Report 98002 Summary - June 1999

State of California:

Internal Control and State and Federal Compliance Audit Report for the Fiscal Year Ended June 30, 1998

The State continues to experience problems in accounting and administrative practices that affect its internal control systems over financial reporting and compliance with federal requirements. 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

Although the new millennium is rapidly approaching, the State has not yet ensured computer systems that provide critical services at many agencies will recognize the year 2000. Many of the State's computer hardware and software applications identify a year using two digits; for example, 98 represents 1998. On January 1, 2000, these systems may produce nonsensical data or fail to operate because the computers will read 00 as 1900 rather than 2000. State agencies are focusing their efforts on applications that support mission-critical business practices and are making progress toward correcting critical computer systems. However, as of December 31, 1998, some agencies had not completely tested their computer systems, resolved critical issues with their data-exchange partners, corrected or replaced embedded chips that control certain computerized functions, or completed business continuation plans. Five of these agencies administer some of the largest federal programs. These agencies are the Department of Education, Employment Development Department, Department of Health Services, Department of Social Services, and Department of Transportation.

Compliance and Internal Control Issues Applicable to the Financial Statements

Inadequacies in various state departments' compliance with state requirements and in their internal controls resulted in problems that affect financial statement amounts. Specifically, we found the following problems:

  • The State did not ensure that the Statewide Real Property Inventory and the State's financial statements incorporated all real property transactions.

  • The Department of Transportation did not accurately account for fixed assets for the Equipment Service Fund.

  • The State Controller's Office and the Department of Finance (Finance) do not ensure that departments reconcile fund balance differences before issuing reports on the budgetary basis fund balances.
Compliance and Internal Control Issues of General Concern Related to Federal Grant Requirements

We found that weaknesses exist in the State's compliance with federal requirements and in internal controls over cash management. Specifically, Finance issued instructions to agencies regarding transactions under the Cash Management Improvement Act that were inconsistent with prescribed procedures. As a result, in at least one instance, the State's interest liability to the federal government was understated by $17,400.

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 applicable to the administration of individual federal programs. We noted the following specific conditions under the related federal departments:

U.S. Department of Agriculture
U.S. Department of Education
The State's Department of Education (Education) did not always report to Finance transfers of federal funds. During fiscal year 1997-98, Education excluded 5 transfers totaling $16,200,000 from work sheets submitted in the first 3 quarters of the fiscal year for the Vocational Education-Basic Grants to States and 17 transfers totaling $5,400,000 from work sheets submitted for the Child and Adult Care Food Program. As a result, Finance understated the State's interest liability for transfers related to these programs by $49,000.

U.S. Department of Agriculture
U.S. Department of Education
U.S. Department of Health and Human Services
Education lacks adequate procedures to ensure it promptly receives all required A-133 audit reports from nonprofit subrecipients. As of March 1999, Education had not received fiscal year 1996-97 audit reports from 70 of 180 subrecipients in the Food Distribution, Child and Adult Care Food Program, and the Adult Education-State Grant Program. Because of deficiencies in Education's tracking system, we could not determine which subrecipients in its Child Care Mandatory and Matching Funds of the Child Care and Development Fund program were required to submit A-133 audit reports.

U.S. Department of Interior
For 3 of 12 sport fish restoration and wildlife restoration projects it completed during fiscal year 1997-98, the Department of Fish and Game did not have required documentation for in-kind contributions totaling $687,409. In addition, for a fourth project, the department could not support approximately $9,600 it reported as cost-sharing expenditures.

Federal Emergency Management Agency
The State's Office of Emergency Services (Emergency Services) did not always report to Finance transfers of federal funds. During fiscal year 1997-98, Emergency Services failed to report all refunds, totaling approximately $68,200,000, and four drawdowns totaling approximately $2,500,000, for the Public Assistance Grants. As a result, Finance understated the State's interest liability for transfers related to this program by approximately $177,000.

In addition, Emergency Services failed to follow up on the 27 findings it received from the State Controller's Office during fiscal year 1997-98. These findings included $212,000 in questioned costs.

U.S. Department of Education
The State's Department of Education (Education) did not always ensure that it approved only allowable costs and activities. For instance, Education approved all 5 Goals 2000-State and Local Education Systemic Improvement Grants (Goals 2000) applications we reviewed even though they either included disallowed expenditures or did not sufficiently describe how the subrecipient intended to use the funds. Specifically, of the $683,124 awarded to these 5 subrecipients, we identified $74,596 for questionable activities and $202,098 in costs that lacked adequate documentation. Likewise, for 1 of the 40 Adult Education-State Grant Program applications we reviewed, Education approved the community-based organization's application for $69,500 and subsequently increased the award to $325,750 without receiving a complete application to justify the funding.

In addition, Education and the California Community Colleges, Chancellor's Office (Chancellor's Office) did not always adequately limit cash payments to subrecipients. For example, in April 1998, Education advanced approximately $42,000,000-or 80 percent of the $52,000,000 it awarded through 350 grants-to subrecipients of the Goals 2000 program without first determining their cash needs. As of February 1999, Education had received reports from subrecipients of only 5 of these grants indicating that they had spent their advances. Similarly, between October and November 1997, the Chancellor's Office disbursed approximately $990,000, or 75 percent, of its fiscal year 1997-98 Tech-Prep Education awards, totaling $1,320,000, without first determining the cash needs of the subrecipients. As of December 31, 1997, the subrecipients had used from 4 percent to 55 percent of their funds, totaling approximately $316,000.

U.S. Department of Health and Human Services
Because of a computer error, the State's Department of Health Services (Health Services) incorrectly paid certain claims for psychological services between August 1997 and December 1998. As a result, Health Services estimates it may have overpaid providers between $5,200,000 and $6,300,000. Although Health Services has been aware of the error for some time, it has not yet identified actual overpayments to providers it should recover or the amount that it should refund to the federal government. According to Health Services, it has corrected the error, so no additional provider overpayments should occur. In addition, Health Services' Investigations Branch (Investigations) does not have an adequate tracking system to ensure it properly refers all potentially fraudulent activities to the State's Department of Justice (Justice). Specifically, Investigations stated that it referred 23 fraud cases to Justice during fiscal year 1997-98 but it cannot confirm this. Additionally, Justice did not find 16 of those cases in its statewide fraud tracking system. As a result, Health Services cannot ensure that potentially fraudulent activity is properly investigated for prosecution or recovery of state and federal medical assistance funds.

Corporation for National and Community Service
The State's California Conservation Corps did not always ensure the service districts and subgrantees properly supported their invoices before it forwarded them for reimbursement under the AmeriCorps program. Specifically, 12 of 38 invoices reviewed were based on estimated costs rather than actual expenditures. These invoices totaled $195,700 for the grant period ending December 31, 1997. Further, it did not verify the invoices included allowable costs that complied with the program requirements.


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