Report 97002 Summary - June 1998
State of California:
Internal Control and State and Federal Compliance Audit Report for the Year Ended June 30, 1997
The State continues to experience certain problems in accounting and administrative practices that affect its internal control system over financial reporting and over compliance with federal requirements. Furthermore, these problems result in noncompliance with some state and federal regulations. Although these weaknesses are not individually significant, they have a cumulative effect on the accuracy of reported financial information and on the efficiency, effectiveness, and propriety of the State's operations.
Status of Year 2000 Compliance
Currently the State is not yet Year 2000 compliant and is rushing to ensure that over 2,700 of its computer systems recognize the year 2000. Many hardware and software applications cannot properly recognize the year 2000 because they were programmed to identify a year using two digits, such as 98, to represent 1998, rather than using a four-digit field. Therefore, when the calendar reaches January 1, 2000, these systems may produce nonsensical results or fail to operate because they will read the date 00 as 1900 rather than 2000. The governor issued an executive order requiring all state agencies to make Year 2000 solutions a priority and to identify and fix Year 2000 problems in their essential computer systems no later than December 31, 1998. However, according to the April 1998 Quarterly Report issued by the Department of Information Technology regarding the State's Year 2000 progress, state agencies have reported fixing only 176 of the 787 systems identified as "mission critical".
Compliance and Internal Control Issues Applicable to the Financial Statements
Inadequacies in various departments' compliance with state requirements and internal controls resulted in miscellaneous problems which affect financial statement amounts. Specifically, we found:
- The State did not ensure that the Statewide Real Property Inventory incorporated all real property transactions as recorded in state agency accounting records.
- The Department of General Services did not account for all its telecommunications microwave fixed asset equipment in its 1996-97 financial statements.
- The State Controller's Office and the Department of Finance do not ensure that departments reconcile fund balance differences before issuing reports on the budgetary basis fund balances.
We found issues of general concern in the State's internal controls and compliance with federal requirements for major programs. For example, weaknesses exist in the State's compliance with federal requirements and internal controls regarding cash management, cost allocation and subrecipient monitoring for federal grant programs administered by many departments. We noted the following specific conditions:
The State did not always comply with federal regulations for the Cash Management Improvement Act. As a result, for certain federal programs governed by default procedures, the State understated the interest it owed to the federal government by approximately $388,500.
Many departments did not fully comply with the federal requirements to certify or document personal service costs, such as salaries and benefits, charged to the federal grant programs that they administer. For example, several of the departments that we reviewed failed to require or correctly use personal activity reports, such as certified time sheets, for those employees who worked on multiple projects. These departments allocated at least some personal service costs based on budget estimates rather than on actual time worked.
The State does not always adequately monitor audit reports submitted by certain subrecipients of federal grant moneys. These subrecipients include cities, community college districts, special districts, and nonprofit organizations. The State also does not ensure that nonprofit subrecipients and community college districts promptly resolve instances of noncompliance with federal regulations addressed in the audit reports.
Compliance and Internal Control Issues Related to Grants Administered by Individual Departments
We found weaknesses in several state departments regarding their compliance with federal requirements and internal controls in the administration of individual federal programs. We noted the following specific conditions under the related federal departments:
U.S. Department of Housing and Urban Development
The State's Department of Housing and Community Development's (HCD) system of internal administrative controls is not sufficient to assure that the fiscal information the HCD reports to the federal Department of Housing and Urban Development is complete, accurate and adequately supported. For example, some of the supporting documentation for the Community Development Block Grant program's fiscal data contained mathematical errors, which resulted in HCD understating the amount of total funds leveraged from other sources by $7.2 million. In addition, it understated the total utilization of small and minority-owned businesses by $2.8 million. Similarly, for the Home Investment Partnerships Program, the HCD overstated the amount of other matching funds by $5 million and overstated the amount of other funds leveraged from other sources by $30.5 million.
U.S. Department of Justice
The State's Office of Criminal Justice Planning (OCJP) did not comply with the federal period of availability requirements for its 1994 and 1995 Byrne Formula Grants. Specifically, the OCJP spent $28,600 of 1994 grant funds and $329,000 of 1995 grant funds after those funds should have reverted to the U.S. Department of Justice. In addition, the OCJP did not maintain accurate accounting records, nor did it properly track and report its financial activities related to several of its Byrne Formula Grants. For example, for one of its final financial status reports, the OCJP reported expenditures totaling $258,000 that it did not spend.
U.S. Department of Education
The State's Department of Education (CDE) may have inappropriately used federal funds for the Special Education-Grants to States program. Specifically, it used these funds to pay approximately $810,000 of costs associated with the CDE's administration of state, rather than federal, special education funds by its Education Finance Division. Although the CDE contends that using federal funds for this purpose is allowable, we believe the law does not authorize the State to use federal funds in this manner.
The State's California Student Aid Commission (CSAC) did not have a system to provide adequate oversight of the activities of its auxiliary organization during the period from the creation of its auxiliary organization on January 2, 1997, through June 30, 1997. Specifically, the CSAC did not retain sufficient staff to adequately protect the Federal Family Education Loan funds entrusted to it and paid invoices submitted by the auxiliary organization without reviewing them for propriety. The CSAC paid over $4.8 million to the auxiliary organization for invoices that were unsupported. The auxiliary organization, not the CSAC, detected and corrected the error months later.
U.S. Department of Health and Human Services
The State's Department of Community Services and Development (DCSD) does not have a system to track its expenditures and encumbrances for the Low-Income Home Energy Assistance program (LIHEAP) to determine funds available for carry-over from one fiscal year to the subsequent fiscal year. Although the department asserts that it has had spreadsheets to determine the amount of carry-over, the spreadsheets the department refers to are not specifically related to calculating the amount of carry-over for a particular LIHEAP grant year.
Corporation for National and Community Service
The State's California Conservation Corps (CCC) did not have adequate controls over subgrantee activities. For example, it did not always review the invoices from a subgrantee under the AmeriCorps program. Furthermore, the CCC made payments on invoices that were based on estimates and were not supported by documentation. Amended invoices, prepared at our request, disclosed an overpayment of $14,000. In addition, the CCC did not sufficiently monitor its subgrantees' fiscal activities, resulting in inaccurate financial status reports for the AmeriCorps program.