DEPARTMENT OF BEHAVIORAL HEALTH AND INTELLECTUAL DISABILITIES SERVICES AUDITOR S REPORT FISCALS 2009 AND 2008

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1 DEPARTMENT OF BEHAVIORAL HEALTH AND INTELLECTUAL DISABILITIES SERVICES AUDITOR S REPORT FISCALS 2009 AND 2008

2 October 18, 2011 Arthur C. Evans, Commissioner Department of Behavioral Health and Intellectual Disabilities Services 1101 Market Street 7 th Floor Philadelphia, PA We have examined the financial affairs and operations of the Department of Behavioral Health and Intellectual Disabilities Services for fiscal years 2009 and 2008 pursuant to the requirements of Section (c) of the Philadelphia Home Rule Charter. A synopsis of the results of our work is provided in the executive summary to the report. We discussed our findings and recommendations with your staff at an exit conference and you have elected to forgo submitting a formal written response. Our recommendations have been numbered to facilitate tracking and follow-up in subsequent years. We believe that, if implemented by management, these recommendations will improve internal controls and the effectiveness and efficiency of your department s operations. We would like to express our thanks to you and your staff for the courtesy and cooperation displayed toward us during the conduct of our work. Very truly yours, ALAN BUTKOVITZ City Controller cc: Honorable Michael A. Nutter, Mayor Honorable Anna C. Verna, President and Honorable Members of City Council Members of the Mayor s Cabinet

3 DEPARTMENT OF BEHAVIORAL HEALTH AND INTELLECTUAL DISABILITIES SERVICES EXECUTIVE SUMMARY Why the Controller s Office Conducted the Examination Pursuant to the requirements of Section (c) of the Philadelphia Home Rule Charter, we examined the financial affairs of the Department of Behavioral Health and Intellectual Disabilities Services (DBH/IDS) as part of our audit of the City of Philadelphia s basic financial statements. The focus of our examination was limited to determining if department management had placed in operation suitably designed internal controls and had complied with any laws and regulations related to its revenue and expenditure activities, as well as personal property inventory. What the Controller s Office Found DBH/IDS did not comply with audit requirements relating to certain grant fund expenditures. Failure to comply with grant requirements could negatively impact the city s ability to secure future grant funding, and/or result in the city having to refund previously received grant funds. We also noted weaknesses in controls over personal service expenditures. Employees did not always sign out and back in from lunch, and overtime was authorized after the time had been worked. As a result, there was an increased risk that DBH/IDS was paying for time not worked or for unnecessary overtime costs. DBH/IDS management took corrective action on a number of deficiencies that we brought to its attention in our prior report. For example, we observed that procedures had been implemented to ensure the eligibility of administrative costs charged by the Community Behavior Health Corporation (CBH), and to ensure that CBH s subcontractors obtained required insurance coverage. In addition, we noted that required annual performance evaluations were now being prepared for civil service employees. What the Controller s Office Recommends The Controller s Office recommended that management: (1) contact their grant funding source to determine if the exemption to its audit requirements is retro-active to fiscal years 2008 and 2009; (2) require all employees to record meal times on daily attendance records; and (3) ensure that nonemergency overtime is approved and documented in advance.

4 CONTENTS INTRODUCTION Page Background...1 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS...3 FINDINGS AND RECOMMENDATIONS Noncompliance with Audit Requirements...5 Meal Times Are Not Being Recorded...5 Overtime Not Authorized in Advance...6 CORRECTIVE ACTIONS TAKEN BY DEPARTMENT Resolution of City Financial Reporting Problem for HealthChoices Program...6 Eligibility of CBH Administrative Costs Now Verified...7 Insurance Coverage of CBH Subcontractors Now Confirmed...8 Employee Annual Performance Evaluations Were Being Completed...8

5 INTRODUCTION BACKGROUND Powers and Duties The Department of Behavioral Health and Intellectual Disabilities Services 1 (DBH/IDS) was established in 2004 by executive order. The major objective of DBH/IDS is to assure the availability of state mandated mental health services to residents of Philadelphia. Services include residential housing, vocational rehabilitation, intensive case management, employment, and emergency services aimed at providing supportive environments for both consumers and their families. DBH/IDS collaborates with other service systems in both program development and service delivery efforts, especially when the consumer is receiving care from more than one service system. Additionally, DBH/IDS attempts to foster community understanding and acceptance of individuals with disabilities in order to improve opportunities for community based services for consumers. The formation of DBH/IDS brings together the following three agencies to form a single entity: the Office of Mental Health (OMH), the Coordinating Office for Drug and Alcohol Abuse Programs (CODAAP), and Community Behavioral Health (CBH - a nonprofit corporation serving as the city s managed care organization for Medicaid patients). These three components of the system collaborate in a range of functions, including: fiscal and administrative oversight of programs and services, policy analysis and planning, quality improvement, monitoring of treatment providers, and authorization of services. In addition to the three components above that make up the behavioral health system, the department also provides services for persons with intellectual disabilities. The department acts as an administrative organization for the state to insure compliance with state directives and mandates for persons with intellectual disabilities. Management and Staffing DBH/IDS management consists of a director, two deputy directors, a medical director, and a chief financial officer. Management directs a staff that numbered 271 and 262 at the close of fiscal years 2009 and 2008, respectively. Most of these individuals were appointed through the city s civil service system. Financial Resources For fiscal 2009 and 2008, DBH/IDS management was accountable for the following appropriations, budgeted revenues and assets: 1 DBH/IDS was formerly known as the Office of Behavioral Health and Mental Retardation Services. 1

6 INTRODUCTION Appropriations: Operating funds $ 1,447,796,897 $ 1,439,223,887 Budgeted Revenues: From other governments $ 1,354,535,000 $ 1,345,962,000 Non-tax revenue 10,000,000 10,000,000 Assets (year-end balances): Accounts receivable $ 76,884,462 $ 20,387,272 Cash on deposit 25,227 12,859 Personal Property 1,624,674 1,389,210 Internal Control Management has responsibility for establishing and maintaining internal controls to safeguard the financial resources for which it is accountable. Internal controls are designed to (1) prevent or timely detect unauthorized acquisition, use, or disposition of assets, (2) ensure the reliability of financial reporting and (3) help make certain there is compliance with applicable laws and regulations. 2

7 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS We annually audit the basic financial statements of the City of Philadelphia, Pennsylvania, as of and for its June 30 fiscal year end and issue a report thereon. Those statements include financial transactions of various city agencies. We conduct our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we consider the City of Philadelphia s centralized and agency internal controls over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City of Philadelphia s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City of Philadelphia s internal control over financial reporting. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects an agency s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the city s financial statements that is more than inconsequential will not be prevented or detected by the agency s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the agency s internal control. 3

8 C I T Y O F P H I L A D E L P H I A O F F I C E O F T H E C O N T R O L L E R Our consideration of the Department of Behavioral Health and Intellectual Disabilities Services internal control over financial reporting was limited to determining if its internal control components for revenue, payroll, and other expenditure activity, as well as its property inventory were suitably designed and placed in operation during fiscal years 2009 and 2008, and would not necessarily identify all deficiencies in the internal control over financial reporting that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as described above. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City of Philadelphia s financial statements are free of material misstatement, we performed centralized and agency tests of compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. Our consideration of the Department of Behavioral Health and Intellectual Disabilities Services compliance with certain provisions of laws, regulations, and contracts was limited to tests of revenue, payroll, and other expenditure activity, as well as property inventory during fiscal years 2009 and Grant compliance was tested and reported on as part of our Single Audit in accordance with Office of Management and Budget Circular A-133. Our agency tests disclosed no instances of noncompliance or other matters by the Department of Behavioral Health and Intellectual Disabilities Services that are required to be reported under Government Auditing Standards. We noted certain other conditions that are not required to be reported under Government Auditing Standards, but nonetheless represent deficiencies in internal control over financial reporting and noncompliance with laws or regulations that should be addressed by management. These conditions are listed in the table of contents and included in the findings and recommendations section of the report. This report is intended solely for the information and use of the management of the City of Philadelphia, the Department of Behavioral Health and Intellectual Disabilities Services, and City Council and is not intended to be and should not be used by anyone other than these specified parties. August 25, 2010 GERALD V. MICCIULLA, CPA Deputy City Controller 4

9 FINDINGS AND RECOMMENDATIONS NONCOMPLIANCE WITH AUDIT REQUIREMENTS The Department of Behavioral Health and Intellectual Disabilities Services (DBH/IDS) did not comply with audit requirements relating to certain grant fund expenditures. Our testing determined that DBH/IDS expended Pennsylvania Commission on Crime and Delinquency (PCCD) grant funds amounting to $7.8 million during fiscal 2008, and $5.8 million during fiscal These expenditures pertained to the Restrictive Intermediate Punishment Drug and Alcohol program, a program for reducing prison population through direct sentencing of individuals to substance abuse treatment programs. PCCD grant regulations require that grantees obtain an independent financial and compliance audit if expenditures of $100,000 or more are made during a fiscal year period. We found that DBH/IDS did not obtain the required audits for fiscal years 2008 or Failure to comply with grant requirements could negatively impact the city s ability to secure future grant funding, and/or result in the city having to refund previously received grant funds. Subsequent to our field work, it came to our attention that PCCD recently decided to revise their procedures and considered Philadelphia exempt of its audit requirements because the city was not considered high risk per its risk criteria. Recommendations: We recommend that DBH/IDS contact PCCD to determine if the exemption to their audit requirements is retro-active to fiscal years 2008 and 2009 and, if so, obtain a waiver of the audit requirements for those fiscal years in writing [ ]. We further suggest that in the future, DBH/IDS ensure that all grant related audit requirements are met or that it obtain a written waiver for the requirement prior to, or at the time of the grant award [ ]. MEAL TIMES ARE NOT BEING RECORDED As we disclosed in our prior report, 2 DBH/IDS employees do not always record their meal times by signing out and back in from lunch on attendance records. Auditors selected daily attendance records from two locations during a 10 day period. Our testing found that 41 out of 152 (27%) daily attendance record entries related to nine employees who did not sign out or back in from lunch during that period. Standard Accounting Procedure #E-9011, issued by the city s Finance Office, requires that employees accurately record their meal times on attendance records. Supervisory staff must ascertain there is compliance with this requirement to prevent abuse and ensure the propriety of payroll costs. 2 See Office of Behavioral Health and Mental Retardation Services Auditor s Report Fiscal 2007 and

10 FINDINGS AND RECOMMENDATIONS Recommendation: We again recommend that management require all employees to record meal times as they occur on daily attendance records. Supervisors should monitor compliance with this requirement, take appropriate disciplinary action for violations, and keep records of action taken [ ]. OVERTIME NOT AUTHORIZED IN ADVANCE In prior reports, 3 we commented about DBH/IDS supervisory staff authorizing overtime after the fact. When overtime is not approved in advance, employees could be working unnecessary hours and the agency incurring unnecessary costs. We recommended that DBH/IDS management document authorization for all overtime in advance [ ]. Out of 15 sampled overtime slips we reviewed during the current audit, 14 indicated that the overtime was approved after the time asserted to have been worked. DBH/IDS has in the past indicated that overtime often occurs due to an emergency. However, our review of assignments applicable to the sampled overtime slips we questioned suggest this was not the case as the work involved tasks of a non-emergency nature, such as: filing correspondence, training preparation, and preparing annual performance reports. Recommendation: We continue to recommend that DBH/IDS management implement procedures to ensure that nonemergency overtime be approved and documented in advance [ ]. CORRECTIVE ACTIONS TAKEN BY THE DEPARTMENT As part of our current review, we followed up on the conditions brought to management s attention during our last review. We routinely monitor uncorrected conditions and report on them until management takes corrective action or until changes occur that resolve our recommendations. Resolution of City Financial Reporting Problem for HealthChoices Program To act as a conduit for state funding of behavioral health care for city residents, the city created the HealthChoices Behavioral Health Fund. A significant amount of the expenditures reported in this fund are those the city pays to Community Behavioral Health (CBH), a non-profit managed care organization established by the city in 1997 to provide administrative services for the behavioral health services program. 3 See the fiscal 2005 and 2007 and 2006 Auditor s Reports for the Office of Behavioral Health and Mental Retardation Services. 6

11 FINDINGS AND RECOMMENDATIONS Each year, the city obtains assurance that the money paid to CBH was used properly by obtaining an independent auditor s report on the organization s financial statements, which are reported on a calendar year basis. However, each year the city includes the HealthChoices Behavioral Health Fund in its fiscal June 30 Comprehensive Annual Financial Report, a report that extends six months beyond the period covered by CBH s audit report. Consequently, the city has no assurance on the propriety of the HealthChoices Behavioral Health Fund expenditures for the last six months of its fiscal year. To remedy this situation, we previously recommended 4 that DBH/IDS management lobby the Pennsylvania Department of Public Welfare to change CBH s reporting period to coincide with both the city and commonwealth s June 30 fiscal year end [ ]. DBH/IDS management reported that it had contacted the state welfare department requesting the change, but the request was denied. A representative of the Pennsylvania Department of Public Welfare confirmed the denial and indicated it was due to certain federal rules, which mandated calendar year reporting. As an alternative solution, CBH s independent CPA firm now performs interim testing of the organization s financial information for the period January 1 through June 30 and provides the results of this audit work to the City Controller s Office each year. Because of the commonwealth s response and the CPA s interim audit work, we consider this matter adequately resolved. Eligibility of CBH Administrative Costs Now Verified We have previously commented 5 that DBH/IDS was not reviewing CBH invoices to determine whether the amounts billed for administrative costs were eligible for reimbursement. CBH is a nonprofit corporation serving as the city s managed care provider. Invoice monitoring was impeded by the fact that the contract between the city and CBH did not include a line-item budget (a budget showing detailed cost categories and amounts). To improve controls over managed care expenditures, we recommended that DBH/IDS incorporate a line-item budget into the city s contract with CBH, and require that CBH invoices be reviewed to ensure that only eligible contract costs are reimbursed [ ]. Our current review determined that a line-item budget had been incorporated into the city/cbh contract and that invoiced amounts were being compared to budgeted contract amounts on a line item basis. We therefore consider this issue resolved. 4 Ibid. 5 Ibid. 7

12 Insurance Coverage of CBH Subcontractors Now Confirmed FINDINGS AND RECOMMENDATIONS In our fiscal 2005 Auditor s Report we stated that DBH/IDS had not obtained documentation from CBH attesting that its subcontractors were in compliance with the insurance provisions of its contract with the city. We recommended that to limit the city s exposure of any financial liability, management either obtain certificates of insurance for the CBH subcontractors or obtain a copy of the control document used by CBH to attest to the city that certificates of insurance for these subcontractors had been obtained. If DBH/IDS chose the later alternative, we suggested that its staff validate the accuracy of the listing on a sample basis [ ]. During our current review, management indicated that it chose the later alternative and showed us the copy of the CBH control document it had obtained and reviewed twice a year. It showed us evidence that it had verified a sample of the subcontractors listed by examining their certificates of insurance. We therefore consider this matter resolved. Employee Annual Performance Evaluations Were Being Completed Our work we previously did for fiscal years 2005 through 2007 disclosed that annual performance evaluations were not being prepared for all DBH/IDS civil service employees. Civil service Regulation requires a performance evaluation to be filed with the city s Office of Human Resources for each employee at least once in every calendar year. This procedure provides management with a useful tool to assess the competency and attitudes of their employees. Failure to complete annual performance evaluations deprives employees of the opportunity to review their strengths and weaknesses, penalizes employees who may be entitled to performance bonus points on promotional tests, and weakens efforts to appropriately discipline employees who are performing at a substandard level. We recommended that DBH/IDS management comply with Civil Service Regulation and provide each of its civil service employees with an annual performance evaluation [ ]. Our testing done as part of this audit found that annual performance evaluations were being prepared for all civil service employees of the agency. Accordingly, we consider this matter resolved. 8