Audit Report Department of Human Resources Local Department Operations March 2002
This report and any related follow-up correspondence are available to the public. Alternate formats may also be requested by contacting the Office of Legislative Audits as indicated at the bottom of the next page or through the Maryland Relay Service at 1-800-735-2258. Please address specific inquiries regarding this report to the Audit Manager listed on the inside back cover by telephone at (410) 946-5900. Electronic copies of our audit reports can be viewed or downloaded from the Internet via http://www.ola.state.md.us. The Department of Legislative Services Office of the Executive Director, 90 State Circle, Annapolis, Maryland 21401 can also assist you in obtaining copies of our reports and related correspondence. The Department may be contacted by telephone at (410) 946-5400 or (301) 970-5400.
March 8, 2002 Senator Nathaniel J. McFadden, Co-Chair, Joint Audit Committee Delegate Samuel I. Rosenberg, Co-Chair, Joint Audit Committee Members of Joint Audit Committee Annapolis, Maryland Ladies and Gentlemen: We have audited the Local Department Operations of the Department of Human Resources for the period beginning July 1, 1998 and ending June 30, 2001. Our audit disclosed that in accordance with State law, the Department performs or contracts with an independent accounting firm to perform biennial audits of the 24 local departments of social services. Although we determined the scope of the audits generally to be adequate, we did note that the audit reports for the largest local departments of social services were not always issued in a timely manner. Also, we noted that appropriate procedures had not been implemented for timely follow-up of the audit findings. Respectfully submitted, Bruce A. Myers, CPA Legislative Auditor
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Table of Contents Background Information 4 Agency Responsibilities 4 Audit Approach 4 Summary of Other Auditors Findings 5 Fraud Investigations 6 Findings and Recommendations 7 Biennial Audits of Local Departments of Social Services Finding #1 Audits Were Not Always Completed Timely 7 Finding #2 Procedures to Perform Timely Follow-up of Audit 7 Findings Had Not Been Implemented Finding #3 Department Did Not Review Audit Working Papers 8 of Accounting Firm for Compliance With the Contract Audit Scope, Objectives and Methodology 9 Agency Response Appendix 3
Agency Responsibilities Background Information Local Department Operations is a separate budgetary unit of the Department of Human Resources. It consists of the funds appropriated for the various activities administered by the State s 24 local departments of social services. These activities primarily involve the various Department entitlement programs (such as food stamps and temporary cash assistance) administered by the local departments of social services. The unit s fiscal year 2002 appropriation is approximately $1.1 billion. Audit Approach The 24 local departments of social services are subject to audit by this Office, as part of the Department of Human Resources - Local Department Operations budgetary unit. Since the creation of this unit in fiscal year 1995, we have periodically conducted fiscal/compliance audits of select local departments. However, we have not audited a local department since the passage of Chapter 486, Laws of Maryland, 1999 (effective July 1, 1999) that required the Department of Human Resources to conduct or contract for a financial and compliance audit of each local department of social services at least every two years. Accordingly, we have relied on the work of the aforementioned auditors to provide adequate audit coverage to the local departments of social services, and we did not conduct individual audits of the local departments. These audits were conducted by the Department s Office of the Inspector General and, for the five largest local departments (Baltimore City, Anne Arundel, Baltimore, Montgomery and Prince George s Counties), by an independent accounting firm contracted by the Department. Our audit procedures were generally limited, therefore, to obtaining a sufficient basis for that reliance. Specifically, we reviewed current audit reports and the related working papers of certain audits. We have concluded that the audit coverage of the local departments was generally adequate. We also noted that the audits included follow-up on the findings from prior legislative audits of local departments as appropriate. 4
Summary of Other Auditors Findings Our review of the most recent audit reports for the 24 local departments of social services prepared by either the Department s Office of the Inspector General or the independent accounting firm disclosed that the reports collectively included approximately 320 audit findings. The following is a summary of 239 significant or common findings from critical areas: Area Number of Findings Typical Findings Child Support 30 Inadequate collection efforts; Control deficiencies over related receipts and disbursements. Recovery of Overpayments 29 Inadequate collection efforts; Inadequate or inaccurate records. Bank Accounts 32 Untimely or improper bank reconciliations; Control deficiencies over disbursements. Contracts and 25 Poor controls over disbursements. Administrative Expenditures Supervisory Reviews of TCA Eligibility 19 Inadequate number of eligibility determinations reviewed; Reviews were not always adequately documented. Determinations Electronic Benefits Transfer System 21 Improper accounting of EBTS cards; Clients were not notified of expiring benefits. Foster Care 31 Eligibility for Federal funds was not properly determined; Poor controls over disbursements; No verifications that all Federal funds were received. Payroll 22 Internal control deficiencies; Employee evaluations not always completed. Computer Security 30 Inappropriate access to computer files. Summary Total: 239 5
Fraud Investigations Subsequent to the conclusion of our audit fieldwork, we were advised by the Department s Office of the Inspector General that it was investigating the apparent theft of in excess of $375,000 in two separate cases by employees of the Anne Arundel County and Baltimore City Local Departments of Social Services. According to Department management, in one case the employee forged endorsements on checks written to absent parents in the Child Support Initiative Program. These checks were to be used for such purposes as job search and housing. In the other case, TCA and Food Stamp benefits were stolen by establishing bogus accounts and/or improperly using existing accounts which was made possible by unauthorized use of a supervisor s password to the automated system. We were advised that in both cases, the applicable employee s employment was terminated and the matter had been referred to the appropriate legal authority for possible criminal prosecution. Additionally, the Office of the Inspector General s preliminary review of the conditions contributing to the alleged thefts has disclosed several potential breakdowns in the system of internal control. We were advised that the Department intends to correct these deficiencies. 6
Findings and Recommendations Biennial Audits of Local Departments of Social Services Finding #1 Audits of the large local departments of social services were not completed in a timely manner. Analysis Four of five audits of the local departments of social services performed by an independent accounting firm under contract with the Department were not completed timely. For example, the final audit reports for two of the largest local departments were not formally issued until December 19, 2001 and January 31, 2002, which is more than a year past the contractually required due date of October 1, 2000. Chapter 486, Laws of Maryland, 1999, effective July 1, 1999, required the Department, at least every two years, to conduct or contract for a financial and compliance audit of each local department of social services. The law also requires the preparation of written reports of the audit findings. Recommendation #1 We recommend that the Department ensure that audit reports are issued on a timely basis and in accordance with contractual requirements. Finding #2 The Department had not implemented procedures to perform timely followup of local department audit findings. Analysis The Department had not implemented a formal process to perform timely follow up on significant findings from previous audits and to determine if the local departments had taken appropriate corrective action. Although the biennial audits included a follow-up of prior audit report findings from the Office of the Inspector General and the Office of Legislative Audits, the number and significance of the current audits findings (approximately 320 findings from 24 audits) indicate the need for more frequent follow up. Department management advised us that it had recently established a policy requiring formal follow-up reviews of all local department audits six months after the related report issuance. 7
However, as of October 2001, it had not conducted any follow up of the aforementioned audits findings, even though the earliest reports date to late calendar year 1999. Recommendation #2 We recommend that the Department take appropriate and timely follow-up action to ensure that the recommendations in the audit reports of the local departments of social services are implemented and the related deficiencies corrected. Finding #3 The Department did not review audit working papers of the independent accounting firm for compliance with the contract. Analysis The Department s Office of the Inspector General did not review the working papers of the independent accounting firm to ensure that the audit coverage was in accordance with the contract. Our review of the working papers for two of these audits disclosed that significant areas and relevant issues were frequently included in the scope. However, the scope of the independent accounting firm s audits, as documented in the working papers, was not always in compliance with the contract. For example, for one of the audits we reviewed, procedures related to cash receipts were not reviewed as specifically required by the contract. Recommendation #3 We recommend that the Department review the working papers, at least on a test basis, of any contract audits to ensure adequate audit coverage. 8
Audit Scope, Objectives and Methodology We have audited the Department of Human Resources Local Department Operations unit for the period beginning July 1, 1998 and ending June 30, 2001. The audit was conducted in accordance with generally accepted government auditing standards. As prescribed by the State Government Article, Section 2-1221 of the Annotated Code of Maryland, the objectives of this audit were to examine the unit s financial transactions, records and internal control, and to evaluate its compliance with applicable State laws, rules and regulations. We also determined that follow-up was performed of the findings contained in our preceding audit reports of local departments of social services as appropriate. 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, inspection of documents and records, and observation of the Department s operations. We also tested transactions and performed other auditing procedures that we considered necessary to achieve our objectives. The Department 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. Because of inherent limitations in internal control, errors or fraud may nevertheless occur and not be detected. In addition, 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. 9
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 the Department s ability to maintain reliable financial records, operate effectively and efficiently, and 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. The Department s response to our findings and recommendations is included as an appendix to this report. As prescribed in the State Government Article, Section 2-1224 of the Annotated Code of Maryland, we will advise the Office regarding the results of our review of its response. 10
Mr. Bruce A. Myers Page 2 Finding #1 Audits of large local departments of social services were not completed in a timely manner. Recommendation #1 We recommend that the Department ensure that audit reports are issued on a timely basis and in accordance with contractual requirements. Department s Response: The Department agrees with the recommendation. The Office of the Inspector General will more closely monitor to ensure that any audits performed by independent accounting firms are completed and issued in a timely manner. Finding #2 The Department had not implemented procedures to perform timely follow-up of local department findings. Recommendation #2 We recommend that the Department take appropriate and timely follow-up action to ensure that the recommendations in the audit reports of the local departments of social services are implemented and the related deficiencies corrected. Department s Response: The Department agrees with the recommendation. In September, 2001 the Internal Audit Division of the Office of the Inspector General reorganized, and created a Corrective Action Follow-up Unit. The unit will allow the Inspector General s office to follow-up on audit corrective action in a timely manner. Finding #3 The Department did not review audit working papers of the independent accounting firm for compliance with the contract. Recommendation #3 We recommend that the Department review the working papers, at least on a test basis, of any contract audits to ensure adequate audit coverage. Department s Response: The Department agrees with the recommendation. To ensure adequate audit coverage, the Office of the Inspector General will review, on a test basis, the audit working papers of independent accounting firms that perform local department audits under contract.
AUDIT TEAM Gregory A. Hook, CPA Audit Manager Stephen C. Pease, CPA Senior Auditor