California Department of Education (cde) Payroll Process Review –

CALIFORNIA DEPARTMENT OF EDUCATION Review Report PAYROLL PROCESS REVIEW March 1, 2015, through February 28, 2018 BETTY T. YEE California State Controller July 2019 BETTY T. YEE California State Controller July 31, 2019 Tony Thurmond, State Superintendent of Public Instruction California Department of Education 1430 N Street Sacramento, CA 95814 Dear Mr. Thurmond: The State Controller’s Office has reviewed the California Department of Education (CDE) payroll process for the period of March 1, 2015, through February 28, 2018. CDE’s management is responsible for maintaining a system of internal control over payroll process within its organization, and for ensuring compliance with various requirements under state laws and regulations regarding payroll and payroll-related expenditures. Our review found material weaknesses in internal control over CDE’s payroll process. These weaknesses contributed to CDE’s employee’s excessive vacation and annual leave balances, improper and question payments of overtime and separation lump-sum payments, costing the State an estimated net total of $2,123,754. If you have any questions, please contact Andrew Finlayson, Chief, State Agency Audit Bureau, by telephone at (916) 324-6310. Sincerely, Original signed by JIM L. SPANO, CPA Chief, Division of Audits JLS/as Tony Thurmond, State Superintendent of -2- July 31, 2019 Public Instruction cc: Nick Schweizer, Deputy Superintendent of Public Instruction California Department of Education Valarie Bliss, Director Personnel Services Division California Department of Education Mark Rodriguez, Chief Administrative Services Division California Department of Human Resources Marissa Revelino, Chief Personnel and Payroll Services Division State Controller’s Office California Department of Education Payroll Process Review Contents Review Report Summary ............................................................................................................................ 1 Background ........................................................................................................................ 1 Objectives, Scope, and Methodology ............................................................................... 2 Conclusion .......................................................................................................................... 3 Views of Responsible Officials .......................................................................................... 4 Restricted Use .................................................................................................................... 4 Schedule—Summary of Findings ......................................................................................... 5 Findings and Recommendations ........................................................................................... 6 Appendix—Sampling Methodology ..................................................................................... A1 Attachment—California Department of Education’s Response to Draft Review Report California Department of Education Payroll Process Review Review Report Summary The State Controller’s Office (SCO) reviewed the California Department of Education (CDE) payroll process for the period of March 1, 2015, through February 28, 2018. CDE’s management is responsible for maintaining a system of internal control over payroll process within its organization, and for ensuring compliance with various requirements under state laws and regulations regarding payroll and payroll-related expenditures. Our limited review identified material weaknesses in internal control over CDE’s payroll process that leaves CDE at risk of additional improper payments if not mitigated. We found that CDE has a combination of deficiencies in internal control over its payroll process such that there is a reasonable possibility that a material misstatement in financial information or noncompliance with provisions of laws, regulations, or contracts will not be prevented, or detected and corrected, on a timely basis. Specifically, CDE lacked adequate segregation of duties and compensating controls over its processing of payroll transactions. In addition, CDE inappropriately granted six employees keying access to the state payroll system, which leaves payroll data at risk of misuse, abuse, and unauthorized use. These deficiencies have a pervasive effect on the CDE payroll process, and impair the effectiveness of other controls by rendering their design ineffective or by keeping them operating effectively. We also found that CDE lacked sufficient controls over the processing of specific payroll related transactions to ensure that CDE complied with collective bargaining agreements and state laws, and that only valid and authorized payments were processed. As quantified in the Schedule, these control deficiencies contributed to CDE employee’s excessive vacation and annual leave balances; improper and questioned payments for separation lump-sum pay and overtime pay costing the State an estimated net total of $2,123,754. Background In 1979, the State of California adopted collective bargaining for state employees. This created a significant workload increase for the SCO’s Personnel and Payroll Services Division (PPSD), as PPSD was the State’s centralized payroll processing center for all payroll-related transactions. PPSD decentralized the processing of payroll, allowing state agencies and departments to process their own payroll-related transactions. Periodic reviews of the decentralized payroll processing at state agencies and departments ceased due to budget constraints in the late 1980s. In 2013, the California State Legislature reinstated these payroll reviews to gain assurance that state agencies and departments maintain adequate internal control over payroll, provide proper oversight over their decentralized payroll processing, and comply with various state laws and regulations regarding payroll processing and related transactions. -1- California Department of Education Payroll Process Review Review Authority Authority for this review is provided by California Government Code (GC) section 12476, which states, “The Controller may audit the uniform state pay roll system, the State Pay Roll Revolving Fund, and related records of state agencies within the uniform state pay roll system, in such manner as the Controller may determine.” In addition, GC section 12410 stipulates that “The Controller shall superintend the fiscal concerns of the state. The Controller shall audit all claims against the state, and may audit the disbursement of any state money, for correctness, legality, and for sufficient provisions of law for payment.” Objectives, Scope, We performed this review to determine whether CDE: and Methodology  Processed payroll and payroll-related disbursements accurately and in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures;  Established adequate internal control over payroll to meet the following control objectives: o Payroll and payroll-related transactions are properly approved and certified by authorized personnel; o Only valid and authorized payroll and payroll-related transactions are processed; o Payroll and payroll-related transactions are accurate and properly recorded; o Payroll systems, records, and files are adequately safeguarded; o State laws, regulations, policies, and procedures are complied with regarding payroll and payroll-related transactions;  Complied with existing controls as part of the ongoing management and monitoring of payroll and payroll-related expenditures;  Maintained accurate records of leave balances; and  Administered and recorded salary advances in accordance with state laws, regulations, policies, and procedures. We reviewed CDE payroll process for the period of March 1, 2015, through February 28, 2018. To achieve our review objectives, we:  Reviewed state and CDE policies and procedures related to payroll process to understand CDE’s methodology for processing various payroll and payroll-related transactions;  Interviewed CDE payroll personnel to understand CDE’s methodology for processing various payroll and payroll-related transactions, determine their level of knowledge and ability relating to -2- California Department of Education Payroll Process Review the payroll transaction processing, to gain an understanding of internal control over the payroll process and systems;  Selected transactions recorded in the State’s payroll database using statistical sampling, as outlined in the Appendix, and targeted selection based on risk factors and other criteria for review;  Analyzed and tested transactions recorded in the state payroll database and reviewed relevant files and records to determine the accuracy of payroll and payroll-related payments; accuracy of leave transactions; propriety of review and approval of transactions; adequacy of internal control over the payroll process and systems; and compliance with collective bargaining agreements and state laws, regulations, policies, and procedures (errors found in statistically-determined samples were projected to the intended population); and  Reviewed salary advances to determine whether CDE properly administered and recorded them in accordance with state laws, regulations, policies, and procedures. Conclusion Based on the results of our review, we found that CDE:  Did not process payroll and payroll-related disbursements accurately and in accordance with collected bargaining agreements and state laws, regulations, policies, and procedures (see Findings 3 through 6);  Lacked adequate internal controls over payroll and payroll-related transactions (see Findings 1 through 6); and  Did not maintain accurate records of leave balances (see Findings 4 and 5). As quantified in the Schedule and described in the Findings and Recommendations section of this review report, these material weaknesses1 in internal control over the payroll process contributed to CDE employees’ excessive vacation and annual leave balances, improper payments, and improper holiday credit transactions, costing the State an estimated net total of $2,123,754. 1An evaluation of an entity’s payroll process may identify deficiencies in its internal control over the process. 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 in financial information, impairments of effectiveness or efficiency of operations, or noncompliance with provisions of laws, regulations, or contracts on a timely basis. Control deficiencies, either individually or in combination with other control deficiencies, may be evaluated as significant deficiencies or material weaknesses. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement in financial information, impairment of effectiveness or efficiency of operations, or noncompliance with provisions of laws, regulations, or contracts will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention from those charged with governance. -3- California Department of Education Payroll Process Review Views of We issued a draft review report on June 28, 2019. Lupita Cortez Alcalá, Chief Deputy Superintendent of Public Instruction, responded by letter Responsible dated July 26, 2019 (Attachment), agreeing with the review findings and Officials stating that CDE has taken steps to correct the deficiencies noted. We will follow up during the next payroll audit to verify that these corrective actions were adequate and appropriate. Restricted Use This report is solely for the information and use of CDE and the SCO; it is not intended to be and should not be used by anyone other than these specified parties. This restriction is not intended to limit distribution of this report, which is a matter of public record, and is available on the SCO website at www.sco.ca.gov. Original signed by JIM L. SPANO, CPA Chief, Division of Audits July 31, 2019 -4- California Department of Education Payroll Process Review Schedule— Summary of Findings March 1, 2015, through February 28, 2018 Issues as a Total Dollar Number of Dollar Amount Number of Percentage of Dollar Dollar Amount of Finding Selections Method of Selection of Selections Selections with Selections Amount of Amount of Known and Number Issues Reviewed Selection Unit Reviewed Issues Reviewed * Known Issues Likely Issues Likely Issues 1 Inappropriate keying access to the 2 7 Targeted Employee N/A 6 22% N/A N/A N/A State’s payroll system 2 Inadequate segregation of duties and N/A N/A N/A N/A N/A N/A N/A N/A N/A compensating controls over payroll transactions 3 Inadequate controls over separation lump-sum pay, resulting in improper and questioned payments -Overpayments 120 Statistical Employee $ 1 ,737,121 4 3% $ 3,196 $ 5 ,554 $ 8 ,750 -Underpayments -- Same selections above -- 1 1 9% (4,765) (8,280) (13,045) -Questioned payments -- Same selections above -- 1 1 9% 45,551 79,158 1 24,709 4 Inadequate controls over vacation and 160 Targeted Employee 2,000,913 160 100% 2,000,913 N/A 2,000,913 annual leave balances, resulting in liability for excessive balances 5 Inadequate controls over holiday credit 1 8 Targeted Holiday credit 5,677 6 33% 508 N/A 5 08 transactions, resulting in improper transaction credits 6 Inadequate controls over overtime pay, resulting in improper and questioned payments -Overpayments 125 Statistical Payment 5 6,427 3 2% 141 376 5 17 transaction -Underpayments -- Same selections above -- 2 2% (606) (1,611) (2,217) -Questioned payments -- Same selections above -- 8 6% 989 2,630 3,619 Total $ 3 ,800,138 $ 2 ,045,927 $ 77,827 $ 2 ,123,754 ______________ *All percentages are rounded to the nearest full percentage point. -5- California Department of Education Payroll Process Review Findings and Recommendations FINDING 1— CDE lacked adequate controls to ensure that only appropriate staff have keying access to the State’s payroll system. Of the 27 employees we Inappropriate reviewed, six (22%) had improper key access to the system. If not keying access to the mitigated, this control deficiency leaves payroll data at risk of misuse, State’s payroll abuse, and unauthorized use. system The SCO maintains the State’s payroll system. The system is decentralized, thereby allowing employees of state agencies to access the system. PPSD has established a Decentralized Security Program Manual that all state agencies are required to follow in order to access the State’s payroll system. The program’s objectives are to secure and protect the confidentiality and integrity of payroll data against misuse, abuse, and unauthorized use. CDE had 27 employees with keying access to the State’s payroll system at various times between March 1, 2015, and February 28, 2018. Our review of the 27 employees found that CDE did not immediately remove or modify their keying access after the employees’ separation from state service, transfer to another agency or unit, or change in classification. The six employees’ keying accesses should have been deleted when the employees either separated or transferred from the CDE Personnel Office. One employee’s keying access was not removed until 113 days after the employee’s separation date. The Decentralized Security Program Manual states, in part: The privilege to access the PPSD database poses a significant risk to the ability for SCO to function. Therefore, that privilege is restricted to persons with a demonstrated need for such access. Currently, … applications are restricted to Personnel Services Specialists (PSS), or Payroll Technician (PT) classifications because their need is by definition a function of their specific job duties, and any change in those duties requires a reevaluation of the need for access. If the employees’ duties change, such that the need for access no longer exists, the access privilege MUST be removed or deleted immediately by a request submitted by the department… A request for an individual in a classification other than in the PSS/PT series to access (the payroll system) requires a written justification from the Personnel/Payroll Officer. The justification must describe the individuals’ specific job duties that require the need to each type of information ….as well as the level of access to that application, in order to perform their Statutory and/or Constitutional duties… To prevent unauthorized use of a transferred, terminated or resigned employee’s userID, it is required that the Security Monitor IMMEDIATELY submit a PSD125A to delete their system access. DO NOT WAIT until another employee fills this position; this only increases the chances for breach of security, utilizing and old userID. -6- California Department of Education Payroll Process Review Recommendation We recommend that CDE:  Update the keying access to the payroll system after employees separate from state service, transfer to another agency or unit, or change classifications;  Periodically review access to the system to determine that access complies with the Decentralized Security Program Manual. CDE lacked adequate segregation of duties within its payroll transactions FINDING 2— unit to ensure that only valid and authorized payroll transactions were Inadequate processed. CDE also failed to implement other controls to compensate for segregation of this risk. duties and compensating GC sections 13400 through 13407 require state agencies to establish and controls over maintain internal controls, including proper segregation of duties and an payroll effective system of internal review. Adequate segregation of duties transactions reduces the likelihood that fraud or error will remain undetected by providing for separate processing by different individuals at various stages of a transaction and for independent reviews of the work performed. Our review found that CDE payroll transactions unit staff performed conflicting duties. Staff members perform multiple steps in processing payroll transactions, including data entry into the State’s payroll system; auditing employee timesheets; reconciling payroll, including reconciling system output to source documentation; and processing adjustments. For example, the staff members keyed in regular and overtime pay and reconciled the master payroll, overtime, and other supplemental warrants. CDE failed to demonstrate that it had implemented compensating controls to mitigate the risks associated with such a deficiency. We found no indication that these functions were subjected to periodic supervisory review. The lack of adequate segregation of duties and compensating controls has a pervasive effect on the CDE payroll process, and impairs the effectiveness of other controls by rendering their design ineffective or by keeping them from operating effectively. These control deficiencies, in combination with other deficiencies discussed in Finding 1 and Findings 3 through 6, represent a material weakness in internal control over the payroll process such that there is a reasonable possibility that a material misstatement in financial information or noncompliance with provisions of laws, regulations, or contracts will not be prevented, or detected and corrected, on a timely basis. Good internal control practices require that the following functional duties be performed by different work units, or at minimum, by different employees within the same unit:  Recording transactions – This duty refers to the record-keeping function, which is accomplished by entering data into a computer system. -7- California Department of Education Payroll Process Review  Authorization to execute – This duty belongs to individuals with authority and responsibility to initiate and execute transactions.  Periodic review and reconciliation of actual payments to recorded amount – This duty refers to making comparisons of information at regular intervals and taking action to resolve differences. Recommendation We recommend that CDE:  Separate conflicting payroll function duties to the greatest extent possible. Adequate segregation of duties will provide a stronger system of internal control whereby the functions of each employee are subject to the review of another. If it is not possible to segregate payroll functions fully and appropriately due to specific circumstances, CDE should implement compensating controls. For example, if the payroll transaction unit staff responsible for recordkeeping also performs a reconciliation process, the supervisor could perform and document a detailed review of the reconciliation to provide additional control over the assignment of conflicting functions. Compensating controls may also include dual authorization requirements and documented review of payroll system input and output; and  Develop formal procedures for performing and documenting compensating controls. CDE lacked adequate controls over the processing of employee separation FINDING 3— lump-sum pay. Of the 120 employees whose records we reviewed, four Inadequate were overpaid by $3,196, 11 were underpaid by $4,765, and 11 payments controls over in the amount of $45,551 could not be verified because the agency purged separation lump- the employees’ official personnel files based on the employee’s birthday sum pay, resulting instead of the employee’s separation date (“known”); and we identified in improper and $5,554 in overpayments, $8,280 in underpayments, and $79,158 in questioned questioned payments based on the results of statistical sampling (“likely”). payments If this control deficiency is not mitigated, CDE is at risk of additional improper payments. GC section 19839 allows lump-sum payment for accrued eligible leave credits when an employee separates from state employment. Collective bargaining agreements include similar provisions regarding separation lump-sum pay. Payroll records show that CDE processed payments for separation lump- sum pay, totaling $4,755,876, for 337 employees between March 1, 2015, and February 28, 2018, as follows: Separation Lump-Sum Pay Group Unit Amount Payments (statistically sampled) 337 4,755,876 Total population 337 $ 4,755,876 _____________ * Amounts in this table are rounded to the nearest dollar. -8- California Department of Education Payroll Process Review As we used a statistical sampling method to select the employees whose payments for separation lump-sum pay were examined, we projected the amount of improper and questioned payments to be $76,432. Therefore, the known and likely improper payments totaled a net approximate of $120,414. The following table summarizes the results of our statistical sampling: Known improper and questioned payments, net $ 43,982 Divide by: Sample 1,737,121 Error rate for projection (differences due to rounding) 2.53% Population that was statistically sampled 4,755,876 Multiply by: Error rate for projection 2.53% Known and likely improper and questioned payments, net (differences due to rounding) 120,414 Less: Known improper and questioned payments, net 43,982 Likely improper and questioned payments, net $ 76,432 _____________ * Amounts in this table are rounded to the nearest dollar. These improper payments resulted from miscalculation of the employees’ accrued leave credits by the payroll transactions unit staff. CDE also lacked adequate supervisory review to ensure accurate processing of separation lump-sum pay. GC sections 13400 through 13407 require state agencies to establish and maintain internal controls, including an effective system of internal review. Recommendation We recommend that CDE:  Establish adequate controls to ensure accurate calculation and payment of employee separation lump-sum pay;  Conduct a review of employee separation lump-sum payments made during the past three years to ensure that the payments were accurate and in compliance with collective bargaining agreements and state laws;  Recover overpayments made to separated employees in accordance with GC section 19838 and SAM section 8776.6; and  Properly compensate those employees who were underpaid. CDE failed to implement controls to ensure that it adheres to the FINDING 4— requirements of collective bargaining agreements and state regulations to Inadequate limit the accumulation of vacation and annual leave credits. This controls over deficiency resulted in liability for excessive leave credits with a value of vacation and at least $2,000,913 as of February 28, 2018. We expect the liability to annual leave increase if CDE does not take action to address the excessive vacation and balances, resulting annual leave balances. in liability for excessive balances -9- California Department of Education Payroll Process Review Collective bargaining agreements and state regulations limit the amount of vacation and annual leave that most state employees may accumulate to no more than 80 days (640 hours). The limit on leave balances helps state agencies manage leave balances and control the State’s liability for accrued leave credits. State agencies may allow employees to carry higher leave balances only under limited circumstances. For example, an employee may not be able to reduce accrued vacation or annual leave hours below the limit due to business needs. When an employee’s leave accumulation exceeds or is projected to exceed the limit, state agencies should work with employees to develop a written plan for reducing leave balances below the applicable limit. Our review of CDE’s leave accounting records determined that CDE had 160 employees whose unused vacation or annual leave as of February 28, 2018, exceeded the limit set by collective bargaining agreements and state regulations. Collectively, the 160 employees accumulated 40,718 hours of excess vacation and annual leave, with a value of at least $2,000,913 as of February 28, 2018. This estimated liability does not adjust for salary rate increases and additional leave credits.2 Accordingly, we expect that the amount needed to pay for this liability will be higher. We performed an additional review of the records for 10 out of 160 employees to determine whether CDE complied with collective bargaining agreements and state regulations. We determined that CDE could not demonstrate that it had complied with collective bargaining agreements and state regulations when allowing these employees to maintain excess vacation or annual leave balances. We found that only three of the 10 had justification or a plan in place during the review period. If CDE does not take action to reduce the excessive leave balances, the liability for accrued vacation and annual leave will likely increase. This is because most employees will receive salary increases or use other non- compensable leave credits instead of vacation or annual leave, increasing their vacation or annual leave balances. The state agency responsible for paying these leave balances may face a cash flow problem if a significant number of employees with excessive vacation or annual leave balances separate from state service. Normally, state agencies are not budgeted to make these separation lump-sum payments. However, the State’s current practice dictates that the state agency that last employed an employee pays for that employee’s lump-sum separation payment, regardless of where the employee accrued the leave balance. 2Most state employees receive pay rate increases every year pursuant to stat laws and/or collective bargaining agreements until they reach the top of their pay scale, or promote into a higher-paying position. In addition, when an employee’s accumulated leave balances upon separation are calculated for lump-sum pay, the employee is credited with additional leave credits equal to the amount that the employee would have earned had the employee taken time off and not separated from state service. -10- California Department of Education Payroll Process Review Recommendation We recommend that CDE:  Implement controls, including existing policies and procedures, to ensure that its employees’ vacation and annual leave balances are maintained within levels allowed by collective bargaining agreements and state regulations;  Conduct ongoing monitoring of controls to ensure that they are implemented and operating effectively; and  Participate in leave buy-back programs if the State offers such programs and funds are available. CDE lacked adequate controls over the processing of holiday credit FINDING 5— transactions. We identified approximately $508 in improper holiday Inadequate credits. If not mitigated, this control deficiency leaves CDE at risk of controls over additional improper holiday credits. holiday credit transactions, GC section 19853 specifies the compensation that an eligible employee is resulting in entitled to receive when required to work on a qualifying holiday. The improper credits collective bargaining agreement between the State and Bargaining Unit 6 includes similar provisions regarding holiday compensation for represented employees. We examined 18 holiday credit transactions, totaling approximately $5,677, because they involved unusual credits. Of the 18 transactions, three were under-accrued by four hours (or $146) and three were over- accrued by a total of 24 hours (or $654), for a net total of $508. The improper holiday credit transactions occurred because the CDE timekeeping system allowed employees to enter improper holiday credit hours. CDE also lacked adequate supervisory review to ensure accurate processing of holiday credits. GC sections 13400 through 13407 require state agencies to establish and maintain internal controls, including an effective system of internal review. Recommendation We recommend that CDE:  Conduct a review of holiday credits granted during the past three years to ensure that credits complied with collective bargaining agreements and state laws;  Correct any improper holiday credits in the State’s leave accounting system; and  Establish adequate controls to ensure that holiday credits granted are valid and comply with collective bargaining agreements and state law. -11- California Department of Education Payroll Process Review CDE lacked adequate controls over the processing of overtime pay. We FINDING 6— reviewed the records of 125 employees who received overtime payments. Inadequate Of these payments, we identified $517 in overpayments, $2,217 in controls over underpayments, and $3,619 in questioned payments for overtime pay, overtime pay, consisting of $141 in overpayments, $606 in underpayments, and $989 in resulting in questioned payments based on actual transactions (“known”); and $376 in improper and overpayments, $1,611 in underpayments, and $2,630 in questioned questioned payments based on the results of statistical sampling (“likely”). If not payments mitigated, these control deficiencies leave CDE at risk of additional improper payments for overtime. Collective bargaining agreements, and state law and policies, contain specific clauses regarding the calculation of overtime compensation. Payroll records show that CDE processed 437 payments for overtime pay, totaling $206,528, between March 1, 2015, and February 28, 2018, as follows: Overtime Payment Type by Group Unit Amount Work Week Group 2 – Overtime hours (statistically sampled) 437 206,528 Total population 437 $ 206,528 _____________ * Amounts in this table are rounded to the nearest dollar. Of the 437 payments for overtime pay, totaling $206,528, we randomly selected a statistical sample (as described in the Appendix) of 125 payments, totaling $56,427. Of the 125 payments sampled, CDE overpaid three by approximately $141 and underpaid two by approximately $606. We also questioned eight payments totaling $989. These payments resulted in an estimated net total improper payments of $524. As we used a statistical sampling method to select the overtime transactions examined, we projected the amount of likely improper and questioned payments to be $1,395. Therefore, the known and likely improper payments totaled an estimated $1,919. The following table summarizes the results of our statistical sampling: Known improper and questioned payments, net $ 524 Divide by: Sample 56,427 Error rate for projection (difference due to rounding) 0.93% Population that was statistically sampled 206,528 Multiply by: Error rate for projection 0.93% Known and likely improper and questioned payments, net (differences due to rounding) 1,919 Less: Known improper and questioned payments, net 524 Likely improper and questioned payments, net $ 1,395 _____________ * Amounts in this table are rounded to the nearest dollar. The known improper payments were made because personnel specialists were making calculation and keying errors. CDE also lacked adequate supervisory review to ensure the accurate processing of overtime pay. -12- California Department of Education Payroll Process Review GC sections 13402 through 13407 require state agencies to establish and maintain internal controls, including a system of policies and procedures adequate to provide compliance with applicable laws and other requirements, and an effective system of internal review. Recommendation We recommend that CDE:  Conduct a review of overtime payments made during the past three years to ensure that the payments complied with collective bargaining agreements and state law;  Recover overpayments made to employees through an agreed-upon collection method in accordance with GC section 19838; and  Properly compensate those employees who were underpaid. We further recommend that, to prevent improper overtime payments from recurring, CDE:  Establish adequate internal controls to ensure that overtime payments are accurate and comply with collective bargaining agreements and state law;  Provide adequate oversight to ensure that payroll transactions unit staff process only valid and authorized overtime payments that comply with collective bargaining agreements and state laws and policies;  Provide training to payroll transactions unit staff who process overtime payment transactions to ensure that they understand the requirements under collective bargaining agreements and state law; and  Maintain supporting documentation for overtime payments pursuant to retention policies. -13- California Department of Education Payroll Process Review Appendix— Sampling Methodology March 1, 2015, through February 28, 2018 We used attributes sampling for test of compliance. The following table outlines our sampling application for review areas that included errors: Results Expected Projected to Review Type Population Population Sampling Sample Selection Confidence Tolerable Error Sample Intended Finding Area of Test (Unit) (Dollar) Unit Method Level Error Rate (Rate) ¹ Size Population Number Separation lump-sum pay Compliance 3 37 $ 4 ,755,876 Employee Computer-generated 95% 5% 2 (1.75%) 120 Yes 3 simple random Overtime pay Compliance 4 37 $ 2 06,528 Payment Computer-generated 95% 5% 2 (1.75%) 125 Yes 6 transactions simple random _________________ *Pursuant to the AICPA’s Audit Guide: Audit Sampling (May 1, 2017 edition), pages 131-133, the expected error is the expected number of errors planned for in the sample. It is derived by multiplying the expected error rate by the sample size. The expected number of errors in the sampling tables on pages 135-136 was rounded upward, e.g., 0.2 errors becomes 1 error. -A1- California Department of Education Payroll Process Review Attachment— California Department of Education’s Response to Draft Review Report State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 http://www.sco.ca.gov S18-PAR-9009