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What the State Auditor is Looking for...and Findings (Part 2)


February 25, 2013 by Tracy Burrows
Category: Accounting

What the State Auditor is Looking for...and Findings (Part 2)

How can your local government avoid a finding from the Washington State Auditor’s Office? Well, it would likely help to know what the auditor’s office is looking for in their review. My Part 1 post summarized 225 separate findings from 2010–2012 in State Audit Reports for cities. This Part 2 post takes a closer look at county and selected special district audit findings during that same time period.

Over that period of time, there were 150 findings in county audit reports and 140 findings in the audit reports for selected special districts. MRSC reviewed audit reports for the types of special districts (excluding school districts) that had 10 or more findings during the three-year period reviewed. The special districts included in this review are water and sewer districts, port districts, public utility districts, public hospital districts, and fire districts.

The tables below give more detail on the findings for counties and special districts.

Counties

 

Issue

 

#
of Findings

 

%
of Total

 

Lack of Adequate Controls to Ensure Compliance with Federal Grant Requirements

 

80

 

53.3%

 

Lack of Adequate Internal Financial Controls

 

44

 

29.3%

 

Assets and Equipment—Inadequate Reporting or Controls

 

9

 

6.0%

 

Misappropriation of Funds

 

7

 

4.7%

 

Irregularities in Interfund Loans or Transfers

 

3

 

2.0%

 

Irregularities in Purchasing, Bidding, Contracting

 

2

 

1.3%

 

Decline in Financial Condition Due to Lack of Monitoring or Failure to Reduce Costs

 

2

 

1.3%

 

Other

 

3

 

2.0%

 

Total

 

150

 

100%

Special Districts

 
 

Issue

 

#
of Findings

 

%
of Total

 

Lack of Adequate Internal Financial Controls

 

44

 

31.4%

 

Lack of Adequate Controls to Ensure Compliance with Federal Grant Requirements

 

23

 

16.4%

 

Decline in Financial Condition Due to Lack of Monitoring or Failure to Reduce Costs

 

19

 

13.6%

 

Irregularities in Purchasing, Bidding, Contracting

 

17

 

12.1%

 

Did not Provide Financial Information to Auditors

 

11

 

7.9%

 

Misappropriation of Funds

 

9

 

6.4%

 

Conflict of Interest

 

6

 

4.3%

 

Noncompliance with Open Government Requirements

 

5

 

3.6%

 

Other

 

6

 

4.3%

 

Total

 

140

 

100.0%

Top Issues Cited in Auditor’s Findings

Overall, the top five problem areas identified in local government audit findings for cities, counties, and special districts were lack of internal financial controls; lack of compliance with federal grant requirements; decline in financial condition; misappropriation of funds; and problems related to bidding, purchasing, and contracting. Below are more details on each of these areas.

Lack of Internal Financial Controls

The lack of adequate internal financial controls accounted for approximately one-third of all findings for counties and special districts. The most common issues cited related to a lack of independent review and other safeguards to ensure accuracy of the following:

  • Financial statements
  • Cash receipts
  • Utility billing
  • Payroll payments for goods and services
  • Annual leave cash-outs
  • Retirement benefits
  • Credit card usage
  • Property tax assessments

Federal Grants

Over 50% of county findings related to lack of controls were associated with federal grant requirements! While this area was most troublesome for counties, it also accounted for a significant portion of the findings for cities and special districts. Common issues cited were the following:

  • Failure to check whether contractors selected were suspended or debarred from doing business with the federal government
  • Failure to adequately monitor sub-recipients (agencies that receive pass-through funds)    Note - this was a common finding for counties.
  • Failure to ensure payment of prevailing wages
  • Failure to enforce the submission of weekly payroll reports
  • Inadequate schedule of expenditures
  • Unallowable costs charged to the grant  

Decline in Financial Condition

Almost all local governments are struggling to balance budgets. A small number have experienced serious financial decline. A number of local governments cited the expense of responding to public records requests and related lawsuits as a factor in their decline in financial position. The auditor’s office stressed the importance of ongoing monitoring and separate evaluation of programs to prevent such declines.  Issues cited included:

  • Overreliance on inter-fund loans to the general fund
  • Exhaustion of reserve balances
  • Use of registered warrants to pay daily operating costs
  • Significant outstanding accounts receivable
  • Negative general fund balance

 Misappropriation of Funds

While not common, any misappropriation of public funds is a cause of grave concern. Proper oversight and monitoring is essential to adequately safeguard public resources. Auditor’s office suggestions included the following:

  • Ensure appropriate monitoring and oversight of all transactions
  • Require proper documentation of adjustments to accounts
  • Strictly limit staff members with complete access to key systems

Bidding, Purchasing, and Contracting

State bid laws that apply to local government are complex, as is evident by the variety of findings under this category. Having expertise on purchasing and capital project requirements is essential. Issues in this category included:

  • Failure to bid projects that should have been competitively bid, including significant change orders or projects outside the scope of the original contract
  • Improperly splitting a larger project into phases to eliminate requirement for sealed bids
  • Improper use of volunteer or in-house employees for project labor
  • Use of piggybacking without an interlocal agreement or without ensuring the use of a competitive bid process
  • Failure to document three vendor quotes for a small works roster project
  • Failure to perform responsible bidder checks
  • Failure to ensure prevailing wages paid
  • Failure to withhold retainage or receive bonds in lieu of retainage
  • Failure to have a signed contract in place before the start of a project

Additional Advice for Transitions

In the local government response to the audit findings, a surprising number cite a changeover in key staff as contributing to the issue or problem identified by the auditor. To ensure a smooth transition

  • Prepare for transitions by thoroughly documenting procedures for internal financial controls
  • Make sure finance staff that are new to local government get proper training in local government accounting principles.

MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.

About Tracy Burrows

As MRSC’s Executive Director, Tracy seeks out innovations in local government, tracking trends in management and technology that impact your work. She has over 20 years of local government and non-profit experience, specializing in growth management, transportation, and general city management issues.

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