OFFICE OF THE AUDITOR

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1 OFFICE OF THE AUDITOR CAREER SERVICE AUTHORITY PROGRAM AUDIT AUGUST 2007 Dennis J. Gallagher Auditor

2 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX August 16, 2007 Mr. Bruce Backer, Acting Co Director Ms. Dani Brown, Acting Co Director Career Service Authority City and County of Denver Dr. Sharon Bailey, Director of Accounting, Finance and Policy Auditor s Office City and County of Denver Dear Mr. Backer, Ms. Brown and Dr. Bailey: Attached is the Auditor s Office Internal Audit Division s report examining the Education Refund Program for the year ended December 31, The purpose of the audit was to determine whether internal controls in place were adequate and to ensure program compliance to the Revised Municipal Code. The audit revealed reportable internal control weaknesses related to the Education Refund Program s application and refund processes as disclosed within the accompanying report. If you have any questions, please contact Kip Memmott, Director of Internal Audit, at Sincerely, DJG/kh Dennis J. Gallagher Auditor cc: Honorable John W. Hickenlooper, Mayor Honorable Members of City Council Members of Audit Committee Arlene Dykstra, Acting City Attorney Lauri Dannemiller, City Council Staff Director Kelly Brough, Chief of Staff Chris Henderson, Chief Operating Officer Beth Machann, Controller Claude Pumilia, Chief Financial Officer Education Refund Committee Members The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government 1

3 TABLE OF CONTENTS Transmittal Letter 1 Table of Contents 2 Internal Auditor s Report 3 Executive Summary 4 Background, Scope, Objective, and Methodology 5 Findings, Recommendations, and Responses 7 Career Service Authority s Responses 11 2

4 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX INTERNAL AUDITOR S REPORT We have completed an audit of the Education Refund Program. The purpose of the audit was to determine if the program was being monitored by the City in an efficient manner and to verify compliance with program requirements and other regulations. This audit was included in the Auditor s Office Internal Audit Division s 2006 Annual Audit Plan and is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor. We conducted our audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about the effectiveness of internal controls and status of regulation compliance. An audit includes examining, on a test basis, evidence supporting compliance with applicable requirements and regulations, and accounting and administrative internal controls, as we considered necessary in these circumstances.. The Internal Audit Division is considered organizationally independent when audits are performed on activities of business processes not controlled by the Office of the Auditor. However, when the Internal Audit Division performs an audit of operational functions controlled or partially controlled by the Office of the Auditor, the division cannot be viewed as independent. Accordingly, we declare a potential impairment of our independence of this Education Refund Program audit in accordance with generally accepted government auditing standards. Functions of the Auditor s Office Accounting Division, include citywide payroll and processing the refunds for employees enrolled in the program. We relied on this activity as part of our audit. Our objectives were met in all areas except as noted in the findings contained in this report. We extend our appreciation to the personnel who assisted and cooperated with us during the audit. Internal Audit Division Date: August 16, 2007 Kip R. Memmott Director of Internal Audit Staff: Dick Wibbens, CPA, Audit Manager John Finamore, CPA, Audit Supervisor Sonia Montano, CICA, Lead Auditor The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government. 3

5 EXECUTIVE SUMMARY FOR THE YEAR ENDED DECEMBER 31, 2006 This summary highlights the findings of this audit, which are more fully described in the Findings, Recommendations, and Responses section beginning on page 7. The Findings, Recommendations, and Responses section also includes the responses of the Career Service Authority and the Auditor s Office Accounting Division. 1. Internal Controls The internal controls used in the administration of the Education Refund Program need improvement. Specifically, no written policies and procedures exist detailing the application and refund processes to be performed by the program administrator. 2. Reconciliations Detailed reconciliations are not performed on the Education Refund Program s fund. 3. Incorrect Refund Entries The Office of the Auditor s Payroll Division made errors in processing some of the refunds for the Education Refund Program. 4. Education Refund Committee Responsibilities There should be more oversight of the program provided by the Education Refund Committee to ensure that proper processes and controls are in place to administer the program. 4

6 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY FOR THE YEAR ENDED DECEMBER 31, 2006 Background The Educational Refund Program, administered by the Career Service Authority (CSA) with the oversight of the education refund committee, 1 provides partial refunds to city employees for courses taken at accredited institutions. To qualify for a refund, employees must demonstrate that the course will improve their current performance and productivity or enhance their ability to promote within the City. Employees are reimbursed 75% of tuition up to the maximum of $1,600 per year. The program does not reimburse for any fees, books, parking, childcare cost or any other expenses not directly related to tuition. Additionally, employees can receive reimbursement for Professional license and certification examinations and non credit Professional Development Certification courses. The professional and non professional license and certifications courses are reimbursed at 50% up to a yearly maximum amount of $1,000. Tuition applications are approved on a first come, first serve basis. In 2006, 222 employees participated in the program and tuition reimbursements totaled $183,995. The process to qualify for the program; an active City employee submits an application which details the educational goal, course(s) to be taken, tuition amount, dates of the course and the institution (the application also requires any grant money or scholarships to be reported). The Program Administrator forwards the applications to CSA for approval. If the application is approved, committed funds are set aside until a reimbursement is requested. Once the course is completed, the applicant must submit final grade(s) and proof of payment (receipt) within 30 calendar days of the course(s) end date. The Program Administrator submits refund requests to the Office of the Auditor s Payroll Help desk for reimbursement. It should be noted that over the past few years, funding for the Education Refund Program has only increased by $2,700 (l.9%) while participation in the program has increased by 17%. As a result of limited funding, applicants have periodically been denied the opportunity to take advantage of this program. Scope The scope of this audit was to review the internal controls and to ascertain compliance with rules and regulations for the Education Refund Program, administered by CSA. The Education Refund Program s Fund 11801/Org was included within the scope of this program audit. 1 According to the Revised Municipal Code (RMC), Sec , the education refund committee consists of the career service personnel director and four members appointed by the mayor. The committee s duties include some of the following; establish standards, policies and procedures for program administration; provide oversight and ensure compliance with all standards and policies; and act as a final board of review for any disputes relating to the education refund program which cannot be settled by the career service authority. The decisions of the committee in approving or disapproving any actions in regard to reimbursement shall be final. 5

7 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY Objective The objective of the audit was to verify program compliance with applicable City rules and regulations, and to assess the adequacy of internal accounting and administrative controls. Methodology In order to achieve the scope and objectives of the audit, we conducted the following activities: Interviewed personnel involved in the various functions of the program; Examined applications and refunds on a sample basis 2 to determine if they were in compliance with requirements of the program; Reviewed entries posted to the General Ledger of the Education Refund Program s Fund; and Assessed management controls over the administration of the program by reviewing program fund reconciliation and refund approval processes and examining and documenting the Education Refund Committee s involvement and oversight of the program. 2 Sample size selected for applications and refunds was determined to be 29% of the total population as follows: 222 x 29% = 65; 63 random and 2 judgmentally selected items. 6

8 FINDINGS, RECOMMENDATIONS, AND RESPONSES FOR THE YEAR ENDED DECEMBER 31, Internal Controls The internal controls used in the administration of the Education Refund Program need improvement. Specifically, we found inadequate segregation of duties and management oversight for program application and refund processes. The lack of effective oversight and adequate segregation of duties increases the opportunity for misappropriation of program funds. The following exceptions demonstrate issues related to program internal control weaknesses. Lack of Policies and Procedures During our audit, we found there are no written policies and procedures in place detailing the program administrator s duties in processing applications and refunds for the Education Refund Program. Incomplete and Inaccurate Program Databases Audit work determined that information in the program s databases was not complete or accurate. For example, a participant s refund request was not received within the 30 calendar day requirement after completing the course, but the participant received a refund. Additionally, another participant s information was not entered in the database, but had an approved application and refund. Other exceptions related to the inaccurate information kept in the databases concerned tracking funds earmarked for pending applications and funds available for future applicants. Specifically, the program administrator entered the entire amount requested on the application rather than the allowable 75% reimbursement amount and did not consider possible grants or stipends that might reduce the potential refund amount. Further, approved applications for which refund requests were never received were not removed from the database hindering administrators from determining accurate program funding amounts/balances. Another identified database management issue involved participants receiving refunds in excess of the $1,600 limit per calendar year. We found that some participants received more than $1,600 in 2006 because a portion of the reimbursement amount was for courses that had been taken in While the refunds were appropriate, incomplete database information hindered the ability to easily detect overpayments in the databases. For example, we identified five other participants that had improperly received an excessive annual refund amount. We found the program administrator to be proactive in collecting these overpayments. Refund Process Weaknesses Our testing also discovered various exceptions related to refunds processed for the Education Refund Program. For example; A refund request was not date stamped so we could not verify if the request was sent in within the required timeframe. We found a few refund requests were submitted and accepted after the 30 calendar day deadline. Refunds were not computed in accordance to the program requirements. 7

9 FINDINGS, RECOMMENDATIONS, AND RESPONSES A refund that was not computed correctly resulted in an overpayment (later reimbursed to the program). The supporting documentation for a refund was not itemized which prevented verification of the proper refund amount. A few refunds had to be computed by the administrator because the participants did not pass all of the courses, but the calculations were not clearly documented. Some refunds did not have any supporting documentation to ensure the participant had paid for and/or passed the course. Audit work determined that an ineligible employee received a refund. Specifically, the employee was an on call in 2006 when approved for the program and received refunds for courses taken. According to the requirements, on call employees are not eligible. Recommendation We recommend policies and procedures be developed detailing the application and refund processes performed by the program administrator. Policies should include the following: A requirement for proper support documentation for any irregular calculations or approvals. Any notations regarding applications or refunds should be clearly documented to serve as an audit trail supporting the actions. Details on how to compute refunds for courses not passed. Information concerning various school billing information. Establishing a tracking system to monitor available funds. Refunds should be reconciled and verified to prevent overpayments. A process for escalating program issues to Education Refund Committee. Additionally, the program administrator should track the funds allocated for pending applications, funds paid, and funds still available for future applications. This would ensure the funds for the Education Refund Program are being used appropriately and in the best interest of the program. A tracking process should also be put in place to monitor the funds distributed to each participant to ensure overpayments do not occur. We also recommend strengthening the segregation of duties for some of the processes handled in the Education Refund Program or increasing management oversight of these processes. Implementation of these recommendations will strengthen the internal controls over the program. CSA s Response (See page 12) 2. Reconciliations Financial reconciliations of the Education Refund Program are not being performed. As a result, incorrect and undetected entries have been posted to the program s fund and organization. For example, one entry was posted to the incorrect account number. Another incorrect entry resulted 8

10 FINDINGS, RECOMMENDATIONS, AND RESPONSES in a participant not receiving a refund even though the program administrator had included the participant on the refund request. Recommendation We recommend CSA ensure that the financial personnel in their agency perform regular reconciliations on the Education Refund Program s fund. Requiring the Education Refund Program fund to be reconciled by someone other than the program administrator would properly segregate duties, thereby ensuring that incorrect entries are identified and corrected in a timely manner. CSA s Response (See page 14) 3. Incorrect Refund Entries Audit work identified Payroll Division processing errors for some program refunds. For example, we found that one participant s refund was not entered from a request. Additionally, refund requests for eight participants totaling $6,153 were paid and duplicated on two separate payrolls. Therefore, the program administrator had to notify the participants and collect reimbursements. Recommendation We recommend that the Office of the Auditor s Payroll Division examine, identify, and correct processes to make certain refund requests that are sent through to the Payroll Help desk for the Education Refund Program are entered properly. We also recommend that the Payroll division personnel work with the Education Refund Program administrator and agree on the best approach to handle errors if they occur. Auditor s Office Accounting Division s Response The Auditor s Payroll Department s response to the finding contains the following elements. The department is in agreement with the findings listed in the audit. The previous Payroll Manager held meetings with the payroll operations team and the Education Refund Program administrator. As a result of these findings the following steps have been taken to ensure stronger controls and accuracy: A component interface upload has been designed and implemented. This interface will streamline our processes and eliminate the need for the Payroll Department to manually key the education refunds into the payroll system. The process that flags files sent to the Payroll Helpdesk that have already been addressed has been reinforced. This will eliminate the possibilities of a file being uploaded twice. The auditing and reconciliation processes have been reinforced within the Payroll Department. 9

11 FINDINGS, RECOMMENDATIONS, AND RESPONSES A process was created and communicated to the Education Refund Program administrator on how we will process the education refunds. We have asked that the requests are only sent via softcopy to the Payroll Helpdesk to be uploaded via the component interface. We have also requested that the administrator not follow up with hardcopies. Instructions have been provided to the Education Refund Program administrator that all overpayments must be processed via payroll to ensure W 2 reporting is accurate. 4. Education Refund Committee s Responsibilities Audit work determined that an Education Refund Committee is in place but the program administrator has been given full responsibility over the application and refund processes. As a result, there is a lack of oversight necessary to ensure the duties performed by the program administrator are in compliance with the program requirements. It should be noted that the program administrator does take questionable issues such as certifications and appealed cases to the committee to seek advice and the committee has recently been active in making changes to the program s requirements. Recommendation We recommend that the Education Refund Committee members provide more oversight of the program. On a rotating basis members should conduct periodic reviews of the program s processes. We also recommend refund requests be reviewed by another CSA employee or a committee member to provide for adequate segregation of duties. The committee should also review the funding and participation of the program on a regular basis to ensure that the City s goals for the program are being met. If participation objectives are not being met, the committee should examine ways to better promote and fund the program. This may entail setting actual participation goals and other performance measures. CSA s Response (See page 15) 10

12 CAREER SERVICE AUTHORITY RESPONSES FOR THE YEAR ENDED DECEMBER 31, 2006 Summary Response Career Service Authority s Responses The Education Refund Program will manage and appropriate approximately $138,000 for fiscal year The Program Administrator in partnership with the Education Refund Committee has done a great job managing employee expectation, communicating program guidelines and reimbursing eligible employees with timely payments. In essence the Auditors have identified three areas of focus for the program: Clearer duties statements and processing guidelines and checks and balances for the Program Administrator. Routine reconciliation of funds and payments. Greater Committee oversight of the day to day processes. Some recommendations from the audit coincided with a recently devised procedures and guidelines manual that clearly maps out the role and processes managed by the Program Administrator. The Committee does believe that there was an opportunity to create an additional layer of check and balance and have leveraged CSA s budget analyst to fulfill that role. In addition, the CSA budget Analyst will perform a quarterly reconciliation of the dollars and the reimbursements and provide a report to the Education Refund Committee members. The audit also recommended that the Education Refund Committee play a greater role in overseeing the day to day processes. The Committee already plays a strategic role in setting policy, adjudicating reimbursement disputes, and providing policy interpretation for the Program Administrator. It is the opinion of the Refund Committee that the use of two CSA staff along with the new procedures and guidelines to improve the administration will be sufficient to address the issues raised in the audit. The Program Administrator has broken down the issues raised as bullet items within three areas 1) Internal Controls, 2) Reconciliations, and 3) Education Refund Committee Responsibilities and provided a relational response (see below). Internal Controls The internal controls used in the administration of the Education Refund Program need improvement. Our audit found the following exceptions related to internal controls: i. An employee was allowed to participate in the program but was not eligible in accordance to the requirements. ii. Information kept in the databases for the program contained a variety of errors. iii. The funds for the program were not tracked appropriately to monitor the amount available for future applicants. 11

13 CSA RESPONSES iv. During our audit we found that there are no written policies and procedures in place to detail the program administrator s duties in processing applications and refunds for the Education Refund Program. v. A participant was noted that their refund request was not received within the 30 calendar day requirement after completing the course but yet the participant had actually received a refund vi. Another participant s information was not entered in the database but had an approved application and refund. vii. Inaccurate tracking of the funds earmarked for pending applications and also still available for other future applicants. viii. Another issue was that funds allocated for approved applications but refund requests were never received, were not removed so it was not known the funds were available. ix. Refund requests were sent in after the required 30 calendar day period upon completion of the course. x. Refund requests were not date stamped so we could not verify if the request was sent in within the required timeframe. xi. Refunds were not computed in accordance to the program requirements. xii. A refund that was not computed correctly resulted in an overpayment that was later reimbursed to the program. xiii. The support documentation for a refund was not itemized so we could not verify what the refund amount should be. xiv. A few refunds had to be computed by the administrator because the participants did not pass all of the courses but the calculations were not clearly noted. xv. Some refunds did not have any support documentation to ensure the participant had paid for the course and/or passed. xvi. There should be some segregation of duties regarding the application and refund processes for the Education Refund Program. CSA Response Internal Controls: i. This issue concerned an on call employee for whom a status check was not completed prior to the review of his application. All participants are given a status check prior to having their applications approved or denied. This ensures the accuracy of the data submitted. In this instance, it appears that the status check did not occur. The new procedure does institutionalize this check point more emphatically. ii. iii. CSA updates the ERP database ongoing. This data will be reviewed on an on going basis by the CSA Business Analyst to ensure that the information in it is current and accurate. Additional fields have been added to the tracking system to identify available monies for future applicants. The Fiscal Officer will ensure that available funds are closely monitored by reconciling dollars committed early in the term to actual expenditures later in the term. 12

14 CSA RESPONSES iv. CSA has recently implemented polices and procedures addressing the administration of the program. These have been approved by the ERP Board and help ensure that established guidelines are followed. v. This individual presented to the ERP Board a set of extenuating circumstances which required the Board to meet and discuss before ruling. This took the applicant s date outside of the normal required date range. vi. vii. viii. ix. This individual participant had indeed followed all application procedures and the Program Administrator was in possession of the hard copy paper trail. The Program Administrator failed to input that data into the system. The creation of a checklist institutionalizes this step in our new procedure. Recently implemented procedures include a new tracking system that will ensure that expenditures made during the refund process and in accordance with program rules. A new tracking system will ensure that all applications will be entered into the database. Committed funds will be monitored in relation to actual expenditures to identify any unused funds. Program guidelines allow refund requests to be evaluated on an individual case bycase basis. This includes those requests that are submitted outside of the 30 day submission period. In these instances, documentation clarifying the reason behind the late submission will be collected. Such requests will be presented to the ERP Board for final adjudication. x. New guidelines have been established to ensure that all applications are time stamped by CSA immediately upon receipt. xi. xii. xiii. Prior to the program design changes for 2007, there was not an active role for the Program Administrator to calculate payments. It was simply an exercise in looking at the 75% threshold and the $1600 reimbursement ceiling. New guidelines and an improved tracking system will assist with computing all refunds in accordance with established program rules. In addition, recent program rule changes no longer restrict payment to a certain percentage of the tuition of a particular class. Now, CSA will simply pay up to the annual maximum threshold for each employee. This greatly simplifies the refund calculation process. All overpayments have been identified and all monies have been collected from the participating members. A new tracking system will allow the program administrator to review all payments for participants to ensure that no overpayments take place in the future. Certain unique scenarios exist in relation to the types of documentation and information provided to students with respect to tuition, fees, books, etc This lack of consistency makes it sometimes unclear as to how to decipher what is a 13

15 CSA RESPONSES reimbursable expense. The Program Administrator has institutional knowledge of these anomalies and has committed to represent that information in the Procedures and Guidelines Manual. xiv. xv. xvi. A new calculation worksheet has been designed and added to the process. This will provide a stronger and clearer documentation trail for future transactions The Program Administrator requires supporting documentation for all transactions and refunds. In this case, the required documentation was not attached. The Budget Analyst will randomly review selected cases to ensure that proper documentation is being collected. An additional staff member has been assigned to work closely with the Program Administrator to allow for the separation of the application and refund processes. Furthermore, the Budget Analyst will randomly review selected cases to ensure the proper handling of the application and refund processes. Reconciliations a. Detailed financial reconciliations of the Education Refund Program are not being performed. b. Incorrect entries have been posted to the program s fund/org. c. Another entry that resulted in a participant not receiving a refund even though the program administrator had included the participant on the refund request was never discovered. d. A detailed reconciliation of the Education Refund Program fund/org. should be performed each month by CSA s financial personnel to ensure postings to the General Ledger are correct. e. Monthly reconciliations would also improve the internal controls to provide another check and balance in the program s application and refund process. CSA Response Reconciliations: i. CSA has implemented a procedure to ensure the reconciliation of the ERP account on a regular basis. This reconciliation will focus on three areas: 1) The Special Revenue Fund which supports the program will be reconciled to ensure that total expenditures will not exceed available funding. 2) Individual participant accounts will be reconciled to ensure that payments to any single employee do not exceed the annual maximum threshold for each person. 3) The expenditures made at the end of each term will be reconciled against the funds initially committed at the beginning of the term. 14

16 CSA RESPONSES ii. iii. iv. We did not receive specific examples of incorrect entries, but would like those specifics shared with the Program Administrator and Budget Analyst to determine if charge backs should occur to remedy any coding and/or misappropriated charges. CSA will review entries on a regular basis to ensure that amounts have been posted to the appropriate Fund / Org Codes. The Budget Analyst will provide oversight of the codes and dollar amounts included in the proprietary spreadsheets. CSA will reconcile expenditures made at the end of each term to the funds committed at the beginning of the term. This will help identify participants who had funds committed on their behalf at the beginning of the term but with no expenditures for them at the end of the term. Reporting from the Auditors office on which payments are made and self identification on behalf of the employee are two additional informational opportunities that would prevent unrealized payments. The ERP Committee agrees with this audit finding and recommendation. CSA has established a procedure to reconcile its proprietary ERP spreadsheets against the General Ledger on the PeopleSoft system v. The ERP Committee agrees with this audit finding and recommendation. CSA has established a procedure to reconcile funds committed during the application process to actual expenditures made during the refund process. Education Refund Committee s Responsibilities i. There are no checks and balances being performed by other CSA personnel or committee members to ensure the duties performed by the program administrator are in compliance with the program requirements. ii. According to the Revised Municipal Code (RMC), Sec (a) (2) it is the Education Refund Committee s duty to provide oversight and ensure compliance with all standards and policies. CSA Response Education Refund Committee Responsibilities: i. With the checks and balances now in place, the ERP Board will be more appropriately focused on its responsibilities of providing direction to the program and ensuring its compliance with all standards and procedures. These checks and balances include a more robust tracking system, additional staff to assist in separating critical functions, institutionalized collection of supporting documentation from participating employees, and direct involvement of the Budget Analyst who will provide quarterly reconciliations and random monitoring of transactions. 15

17 CSA RESPONSES ii. The language in Revised Municipal Code (RMC), Sec (a) (2) clearly establishes the oversight and compliance responsibilities of the ERP Board. These responsibilities include setting program policy, interpreting policy, designing the program guidelines, and mapping out the overall strategic direction of the program. The ERP Committee has authorized the Program Administrator in CSA to manage the ERP on a day to day basis. With the changes that have been recently implemented, CSA will handle the day to day administration of the program in a more efficient manner and the Board will be better positioned to maintain standards associated with oversight and compliance. 16