will be reviewed and verified by a Utilities Financial Specialist to ensure all documentation is included in the loan file. In addition, a Utilities Administrative Specialist checks all new loan files and system records to ensure each loan set up is accurate and complete. The original draft policy used for this audit included documentation that has since been determined as not required, therefore the revised draft policy has been corrected. In some instances some documentation may not be required so that will be noted on the checklist and the reason. (Example: The Real Property Lien may be notarized by a third party and therefore a form of personal identification is not included in the file). In addition, Utilities Permitting Coordinators have been informed that utility service is not to be provided until proper documentation is verified. Procedures are being drafted and should be completed by October 31, Page 27

28 H. Lack of Review and Approval Documentation for Adjustments There is no documentation for the review and approval process related to adjustments. Audit Observations: It was noted through testing of May 2013 adjustments that there is no formal or written review and approval of adjustments to loan accounts. Audit Recommendation: 10. Recommend a formal process (ie. a form) created and used to document the reason for the adjustment, the employee performing the adjustment and the authorized individual reviewing and approving the adjustment. The form should be included with the documentation in the loan files. Management Response Utilities Management agrees with this recommendation and has a process and form in place to document and approve required loan adjustments. All Adjustments must be reviewed and approved by a Utilities Manager. Utilities Management recommends that the adjustment approval form and any documentation remain with the daily reports for reconciliation and not be included in the loan file, with the exception of charge write offs, such as upon pay off of the loan, since only these type of adjustments affect the actual loan balance. Since loan terms are up to 20 years, maintaining the hard copy files at a convenient location may be difficult. However, each adjustment to an active loan will be noted on the loan electronic notes record in the Sungard software. Page 28