Department of the Treasury Office of Management and Budget Selected Programs

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1 New Jersey State Legislature Office of Legislative Services Office of the State Auditor Department of the Treasury Office of Management and Budget Selected Programs July 1, 1995 to March 31, 1997 Richard L. Fair State Auditor

2 Table of Contents Page Transmittal Letter... 1 Scope... 3 Objectives Methodology... 4 Conclusions... 4 Findings and Recommendations Maintenance of Returned Checks on File by Cash Accounting... 5 Disposition of Excess and/or Damaged Check Stock... 6 Departmental Response... 7

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4 The Honorable Christine Todd Whitman Governor of New Jersey The Honorable Donald T. DiFrancesco President of the Senate The Honorable Jack Collins Speaker of the General Assembly Mr. Albert Porroni Executive Director Office of Legislative Services Enclosed is our report on the audit of the Department of the Treasury, Office of Management and Budget-Selected Programs for the period July 1, 1995 to March 31, If you would like a personal briefing, please call me at (609) Peter M. Guilfoyle Assistant State Auditor May 28, 1997 Page 1

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6 Department of the Treasury Office of Management and Budget-Selected Programs Scope We have completed an audit of the following selected programs of the Department of the Treasury, Office of Management and Budget (OMB) for the period July 1, 1995 to March 31, 1997: C manual replacement checks generated by the Cash Accounting Unit, C the Check Distribution Section, and C funding allocations of higher education appropriations by the OMB Budget Unit. The Cash Accounting Unit of OMB receives approximately 40,000 inquiries regarding lost, stolen or never received checks per year and issues, on average, 15,000 to 20,000 replacements annually. Replacement checks issued during our audit period totaled approximately $38 million. The Check Distribution Section is responsible for the distribution of various types of checks generated by the Barrack Street Data Center. They ensure that all check runs are accurate, verified and readied for distribution to recipients. They processed 22.6 million checks during our audit period. The OMB Budget Unit is responsible for the review and allocation of funds appropriated for higher education institutions in accordance with documented funding formulas. Formula funding to be allocated during the audit period totaled $880.7 million and $831.9 million for fiscal years 1996 and 1997, respectively. Objectives The objectives of our audit were to determine whether financial transactions were properly authorized, were reasonable and were recorded properly in the accounting systems. Page 3

7 This audit was conducted pursuant to the State Auditor's responsibilities as set forth in Article VII, Section 1, Paragraph 6 of the State Constitution and Title 52 of the New Jersey Statutes. Methodology Our audit was conducted in accordance with Government Auditing Standards, issued by the Comptroller General of the United States. In preparation for our testing, we studied legislation, administrative code, circular letters promulgated by the State Comptroller, and policies of the agency. Provisions that we considered significant were documented and compliance with those requirements was verified by interview and observation and through our samples of financial transactions. We also read the budget message, reviewed financial trends, and interviewed agency personnel to obtain an understanding of the programs and the internal control structure. A nonstatistical sampling approach was used. Our samples of financial transactions were designed to provide conclusions about the validity of transactions as well as internal control and compliance attributes. Sample transactions were randomly and judgmentally selected. Conclusions We found that the financial transactions included in our testing were properly authorized, were reasonable and were recorded properly in the accounting systems. In making this determination, we noted certain internal control weaknesses meriting management s attention. Details of our findings and recommendations follow. Maintenance of Returned Checks on File by Cash Accounting Page 4

8 nhancing proce- Edures for handling checks returned to Cash Accounting to ensure that they are properly voided before they are filed could reduce the risk of misuse. Recommendation Cash Accounting requires that returned checks be voided by removing the signature portion of the check or marking it void before they are filed. Employees, each of whom are responsible for particular check types, process and file their own returned checks. We found that returned checks were not always voided. In eleven instances sampled, where the original check was returned, five had not been voided. A subsequent limited scanning of selected replacement check files disclosed an additional eleven checks on file which had not been voided. Of the 16 exceptions noted during our testing, four were not even opened. The remaining exception items ranged from a low of $80 to a high of $1.6 million. An adequate system of internal controls requires management to develop, implement and monitor procedures which will reasonably ensure that assets are safeguarded against misuse or illegal acts. Returned checks which have not been properly voided could be stolen and illegally cashed. We recommend the Cash Accounting Unit comply with established policies and procedures for voiding returned checks. In addition, we also recommend a central receiving point be established where all checks returned to the unit could be recorded and voided prior to distribution to the staff. ¼½ Page 5

9 Disposition of Excess and/or Damaged Check Stock nternal controls Ishould be strengthened by segregating the disposition of excess and/or damaged check stock from the Check Distribution Section. Recommendation The Check Distribution Section is responsible for the distribution of checks produced by the Barrack Street Data Center. The data center issues a control sheet at the completion of each run which summarizes the number of checks and check stock processed by inventory number. The Check Distribution Section is responsible for reconciling all processed check runs with the control sheet at the completion of each distribution run. In prior years the section had a separate individual handling the destruction functions, but that control was discontinued. Currently the individual responsible for the reconciliation process is also responsible for the destruction of any blank stock or damaged checks associated with each check run once reconciliation has been completed. Neither function is reviewed or assisted by another individual. An adequate level of segregation of duties is necessary to assure that blank stock and damaged checks are destroyed. Failure to increase the level of oversight in this area could lead to loss and misuse of state resources. We recommend the Check Distribution Section develop and implement reconciliation and destruction procedures for excess or damaged check stock which would require more than one individual to be involved in the process. This would increase the controls and reduce the risk of loss and misuse. ¼½ Page 6

10 STATE OF NEW JERSEY DEPARTMENT OF THE TREASURY CN-221 TRENTON, NJ CHRISTINE TODD WHITMAN BRIANW.CLYMER GOVERNOR STATE TREASURER MAY 13, 1997 DEPARTMENTAL RESPONSE Mr. Richard L. Fair State Auditor Office of Legislative Services Office of the State Auditor 125 South Warren Street CN 067 Trenton, NJ Dear Mr. Fair: I have reviewed the Division of State Auditing Audit Report of the Department of the Treasury, Office of Management and Budget, Selected Programs and I am pleased to note that you have determined that financial transactions were properly authorized, were reasonable and were recorded properly in the accounting systems. The following responses relate to the specific findings and recommendations noted. Finding Maintenance of Returned Checks on File by Cash Accounting Recommendation: We recommend the Cash Accounting Unit comply with established policies and procedures for voiding returned checks. In addition, we also recommend a central receiving point be established where all checks returned to the unit be recorded and voided prior to distribution to the staff. RESPONSE: All employees who handle returned checks have been reminded of procedures to be used in voiding returned checks. In addition, supervisors responsible for reviewing correspondence files prior to the release of replacement checks will insure that any returned checks included in the file have been properly voided. Employees who open or receive mail have been instructed to forward all returned checks to the supervisor of the correspondence unit for proper voiding. New Jersey Is An Equal Opportunity Employer - Printed on Recycled Paper and Recyclable Page 7

11 Mr. Richard L. Fair Page 2 May 13, 1997 Finding: Disposition of Excess and/or Damaged Check Stock Recommendation: We recommend the Check Distribution Section develop and implement reconciliation and destruction procedures for excess or damaged check stock which would require more than one individual to be involved in the process. This would increase the controls and reduce the risk of loss and misuse. Response: The Check Distribution Section has implemented procedures which will provide for an adequate separation of duties to ensure internal control over the above function. An additional employee, not part of the reconciliation process, will be assigned the task of disposing of blank stock and damaged checks. Sincerely, bh Elizabeth L. Pugh Director Page 8