State Audit Results In 12 Findings Against Cannon Co.
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The State of Tennessee Comptroller of the Treasury, Division of County Audit, released its annual audit of Cannon County Wednesday.

The audit resulted in 12 findings and recommendations. Following is the highlights of the audit. At the end is a link to a PDF fill of the full report.

Audit Highlights
Annual Financial Report Cannon County, Tennessee
For the Year Ended June 30, 2011

Scope

We have audited the basic financial statements of Cannon County as of and for the year ended June 30, 2011.

Results

Our report on Cannon County’s financial statements is unqualified. Our audit resulted in 12 findings and recommendations, which we have reviewed with Cannon County management. Detailed findings, recommendations, and management’s responses are included in the Single Audit section of this report.

 Findings and Best Practices

 The following are summaries of the audit findings and best practices:

OFFICE OF COUNTY EXECUTIVE

• Cannon County does not require all eligible employees to participate in the Tennessee Consolidated Retirement System.
 
•  The office had deficiencies in budget operations.

• The office had deficiencies in administering the REACH program.

•  The office had deficiencies in purchasing procedures.

• Government-wide financial statements did not include other postemployment benefits as required by generally accepted accounting principles.

• Employees of the Solid Waste Department sold scrap metal for personal gain, resulting in an undetermined cash shortage.

 OFFICES OF COUNTY EXECUTIVE AND ROAD SUPERVISOR

• Material audit adjustments were required in the Highway/Public Works Fund and capital asset records for proper financial statement presentation.

OFFICE OF ROAD SUPERVISOR

• The office had deficiencies in budget operations.

OFFICE OF CIRCUIT AND GENERAL SESSIONS COURTS CLERK

 • The office did not issue prenumbered receipts in compliance with state statute.

OFFICE OF CLERK AND MASTER

• The office had deficiencies in computer system backup procedures.

 OFFICES OF COUNTY CLERK, CIRCUIT AND GENERAL SESSIONS COURTS CLERK, AND REGISTER

• Multiple employees operated from the same cash drawer.

OFFICES OF ROAD SUPERVISOR, SHERIFF, AND THE AMBULANCE SERVICE DEPARTMENT

• Duties were not segregated adequately.

 BEST PRACTICES

The Division of County Audit strongly believes that the items noted below are best practices that should be adopted by the governing body as a means of significantly improving accountability and the quality of services provided to the citizens of Cannon County.

• Cannon County should adopt a central system of accounting, budgeting, and purchasing.
 
• Cannon County should establish an Audit Committee. (EDITOR’S NOTE: Cannon County has established an Audit Committee.)

Cannon County, Tennessee
Schedule of Audit Findings Not Corrected
June 30, 2011

Government Auditing Standards require auditors to report the status of uncorrected findings from prior audits. Presented below are findings from the Annual Financial Report for Cannon County, Tennessee, for the year ended June 30, 2010, which have not been corrected.

OFFICE OF COUNTY EXECUTIVE

• Deficiencies were noted in the administration of the REACH program

•  Expenditures exceeded appropriations

• The office had deficiencies in purchasing procedures

• 10.08 161 Government-wide financial statements did not include other postemployment benefits as required by generally accepted accounting principles

 OFFICES OF ROAD SUPERVISOR, SHERIFF, AND AMBULANCE SERVICE

• Duties were not segregated adequately

CANNON COUNTY, TENNESSEE SCHEDULE OF FINDINGS AND QUESTIONED COSTS

For the Year Ended June 30, 2011

PART I, SUMMARY OF AUDITOR’S RESULTS

1. Our report on the financial statements of Cannon County is unqualified.

2. The audit of the financial statements of Cannon County disclosed significant deficiencies in internal control. Two of these conditions were considered to be material weaknesses.

3. The audit disclosed one instance of noncompliance that was material to the financial statements of Cannon County.

4. The audit disclosed no significant deficiencies in internal control over major programs.

5. An unqualified opinion was issued on compliance for major programs.

6. The audit revealed one finding that was required to be reported under Section 510(a) of OMB Circular A-133.

7. The Child Nutrition Cluster: School Breakfast Program and National School Lunch Program (CFDA Nos. 10.553 and 10.555); Title I, Part A Cluster: Title I Grants to Local Educational Agencies and Title I Grants to Local Education Agencies, Recovery Act (CFDA Nos. 84.010 and 84.389); the Special Education Cluster: Special Education - Grants to States, Special Education - Grants to States, Recovery Act, Special Education – Preschool Grants, and Special Education – Preschool Grants, Recovery Act (CFDA Nos. 84.027, 84.391, 84.173, and 84.392); and the State Fiscal Stabilization Fund Cluster: Education State Grants, Recovery Act and Government Service, Recovery Act (CFDA Nos. 84.394 and 84.397) were determined to be major programs.

8. A $300,000 threshold was used to distinguish between Type A and Type B federal programs.

9. Cannon County did not qualify as a low-risk auditee.

PART II, FINDINGS RELATING TO THE FINANCIAL STATEMENTS

Findings and recommendations, as a result of our examination, are presented below. We reviewed these findings and recommendations with management to provide an opportunity for their response. The written responses of the county executive are paraphrased in this report. Other management officials did not provide responses for inclusion in this report.

OFFICE OF COUNTY EXECUTIVE

FINDING 11.01: CANNON COUNTY DOES NOT REQUIRE ALL ELIGIBLE EMPLOYEES TO PARTICIPATE IN THE TENNESSEE CONSOLIDATED RETIREMENT SYSTEM (Noncompliance Under Government Auditing Standards)

As of June 30, 2011, Cannon County employed approximately 66 full-time employees who were eligible to participate in the Tennessee Consolidated Retirement System (TCRS); however, only 53 of those employees were participating in the TCRS. Title 8, Chapters 34-37 of Tennessee Code Annotated (TCA), establish and govern the TCRS. These statutes require mandatory participation in the TCRS for all employees of participating employers after a probationary period. Cannon County officials advised that employees who deemed participation to be cost prohibitive were allowed to choose not to participate in TCRS. This finding has been reported to the TCRS.

RECOMMENDATION

Cannon County should comply with provisions of Title 8, Chapters 34-37, TCA, regarding employee participation in the TCRS. County officials should contact the TCRS to determine a corrective action plan.

MANAGEMENT’S RESPONSE – COUNTY EXECUTIVE

We concur. The County Executive’s Office has sent a letter to all department heads informing them that all full-time employees will be required to participate in the TCRS.
 
FINDING 11.02: THE OFFICE HAD DEFICIENCIES IN BUDGET OPERATIONS (A. – Internal Control – Significant Deficiency Under Government Auditing Standards; B. and C. – Noncompliance Under Government Auditing Standards)

Our examination revealed the following deficiencies in budget operations. These deficiencies can be attributed to management’s failure to adequately monitor and review budget procedures and to correct the findings noted in the prior-year audit report.

A. The budget and subsequent amendments approved by the County Commission for the Solid Waste/Sanitation Fund resulted in appropriations exceeding estimated available funding by $8,862. Sound principles dictate that appropriations be held within estimated available funding.

B. Expenditures exceeded total appropriations approved by the County Commission in the Solid Waste/Sanitation Fund by $1,012.

C. Expenditures exceeded appropriations approved by the County Commission in the following funds’ major appropriation categories (the legal level of control):

Funds/Major Category … Amount Overspent

General:
Jail … $ 1,498
Other Public Safety … $21,896
Dental Health Program – REACH … $996
Other Public Health and Welfare - REACH … $40
General Debt Service:
Other Debt Service - General Government … $4,687

Section 5-9-401, Tennessee Code Annotated, states that “All funds from whatever source derived, including, but not limited to, taxes, county aid funds, federal funds, and fines, that are to be used in the operation and respective programs of the various departments, commissions, institutions, boards, offices and agencies of county governments shall be appropriated to such use by the county legislative bodies.” Management failed to stay within the spending limits authorized by the County Commission, which resulted in unauthorized expenditures.

RECOMMENDATION

Appropriations that exceed estimated available funding should not be submitted to the County Commission, and the County Commission should not approve such appropriations. Expenditures should be held within appropriations approved by the County Commission.

MANAGEMENT’S RESPONSE – COUNTY EXECUTIVE

We concur. The Solid Waste Sanitation Department operates with a very small fund balance. Every effort will be made to amend estimated expenditures before year end.

FIND 11.03: THE OFFICE HAD DEFICIENCIES IN ADMINISTERING THE REACH PROGRAM
(A. – Internal Control – Significant Deficiency Under Government Auditing Standards and OMB Circular A-133; B. – Internal Control – Significant Deficiency Under Government Auditing Standards; C. – Noncompliance Under Government Auditing Standards)

The REACH program is an after-school care program that operates sites in several of the county’s schools. The program collects donations and childcare fees at the sites. Our examination of the REACH program revealed that county officials failed to exercise proper oversight of the program as evidenced by the following deficiencies, all of which were a result of management’s failure to correct findings noted in the prior-year audit report. It should be noted that our office is concluding certain investigative work related to the REACH program, and other findings and recommendations will be subsequently released in a special report.

A. The REACH program was awarded a reimbursable grant (CFDA No. 16.803) from the state Office of Criminal Justice Programs (OCJP) totaling $170,000 to be paid over a two-year period at $85,000 annually. During the year examined, OCJP monitored this grant and had several findings resulting in questioned costs of $6,531. REACH officials filed a corrective action plan as required by the monitoring report and satisfied the questioned costs by not filing a reimbursement claim for program expenses for the month of April 2011. This disallowed reimbursement claim resulted in Cannon County having to provide local funds of $6,531 to the REACH Program. This monitoring report can be obtained from the State Department of Finance and Administration, Office of Criminal Justice Programs, Suite 1200, 312 Rosa L. Parks Avenue, Nashville, Tennessee.

B. Receipts were issued for after-school care fees; however, these receipts were not reconciled with attendance records from each remote site. The failure to reconcile receipts with attendance records increases the risk of fraud and abuse.

C. REACH officials did not always deposit funds within three days of collection as required by Section 5-8-207, Tennessee Code Annotated. This statute requires county officials to deposit public funds within three days of collection.

RECOMMENDATION

All grant funds should be expended in accordance with appropriate guidelines. Receipts should be reconciled with attendance records from each of the program’s remote sites. Funds should be deposited within three days of collection in accordance with state statute.

MANAGEMENT’S RESPONSE – COUNTY EXECUTIVE

We concur.

A. The Office of Criminal Justice Program grant was reduced after the previous director’s salary was taken out of this grant.

B. As of November 8, 2011, receipts are issued and filed at the REACH office and reconciled with attendance records.

C. Almost every collection was deposited within the three-day requirement. However, due to the location of some of the sites and holidays, it was impossible to deposit some collections within the three-day time frame. The REACH staff has been instructed to make every effort to deposit collections within three days.

FINDING 11.04: THE OFFICE HAD DEFICIENCIES IN PURCHASING PROCEDURES
and B. – Internal Control – Significant Deficiencies Under Government Auditing Standards; C. – Material Noncompliance Under Government Auditing Standards)

Our examination revealed the following deficiencies in purchasing procedures. These deficiencies can be attributed in part to the failure of management to correct audit findings noted in prior-year audit reports.

A. Purchase orders were not issued in some instances. Purchase orders are necessary to control who has purchasing authority for the county and to document purchasing commitments. The failure to issue purchase orders in all required instances increases the risks of unauthorized purchases.

B. In some instances, the office paid invoices without canceling or marking the invoices as paid. This weakness could result in the office paying invoices more than once.

C. Competitive bids were not solicited for the hauling of waste collections to a landfill totaling $137,980 and fuel purchases. Sections 5-14-201 through 5-14-206, Tennessee Code Annotated, require public advertisement and solicitation of competitive bids for purchases exceeding $10,000. The failure to solicit competitive bids could result in the county paying more than the most competitive price.

RECOMMENDATION

The office should issue purchase orders for all applicable purchases to improve internal controls over the purchasing process and to document purchasing commitments. The office should ensure that all invoices are canceled when paid. Competitive bids should be solicited for all purchases exceeding $10,000 as required by statute.

MANAGEMENT’S RESPONSE – COUNTY EXECUTIVE

We concur.

A. Purchase orders are required for purchases of $100 or more. However, in some instances there are emergencies that require expenditures before a purchase order can be obtained. County employees have been notified to call the county executive for approval of such expenditures.

B. It is our policy to stamp every invoice upon payment. Every effort will be made to ensure all invoices are stamped paid.

C. Cannon County is working on a plan to correct this finding.

11.05: GOVERNMENT-WIDE FINANCIAL STATEMENTS DID NOT INCLUDE OTHER POSTEMPLOYMENT BENEFITS AS REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Noncompliance Under Government Auditing Standards)

Cannon County general government provides postemployment healthcare benefits through a commercial carrier that allows pre-65 age retirees to remain in the plan at the active employee rates. Cannon County did not obtain an actuarial valuation to determine the data necessary for the measurement, recognition, and display of other postemployment benefits (OPEB) necessary to prepare government-wide financial statements and note disclosures as required by Governmental Accounting Standards Board (GASB) Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. GASB is the standard-setting body for accounting principles that state and local governments are required to follow. This statement establishes standards for the measurement, recognition, and display of OPEB expenses/expenditures and related liabilities (assets), note disclosures, and, if applicable, required supplementary information in the county’s financial statements. The general government recognized only the current year cost (expense) of these benefits on a pay-as-you go basis. We believe the omission of this data is not material to the government-wide financial statements at June 30, 2011; however, in the future this omission will become material and will lead to a qualification of the auditor’s report.

RECOMMENDATION

Cannon County should present government-wide financial statements and note disclosures in conformity with generally accepted accounting principles. The county should contract for a biennial actuarial valuation of the plan and provide the necessary information for the measurement, recognition, and display of OPEB.

MANAGEMENT’S RESPONSE – COUNTY EXECUTIVE

We concur. The county has stopped allowing employees to stay on the insurance upon retirement. However, our personnel policy has not been changed. We are presenting the change to the County Commission for their approval.

FINDING 11.06: EMPLOYEES OF THE SOLID WASTE DEPARTMENT SOLD SCRAP METAL FOR PERSONAL GAIN, RESULTING IN AN UNDETERMINED CASH SHORTAGE (Noncompliance Under Government Auditing Standards)

Employees of the Solid Waste Department admitted to us that they had removed scrap metal from the county’s convenience center and sold the metal for personal gain. The county executive advised us that since the employees weren’t making much money, he had given them verbal approval to take scrap metal that was “given to them.” Also, the county executive advised that sometime around the summer of 2010, he told employees that they could no longer take the scrap metal. However, based on statements from an employee, inmates who worked at the convenience center were allowed to remove the wiring from items, and at least one employee would sell the copper for the inmates. We could not determine the amount of and the value of the scrap metal sold. This unauthorized removal of scrap metal resulted in a loss of revenue for the county. This finding will be reviewed with the district attorney.

RECOMMENDATION

County officials should seek to recover any funds determined to have been generated from the unauthorized removal of scrap metal. The Solid Waste Department should maintain lists detailing items sold as scrap and reconcile the sale proceeds from the recycler with amounts deposited with the county trustee.

MANAGEMENT’S RESPONSE – COUNTY EXECUTIVE

The county executive does not dispute or attempt to refute the allegation described in the finding. As admitted by the employees of the Solid Waste Department and the county executive, employees were allowed to take items if given to them by residents using the Convenience Center. This practice was stopped after learning that it was not proper and well before the audit was conducted. Employees are not allowed to take anything once an item has entered the Convenience Center premises. As to the inmates collecting cords to be sold, the county executive was not aware of this practice. The inmates, as admitted by the Solid Waste Department employees, would remove electrical cords from appliances and the copper was sold for inmates to purchase tobacco products and snacks. These were used by the inmates while working. The cords would have gone into the landfill and this was allowed by the Solid Waste employees as an incentive to the inmates for a good job performed. Inmates no longer provide labor at the Convenience Center and this practice had stopped before this audit. County management will make every attempt possible to ensure that every item that enters the premises of the Solid Waste Department will go to the landfill or be sold for county revenue.

OFFICES OF COUNTY EXECUTIVE AND ROAD SUPERVISOR

FINDING 11.07: MATERIAL AUDIT ADJUSTMENTS WERE REQUIRED IN THE HIGHWAY/PUBLIC WORKS FUND AND CAPITAL ASSET RECORDS FOR PROPER FINANCIAL STATEMENT PRESENTATION
(Internal Control – Material Weakness Under Government Auditing Standards)

At June 30, 2011, various general ledger account balances in the Highway/Public Works Fund and the capital asset records were not materially correct, and audit adjustments were required for the financial statements to be materially correct at year-end. Generally accepted accounting principles require Cannon County to have adequate internal controls over the maintenance of its accounting records. Therefore, the county’s financial reporting system did not prevent, detect, or correct potential misstatements in the accounting records. Although it is permissible for us, as the external auditors, to assist the county in preparing its financial statements, it is a strong indicator of a material weakness in internal controls if the county has ineffective controls over the maintenance of its accounting records, which are used to prepare the financial statements, including the related notes. This deficiency is the result of management’s failure to determine and record receivables at year end and the failure to examine and post all capital assets acquired during the year. We presented audit adjustments to management that they approved and posted to properly present the financial statements in this report.

RECOMMENDATION

Cannon County should have appropriate processes in place to ensure that its general ledgers are materially correct.

OFFICE OF ROAD SUPERVISOR

FINDING 11.08: THE OFFICE HAD DEFICIENCIES IN BUDGET OPERATIONS
Internal Control – Material Weakness Under Government Auditing Standards; B. – Noncompliance Under Government Auditing Standards)

Our examination revealed the following deficiencies in budget operations. These deficiencies can be attributed to the failure of management to adequately monitor and review budget procedures.

A. The Highway/Public Works Fund’s actual beginning fund balance at July 1, 2010, exceeded the estimated beginning fund balance presented to the County Commission by $1,011,608. Sound business practices dictate that realistic estimates of beginning fund balances should be presented to the County Commission during the budget process. This deficiency is due to management’s failure to properly estimate the actual ending fund balance for June 30, 2010, and resulted in materially understating the estimated beginning fund balance.

B. Expenditures exceeded appropriations approved by the County Commission in the Operation and Maintenance of Equipment major appropriation category (the legal level of control) of the Highway/Public Works Fund by $2,907. Section 5-9-401, Tennessee Code Annotated, states that “All funds from whatever source derived, including, but not limited to, taxes, county aid funds, federal funds, and fines, that are to be used in the operation and respective programs of the various departments, commissions, institutions, boards, offices and agencies of county governments shall be appropriated to such use by the county legislative bodies.”

RECOMMENDATION

Estimates of the beginning fund balance should be made on a more realistic basis to provide county officials with accurate information to base funding decisions. The estimated beginning fund balance should be amended during the year when it becomes apparent that the original estimate varies from the actual by a material amount. Expenditures should be held within appropriations approved by the County Commission.

OFFICE OF CIRCUIT AND GENERAL SESSIONS COURTS CLERK

FINDING 11.09: THE OFFICE DID NOT ISSUE PRENUMBERED RECEIPTS IN COMPLIANCE WITH STATE STATUTE (Noncompliance Under Government Auditing Standards)

In-lieu-of using prenumbered receipt stock, the office generated receipts on plain paper. Because the court software provided users the ability to change the computer-generated receipt number, a gap in receipt numbers could be created. This is a violation of Section 9-2-104, Tennessee Code Annotated, which provides for receipts to be prenumbered consecutively. In-lieu-of prenumbered receipts, computer-generated receipts may be printed on plain paper only if the receipt number generated by the software cannot be manipulated. Sound business practices dictate that proper application controls be implemented. Since the software did not have the proper control, inappropriate system activity could occur if prenumbered receipt stock was not used. Controls restricting users from manipulating the receipt number were implemented in June 2011.

RECOMMENDATION

Management should ensure that receipt numbers cannot be manipulated.

OFFICE OF CLERK AND MASTER

FINDING 11.10: THE OFFICE HAD DEFICIENCIES IN COMPUTER SYSTEM BACKUP PROCEDURES (Noncompliance Under Government Auditing Standards)

System backups were not stored off-site. Section 10-7-121, Tennessee Code Annotated, provides that records required to be retained by any government official may be maintained on a computer or removable storage media as long as certain standards are met. One of these standards requires that all data generated and stored within the computer system be copied to storage media daily, and media more than one week old be stored at an off-site location. This deficiency is the result of management’s failure to implement adequate disaster recovery planning procedures. In the event of a disaster, all backup data could be destroyed, resulting in costly delays in generating and recording information accounted for through the automated process. Proper system backup procedures were implemented in May 2011.

RECOMMENDATION

Management should ensure backups are rotated off-site on a routine basis.

OFFICES OF COUNTY CLERK, CIRCUIT AND GENERAL SESSIONS COURTS CLERK, AND REGISTER

FINDING 11.11: MULTIPLE EMPLOYEES OPERATED FROM THE SAME CASH DRAWER (Internal Control – Significant Deficiency Under Government Auditing Standards)

Multiple employees operated from the same cash drawer in the Offices of County Clerk, Circuit and General Sessions Courts Clerk, and Register. Good internal controls dictate that each employee have their own cash drawer, start the day with a standard fixed amount of cash, and remove all but the beginning amount at the end of the day. This amount should be verified to the employee’s receipts at the end of each day. Failure to adhere to this control regimen greatly increases the risk that a cash shortage may not be detected in a timely manner. Furthermore, in the event of a cash shortage, the official would not be able to determine who was responsible for the shortage because multiple employees were working from one cash drawer. This deficiency in internal controls was the result of a lack of management oversight over risks related to safeguarding assets.

RECOMMENDATION

Officials should assign each employee their own cash drawer.

OFFICES OF ROAD SUPERVISOR, SHERIFF, AND THE AMBULANCE SERVICE DEPARTMENT

FINDING 11.12: DUTIES WERE NOT SEGREGATED ADEQUATELY
(Internal Control – Significant Deficiency Under Government Auditing Standards)

Duties were not segregated adequately among the officials and employees in the Offices of Road Supervisor, Sheriff, and the Ambulance Service Department. Officials and employees responsible for maintaining accounting records were also involved in receipting, depositing, and/or disbursing funds. Accounting standards provide that internal controls be designed to give reasonable assurance of the reliability of financial reporting and of the effectiveness and efficiency of operations. This lack of segregation of duties is the result of management’s decisions based on the availability of financial resources and is a significant deficiency in internal controls that increases the risk of unauthorized transactions. Also, this deficiency is the result of management’s failure to correct the finding noted in the prior-year audit report.

RECOMMENDATION

Officials should segregate duties to the extent possible using available resources.

MANAGEMENT’S RESPONSE – COUNTY EXECUTIVE

We concur. The County Executive’s Office has given the audit recommendation to the Ambulance Service and asked that they institute a corrective action plan if possible.

BEST PRACTICES

The Division of County Audit strongly believes that the items noted below are best practices that should be adopted by the governing body as a means of significantly improving accountability and the quality of services provided to the citizens of Cannon County.

ITEM 1. CANNON COUNTY SHOULD ADOPT A CENTRAL SYSTEM OF ACCOUNTING, BUDGETING, AND PURCHASING

Cannon County does not have a central system of accounting, budgeting, and purchasing. Sound business practices dictate that establishing a central system would significantly improve internal controls over the accounting, budgeting, and purchasing processes. The absence of a central system of accounting, budgeting, and purchasing has been a management decision by the County Commission resulting in decentralization and some duplication of effort. We recommend the adoption of the County Financial Management System of 1981 or a private act, which would provide for a central system of accounting, budgeting, and purchasing covering all county departments.

ITEM 2. CANNON COUNTY SHOULD ESTABLISH AN AUDIT COMMITTEE

Cannon County does not have an Audit Committee. An Audit Committee can assist the County Commission by providing independent and objective reviews of the financial reporting process, internal controls, the audit function, and would be responsible for monitoring management’s plans to address various risks. County officials should establish an Audit Committee as a best practice.

(EDITOR’S NOTE: The Cannon County Commission established an Audit Committee last year.)

DOWNLOAD THE 2011 CANNON COUNTY AUDIT
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