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15 Chapter 2: Internal Control Deficiencies Thedepartment received approximately $92.2 million in federal financial assistance during the fiscal year ended June 30, 2003. As a recipient of federal funds, thedepartment must ensure compliance with reporting requirements set forth in applicable laws, regulations, contracts, and grants. Recipient programs are responsible for the preparation and timely submission of all required reports. Failure to submit federal financial reports on a timely basis can delay the draw- down of additional funds and jeopardize a program’s ability to receive future federal funding. As part of our review ofthe department’s compliance with applicable reporting requirements, we selected six programs with total federal expenditures amounting to approximately $92.8 million (accounting for approximately 68 percent ofthe department’s federal expenditures for the fiscal year ended June 30, 2003). We found that the department’s Special Programs for the Aging—Title III, Part B & C program (Special Programs for the Aging Program) did not submit certain financial reports tothe U.S. DepartmentofHealthand Human Services on a timely basis. The grant agreement between the Special Programs for the Aging Program andthe U.S. DepartmentofHealthand Human Services requires that a Federal Cash Transaction Report be submitted on a quarterly basis no later than 45 days after the end ofthe reporting period. Our testing revealed that three out of four such reports submitted by the Special Programs for the Aging Program during the fiscal year ended June 30, 2003 were not submitted in a timely manner. Thedepartment filed these reports between three and 18 days after their required submission deadlines. We note that the department’s external auditors reported similar findings relating tothe department’s failure to comply with federal reporting requirements for fiscal years ended June 30, 2002, 2001, and 2000. Department personnel informed us that the cash transaction reports were not submitted within required deadlines due to personnel resource issues. Despite the department’s inability to submit required federal financial reports on a timely basis, it has not experienced any delays in the receipt of additional funding nor been informed that future funding will be impacted. We recommend that thedepartment ensure all required federal financial reports are submitted within required deadlines. This can be accomplished by implementing a checklist system to remind personnel of various reporting deadlines. We also recommend that appropriate-level TheDepartment Failed To Submit Required Federal Financial Reports On a Timely Basis Recommendations This is trial version www.adultpdf.com 16 Chapter 2: Internal Control Deficiencies management be responsible for monitoring each federal program’s reporting process to ensure that proper staffing is available and reports are prepared, reviewed, and submitted on a timely basis. Encumbrances are legal commitments related to unperformed purchase orders or contracts for goods and services. They do not become liabilities until an agency actually receives the goods or services. The primary purpose for encumbering funds is to reserve an appropriation (or portion thereof) for future expenditures that an agency will be required to pay. TheLegislature requires an accurate accounting of available funds for budgeting purposes. All outstanding encumbrances related to projects that have been closed, inactive, and/or completed are to be promptly unencumbered, and unspent funds made available for other state purposes. Thedepartment does not have formal policies and procedures for monitoring outstanding encumbrances. As a result, we found encumbrances relating to contracts that were closed, inactive, and/or completed. By not lapsing its unneeded encumbrances, thedepartment improperly reserved funds and overstated its reserved fund balance. Of 30 encumbrances, we found four instances where funds were encumbered for contracts that were closed, inactive, and/or completed. These totaled $54,537 and should have been unencumbered between January 1999 and October 2002. Thedepartment informed us that there is a lack of communication between divisions/offices andthe fiscal office. The division/office originating the contract or purchase order is responsible for notifying the fiscal office when related projects are closed, inactive, and/or completed. Upon such notification, the fiscal office is responsible for unencumbering any unspent funds related tothe contract or purchase order. In the instances noted above, department personnel indicated the respective division/office failed to inform the fiscal office ofthe related inactive contracts. Consequently, the fiscal office did not lapse the remaining unspent balances. Thedepartment does not have formal policies and procedures to ensure the validity of outstanding encumbrances. Department personnel indicated they have not performed periodic reviews of outstanding encumbrances to identify and unencumber invalid encumbrances. As a result, unspent balances remain encumbered, even when related contracts are inactive. TheDepartment Lacks Formal Policies and Procedures to Identify and Lapse Invalid Encumbrances Thedepartment does not properly unencumber funds Thedepartment lacks a formal process to monitor outstanding encumbrances This is trial version www.adultpdf.com 17 Chapter 2: Internal Control Deficiencies The administrator of each division/office should review the outstanding encumbrance report on a periodic basis (e.g., quarterly) to ensure that all encumbrances initiated by the division/office relate to valid future expenditures. If encumbrances relating to fulfilled or closed contacts or purchase orders are detected, the administrator should notify the fiscal office immediately to unencumber those amounts. The fiscal office should assist in managing encumbrances by periodically scanning the department’s outstanding encumbrance report for any old (e.g., outstanding longer than two years) encumbrances, and determine whether these encumbrances are for valid future expenditures. If any relate to contracts or purchase orders that have been fulfilled, the respective division/office should be notified andthe unspent funds unencumbered. We recommend that the department: • Adhere tothe State’s policy of unencumbering funds when contracts and purchase orders are fulfilled, closed, or become inactive; • Establish formal policies and procedures to monitor outstanding encumbrances. Specifically, thedepartment should require that outstanding encumbrances be periodically evaluated by both the fiscal office and each division/office to ensure that all encumbrances relate to valid, ongoing commitments; and • Promptly identify and unencumber unspent funds related to contracts and purchase orders that are no longer active. Thedepartment maintains 48 petty cash accounts, which are used for small purchases and employee reimbursements less than $100. Petty cash accounts within thedepartment totaled $46,405 at June 30, 2003, with individual accounts ranging from $100 to $10,000. Petty cash account balances are authorized based on a respective program’s needs. Disbursements from petty cash funds require approval ofthe petty cash custodian and respective division head, and must be supported by original receipts. Funds are generally replenished on a monthly basis or as necessary. At any point in time, petty cash on hand plus outstanding petty cash vouchers should equal the authorized petty cash balance. We found that the department’s controls over petty cash are inadequate. Recommendations TheDepartment Lacks Controls Over Petty Cash This is trial version www.adultpdf.com 18 Chapter 2: Internal Control Deficiencies Hawaii Administrative Rules andthe department’s own internal policies and procedures require that periodic, unannounced cash counts of petty cash accounts be performed, and that reconciliations of petty cash accounts be performed at least twice a year and be submitted tothe Administrative Services Office. Thedepartment has not adhered to these policies and procedures for safeguarding its petty cash accounts. Thedepartment lacks adequate segregation of duties over petty cash functions. The petty cash custodian performs both custodial and reconciliation functions. Ideally, different individuals should perform these functions to minimize the risk associated with the misappropriation of petty cash funds. However, given the limited resources at the program or division level, it may be more feasible to have an individual independent ofthe petty cash process perform the periodic, unannounced reviews of petty cash reconciliations, including the unannounced cash counts. We also found that the department’s various programs and divisions did not prepare and submit their petty cash account reconciliations as required by department policy. Thedepartment informed us that the Administrative Services Office had neither enforced this requirement nor received reconciliations from the various programs and divisions in a timely and consistent manner. We recommend that the department: • Perform periodic, unannounced reviews of each petty cash account, including surprise cash counts. An employee independent ofthe petty cash process should perform these reviews. • Adhere to established policies requiring programs and divisions to prepare and submit reconciliations of petty cash accounts at least semi-annually. We further recommend that thedepartment consider requiring the preparation and submission of petty cash reconciliations upon each request for replenishment. If reconciliations are not prepared and submitted, the Administrative Services Office should not process the replenishment request. Established policies and procedures for safeguarding petty cash accounts are not adhered to Recommendations This is trial version www.adultpdf.com 19 Chapter 3: FinancialAudit Chapter 3 FinancialAudit This chapter presents the results ofthefinancialauditoftheDepartmentof Health, StateofHawaii (department), as ofand for the fiscal year ended June 30, 2003. This chapter includes the independent auditors’ reportandthereport on compliance and on internal control over financial reporting based on an auditoffinancial statements performed in accordance with Government Auditing Standards. It also displays the basic financial statements ofthedepartment together with explanatory notes and supplementary information required by accounting principles generally accepted in the United States of America (GAAP). In the opinion of KPMG LLP, based on its audit, the basic financial statements present fairly, in all material respects, thefinancial position ofthe governmental activities, the business-type activities, each major fund, andthe aggregate remaining fund information ofthedepartment as of June 30, 2003, andthe respective changes in financial position and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. KPMG LLP noted matters involving the department’s internal control over financial reporting and its operations that the firm considered to be reportable conditions. KPMG LLP also noted that the results of its tests disclosed instances of noncompliance that are required to be reported under Government Auditing Standards. The Auditor Stateof Hawaii: We have audited the accompanying financial statements ofthe governmental activities, the business-type activities, each major fund, andthe aggregate remaining fund information oftheDepartmentof Health, StateofHawaii (department), as ofand for the year ended June 30, 2003, which collectively comprise the department’s basic financial statements. These financial statements are the responsibility ofthe department’s management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America andthe Summary of Findings Independent Auditors’ Report This is trial version www.adultpdf.com 20 Chapter 3: FinancialAudit standards applicable tofinancial audits contained in Government Auditing Standards, issued by the Comptroller General ofthe United States. Those standards require that we plan and perform theauditto obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. As discussed in Note 1, thefinancial statements ofthedepartment are intended to present thefinancial position, andthe changes in financial position and cash flows, where applicable, of only that portion ofthe governmental activities, the business- type activities, each major fund, andthe aggregate remaining fund information oftheStateofHawaii that are attributable tothe transactions ofthe department. They do not purport to, and do not, present fairly thefinancial position oftheStateofHawaii as of June 30, 2003, andthe changes in its financial position and its cash flows, where applicable, for the year then ended in conformity with accounting principles generally accepted in the United States of America. In our opinion, thefinancial statements referred to above present fairly, in all material respects, the respective financial position ofthe governmental activities, the business-type activities, each major fund, andthe aggregate remaining fund information ofthedepartment as of June 30, 2003, andthe respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. The budgetary comparison schedules that follow the notes tothe basic financial statements are not a required part ofthe basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation ofthe required supplementary information. However, we did not auditthe information and express no opinion on it. This is trial version www.adultpdf.com This is trial version www.adultpdf.com This is trial version www.adultpdf.com 23 Chapter 3: FinancialAuditThe following is a brief description ofthe department’s basic financial statements audited by KPMG LLP, as well as the unaudited required supplementary information, which are presented at the end of this chapter. Government-Wide Financial Statements Statement of Net Assets (Exhibit 3.1). This statement is prepared using the accrual basis of accounting and is designed to display thefinancial position ofthedepartment at June 30, 2003. This approach is not limited to reporting just current assets and liabilities, but also capital assets and long-term liabilities. The department’s net assets are classified as either invested in capital assets, restricted, or unrestricted. Statement of Activities (Exhibit 3.2). This statement is prepared using the accrual basis of accounting and presents a comparison between direct expenses and program revenues in a format that focuses on the cost of each ofthe department’s functions. Under this approach, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Fund Financial Statements Balance Sheet - Governmental Funds (Exhibit 3.3). This statement presents the assets, liabilities, and fund balances ofthe department’s governmental funds and is prepared using the current financial resources measurement focus andthe modified accrual basis of accounting. Because the emphasis of this statement is on current financial resources, capital assets and long-term liabilities are not reported. Reconciliation ofthe Governmental Fund Balances tothe Statement of Net Assets (Exhibit 3.4). This statement presents a reconciliation ofthe department’s fund balance reported in the Governmental Funds – Balance Sheet tothe net assets of governmental activities reported in the Statement of Net Assets. Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds (Exhibit 3.5). This statement presents the revenues, expenditures, and other financing sources and uses ofthe department’s governmental funds and is prepared using the current financial resources measurement focus andthe modified accrual basis of accounting. Under this approach, revenues are recognized when measurable and available while expenditures are recorded when the related fund liability is incurred. Description of Basic Financial Statements and Required Supplementary Information Basic Financial Statements This is trial version www.adultpdf.com 24 Chapter 3: FinancialAudit Reconciliation ofthe Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds tothe Statement of Activities (Exhibit 3.6). This statement presents a reconciliation ofthe department’s net change in fund balances reported in the Governmental Funds – Statement of Revenues, Expenditures, and Changes in Fund Balances tothe change in net assets reported in the Statement of Activities. Statement of Net Assets – Proprietary Funds (Exhibit 3.7). This statement is prepared using the accrual basis of accounting and is designed to display thefinancial position ofthe department’s proprietary funds at June 30, 2003. This approach is not limited to reporting just current assets and liabilities, but also capital assets and long-term liabilities. The department’s proprietary fund net assets are classified as either invested in capital assets or restricted for loans. Statement of Revenues, Expenses, and Changes in Fund Net Assets – Proprietary Funds (Exhibit 3.8). This statement is prepared using the accrual basis of accounting and is designed to display the changes in the department’s proprietary fund net assets. Under this approach, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Statement of Cash Flows – Proprietary Funds (Exhibit 3.9). This statement presents the cash inflows and outflows ofthe department’s proprietary funds. This statement is designed to display the net cash flows provided by or used in operating activities, noncapital financing activities, capital and related financing activities, and investing activities. Statement of Fiduciary Net Assets – Fiduciary Funds (Exhibit 3.10). This statement presents the assets, liabilities, and net assets ofthe department’s fiduciary funds. Budgetary Comparison Schedule – General Fund (Exhibit 3.11). This schedule compares actual revenues and expenditures ofthe department’s general fund on a budgetary basis tothe original and final budgets adopted by theStateLegislature for the year ended June 30, 2003. Budgetary Comparison Schedule – Tobacco Settlement Fund (Exhibit 3.12). This schedule compares actual revenues and expenditures ofthe department’s tobacco settlement fund on a budgetary basis tothe original and final budgets adopted by theStateLegislature for the year ended June 30, 2003. Required Supplementary Information (Unaudited) This is trial version www.adultpdf.com [...]... are pertinent to an understanding ofthe basic financial statements andfinancial position ofthe department, are discussed in this section Note 1 – Summary of Significant Accounting Policies Financial Reporting Entity and Basis of Presentation Thedepartment is part ofthe executive branch oftheStateofHawaii (the State) The basic financial statements ofthedepartment are intended to present the. .. thefinancial position, andthe changes in financial position and cash flows, where applicable, of only that portion ofthe governmental activities, the business-type activities, each major fund, andthe aggregate remaining fund information oftheState that is attributable to the transactions ofthedepartment They do not purport to, and do not, present fairly thefinancial position oftheState as of. .. 2003, andthe changes in its financial position and its cash flows, where applicable, for the year then ended in conformity with GAAP TheDepartmentof Health, StateofHawaii (department) , administers and oversees statewide personal health services, health promotion and disease prevention, mental health programs, monitoring ofthe environment andthe enforcement of environmental health laws Federal grants... received to support theStateofHawaii s health services and programs are administered by thedepartmentThedepartment has considered all potential component units for which it is financially accountable and other organizations for which the nature and significance of their relationship with thedepartment are such that exclusion would cause thedepartment s basic financial statements to be misleading... misleading or incomplete The Governmental Accounting Standards Board has set forth criteria to be considered in determining financial accountability Thedepartment has determined, based on the GASB criteria, that it has no component units The accompanying basic financial statements ofthedepartment have been prepared in conformity with GAAP prescribed by GASB This is trial version www.adultpdf.com 25 ...Chapter 3: FinancialAudit Note to the Budgetary Comparison Schedules (Exhibit 3.13) This note contains a reconciliation for the general fund andthe tobacco settlement fund, comparing the excess of revenues over expenditures presented on a budgetary basis to the excess (deficiency) of revenues over expenditures presented in conformity with GAAP Notes To Basic Financial Statements Explanatory notes, . fund, and the aggregate remaining fund information of the State of Hawaii that are attributable to the transactions of the department. They do not purport to, and do not, present fairly the financial. the State of Hawaii (the State) . The basic financial statements of the department are intended to present the financial position, and the changes in financial position and cash flows, where applicable,. information of the Department of Health, State of Hawaii (department) , as of and for the year ended June 30, 2003, which collectively comprise the department s basic financial statements. These financial statements