OFFICE OF THE AUDITOR CASH MANAGEMENT AUDIT JULY 2005 Dennis J. Gallagher Auditor
Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado 80202 720-913-5000, FAX 720-913-5247 www.denvergov.org/auditor July 19, 2005 Wayne E. Vaden, Esq., Clerk and Recorder and Public Trustee City and County of Denver Dear Mr. Vaden: Attached is the Auditor s Office Internal Audit Division s report of their audit of the Office of the Public Trustee cash management policies and procedures for the time period January 2003 through December 2003. The purpose of the audit was to determine if the cash management policies and procedures used by the Public Trustee are satisfactory and whether internal controls were adequate under the circumstances. The audit disclosed reportable conditions related to internal controls, cash handling, and bank reconciliations. Identified are weaknesses related to the preparation of monthly bank reconciliations, accurate recording of business transactions, maintaining activity control accounts, cash handling procedures, and written policies and procedures. These weaknesses are detailed further within the accompanying report. If you have any questions, please call Mike Clark, Director of Internal Audit, at 720-913-5029. Sincerely, DJG/kh Dennis J. Gallagher Auditor cc: Honorable John Hickenlooper, Mayor Honorable Members of City Council Ms. Cheryl Cohen-Vader, Chair, Audit Committee Mr. Cole Finegan, City Attorney Ms. Lauri Dannemiller, City Council Staff Director 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
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 2
City and County of Denver Dennis J. Gallagher Auditor 201 West Colfax Ave., Dept. 705 Denver, Colorado 80202 720-913-5000, FAX 720-913-5247 www.denvergov.org/auditor INTERNAL AUDITOR S REPORT We have completed the audit of the Office of the Public Trustee s cash management policies and procedures. The purpose of the audit was to determine if public trustee personnel were using proper procedures for cash management and whether adequate internal controls were in place. This audit was included in the Auditor s Office Internal Audit Division s Annual Audit Plan and is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, 5.2.1. 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 that internal accounting and administrative controls are adequate under the circumstances. We also reviewed operations for compliance with City rules and regulations. An audit includes examining, on a test basis, evidence supporting compliance with applicable rules and regulations and adequate accounting and administrative internal controls. We conclude the Public Trustee s internal controls related to cash management are inadequate. Specifically, the Public Trustee did not prepare accurate bank reconciliations, there are deficiencies associated with cash handling, and the public trustee lacks proper procedures for recording revenue and internal transactions. We extend our appreciation to the personnel who assisted and cooperated with us during the audit. Internal Audit Division Date: July 19, 2005 Staff: Dick Wibbens, CPA, Audit Manager Philip Cummings, CPA, Audit Supervisor Mike Widner, Lead Auditor Wayne Sanford, Senior Auditor Norine Reigan, CPA, Senior Auditor Michael Clark, CPA Director of Internal Audit 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
EXECUTIVE SUMMARY FOR THE YEAR JANUARY 1, 2003 THROUGH DECEMBER 31, 2003 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 Public Trustee to our findings. 1. Bank Statement Reconciliations The Public Trustee (PT) does not maintain appropriate written procedures or trained personnel to prepare accurate and timely bank statement reconciliations. We noted internal control weaknesses related to segregation of duties, accounting for stale and outstanding checks, and recording internal transactions. In order to develop and implement a sound system of internal controls and achieve accurate financial reporting, we believe the Public Trustee should hire an experienced senior accountant. 2. Internal Controls Cash Handling and Accounting Our audit noted an overall lack of internal controls and accounting procedures related to cash handling and internal accounting. Funds received by the Public Trustee are not always recognized by a written receipt, checks are not consistently endorsed upon receipt, and there is a lack of separation of duties for key personnel involved in cash transactions. Previous audit findings in these areas were not addressed by prior Public Trustee management. 3. Accounting for Copy Revenue We noted several exceptions related to the accounting of revenue for copying services provided by the Public Trustee. Specifically, we noted PT personnel did not always record revenue at the time of receipt, perform daily reconciliations of amounts received to amounts deposited, account for daily cash over or shorts, or deposit revenue received by the next business day. 4
BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY FOR THE YEAR JANUARY 1, 2003 THROUGH DECEMBER 31, 2003 Background The Office of the Public Trustee (PT) for the City and County of Denver is part of the Office of the Clerk and Recorder. The PT is responsible for processing releases of deeds of trusts and the administration of all foreclosures in the City. This includes processing withdrawals, redemptions, cures, and foreclosure sales. Funds received for foreclosures are designated by Colorado statute as custodial and are not the property of the City. These funds are payable to third parties and are not recorded in the City financial records as an asset nor are they reported in the City s annual financial statement. The PT maintains a separate bank account to receive and disburse these custodial funds. The PT is authorized to collect fees for foreclosures and releases. The foreclosure and release fees received by the PT are recorded as revenue by the City and deposited with Treasury. The PT is also involved in maintaining tax escrow accounts for installment land contracts. The PT accepts monthly payments that are deposited to an escrow bank account for real estate taxes related to the contracts. Escrow payments are transferred to the City Treasury each April. The PT is authorized by Colorado statutes to charge $75 as an annual fee for this service. The PT collects revenue from providing copies of recorded property documents. The PT has one operating bank account for depositing and disbursing the foreclosure and releases of deeds of trusts funds received, excluding copy fees. Copy fees are deposited periodically with the City Treasury. Scope Our audit of the cash management system of the PT was for the period January 1, 2003 through December 31, 2003. The scope of our work focused on the areas of bank account reconciliations, cash handling procedures, deposits and disbursements, and the accounting procedures in use for recording, reporting, and monitoring PT business activity. We reviewed and evaluated the internal and administrative controls related to these areas. Additionally, PT transactions were examined for supporting documentation, completeness, and compliance with applicable state and City rules and regulations for cash management. 5
BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY Objective The objectives of our audit were to determine if the PT s cash management internal controls were adequate to assure: (a) bank reconciliations are accurate and completed on a monthly basis; (b) cash receipts, deposits, and disbursements are processed in an accurate and timely manner; (c) PT internal transactions are correctly recorded and reconciled; (d) installment land contract tax escrow accounts are properly administered; and, (e) the PT change fund is maintained in compliance with Treasury rules. Methodology To meet the audit objectives, we used the following methods to obtain and analyze evidence including, but not limited to: Documentation of current internal controls and an assessment of their adequacy. Discussions with PT management and staff regarding accounting procedures and processes, and areas of potential fraud and abuse. Sample testing of transactions from the areas audited, including tracing to appropriate source documentation. Verification of PT compliance with applicable rules and regulations. 6
FINDINGS, RECOMMENDATIONS, AND RESPONSES FOR THE YEAR JANUARY 1, 2003 THROUGH DECEMBER 31, 2003 1. Bank Statement Reconciliations In our review of the bank reconciliations completed by Public Trustee (PT) staff, we noted the following: The PT staff is not preparing the bank reconciliations in an accurate or timely manner. The PT does not maintain adequate segregation of duties related to disbursements, deposit preparation, recording transactions, and bank reconciliations. Business activity reports generated by the PT staff for the bank reconciliation do not always reflect account adjustments. Stale dated and outstanding check lists used for the bank reconciliations are not accurate. The PT does not maintain a book account for checking account activity. Deposits, disbursements, and adjustments are not separately recorded in one check book account. A previous audit issued by the Auditor's Office in 1995 reported similar findings related to cash handling and bank reconciliations. Our current audit did not note any significant improvements in these areas since the prior audit. Operating without a strong system of internal controls contributes to opportunities for theft, accounting errors, and inaccurate financial statements. An important internal control feature involves having trained individuals who have the skills and experience to perform accounting duties and supervise personnel. Good internal controls require bank statement reconciliations to be accurate and prepared on a monthly basis. Additionally, reconciliations should be reviewed and approved by a qualified supervisor. Also, good internal controls and accounting practices require the use of a separate book account balance for reconciling with the monthly bank statement. Another important internal control principle dictates separation of duties among individuals who receive cash, perform daily cash summaries, prepare and make the bank deposits, record financial transactions, and perform the monthly bank reconciliations. Recommendation An important part of the responsibilities and duties of the Office of the Public Trustee involves detailed accounting transactions and financial reporting. The primary bank account which we reviewed for the calendar year 2003 showed 12 months deposits of $43,748,308, disbursements of $46,889,353, and maintained a bank balance of approximately $3,364,700. In order to provide the Office of the Public Trustee with the necessary support to accomplish their duties and goals, we recommend the PT requisition and hire a qualified individual at least the senior accountant level. This individual should have a range of accounting skills and experience to perform the following responsibilities: 7
FINDINGS, RECOMMENDATIONS, AND RESPONSES Establish appropriate accounting procedures related to internal financial transactions, cash handling, daily and monthly summary reports, and implement a record retention policy for documents used in daily accounting activity. Implement a sound system of internal controls incorporating the principles of segregation of duties, supervisory review, safeguarding of cash and accounting records, and periodic reconciliations of report balances to supporting documentation. Special attention should be given to the areas of cash handling and revenue recordation. Provide and maintain supervisory responsibilities for staff personnel assigned to perform accounting and cash handling duties. The senior accountant should be able to provide adequate and appropriate training to the staff, match staff employee s skills with their assigned duties, monitor and evaluate their performance, and make recommendations for improvements. Establish an appropriate internal accounting system to generate an accurate book balance amount at the end of each month in order to perform a reconciliation with the monthly bank statement. The senior accountant should perform this reconciliation each month and make the appropriate adjustments to the book balance. This bank reconciliation should be reviewed by the Public Trustee or a qualified delegate. Office of the Public Trustee s Response See overall response in this section of report on page 11. 2. Internal Controls Cash Handling and Accounting During our examination, we noted that the PT does not maintain appropriate internal controls related to cash handling and accounting transactions. Specifically, we found internal control deficiencies in the following areas: Prior PT management did not address previous audit findings by establishing written accounting policies and internal control procedures. Current PT procedures do not have adequate separation of duties for key personnel involved in cash receipts, daily cash summaries, deposit preparation, revenue recordation, and bank account reconciliations. Receipt of funds for copying charges, fees, or custodial duties completed by the PT are not always recognized by an appropriate written receipt, check log, remittance list, or cash register receipt. PT employees do not immediately stamp checks with a restrictive endorsement upon their receipt. The PT does not maintain current signatory cards for personnel assigned to conduct bank transactions. 8
FINDINGS, RECOMMENDATIONS, AND RESPONSES The PT does not consistently deposit funds received with Treasury by the next business day. Internal controls related to cash handling and accounting procedures are designed to ensure safe custody of cash assets, accurate and timely revenue reporting, and maximizing interest revenue to the City. Recommendation In order to ensure the internal control objectives expressed immediately above are met, we recommend the Public Trustee incorporate the following basic internal controls and requirements contained in Executive Order No. 2, Cash Handling Practices. In conjunction with our recommendation No. 1, we recommend the PT hire a senior accountant who has the expertise to implement basic internal control procedures and develop written accounting procedures for other PT personnel. New internal controls should contain provisions for adequate segregation of duties related to cash handling and accounting transactions. If a senior accountant is hired by the PT, it will provide another qualified person to relieve PT personnel who currently have too many or incompatible responsibilities in these areas. PT cash handling personnel should recognize and record all revenue and custody funds when received by utilizing an appropriate document such as a written receipt, check log, or cash register receipt. The total amount of each type of fund should be summarized and reconciled to the total of the individual transactions on a daily basis. PT personnel should immediately endorse all checks upon receipt with a restrictive endorsement. The Public Trustee should review and update all bank signatory cards and ensure only current and authorized personnel are assigned bank transaction responsibilities. The PT must develop accounting procedures that ensure a proper cut off time for summarizing daily revenue and deposit these funds no later than the next business day. Office of the Public Trustee s Response See overall response in this section of report on page 11. 9
FINDINGS, RECOMMENDATIONS, AND RESPONSES 3. Accounting for Copy Revenue The PT charges customers a fee of $1.25 per page for requested copies of documents maintained on site. Copy revenue transactions are conducted over the counter utilizing an imprest change fund of $100. Our audit of the copy fee transactions and the change service provided by the PT revealed the following exceptions related to cash handling and accounting for revenue: PT personnel utilize a three part pre-numbered receipt for copy revenue transactions which are supposed to be recorded on a copy fee log. We noted PT staff do not always record these receipts on the log nor maintain all three copies of voided receipts. Daily amounts of copy fee revenue are not reconciled by a supervisor to the individual receipts or the copy fee log prior to the preparation of the deposit to Treasury. Assigned personnel do not investigate missing receipts nor report daily cash over and short amounts. The PT does not deposit copy fee revenue on a daily basis or by the next business day to Treasury. The PT does not even comply with their own monthly deposit schedule. Our audit noted the PT held approximately $200 in an office safe. These funds could not be documented or traced to its source or time of receipt by office personnel. It is likely these funds represent accumulated overage amounts which should have been deposited to Treasury. With respect to the funds used to provide a change service to its customers, we noted all PT counter staff have access to this change fund. Also, the PT does not designate a supervisor to reconcile the change fund each day to account for any over or short difference. Our audit for calendar year 2003 and the first six months of 2004 noted a difference of $216 between amounts reported on the copy fee log and the amount deposited to Treasury. As already stated in Finding and Recommendation No. 2, the PT lacks comprehensive written policies and procedures and a defined system of internal controls related to their accounting and cash handling activities. These guidelines and controls are necessary to ensure consistent financial reporting, accurate and timely recording of revenue transactions, and the safeguarding of financial assets from misappropriation. Recommendation In conjunction with Finding and Recommendation No. 1 reported above, we recommend the Public Trustee hire and direct a senior accountant to review and evaluate the entire cash handling and accounting procedures related to copy fee revenue and the change fund. The guidelines and criteria established by basic internal control procedures, Executive Order No. 2, Cash Handling Procedures, and Treasury policies and should be utilized to accomplish the following specific recommendations: 10
FINDINGS, RECOMMENDATIONS, AND RESPONSES Assigned PT personnel must accurately record all copy fee revenue transactions on sequentially, pre-numbered written receipts at the time of the transaction. The two office receipt copies must be accounted for on a daily basis, and all three copies of voided receipts must be retained for reconciliations. A PT supervisor should perform a daily summary report reconciling amounts received to the amounts recorded on the individual receipts prior to the preparation of the deposit. All cash overage and shortage should be investigated and resolved by the supervisor. Unexplained cash overage amounts should be deposited to Treasury using the appropriate account code. PT procedures should require the personnel responsible for the copy fee transactions to make up cash shortages. PT personnel should deposit the copy fee revenue on a daily basis or by the next business day with Treasury. The PT should assign the change fund service to a select few employees. A supervisor or accountant should count this change fund on a daily basis and resolve any over and short amounts. This count should be documented and filed for future reference. Office of the Public Trustee s Response With the new administration in the Clerk & Recorder s office, it is Administration s intent to take the recommendations from the Auditor s office make the necessary implementations to ensure proper internal controls for cash are in place. In response to the comments noted, the implementations will be made between June 1 and June 30, 2005. In all of the recommendations, the hiring a staff person equivalent to a senior accountant is a priority. On March 16, 2005, the Clerk hired... Associate Financial Management Analyst.... [This Analyst] has a degree in accounting and over 12 years of accounting, audit, financial analysis, business policy and management, and systems implementation experience. In addition, on April 25, 2005, the Clerk hired a Chief Deputy Public Trustee,..., to manage the daily operations of the Public Trustee office.... [This Chief Deputy] is a practicing lawyer who has over 16 years experience in real estate and foreclosure law. She is a member of the Public Trustee s Association and serves as a member of several State Electronic Filing committees.... [These two personnel] are working closely together to reengineer business processes and document policies and procedures, for the Public Trustee s office so that there are strong internal controls over cash receipts and disbursements. It is our goal to have new cash management procedures implemented by June 30, 2005 and the corresponding policies documented by July 31, 2005. The following bulleted points address the actions... [these personnel] have taken or will take to implement the necessary changes: In response to Audit Comments, the Clerk and Recorder s office has addressed, or will be addressing, the noted issues as follows: 11
FINDINGS, RECOMMENDATIONS, AND RESPONSES Completed Items: Hired an Associate Financial Management Analyst ( Business Analyst), March 2005 Hired a Chief Deputy Public Trustee to supervise the daily operations of the Public Trustee s office, April 2005. Reconciled the Wells Fargo main bank account through April 30, 2005 Updated outstanding check list as a result of reconciling main account Created a Correction Form, with which to track errors and make corrections in the system. Opened three new bank accounts with Bank One: 1. Designated Foreclosure Account 2. Designated Releases Account 3. Designated Installment Land Contracts Account 4. Phase-out of Wells Fargo Account will occur through 11/30/05, at which time the account will be closed, a final reconciliation will be completed, and stale dated checks will be written off the books. Updated Signatory Cards Implemented segregation of duties with regards to opening the mail and cash handling, effective June 15, 2005 as follows: 1. Assigned one person to open mail, log and restrictively endorse checks 2. Assigned one or more person(s) (not listed in 1. or 3.) to complete deposit slip 3. Assigned Budget Analyst to reconcile bank accounts by a least 5 days after receiving the bank statements Effective June 1, 2005, deposits will be made on a daily basis 1. Cut-off of day s business will be 4 pm 2. Cash Receipts Journals will be sent to Treasury on a monthly basis 3. Reconciling items will be made before month-end Items In Progress: Implement Quickbooks by June 17, 2005, as the Clerk s accounting program ( books ), which creates a dual accounting record of transactions Create a Policy & Procedure manual (to be completed July 31, 2005) which addresses all facets of cash management for the Public Trustee s office and will be included in the Policy & Procedure manual for the entire Clerk s office Account for Copy Revenue by using Quickbooks Track copy funds by configuring computers to identify users. Clerks will be responsible for retrieving copies and charging customers based on the number of pages printed. Copy revenue will be deposited on a daily basis beginning July 1, 2005 Imprest fund will remain at $100 1. Change fund will be managed by one person or the designated back-up 2. Overages and shortages will be reported and deposited on a daily basis 3. Employees will be trained to count change correctly to minimize the amount that is reported as over/short 4. Fund will be counted on a daily basis by the Chief Deputy Public Trustee or designated backup 12