Comptroller of the Treasury Central Payroll Bureau

Transcription

1 Audit Report Comptroller of the Treasury Central Payroll Bureau June 2006 OFFICE OF LEGISLATIVE AUDITS DEPARTMENT OF LEGISLATIVE SERVICES MARYLAND GENERAL ASSEMBLY

2 This report and any related follow-up correspondence are available to the public through the Office of Legislative Audits at 301 West Preston Street, Room 1202, Baltimore, Maryland The Office may be contacted by telephone at , , or Electronic copies of our audit reports can be viewed or downloaded from our website at Alternate formats may be requested through the Maryland Relay Service at The Department of Legislative Services Office of the Executive Director, 90 State Circle, Annapolis, Maryland can also assist you in obtaining copies of our reports and related correspondence. The Department may be contacted by telephone at or

3 June 9, 2006 Senator Nathaniel J. McFadden, Co-Chair, Joint Audit Committee Delegate Charles E. Barkley, Co-Chair, Joint Audit Committee Members of Joint Audit Committee Annapolis, Maryland Ladies and Gentlemen: We have audited the Comptroller of the Treasury Central Payroll Bureau (CPB) for the period beginning March 4, 2003 and ending December 31, Our audit disclosed that CPB s procedures and controls over the State payroll system need improvement. Specifically, a number of employees had access to critical automated payroll processing functions that could allow them to process unauthorized payroll transactions, and payroll adjustments were not adequately documented and independently reviewed. In addition, CPB s procedures to assist State agencies in the prevention or detection of improper payments to employees on multiple State payrolls should be improved. We also noted deficiencies relating to clearing accounts used for payroll deductions, and with CPB s information systems security. Respectfully submitted, Bruce A. Myers, CPA Legislative Auditor

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5 Table of Contents Background Information 4 Agency Responsibilities 4 Current Status of Findings From Preceding Audit Report 4 Findings and Recommendations 5 State Payroll System * Finding 1 A Number of Employees Had Improper Access to Critical 5 Automated Payroll Processing Functions Finding 2 Payroll Adjustments Were Not Adequately Documented 6 and Were Not Subject to Independent Review Finding 3 - Procedures and Controls to Prevent or Detect Improper 7 Payments to Employees on Multiple Payrolls Need Improvement Non-Budgeted Funds Finding 4 The Compositions of Fund Balances Were Not Analyzed, and 8 the Proper Disposition of Certain Funds Retained Had Not Been Determined Computer Security Finding 5 Adequate Access and Logging Controls Did Not Exist 9 Audit Scope, Objectives, and Methodology 10 Agency Response Appendix * Denotes item repeated in full or part from preceding audit report 3

6 Agency Responsibilities Background Information The Central Payroll Bureau (CPB), a unit of the Comptroller of the Treasury, is primarily responsible for processing and issuing payroll checks and direct deposit advices on a biweekly basis for the regular State payroll, and for the payrolls of the Maryland Department of Transportation and the University System of Maryland. CPB is also responsible for processing payroll deductions, certain employee withholding statements, and other payroll reports for State government. According to CPB s records, these payrolls totaled approximately $4.4 billion during calendar year Current Status of Findings From Preceding Audit Report We reviewed the current status of the four findings included in our preceding audit report dated August 13, We determined that CPB satisfactorily addressed three of these findings. The remaining item is repeated in this report. 4

7 State Payroll System Findings and Recommendations Finding 1 A number of CPB employees had access to critical automated payroll processing functions that could allow them to initiate unauthorized payroll transactions. Analysis Unnecessary or improper access to critical automated payroll processing functions had been granted to a number of CPB employees that could allow them to initiate unauthorized payroll transactions. Specifically, we noted the following conditions: Statewide payroll data on electronic payroll reports were subject to change by six employees after they had been approved by both the related agencies and CPB personnel. As a result, these employees could record improper payroll changes (such as increasing employee pay amounts) which would not be subject to approval and may not be detected. Nine employees had access to critical online payroll processing functions even though their job responsibilities did not require such access. For example, six employees could record payroll deductions (such as tax liens and income taxes) when such access was not required for these employees. A similar condition was commented upon in our preceding audit report. Two employees had sole responsibility for processing wage garnishments and for establishing the related payee accounts to which the garnishments were to be disbursed. As a result, unauthorized or improper garnishments could be processed and the related funds misappropriated without detection. Wage garnishments, which totaled approximately $18.9 million in calendar year 2005, are used to deduct funds from employee paychecks to satisfy courtordered payments, such as for child support. Recommendation 1 We recommend that CPB restrict access to critical automated payroll processing functions to prevent changes from being made after they have been approved. In addition, we again recommend that access to critical online payroll processing functions be limited to only those employees whose job duties require such access. Finally, we recommend that an employee 5

8 independent of the wage garnishment process review all source documentation for garnishments processed by CPB employees to ensure their propriety, and document such reviews. Finding 2 Payroll adjustments processed by CPB employees were not adequately documented and were not subject to independent review. Analysis Employee payroll adjustments (for example, increases to pay) requested by agency personnel were processed by CPB employees without adequate documentation and were not subject to independent review. Normally, adjustments to employee payrolls are made by agency personnel prior to submission of the payrolls to CPB. When changes are needed after the payrolls have been submitted, agency personnel notify CPB staff to process the requested adjustments. However, CPB did not require written documentation from the agencies to support the requests. Rather, requests for adjustments were accepted via telephone call, and CPB personnel recorded the names of the employees who made these requests and ensured that they were on the list of employees authorized to make such adjustments. Since these requests were verbal, there was a lack of adequate support for the related transactions and a lack of accountability should any erroneous or improper adjustments be identified. Furthermore, while CPB procedures required independent approval of adjustments by the respective agencies after the payments were made, the aforementioned CPB employees were solely responsible for ensuring that such approvals were obtained. Consequently, adjustments could be both processed and approved by the same agency employee. Our test of 62 adjustments processed by CPB employees during two pay periods in calendar year 2005 disclosed that, for 25 adjustments, agency approval was obtained from the same employee who had requested the adjustment or such approval could not be located by CPB. For example, for 20 adjustments which increased employee pay by $17,880, the same agency employee had both requested and approved the adjustments. We were able to subsequently confirm the propriety of these adjustments with independent agency personnel. Recommendation 2 We recommend that CPB require requests for adjustments to be submitted in writing by agency personnel and that subsequent independent written agency approvals be obtained for all adjustments. In addition, we 6

9 recommend that all payroll adjustments processed by CPB employees be reviewed and approved by independent CPB personnel. Finally, we recommend that CPB retain supporting documentation for all payroll adjustments. Finding 3 Procedures and controls to prevent or detect improper payments to employees on multiple payrolls need improvement. Analysis Procedures and controls to prevent or detect improper payments to employees on multiple payrolls for overlapping employee hours need improvement. CPB has certain system edits that help prevent an employee from being paid more than once on the same payroll system at the same agency. However, there were no established system controls designed to prevent or detect an employee from being paid on two different payrolls at one agency (such as on both regular and contractual payrolls), or from being paid on the same or different payrolls at multiple agencies (such as on the regular payroll at two different agencies). Specifically, when a new employee was added to an agency payroll, there was no mechanism to alert CPB if that employee was also on another State payroll. While CPB has the ability to generate reports that identify employees on duplicate payrolls, it did not generate such reports unless specifically requested by an agency. In January 2006, we generated a report which reflected more than 400 State employees on two or more payrolls. Many of these employees are legitimately working at multiple agencies. Nevertheless, during our audits of other agencies, we have identified numerous employees on two or more payrolls who were paid more than once for the same hours worked. For example, our August 2004 report on Spring Grove Hospital Center identified a management employee who was employed on a full-time basis by the Center and on a contractual basis at several Department of Public Safety and Correctional Services facilities. Our limited review of this employee s time records disclosed 160 overlapping hours for which related payments approximated $8,800. One State agency recently identified an employee that was improperly paid approximately $70,000 over an 18-month period. This employee was erroneously paid on both the agency s contractual and regular payrolls for the same hours worked, and this matter has been referred to 7

10 the Office of the Attorney General - Criminal Investigations Division. These situations could have either been prevented or detected earlier if additional controls had been in place. Recommendation 3 We recommend that CPB implement procedures to assist State agencies in the identification and prevention of payroll improprieties. Specifically, we recommend that CPB enhance system controls to detect all recently hired employees who are on more than one payroll and submit such data to the applicable State agencies for investigation and approval. We also recommend that, in the future, CPB submit periodic (such as quarterly) reports to State agencies notifying them of all employees on multiple payrolls so that appropriate follow-up can be performed. Non-Budgeted Funds Finding 4 CPB did not analyze the composition of two clearing account funds, and the proper disposition of certain funds had not been determined. Analysis CPB did not analyze the composition of two clearing account funds that had combined balances of approximately $687,000 as of November 30, CPB maintained a clearing account for employee payroll deductions. Transactions recorded in this account totaled in excess of $1.1 billion during fiscal year The other clearing account was maintained for the employer s share of fringe benefits, such as social security and income taxes. While CPB maintained internal accounting records for these funds and periodically reconciled the records to the State s accounting system, it did not analyze the composition of the funds in these accounts. Fund composition analyses of clearing accounts are necessary to determine the specific transactions remaining in the accounts and to provide for their subsequent and timely disposition. Furthermore, we noted that one of these accounts contained $267,022, which primarily consisted of federal tax refunds that were sent to CPB, including one refund check for approximately $200,000 that was received in fiscal year CPB management believes the refunds were not owed to the State, and certain 8

11 efforts made to return the funds to the federal government have been unsuccessful. CPB management acknowledges that, since the proper disposition of these funds could not be determined, the funds should most likely be reverted to the State s General Fund. Recommendation 4 We recommend that CPB analyze the aforementioned non-budgeted fund clearing accounts to determine the composition of the balances, and continue to prepare monthly compositions in the future. In addition, we recommend CPB notify the Department of Budget and Management of the existence of the $267,022 and revert the funds to the General Fund unless otherwise directed by the Department. Computer Security Finding 5 Adequate access and logging controls did not exist. Analysis Adequate controls were not established over critical production payroll data files and online transactions. CPB uses the Comptroller of the Treasury s Annapolis Data Center to process the State s payroll. The Data Center's computer system contains a security software system capable of restricting and logging direct modification access to CPB s data files and online transactions. However, nine individuals had unlogged direct modification access to critical production payroll data files, including one person whose job responsibilities did not require such access. In addition, two of these individuals had unnecessary access to critical online payroll transactions. These conditions could result in the improper modification of critical payroll data. Recommendation 5 We recommend that CPB restrict direct modification access to critical production data files and restrict the use of online transactions to users who require such access. We also recommend that all direct modifications of critical payroll files be logged by the security software and reviewed and approved by management. 9

12 Audit Scope, Objectives, and Methodology We have audited the Comptroller of the Treasury Central Payroll Bureau (CPB) for the period beginning March 4, 2003 and ending December 31, The audit was conducted in accordance with generally accepted government auditing standards. As prescribed by the State Government Article, Section of the Annotated Code of Maryland, the objectives of this audit were to examine CPB s financial transactions, records, and internal control, and to evaluate its compliance with applicable State laws, rules, and regulations. We also determined the current status of the findings included in our preceding audit report. In planning and conducting our audit, we focused on the major financial-related areas of operations based on assessments of materiality and risk. Our audit procedures included inquiries of appropriate personnel, inspections of documents and records, and observations of CPB s fiscal operations. We also tested transactions and performed other auditing procedures that we considered necessary to achieve our objectives. Data provided in this report for background or informational purposes were deemed reasonable, but were not independently verified. Our audit did not include certain support services provided to CPB by the Comptroller of the Treasury Office of the Comptroller. These support services (such as processing of invoices, maintenance of accounting records, and related fiscal functions) are included in the scope of our audits of the Office of the Comptroller. Our audit also did not include certain support services provided to CPB by the Comptroller of the Treasury Information Technology Division related to the procurement and monitoring of information technology equipment and services. These support services are included in the scope of our audits of the Information Technology Division. Our audit scope was limited with respect to CPB s cash transactions because the Office of the State Treasurer was unable to reconcile the State s main bank accounts during the audit period. Due to this condition, we were unable to determine, with reasonable assurance, that all CPB cash transactions were accounted for and properly recorded on the related State accounting records as well as the banks records. CPB s management is responsible for establishing and maintaining effective internal control. Internal control is a process designed to provide reasonable assurance that objectives pertaining to the reliability of financial records, effectiveness and efficiency of operations including safeguarding of assets, and compliance with applicable laws, rules, and regulations are achieved. 10

13 Because of inherent limitations in internal control, errors or fraud may nevertheless occur and not be detected. Also, projections of any evaluation of internal control to future periods are subject to the risk that conditions may change or compliance with policies and procedures may deteriorate. Our reports are designed to assist the Maryland General Assembly in exercising its legislative oversight function and to provide constructive recommendations for improving State operations. As a result, our reports generally do not address activities we reviewed that are functioning properly. This report includes findings relating to conditions that we consider to be significant deficiencies in the design or operation of internal control that could adversely affect CPB s ability to maintain reliable financial records, operate effectively and efficiently, and/or comply with applicable laws, rules, and regulations. Our report also includes a finding regarding a significant instance of noncompliance with applicable laws, rules, or regulations. Other less significant findings were communicated to CPB that did not warrant inclusion in this report. The Office of the Comptroller s response, on behalf of CPB, to our findings and recommendations is included as an appendix to this report. As prescribed in the State Government Article, Section of the Annotated Code of Maryland, we will advise the Office regarding the results of our review of its response. 11

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16 AUDIT TEAM Brian S. Tanen, CPA, CFE Audit Manager A. Jerome Sokol, CPA Information Systems Audit Manager Mark S. Hagenbuch, CPA Senior Auditor Terry S. Gibson Staff Auditor Veronica Arze Information Systems Staff Auditor