Internal Audit: Sonoma County. Northern Sonoma County Air Pollution Control District (NSCAPCD) Auditor Controller Treasurer Tax Collector

Transcription

1 Auditor Controller Treasurer Tax Collector Internal Audit Sonoma County Northern Sonoma County Air Pollution Control District (NSCAPCD) For the Period July 1, 2011 through June 30, 2013 The Internal Audit Division of the Sonoma County Auditor Controller Treasurer Tax Collector s Office (IA) completed an audit of NSCAPCD for the above period. The primary objective was to review internal control procedures over cash receipts, disbursements, capital assets and grants. We recommend the District: Comply with the County Fiscal Policy C 2 and use County issued receipt books and deposit collections on a weekly basis or when collections reach $500 Reconcile collections with the internal records (permit database) on a daily basis Review changes made to burn permit data in the permit database after the permit has been issued Provide the payment schedule section of lease agreements as support for lease payment requests Ensure that fixed asset transactions are properly recorded by timely completing and processing Accountability of Fixed Assets and Fixed Asset Form for Equipment Purchases as appropriate Perform a physical verification of the fixed assets on hand before certifying the capital assets report Report Date: September 18, 2014 Audit Manager: Kanchan K. Charan, CPA, CGMA Audit Supervisor: Damian Gonshorowski, CPA, CGMA Auditor: Carmela Boudreaux

2 Table of Contents Audit No For the Period July 1, 2011 through June 30, 2013 Introduction and Background 1 Overview 2 Objectives and Scope 4 Procedures 5 Findings and Recommendations 7 Attachment A Management Response 12 Attachment B Report Item Risk Classification 14

3 Introduction and Background Introduction The Internal Audit Division of the Sonoma County Auditor Controller Treasurer Tax Collector s Office (IA) has completed the audit of the Northern Sonoma County Air Pollution Control District (NSCAPCD or the District ) for the period July 1, 2011 thru June 30, The audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing (Standards). These Standards require that we identify, analyze, evaluate, and document sufficient information and evidence to achieve our audit objectives. We believe that the evidence obtained provides a reasonable basis for the results, observations, and recommendations contained in our report. The purpose of this audit report is to furnish management independent and objective analyses, recommendations, and other information concerning the activities reviewed. The audit report is a tool to help management identify and implement improvements. We appreciate the courtesy and cooperation extended to us by the District management and staff. Background The Northern Sonoma County Air Pollution Control District is one of the 35 local air pollution control districts in the State of California. The District derives its authority from the Federal Clean Air Act, and from specific authorities and mandates in the California Health and Safety Code. It is governed by its Board of Directors, the composition of which is specified in law and presently includes members of the Sonoma County Board of Supervisors. In addition to its governing Board, the District is required by statute to have a Hearing Board and an Air Pollution Control Officer. The District s primary responsibility is to implement federal and state requirements as they pertain to stationary sources of air pollution. This includes monitoring levels of certain pollutants in the ambient air, and adopting and enforcing rules and regulations as needed to ensure those levels meet the standards established by law. The District also implements and enforces requirements for stationary sources adopted by the federal and state governments, investigates complaints about air quality, and implements education and incentive programs to reduce air pollution. Page 1

4 Overview The District is funded by a combination of grants, subventions, permit fees, penalties, surcharges on motor vehicle registrations, property tax revenues, and interest on fund balance. The funds are restricted to the mission of the district, and certain funds are more narrowly restricted to specified purposes. The Health and Safety Code further provides that if the District has expenses that are not met by other sources, those expenses shall be provided by a per capita assessment on the County and any cities that sit on the District s governing Board. Under the Health and Safety Code, the District s budget is approved by the District s Board of Directors (Board), separate from the County budget processes. The budget is divided into six indices, which generally reflect program specific restrictions on revenues: NSCAPCD Operations (689018): This is the District s operational fund, out of which the majority of air district programs are implemented, including costs of personnel, facilities and materials. A majority of the revenue is derived from permit fees. The District maintains a sufficient fund balance to fund at least six months of operations and certain contingencies. NSCAPCD VPMP (689034): The Vehicle Pollution Mitigation Program (VPMP) was authorized by Legislature and approved by the Board to implement specified activities and to mitigate the air pollution impacts of the use of motor vehicles. Revenues derive from a surcharge of $4 on each motor vehicle registered within the District. Pursuant to guidelines established by the California Air Resources Board (ARB), the District funds eligible air monitoring activities and costs, and makes funds available for grants for projects to reduce pollution associated with motor vehicle use. Funds are granted pursuant to program guidelines approved by the Board. There is no minimum fund balance requirement but the District has historically tried to maintain sufficient fund balance to allow funding of a larger project or a series of projects. NSCAPCD DMV Moyer (689042): This is a single purpose fund that provides grants for reductions in emissions from eligible heavy duty diesel engines. It derives its revenue from a $2 surcharge on motor vehicle registrations which sunsets in 2023 unless an extension is authorized by Legislature and approved by the District s Board of Directors. Any fund balance remaining after the sunset of the surcharge would allow for a continuation of grants for a limited time. NSCAPCD Carl Moyer Fund (689059): This is a single purpose fund that provides grants for reductions in emissions from eligible heavy duty diesel engines. Revenues are generated through grants from ARB (derived from State fees paid in lieu of smog check obligations in the early years of a vehicle s life, and by a surcharge on tire sales). Funds are allocated to the District pursuant to a formula in statute, which specifies minimum allocation of $200,000. Page 2

5 Overview Beginning in fiscal year , the Truck Improvement/Modernization Benefitting Emission Reductions (TIMBER) Program was implemented under the Carl Moyer program. The allocation for this program is anticipated to be $132,000 and is to be used to provide funding opportunities to quickly replace older, heavy duty log trucks earlier than would otherwise be required by regulation. All funds received from the state for the Carl Moyer programs, and any interest accrued, must be expended within two years in accordance to guidelines established by the ARB. The tire surcharge and the allocation formula sunset in 2023, with expenditures to be completed by It is uncertain what, if any, funds will be available to the District after the sunset. NSCAPCD GAMP (689109): This is a single purpose fund that supports the Geysers Air Monitoring Program (GAMP) in the Geysers, a public private consortium that includes the air districts of Sonoma and Lake Counties, representatives of the State, the power generators in the Geysers, and representatives of downwind communities. It is funded by member contributions; the District s contribution is in kind as administrator of the fund. The budget for the program is developed and approved by members of the public private consortium. NSCAPCD Community Benefit Fund (689307): This fund was created by the Board as a mechanism to address community concerns related to air pollution. Its revenues derive from penalties assessed against facilities that have violated District regulations, and other miscellaneous sources. Broadly, the funds may be used to measure or otherwise study air pollution in communities, and to implement projects to mitigate the impacts of air pollution on communities. Some funds are more specifically restricted by settlement agreements. Historically, staff has strived for a balance between funding beneficial projects and maintaining fund balance for future uses. The District relies on the accounting and administrative services of the Department of Transportation and Public Works (DTPW) and the Client Accounting Division of the Auditor Controller Treasurer Tax Collector s Office (ACTTC) to manage its funds. Page 3

6 Objectives and Scope Objectives The objectives of this audit were to determine if internal controls are adequate and functioning properly to: 1. Ensure that cash receipts from fees, fines and State funding are accounted for properly and on a timely basis 2. Ensure proper accounting of cash disbursements from accounts payable and grant disbursements 3. Ensure that capital assets have been recorded, amortized and disposed in accordance with County policies Scope The audit period covered the revenues and expenditures for the period from July 1, 2011 through June 30, The scope of our work included but was not limited to the following: 1. A preliminary survey to update our knowledge of the operating environment; identify changes in laws and regulations, systems, personnel and organization structure 2. A risk analysis to identify significant risks of non compliance with policies, procedures or laws, loss or misuse of assets and inefficiencies in processes 3. A review and evaluation of internal controls designed to ensure compliance with the above requirements and to adequately reduce the risks identified The audit included inquiry, observation, and testing for assessing the District s controls over its revenues and disbursements, including those transactions related to the administration of grants and the capitalization of purchased assets. Page 4

7 Procedures IA performed the procedures outlined below to achieve the audit objectives with respect to revenue, expenditures and capitalization of assets. The controls over grant revenues and disbursements were indirectly tested within these procedures. IA performed the following procedures with respect to revenue: 1. Compared actual revenues to budget and to prior year actuals and investigated unusual fluctuations 2. Tested all receipt books to ensure that no books and receipts were missing and all voided originals are still in the books, and verified numerical sequence continuity. Scanned receipt books for unusual transactions 3. Selected a sample of deposit authorizations from the Revenue Transaction Detail and ensured that deposit authorizations are supported by County receipts, report from the permit databases, and that deposit amounts agree with all sources and were properly reviewed and approved for deposit by the Account Clerk and Treasury, and were accounted for in the proper period and classification 4. Selected a random sample of receipt numbers from the County receipt books and traced them back to the Revenue Transaction Detail to ensure deposits were accounted for in the proper period and agree in classification and amounts, and receipts had supporting documentation 5. Analyzed individual subsequent receipts, greater than $10,000, to ensure deposits were accounted for in the proper fiscal year and should not have been accrued at fiscal year end IA performed the following procedures with respect to expenditures: 1. Compared actual expenditures to budget and to prior year actuals and investigated unusual fluctuations 2. Tested a sample of non payroll related expenditures for authorization, coding, correct FY, math accuracy, agreement with contracts, etc. Ensured that capital asset purchases that meet the capital asset threshold are included in the Fixed Asset System. Ensured that grant disbursements are authorized by Agreement and approved by the Air Quality Specialist for payment Page 5

8 Procedures 3. Reviewed subsequent expenditures for three months after the fiscal year end to determine if any accruals should have been made IA performed the following procedures with respect to capital assets: 1. Obtained a capital asset reconciliation showing capital asset activity during the audit years and tested for completeness and accuracy 2. Reviewed the Fixed Asset Certification report for evidence of review and approval by Management and tested for completeness and accuracy 3. Tested capital asset additions for proper documentation, approvals and that assets were included in the Fixed Asset System in the proper period 4. Tested deletions were properly disposed via Surplus or Fleet and that documentation was sent to ACTTC for removal from the Fixed Asset System Page 6

9 Findings and Recommendations Objective #1: Ensure that cash receipts from fees, fines and State funding are accounted for properly and on a timely basis Our tests support that amounts received from various sources as described above, with the exception of burn permit fees, are being properly accounted for. Due to the weaknesses relating to use of receipts as discussed below, we are not able to provide assurance that all burn permits have been properly accounted for. Control Finding #1: The District uses receipt books purchased from a stationary store, instead of those issued by the County, for walk in cash payments for burn permits. We noted that the receipt number sequence is not continuous and some receipt books used had receipts with the same numbers. We also noted four instances where all copies of the voided receipts were not maintained. Where payments are received in person it is critical to have a receipting system that provides assurance that all collections are properly accounted for. The key aspects of such a system of controls are 1) unbroken receipt number sequence, 2) control over unused receipt books and 3) accounting for all copies of voided receipts. Together, these controls provide a basis for conducting an audit to gain assurance that all collections have been properly accounted for. The County Fiscal Policy C 2 requires all County departments and districts under the Board to use official County of Sonoma receipt books. Control Finding #2: The District relies on DTPW s Accounting Department for accounting services. As such, the cash deposit is a two step process initiated by cash or checks received at the District s remote office. District staff deliver the monies and deposit receipts to DTPW s Accounting Department for entry into the County s financial system and physical deposit to Treasury. We noted that some checks were held at the District or DTPW office between 8 to 21 days before depositing to the County Treasury. Out of the $3.1M in revenues that we selected for testing, approximately $897K, received in checks, was deposited between 8 to 21 days from the date of receipt. A $553K deposit made on 09/08/11 included checks totaling $90K and $426K (3 checks) that were held in the office for 7 and 9 days respectively after the receipt date. Timely deposits of checks into the Treasury ensures that revenues are recorded timely, are included in the correct period and are available for the District s use. The risk of misappropriation increases with the length of time collections are held outside the Treasury. Page 7

10 Findings and Recommendations The County Fiscal Policy C 2 requires County departments, agencies, or districts under the County Board of Supervisors to deposit monies collected no later than one business day following the receipt date. The policy allows deposits to be held as long as one week or until collections reach $500, if next day deposit is not practical. The ACTTC may allow collections to be held for longer than one week under special circumstances. Given the remote location of the District offices, it would appear that the District would comply with the County policy if collections were deposited weekly or when total collections reach $500. Control Finding #3: The reconciliation between the permit database and daily receipts is not being done daily even though the Cash Handling Procedures documented by the District states that "the Senior Office Assistant (SOA), at the end of the day, would run a report from the permit databases and reconcile against the daily receipts." A daily reconciliation would allow time for errors and discrepancies in the databases to be identified and corrected by the Air Quality Engineer or an Air Quality Specialist, assigned by the Air Quality Engineer. The reconciled reports are included with the official County receipts that are hand delivered to the DTPW Account Clerk who verifies that the totals match before generating the Deposit Authorizations. During non peak burn seasons, which are in April and October, the SOA may not do a daily reconciliation between the database reports and receipts. As a result, on the day of the deposit, several manual adjustments are sometimes required to balance the permit database reports with the amount of deposit. While we did not find any exceptions in our tests of deposit amounts, classification, and deposit authorizations, the practice of not performing daily reconciliations increases the risk of unexplained differences. Control Finding #4: The burn permit data contained in the permit database can be changed and the permits reprinted an unlimited number of times after they have been issued. Although the system maintains records of the changes, no policies or procedures currently exist to ensure that the changes were made for justifiable reasons. Under the current process, there is a risk that previously issued burn permits will be changed and reissued to multiple customers and burn fees misallocated. Page 8

11 Findings and Recommendations Recommendation #1: The District should use official County of Sonoma receipt books. Recommendation #2: The District should ensure that collections are deposited weekly or when they reach $500, as required by the County Fiscal Policy C 2. Recommendation #3: The District should reconcile receipts with the permit databases reports on a daily basis to facilitate timely identification of errors and correction of the permit database. Recommendation #4: The staff making changes to burn permit data should be required to document the reasons for the change. Periodically, reports should be generated showing all changes to burn permits. An employee other than those assigned to issue burn permits should review these reports to ensure changes were for valid reasons. Objective #2: Ensure proper accounting of cash disbursements from accounts payable and grant disbursements: We found no significant control weaknesses in accounting for cash or grant disbursements. We selected 43 non payroll transactions valued at $940K out of $1.2M disbursed during FY 11 12, and 40 similar transactions valued at $554K out of $882K disbursed during FY12 13 for testing. No exceptions were noted. In our review of the District s lease agreements, we noted that monthly payments to Pena Creek Land Co. lacked adequate supporting documents. These monthly payments were not included in our testing discussed above as they were below our individual materiality level of $10K. Control Finding #5: Prior to FY07 08, the County had a policy of a "zero encumbrance" process whereby departments with lease agreements, with standard monthly payments, could submit claims each month without attaching the full lease agreement. A copy of the original lease agreement and amendments would be maintained by the General Services Real Estate Department and only the zero encumbrance form needed to be attached to the claims submitted to ACTTC. Even Page 9

12 Findings and Recommendations though the County eliminated its zero encumbrance policy in FY07 08,, the District continued its practice of attaching the zero encumbrance form as support for its monthly claims for lease payments, assuming that ACTTC had a copy of the agreement and amendment on file. This zero encumbrance form, established at the beginning of the original lease term in August 1996, did not contain any amounts to support the new payment terms that began in August 31, 2011, which had amended the monthly payments from $2, to $3, (or, annually, from $36K to $40K). ACTTC did not have a copy of the original agreement nor the first amendment on file to verify that the payment requests matched with amounts on the lease agreement. Recommendation #5: The District should stop using the zero encumbrance forms. Instead, a copy of the lease payment schedule should be provided as support for each monthly claim. ACTTC staff should not process the claim without adequate supporting documents. Objective #3: Ensure that capital assets have been recorded, amortized and disposed in accordance with County policies: In the County s financial accounting system, fixed assets are assigned to respective operating units (department, division etc.). Annually, reports of fixed assets by operating units are produced from the system, which management of the respective operating units are required to certify, after physically verifying that the fixed assets listed are under his/her control. Fixed asset additions are recorded via the "Fixed Asset Form for Equipment Purchases" and transfers via the Accountability of Fixed Assets forms. It is noted that the District is not adhering to the above procedures as discussed below: Control Finding #6: In addition to land valued at $46K, the District currently has 18 items in its capital assets listing totaling $296K, including buildings, vehicles and air monitoring equipment. The average value of a piece of equipment is approximately $16K with a useful life of between 10 to 12 years. As such, the District s capital assets do not turn over often. The District disposed 10 fully depreciated fixed asset items, purchased between 1990 and 1997, via the County s Surplus program. The exact timing of the disposal is unclear. In June 2012 the District notified ACTTC, as part of the asset certification process, that these assets had already Page 10

13 Findings and Recommendations been transferred as surplus. However, the Accountability of Fixed Assets transfer forms were not delivered to ACTTC until January As a result of the delay, the disposed assets remained assigned to the District for the entire FY Control Finding #7: The District and ACTTC could not locate the District s officially signed fixed asset certification for FY The District s fixed asset reports for FY12 13 and FY13 14 were certified although they did not include an item (Agilaire Data Logger) purchased by the District in October of This item was assigned to the Roads Department in error which was corrected in May of Recommendation #6: When assets are disposed or transferred, an "Accountability of Fixed Assets" form must be completed and submitted to ACTTC so that the Fixed Asset System can be updated. Recommendation #7: When a purchase meets the capital asset criteria, a "Fixed Asset Form for Equipment Purchases" should be attached to the voucher and submitted timely to ACTTC. Recommendation #8: The District should physically verify assets under its control before certifying the capital assets report. Any discrepancy between the physical verification and the report should be investigated and resolved in a timely manner. Page 11

14 NORTHERN MACouNTY ~~~-AIR PO LLU TION CONTRO L DIS TRICT 150 Matheso n Street, Hea ldsburg, CA PH : (707) FX: (7 07) Northern Sonoma County Air Pollution Control District Response to Audit Findings for FYE 6/30/2012 and 6/30/2013 October 31, 2014 During the months of May and June, 2014, Internal Audit conducted an internal controls audit over of the Northern Sonoma County Air Pollution Control District (District) for the periods ending June 30, 2012 and June 30, The audit reviewed areas of cash receipts, disbursements, capital assets, and grant agreements. As a result of the audit, six control findings were submitted to the District. After review and careful consideration of the findings, the District respectfully submits the following responses: Issue Area Number 1, Receipts See Audit Control Finding #1 and Recommendation #1 The District has secured approval from Erick Roeser, Accounting Manager in the Sonoma County Auditor-Controller-Treasurer-Tax Collector's office regarding the official receipt books to be printed for the District with the District's name. The receipt books will be sequential with non-repeating numbers to ensure an unbroken receipt number sequence. The printed receipt books will be held in a secure storage by the Department of Transportation and Public Works Department Analyst assigned to the District d properly accounted for to ensure control over unused books and ciccounting for all copies of voided receipts. Books will be released sequentially to the District for use consistent with Fiscal Policy C- 2. Issue Area Number 2, Deposits See Audit Control Finding #2 and Recommendation #2 The District office is located in Healdsburg, roughly twenty minutes from the Main Transportation and Publ ic Works Office. When deposits are generated, staff brings the deposit to the main office at t he close of their business day. Once the deposit is received in the main office, the deposit is secured in the safe until the deposit is reconciled and delivered to the treasury. In accordance with the Fiscal Policy Manual, Policy C-2, the District will make every effort to make a deposit at least weekly. The special circumstances clause, as noted in the aforementioned Po licy C-2, does apply to the District; specifically the distance of the District's primary place of business to the County Center. The District has reviewed practices in other offices and departments and has confirmed with the ACCTC that the District may have a larger accumulation of monies at their District office before the deposit is brought to the Treasury. The District has, and will co ntinue to work to ensure the timely deposit of all received funds.

15 Current pract ice is to run a reconciliation of the Bu rn Permit Database daily and t his is done except in unusual circu mst ances. During non-peak seasons t here are days when there are no transactions in the Database; in this case, the Database will not run a reconciliation. The District has revised its practice to Points of weakness in the fixed asset system and associated paper trail will be corrected with the implementation of the Enterprise Financial System. Issue Area #6, Fixed Assets See Audit Control Finding #6 and #7 and Recommendation #6, #7, and #8 Paper copies, or white claims, are no longer the basis of payments under the Enterprise Financial System. Supporting documentation, including a copy of the lease for the office space, are automatically linked. Issue Area #5, Office Lease Payment See Audit Control Finding #5 and Recommendation #5 The controls in the Database requ ire the entry of payment information prior to saving a permit, and a permit record must be saved before it is printed. The Database allows the reprinting of permits already issued without saving because we do provide copies of permits if the permit holder requests one. The Database tracks all actions to print, and the credentials of the person giving the print command. The District is reviewing its policies and procedures regarding documentation and review of actions to reprint burn permits. Issue Area #4, Burn Permit Database Fields See Audit Control Finding #4 and Recommendation #4 Manual adjustments may be made if a client comes to the desk for a transaction after the daily reconciliation is run. This is a rare occurrence but can happen because the front door remains open until the end of the business day, which is also the end of the workday for the Senior Officer Assistant. The District is reviewing its procedures to minimize the likelihood of this happening, and to better document t hese events when they occur. print the screen when the Database denies the request to run a reconciliation, and to save that as a record. Issue Area Number 3, Burn Permit Database Reconciliation See Audit Control Finding #3 and Recommendation #3

16 Attachment B: Report Item Risk Classification For purposes of reporting our audit findings and recommendations, we classify audit report items into three distinct categories to identify the perceived risk exposure: Critical Control Weakness: Serious audit findings or a combination of Significant Control Weaknesses that represent critical exceptions to the audit objective(s), policies, and/or business goals of a department/agency or the County as a whole. Management is expected to address Critical Control Weaknesses brought to their attention immediately. Significant Control Weakness: Audit findings or a combination of Control Findings that represent a significant deficiency in the design or operation of internal controls. Significant Control Weaknesses generally will require prompt corrective actions. Control Findings: Audit findings concerning internal controls, compliance issues, or efficiency/effectiveness issues that require management s corrective action to implement or enhance processes and internal controls. Control Findings are expected to be addressed within our followup process. The current status of implementation of recommendations will be followed up no later than the end of the second fiscal year after the report has been issued. Critical control weakness findings will be followed up between six months and one year of the date of the report. Page 14