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Fiscal court audit released

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FRANKFORT, Ky. – State Auditor Mike Harmon has released the audit of the financial statement of the Magoffin County Fiscal Court for the fiscal year ended June 30, 2018. State law requires annual audits of county fiscal courts.

Auditing standards require the auditor’s letter to communicate whether the financial statement presents fairly the receipts, disbursements, and changes in fund balances of the Magoffin County Fiscal Court in accordance with accounting principles generally accepted in the United States of America. The fiscal court’s financial statement did not follow this format. However, the fiscal court’s financial statement is fairly presented in conformity with the regulatory basis of accounting, which is an acceptable reporting methodology. This reporting methodology is followed for 115 of 120 fiscal court audits in Kentucky.

As part of the audit process, the auditor must comment on noncompliance with laws, regulations, contracts, and grants. The auditor must also comment on material weaknesses involving internal control over financial operations and reporting.

The audit contains the following comments:

The fiscal court’s administrative code does not address commuting mileage or the personal use of vehicles owned by the fiscal court: This is a repeat finding and was included in the prior year audit report as Finding 2017-002. Internal Revenue Service (IRS) Code Section 61(a) states that the commuting value of a vehicle owned or leased by a public entity represents taxable income to the employee. The fiscal court’s administrative code should address the use of vehicles and other assets owned by the fiscal court.

The fiscal court understands the recommendations, but as of June 30, 2018, has not implemented the recommendations.

We recommend the fiscal court establish internal controls over vehicles by implementing the following: • Report personal use and commuting mileage for vehicles as compensation/employee benefit on W-2 wage and tax statements in accordance with IRS regulations. Several methods can be used to determine the vehicle use that is taxable income to the employees, including the cents-per-mile rule, the lease value rule, and the commuting rule.

• Every employee and every department that has vehicles should maintain vehicle logs. The logs should include at a minimum, the date, destination, purpose, and mileage for all use of the vehicle.

• The fiscal court should amend the current administrative code to include a policy on the authorization and use of vehicles and other assets owned by the fiscal court. In addition, it should address the tax implications of using a vehicle for personal use or commuting travel.

County Judge/Executive’s Response: The Fiscal Court adopted a new administrative code that addresses this issue and will ensure compliance with IRS regulations regarding accounting for the use of county owned vehicles.

The fiscal court did not consistently utilize the purchase order system: This is a repeat finding and was reported in the prior year as Finding 2017-007. The fiscal court is not consistently utilizing the purchase order system in accordance with the Department for Local Government (DLG) guidelines. Of the 81 items tested, 53 disbursements totaling $2,206,441 did not have a purchase order. Failure to issue purchase orders for all disbursements increases the risk that adequate funds or sufficient budget appropriation will not be available to satisfy all financial obligations.

We recommend the fiscal court require purchase orders be obtained prior to items being ordered or services received to determine adequate funds and budget appropriations are available for the purchase. Purchase orders should be completely filled out at the time of issuance. Additionally, we recommend the fiscal court properly utilize the purchase order system in order to comply with DLG requirements.

County Judge/Executive’s Response: The treasurer was not aware that purchase orders for reoccurring monthly services such as Utilities, Payroll and Debt were required. As of January 1, 2019, the finance officer began utilizing the purchase order system that is included in the accounting program and should eliminate this issue. In addition, the new administration is developing a “Standard Operating Manual” for all accounting functions to enhance internal controls and ensure compliance with all statutes, regulations and generally accepted accounting principles.

The fiscal court was not presented all claims for review before payment: The fiscal court was not presented all claims to review before payment was made. Of the 81 transactions tested, 19 transactions totaling $705,662 were not presented to the fiscal court. Management did not have adequate controls in place to ensure all claims and disbursements were presented to the fiscal court for review before payment. We recommend management implement adequate controls to ensure all claims and disbursements are presented to the fiscal court for review prior to payment.

County Judge/Executive’s Response: During this audit year it was believed that all claims were presented to the Fiscal Court for review except for claims approved by the fiscal court on the standing order. The new administration is developing a “Standard Operating Manual” for all accounting functions to enhance internal controls and ensure compliance with all statutes, regulations and generally accepted accounting principles.

The fiscal court did not pay invoices timely: The Magoffin County Fiscal Court did not pay invoices within 30 days of receipt of invoice. Of the 81 items tested, 11 transactions, totaling $514,393, were not paid timely. Insurance payments were not made timely, resulting in late fees of $7,661. In addition, finance charges were noted for credit cards totaling $355. Management did not have adequate controls in place to ensure that invoices were paid timely. We recommend the county comply with KRS 65.140(2) by paying invoices within 30 working days.

County Judge/Executive’s Response: The Fiscal Court will ensure that invoices are entered on a claims list as they are received. Unless disputed, the bill will be paid according to the Department for Local Government (DLG) County Budget Preparation and State Local Finance Officer Policy Manuel. In addition, the new administration is developing a “Standard Operating Manual” for all accounting functions to enhance internal controls and ensure compliance with all statutes, regulations and generally accepted accounting principles.

The fiscal court lacks adequate segregation of duties over payroll: This is a repeat finding and was included in the prior year audit report as Finding 2017-003. We noted inadequate segregation of duties over payroll. The treasurer is responsible for maintaining timesheets, entering payroll information into the computer system for processing, posting to the payroll ledgers, transferring funds to the revolving payroll account, administering health reimbursement and flex spending programs, preparing pay checks, preparing state and local withholding reports, and reconciling the payroll account. According to the fiscal court, they have a small accounting/payroll department and segregation of duties has been challenging to achieve.

By delegating all these duties to the same individual, the risk of undetected fraud and errors increases. Segregation of duties is an essential element of sustainable risk management and internal controls. The principle of segregation of duties is based on shared responsibilities of a key process that disperses the critical functions of that process to more than one person or department. A strong internal control system does not allow one person to perform processing, documentation, and reporting functions. We recommend the fiscal court find ways to segregate key duties related to payroll or implement other controls to compensate for these weaknesses (for example, designating an individual to review the payroll ledgers, reconciliations, and reports, and requiring the individual to document their review by initialing the documents that were reviewed).

County Judge/Executive’s Response: Changes were made after the FY2015 audit in an attempt to further improve the segregation of duties and internal controls. At that time the E.M. director reviewed and signed the timesheets. The finance officer then posted checks to the ledger and the secretary reviewed and distributed the checks. In addition, the new administration is developing a “Standard Operating Manual” for all accounting functions to enhance internal controls and ensure compliance with all statutes, regulations and generally accepted accounting principles.

The fiscal court did not comply with procurement procedures for competitive bidding: The fiscal court did not solicit competitive bids for all contracts exceeding $20,000. Additionally, we noted one instance in which the bid being used was obtained in 2015. Management did not have adequate controls in place to ensure competitive bidding procedures were followed. The fiscal court is in violation of procurement statutes and there is increased risk that the fiscal court did not receive goods and services at the best possible price.

We recommend management implement adequate controls to ensure all contracts and expenditures are properly procured in accordance with local model procurement code and the county’s administrative code.

County Judge/Executive’s Response: All items purchased will be procured in compliance with the Model Procurement Code and the county’s Administrative Code. In addition, the new administration is developing a “Standard Operating Manual” for all accounting functions to enhance internal controls and ensure compliance with all statutes, regulations and generally accepted accounting principles.

The audit report can be found on the auditor’s website.

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