The URL can be used to link to this page

Home My WebLink About2022-04 Department of Water Supply Cash Handling Follow-upCounty of Hawai'i Seal County of Hawai'i Office of the County Auditor Department of Water Supply Cash Handling Follow-Up Report No. 2022-4 September 2, 2022 Top Picture of Rainbow Falls Bottom Picture of someone counting several one hundred dollar bills. Tyler J. Benner County of Hawaii County Auditor Office of the County Auditor County of Hawaii 120 Pauahi St., 309 Office of the County Auditor Hilo, HI 96720 Ph 808.961.8386 F 808.961.8905 www.hawaiicounty.gov September 2, 2022 Honorable Maile Mederios David, Council Chair and Members of the Hawaii County Council Hawaii County Council 25 Aupuni Street Hilo, Hawaii 96720 Dear Chair David and Council Members, In accordance with generally accepted government auditing standards and the Hawaii County Charter Section 3-18(d)(3), the Office of the County Auditor has a responsibility to monitor and follow up on audit recommendations to ensure that audit findings are being addressed through appropriate corrective action and to aid us in planning future audits. We have completed our follow-up engagement of the Cash Handling at the Department of Water Supply Report No. 2017-02, dated August 25, 2017. The objective was to determine if the Department of Water Supply implemented the 2017 cash handling audit recommendations. This follow-up is limited to reviewing and reporting on the implementation of outstanding audit recommendations. We tested seven recommendations and found five were implemented, one was resolved, and one was partially implemented. Status of Recommendations Implemented Resolved Partially Implemented 5 1 1 Sufficient and appropriate Department implemented an Department has made evidence was available to alternative solution that fully significant progress. We support all aspects of the addresses the audit finding or reviewed sufficient and recommendation. risks. appropriate evidence to support key aspects of the recommendation. Hawai`i County is an Equal Opportunity Provider and Employer To improve government accountability and ensure audit recommendations are implemented or resolved, we will continuously monitor the status of recommendations using our remediation tracker. To view the status, please visit us at: https://www.hawaiicounty.gov/our-county/legislative/office-of-the-county-auditor. In response to a draft of this follow-up report, management expressed general agreement with our audit results. A copy of management's complete response can be found in Chapter 4. We would like to express our sincere appreciation and commend the Department of Water Supply for their continued efforts to improve cash handling practices, professionalism, and prompt feedback during the follow-up audit process. Their cooperation was exceptional. If you have any questions or concerns about the status of the recommendations discussed, please feel free to contact me at 961-8386. Respectfully, Tyler J. Benner County Auditor County of Hawaii cc: Mitchell D. Roth, Mayor Lee Lord, Managing Director Jon Henricks, County Clerk Keith K. Okamoto, P.E., Manager-Chief Engineer Kawika Uyehara, P.E., Deputy Candace Gray, Waterworks Controller Water Board Table of Contents Executive Summary................................................. 1 AboutUs................................................................... 4 Chapter 1 Introduction Objective................................................................5 Scope and Methodology........................................5 Definitions..............................................................7 Chapter 2 Status of Recommendations Segregation of Duties Recommendation 1 ....................................8 Implementing Monitoring and Oversight Recommendation 2....................................9 Recommendation 3..................................10 Recommendation 4..................................11 Recommendation 5..................................12 Update and Enforce Policies and Procedures Recommendation 6..................................13 Provide Training Recommendation 7..................................14 Chapter 3 Fraud, Waste, and Abuse ................... 15 Conclusion ............................................................. 16 Chapter 4 Management Response.........................17 Chapter 5 Attachments.............................................18 This page intentionally left blank. Executive Summary Background The Office of the County Auditor has completed a follow-up engagement with the County of Hawai`i's Department of Water Supply (DWS) Cash Handling. We initiated the audit as we believe cash receipts are an inherently high-risk process. The initial audit identified incomplete and inaccurate policies and procedures over the water receipts cash handling process, which resulted in significant internal control weaknesses. These weaknesses included inadequate segregation of duties and insufficient independent review and monitoring. Based on the conditions at the time, seven recommendations were made. The purpose of this follow-up audit was to determine if DWS implemented the prior recommendations. Subsequently, in January 2020, the Department of Water Supply upgraded its customer service and billing system to Northstar CIS, and manual receipts became obsolete and were no longer used to process payments. In this follow-up, we tested seven recommendations to determine if DWS implemented our cash handling recommendations. We determined five recommendations were implemented, one was resolved, and one was partially implemented. We found: Executive Summary 1 Status of Recommendations Status Segregation of Duties 1. We recommended DWS management separate incompatible duties. Implemented Implementing Monitoring and Oversight 2. We recommended DWS management perform ongoing monitoring of Implemented their internal control system as part of the normal course of operations. 3. We recommended DWS Finance, and Customer Service Branch Implemented implements an independent verification process by an employee outside the cash handling process. 4. We recommended DWS Finance, and Customer Service Branch Resolved reconciles all adjustments in the customer service and billing system (Northstar CIS) to an approved debit/credit memo. 5. We recommended DWS Finance and Customer Service Branch Implemented conduct surprise counts at all cash receipting locations. Update and Enforce Policies and Procedures 6. We recommended DWS management clarify and enforce internal Partially controls in County policy and procedures to ensure consistency Implemented throughout the department and with industry best practices. Provide Training 7. We recommended DWS management provide ongoing cash handling Implemented and internal controls training for all DWS employees who handle revenue. 2 Executive Summary Department of Water Supply (DWS) Actions 1. Management achieved segregation of duties by realigning responsibilities ensuring no one person was responsible for consecutive steps in the cash handling environment, including accepting cash payments, depositing, recording/adjusting transactions in the system, and reconciling bank statements. 2. Supervisors monitored cash receipts and cashier's daily reconciliations. 3. Accountants outside the cash receipting process independently reviewed supervisors' reconciliations. 4. Adjustments are approved by a supervisor and reconciled by an accountant. Adjustments are logged, and variances are investigated. 5. Conducted surprise cash counts. 6. Updated policies and procedures are being reviewed but have not been disseminated. 7. Provided ongoing cash handling and internal controls training to employees who handled revenue. Did DWS' Internal Controls Improve Since the 2017 Audit? Internal Control Did DWS perform internal Did DWS perform internal controls in 2017? controls in 2022? Segregation of Duties No Yes Independent Monitoring No Yes Written Policies and Procedures No No Safeguarding of Assets Yes Yes Source: Data compiled by the Office of the County Auditor Conclusion We commend the Department of Water Supply for its efforts to improve cash handling. To further strengthen internal controls over the cash handling process, we've identified some opportunities DWS should: Disseminate updated policies and procedures to clarify: • Deleting receipts • Making change for payment overages • Providing ongoing training when policies and procedures have been updated Executive Summary 3 About us Mission It is our mission to serve the Council and citizens of Hawaii County by promoting accountability, fiscal integrity, and openness in local government. Through performance and/or financial audits of County agencies and programs, the Office of the County Auditor examines the use of public funds, evaluates operations and activities, and provides findings and recommendations to elected officials and citizens in an objective manner. Our work is intended to assist County government in its management of public resources, delivery of public services, and stewardship of public trust. Audit Authority Hawaii County Charter §3-18 establishes an independent audit function within the Legislative Branch through the Office of the County Auditor. Purpose The purpose of this engagement is to follow up and monitor the responses to audit recommendations by audited entities by evaluating if internal controls over water receipts at all Department of Water Supply cash receipting locations are preventing, detecting, and deterring fraudulent transactions, whether these internal controls are following best practices, and if receipts are deposited timely and intact. Performance Audit Definition Performance audits provide objective analysis, findings, and conclusions to assist management and those charged with governance and oversight with, among other things, improving program performance and operations, reducing costs, facilitating decision-making by parties responsible for overseeing or initiating corrective action, and contributing to public accountability. 4 About Us Chapter 1 Introduction Objective Did the Department of Water Supply implement the 2017 cash handling audit recommendations? Scope The prior audit evaluated DWS' Hilo Office cash handling from November 2015 to December 2015 and May 2016 to June 2016. The Waimea, Kona, and Kau Offices were not included in the original scope because all work was reviewed, and final cash receipting system reports were posted through the Hilo Office. The follow-up audit evaluated cash handling practices from July 2022 to August 2022 at the Hilo, Waimea, and Kona Offices. The Kau Office no longer receipts cash and, therefore, was not in scope. The audit engagement began in August 2020. Subsequently, the audit was suspended in October 2020 due to implementing the Northstar CIS system (customer service and billing system) and resumed in July 2022. This follow-up audit was limited to reviewing and reporting on the implementation of outstanding audit recommendations. We did not consider new or previous issues that did not relate to our original recommendations. Methodologv To verify the Department of Water Supply implemented the 2017 cash handling recommendations, we: • Corroborated information with appropriate staff to follow up on the responses to audit recommendations • Reviewed applicable laws and other relevant governance • Performed tests of internal controls and transactions over the cash handling process • Conducted site visits to verify monitoring and oversight practices • Was mindful of potential fraud, waste, and abuse during the audit • Noted exceptions and identified areas for improvement Introduction 5 We conducted this performance audit in accordance with generally accepted government auditing standards. 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. 6 Introduction Definitions Implemented: Department has fully completed the audit recommendation. We reviewed sufficient and appropriate evidence to support all aspects of the recommendation. Resolved: Although the department did not implement the audit recommendation, it implemented an alternative solution/mitigating/compensating control that fully addressed the applicable audit finding or risk. Partially Implemented: Department has made significant progress. We reviewed sufficient and appropriate evidence to support key aspects of the recommendation. Not Implemented: Sufficient and appropriate evidence was unavailable to support key aspects of the recommendation, or the department has no plans to implement the recommendation. Not Applicable: The risk associated with the recommendation no longer exists or is no longer applicable. Definitions 7 This page intentionally left blank. Chapter 2 Status of Recommendations Segregation of Duties Condition and Cause One employee had complete control over the cash handling process. The same employee had full administrative computer access to record/adjust transactions in the public utility billing system (PUBS) and the general ledger(GL), reconciled bank statements, and made daily bank deposits. Effect of the Condition The lack of segregation of duties made adjustments difficult to detect. Recommendation 1 "We recommend that Department of Water Supply management separate incompatible duties. One individual should not be in charge of all of these cash handling elements: physical custody of cash, depositing cash, recording/adjusting transactions in the system, and reconciling the bank statements. If duties cannot be sufficiently segregated, mitigating controls, such as removing administrator computer access rights to the cash receipting system and/or a lower level of detailed supervisory review, could be implemented." Department Action To meet this recommendation, in 2017, DWS reassigned duties to segregate incompatible duties over: • Physical custody of cash • Receipting cash transactions • Reconciling cash receipts • Reconciling monthly bank statements • Recording/adjusting transactions in the systems • Making daily bank deposits • Investigating variances Audit Activity To verify status, we observed cash receipting, reconciliation, and safeguarding practices and found no exceptions. We found various staff performed different functions to ensure adequate segregation of duties for those responsible for handling cash (i.e., cashiers/customer service representatives, supervisors, clerks, accountants, and management). Status: Implemented Status of Recommendations 8 Implementing Monitoring and Oversight Condition and Cause Receipts and daily deposits posted in PUBS were not reviewed for accuracy. Effect of the Condition The lack of oversight made the reconciliation of deposits difficult to monitor. Recommendation 2 "We recommend the Department of Water Supply management perform ongoing monitoring of their internal control system as part of the normal course of operations. Ongoing monitoring includes regular management and supervisory activities, daily reconciliation of adjustments and cash receipts, and other routine actions. Department Action To meet this recommendation, DWS implemented: • Daily reconciliation of cash receipts and bank deposits • End-of-the-month reconciliation of journal entries to the general ledger and bank statements • Scheduled surprise cash counts • Monitoring and investigating variances Audit Activity To verify status, we conducted site visits to observe monitoring and oversight practices, including reconciliations between cash receipts, bank deposits and statements, adjustments, and various tracking reports, corroborated with staff, and found no exceptions. Status: Implemented 9 Status of Recommendations Condition and Cause Independent verification was not being performed. Effect of the Condition The lack of independent verification over the cash handling process made fraud detection and variances difficult to detect. Recommendation 3 "We further recommend that the Department of Water Supply Finance and Customer Service Branch implement an independent verification process by an employee outside the cash handling process to review. • the daily cash receipts reconciliation and bank reconciliation; • cash receipts in the Public Utility Billing System (PUBS) that are reconciled to the general ledger; and • manual receipts posted in PUBS for accuracy." Department Action To meet this recommendation, DWS no longer uses manual receipts since they upgraded to the Northstar CIS system in January 2020. Independent reviewers outside the cash handling process: • Re-verifies cash receipts and compares transactions itemized by tender (cash, credit card, and checks) • Reconciles daily and monthly transactions against Northstar and the general ledger • Reconciles daily bank transactions • Investigates variances Audit Activity To verify status, we conducted site visits to observe monitoring practices, corroborated with staff, reviewed itemized calculator tape totals, and found no exceptions. Independent reviewers outside the cash receipting process at various locations reviewed transactions for accuracy and reconciled cash receipts and bank transactions to Northstar and the general ledger. Status: Implemented Status of Recommendations 10 Condition and Cause Adjustments due to over/under meter readings, billing errors, customer leakage, outlet coupling leak, late charges, and customer credits could be made by a cashier and not detected by management. An authorized debit/credit memo was not used to reconcile adjustments. Effect of the Condition Management does not know if all adjustments to PUBS were authorized and if revenue was misappropriated. Recommendation 4 "We further recommend that the Department of Water Supply Finance and Customer Service Branch reconcile all adjustments in PUBS to an approved debit/credit memo." Department Action To meet this recommendation, adjustments are approved by a supervisor and reconciled by an accountant from source documents to the general ledger. Adjustments are logged, and variances are investigated. Debit/credit memos are no longer used for adjustments to water service accounts since DWS upgraded to the Northstar CIS system. Cashiers do not have the ability to access or post adjustments to a customer's account relating to billing errors or any other adjustments in the system. Audit Activity To verify status, we compared adjustment journals to final bill reports, corroborated with staff, and found no exceptions. Status: Resolved 11 Status of Recommendation Condition and Cause Surprise cash counts were not addressed in 2010 cashier procedures or performed at all cash receipting locations. Supervisors counted the daily beginning balance of the cash drawer at the Hilo Office. Effect of the Condition Monetary variances may go undetected, and management may not know if revenue was misappropriated. Recommendation 5 "We further recommend that the Department of Water Supply Customer Service Branch conduct surprise cash counts at all cash receipting locations." Department Action To meet this recommendation, supervisors developed a schedule, conducted surprise cash counts, reconciled petty cash receipts, and verified cash cans. During the pandemic, surprise cash counts were conducted via webcam. Audit Activity To verify status, we reviewed surprise cash count schedules and worksheets, corroborated with staff, and found surprise cash counts were conducted for the Hilo, Kona, and Waimea Offices. Status: Implemented Status of Recommendations 12 Update and Enforce Policies and Procedures Condition and Cause DWS' 2010 cashier procedures were outdated and incomplete and not followed and enforced. Effect of the Condition DWS was unable to enforce compliance with incomplete and outdated policies and procedures. Recommendation 6 "We recommend the Department of Water Supply management 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: ✓ reconciling adjustments in PUBS with approved debit/credit memos; ✓ reconciling cash receipts in PUBS to the general ledger system; ✓ reviewing manual receipts posted in PUBS for accuracy and ✓ completeness; ✓ independently reviewing the bank reconciliation; and ✓ performing surprise cash counts at all locations. • Provide guidance and clarification on individualjob duties to ensure adequate segregation of duties exists. • Clarify or add policies regarding any updated procedures to reflect current processes. Updated policies should also include: ✓ endorsing checks immediately upon receipt; ✓ require all adjustments are supported with an approved debiucredit memo; and ✓ fraud reporting guidance." Department Action DWS said existing policies and procedures are currently being revised and streamlined to incorporate Northstar CIS system. Audit Activity To verify status, we conducted a site visit to observe cash receipting activities, compared DWS' Revised Cashier Procedures dated January 2010 to Internal Guidelines - Cash Receipts (draft) policy dated July 2022, and found policies and procedures have not been updated by management in twelve years. To strengthen policies and procedures, DWS should clarify: • Deleting receipts • Making change for payment overages • Providing ongoing training when policies and procedures have been updated To meet this recommendation, DWS should review policies and procedures at least annually, update accordingly, disseminate, provide training, and have staff acknowledge receipt to ensure employees who handle revenue understand and comply with written policies and procedures. Status: Partially Implemented 13 Status of Recommendations Provide Training Condition and Cause Employees who handled revenue were not continuously trained. Effect of the Condition Unclear and outdated written policies and procedures resulted in inefficiencies and frustrations among staff and management. Recommendation 7 "We recommend the Department of Water Supply management provide ongoing cash handling and internal controls training for all DWS employees who handle revenue." Department Action To meet this recommendation, cash receipts training was provided during orientation by a supervisor. In Fall 2019, staff received training on the new customer service and billing system (Northstar CIS). Staff also receives continuous on-the-job training. Audit Activity To verify status, we reviewed training material, corroborated with staff, and found although staff had individual desk procedures, staff should be provided ongoing training when policies and procedures have been updated to ensure they understand and are consistently applied. Status: Implemented Status of Recommendations 14 Chapter 3 Fraud , Waste, and Abuse Government auditing standards require that we remain mindful and document instances of fraud, waste, and abuse. Management and staff did not identify any instances of fraud or misappropriations during the engagement. We did not identify specific issues during the audit. 15 Fraud,Waste,and Abuse Conclusion 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 increase, thereby increasing the risk exposure to the County. On a national level, employee misappropriation of cash is the most common type of fraud. According to the Association of Certified Fraud Examiners (ACFE) 2022 Report to the Nations on Occupational Fraud, organizations lose an estimated five percent of revenues to fraud each year. 1 (Attachment 1) "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."2 To improve government accountability, the Office of the County Auditor identified opportunities to further strengthen internal controls over cash handling. Internal controls are broadly defined as a process affected 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. By identifying gaps in policies and procedures, DWS can identify where effective controls need to be placed, where to provide sufficient detail for new and existing procedures, and clarify unclear procedures so that they are easier to follow. To meet our recommendations, DWS should disseminate updated policies and procedures to clarify: • Deleting receipts • Making change for payment overages • Providing ongoing training when policies and procedures have been updated In closing, to improve government accountability and ensure audit recommendations are implemented or resolved, we will continue to monitor the department's pending status using our remediation tracking tool. We commend the Department of Water Supply's cooperation and its commitment to improving internal controls over cash handling. 1 Association of Certified Fraud Examiners (ACFE). "Occupational Fraud 2022:A Report to the Nations." https://acfepublic.s3.us-west-2.amazonaws.com/2022+Report+to+the+Nations.pdf. Date Accessed: 1 Aug. 2022. 2 Wolters Kluwer. "Guarding Against Internal Frauds Committed by Employees. https://www.wolterskluwer.com/en/expert-insights/guarding-against-internal-frauds-committed-by-employees. Date Accessed: 1 Aug. 2022. Fraud,Waste,and Abuse 16 Chapter 4 Management Response DEPARTMENT OF WATER SUPPLY COUNTY OF HAWAl'I 345 KEKUANAO'A STREET, SUITE 20 HILO, HAWAl'I 96720 TELEPHONE (808) 961-8050 FAX (808) 961-8657 September 1, 2022 TO: Mr. Tyler J. Benner, County Auditor County of Hawai' i Office of the County Auditor 120 Pauahi St., Suite 309 Hilo, HI 96720 FROM: Keith K. Okamoto, P.E., Manager-Chief Engineer SUBJECT: Department of Water Supply Cash Handling Follow-up Audit Report After reviewing the draft of the subject follow-up report, we'd like to express our agreement in the status of all seven (7) of the audit recommendations. We understand that we need to continue improvement on Recommendation 6, stated as follows: Update and Enforce Policies and Procedures: Updated policies and procedures are being reviewed but have not been disseminated. To meet this recommendation, DWS should review policies and procedures at least annually, update accordingly, disseminate, provide training, and have staff acknowledge receipt to ensure employees who handle revenue understand and comply with written policies and procedures. Status: Partially Implemented We appreciate your and your staffs collaborative effort to improve our cash handling practices. We look forward to implementing your follow-up recommendation while meeting your requirements to improve our status from "Partially Implemented" to "Implemented" for Recommendation 6, in the near future. Sincerely Yours, Keith Okamoto, P.E. Manager-Chief Engineer CG:smc Water, Our Most Precious Resource... Ka Wai A Kane The Department of Water Supply is an Equal Opportunity provider and employer. 17 Management Response Chapter 5 Attachments ACFE's Impact ofFraud Findirip Key Findings Our Study Covered: 2,110 cases from 133 countries causing total losses of more than $3.6 Billion. CFE's estimate that organizations lose 5% of revenue to fraud each year. Median loss per case $117,000 Average loss per case $1,783,000. Detection. 42% of frauds were detected by tips, which is nearly 3 times as many cases as the next most common method. More than half of all tips came from employees. 40% emails, 33% web based/ online form, and 27% telephone hotline. Email and web-based reporting both surpassed telephone hotlines. Organizations with hotlines detect fraud more quickly and have lower losses than organizations without hotlines. $100,000 in 12 months with fraud hotlines. $200,000 in 18 months without fraud hotlines. Schemes. Asset misappropriation schemes are the most common but least costly. 86% of cases, $100,000 median loss. Financial Statement Fraud Schemes are the least common but most costly. 9% of cases, $593,000 median loss. Corruption was the most common scheme in every global region. A typical fraud case. Causes a loss of $8,300 per month. Last 12 months before detection. 8% of fraud cases involved the use of cryptocurrency. Among these cases, cryptocurrency was most commonly used for: 48% making bribery and kickback payments, and 43% converting misappropriated assets. Source:Occupational Fraud 2022: A Report to the Nations https://acfepublic.s3.us-west.amazonaws.com/2022+Report+to+the_Nations.pdf Attachments 18 Key Findings. Victim Organizations. Top 5 median losses by industry. Real estate, $435,000. Wholesale trade, $400,000. Transportation and warehousing, $250,000. Construction, $203,000. Utilities, $200,000. Organizations with the fewest employees had the highest median loss $150,000. Perpetrators. Owners/ executives committed only 23% of occupational frauds, but they caused the largest losses. Owners/ executives, $337,000. Managers, $125,000. Employee, $50,000. Nearly half of all occupational frauds came from these four departments: Operations 15%, accounting 12%, executive/ upper management 11%, and sales 11%. 85% of fraudsters displayed behavioral red flags of fraud. Only 6% or perpetrators had a prior fraud conviction. Anti-Fraud Controls. The presence of anti-fraud controls is associated with lower fraud losses and quicker fraud detection. Nearly half of cases occurred due to: lack of internal controls 29% or override of existing controls 20%. 81% of victim organizations modified their anti-fraud controls following the fraud. 75% increased management review procedures. 64% Increased use of proactive data monitoring analysis. Case results. 61% of perpetrators were terminated by their employers. 58% of cases were referred to law enforcement. 66% of cases referred to law enforcement resulted in conviction. 50% of organizations that didn't refer cases to law enforcement cited internal discipline as the reason. Key Findings Occupational Fraud 2022: A Report to the Nations. https://acfepublic.s3.us-west.amazonaws.com/2022+Report+to+the_Nations.pdf 19 Attachments Tyler J. Benner County of Hawaii County Auditor Office of the County Auditor 120 Pauahi St., 309 Hilo, HI 96720 808.961.8386 www.hawaiicounty.gov The Office of the County Auditor is tasked with promoting accountability,fiscal integrity, and openness in local government. Our work is intended to assist County government in its management of public resources, delivery of public services, and stewardship of public trust. Copies of this audit report can be obtained by contacting the Office of the County Auditor or visiting our website: https://www.hawaiicounty.gov/our-county/legislative/office-of-the-county-auditor/audit-reports