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HomeMy WebLinkAboutSingle Audit of Federal Financial Assistance Programs for Fiscal Year 2015 - 2016COUNTY OF HAWAII STATE OF HAWAII SINGLE AUDIT OF FEDERAL FINANCIAL ASSISTANCE PROGRAMS Fiscal Year Ended June 30, 2016 N&K CPAs, Inc. AC 4m:OLJN11AI11` It"C. N SUL[ANIS AMERICAN SAVINGS BANK TOWER I 1001 BISHOP STREET, SUITE 17001 HONOLULU, HAWAII 96813-3696 T (808) 524-2255 F (808) 523-2090 1 nkcpa.com . k0i � N&K CPAs, Inc. ACCOUNTANTS I CONSULTANTS March 29, 2017 To the Chair and Members of the County Council County of Hawaii AMERICAN SAVINGS BANK TOWER 1001 BISHOP STREET, SUITE 1700 HONOLULU, HAWAII 96813-3696 T (808) 524-2255 F (808) 523-2090 We have completed our financial audit of the basic financial statements and other supplementary information of the County of Hawaii, State of Hawaii (the County), as of and for the fiscal year ended June 30, 2016. Our report containing our opinions on those basic financial statements is included in the County's Comprehensive Annual Financial Report. We submit herein our reports on the County's internal control over financial reporting and compliance, the County's compliance with requirements that could have a direct and material effect on each of its major federal programs and internal control over compliance, and our report on the schedule of expenditures of federal awards. OBJECTIVES OF THE AUDIT The primary purpose of our audit was to form opinions on the fairness of the presentation of the County's basic financial statements as of and for the fiscal year ended June 30, 2016, and to comply with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), which establishes audit requirements for state and local governments that receive federal financial assistance. More specifically, the objectives of the audit were as follows: To provide a basis for an opinion on the fairness of the presentation of the County's financial statements. 2. To report on internal control over financial reporting and compliance with provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts in accordance with Government Auditing Standards. 3. To report on internal control over compliance related to major federal programs and an opinion on compliance with federal statutes, regulations, and the terms and conditions of federal awards that could have a direct and material effect on each major program in accordance with the Single Audit Act Amendments of 1996 and the Uniform Guidance. 2 N&K CPAs, Inc. ACCOUNTANTS I CONSULTANTS SCOPE OF THE AUDIT Our audit was performed in accordance with auditing standards generally accepted in the United States of America as prescribed by the American Institute of Certified Public Accountants; Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of the Uniform Guidance. The scope of our audit included an examination of the transactions and accounting records of the County for the fiscal year ended June 30, 2016. ORGANIZATION OF THE REPORT This report is presented in five parts as follows: • Part I - Our report on internal control over financial reporting and on compliance and other matters. • Part II - Our report on compliance for each major federal program; report on internal control over compliance; and report on the schedule of expenditures of federal awards required by the Uniform Guidance. • Part III - The schedule of findings and questioned costs. • Part IV - The corrective action plan. • Part V - The summary schedule of prior audit findings. We wish to express our sincere appreciation for the excellent cooperation and assistance extended by the staff of the County. Sincerely, N&K CPAs, INC. 3 COUNTY OF HAWAII, STATE OF HAWAII TABLE OF CONTENTS Page PART I REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 6 - 7 PART II REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND REPORT ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS REQUIRED BY THE UNIFORM GUIDANCE Report on Compliance on Each Major Federal Program; Report on Internal Control over Compliance; and Report on the Schedule of Expenditures of Federal Awards Required by the Uniform Guidance 9-11 Schedule of Expenditures of Federal Awards 12-24 Notes to Schedule of Expenditures of Federal Awards 25 PART III SCHEDULE OF FINDINGS AND QUESTIONED COSTS 27-28 PART IV CORRECTIVE ACTION PLAN Response of County of Hawaii PART V SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS Status Report 12 30-31 33-34 PART I REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS . k0i � N&K CPAs, Inc. ACCOUNTANTS I CONSULTANTS AMERICAN SAVINGS BANK TOWER 1001 BISHOP STREET, SUITE 1700 HONOLULU, HAWAII 96813-3696 T (808) 524-2255 F (808) 523-2090 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS INDEPENDENT AUDITOR'S REPORT To the Chair and Members of the County Council County of Hawaii We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business -type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the County of Hawai°i, State of Hawaii (the County), as of and for the fiscal year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the County's basic financial statements, and have issued our report thereon dated December 28, 2016. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the County's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the County's internal control. Accordingly, we do not express an opinion on the effectiveness of the County's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 0 N&K CPAs, Inc. ACCOUNTANTS I CONSULTANTS Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. We did identify a deficiency in internal control, described in the accompanying schedule of findings and questioned costs as item 2016-001, that we consider to be a significant deficiency. Compliance and Other Matters As part of obtaining reasonable assurance about whether the County's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. County's Response to Findings The County's response to the findings identified in our audit is described in Part IV, Corrective Action Plan. The County's response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Honolulu, Hawaii December 28, 2016 7 PART II REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND REPORT ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS REQUIRED BY THE UNIFORM GUIDANCE 0 . k0i � N&K CPAs, Inc. ACCOUNTANTS I CONSULTANTS AMERICAN SAVINGS BANK TOWER 1001 BISHOP STREET, SUITE 1700 HONOLULU, HAWAII 96813-3696 T (808) 524-2255 F (808) 523-2090 REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND REPORT ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS REQUIRED BY THE UNIFORM GUIDANCE INDEPENDENT AUDITOR'S REPORT To the Chair and Members of the County Council County of Hawaii Report on Compliance for Each Major Federal Program We have audited the County of Hawai°i, State of Hawai°i's (the County) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the County's major federal programs for the fiscal year ended June 30, 2016. The County's major federal programs are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management's Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each of the County's major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the County's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. 0 N&K CPAs, Inc. ACCOUNTANTS I CONSULTANTS We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the County's compliance. Opinion on Each Major Federal Program In our opinion, the County complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the fiscal year ended June 30, 2016. Report on Internal Control Over Compliance Management of the County is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the County's internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the County's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 10 N&K CPAs, Inc. ACCOUNTANTS I CONSULTANTS The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance We have audited the financial statements of the governmental activities, the business - type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the County as of and for the fiscal year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the County's basic financial statements. We issued our report thereon dated December 28, 2016, which contained unmodified opinions on those financial statements. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the County's basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the Uniform Guidance and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated in all material respects in relation to the basic financial statements as a whole. 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E co q k % / 24 County of Hawaii, State of Hawaii NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Fiscal Year Ended June 30, 2016 NOTE A - BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards (the Schedule) includes the federal award activities of the County of Hawaii and its discretely presented component unit, the Department of Water Supply, under programs of the federal government for the fiscal year ended June 30, 2016. The information in this Schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the Schedule presents only a selected portion of the operations of the County of Hawaii , it is not intended to, and does not present the financial position, changes in financial position, or cash flows of the County of Hawaii. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Expenditures reported on the Schedule are reported on the cash basis of accounting. Such expenditures are recognized following, as applicable, either the cost principles in Office of Management and Budget Circular A-87, Cost Principles for State, Local and Indian Tribal Governments, or the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. NOTE C - INDIRECT COST RATE The County of Hawaii has elected not to use the 10 -percent de minimis indirect cost rate allowed under the Uniform Guidance. 25 PART III SCHEDULE OF FINDINGS AND QUESTIONED COSTS 26 County of Hawaii, State of Hawaii SCHEDULE OF FINDINGS AND QUESTIONED COSTS Fiscal Year Ended June 30, 2016 SECTION I - SUMMARY OF AUDITOR'S RESULTS Financial Statements Type of report the auditor issued on whether the financial statements audited were prepared in accordance with GAAP: Unmodified Internal control over financial reporting Material weakness(es) identified? _ yes ✓ no Significant deficiency(ies) identified? ✓ yes _ none reported Noncompliance material to financial statements noted? _ yes ✓ no Federal Awards Internal control over major federal programs Material weakness(es) identified? _ yes ✓ no Significant deficiency(ies) identified? _ yes ✓ none reported Type of auditor's report issued on compliance for major federal programs: Unmodified Any audit findings disclosed that are required to be reported in accordance with 2 CFR 200.516(a)? _ yes ✓ no Identification of major federal programs CFDA Numbers Name of Federal Program or Cluster 14.239 HOME Investment Partnerships Program 17.258/17.259/17.278 WIA/WIOA Cluster 20.205 Highway Planning and Construction Dollar threshold used to distinguish between Type A and Type B programs: $1,713,444 Auditee qualified as a low-risk auditee? ✓ yes _ no 27 County of Hawaii, State of Hawaii SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) Fiscal Year Ended June 30, 2016 SECTION II - FINANCIAL STATEMENT FINDINGS Ref. No. Internal Control Findings 2016-001 Physical Security - Significant Deficiency Criteria: Physical access to servers and other sensitive areas is appropriately restricted to authorized personnel. Devices are used to secure sensitive equipment and storage media from the risk of damage from fire. Condition: At June 30, 2016, the servers for the County's accounting system were located in a room at the Civil Defense Center (Center). We noted the following conditions: • The door to the room housing these servers is left open due to cooling concerns. Anyone with access to the Center could potentially access the server room. • A fire suppression system was not installed. Cause: The County has not formally documented policies and procedures over the physical security of IT systems at the Center nor effectively designed these controls. Effect: Unauthorized access to the server room could result in unauthorized use, modification, damage or loss of data. The absence of a fire suppression system could increase the likelihood of the loss or destruction of data due to fire. Identification as a Repeat Finding: See finding 2015-002 included in the Summary Schedule of Prior Audit Findings. Recommendation We recommend that the County develop formal policies over the physical security of IT systems at the Center and to implement them. The server room should be locked and access to keys or codes should be limited to authorized personnel. A fire suppression system should be installed to prevent or limit the loss of data from fire. Views of Responsible Officials and Planned Corrective Action The County agrees with certain parts of the finding and the recommendation. See Part IV Corrective Action Plan. SECTION III - FEDERAL AWARD FINDINGS AND QUESTIONED COSTS No matters reported. K4 PART IV CORRECTIVE ACTION PLAN 29 Harry Kim Mayor Wil Okabe Managing Director March 29, 2017 County of Hawaii DEPARTMENT OF INFORMATION TECHNOLOGY 25 Aupuni Street • Hilo, Hawaii 96720-4252 (808) 932-2960 • Fax (sos) 961-8089 Subject: Corrective Action Plan in response to 2016 Single Audit Internal Control Finding Reference Number 2016-001 Recommendation: Jules Ung Director We recommend that the County develop formal policies over the physical security of IT systems at the Center and to implement them. The server room should be locked and access to keys or codes should be limited to authorized personnel. A fire suppression system should be installed to prevent or limit the loss of data from fire. County's Comment: Management agrees with the finding and recommendations regarding the development of formal policies over the physical security of IT systems. In response, DIT has created and implemented 6 IT policies including: 1) Internet Network Email Policy 2) Password Policy 3) E -Mail Retention Policy 3) Electronic Data Destruction Policy 5) Mobile Device Policy 6) Social Media Policy. These policies outline best practices to protect the County's devices, network, and information systems from unauthorized access, damage, and tampering. However, as in prior years, the County contends that its current policies outlined below serve as mitigating controls that address the findings of the server room. Although the specific room at Civil Defense that houses the servers is left open, the general Civil Defense facility is restricted to authorized personnel and access to the facility itself is limited. Visitors are required to sign in before being allowed entry to Civil Defense and are typically escorted. Although a fire suppression system has not been selected as of yet, the County has implemented mitigating controls to reduce the risk of data loss due to fire and other potential hazards by ensuring that all data is backed up nightly from these servers to a different physical location. In addition, the following plan is also currently being implemented. Researching the possibility of partnering with Civil Defense to construct a new shelter to contain the server room that will be situated adjacent to Civil Defense, with an underground conduit for fiber to preserve the integrity of the County Network during times of disaster. Hawai `i County is an Equal Opportunity Provider and Employer 30 2. Applying for Homeland Security grant monies for a mobile data center which would also be located adjacent to Civil Defense for optimal network integrity. 3. In the interim, DIT will temporarily relocate 2 racks of servers to the Mauka Aupuni Server Room. Anticipated to be complete by June 30, 2017, this will maximize the open space of the Civil Defense communications room, increase airflow, reduce noise for the 911 dispatch consoles, and allow the door of the room to be closed and locked once the AC Unit is repaired. The remaining racks at Civil Defense will house all essential services including payroll for the county. Contact: Jules Ung, Director Information Technology 31 PART V SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS 32 County of Hawaii, State of Hawaii STATUS REPORT Fiscal Year Ended June 30, 2016 This section contains the current status of prior audit recommendations. The recommendations are referenced to the pages of the previous audit report for the fiscal year ended June 30, 2015, dated March 28, 2016. FINANCIAL STATEMENT FINDINGS Reference Number Recommendation 2015-001 Information Security Policy (page 27) Management should develop standardized information security policies and procedures that are followed by all departments and agencies of the County. 2015-002 Physical Security (page 28) We recommend that the County develop formal policies over the physical security of IT systems at the Center and to implement them. The server room should be locked and access to keys or codes should be limited to authorized personnel. A fire suppression system should be installed to prevent or limit the loss of data from fire. 33 Current Status Accomplished. Effective 12/30/16, six information technology policies and an information security handbook have been approved by the Mayor and the Hawaii County Council. These documents are designed to serve as the baseline policies that all departments and agencies of the County will be required to comply with. Not accomplished. Refer to current year finding 2016-001 for management's response. County of Hawaii, State of Hawaii STATUS REPORT (Continued) Fiscal Year Ended June 30, 2016 FEDERAL AWARD FINDINGS AND QUESTIONED COSTS Reference Number Recommendation 2009-001 Activities Allowed and Unallowed - Calculation of Federal Expenditures (page 31) The County overstated the federal share of eligible costs related to the Ikuo Hisaoka Gymnasium, resulting in a questioned cost of $27,965. The amount the County reported was based on the actual expenditures, however, as the Ikuo Hisaoka Gymnasium was insured at the time of the loss, the expenditures should have been based on the insurance deductible in accordance with Title 44 Code of Federal Regulations (44 CFR 206.250(c)). 34 Current Status As an indication of the difficulty posed by this project's various sources of funding, the State Civil Defense has just submitted their recommendation to closeout this project to the federal government over seven (7) years after the County submitted initial paperwork. The State Civil Defense's recommendation is that the County be paid $50,431.20 (75% of $67,241.60).