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HomeMy WebLinkAboutCOM 0121.000 2010-2012JNty'� {qty Colleen M. Schrandt .? Legislative Auditor gr E • OFHO`� Mailing Address.' Business Address: Hawaii County Building t �� 1266 Kamehameha Avenue 25 Aupuni Street 1(� Un N laf 'IA abint t t Ironworks Building, Room A -1 Hilo, Haivai'i 96720 �� Hilo, Hawaii 96720 OFFICE OF THE LEGISLATIVE AUDITOR Telephone: (808) 961 -8386 Facsimile: (808) 961 -8905 Date: March 2, 2011 To: Dominic Yagong, Chairman And Members of the County Council From: Colleen Schrandt Legislative Audito l(jo LS ; RE: Post -Audit Reports for Fiscal Year Ending June 30, 2010 This letter transmits for your review, deliberation, and acceptance, the Comprehensive Annual Financial Audit Report and Single Audit Report of Federal Financial Assistance Programs for Fiscal Year Ending June 30, 2010, as prepared by external auditors Accuity LLP, in compliance with Hawaii County Charter section 10 -13, Post- audit, which provides for an independent audit of the accounts and financial transactions of the County at least once annually by a certified public accountant or firm of certified public accountants, designated by the Council, who have no personal interest, direct or indirect, in the fiscal affairs of the County. Accuity LLP will be present at the Finance Committee meeting on March 15, 2011, to answer any questions you may have. Appropriate department head(s) or their representative(s) will also be asked to attend the meeting. In the meantime, please feel free to contact me should you require further information. Enclosures cc w/o enclosures: Cindy Yee, Accuity LLP Department of Finance Serving the Interests of the People of Our Island Hawai `i County is an Equal Opportunity Provider and Employer Comm. No. /2 / Ref. To: F'CG Ref. Date _MAR p 2 2Qj{ -d� d1dW -d� • A Ccui t yLLP CERTIFIED PUBLIC ACCOUNTANTS County of Hawaii State of Hawaii Single Audit of Federal Financial Assistance Programs June 30, 2010 Quality Integrity Insight County of Hawaii State of Hawaii Index June 30, 2010 Page(s) Introduction AuditObjectives ............................................................................................................... ..............................1 Scopeof Audit ................................................................................................................. ..............................2 Organizationof Report .................................................................................................... ..............................2 Compliance and Internal Control over Financial Reporting Report of Independent Auditors 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 Compliance and Internal Control over Federal Awards Report of Independent Auditors on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 Schedule of Expenditures of Federal Awards .............................................................. ...........................7 -16 Notes to Schedule of Expenditures of Federal Awards ............................................... ..........................17 -18 Schedule of Findings and Questioned Costs .............................................................. ..........................19 -26 Corrective Action Plan SECTION I Introduction ACuity,P GERTIFIF.D PUBLIC ACCOUNTANTS February 24, 2011 To the Chair and Members of the County Council County of Hawaii We have completed our audit of the basic financial statements of the County of Hawaii, State of Hawaii (the "County'), as of and for the year ended June 30, 2010. Our report containing our opinion on those basic financial statements is included in the County's Comprehensive Annual Financial Report. We have also audited the County's compliance with requirements applicable to its major federal financial assistance programs. We submit herein our reports on compliance and on internal control over financial reporting and over federal awards, a schedule of expenditures of federal awards, and a schedule of findings and questioned costs. The audit objectives and scope of the audit were as follows: Audit Objectives 1. To provide opinions on the fair presentation of the County's basic financial statements and the schedule of expenditures of federal awards as of and for the year ended June 30, 2010 in accordance with accounting principles generally accepted in the United States of America. 2. To consider the County's internal control over financial reporting in order to design our auditing procedures for the purpose of expressing our opinions on the financial statements. 3. To perform tests of the County's compliance with certain provisions of laws, regulations, contracts, and grant agreements that could have a direct and material effect on the determination of financial statement amounts. 4. To consider the County's internal control over compliance with the requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with the U.S. Office of Management and Budget ( "OMB ") Circular A -133, Audits of States, Local Governments, and Non - Profit Organizations. 5. To provide an opinion on the County's compliance with the requirements of laws, regulations, contracts, and grants that could have a direct and material effect on each major program. 6. To report on the status of prior year findings and questioned costs. 999 BISHOP STREET, Sui , rL•' 1900 HoNOLUi.u, HxAvAn 96813 I'LLEPLIONE: 808 5313400 FAcSiMII.E: 808 5313433 To the Chair and Members of the County Council County of Hawai'i February 24, 2011 Page 2 Scope of Audit We performed an audit of the County's basic financial statements and schedule of expenditures of federal awards as of and for the year ended June 30, 2010, 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 provisions of the OMB Circular A -133. Organization of Report Our report is organized into three sections as follows: 1. Section I, entitled "Introduction," describes the objectives and scope of our audit and the organization and contents of this report. 2. Section II, entitled "Compliance and Internal Control over Financial Reporting," contains our report on the County's internal control over financial reporting and on compliance and other matters based upon our audit of the County's basic financial statements. 3. Section III, entitled "Compliance and Internal Control over Federal Awards," contains our report on the County's compliance with requirements that could have a direct and material effect on each major program and on the internal control over compliance in accordance with OMB Circular A -133, a schedule of expenditures of federal awards, and a schedule of findings and questioned costs. Our report on the basic financial statements of the County as of and for the year ended June 30, 2010 is included under a separate cover. A separate management letter containing our observations regarding the County's internal controls dated December 30, 2010 has also been issued to the County Council. We would like to take this opportunity to express our appreciation to the personnel of the County of Hawai'i for the cooperation and assistance extended to us during our audit. We will be pleased to discuss any questions that you or your associates may have regarding our recommendations. Very truly yours, >�C-r- LLB SECTION II Compliance and Internal Control Over Financial Reporting • cu LLP CF.RTIFIE1) P11131, 1C AC C0 t1NTAN'15 Report of Independent Auditors 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 To the Chair and Members of the County Council County of Hawaii 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 of Hawaii, State of Hawaii (the "County') as of and for the year ended June 30, 2010, which collectively comprise the County's basic financial statements, and have issued our report thereon dated December 30, 2010. We conducted our audit in accordance with 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. Internal Control over Financial Reporting In planning and performing our audit, we considered the County's internal control over financial reporting as a basis for designing our auditing procedures 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 over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the County's internal control over financial reporting. 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 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. Our consideration of the internal control over financial reporting 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 financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. However, we identified certain deficiencies in internal control over financial reporting, described in Finding Nos. 2010 -1 to 2010 -3 in the accompanying schedule of findings and questioned costs that we consider to be significant deficiencies in internal control over financial reporting. 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. 999 Bisttot STRLLT, SUITE 1900 HoNou' I X, HAWAII 96813 Ti'LLI 1 110NL: 808 5313400 FACStMU.E: 808 5313433 Compliance and Other Matters As part of obtaining reasonable assurance about whether the County's financial statements are free of 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. We noted certain matters that we reported to the County Council in a separate letter dated December 30, 2010. The County's response to the findings identified in our audit is described in the accompanying corrective action plan. We did not audit the County's response and, accordingly, we express no opinion on it. This report is intended solely for the information and use of the County Council, management, others within the entity, and federal awarding agencies and pass- through entities and is not intended to be and should not be used by anyone other than these specified parties. Acc.c�L�� 0 Honolulu, Hawaii December 30, 2010 SECTION III Compliance and Internal Control Over Federal Awards • c I LLP CF.kTTFIF.D PUHL[C AC CO C7NTANT:S Report of Independent Auditors on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A -133 To the Chair and Members of the County Council County of Hawai'i Compliance We have audited the compliance of the County of Hawai'i, State of Hawaii (the "County"), with the types of compliance requirements described in the U.S. Office of Management and Budget ( "OMB ") Circular A -133 Compliance Supplementthat could have a direct and material effect on each of the County's major federal programs for the year ended June 30, 2010. The County's major federal programs are identified in the summary of auditors' results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its major federal programs is the responsibility of the County's management. Our responsibility is to express an opinion on the County's compliance based on our audit. 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 OMB Circular A -133, Audits of States, Local Governments, and Non - Profit Organizations. Those standards and OMB Circular A -133 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. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the County's compliance with those requirements. In our opinion, the County complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2010. However, the results of our auditing procedures disclosed instances of noncompliance with those requirements, which are required to be reported in accordance with OMB Circular A -133 and which are described in the accompanying schedule of findings and questioned costs as Finding Nos. 2010 -4 and 2010 -5. Internal Control over Compliance Management of the County is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered the County's internal control over compliance with the requirements that could have a direct and material effect on a major federal program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test 999 Bisi me STREET, SUITE 1900 HONOLL' -Lu, Rmvmi 96813 TELLY}[ONE: 808 5313400 FACSIMILE: 808 5313433 and report on internal control over compliance in accordance with OMB Circular A -133, 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 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. 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 the entity's internal control that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. However, we identified a deficiency in internal control over compliance that we consider to be a significant deficiency as described in the accompanying schedule of findings and questioned costs as Finding No. 2010 -4. 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. Schedule of Expenditures of Federal Awards 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 year ended June 30, 2010, and have issued our report thereon dated December 30, 2010. Our audit was performed for the purpose of forming our 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 OMB Circular A -133 and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. The County's responses to the findings identified in our audit are described in the accompanying corrective action plan. We did not audit the County's responses and, accordingly, we express no opinion on the responses. This report is intended solely for the information and use of management, the County Council, the County Administration, others within the entity, federal awarding agencies, and pass- through entities, and is not intended to be and should not be used by anyone other than these specified parties. C_r_4t_ Honolulu, Hawaii February 24, 2011 U) L 7 W d � c d y LL a x w E of L lC o L O) O y O Q E LL L IL a L d 0 O O C 0) _O CD V V L 0.0 C O LL C O U = C) z o O �I Cl? C1 co 00 � r— h U) C%4 0) o (n o LO 00 N (D O N 00 N O M D) N 1� N U) f� O O LO V O O (D h M - U V) (OD O Cl) CO Q N V LO[) MM (D 0 rn ((D rn N 00 N N co 0 0o ❑ ❑ CD C) Q Q Q 0 & 00 O(D O O O O U) CO LO I� O M co U) O C N M I� � M O � O (� Q) 0 h M (D r M U) N N O �I Cl? 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K O 3 LL O m d 0) _rn - a) o U _ N W W -� '�'' w L p N �_ N U O C 0 'O U(D Q 5 0 :) 2 O� c ��m� •° w� ALL ° -0 rn m � o E 9 �°' co O d d 'a E (n U wo 7 (n > 7 (n O -0 m O 7 3 N (n O O U O 7 U O H O F � 0 O o R O N o m Q ( O ff_ � lL c = 4.0 LLJ a -0 EP U U . (0 N -5 cu o _ ( L O p y N Y (n E Mn N a o .� y N p J U (n 0 ++ V N vi �❑ W y2 0Z� ma 2 16 County of Hawaii State of Hawaii Notes to Schedule of Expenditures of Federal Awards Year Ended Ju 30, 2010 Basis of Presentation The accompanying schedule of expenditures of federal awards includes the federal grant activity of the County of Hawaii, State of Hawaii (the "County') and its discretely presented component unit, the Department of Water Supply (the "Department') and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A -133, Audits of States, Local Governments, and Non - Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic financial statements. 17 County of Hawaii State of Hawaii Notes to Schedule of Expenditures of Federal Awards Year Ended June 30, 2010 2. Subrecipients Of the federal expenditures presented in the schedule, the County provided federal awards to subrecipients as follows: U.S. Department of Labor Unemployment Insurance 17.225 Amount WIA Adult Program CFDA Provided to Program Title Number Subrecipients U.S. Department of Housing and Urban Development 17.259 441,788 Community Development Block Grant /State's Program and 17.259 416,285 Non - Entitlement Grants in Hawaii 14.228 $ 366,206 ARRA — Community Development Block Grant/State's Program 17.260 285,014 and Non - Entitlement Grants in Hawai'i 14.255 375,026 HOME Investment Partnerships Program 14.239 243,739 Total U.S. Department of Housing and Urban Development 984,971 U.S. Department of Justice Juvenile Accountability Incentive Block Grant 16.523 55,716 Crime Victim Assistance 16.575 140,005 Public Safety Partnership and Community Policing Grants 16.710 138,263 ARRA — State Victim Assistance Formula Grant Program 16.801 34,906 Total U.S. Department of Justice 368,890 U.S. Department of Labor Unemployment Insurance 17.225 946,029 WIA Adult Program 17.258 297,703 ARRA — WIA Adult Program 17.258 232,398 WIA Youth Activities 17.259 441,788 ARRA — WIA Youth Activities 17.259 416,285 WIA Dislocated Workers 17.260 209,053 ARRA — WIA Dislocated Workers 17.260 285,014 Total U.S. Department of Labor 2,828,270 U.S. Environmental Protection Agency Water Protection Grants to the States 66.474 25,000 Surveys, Studies, Investigations, and Special Purpose Grants 66.606 6,401 Total U.S. Environmental Protection Agency 31,401 Total Provided to Subrecipients $ 4,213,532 iF:3 County of Hawaii State of Hawaii Schedule of Findings and Questioned Costs Year En ded June 30, 2010 Section I — Summary of Auditors' Results Financial Statements Type of auditors' report issued Unqualified Numbers Internal control over financial reporting 14.228/14.255 CDBG — State - Administered Small Cities Program Cluster • Material weaknesses identified? yes X no • Significant deficiencies identified? X yes none reported Noncompliance material to financial statements noted? yes X no Federal Awards 66.458 Capitalization Grants for Clean Water State Revolving Funds Internal control over major programs Capitalization Grants for Drinking Water State Revolving Funds Dollar threshold used to distinguish between type A and • Material weaknesses identified? yes X no • Significant deficiencies identified? X yes none reported Type of auditors' report issued on compliance for major programs Unqualified Any audit findings disclosed that are required to be reported in accordance with section 510(a) of Circular A -133? X yes no Identification of major programs CFDA Numbers Name of Federal Program or Cluster 14.228/14.255 CDBG — State - Administered Small Cities Program Cluster 14.871 Section 8 — Housing Choice Vouchers 17.258/17.259/17.260 W IA Cluster 20.205 Highway Planning and Construction 20.500 Federal Transit — Capital Investment Grants 20.509 Formula Grants for Other Than Urbanized Areas 66.458 Capitalization Grants for Clean Water State Revolving Funds 66.468 Capitalization Grants for Drinking Water State Revolving Funds Dollar threshold used to distinguish between type A and type B programs $1,550,000 Auditee qualified as low -risk auditee? X yes no 19 County of Hawaii State of Hawaii Schedule of Findings and Questioned Costs Year Ended June 30, 2010 Section II — Financial Statement Findings Finding No. 2010 -01: Information Technology (Significant Deficiency) Condition Information technology ( "IT ") is a strategic element of the operations of the County of Hawaii (the "County") and the Department of Water Supply (the "Department'), a component unit of the County. Because of the high volume of transactions at the County and the Department, the establishment of internal controls over processes incorporating IT is critical to its operations. As part of our financial statement audits for the year ended June 30, 2010, we performed IT general controls reviews of the following systems operated by the County and the Department: County • Windows Domain • Eden • Integrated Assessment System • Revenue Collection Department • Windows Domain • Select Financial System • Public Utility Billing System • ARB N_Sight Mobile System Our review resulted in several IT control deficiencies as follows: Physical and logical security • Lack of formal security administration policies and procedures addressing: • New, transferred and terminated user account administration • Maintenance of audit evidence to support approval of employee access to the system • Identification of terminated employees who continue to have access to the system • Identification of employees whose access to system resources are not commensurate with their job responsibilities • Minimum password security settings • Network security reviews • Minimum environmental security requirements • Physical access to the servers • Weak password security settings or the lack of system functionality to enforce strong password policies. • Sharing of user accounts. • Lack of user access reviews performed or evidence that a user access review was performed to ensure user access rights were commensurate with job responsibilities. • Terminated user review not performed (terminated users continued to have access to certain systems) or not performed on a timely basis. • Lack of segregation of duties in the area of systems, network, and applications administration. • Lack of formal monitoring controls to identify suspicious attempts to gain access to the County and Department networks. • Lack of raised floors in the server room. • Lack of restricted access to certain systems and backup media. 20 County of Hawaii State of Hawaii Schedule of Findings and Questioned Costs Year Ended June 30, 2010 Change management • Lack of a formalized change management process for certain systems. • Lack of internal controls to identify unauthorized changes to the system. • No formal request or approval obtained for an IAS change made. • Lack of evidence that an IAS change was programmed in a non - production environment, tested and accepted by users prior to being promoted to the production environment. • Programmers for a third party service provider have root access to the IAS and Eden production environments, without controls in place to identify unauthorized changes to the system. Backup and Recovery • No formal backup, retention and restoration policy. • No full restoration testing from backup media. • No formal disaster recovery plan. Collectively, the number and related nature of the IT control deficiencies resulted in an overall significant deficiency. Criteria When IT is used to initiate, record, process and report on transactions included in the financial statements, the systems and related processes should include internal controls to prevent or detect potential misstatements. Effect Internal controls in the following areas address the following risks: Physical and logical security Unauthorized access to these systems could result in either the destruction or theft of data, unauthorized or nonexistent transactions being made or transactions being inaccurately recorded. Change management Unauthorized or untested changes promoted to the production environment could cause the systems to either process data differently than intended or unexpectedly compromise the integrity of the data maintained. Backup and Recovery The loss of data as a result of backups not being performed or backup media being unreadable. Cause The primary cause was due to the lack of IT policies and procedures which include internal controls to address the IT risks discussed above. Recommendation We recommend that the County and the Department perform the following: • Develop or update IT policies and procedures to include internal control procedures addressing the IT risks above. • Identify procedures to ensure that IT policies and procedures are consistently followed. • Work with vendor programmers to address any internal control deficiencies due to system limitations. 21 County of Hawaii State of Hawaii Schedule of Findings and Questioned Costs Year End ed June 30, 2010 Finding No. 2010 -02: Accounting for Capital Assets Should Be Improved (Significant Deficiency) Condition During our audit, we identified the following issues related to the County's accounting for capital assets: • Capital outlays were improperly expensed in the prior year. Based on management's estimate of the percentage of capital outlays historically capitalized, the amount improperly expensed was calculated to be approximately $8.0 million. • Approximately $63.1 million of land improvements appear to be misclassified as infrastructure and buildings and improvements. • Approximately $60.7 million of capital assets that were placed into service by year end were improperly classified as construction work in progress. Additionally, depreciation expense for the capital assets placed into service was understated by approximately $1.8 million. • It appears that the County continued to record depreciation expense on certain infrastructure assets past their estimated useful lives. • Intangible assets of approximately $533,000 were not recorded as capital assets. • Approximately $5.3 million of accounts payable and retainage payable for construction and equipment were not properly accrued at year end. • Lack of procedures to determine whether infrastructure assets that have been removed or replaced are properly recorded as disposals. • Lack of procedures to periodically reevaluate the estimated useful lives for the depreciation of capital assets. Criteria The County is required to follow generally accepted accounting principles ( "GAAP "). Effect The County's capital asset balances and various classifications were misstated. Cause The adjustments related to capital assets were primarily due to the County's accounting practices that do not record certain transactions in accordance with GAAP. We also noted that the issues related to infrastructure were due to infrastructure assets that have not yet been entered into the County's accounting system but are still tracked and depreciated through a manual process. Recommendation We recommend that management implement proper accounting practices to ensure that transactions are recorded in accordance with GAAP. Management should also focus on completing the conversion of the manual infrastructure records to the accounting system. 22 County of Hawaii State of Hawaii Schedule of Findings and Questioned Costs Year Ended June 30, 2010 Finding No. 2010 -03: Restatement of Beginning Net Assets (Significant Deficiency) Condition During our audit, we identified prior year errors related to the Department's accounting for revenues in the proper period, project costs that should have been expensed, costs that should have been accrued, and over - depreciation of capital assets. Criteria The Department is required to follow GAAP. Effect Due to the errors, the Department restated its beginning net assets as of July 1, 2009 by $8.9 million to correct these errors. • Revenues were recognized at the time of billing, which were based on the performance of the monthly or bi- monthly meter readings, rather than when the revenues were earned. This resulted in an understatement of net assets of $3.1 million at June 30, 2009. • Invoices for services spanned two fiscal years but the expenses were not allocated between fiscal years and accrued at year end. This resulted in an overstatement of net assets of $880,000 at June 30, 2009. • Management continued to record depreciation expense on fully depreciated assets. This resulted in an understatement of net assets of $9.0 million at June 30, 2009. • There were $1.2 million of consulting project costs that were improperly capitalized as deferred charges and $1.1 million of construction costs of an abandoned project were not written off from construction work in progress. This resulted in an overstatement of net assets of $2.3 million at June 30, 2009. Cause The adjustments were due to the Department's accounting practices that were not in accordance with GAAP and due to the Department's policy to investigate the status of projects after three years of inactivity rather than on an annual basis. Recommendation We recommend and the Department has already restated the beginning net assets balance in the financial statements for the year ended June 30, 2010 to correct the errors identified. We also recommend that management of the Department implement proper accounting practices to ensure that transactions are recorded in accordance with GAAP. Management of the Department should also consider revising the deferred charges and construction work in progress policies to investigate the status of projects on an annual basis. 23 County of Hawaii State of Hawaii Schedule of Findings and Questioned Costs Year Ended June 30, 2010 Section III — Federal Award Findings and Questioned Costs Questioned Cost Finding No. 2010 -04: Suspension and Debarment (Significant Deficiency) $ - Federal Agency: U.S. Department of Transportation U.S. Environmental Protection Agency CFDA Number and Title: 20.205 — Highway Planning and Construction 20.509 — Formula Grants for Other Than Urbanized Areas 66.458 — Capitalization Grants for Clean Water State Revolving Funds 66.468 — Capitalization Grants for Drinking Water State Revolving Funds Award Number and Award STP- 0190(14) 9/20/06 — completion Year: ARRA- 1880(1) 11/20/09 — completion HI -18 -X026 2/15/08 — 6/30/10 C15008019 1/04/10 — 2/17/11 NPS007200 11/30/09 — 5/28/11 DW105 -0001 11/22/03 — completion DW 130 -0005 7/17/09 — 8/31/10 Condition For 7 out of 27 items we tested, either a suspension and debarment certification was not obtained or the County did not perform a verification check. However, none of the items tested were with suspended or debarred parties. Criteria To comply with OMB Circular A -102, Grants and Cooperative Agreements With State and Local Governments, the County must verify that the vendor is not suspended or debarred. Effect There is a risk that inappropriate procurement transactions could take place. Cause The noncompliance was due to a lack of formal procedures and assignment of responsibility over suspension and debarment. Recommendation We recommend that the County develop formalized procedures to perform a suspension and debarment verification check and assign responsibility for the performance of the verification check. The County should provide adequate training for all personnel administering federally funded programs. 24 County of Hawaii State of Hawaii Schedule of Findings and Questioned Costs Year Ended June 30, 2010 Questioned Cost Finding No. 2010 -05: Subrecipient Central Contractor Registration Federal Agency: CFDA Number and Title Award Number and Award Year: U.S. Department of Housing and Urban Development 14.255 — ARRA — Community Development Block Grant/State's Program and Non - Entitlement Grants in Hawai'i B- 09 -HY -15 -0002 6/5/09 — 9/30/12 Condition We noted that the County did not monitor the subrecipients receiving recovery act funds to ensure that subrecipients were properly registered on the Central Contractors Registration ( "CCR "). Criteria To comply with the American Recovery and Reinvestment Act ( "ARRA ") Section 1512, recipients and their first -tier recipients must maintain current registrations in the CCR (2 CFR 176.50(c)). Effect One of the County's subrecipients was not registered on the CCR. Cause The noncompliance was due to a lack of formal procedures to properly monitor subrecipient's registration on the CCR. Recommendation We recommend that the County develop formalized procedures to ensure that the subrecipients receiving ARRA funds have current CCR registrations. The County should provide adequate training for all personnel administering ARRA programs. 25 County of Hawaii State of Hawaii Schedule of Findings and Questioned Costs Year Ended June 30, 2010 Section IV — Status of Prior Year Findings and Questioned Costs Questioned Cost Finding No. 2009 -01: Activities Allowed and Unallowed — Calculation of Federal Expenditures $ 27.965 Federal Agency: CFDA Number and Title: Award Number and Award Year: U.S. Department of Homeland Security 97.036 — Disaster Grants — Public Assistance (Presidentially Declared Disasters): Kiholo Earthquake FEMA- 1664 -DR -H I 10/15/06 — 10/15/1 C Per the prior auditor's testing of the activities allowed and unallowed compliance requirement, it was noted that the County overstated the federal share of eligible costs related to the Ikuo Hisaoka Gymnasium by $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 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). It was recommended that the County be more cognizant of deviations in the calculation of the federal share to ensure that the expenditures are accurately reported, including applying the applicable guidance. Status We understand that the County has sought the assistance of the Hawaii State Civil Defense in determining the correct portion eligible for federal aid and is currently awaiting a response. 26 Corrective Action Plan CORRECTIVE ACTION PLAN Financial Statement Findings: Finding 2010 -01 Information Technology (Significant Deficiency) Recommendation: We recommend that the County and the Department perform the following: • Develop or update IT policies and procedures to include internal control procedures addressing the IT risks above. • Identify procedures to ensure that IT policies and procedures are consistently followed. • Work with vendor programmers to address any internal control deficiencies due to system limitations. General Comment: Not all the comments applied to both entities which have separate IT environments and staff. We have broken out the response into two pieces and have done our best to respond fully to the comment. We acknowledge the importance of good internal controls especially in the area of information technology. Water Department's Comment: The Department has 2 projects to address the comments relating to the financial and billing systems. First, we bought a new server exclusively for these systems. This server is located in a more secure location and will be administered by the Department's IT section. Transition of the systems to the new server is still in progress but once completed, controls relating to physical and logical security and backup and recovery will be improved. The second project involves switching our billing system from one currently supported by a company in Canada, to a system owned by the Board of Water (BOW) on Oahu. The benefits of using the BOW's billing system, besides having local support in the same time zone, is that controls relating to physical and logical security, change management, and backup and recovery will be addressed by the BOW's more sophisticated IT environment. We believe these projects will adequately address the IT concerns raised in this report. County's Comment: The County has recently implemented policies to address some of the auditor's concerns including requiring complex passwords that must be changed every 90 days in addition to our current policy to disallow the reuse of the last 5 passwords. The County is in the process of addressing other concerns including procuring hardware and software to allow us to proactively monitor our internet connections for suspicious activity; the IT department is researching options available to detect unscheduled changes on our servers and applications; and the IT department is in the process of implementing an offsite disk based backup application which will allow backups and restores to be completed more efficiently. In addition, the IT department plans to work on the following in the near future: develop a method to mitigate the risks associated with third party service providers having root access; develop formal policies relating to formal backup, retention and restoration policies and others as needed; restoration testing after the implementation of the offsite disk based backup. Since the comment is not specific in some areas and in other areas we have restrictions to implementation, the IT department provides the following information: user access reviews are performed annually for our Eden financial system; active directory accounts are reviewed on an annual basis, in addition there are cases where former employees are hired to work for the County on a contract basis which requires an active directory account to be recreated which may explain the continued access to the network; the lack of total positions in the IT department prevents us from segregating job duties optimally; most server facilities used by the County are repurposed rooms and have not been built with raised flooring — there are currently no plans to implement raised flooring in our current facilities; the IT Page 1 department makes every effort to keep copies of emails related to maintenance and update for our software applications — we are researching options available for formal change management of our critical systems; and two systems are maintained for IAS specifically for testing and production and we will work to provide evidence of our testing in the future for this system. We acknowledge that there are some areas for improvement and we will work towards addressing these. In many cases we need to formalize our procedures already in place which we will also work on. However, we are not aware of any situations or issues that arose due to our lack of formal policies and procedures. We will continue to evaluate the cost versus benefit of each choice we make. It is very likely that for us to do every item on this list, we would have to increase our IT staffing by 3 to 5 people. The IT department currently has 18 positions and supports over 900 computers and users. Anticipated Completion Date: Some items have already been implemented, others will be implemented by June 30, 2011 and for a few items this will be an ongoing effort as we strive to improve our internal controls over information technology. Contact People: Rick Sumada, Waterworks Controller Department of Water Supply Burt Tsuchiya, Director of Information Technology County of Hawaii Finding 2010 -02 Accounting for Capital Assets Should Be Improved (Significant Deficiency) Recommendation: We recommend that management implement proper accounting practices to ensure that transactions are recorded in accordance with GAAP. Management should also focus on completing the conversion of the manual infrastructure records to the accounting system. County's Comment: The County acknowledges the importance of GAAP and strives to ensure that all of our financial reporting and accounting practices are in compliance with GAAP. In many of the areas noted by the auditors, we have already taken corrective action and provided training where necessary to our new staff working in this area. We will formalize some of our policies as time permits. We are in the process of converting our infrastructure records into our fixed asset system. However, we continue to respectfully question some of the comments provided by the auditors and will take the following steps in the coming months: • Approximately $13.5 million of the land improvements referred to in the second bullet point of the condition, relate to assets acquired between 1975 and 1997. We will continue to investigate the nature of these assets and change their classification in the coming year if necessary. • Approximately $49.6 million of the land improvements referred to in the second bullet point of the condition, related to dedicated roads. We do not feel that the base of the road should be classified separately from the road pavement. We will continue to investigate the guidance in this area and consult with the Government Finance Officers Association (GFOA) in the coming year. If necessary, the classification of the base part of the roads will be changed next fiscal year. • We use a composite method for recording depreciation on our infrastructure assets which resulted in bullet point number four. As we convert our infrastructure assets to our fixed asset system, this should take care of any confusion. However, if necessary, we will consult with GFOA in the coming months to determine if our method is allowable. Anticipated Completion Date: For items not yet completed: June 30, 2011. Contact Person: Kay Oshiro, Controller County of Hawaii Page 2 Finding 2010 -03 Restatement of Beginning Net Assets (Significant Deficiency) Recommendation: We recommend and the Department has already restated the Department's beginning net assets balance in the financial statements for the year ended June 30, 2010 to correct the errors identified. We also recommend that management of the Department implement proper accounting practices to ensure that transactions are recorded in accordance with GAAP. Management of the Department should also consider revising the deferred charges and construction work in progress policies to investigate the status of projects on an annual basis. Water Department's Comment: Management strives to ensure that financial reporting and accounting practices are in compliance with GAAP. The Department acknowledges that there may have been a difference in the interpretation of GAAP, however, has already completed the restatement of their financial statements. Procedures are being implemented to properly reflect transactions in the June 30, 2011 financial statements. The Department has already revised their policies to investigate the status of projects annually. Anticipated Completion Date: For items not already completed: June 30, 2011. Contact Person: Rick Sumada, Waterworks Controller Department of Water Supply Federal Award Findings: U.S. Department of Transportation, Passed through the State Department of Transportation Highway Planning and Construction CFDA No. 20.205 Federal Award Nos.: STP- 0190(14) and ARRA- 1880(1) Award Period: July 1, 2009 to June 30, 2010 Formula Grants for Other Than Urbanized Areas CFDA No. 20.509 Federal Award No.: HI -18 -X026 Award Period: July 1, 2009 to June 30, 2010 U.S. Environmental Protection Agency, Passed through the State Department of Health Capitalization Grants for Clean Water State Revolving Funds CFDA No. 66.458 Federal Award Nos.: C15008019 and NPS007200 Award Period: July 1, 2009 to June 30, 2010 Capitalization Grants for Drinking Water State Revolving Funds CFDA No. 66.468 Federal Award Nos.: DW105 -0001 and DW130 -0005 Award Period: July 1, 2009 to June 30, 2010 Finding 2010 -04 Suspension and Debarment (Significant Deficiency) Recommendation: We recommend that the County develop formalized procedures to perform a suspension and debarment verification check and assign responsibility for the performance of the verification check. The County should provide adequate training for all personnel administering federally funded programs. County's Comment: The County acknowledges the importance of a suspension and debarment verification check. We will be formalizing our procedures and assigning responsibility for the verification check as well as providing training on this new procedure to add federal checks to our current state suspension and debarment checks. Anticipated Completion Date: June 30, 2011 Contact Person: Kay Oshiro, Controller County of Hawaii Page 3 U.S. Department of Housing and Urban Development ARRA — Community Development Block Grant/State's Program and Non - Entitlement Grants in Hawaii CFDA No. 14.255 Federal Award No.: B- 09 -HY -15 -0002 Award Period: July 1, 2009 to June 30, 2010 Finding 2010 -05 Subrecipient Central Contractor Registration Recommendation: We recommend that the County develop formalized procedures to ensure that the subrecipients receiving ARRA funds have current CCR registrations. The County should provide adequate training for all personnel administering ARRA programs. County's Comment: The County acknowledges the importance CCR registration verification. We will develop formalized procedures to ensure that subrecipients have current CCR registrations. While training has been held, additional training will also be provided. Anticipated Completion Date: This will be an ongoing effort. Contact Person: Susan Akiyama, Office of Housing and Community Development County of Hawaii Status of Prior Year Findings: U.S. Department of Homeland Security Disaster Grants — Public Assistance (Presidentially Declared Disasters): Kiholo Earthquake CFDA No. 97.036 Federal Award No.: FEMA- 1664 -DR -HI Award Period: July 1, 2008 to June 30, 2009 Finding 2009 -01 Activities Allowed and Unallowed — Calculation o f Federal Expenditures Recommendation: We recommend that the County be more cognizant of deviations in the calculation of the federal share to ensure that the expenditures are accurately reported, including applying the applicable guidance. County's Comment: The County continues to strive to be more diligent in meeting its activities allowed and unallowed requirements, including the accurate reporting of the federal expenditures. Repairs to the facility in question have now been completed and we have received our final insurance proceeds — the amount of which impacts the allowed federal expenditures. We are in the process of working with Hawaii State Civil Defense in determining the final eligible portion for federal aid. Anticipated Completion Date: June 30, 2011 Contact Person: Kay Oshiro, Controller County of Hawaii Page 4