Audit Reveals Dozens of Flaws in State Financial Reporting

Audit Reveals Dozens of Flaws in State Financial Reporting

Flaws in reporting methods, a lack of personnel in some departments and weak control systems led to more nearly 40 deficiencies in internal control over financial reporting within state government in the 2011 fiscal year, according to a report filled by acting Auditor General Denny Hoyle.

The report, which was issued to members of the House Finance Committee and the Joint Committee on Legislative Services on April 3, found 38 “deficiencies or material weaknesses” in financial reporting procedures, many of which have been evident for several years, according to the audit.

Material Weaknesses

According to the report, “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. Control deficiencies classified as material weaknesses represent a higher likelihood that a material misstatement could occur and not be prevented or detected than those findings classified as significant deficiencies.”

GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST

The control deficiencies included:

Accounting System Not Implemented
According to the audit, full implementation of the state’s “multi-module, integrated accounting system” (known as the Rhode Island Financial and Accounting Network System) has stalled and certain parts of the system are not operational, which weakens controls over financial reporting. The inability to use parts of the system has delayed increases in efficiency over the reporting process, the audit found.

The Department of Administration blamed budget constraints as the reason some modules have not been installed and said it would continue to request funding for implementation.

Weak Controls Over Cash Receipts and Disbursements
The audit found that the Treasury was both authorizing and recording state transactions were also responsible for initiating the transactions, which it says is inappropriate. The report recommends “completing the process of analyzing transactions and better segregating certain duties currently performed by the Office of the General Treasurer.”

Mid-Year Financial Reporting Limited
Formula errors, failure to prior year data, or incorrect computations on spreadsheets led to errors that the audit says could be prevented if the state had a more automated reporting process. Because the process is "manually intensive," reporting is susceptible to error, the audit found.

Weak Controls over Federal Funds
The state received $2.5 billion in federal funds in FY2011, but it needs to implement better systems for “validating revenue and expenditure amounts reported on federal reports and ensuring that these amounts are consistent with amounts recorded within the State accounting system and available federal award limitations,” according to the audit.

Poor Accounting for Capital Projects
About $8 million in building and infrastructure improvement projects were not recorded in capital asset accounting records. Weaknesses in the accounting system are to blame, the audit found.

Lack of Resources in Medicaid Program
Because the state “does not have sufficient personnel dedicated to the consideration and documentation of internal controls, including related monitoring procedures performed to ensure the proper administration of significant program areas,” the more than $2 billion in Medicaid expenses in FY2011 had oversight issues that could have led to a lack of compliance with federal regulations.

Security Issues with Tax Data
Files related to the roughly $2.5 billion in tax revenue in FY2011 "reside in an unprotected network folder prior to and after upload," and the entire process allows for a potential manipulation of data, according to the audit.

Supervision Problems with Tax Corrections
Between July 2010 and May 2011, about $68 million in personal income tax “Accounts Receivable Correction (ARC)” transactions were made without supervisory review. Six of those transactions were for more than $1 million. The audit suggests making all accounts subject to supervisory review.

Division of Taxation Data Issues
The report found that “Due to the age and inflexibility of certain mainframe tax systems, Taxation intends to use its data warehouse more extensively.” In order to remain in compliance with state policies, the department’s policies need to reviewed.

Timely Reporting at DOT
The audit suggests establishing certain goals to ensure more reliable information is available around financial reporting. Currently, DOT is using two programs to report the same information.

Transportation Fund Reporting
The audit found weaknesses in financial reporting within the Intermodal Surface Transportation (IST) fund that required adjustments to financial statements. The audit recommended strengthening certain control procedures.

Transportation Infrastructure Reporting
The state’s “failure to recognize the completion of certain projects totaling $108 million from previously reported construction in progress” was among the many misstatements in financial reporting in FY2011. The audit recommended stronger reporting procedures.

Errors in Reporting at the Public Telecommunications Authority
The audit called for the board of directors at the Public Telecommunications Authority to revise certain procedures to require review of consolidated financial statements after various calculation errors.

Lack of Resources a Problem

The report found that many of the weaknesses reported have existed for a numbers of years, but the state has been unable to correct the problems for a variety of reasons, most notable a lack of resources.

“Most of the control deficiencies reported herein are conditions that have existed for several years,” the executive summary explained. “Many continue due to a lack of investment by the State in the operation and security of its information systems. The State has struggled in recent years to maintain its complex information systems environment without sufficient resources.”

 

If you valued this article, please LIKE GoLocalProv.com on Facebook by clicking HERE.