State of New York Office of the State Comptroller Division of Management Audit and State Financial Services

State of New York Office of the State Comptroller Division of Management Audit and State Financial Services OFFICE OF COURT ADMINISTRATION FIRST JUDICIAL DISTRICT NEW YORK COUNTY CLERK CONTROLS OVER REVENUE COLLECTION REPORT 98-S-82 H. Carl McCall Comptroller

State of New York Office of the State Comptroller Division of Management Audit and State Financial Services Report 98-S-82 The Honorable Jonathan Lippman Chief Administrative Judge Office of Court Administration Empire State Plaza Agency Building 4 Albany, New York 12223 Dear Judge Lippman: The following is our audit report on controls over revenue collected by the New York County Clerk in the First Judicial District of the Office of Court Administration. This audit was performed pursuant to the State Comptroller's authority as set forth in Article V, Section 1 of the State Constitution and Article II, Section 8 of the State Finance Law. Major contributors to this report are listed in Appendix A. February 9, 2000 OSC Management Audit reports can be accessed via the OSC Web Page : http://www.osc.state.ny.us. If you wish your name to be deleted from our mailing list or if your address has changed, contact the Management Audit Group at (518) 474-3271 or at the Office of the State Comptroller, Alfred E. Smith State Office Building, 13th Floor, Albany, NY 12236.

Executive Summary Office of Court Administration First Judicial District - New York County Clerk Controls Over Revenue Collection Scope of Audit The Office of Court Administration (OCA) is responsible for directing and overseeing the administrative operations of all courts in the New York State United Court System. These courts are divided into 12 judicial districts, each of which oversees the administrative operations of all State courts in its geographic area. The First Judicial District, one of the largest, covers the borough of Manhattan (New York County) in New York City. The New York County Clerk s Office (County Clerk) acts as the clerk of the Supreme Court. It receives, indexes, and files all Supreme Court documents and miscellaneous papers and collects all associated filing fees, fines, and surcharges. For the fiscal year that ended on March 31, 1999, the County Clerk reportedly collected and transferred to the State Treasury approximately $17 million relating to fees and services rendered. Our audit addressed the following question regarding revenue-collection practices of the County Clerk for the period of April 1, 1997 through May 14, 1999:! Are internal controls and procedures adequate to ensure that State revenues are collected and transmitted properly to the State Treasury? Audit Observations and Conclusions We found that some of the County Clerk s control systems do not meet OCA s minimum acceptable standards for internal controls over cash. OCA needs to strengthen its internal controls related to the collection, recording and transmission of State revenues. OCA s Financial Planning and Control Manual (Manual) requires that cash be safeguarded adequately against loss. It states that cash receipts should be recorded promptly, revenue should be restrictively endorsed immediately upon receipt, and mailed-in revenue should be logged in and transmitted to the cashier on a daily basis. Applying these procedures reduces the opportunity and risk that funds could be diverted. Mailed-in revenue, with an annual value of approximately $450,000 to $480,000, is not processed in accordance with mandated controls. We identified several checks that took from 10 to 18 days to arrive at the cashiers booth, where their receipt was ultimately recorded and the restrictive endorsement applied. (See pp. 3-4) OCA requires that cash be secured and that access be limited to authorized personnel. We found that clerks leave sealed and opened envelopes

containing checks on their desks overnight. (Since we brought this situation to management s attention, clerks lock up these items overnight.) (See p. 4) We found that County Clerk managers need to separate certain duties so that an adequate system of checks and balances exists. For example, employees other than the cashiers should count the daily receipts and remove the register tapes. In addition, cashiers should not be able to reset the cash register totals. Also, cash register tapes should capture pertinent data regarding revenue transactions, and be retained and available for management review. (See pp. 7-8) Moreover, supervision needs to be improved. We found that cashiers normally void transactions without the required on-the-spot approval of their supervisors. For one week, we found 59 void transactions worth about $4,000 that had not been approved by supervisors; nor was there any written documentation explaining the reason for these entries. (See pp 9-10) Refunds must be approved by the District Administrative Judge s Office and the Office of the State Comptroller. However, we found that cashiers issue refunds directly to customers. (See pp. 9-10) Comments of OCA Officials OCA officials generally agreed with our recommendations. They indicated that the County Clerk has implemented or will implement procedures to ensure that revenue is collected and recorded in accordance with the minimum standards set forth in the Manual. Further, they stated that they have discussed steps needed to be taken to install fully automated cashing equipment that would provide effective control over revenue.

Contents Introduction Internal Controls Separation of Duties Supervision and Authority Control and Tracking Procedures Appendix A Appendix B Background... 1 Audit Scope, Objective, and Methodology... 1 Internal Control and Compliance Summary... 2 Response of OCA Officials... 2 Safeguarding Revenue... 3 Receipt of Cash... 3 Access to Revenue... 4 Documentation... 4 Recommendations... 6... 7 Recommendation... 8... 9 Recommendations... 10... 11 Recommendation... 11 Major Contributors to this Report Comments of OCA Officials

Introduction Background The Office of Court Administration (OCA) is responsible for directing and overseeing the administrative operations of all courts in the New York State United Court System. This system serves the State s 62 counties through 12 st districts. The 1 Judicial District, one of the largest court districts in the State, covers the borough of Manhattan (New York County) in New York City. It encompasses the Supreme Court - Civil Part, Supreme Court - Criminal Part, Surrogate s Court, New York County - Criminal Court Part, New York County - Civil Court Part, and the New York County Clerk s Office. The New York County Clerk s Office (County Clerk) acts as the clerk of the Supreme Court. It receives, indexes, and files all Supreme Court documents and miscellaneous papers; and collects all associated filing fees, fines, and surcharges. The County Clerk s Office also enters all judgements and liens; maintains and preserves all County Clerk records; certifies filed documents; processes notary public renewals; and collects fees for passports and various other court and county-related services. For fiscal year 1998-99, the County Clerk reportedly collected and transferred to the State Treasury approximately $17 million relating to fees and services rendered. Audit Scope, Objective, and Methodology We audited the New York County Clerk s revenue-collection process for the period of April 1, 1997 through May 14, 1999. The objective of this financial-related audit was to determine the adequacy of internal controls over the collection of revenue. To accomplish this objective, we reviewed applicable laws, policies, and procedures; interviewed County Clerk management and staff; reviewed relevant accounting and County Clerk records; observed operations; and tested transactions. We conducted our audit in accordance with generally accepted government auditing standards. Such standards require that we plan and perform our audit to adequately assess those operations which are included in our audit scope. Further, these standards require that we understand Count Clerk s internal control structure and its compliance with those laws, rules and regulations that are relevant to the operations included in our audit scope. An audit includes examining, on a test basis, evidence supporting transactions recorded in the accounting and operating records and applying such other auditing procedures as we consider necessary in the circumstances. An audit also includes assessing the estimates, judgments, and decisions made by management. We believe that our audit provides a reasonable basis for our findings, conclusions and recommendations. We use a risk-based approach when selecting activities to be audited. This approach focuses our audit efforts on operations that have been identified

through a preliminary survey as having the greatest probability for needing improvement. Consequently, by design, finite audit resources are used to identify where and how improvements can be made. Thus, little audit effort is devoted to reviewing operations that may be relatively efficient or effective. As a result, our audit reports are prepared on an exception basis. This report, therefore, highlights those areas needing improvement and does not address activities that may be functioning properly. Internal Control and Compliance Summary Response of OCA Officials Our consideration of the New York County Clerk s internal control structure focused on controls over revenue. We identified significant weaknesses in these controls and described them in each section of this report. Our ability to determine the impact of some of these weaknesses was hindered because the Court does not capture or retain all required information relative to revenue transactions, this issue is discussed in the Documentation section of the report.. A draft copy of this report was provided to OCA officials for their review and comment. Their comments have been considered in preparing this report and are included as Appendix B. OCA officials responded that the County Clerk has implemented or will implement procedures to ensure that revenue is collected and recorded in accordance with the minimum standards set forth in the Manual. Further, they stated that they have discussed steps needed to be taken to install fully automated cashing equipment that would provide effective control over revenue. Within 90 days after final release of this report, we recommend that the Chief Administrative Judge of the Office of the Court Administration report to the Governor, the State Comptroller, and the leaders of the Legislature and fiscal committees, advising what steps were taken to implement the recommendations contained herein, and where recommendations were not implemented, the reasons therefor. 2

Internal Controls OCA s Financial Planning and Control Manual (Manual), includes a section devoted to the minimum-acceptable standards for the control of cash. We found that the County Clerk has not implemented all of the standards stipulated by the Manual and needs to improve its controls over revenue collection. In fact, many employees were not aware of OCA-mandated procedures or did not even know there was a Manual. Safeguarding Revenue Receipt of Cash County Clerk employees collect an average of $68,000 each business day. These monies are derived from court-related services such as assigning index (case file) numbers; obtaining certified copies of documents; and requesting judicial interventions, etc., and other fees for notary public renewals, passports, business certificates, etc., not related to court activities. County Clerk managers have developed procedures to account for these revenues. We found that these procedures often do not comply with minimum Manual standards to ensure that all State revenue is transmitted to the State Treasury. The Manual requires that mailed-in revenue be logged and recorded promptly, and that checks be restrictively endorsed immediately upon receipt. It also requires that money received in the mail be transmitted to the cashier on a daily basis. These procedures reduce the risk that funds can be diverted. By referring to the log listing mailed-in revenue, managers can confirm that revenue recorded in the log has been deposited. Restrictively endorsing a check limits the manner in which it may be deposited. Recording cash receipts promptly can provide management with the knowledge that certain revenue has been received and should be deposited. Some revenue received by the County Clerk is not being processed according to these required controls. When money is mailed to the County Clerk, a principal office assistant opens and logs only some of the monetary receipts. The assistant does not open the notary public renewals, because they are too numerous. (Managers told us that the County Clerk receives approximately 15,000 to 16,000 mailed-in renewals each year and that the renewal envelopes can be identified easily by the County Clerk s preaddressed blue envelope.) Since these envelopes are not opened, the checks they contain (worth approximately $450,000 to $480,000 in a typical year) are not restrictively endorsed or recorded immediately. These sealed envelopes go to the notary clerks for processing and, eventually to the cashiers, who record the receipt on the cash register and then apply the restrictive endorsement. We found that it can take a long time for the notary renewal checks to go from the principal office assistant to the cashiers. In August 3

1998, we noted at least 7 checks that took 10 to 18 days to arrive at the cashiers booth. Access to Revenue The Manual states that, before cash receipts are deposited, they should be secured in a cash drawer, vault, or safe, etc., to which only authorized personnel have access. We found that all revenue is not secured adequately; nor is access limited to authorized personnel.! In fiscal year 1998-99, approximate State revenues from notary and passport fees were reported as $563,000 and $88,000, respectively ($15 of each passport fee goes to the State Treasury). Before they are recorded by the cashiers, receipts from passport applications and mailed-in notary public renewals are left on a desk outside the cashiers booth. Access to this desk is not restricted. County Clerk managers asserted that the cashiers booth is too small and cramped to store these documents before they are processed by the cashiers.! On at least two occasions, notary clerks left envelopes on their desks overnight that contained checks to be processed. Some were still sealed; others had been opened. For example, on April 2, 1999, we discovered at least 77 sealed envelopes and 25 opened envelopes, all of which contained checks, still lying on employee desks after the end of the workday. Each opened envelope contained a check for $30. Since we brought this situation to the attention of management, clerks have begun locking up such items overnight. OCA requires that cashiering systems provide for closed-drawer operation. The objective of this control technique is to restrict employee access to cash except for times when revenue is being collected. This practice reduces the risk that monies could be lost, misplaced, or stolen. We observed that one cashier keeps receipts (cash and checks), in an unlocked drawer instead of the cash register drawer. Managers told us that the cash is not stored in the cash register drawer because the drawer is too small. In addition, they pointed out, the drawer is locked when the cashier is absent from the booth. However, on May 14, 1999, we observed that the booth was empty and the drawer was unlocked. Documentation The Manual sets minimum standards for cash controls that include certain documentation requirements. A lack of documentation hinders testing that might identify irregularities regarding cash collections. We found that the County Clerk employees do not comply with many of these standards. For example: 4

! The Manual requires that each cash register be equipped with a nonresettable total. By comparing the registers life-to-date totals with data in previous reports, managers can use such information for monitoring the collection of revenue. We found that the County Clerk cash registers do not have this feature. Instead, cashiers reset their cash registers manually on a daily basis.! County Clerk managers generally do not retain the internal tapes of cash register transactions even though OCA policy requires that receipt tapes be saved. Retaining the tapes is important, because they serve as a record of each transaction processed. Managers could review this record to monitor cash register activity.! The Manual also requires that cash register systems have mandatory operator identification. County Clerk registers do not have this control, which would enable management to easily identify, when necessary, the specific cashier who processed a transaction. Moreover, at most of the cash registers, several of the cashiers work out of the same cash drawer, making it difficult to determine which cashier is responsible for a shortage and overage when it occurs.! One clerk responsible for certifying copies of court documents does not have a satisfactory system for recording the number of certified copy services she provides. Although she keeps a written count of copies requiring a fee, she estimates the number of no-fee certified copies. Therefore, there is a risk that the use of no-fee certified copies could be abused. During the year 1998-99, about 5,300 no-fee certified copies were reportedly issued. In response to our draft report, OCA officials advised us that the County Clerk is considering the purchase of fully automated cashing equipment that would provide the necessary controls over revenue collections. 5

Recommendations 1. Ensure that revenue collections procedures at the County Clerk s Office conform to the minimum standards set forth in the OCA Financial Planning and Control Manual. 2. Train employees on OCA-required procedures that relate to their job responsibilities. 6

Separation of Duties To reduce the risk of error, waste, or wrongful acts, no one individual should control all key aspects of a financial transaction or event. The Manual lists specific tasks that should be separated among employees. However, we found that County Clerk cashiers are involved with several duties that should be divided among several employees. For example:! The Manual states that employees other than cashiers should count the daily receipts and remove the register tapes. In addition, cashiers should not be able to reset the cash register totals. We found that the County Clerk cashiers count the daily receipts, run and remove the end-of-day register report of revenue collected, and reset the cash register totals. Managers explained that they have no other staff available to perform this function. (We note that about 95 employees work for these managers.) The managers also stated that, because these monies are subsequently counted by the County Clerk administrative unit, they are in compliance with the Manual. However, since that reconciliation is performed after the cash is already counted, the cashiers could have adjusted the register tapes to conceal any irregularities.! Different employees should be assigned the responsibilities for programming the cash registers and collecting cash. These functions should be separated so that employees cannot program the registers to report only some of the cash collected. We found that two County Clerk managers collect cash at the registers and program the registers. The managers told us they do not consider this a significant issue because they can change only three cash register functions. However, one of those three functions is the revenue amount.! We found that, in some cases, one cashier controls all key aspects of certain processes of the transaction. For example, cashiers assign index (case) numbers to cases, collect the fees for that service, and record the transaction. A greater separation of functions needs to be established, providing a check that the appropriate fee is collected, and that it is recorded for each index number assigned. 7

Recommendation 3. Separate duties relevant to the collection, recording, and custody of revenue. 8

Supervision and Authority The County Clerk collects cash at three locations within the Supreme Court- Civil Branch building. For each of these locations, we reviewed an internal tape from one cash register machine for either the period of April 7, 1997 through April 11, 1997, or the period of February 1, 1999 through February 8, 1999. (Management did not retain the 1997 tapes for two of the locations.) A total of $291,000 in revenue was collected on the registers during this period. We found that 59 voided transactions, valued at almost $4,000, had been recorded at the three locations. There was no documentation of supervisory justification or approval of these 59 entries. These practices violate internal control standards, which require managers to ensure that control objectives are achieved by reviewing their subordinates work. Furthermore, the Manual requires that voided transactions be documented and approved by a supervisor at the time the transaction occurs. The Manual states that, once funds are in the physical custody of the court, refunds may not be issued from current receipts under any circumstances, even if the payer has not left the building. All refunds must be approved by the District Administrative Judge s Office and the Office of the State Comptroller. In addition, the internal control standards require managers to ensure that transactions are approved and executed only by authorized employees. We found that cashiers are exceeding their authority by issuing refunds to customers. We were told that cashiers request supervisory approval only when a customer requests a refund for a transaction that had occurred on a previous date. New York County Clerk managers indicated to us that it is easier for the cashiers to issue refunds than to comply with the OCA-required refund process. They also expressed the belief that cashiers can have a better working relationship with customers if they are allowed to issue refunds. Since the cashiers can void transactions and issue refunds without adequate supervisory approval, there is a risk that cash may be misappropriated. In response to our draft audit report, OCA officials stated that the County Clerk implemented procedures to provide for supervisory reviews of transactions. 9

Recommendations 4. Ensure that all voided transactions are approved by supervisors and that they are documented adequately. 5. Instruct cashiers not to issue refunds. 10

Control and Tracking Procedures We found that the County Clerk procedures related to tracking documents need to be improved. To track the number of index numbers and liens issued, certified copies processed, affidavits filed, etc., County Clerk employees use hand and mechanical stamping devices, which imprint unique identifying numbers on documents. To reconcile that the amount of revenue collected agrees with the type of services provided, the County Clerk administrative unit compares the quantity of identification numbers used with the amount of revenue collected. We found weaknesses in this control technique. There is a risk that clerks and/or cashiers may use the same identification number more than once, collect the fee from the customer, pocket the fee, and not record the transaction. Because the number-stamping machines sometimes skip numbers, employees have the authority to adjust them. Managers contended that they could not assume sole responsibility for resetting the machines, because customers would be forced to wait in growing lines while employees looked for a supervisor to reset them. The process of certifying copies of court records has a high risk of abuse, because these documents leave with the customers and the County Clerk retains no record of what was certified. For the same reason, we could not test this process. Recommendation 6. Invest in state-of-the-art equipment that will account for all transactions processed, operate properly, and resist easy manipulation by employees. 11

Major Contributors to This Report William Challice Ken Spitzer Cindi Frieder Aaron Fruchter Barry Mordowitz Gene Brenenson Clyde Bynoe Christopher Fauré Marticia Madory Appendix A

Appendix B

B-2