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HomeMy WebLinkAbout05 - CC-7 - Results of Payroll Audit Conducted by La - 1/17/2012CITY COUNCIL AGENDA REPORT MEETING DATE: JANUARY 17, 2012 ITEM NUMBER: SUBJECT: RESULTS OF PAYROLL AUDIT CONDUCTED BY LANCE, SOLL, LUNGHARD, LLP DATE: JANUARY 11, 2012 FROM: FINANCE DEPARTMENT /FINANCE ADMINISTRATION PRESENTATION BY: BOBBY YOUNG, FINANCE AND I.T. DIRECTOR FOR FURTHER INFORMATION CONTACT: BOBBY YOUNG, FINANCE AND I.T. DIRECTOR (714) 754-5243 RECOMMENDED ACTION Receive and file results of payroll audit and consider staff responses to the findings noted by Lance, Soll, Lunghard, LLP. BACKGROUND As part of the FY 11-12 annual budget, City Council approved funding for an audit firm to review the City's policies and procedures over Payroll. This review was to help ensure the City is paying employees correctly based on current contracts and the amounts reported on the Employee Compensation report are fair and accurate. Staff subsequently issued the RFP and received responses from three qualified firms. Upon completing an interview of each firm and determining their availability to complete such a review on the City's schedule, staff recommended selecting the firm of Lance, Soll, Lunghard, LLP (LSL). ANALYSIS LSL began three weeks of field work on August 15. They selected 50 employees and each member of City Council to test payroll transactions within the last calendar year (2010). This sample was determined using a risk based approach with factors including the degree of complexity, level of compensation and the potential for fraud. LSL also selected employees from the executive group and each of the bargaining groups. Their tests covered a review of personnel files and hiring documents, Memorandum of Understandings (MOU's), side letter of agreements, timecards, paychecks, pay journals, leave balances, labor distributions, W-2 reporting, and verification of internal control policies and procedures governing payroll transactions. In addition, LSL tested the accuracy of the employee's total pay exclusive of pensions as reported in the 2010 Employee Compensation Report for the sample referenced above. Attachment 1 is a copy of the final report issued by LSL noting the scope of their testwork and the results to four (4) specific procedures. Attachment 2 are responses by staff to the findings noted by LSL after the completion of testwork. In addition to the recommendations by LSL, staff will also be implementing new W-2 distribution procedures to further strengthen internal controls. ALTERNATIVES CONSIDERED Staff has not considered any alternatives at this time. FISCAL REVIEW Based on the recommendation action, there is no fiscal impact at this time. LEGAL REVIEW A legal review is not required for the recommended action. CONCLUSION The City contracted with auditors Lance, Soll, Lunghard, LLP to conduct a review of the City's policies and procedures over Payroll. This review was to help ensure the City is paying employees correctly based on current contracts and the amounts reported on the Employee Compensation report are fair and accurate. Based on the final report (Attachment 1), the findings are limited. However, staff believes each of the findings should be considered and therefore prepared responses to each for the City Council to consider. BOBBY YOUNG Finance and I.T. Director Attachment(s): 1 — Independent Accountants' Report on Agreed -Upon Procedures on the Internal Control Policies and Procedures over Payroll 2 — Memo from Finance and I.T. Director Bobby Young, responding to findinas determined by Lance. Soll. Lunahard. LLP. 2 CITY OF COSTA MESA Independent Accountant's Report on Agreed -Upon Procedures on the Internal Control Policies and Procedures over Payroll September 19, 2011 CITY OF COSTA MESA Independent Accountant's Report on Agreed -Upon Procedures on the Internal Control Policies and Procedures over Payroll September 19, 2011 ��' LSE • CERTIFIED PUBLIC ACCOUNTANTS Brandon W. Burrows, CPA David E. Hale, CPA, CFP A Professional Corporation Donald G. Slater, CPA Richard K. Kikuchi, CPA Susan F. Matz, CPA Shelly K. Jackley, CPA Bryan S. Gruber, CPA September 19, 2011 To the Honorable Mayor and Members of the City Council City of Costa Mesa, California INDEPENDENT ACCOUNTANT'S REPORT ON APPLYING AGREED-UPON PROCEDURES We have performed the procedures enumerated below which were agreed to by the management of the City of Costa Mesa, California (the City), solely to assist the City in reviewing the internal control policies and procedures over payroll. This engagement to apply agreed-upon procedures was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of the procedures is solely the responsibility of the management of the City. Consequently, we make no representation regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested, or for any other purpose. The specific procedures performed and the results obtained from the performance thereof were as follows: Procedures Performed: We selected a sample of 50 employees of the City and each member of the City Council to analyze payroll transactions within the last calendar year (2010). The sample was determined using a risk based approach with factors including the degree of complexity, level of compensation, and the potential for fraud. We selected employees from the executive group and each of the bargaining groups for our sample. Our tests covered a review of personnel files and hiring documents, Memorandum of Understandings (MOU's), side letter of agreements, timecards, paychecks, pay journals, leave balances, labor distributions, W-2 reporting, and verification of internal control policies and procedures governing payroll transactions. Findings: No findings were noted as a result of the procedures performed. 2. Procedures Performed: We tested the accuracy of the employee's total pay exclusive of pensions as reported in the 2010 Employee Compensation Report for the sample we selected in the procedure above. Findings: When comparing the compensation report's total pay amount to the 2010 payroll records we noted three deviations. There were two employees whose total pay on the compensation report was understated by auto allowance pay in the amounts of $9,911 and $6,963. The other employee's total pay on the compensation report was understated by an instructional fee pay for firefighters in the amount of $8,800. Lance, Soil & Lunghard, LLP 203 North Brea Boulevard Suite 203 Brea, CA 92821 TEL: 714.672.0022 Fax: 714.672.0331 www.islepas.com 41185 Golden Gate Circle Suite 103 Murrieta, CA 92562 TEL: 951.304.2728 Fax: 951.304.3940 LSE�: CEOTI FIE' PUBLIC ACCOUNTANTS Honorable Mayor and Members of City Council City of Costa Mesa Page 2 3. Procedures Performed: We reviewed the City -prepared manuals, memorandums, MOU's, Administrative Regulations, letters or other documents setting forth the City's payroll policies and procedures. Findings: The City currently does not have all of its key internal control policies and procedures in written form. The City follows certain procedures based on verbal understandings, however, we recommend these should be documented in writing and formalized. This will further communicate the importance of internal control within the City and hold employees accountable for following such procedures. The documented procedures should outline key risks to the process and the compensating control procedure in place to mitigate the risk. The procedures should address the five components of internal control developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) which include control environment, risk assessment, control activities, information and communication, and monitoring. We also noted that currently the City does not have a formal fraud and ethics policy. We recommend that the City implement such policies, and in addition, implement a hotline for anonymous tips from employees to report issues or concerns within the City. We recommend that these policies be provided to employees upon hire and in addition be presented and discussed with employees on a periodic basis. 4. Procedures Performed: We analyzed procedures for internal control weaknesses and for the segregation of duties related to payroll. Findings: The City has provided its Payroll Coordinator, the employee processing the City's payroll, the ability to make certain changes to employee information in the payroll system including changes to pay rates and status which creates an internal control weakness. To create an optimal segregation of duties, this access should be limited to the applicable personnel in the Human Resources Department and not given to any employee preparing payroll. However, for practical considerations and due to available staffing resources, if the step is not considered practical, a formal process should be developed to have someone outside of payroll review and approve all changes made to employee information as a compensating control. From our discussion with City personnel, the Assistant Finance Director periodically performs a similar review procedure however not on a consistent basis. While reviewing system access rights for payroll, we noted that the Assistant Finance Director has access to the payroll system. We recommend that this access be limited to inquiry only, as the Assistant Finance Director is responsible for reviewing changes in the payroll system under the current procedure as mentioned above. We also noted other employees have varying access levels and also the City's Information Technology Department (IT) who has made certain approved changes in the payroll system on an as needed basis. We recommend that these changes only be performed if considered necessary and that all changes are formally reviewed and that access is formally monitored for all employees with any access level. LSL 0 LEBTIFIEB PNBLIL AB6BNNTANTS Honorable Mayor and Members of City Council City of Costa Mesa Page 3 Conclusion We were not engaged to, and did not conduct an audit, the objective of which would be the expression of an opinion on the specified elements, accounts or items. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to the City. This report is intended solely for the use of the specified users listed above and is not intended to be, and should not be, used by anyone other than those specified parties. Brea, California September 19, 2011 BY12-010 CITY OF COSTA MESA - DEPARTMENT OF FINANCE AND r INFORMATION & TECHNOLOGY INTEROFFICE MEMORANDUM TO: CITY COUNCIL MEMBERS THROUGH: THOMAS HATCH, CHIEF EXECUTIVE OFFICER FROM: BOBBY YOUNG, FINANCE AND I.T. DIRECTOR DATE: JANUARY 11, 2012 SUBJECT: RESPONSES TO AGREED UPON PROCEDURES ON THE INTERNAL CONTROL POLICIES AND PROCEDURES OVER PAYROLL PERFORMED BY LANCE, SOLL & L UNGHARD, LLP. Throughout the month of August, the accounting firm Lance, Soll & Lunghard, LLP (LSL) performed a review of the City's policies and procedures over Payroll. Upon completion of testwork, LSL has issued a report containing their findings. Staff feels it is important to respond to each finding, provide an explanation of the finding or a plan of action to remediate the finding and implement any recommendations. The following are staff's responses to the findings determined by LSL. 1. No findings were noted as a result of the procedures performed. Response: City concurs with the results of the procedures performed. 2. When comparing the compensation report's total pay amount to the 2010 payroll records we noted three deviations. There were two employees whose total pay on the compensation report was understated by auto allowance pay in the amounts of $9,911 and $6,963. The other employee's total pay on the compensation report was understated by an instructional fee pay for firefighters in the amount of $8,800. Response: All three deviations were instances where adjustments had been made to the employees' year end W-2, but these adjustments were not picked up on the Employee Compensation Report for calendar year 2010. At year end, the IRS requires the City to adjust employees' W-2 to include: the personal use of a city vehicle and additional instructional pay received. The wages and benefits reported on the Employee Compensation Report is generated from data that was paid only through the payroll system. Since the adjustments were not paid through the payroll system, they were not included on the compensation report. Based on this finding, staff noted no other instances that would require an adjustment to the 2010 Employee Compensation Report. Also, staff will ensure all year end W-2 adjustments are included on future Employee Compensation Reports. 3. The City currently does not have all of its key internal control policies and procedures in written form. The City follows certain procedures based on verbal understandings, however, we recommend these should be documented in writing and formalized. We also noted that currently the City does not have a formal fraud and ethics policy. We recommend that the City implement such policies, and in addition, implement a hotline for anonymous tips from employees to report issues or concerns within the City. We recommend that these policies be provided to employees upon hire and in addition be presented and discussed with employees on a periodic basis. Response: While the City does have desk procedures and instruction manuals for the payroll process, staff recognizes it does not have documented internal control policies and procedures that overlap those manuals. Especially in the Finance Department, staff recognizes the importance of internal controls. LSL does acknowledge the City follows internal control procedures, however those are based on verbal understandings not documented policies. Staff concurs with the finding, and will work with the City's auditors to formally document those internal control policies and procedures. Also, the City does not have a formal fraud and ethics policy. This policy will not be limited to the payroll process, and therefore City management is committed to implementing a city-wide fraud and ethics policy as recommended. City management will also consider how best to implement the suggested hotline. 4. The City has provided its Payroll Coordinator, the employee processing the City's payroll, the ability to make certain changes to employee information in the payroll system including changes to pay rates and status which creates an internal control weakness. To create and optimal segregation of duties, this access should be limited to the applicable personnel in the Human Resources Department and not given to any employee preparing payroll. However, for practical consideration and due to available staffing resources, if the step is not considered practical, a formal process should be developed to have someone outside of payroll, review and approve all changes made to employee information as a compensating control. From our discussion with City personnel, the Assistant Finance Director periodically performs a similar review procedure however not on a consistent basis. Response: The best way to maintain proper internal controls is through the segregation on duties. However, if an agency reduces its workforce, it may not be able to maintain the optimal level of staffing necessary to maintain this segregation of duties. In 2007, Finance staff realized the lack of optimal internal control noted above and began having the Assistant Finance Director perform a review of payroll changes. Finance staff will ensure this review is completed on a more consistent basis as recommended by LSL. LSL also recommends limiting system access rights for payroll. Staff concurs with the recommendation and will review current allowed access and reduce that access to an as needed basis only. I would like to thank for LSL for their professionalism throughout this review, and for the thoughtful recommendations to strengthen the current policies and procedures. Staff is committed to implementing and maintaining strong internal controls, especially over its payroll process. Bobby Young Finance and I.T. Director 2