Centinela State Prison - Payroll Audit

CENTINELA STATE PRISON Audit Report PAYROLL AUDIT August 1, 2015, through July 31, 2018 BETTY T. YEE California State Controller July 2019 BETTY T. YEE California State Controller July 31, 2019 Raymond Madden, Warden Centinela State Prison P.O. Box 731 Imperial, CA 92251 Dear Mr. Madden: The State Controller’s Office audited the Centinela State Prison (CEN) payroll process for the period of August 1, 2015, through July 31, 2018. Our audit found material weaknesses in internal control over the CEN payroll process. These weaknesses contributed to CEN employees’ excessive vacation and annual leave balances; improper and questioned payments for separation lump-sum pay, overtime pay, and uniform allowance; and improper holiday credit transactions, costing the State an estimated net total of $1,108,644. If you have any questions, please contact Andrew Finlayson, Chief, State Agency Audits Bureau, by telephone at (916) 324-6310. Sincerely, Original signed by JIM L. SPANO, CPA Chief, Division of Audits JLS/as Raymond Madden, Warden -2- July 31, 2019 cc: Tamatha Bailey, Staff Services Manager I Centinela State Prison Linda Larabee, Staff Services Manager II Office of Audits and Court Compliance California Department of Corrections and Rehabilitation Micheale L. Sabbagh, Staff Services Manager I Office of Audits and Court Compliance California Department of Corrections and Rehabilitation Keely Percy, External Audits Analyst Office of Audits and Court Compliance California Department of Corrections and Rehabilitation Marissa Revelino, Chief Personnel and Payroll Services Division State Controller’s Office Mark Rodriquez, Chief Administrative Services Division California Department of Human Resources Centinela State Prison Payroll Audit Contents Audit Report Summary ............................................................................................................................ 1 Background ........................................................................................................................ 1 Objectives, Scope, and Methodology ............................................................................... 2 Conclusion .......................................................................................................................... 3 Follow-up on Prior Audit Findings .................................................................................. 4 Views of Responsible Officials .......................................................................................... 4 Restricted Use .................................................................................................................... 4 Schedule—Summary of Findings ......................................................................................... 5 Findings and Recommendations ........................................................................................... 6 Appendix—Audit Sampling Methodology ........................................................................... A1 Attachment—Centinela State Prison’s Response to Draft Audit Report Centinela State Prison Payroll Audit Audit Report Summary The State Controller’s Office (SCO) audited the Centinela State Prison’s (CEN) payroll process and transactions for the period of August 1, 2015, through July 31, 2018. CEN management is responsible for maintaining a system of internal control over the payroll process within its organization, and for ensuring compliance with various requirements under state laws and regulations regarding payroll and payroll-related expenditures. We completed our audit fieldwork on May 22, 2019. Our audit determined that CEN:  Did not maintain adequate and effective internal controls over its payroll process. We found the following deficiencies in internal control over the payroll process that we consider to be material weaknesses: o Lack of adequate segregation of duties to ensure that only valid and authorized payroll transactions were processed (see Finding 1); o Inappropriate keying access to the State’s payroll system (see Finding 2);  Did not process payroll and payroll-related disbursements and leave balances accurately and in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures. We found the following instances of noncompliance with the requirements of collective bargaining agreements and state laws, regulations, policies, and procedures: o Failed to limit the accumulation of vacation and annual leave credits (see Finding 3); o Inaccurately calculated and improperly paid separation lump-sum payments (see Finding 4); o Inaccurately calculated and improperly paid overtime compensation (see Finding 5); o Processed unearned holiday credit accruals (see Finding 6); o Made improper uniform allowance payments (see Finding 7); These improper and questioned payments cost the State an estimated net total of $1,108,644; and  Administered salary advances in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures. 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 -1- Centinela State Prison Payroll Audit audits of the decentralized payroll processing at state agencies and departments ceased due to the budget constraints in the late 1980s. In 2013, the California State Legislature reinstated these payroll audits 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. Audit Authority Authority for this audit 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 audit to determine whether CEN: and Methodology  Maintained adequate and effective internal controls over its payroll process;  Processed payroll and payroll-related disbursements and leave balances accurately in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures; and  Administered salary advances in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures. The audit covered the period from August 1, 2015, through July 31, 2018. To achieve our audit objectives, we:  Reviewed state and CEN policies and procedures related to the payroll process to understand CEN’s methodology for processing various payroll and payroll-related transactions;  Interviewed CEN payroll personnel to understand CEN’s methodology for processing various payroll and payroll-related transactions, determine their level of knowledge and ability relating to payroll transaction processing, and gain an understanding of existing 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’s 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 -2- Centinela State Prison Payroll Audit compliance with collective bargaining agreements and state laws, regulations, policies, and procedures; and  Reviewed salary advances to determine whether CEN administered and recorded them in accordance with state laws, regulations, policies, and procedures. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Conclusion Our audit determined that CEN:  Did not maintain adequate and effective internal controls over its payroll process.1 We found the following deficiencies in internal control over the payroll process that we consider to be material weaknesses: o Lack of adequate segregation of duties to ensure that only valid and authorized payroll transactions were processed (see Finding 1); o Inappropriate keying access to the State’s payroll system (see Finding 2);  Did not process payroll and payroll-related disbursements and leave balances accurately and in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures. We found the following instances of noncompliance with the requirements of collective bargaining agreements and state laws, regulations, policies, and procedures: o Failed to limit the accumulation of vacation and annual leave credits (see Finding 3); 1 In planning and performing our audit of compliance, we considered CEN’s internal control over compliance with collective bargaining agreements and state laws, regulations, policies, and procedures to determine the auditing procedures that were appropriate under the circumstances for the purpose of providing a conclusion on compliance, and to test and report on internal control over compliance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this footnote and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. However, as discussed this section, we identified certain deficiencies in internal control over compliance that we consider to be material weaknesses. A deficiency in internal control over compliance 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, 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 in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material 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 over compliance with provisions of laws, regulations, or contracts that is less severe than a material weakness, yet important enough to merit attention from those charged with governance. -3- Centinela State Prison Payroll Audit o Inaccurately calculated and improperly paid separation lump-sum payments (see Finding 4); o Inaccurately calculated and improperly paid overtime compensation (see Finding 5); o Processed unearned holiday credit accruals (see Finding 6); o Made improper uniform allowance payments (see Finding 7); These improper and questioned payments cost the State an estimated net total of $1,108,644; and  Administered salary advances in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures. The prior payroll audit report for the period of October 2010 through Follow-up on September 2011, issued June 2013, included audit findings. California Prior Audit Department of Corrections and Rehabilitation Headquarters stated that Findings CEN was not required to perform any corrective actions as a result of the California State Audit Report; however, CEN implemented corrective actions of its own volition. Based on the work performed in the current audit, we noted that CEN has taken appropriate corrective actions in response to the prior audit finding. Views of We issued a draft audit report on June 18, 2019. Raymond Madden, Warden, responded by letter dated June 27, 2019 (Attachment). CEN Responsible indicated that it has taken steps to address and remedy the findings since Officials the review. We will follow up during the next payroll audit to ensure that these corrective actions were adequate and appropriate. CEN disagreed with Findings 4 and 7. Our responses to Findings 4 and 7 are included in the Findings and Recommendations section. Restricted Use This audit report is solely for the information and use of CEN 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 audit 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- Centinela State Prison Payroll Audit Schedule— Summary of Findings August 1, 2015, through July 31, 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 Inadequate segregation of duties N/A N/A N/A N/A N/A N/A N/A N/A N/A and compensating controls over payroll transactions 2 Inappropriate keying access to 2 6 Targeted Employee $ - 2 8% $ - $ - $ - the State’s payroll system 3 Inadequate controls over vacation 4 8 Targeted Employee 674,767 4 8 100% 674,767 N/A 674,767 and annual leave balances, resulting in liability for excessive balances 4 Inadequate controls over separation lump-sum pay, resulting in improper and questioned payments Overpayments 3 3 Statistical Employee 1 ,595,339 2 2 67% 75,543 5 8,447 1 33,990 Underpayments -- Same selections above -- 5 15% (5,934) (4,591) (10,525) Overpayments 1 0 Targeted Employee 2 38,983 2 20% 4,703 N/A 4,703 Underpayments -- Same selections above -- 2 20% (3,531) N/A (3,531) 5 Inadequate controls over overtime pay, resulting in improper payments Overpayments 7 7 Statistical Payment 115,799 2 3% 1,027 269,178 2 70,204 transaction Questioned Cost -- Same selections above -- 1 1% 111 29,207 2 9,319 Overpayments 1 2 Targeted Payment 119,427 1 8% 864 N/A 8 64 transaction 6 Inadequate controls over holiday 9 8 Targeted Holiday credit 55,806 9 9% 2,350 N/A 2,350 credit transactions, resulting in transaction improper credits 7 Inadequate controls over uniform allowance pay, resulting in improper payments Overpayments 2 7 Targeted Payment 23,588 1 5 56% 6,503 N/A 6,503 transaction Total $ 2,823,709 $ 756,403 $ 352,241 $ 1 ,108,644 ________________ *All percentages are rounded to the nearest full percentage point. -5- Centinela State Prison Payroll Audit Findings and Recommendations FINDING 1— CEN lacked adequate segregation of duties within its payroll transactions unit to ensure that only valid and authorized payroll transactions were Inadequate processed. CEN 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 audit found that CEN payroll transactions unit staff performed conflicting duties. Staff members performed multiple steps in processing payroll transactions, including entering data into the State’s payroll system; auditing employee timesheets; reconciling payroll, including reconciling system output to source documentation; reporting payroll exceptions; and processing adjustments. For example, staff members keyed in regular and overtime pay and reconciled the master payroll, overtime, and other supplemental warrants. CEN 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 CEN 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 Findings 2 through 7, represent a material weakness in internal control over the payroll process such that there is a reasonable possibility that a material 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.  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 amounts – This duty refers to making comparisons of information at regular intervals and taking action to resolve differences. -6- Centinela State Prison Payroll Audit Recommendation We recommend that CEN:  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, CEN should implement compensating controls. For example, if the payroll transactions unit staff member responsible for recordkeeping also performs a reconciliation process, then the supervisor should 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 reviews of payroll system input and output; and  Develop formal procedures for performing and documenting compensating controls. FINDING 2— CEN lacked adequate controls to ensure that only appropriate staff had keying access to the State’s payroll system. CEN inappropriately allowed Inappropriate two employees keying access to the State’s payroll 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 it. PPSD has established a Decentralized Security Program Manual that all state agencies are required to follow in order to access the payroll system. The program’s objectives are to secure and protect the confidentiality and integrity of payroll data against misuse, abuse, and unauthorized use. We examined the records of 26 CEN employees who had keying access to the State’s payroll system at various times between August 2015 and July 2018. Of the 26 employees, two had inappropriate keying access to the State’s payroll system. Specifically, CEN did not immediately remove or modify the employees’ keying access after their separation from state service, transfer to another agency, or change in classification. The Decentralized Security Program Manual states, in part: The PPSD system contains sensitive and confidential information. Access is restricted to persons with an authorized, legal, and legitimate business requirement to complete their duties. . . Currently, PIMS, HIST, KEYM, PIP, LAS, MPC and/or ACAS applications are restricted to Personnel Specialists or Personnel Technician 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. -7- Centinela State Prison Payroll Audit If the employee’s 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/campus. . . . To prevent unauthorized use by a transferred, terminated or resigned employee's user ID, the Security Monitor must IMMEDIATELY submit all pages of the PSD125A to delete the user’s system access. Using an old user ID increases the chances of a security breach which is a serious security violation. Sharing a user ID is strictly prohibited and a serious violation. Recommendation We recommend that CEN:  Provide adequate controls to ensure that employees with keying access to the State’s payroll system do not enter their own data into the system;  Update keying access to the State’s payroll system immediately after employees leave CEN, transfer to another unit, or change classifications;  Periodically review access to the system to verify that access complies with the Decentralized Security Program Manual. CEN failed to implement controls to ensure that it adheres to the FINDING 3— 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 balances with a value of vacation and at least $674,767 as of July 31, 20182. We expect the liability to increase annual leave if CEN does not take action to address the excessive vacation and annual balances, resulting leave balances. in liability for excessive balances 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 a higher leave balance 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 the employee to develop a written plan for reducing leave balances below the applicable limit. Our audit of CEN’s leave accounting records determined that CEN had 1,126 employees with unused vacation or annual leave credits as of July 31, 2018. Of those employees, 48 exceeded the limit set by collective bargaining agreements and state regulations. For example, one employee had an accumulated balance of 1,534 hours of annual leave, or 894 hours beyond the 640-hour limit. Collectively, the 48 employees accumulated 2 At the time of our audit, we used the most recent and complete vacation and annual leave balances, which were as of July 31, 2018. -8- Centinela State Prison Payroll Audit 16,429 hours of excess vacation and annual leave, with a value of at least $674,767 as of July 31, 2018. This estimated liability does not adjust for salary rate increases and additional leave credits.3 Accordingly, we expect that the amount needed to pay for this liability will be higher. We performed a review of the records for the 48 employees to determine whether CEN complied with collective bargaining agreements and state regulations. CEN 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. If CEN does not take action to reduce the excessive leave balances, the liability for accrued vacation and annual leave will likely increase, 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. Recommendation We recommend that CEN:  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. CEN lacked adequate controls over the processing of employee separation FINDING 4— lump-sum pay. We identified $133,990 in overpayments and $10,525 in Inadequate underpayments for Bargaining Unit (BU) 6 employees who received controls over lump-sum payments. We also identified $4,703 in overpayments and separation lump- $3,531 in underpayments for non-BU 6 employees who received lump- sum pay, resulting sum payments. If not mitigated, these control deficiencies leave CEN at in improper and risk of additional improper separation lump-sum payments. questioned payments 3 Most state employees receive pay rate increases every year pursuant to state 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. -9- Centinela State Prison Payroll Audit 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 CEN processed payments for separation lump- sum pay, totaling $5,037,131, for 186 employees between August 2015 and July 2018, as follows: Separation Lump-Sum Pay Group Unit Amount Non-BU 6 employees (targeted sampled) 10 $ 238,983 Non-BU 6 employees (remaining population) 94 1,968,506 BU 6 employees (statistically sampled) 82 2,829,642 Total population 186 $ 5,037,131 _____________ * Amounts in this table are rounded to the nearest dollar. We segregated the 186 employees into BU 6 employees and non-BU 6 employees according to how lump-sum payouts were handled. We identified 104 non-BU 6 employees who received lump-sum payments, with a total amount paid of $2,207,489; and 82 BU 6 employees who received lump sum payments, with a total amount paid of $2,829,642. We examined the separation lump-sum pay for 10 non-BU 6 employees. Of the 10 employees whose records we reviewed, CEN overpaid two employees by a total of approximately $4,703, and underpaid two employees by a total of approximately $3,531. From the 82 BU 6 employees, we randomly selected a statistical sample of 33 employees who were paid separation lump-sum pay, totaling $1,595,339. Of the 33 employees whose records we reviewed, 22 were overpaid by approximately $75,543 and five were underpaid by approximately $5,934. 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 likely overpayments to be $58,447 and likely underpayments to be $4,591. Therefore, the known and likely improper payments totaled a net of approximately $123,465. The following table summarizes the results of our statistical sampling: Known improper payments, net $ 69,609 Divide by: Sample 1,595,339 Error rate for projection (differences due to rounding) 4.36% Population that was statistically sampled 2,829,642 Multiply by: Error rate for projection 4.36% Known and likely improper payments, net 123,465 Less: Known improper payments, net 69,609 Likely improper payments, net $ 53,856 _____________ * Amounts in this table are rounded to the nearest dollar. -10- Centinela State Prison Payroll Audit The known overpayments were made because payroll transactions unit staff members miscalculated leave balances paid. The known underpayments were made because payroll transactions unit staff members miscalculated leave balances paid and failed to include the leave credits that employees would have been credited with when their leave balances were calculated for lump-sum pay. CEN 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 CEN:  Establish adequate controls to ensure accurate calculation and payment of separation lump-sum pay;  Conduct a review of 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 law; and  Recover overpayments made to separated employees in accordance with GC section 19838 and State Administrative Manual (SAM) section 8776.6, and properly compensate those employees who were underpaid. CEN’s Response CEN continues to implement oversight controls which require review and signature approval of lump sum calculations by the Personnel Supervisor II. As a result of the control process, any deficiencies identified in the finding will be remedied. CEN reviewed approximately six of the lump sum calculations reviewed by SCO auditors and could not duplicate the miscalculation identified in the report. SCO Comment Our finding and recommendation remain unchanged. SCO auditors reviewed these calculations during fieldwork and confirmed that CEN miscalculated the lump-sum payments when converting scheduled hours to regular hours. These miscalculations were identified and presented to CEN during the audit. CEN lacked adequate controls over the processing of overtime pay. We FINDING 5— identified $864 in overpayments for overtime pay for employees who were Inadequate paid for 200 hours or more of overtime. We also identified $269,178 in controls over overpayments and $29,207 in questioned costs for overtime pay for overtime pay, employees who were paid for less than 200 hours of overtime. If not resulting in mitigated, these control deficiencies leave CEN at risk of additional improper improper payments for overtime pay. payments -11- Centinela State Prison Payroll Audit Collective bargaining agreements, and state laws and policies, contain specific clauses regarding the calculation of overtime compensation. Payroll records show that CEN processed 21,498 overtime pay transactions, totaling $30,473,810, between August 2015 and July 2018, as follows: Overtime Payment Type by Group Unit Amount Paid for at least 200 hours (items examined 100%) 12 119,427 Paid for less than 200 hours (statistically sampled) 21,486 30,473,810 Total population 21,498 $ 30,593,237 _____________ * Amounts in this table are rounded to the nearest dollar. We examined all 12 payments for overtime of 200 hours or more, which totaled $119,427. Of the 12 payments, CEN overpaid one payment by $864. Of the remaining 21486 overtime payments, totaling $30,473,810, for employees who were paid for less than 200 hours of overtime per transaction, we randomly selected a statistical sample (as described in the Appendix) of 77 transactions, totaling $115,799. Of the 77 transactions, CEN overpaid two transactions in the amount of $1,027 and another had questioned cost in the amount of $111. As we used a statistical sampling method to select the overtime pay transactions examined, we projected the amount of likely overpayments to be approximately $269,178 and the amount of likely questioned payments to be approximately $29,207. The following table summarizes the results of our statistical sampling: Dollar amount of exceptions, net (rounded to the nearest dollar) $ 1,138 Divide by: Sample 115,799 Error rate for projection 0.98% Population that was statistically sampled 30,473,810 Multiply by: Error rate for projection 0.98% Known and likely exceptions 299,524 Less: Known exceptions 1,138 Likely exceptions (difference due to rounding) $ 298,386 _____________ * Amounts in this table are rounded to the nearest dollar. The improper payments were made because payroll transactions unit staff members miscalculated overtime hours worked. The questioned cost resulted from a lack of supporting documentation associated with overtime pay. CEN also lacked adequate supervisory review to ensure accurate processing of overtime compensation. GC sections 13400 to 13407 require state agencies to establish and maintain internal controls, including a system of policies and procedures adequate to ensure compliance with applicable laws and other requirements, and an effective system of internal review. -12- Centinela State Prison Payroll Audit Recommendation We recommend that CEN:  Conduct a review of payments for overtime pay made during the past three years to ensure that the payments complied with collective bargaining agreements and state laws and policies; and  Recover overpayments made to employees through an agreed-upon collection method in accordance with GC section 19838. We further recommend that, to prevent improper and questioned payments for overtime pay from recurring, CEN:  Establish adequate internal controls to ensure that payments are accurate and comply with collective bargaining agreements and state laws and policies; and  Provide adequate oversight to ensure that payroll transactions unit staff process only valid and authorized payments that comply with collective bargaining agreements and state laws and policies. FINDING 6— CEN lacked adequate controls over the processing of holiday credit Inadequate transactions. We identified approximately $2,350 in improper holiday controls over credits. If not mitigated, this control deficiency leaves CEN at risk of additional improper holiday credits. holiday credit transactions, GC section 19853 and collective bargaining agreements for BUs 3, 4, 12, resulting in 15, 18, 19, and 20 specify the number of hours of holiday credits that improper credits employees are eligible to receive per qualifying holiday. We examined 98 holiday credit transactions, with an approximate value of $55,806. These transactions included random selections and transactions selected because they involved unusual credits. Of the 98 transactions, nine involved improper credits, with an estimated value of $2,350. The improper holiday pay transactions occurred because payroll transactions unit staff members incorrectly calculated holiday credit hours and incorrectly keyed hours into the State’s leave accounting system. CEN 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 CEN:  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’ leave accounting system; and -13- Centinela State Prison Payroll Audit  Establish adequate controls to ensure that holiday credits granted are valid and comply with collective bargaining agreements and state laws. CEN lacked adequate controls over the processing of payments for FINDING 7— uniform allowances. We identified $6,503 in overpayments for uniform Inadequate allowance. If not mitigated, these control deficiencies leave CEN at risk controls over of additional improper payments for Uniform Allowance. uniform allowance pay, resulting in Pursuant to the collective bargaining agreement between the State and improper BU 6, certain employees required to wear a uniform and uniform payments accessories receive a maximum uniform allowable of $950 per year, to be paid annually. If an employee leaves the classification entitled to the uniform allowance, the employee receives a prorated share for the annual uniform allowance. Payroll records showed that CEN processed 2,337 Uniform Allowance payments totaling $1,774,765 between August 1, 2015, and July 31, 2018. We reviewed 27 Uniform Allowance payments totaling approximately $23,588. Of the 27 payments tested, 15 were overpaid by approximately $6,503. The improper payments were made to Crisis Response Team employees and are improper because California Department of Corrections and Rehabilitation institutions received an email stating that supplemental Uniform Allowance above the BU 6 allowance for Crisis Response Team members is not allowed. 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 CEN:  Conduct a review of payments for uniform allowance made during the past three years to ensure that the payments complied with collective bargaining agreements; and  Recover overpayments made to employees through an agreed-upon collection method in accordance with GC section 19838. We further recommend that, to prevent improper payments for uniform allowance from recurring, CEN:  Establish adequate internal controls to ensure that payments are accurate and comply with collective bargaining agreements; and  Provide adequate oversight to ensure that payroll transactions unit staff members process only valid and authorized payments that comply with collective bargaining agreements. -14- Centinela State Prison Payroll Audit CEN’s Response CEN makes every effort to issue uniform allowance per policy. In December 2016, CEN discontinued the issuance of uniform allowance to Crisis Response Team members per Departmental policy. The payments issued in 2016 were made prior to the direction received in the December 2016 email, and therefore were in accordance with the policy direction at the time. SCO Comment Our finding and recommendation remain unchanged. In the email referenced by CEN, California Department of Corrections and Rehabilitation states that CEN has been misinterpreting the previous policy memo. Therefore, the allowance had already been out of compliance with existing policy direction. -15- Centinela State Prison Payroll Audit Appendix— Audit Sampling Methodology August 1, 2015, through July 31, 2018 We used attributes sampling for test of compliance. The following table outlines our audit sampling application. Results Projected Expected 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 82 $ 2 ,829,642 Employee Computer-generated 95% 5% 0 (0%) 33 Yes 4 simple random Overtime pay Compliance 21,486 $ 3 0,473,810 Payment Computer-generated 95% 5% 0 (0%) 77 Yes 5 transactions simple random ___________________ 1 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- Centinela State Prison Payroll Audit Attachment— Centinela State Prison’s Response to Draft Audit Report State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 http://www.sco.ca.gov S19-PAR-0006