HomeMy WebLinkAbout2016-01 Performance Audit Report: Cash Handling at County of Hawai'i's Department of Parks and RecreationCash Handling at
County of HawaiTs
Department of Parks and
Recreation
Report No. 2016-01
June 30, 2016
Office of the Legislative Auditor
County of Hawaii
Dru Mamo Kanuha
Chair & Presiding Officer
Council District 7
June 30, 2016
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Bonnie S. Nims, CGAP
Legislative Auditor
Business Address
1266 Kamehameha Avenue
Suite A-8
Hilo, Hawai `i 96720
OFFICE OF THE LEGISLATIVE AUDITOR
25 Aupuni Street Hilo, Hawaii 96720 * (808) 961-8386 * Fax (808) 961-8905
website: hup://HawaVicounty.Qov e-mail: publiclao(aco.Hawai'i.hi.us
The Honorable Dru Kanuha, Council Chairperson and
Members of the Hawaii County Council
Hawaii County Council
25 Aupuni Street
Hilo, Hawaii 96720
Dear Chair Kanuha and Council Members,
In accordance with Hawaii County Charter Section 3-18(d)(2), attached is the Office of the
Legislative Auditor's report of our audit of cash handling of facility use permits at the
Department of Parks and Recreation (P&R) Administration. The purpose of the audit was to
determine whether P&R implemented internal controls over facility use permits to prevent,
detect, and deter fraudulent transactions. We evaluated if these internal controls followed best
practices. In addition, we determined if P&R's facility -use permits cash receipts were deposited
timely and intact.
The County's P&R facility use permits cash handling process lacks significant internal controls
including adequate segregation of incompatible duties, independent review and monitoring,
complete and accurate written policies and procedures, and adequate safeguarding of cash
receipts. Due to these internal control weaknesses, as well as individual errors in the processing
of transactions, our audit could not determine if all cash received was deposited.
If you need any further information, please let me know. We would like to thank the Department
of Parks and Recreation staff for their assistance and cooperation during this audit. We greatly
appreciate all of their valuable time and efforts spent on providing us information.
Respectfully,
Bonnie S. Nims, CGAP
Legislative Auditor
cc: William P. Kenoi, Mayor
Stewart Maeda, County Clerk
Randy Kurohara, Managing Director
Clayton Honma, Director of Parks and Recreation
Deanna Sako, Finance Director
In Brief
Background
7
The County of Hawaii Department of Parks
and Recreation's (P&R) maintains facilities
throughout the island for events such as
parties, luaus, reunions, graduations,
concerts, etc. The public can rent these
facilities for a security deposit and a user
fee. Three offices maintain the reservation
books including the Kona Permit Office, Hilo
Main Office Administration, and the
Recreation Division.
In fiscal year 2014-2015, facility use
permit revenue totaled $176,000 for the
Hilo Administration, Kona Permit Office,
and the Recreation Division.
We reviewed 138 facility use permits from
July through September 2015 at the Hilo
and Kona locations. The Kona Imin facility
was closed during this time for accessibility
improvements; we therefore expanded our
initial audit testing of the Kona facility use
permits to include an additional nine
transactions totaling $3,675 from June
2015.
Why we did this audit
This performance audit was undertaken to
evaluate if the program's internal controls
were adequate to reduce the risk of fraud
and mishandling of facility use permit
revenue and to identify potential areas for
improvement.
The audit also looked at facility use permit
transactions to see if receipts were
deposited timely and intact.
We initiated the audit, as we believe cash
receipts are an inherently high-risk
process.
What we found
The County of Hawai`i's Department of Parks and
Recreation's (P&R) facility use permits cash handling
process lacks significant internal controls including
adequate segregation of incompatible duties,
independent review and monitoring, complete and
accurate written policies and procedures, and adequate
safeguarding of cash receipts.
Due to these internal control weaknesses, as well as
individual errors in the processing of transactions, our
audit could not determine if all cash received was
deposited.
Management has generally agreed with the comments
and recommendations in this report. Their complete
response to this audit can be found on page 20:
Management Comments.
What we recommended
The recommendations identify improvements for
management to increase internal controls for facility use
permits cash handling. Our audit report offers
recommendations designed to address these issues
through:
• Segregate incompatible duties among those who
perform accounting procedures or control activities
and those who handle cash.
• Implementing adequate ongoing monitoring of the
design and operating effectiveness of the internal
control system over cash receipting activities to
ensure that revenue is complete.
• Updating, strengthening, and enforcing cash
handling policies and procedures according to best
practices; and
• Providing initial and on-going cash handling and
internal controls training for all employees who
handle revenue.
These recommendations should be considered for all
cash receipting locations.
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Table of Contents
Introduction...............................................................................................................................1
Background...............................................................................................................................2
AuditObjectives........................................................................................................................4
AuditScope and Methodology.................................................................................................4
Commendations & Noteworthy Accomplishments.................................................................5
AuditResults.............................................................................................................................6
Internal controls over facility use cash receipts are inadequate to prevent, detect,
or deter fraudulent transactions...................................................................................6
Segregation of duties is inadequate.....................................................................7
Independent monitoring is insufficient..................................................................8
Written policies and procedures are incomplete, insufficiently detailed, and not
consistently followed............................................................................................9
Inadequate safeguarding of cash receipts at the Hilo Main Office......................13
We were unable to determine if revenue is complete...............................................14
Numerous miscellaneous errors were identified.................................................14
Deposits were not always made or posted timely...............................................16
Pre -numbered facility use permits were not used...............................................16
Cash over/short was not recorded.....................................................................17
Recommendations..................................................................................................................18
Management's Comments......................................................................................................20
AppendixA — Audit Criteria....................................................................................................22
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Introduction
The Office of the Legislative Auditor conducted this performance audit of County of Hawai`i's
Department of Parks and Recreation's (P&R) cash handling process pursuant to Section 3-18 of
the Hawaii County Charter, which outlines the Office of the Legislative Auditor's primary duties.
Performance audits typically examine the effectiveness, economy, or efficiency of a government
program. They can include analyzing the services of an entire department or activity, identifying
possible cost savings, identifying the outcomes achieved by a program, or comparing actual
department practices against the practices called for in law or policy.
Our objective in performance auditing is to improve public services provided by county
government. We do this by recommending specific actions that will address the issues we raise
and by providing valuable information to the public, the administration, program leadership, the
Hawai'i County Council, and the Mayor.
A performance audit of the P&R's cash handling process was included in the fiscal year 2015-
2016 annual audit plan based on the results of our countywide risk assessment.
There are inherent risks associated with the implementation of the cash handling processes. If
no internal controls exist, or if they exist but are not enforced, the risks related to the process
increases, thereby increasing the risk exposure to the County. On a national level, employee
misappropriation of cash is the most common fraud. According to the Association of Certified
Fraud Examiners' (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse,
organizations lose five percent of revenues to fraud each year.' "The most common employee
occupational frauds of misappropriation of cash include: check tampering, revenue skimming,
fraudulent disbursements by fake invoicing, payroll schemes, and billing scams."' The Office of
the Legislative Auditor determined that a thorough examination of facility use permits cash
handling policies, procedures, and processes was warranted.
1 The Cost of FRAUD (Association of Certified Fraud Examiners, Inc., 2014)
https://www.acfe.com/rttn/images/cost-of-fraud-infographic.pdf
Z Guarding Against Internal Frauds Committed by Employees (BizFilings, Business Owner's Toolkit, Deterring Fraud)
http://www.bizfilings.com/toolkit/sbg/run-a-business/fraud/guarding-against-internal-frauds-by-employees.aspx
Cash Handling for Facility Use Permits: Introduction I 1
Background
What is a facility use permit?
The County maintains facilities throughout the island for events such as parties, luaus, reunions,
graduations, concerts, etc. The public can rent these facilities for a security deposit and a user
fee. Permit fees may be waived for some events such as for other government agencies,
student sports activities, and events open to the public.
Reservations can either be made over the counter or mailed in advance along with payment if
they are not able to come into the office. However, mailed payments will not guarantee a
reservation until the payment is received and availability is confirmed. If structures, tents, or
canopies are used then a temporary structure permit is required. No internet reservation system
is currently available for facility use permits.
Methods of payment include cash, money order or cashier's check, or personal checks.
Personal checks are only accepted if payment is made at least 14 days prior to the reservation
date and payable to the County Director of Finance. Credit cards are now accepted for facility
use permits at both the Hilo office (May 2016) and Kona office (June 2016).
How much is a facility use permit?
Permit cost varies by location. Security deposits range from $200 to $1,000. Facility's rental
fees are:
Location
Fee Per Day
Bay front
$50-$400
Park
$50-$400
Gymnasium
$50-$1,000
Bandstand
$100-$400
Community Centers
$100
- $1,000
Kailua Park Runways South $100 - $500
Kailua Park Runways North $200 - $1,000
Where are facility use permits collected?
There are three offices that maintain reservation books and collect fees for facility use permits
including the Hilo Main Office Administration, the Kona Permit Office, and the Recreation
Division. The Recreation Division maintains the reservations for all the gyms and parks located
throughout the island. The Hilo Main Office and Kona Permit Office maintain reservations as
follows:
Cash Handling for Facility Use Permits : Audit Background 12
Hilo Main Office Administration
• Bayfront Parking Lot 1 & 2
• Bayfront Canoe Area
• Coconut Island
• Honolii
• Issac Hale
Kona Permit Office
• Kona Imin Center
• Old Kona Airport Runway North
and South
• Kalakaua Park
• Liliuokalani Gardens/Isles
• Mooheau Park Bandstand
• Mooheau Concession Area
How much money did the Department of Parks and Recreation receive last fiscal
year for facility use permits?
In fiscal year 2014-2015, facility use permit revenue totaled approximately $176,000. Total
revenue for the Department of Parks and Recreation was approximately $1,325,000
(excluding golf green fees).
Cash Handling for Facility Use Permits : Audit Background 13
Audit Objectives
The Office of the Legislative Auditor's fiscal year 2015-2016 annual audit plan included a
performance audit of the County of Hawai`i's Department of Parks and Recreation (P&R) cash
handling process. The objectives of the audit were to evaluate if internal controls over facilities
use permits at the Hilo Main Office Administration and the Kona Permit Office are preventing,
detecting and deterring fraudulent transactions, whether these internal controls are following
best practices, and if receipts are deposited timely and intact.
Audit Scope and Methodology
To accomplish our objectives, we:
• Developed an understanding of the policies, procedures, processes, and document
flows
• Compared Hilo and Kona office's facility use permit cash handling procedures, practices,
and performance measures with recommended industry best practices;
• Assessed compliance with P&R's facility use permit policies and procedures, County of
Hawai'i Code, County of Hawai'i Charter and State of Hawai'i Revised Statues;
• Analyzed facility use permit data by comparing data extracted from the County of
Hawai`i's Eden FRESH accounting system with Hilo and Kona's facility use permit
supporting documents;
• Corroborated information through interviews with appropriate personnel, reviewing
documentation and performing test of documentation and controls; and
• Reviewed additional documentation (i.e., user fee bookings, daily deposit records,
courier service tickets, treasury receipts, etc.) as needed.
During the course of our audit, we reviewed current internal controls procedures as well as
facility use permits for the Hilo and Kona offices from July 2015 through September 2015; the
Recreation Office was not included in our audit scope. The Kona Imin facility was closed due to
accessibility improvements from August 3 through November 30, 2015; we therefore expanded
testing at the Kona office to include June 2015.
We conducted this audit in accordance with Generally Accepted Government Auditing
Standards (GAGAS), except for the standard requiring an external peer review be obtained
every three years. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives. Our conclusions on the
effectiveness of these controls are detailed within this report.
Cash Handling for Facility Use Permits : Audit Objectives, Scope & Methodology 14
We thank the Department of Parks and Recreation staff for their assistance and cooperation
during this audit. Management generally agreed with the comments and recommendations in
this report. Their complete response to this audit can be found on page 20: Management
Comments.
Commendations & Noteworthy Accomplishments
We are pleased to report that the Department of Parks and Recreation (P&R) has taken a
proactive role in strengthening certain controls we identified as weaknesses during the course of
the audit. Additionally, we appreciate the cooperation exhibited by P&R and its willingness to
implement many of our recommendations. For instance, P&R has asserted they have already:
• established procedures to include a more proactive supervisory review process;
• improved timeliness of check endorsement and revenue reconciliations;
• conducted surprise cash counts; and
• developed and implemented a daily log database to help improve timeliness, accuracy
and oversight of cash handling.
We will follow up at the appropriate time to determine whether and to what extent all
recommendations have been implemented.
Cash Handling for Facility Use Permits : Audit Objectives, Scope & Methodology 15
Audit Results
Internal controls over facility use cash receipts are inadequate to
prevent, detect, or deter fraudulent transactions.
Internal controls are broadly defined as a process effected by management. They are designed
to provide reasonable assurance on the effectiveness and efficiency of operations, reliability of
financial reporting, and compliance with applicable laws and regulations. Internal controls can
help achieve performance targets and prevent loss of resources. An organization's internal
control structure over cash handling operations should include the following elements:
• Segregation of Incompatible Duties. Duties should be segregated amongst employees
so that errors and irregularities made by one employee are difficult to conceal.
• Independent Review and Monitoring. Management should document their review and
approval of critical tasks performed by employees. They should not review and approve
their own work.
• Written Policies and Procedures. Policies & procedures should be approved by
management, cover all aspects of operations, be sufficiently detailed, and be distributed
to staff. In addition, ongoing monitoring is necessary to ensure policies and procedures,
and internal control, remain effective and efficient as operations change.
• Physical Safeguarding of Assets. Assets should be physically protected from loss and
unauthorized use.
The Department of Finance's Accounting Manual requires each County department to establish
internal controls to ensure cash is safeguarded, accounted for, and properly recorded. Our
audit evaluated these internal controls
of Department of Parks and
Recreation's (P&R) facilities cash
receipts. We found that these internal
controls are generally inadequate and
not operating according to best practice
to prevent, detect, or deter fraudulent
transactions. (Figure 1) As a result,
errors and irregularities may go
undetected by employees performing
their normal assigned duties.
Summary of Internal Controls by Location
Best Practice
Kona
Hilo
Segregation of Duties
No
No
Independent Monitoring
No
No
Written Policies and Procedures
No
No
Safeguarding Assets:
Physical security of cash
receipts
Yes
Timely deposits/reporting
No
Figure 1
Cash Handling for Facility Use Permits : Audit Results 16
Segregation of duties is inadequate
Segregation of duties is a key internal control and its primary objective is to minimize the risk or
occurrence of errors or fraud by ensuring that no one employee has the ability to both commit
and/or conceal errors or fraud in the normal course of their duties. Generally, the primary
incompatible duties that should be segregated are:
• Authorization or approval
• Custody of assets
• Recording transactions
• Reconciliation/Control Activity
To achieve the highest level of internal control over the cash handling process, a different
person should be involved in billing/recording, collecting, authorization or approval, and
reconciling functions. Some examples of incompatible duties are:
• An employee who opens the mail and endorses checks should not handle cash
receipts.
• An employee who prepares a document
should not approve that same document.
• An employee who handles cash receipts
should not maintain the change fund and
receive deposit slips or corrections from the
bank (returned checks).
• An employee who prepares bank
deposits/treasury receipts should not receive deposit slips or corrections from the
bank/treasury, verify cash receipts, maintain the change fund, and perform the audit
function.
Incompatible duties should
be segregated so no one
employee has complete
control over the cash
handling process.
When duties cannot be sufficiently segregated due to the small size of a department or division,
it is important that mitigating controls, such as a detailed supervisory review and monitoring of
the activities be put in place to reduce risks.
We examined the cash receipt handling processes at both the Hilo Main Office (Hilo) and the
Kona Permit Office (Kona) and found that proper segregation of duties for cash handling and
processing was not in place. Currently, the Clerk is responsible for the entire cash handling
process from start to finish, with little or no review by management. Specifically, the Clerk
accepts payments, creates and issues permits (receipts), enters transactions into the daily
deposit record, prepares deposit slips, and makes deposits for the facility use permits. In
addition, the Clerk reconciles the deposit to the treasury receipt. Management has not
established or performed any compensating controls to help mitigate this risk.
Cash Handling for Facility Use Permits: Audit Results 17
This situation has resulted from supervisors not receiving training to identify incompatible duties
or to implement compensating controls. As a result, inadequate segregation of duties could
make fraud detection difficult and management may not timely detect and correct errors and
irregularities during the normal course of business.
Independent monitoring is insufficient
When processing a facility use permit, the Clerk performs all the cash receipting functions from
start to finish and has access to the cash receipts. (See above for more detail on segregation of
duties.) When duties cannot be segregated, compensating controls should be considered.
Compensating controls can be preventative, detective, or monitoring activities. An independent,
supervisory -level employee who does not have custody, record keeping, authorization, or
reconciliation responsibilities for the process should perform these duties.
Because of insufficient training, there were many problems that went undetected and therefore,
work was not reviewed for completeness and accuracy. Specifically, we observed the following:
Management at the Department
of Parks and Recreation should
perform additional monitoring of
cash handling to ensure all
revenue is complete and timely.
• Cash receipts are not reviewed or
monitored by an independent person. Since
duties are not adequately segregated, this
review is imperative to ensure all revenue is
collected and deposited in a timely manner.
• There is no review or approval of
voided or waived permit transactions. The
Clerks review their own work and revise any
errors before printing out the permits. No justification or independent approval was
provided for voids or waived fees.
• Surprise cash counts are not performed at the Hilo office. The Clerk was the only person
performing the initial and end of day cash count to reconcile to the $100 authorized
balance. At Kona, non -surprise cash counts were performed before and after the clerk
goes on vacation and some unannounced counts are performed.
• There is no independent review of the general ledger revenue reconciliations performed
by the accountant at Hilo. Currently, the accountant is the only employee that reconciles
and reviews revenue posted on the treasury receipts to the accounting system. As a
result, errors may not be detected timely. The supervisor was unaware that the
accountant was reconciling the current month's entries one to two months after closing.
If adjustments were needed; they would not be posted in the current period, if at all.
• The accountant at Hilo does not perform a complete reconciliation of the revenue
general ledger. Only Hilo's and Kona's revenue are reconciled. Entries posted to the
account by the Recreation Division are not included in the reconciliation. As a result, the
Recreation Division's accounts were included in the facility use permit revenue account.
Cash Handling for Facility Use Permits: Audit Results 18
At the time of our audit, the Hilo office was taking corrective measures with the
Department of Finance to create a separate general ledger account to move Hilo's
facility use permit revenue to a separate account.
• There is no review for consecutiveness or completeness of permit numbers. The Clerks
at both Hilo and Kona use a computer template to complete the permit and assign a
permit number. Controlling and reviewing pre -numbered and carbon copied receipts
helps deter and detect potential theft of cash receipts.
Monitoring is an integral component of internal controls; unmonitored controls tend to
deteriorate over time. When monitoring is designed and implemented appropriately,
organizations are more likely to identify and correct problems on a timely basis. Ongoing
monitoring can occur in the course of daily operations including regular management and
supervisory activities including comparisons, reconciliations, and other routine actions.
There should always be another level of review and approval performed by a knowledgeable
person independent of the process. A thorough review of the processes will help with accuracy,
completeness, and timeliness. The reviewer should be someone who is knowledgeable in daily
operations, has the authority to make decisions, someone who does not perform the process
and document evidence of review by a signature or initials and date.
Written policies and procedures are incomplete, insufficiently detailed, and not
consistently followed
The Government Finance Officers Association (GFOA) establishes best practices including
written policies and procedures that are reviewed on an annual basis. The development of
written departmental policies and procedures are an effective way to maintain a strong system
of internal controls. Policies and procedures should clearly delineate the control activities
performed throughout various business processes. This will aid in the orientation of new
employees, help ensure business continuity in the event of turnover, and help ensure
compliance with applicable laws and regulations.
At the County of Hawaii, each department and agency is
responsible for creating and maintaining their own
policies and procedures by using the Department of
Finance's Accounting Manual as a basis for establishing
an adequate system of internal controls. The Department
of Parks and Recreation created cash receipting policies
and procedures in 2002 and then updated them on
August 13, 2015. However, P&R management did not
Department policies and
procedures should be
clarified so employees are
not subject to risk.
have on-going and continuous monitoring of their policies and procedures in order to remain
effective and efficient as operations change. As a result, the current cash receipting policies
and procedures do not provide adequate guidance to P&R staff.
Cash Handling for Facility Use Permits: Audit Results 19
We compared P&R's cash receipting policies and procedures, as well as current practices, to
expected control procedures and found several deficiencies. (Figure 2)
Comparison of industry best practices to the Department of Park and Recreation's
policies and procedures
Were Policies &
Actual Practice
Expected Practice
Procedures Complete?
Performed?
Hilo
Kona
Hilo
Kona
Independent review and monitoring
Segregation of duties
Timely deposit of receipts (within 24
Insufficient
hours of receipt)
Timely reconciliation to applicable
ledgers
Physical security procedures
Insufficient
Insufficient
Permit numbers being consecutive
Insufficient
Insufficient
and pre -numbered (including voids)
Account for cash as it is received
Insufficient
Insufficient
(Timely recognition of revenue)
Checks endorsed immediately
Insufficient
Reconciliation of total checks and
Insufficient
Insufficient
cash
Fraud reporting
Figure 2
Policies were incomplete
We compared the P&R written policies and procedures to industry best practices and identified
several deficiencies:
Independent review and monitoring. Existing procedures do not require any
independent review during the cash handling process. Policies and procedures
should require a thorough review performed by an independent person to ensure
accuracy, completeness, and timeliness.
Segregation of duties. Existing procedures do not address separating any of the
cash collection, depositing, or cash reconciliation functions. Policies and procedures
should require that a different person be involved in recording, collecting,
authorization, and reconciling functions.
Cash Handling for Facility Use Permits: Audit Results 110
• Timely deposit of receipts. In Hilo, there are no written procedures that address
timely deposits, or even how to perform a deposit. Two of the eight deposits tested
(25%), were deposited two days after the revenue was receipted. As discussed
below, Kona's procedures are insufficient and not followed. Policies and procedures
should require that all funds be deposited within 24 hours of receipt.
• Timely reconciliation to applicable ledgers. Existing procedures do not address
timely reconciliation of revenue to the general ledger. Policies and procedures should
require that reconciliations performed timely to ensure proper adjustments are made
in the correct period.
• Checks endorsed immediately. Kona's procedures require restrictive endorsement of
checks at the end of day. Hilo's policies do not address restrictive endorsement of
checks. Policies and procedures should require check endorsement immediately
upon receipt.
• Fraud reporting procedures. Existing procedures do not address fraud reporting.
Policies and procedures should require a fraud reporting process to aid in the
detection and prevention of fraud. By providing fraud reporting procedures, everyone
within the organization will be aware of the fraud risk policy including types of fraud
and the consequences associated with them. Those who are planning to commit
fraud will know that management is watching and may be deterred by this. Honest
employees who are not tempted to commit fraud will also be made aware of possible
signs of fraud or theft and how to report any concerns.
Policies were insufficient and not consistently followed
We also identified policies and procedures that were not sufficiently detailed and not followed:
• Timely deposit of receipts. In Kona, end of day procedures state that the deposit is
taken to the bank during banking hours or a night deposit. Procedures should be
updated to the current practice of using a courier and require that all funds be
deposited within 24 hours of receipt.
Physical security procedures. Kona's end of day procedures requires locking up
cash. The cash is locked in a desk drawer and the permits are locked in a separate
file cabinet. The procedures should be clarified to ensure cash is secured at all
times, not only at the end of the day.
Hilo's procedures state: "(c)lip payment to our permit copy, place in purple folder,
and lock in drawer." The Clerk puts both the payments and the permits in the same
unlocked drawer. The procedures should require that the payments and permits be
locked and adequately secured in separate drawers.
Permit numbers being consecutive and pre -numbered, including voids. Current
policy at both Hilo and Kona requires the completion of a facility use permit and
require permit numbers to be consecutive including voids. However, neither policy
Cash Handling for Facility Use Permits: Audit Results 111
indicates that the permit must be the pre -numbered carbon copy permit distributed
by the Department of Finance.
Currently, the Clerks at Hilo and Kona create a manual permit using a computer
template, assigns the permit a number, and then prints out copies for all parties. As a
result, in Hilo, there was an error of 90 "missing" waived inter -departmental permits.
These permits were listed on the deposit record but no documentation to verify that
the permits existed, were waived, or were voids
To ensure that all funds received were receipted and deposited, procedures should
require using pre -numbered receipts and an independent review of consecutiveness.
Account for cash as it is received. Both Hilo and Kona's current policy require logging
permit information and totaling the amount collected in the daily deposit and at the
end of day. In Hilo, there were two instances where permits were completed and
checks were collected, but they were not recorded or deposited until the next day.
Procedures should require accounting for cash upon receipt to eliminate the risk of
errors or theft.
Reconciliation of total checks and cash. Both Hilo and Kona's current policy require
reconciliation of cash and check totals. In Hilo, check and cash breakdown is not
verified, only the total from the deposit is reconciled with the treasury receipt total.
In Kona, cash and check composition is not verified and copies of checks are not
sent to the Hilo office with the permit documents to verify that the cash and check
composition is accurate. Procedures should clarify the process of reconciling the
cash and check composition on the log to the actual deposit/bank processed deposit
slip.
There were 10 instances at Kona where check copies were not provided. We were
unable to determine when the check was written, the cash and check composition,
and if the check was written to the County Director of Finance. Verifying cash and
check composition is important to complete the deposit reconciliation and detect
fraud.
By identifying gaps in policies and procedures, management can identify where effective
controls needed to be placed, where to provide sufficient detail for new and existing procedures
and to clarify unclear procedures so that they were easier to follow.
Cash Handling for Facility Use Permits: Audit Results 112
Inadequate safeguarding of cash receipts at the Hilo Main Office
As mentioned above, the Government Finance Officers Association (GFOA) establishes best
practices for general revenue controls. These best
practices include physical security procedures, which is
especially important for funds not deposited the day of All cash should be adequately
receipt. secured and only one
employee should be
Hilo's cash is kept in an unlocked drawer behind the front accountable to an individual
counter where customers are served during the day. This cash drawer.
drawer is unmonitored by either an appointed �1
responsible employee or cameras. At night, the Clerk
takes the money to the Department of Motor Vehicles where it is locked in a safe. The Clerk
then picks up the money the next business morning.
In addition, more than one employee uses the cash drawer (three employees and two
supervisors). As a result, it would be impossible to hold any one person accountable if cash
were missing.
This situation has resulted in part from management not sufficiently updating their procedures
according to best practices. The Department of Parks and Recreation's policies and procedures
were initially created in 2002. However, they submitted a partially updated policy and
procedures on August 13, 2015.
Physically securing cash and assigning accountability to a responsible employee reduces the
risk of loss or theft. All employees accepting payments should have a secured, lockable cash
drawer and only the employee collecting the payments should have access. If there is more
than one person receiving payments at the same time, each person should have their own cash
drawer. In addition, it is good practice to maintain cash records in a separate location from the
cash itself. If fraud or theft does occur, the records cannot easily be taken, destroyed, or
modified. Separation of cash records and cash is a simple cash security practice that can
discourage theft, or at least allow the timely discovery of theft.
Cash Handling for Facility Use Permits: Audit Results 113
We were unable to determine if revenue is complete.
In fiscal year 2014 - 2015, Hilo Main Office, Kona Permit Office and the Recreation Division,
issued 1,297 permits and recorded approximately $176,000 in
revenue from facility use permits. We initially reviewed 138
transactions totaling $12,410 from July through September
2015 for the Hilo Main Office and the Kona Permit Office. The
Kona Imin facility was closed from August 3 — November 30,
2015 for accessibility improvements; we therefore expanded
our initial audit testing of the Kona facility use permits to include
an additional four transactions totaling $1,618 from June 2015;
as well as an additional five transactions totaling $2,057 from
Transactions should be
adequately reviewed and
monitored, so that
individual errors will
decrease.
the June 2015 reservation calendar. Of these transactions, most reconciled to supporting
documents; however, we were unable to determine if revenue was complete since:
• Numerous miscellaneous errors were identified,
• Deposits were not always made or posted timely,
• Pre -numbered facility use permits were not used, and
• Cash over/short was not recorded
Numerous miscellaneous errors were identified
Since the Clerk was the only person processing cash receipts including assigning a permit
number, charging a fee, recording the permit information in the daily deposit record and
depositing the funds, many errors were not detected. (Figure 3)
Cash Handling for Facility Use Permits: Audit Results 114
Summary of errors found at both Hilo and Kona
Error Identified:
# of Errors
Identified
Hilo
Kona
The waived permit use date was not posted on the County website
and/or not recorded on the reservation log.
2
2
The reservation log user fee does not match the actual user fee
charged.
1
2
The treasury receipt was incorrectly coded to pavilion revenue instead of
facility use revenue.
1
0
A check was written two weeks prior to being processed as a permit and
deposited or we were unable to determine when the check was written.
1
9
The payment type was not listed on the general fund daily deposit record
to reconcile to the user permit.
1
10
The check was written to the Dept. of Parks & Rec and County of
Hawai'i instead of the County Director of Finance.
3
9
The user permit sequence (date) did not correspond with the treasury
(date) receipt sequence.
0
2
Figure 3
Individually errors or irregularities may not be significant. However, when combined, they
demonstrate that policies and procedures are not adequately followed, or understood, as well as
a lack of monitoring by management. Undetected errors may result in:
• financial misstatements,
• inaccurate or incomplete information,
• uninformed operational decisions, and
• the inability to detect irregularities including theft or misappropriation.
For instance, while reviewing transactions at Kona, we identified blocks of business days where
daily deposits were not logged (four days in June, three days in July, three days in August, and
four days in September 2015). Facilities in Kona are typically fully rented, especially during the
summer months. In our opinion, based on the routine frequencies of daily deposits during these
four months of peak usage, it is unusual that there were multiple days where no deposit or
revenue was recorded. Due to the lack of monitoring and adherence to policies and procedures,
we cannot determine if these breaks in revenue are correct or accurate.
In Hilo, revenue was logged daily with no breaks in deposits.
Cash Handling for Facility Use Permits: Audit Results 115
If transactions are adequately reviewed and monitored, procedures are improved and followed;
then individual errors and potential risk should decrease.
Deposits were not always made or posted timely
Of the 16 transactions tested at the Kona Permit Office, we identified five transactions that were
not deposited and posted timely. Deposits ranged from two to three business days from the
time the payment was made to the time the courier picked up the revenue. We also identified
an additional ten transactions that were posted to the accounting system between three and
nine business days after the revenue was received.
The Hilo office deposited all funds within 24 hours of receipt except for two instances. The Clerk
completed permits and collected checks on one day, but the deposits were not recorded until
the next day and not deposited with Treasury for two days.
Deposits should be made as often as possible, preferably daily. Failing to make timely deposits
increases the risk of errors, loss, or theft of funds. In addition, by not making frequent deposits,
the County may miss interest that could be earned if the deposits were made in a timely fashion.
Whenever possible, recording check and cash receipts to the general ledger should occur the
same day as the deposit. This reduces the risk of lost or stolen cash receipts and incorrect
recording.
Pre -numbered facility use permits were not used
Of the 131 transactions we reviewed at the Hilo Office, we identified 90 instances of missing
permit numbers. Instead of using the pre -numbered facility use permits provided by the
Department of Finance, the Clerk uses a computer template to assign permit numbers and
complete permit information. The permit numbers were logged as a range of numbers instead of
being listed separately. Since the permit numbers were manually assigned, there was an error
in documenting the correct permit numbers on the log. Therefore, the permit numbers were not
consecutive and we could not determine if all money received was deposited.
At the Kona Office, the Clerk also uses a computer template to assign permit numbers. We did
not identify any issues of sequentially. However, since the permit numbers are assigned by the
Clerk, we cannot determine if duplicate permit numbers were used and the deposit was
complete.
Sequential permit numbers are essential to ensure that all payments are documented and
revenue collected. By using pre -numbered permits, and reviewing the sequentially of these
permits, receipts cannot be easily duplicated or voided. An independent person should review
the deposit reconciliation by matching up permits (receipts) to records and check/cash
composition to deposit totals, as well as ensuring the integrity of permit numbers.
Cash Handling for Facility Use Permits: Audit Results 116
Cash over/short was not recorded
Best practices for cash handling state that when an overage or shortage is identified, a
supervisor should recount the deposit. If it is a valid overage or shortage, an accounting entry
should be made immediately to document the difference in the general ledger.
Neither Hilo or Kona record cash overages or shortages. Hilo uses an envelope stored in the
cash drawer to keep the overages. If cash was short at closing, the Clerk uses this money to
balance the deposit. Kona's Clerk stated that they do not have any overages or shortages. Any
significant balance in this account is an indication to management that cash is not handled
carefully enough. Never having any overages or shortages is also a red flag. Because of our
audit, Department of Park and Recreation took immediate corrective action by disposing of the
envelope and requiring clerks use treasury receipts to account for any cash over/shorts in
revenue.
Cash Handling for Facility Use Permits: Audit Results 117
Audit Recommendations
The County of Hawai'i Department of Parks and Recreation's facility use permit cash handling
process inadequately addresses internal controls, leaving gaps in existing policy including
management oversight. The audit recommends that the Department immediately address the
internal control weaknesses revealed through our site visits and develop a more proactive cash
handling oversight program. Furthermore, these recommendations should be considered for all
cash receipting locations within the Department.
The following recommendations address each of these areas.
Segregation of Duties
We recommend that incompatible duties be adequately segregated at the Department
of Parks and Recreation. If duties cannot be sufficiently segregated, mitigating controls,
such as a detailed supervisory review and monitoring of the activities should be
implemented to reduce risks.
Implementing Monitoring and Oversight
We recommend the Department of Parks and Recreation perform ongoing monitoring of
the design and operating effectiveness of the internal control system as part of the
normal course of operations. Ongoing monitoring includes regular management and
supervisory activities, comparisons, reconciliations, and other routine actions.
We further recommend that the Department of Parks and Recreation implement an
independent verification process by deploying a two- person team (an employee and a
supervisor) in the cash handling process by separating custodial duties and daily
reconciliation from reconciliation review and timely deposits.
Update and Enforce Policies and Procedures
We recommend the Department of Parks and Recreation clarify and enforce internal
controls in County policy and procedures to ensure consistency throughout the
department and with industry best practices including but not limited to:
• Provide clear guidance on independent review and monitoring procedures.
These procedures may include:
✓ Perform and document surprise cash counts
Purchasing Card Program : Audit Recommendations 118
✓ Add independent review/verification by supervisors including review of
voided and waived transactions, adjustments to account for cash
over/short, daily deposits, and reconciliations, date sequence of deposit
record, and numeric integrity of permits
✓ Approval of all voided and waived transactions
• Provide guidance and clarification on individual job duties to ensure adequate
segregation of duties exists.
• Clarify or add policies regarding:
✓ timeliness of deposits;
✓ adequate safeguarding of cash receipts;
✓ utilizing the three-part carbon pre -numbered permits;
✓ endorsing checks immediately upon receipt;
✓ procedures for handling cash overages and shortages;
✓ timeliness of recording revenue, reconciling cash and check composition,
reconciling revenue ledger accounts; and
✓ fraud reporting guidance
Provide Training
We recommend the Department of Parks and Recreation provide on-going cash
handling and internal controls training for all employees who handle revenue.
Cash Handling for Facility Use Permits: Audit Recommendations 119
Management's Comments
Wiliam P. Hanoi
1rfanr
June 29, 2016
Qtoiiiitp of babnifi
DEPARTMIENT OF PAS AND RECREATION
1011 Noah! Strev4 Suite G ■ Fll1q, Hawaii 972*
(808) 0414311 * F*x (806)941-8411
Ms. Somme S. Niu , Legislative Audilor
County of Hawaii
Olfioe of the Legislative Auditor
1266 lea Menne. Suite A-8
Hila, Hawaii 96720
Clayton S. Honma
Dlreetor
James M. Kwn
Depsr Director
Sub pct: Perfbrnamee Audit — Cash Handling at County of Hawaii's Departmumt of Pars
Recreation
Dear Ms. Nims.
Thank you for the opportunity to provide our response to the audit recommendations.
endations.
1Recofi njendution; Segregation of Duties — We recommend that incompatible duties be
adequately segregated at the Department of Parks & Et eercation_ if duties cannot be sufficiently
segregated, mitigating controls, such as a detailed supervisory review arra monitoring ofthe
activities should he implemented to reduce risks.
R.e.ypor ; The Department of Parks & Recreation has minimal staff to accomplish all-inclusive
segregation ofduties. However, we have inr rpotated mitigating oontrtis to our policies and
procedures.
Reor)iamendaharr implementing Monitoring and Oversight — e recommend the Department of
Narks & Recreation perform ongoing monitoring of the design and operating effectiveness ofthc
)ate al control system as part of the normal course ofoperations_ Ongoing monitoring includes
regular management andsupervisnry activities, comparisons, reconciliations, and other routine
actions.
We further recommend that the Department of Parks & Recreation implement an independent
verification process by deploying a two -person Learn (an employee and a supervisor) in the crash
handling process by separating ouatodiol duties & daily recancilialion from reconciliation review
and deposits.
Response: The Department elf Parks & Reeltatikn has initialed supervisory oversight and
monitoring to =ignite and eorrect discrepancies arks improve accuracy, c,mnpletcness and
timeliness.
Comte of Howe! is nor Equal Opperriori yPrev4dermeF.ployer.
Cash Handling for Facility Use Permits: Management's Comments 120
Recommendation: Update and Enfamce Policies and Procedures — We recommend the
Department of Parks & Recreation clarify and enforce internal controls in County policy and
procedures to =bare consistency tlu'oughout the department and with industry best prac:lices
including by not limited to;
✓ Provide clear guidance on independent review and monitoring procedures, 'these
poceedures may include:
1 Perform and document surprise cash counts
*1 Add independent review verification by supervisors including review of
voided and waived transactions, itdjU 1rnenls to accnunt for cash
over/short, daily deposits, and reconciliations, date sequence of deposit
record. arrd numeric integrity of permits
1 Approval of all voided and waived trans,actiQns
• Provide guidance and clarification on individual job duties L enatrre adequate
segregation of duties +=rats.
▪ Clarity or add policies regarding:
▪ Timeliness of deposits;
v.. Adequate safeguarding of cash receipts;
Utilizing the three-part carbon pre -numbered permits;
• Endorsing checks immediately upon receipt;
v. Procedures for handling cash overages and shortages;
• `dere] inns of recording revenue reconciling cash and cheek oo ip[rsi1iort,
reconciling revenue ledger accounts; and
Fraud repcariing guidance
Respoyor The Department of Parks &. Recreation has already integrated additional internal
con1rols to our policy and procedures_ We will continue to work on providing more clarity and
enforcement to policy and procedures_
Recopy /mm.10. . Provide Training — We recommend the Dept -Uncoil of Parks & Recreation
panicle on-gning cash handling and internal controls training for all employees who handle
revenue.
Response: We currently provide training, but will increase our focus in this arca,
Sincerely,
Clayton Honma
Director
C un.iy Ha/mil is ch. 5quol Oppartuiltyr Fi 1e' ;? rw �oyM.•,
Cash Handling for Facility Use Permits: Management's Comments 121
Appendix A: Audit Criteria
Government Finance Officers Association (GFOA) provides best practices for documenting
accounting policies and procedures:
Communication is an essential component of a comprehensive framework of internal
controls. One method of communication that is particularly effective for controls over
accounting and financial reporting is the formal documentation of accounting policies
and procedures. A well-designed and properly maintained system of documenting
accounting policies and procedures enhances both accountability and consistency. The
resulting documentation can also serve as a useful training tool for staff.
Recommendation:
Every government should document its accounting policies and procedures.
Traditionally, such documentation has taken the form of an accounting policies and
procedures manual. Thanks to advances in technology, even more effective methods
are now also available for this purpose.
An appropriate level of management to emphasize their importance and authority should
promulgate accounting policies and procedures. The documentation of accounting
policies and procedures should be evaluated annually and updated periodically, no less
than once every three years, according to a predetermined schedule. Changes in
policies and procedures that occur between these periodic reviews should be updated in
the documentation promptly as they occur. A specific employee should be assigned the
duty of overseeing this process. Management is responsible for ensuring that this duty is
performed consistently.
The documentation of accounting policies and procedures should be readily available to
all employees who need it. It should delineate the authority and responsibility of all
employees, especially the authority to authorize transactions and the responsibility for
the safekeeping of assets and records. Likewise, the documentation of accounting
policies and procedures should indicate which employees are to perform which
procedures. Procedures should be described as they are actually intended to be
performed rather than in some idealized form. Also, the documentation of accounting
policies and procedures should explain the design and purpose of control related
procedures to increase employee understanding of and support for controls.
Government Finance Officers Association (GFOA) recommends governments establish a
revenue control and management policy and review it on an annual basis. This policy should be
customized for the size and resources of the government:
The following factors should be considered in developing a general revenue control and
management policy:
Cash Handling for Facility Use Permits: Audit Criteria 122
a. Internal controls - Management should establish controls, and ensure they are
documented and followed. All aspects of cash receipting and accounts
receivables should be subject to proper internal controls including:
• Segregation of duties such as initiation and authorization of transactions,
execution of transactions (receipting and disbursement), recording
transactions, reconcilement, and maintaining custody.
• Daily processing and timely deposit of receipts. Ideally, all funds should
be deposited within 24 hours of receipt.
• Timely reconciliation to applicable ledgers.
• Physical security procedures. This is especially important for funds not
deposited day of receipt.
• Fraud reporting procedures.
• Use of integrated receipt and accounting systems wherever practical and
cost-effective.
b. Accounting practices — All receipts and receivables should be recorded in
accordance with generally accepted accounting principles (GAAP).
c. Billing and collection practices - Accounts receivable should be established for
services provided in advance of payment and terms for collection should be
established. In accordance with established procedures, bills should be initiated,
recorded in an accounts receivable system, and generated within an established
timely manner after initial service delivery. Effort should be made to ensure that
receivables are collected in a timely fashion.
d. Methods of payment — A policy outlining the acceptable methods of payment for
the governments should be established. This policy should include the method of
access (as well as method of payment) while promoting electronic methods of
access and payment when feasible and cost-effective to reduce overall risk and
increase cash flow.
e. Depositing of received funds - Treasury management should serve as the
primary recipient for all revenue collection sites. There should be timely
recognition and depositing of revenue collected. Smaller governments that do not
have a formal treasury function are encouraged to establish a formal single point
of receipt or cashier function to control access to received funds.
f. Due to the special nature of funds received from grants, developers, partners and
other entities, governments should consider whether separate procedures should
be established for recording and depositing these funds.
Returned checks — Procedures for processing and collection of returned checks
should be established, including the assessment of fees to offset the costs
associated with the returned items.
g.
Cash Handling for Facility Use Permits: Audit Criteria 123
h. Accounts receivable management — All accounts receivable should be recorded
in a manner that allows for aging analysis. After reviewing available collection
options, governments should establish procedures that maximize collections.
Collection agencies that are familiar with federal, state, and local notice
requirements and regulations should be considered when their use proves cost-
effective.
Bad Debts — An allowance for doubtful accounts and a write-off policy
should be established. Bad debt expense should be estimated based
upon a documented method of calculation. An allowance for doubtful
accounts should be recorded. Write-offs should be performed periodically
to ensure that accounts receivable and allowance balances are not
overstated. Efforts should be made to pursue the timely collection of
delinquent accounts.
Budgetary review responsibilities — Revenue collections and accounts receivable
should be monitored in a timely manner. Both actual and budgeted or forecast
revenues should be monitored. Any significant variance of actual from the
forecast or budgeted revenues should be investigated thoroughly.
k. Compliance - Governments should ensure their revenue control and
management policy and procedures are in full compliance with any federal, state,
local or other applicable laws or requirements.
The United Sates Government Accountability Office (GAO) has issued standards for internal
controls ("Green Book") and, in part, describes the monitoring internal control component:
Overview
Finally, since internal control is a dynamic process that has to be adapted continually to
the risks and changes an entity faces, monitoring of the internal control system is
essential in helping internal control remain aligned with changing objectives,
environment, laws, resources, and risks. Internal control monitoring assesses the quality
of performance over time and promptly resolves the findings of audits and other reviews.
Corrective actions are a necessary complement to control activities in order to achieve
objectives.
Principles
16. Management should establish and operate monitoring activities to monitor the
internal control system and evaluate the results.
17. Management should remediate identified internal control deficiencies on a timely
basis.
16.04 Management monitors the internal control system through ongoing monitoring and
separate evaluations. Ongoing monitoring is built into the entity's operations, performed
continually, and responsive to change. Separate evaluations are used periodically and
may provide feedback on the effectiveness of ongoing monitoring.
Cash Handling for Facility Use Permits: Audit Criteria 124
16.05 Management performs ongoing monitoring of the design and operating
effectiveness of the internal control system as part of the normal course of operations.
Ongoing monitoring includes regular management and supervisory activities,
comparisons, reconciliations, and other routine actions. Ongoing monitoring may include
automated tools, which can increase objectivity and efficiency by electronically compiling
evaluations of controls and transactions.
16.08 Management retains responsibility for monitoring the effectiveness of internal
control over the assigned processes performed by service organizations. Management
uses ongoing monitoring, separate evaluations, or a combination of the two to obtain
reasonable assurance of the operating effectiveness of the service organization's
internal controls over the assigned process. Monitoring activities related to service
organizations may include the use of work performed by external parties, such as
service auditors, and reviewed by management.
The Committee of Sponsoring Organizations (COSO) provides an integrated internal control
framework and guidance on monitoring internal control systems, which states in part:
How Does Monitoring Benefit the Governance Process?
Unmonitored controls tend to deteriorate over time. Monitoring, as defined in the COSO
Framework, is implemented to help ensure "that internal control continues to operate
effectively." When monitoring is designed and implemented appropriately, organizations
benefit because they are more likely to:
• Identify and correct internal control problems on a timely basis,
• Produce more accurate and reliable information for use in decision-making,
• Prepare accurate and timely financial statements, and
• Be in a position to provide periodic certifications or assertions on the
effectiveness of internal control.
Over time effective monitoring can lead to organizational efficiencies and reduced costs
associated with public reporting on internal control because problems are identified and
addressed in a proactive, rather than reactive, manner.
Hawai"i Revised Statutes (HRS) Title 5. State Financial Administration establishes the
requirements of receipts, payments, and deposits:
§40-34 Accountants may deposit in bank, when. Every public accountant other than
the director of finance, receiving or disbursing money belonging to the State may deposit
to the public accountant's official credit and keep all moneys received by the public
accountant in such banks as may be designated therefor by the director with the
Cash Handling for Facility Use Permits: Audit Criteria 125
approval of the governor until the moneys are remitted to the director as required by law,
and the public accountant shall not be responsible for the moneys while so deposited.
§40-40 Receipts and payments. For all moneys paid into the treasury there shall be
prepared a treasury deposit receipt in the form and in the number of copies determined
by the comptroller as provided in section 40-6. The receipt shall specify the information
required by the comptroller and the director of finance for the proper accounting of the
amount paid into the treasury...
The Hawai"i County Charter, Article VI, Chapter 6, Section 6-6.3. Powers, Duties, and
Functions (Department of Finance) states in part:
(g) Maintain a general accounting system for the county and require all county agencies
and executive agencies to report and remit all receipts to the finance director as often as
the finance director deems desirable.
County of Hawai"i Main Office - Hilo Facility Use Permits Basic Procedures (August 2015)
states in part:
BASIC PROCEDURE
1. Complete a Facility Use Permit — Special Request Form
2. Original (white) Facility Use permit - our copy
Second copy (yellow) - given to the applicant
Third copy (pink) - posted at the facility by Parks Maintenance staff.
6. Clip payment to our permit, place in purple folder and lock in drawer.
8. Log permit information on the GENERAL FUND DAILY DEPOSIT RECORD at
the end of each day. Be sure permit numbers are consecutive, including any
voided permits. The monies received for that day are reconciled with this record.
Monies are taken to Motor Vehicle registration.
END OF DAY PROCEDURES
5. Reconcile cash/checks with total and make sure there is $100 petty cash.
6. Money is taken to DMV before end of day. Money is picked up in the morning at
7:45am.
County of Hawai"i Kona Permit Office Facility Use Permits procedures (August 2015) states
in part:
BASIC PROCEDURE
2. Complete a Facility Use Permit
3. Original (white) Facility Use permit shall be turned in with the deposit slip
Second copy (yellow) will be given to the applicant
Cash Handling for Facility Use Permits: Audit Criteria 126
Third copy (pink) shall be posted at the facility by Parks Maintenance staff.
7. Log permit information on the GENERAL FUND DAILY DEPOSIT RECORD
Be sure permit numbers are consecutive, including any voided permits
END OF DAY PROCEDURES
2. Reconcile cash/checks with total make sure there is $50 petty cash.
3. Stamp the back of the checks with the General Fund stamp.
7. Lock up petty cash.
8. Take deposit to Bank of Hawai"I Lanihau Center.
You can either do a deposit during banking hours or a night deposit.
For deposits during bank hours, be sure to get a validated deposit slip from the
teller.
For night deposits, keep the receipt.
Cash Handling for Facility Use Permits: Audit Criteria 127