California Department of State Hospitals - Coalinga - Payroll Audit

CALIFORNIA DEPARTMENT OF STATE HOSPITALS – COALINGA Audit Report PAYROLL AUDIT February 1, 2015, through January 31, 2018 BETTY T. YEE California State Controller July 2019 BETTY T. YEE California State Controller July 31, 2019 Stephanie Clendenin, Acting Director California Department of State Hospitals 1600 9th Street Sacramento, CA 95814 Dear Ms. Clendenin: The State Controller’s Office audited the California Department of State Hospitals – Coalinga (DSH – Coalinga) payroll process and transactions for the period of February 1, 2015, through January 31, 2018. Our audit found material weaknesses in internal control over the DSH – Coalinga payroll process. These weaknesses contributed to DSH – Coalinga employees’ excessive vacation and annual leave balances, improper and questioned payments, and long-outstanding salary advances, costing the State an estimated net total of $1,151,276. 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 Stephanie Clendenin, Acting Director -2- July 31, 2019 cc: Mark Ghaly, Secretary California Health and Human Services Agency Sterling Price, Acting Chief Deputy Director California Department of State Hospitals George Maynard, Deputy Director, Administration California Department of State Hospitals Cindy Woolston, Chief, Office of Audits California Department of State Hospitals Brandon Price, Executive Director California Department of State Hospitals – Coalinga 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 State Hospitals – Coalinga Payroll Audit Contents Audit Report Summary ............................................................................................................................ 1 Background ........................................................................................................................ 1 Objectives, Scope, and Methodology ............................................................................... 2 Conclusion .......................................................................................................................... 3 Follow-up on Prior Audit Finding ................................................................................... 4 Views of Responsible Officials .......................................................................................... 5 Restricted Use .................................................................................................................... 5 Schedule—Summary of Findings ......................................................................................... 6 Findings and Recommendations ........................................................................................... 7 Appendix—Audit Sampling Methodology ........................................................................... A1 Attachment—California Department of State Hospitals’ Response to Draft Audit Report California Department of State Hospitals – Coalinga Payroll Audit Audit Report Summary The State Controller’s Office (SCO) audited the California Department of State Hospitals – Coalinga’s (DSH – Coalinga) payroll process and transactions for the period of February 1, 2015, through January 31, 2018. DSH – Coalinga 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 30, 2019. Our audit determined that DSH – Coalinga:  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 and compensating controls over the processing of payroll transactions (see Finding 1); o Inappropriate keying access to the State’s payroll system (see Finding 2); o Lack of sufficient controls over the processing of specific payroll- related transactions to ensure that DSH – Coalinga complied with collective bargaining agreements and state laws, and that only valid and authorized payments were processed (see Findings 3, 4, 5, 6 and 8);  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 Failure to adhere to the requirements of collective bargaining agreements and state regulations to limit the accumulation of vacation and annual leave credits, resulting in liability for excessive leave balances with a value of at least $650,502 as of January 31, 2018 (see Finding 3); o Improper and questioned payments made for overtime pay, separation lump-sum pay, and Medical Officer of the Day (MOD) pay; and improper holiday credits, costing an estimated net total of $484,374 (see Findings 4, 5, 6, and 8); and  Did not administer salary advances in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures (see Finding 7). 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. -1- California Department of State Hospitals – Coalinga Payroll Audit PPSD decentralized the processing of payroll, allowing state agencies and departments to process their own payroll-related transactions. Periodic 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 the payroll function, provide proper oversight of 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 DSH – Coalinga: and Methodology  Maintained adequate and effective internal controls over its payroll process;  Processed payroll and payroll-related disbursements and leave balances accurately and 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 February 1, 2015, through January 31, 2018. To achieve our audit objectives, we:  Reviewed state and DSH – Coalinga policies and procedures related to the payroll process to understand DSH – Coalinga’s methodology for processing various payroll and payroll-related transactions;  Interviewed DSH – Coalinga payroll personnel to understand DSH – Coalinga’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 relevant criteria; -2- California Department of State Hospitals – Coalinga Payroll Audit  Analyzed and tested the selected transactions, and reviewed relevant files and records to determine the accuracy of payroll and payroll- related payments, accuracy of leave transactions, adequacy and effectiveness of internal control over the payroll process, and compliance with collective bargaining agreements and state laws, regulations, policies, and procedures; and  Reviewed salary advances to determine whether DSH – Coalinga administered and recorded them in accordance with collective bargaining agreements and 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 DSH – Coalinga:  Did not maintain adequate and effective internal controls over its payroll process1. 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 and compensating controls over the processing of payroll transactions (see Finding 1); o Inappropriate keying access to the State’s payroll system (see Finding 2); o Lack of sufficient controls over the processing of specific payroll- related transactions to ensure that DSH – Coalinga complied with 1 In planning and performing our audit of compliance, we considered DSH-Coalinga’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- California Department of State Hospitals – Coalinga Payroll Audit collective bargaining agreements and state laws, and that only valid and authorized payments were processed (see Findings 3, 4, 5, 6, and 8).  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 Failure to adhere to the requirements of collective bargaining agreements and state regulations to limit the accumulation of vacation and annual leave credits, resulting in liability for excessive leave balances with a value of at least $650,502 as of January 31, 2018 (see Finding 3); o Improper and questioned payments made for overtime pay, employee separation lump-sum pay, and MOD pay; and improper holiday credits, costing an estimated net total of $484,374 (see Findings 4, 5, 6, and 8); and  Did not administer salary advances in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures (see Finding 7). Follow-up on The Department of Finance, Office of State Audits and Evaluations Prior Audit (Finance) issued a report on January 31, 2008 for its Internal Control Review (December 2007 Internal Control Review) of the California Finding Department of Mental Health (DMH) for the period of July 2007, through December 2007. The December 2007 Internal Control Review report included a finding that involved DSH – Coalinga regarding overtime that was not pre-approved, errors in processing payments, and an employee who was under investigation for fraudulent reporting. Among its recommendations in the December 2007 Internal Control Review report, Finance recommended that DSH – Coalinga: 1. Institute timekeeping procedures to ensure attendance records are adequately prepared, certified, and retained for audit; 2. Require overtime be reviewed and pre-approved by a designated supervisor and second-level reviewer; and 3. Conduct random overtime audits to reduce fraud and abuse. On March 25, 2013, Finance issued a report on its audit (March 2013 Audit), which was conducted to determine whether the California Department of State Hospitals2 (DSH) implemented the recommendations presented in Finance’s December 2007 Internal Control Review report as of June 30, 2012. The March 2013 Audit report indicated that DSH – Coalinga had implemented Recommendation 2, but had not implemented Recommendations 1 and 3, as described above. Based on the work performed during our current audit, we noted that DSH – Coalinga has 2On July 1, 2012, DMH was abolished and the responsibilities for the state hospitals transferred to the then-newly established DSH. -4- California Department of State Hospitals – Coalinga Payroll Audit taken corrective actions in response to Recommendation 1. We also noted that although DSH – Coalinga stated that it has taken corrective actions to implement Recommendation 3 by conducting monthly audits of payroll transactions unit staff, we could not verify that the actions were adequate and appropriate because there is no sufficient record of their implementation. Furthermore, based on the work performed during our current audit, we noted a similar finding regarding errors in processing of overtime payments (see Finding 4). Views of We issued a draft audit report on June 24, 2019. Stephanie Clendenin, Acting Director, DSH, responded by letter dated July 15, 2019 Responsible (Attachment), acknowledging the findings and indicating that DSH – Officials Coalinga 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. DSH also provided additional information regarding Finding 8. Our comments on DSH’s response to Finding 8 are included in the Findings and Recommendations section. Restricted Use This audit report is solely for the information and use of DSH – Coalinga 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 -5- California Department of State Hospitals – Coalinga Payroll Audit Schedule— Summary of Findings February 1, 2015, through January 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 Audited Selection Unit Audited Issues Audited * Known Issues Likely Issues Likely Issues 1 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 2 Inappropriate keying access to the 4 0 Targeted Employee - 1 2 30% - N/A - State’s payroll system 3 Inadequate controls over vacation 5 1 Targeted Employee $ 517,382 5 1 100% $ 650,502 N/A $ 650,502 and annual leave balances, resulting in liability for excessive balances 4 Inadequate controls over overtime pay, resulting in improper payments Overpayments 1 25 Statistical Payment 4 83,538 2 2 18% 6 ,956 8 80,611 887,567 transaction Underpayments --Same selections above-- 7 6% ( 3,601) ( 455,876) ( 459,477) 5 Inadequate controls over separation - lump-sum pay, resulting in improper and questioned payments Overpayments 1 05 Statistical Employee 5 87,524 1 5 14% 7 ,100 1 2,923 2 0,023 Underpayments --Same selections above-- 1 1 10% ( 6,468) ( 11,775) (18,243) Questioned payments --Same selections above-- 2 2% 1 5,140 2 7,559 4 2,699 6 Inadequate controls over Medical 1 05 Statistical Payment 1,223,187 5 5% 2 ,388 5 ,487 7 ,875 Officer of the Day pay, resulting in transaction overpayments 7 Inadequate controls over salary 2 4 Targeted Salary 1 6,400 2 4 100% 1 6,400 N/A 1 6,400 advances, resulting in failure to advance recover outstanding amounts transaction 8 Inadequate controls over holiday 1 1 Targeted Holiday credit 4,161 1 0 91% 3,930 N/A 3,930 credit transactions, resulting in transaction improper credits Total $ 2 ,832,192 $ 692,347 $ 458,929 $ 1 ,151,276 ________________ *All percentages are rounded to the nearest full percentage point. -6- California Department of State Hospitals – Coalinga Payroll Audit Findings and Recommendations FINDING 1— DSH – Coalinga lacked adequate segregation of duties within its payroll transactions unit to ensure that only valid and authorized payroll Inadequate transactions were processed. DSH – Coalinga also failed to implement segregation of other controls to compensate for 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 DSH – Coalinga 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. DSH – Coalinga 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 DSH – Coalinga 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 8, represent a material weakness in internal control over the payroll process 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. 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. -7- California Department of State Hospitals – Coalinga Payroll Audit Recommendation We recommend that DSH – Coalinga:  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, DSH – Coalinga 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. DSH – Coalinga lacked adequate controls to ensure that only appropriate FINDING 2— staff had keying access to the State’s payroll system. DSH – Coalinga Inappropriate inappropriately allowed 12 employees keying access to the State’s payroll keying access to the system. If not mitigated, this control deficiency leaves payroll data at risk State’s payroll of misuse, 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 40 DSH – Coalinga employees who had keying access to the State’s payroll system at various times between February 2015 and January 2018. Of the 40 employees, we determined that DSH – Coalinga did not immediately remove or modify keying access for 12 employees after the employees’ separation from state service, transfer to another agency, or change in classification. For example, a Staff Services Manager II transferred to another state agency on May 13, 2016. DSH – Coalinga did not request to remove the employee’s access until October 26, 2016, 166 days later. 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. -8- California Department of State Hospitals – Coalinga 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 DSH – Coalinga:  Update keying access to the State’s payroll system immediately after employees leave DSH – Coalinga, transfer to another unit, or change classifications;  Periodically review access to the system to verify that access complies with the Decentralized Security Program Manual. DSH – Coalinga failed to implement controls to ensure that it adheres to FINDING 3— the requirement of collective bargaining agreements and state regulations Inadequate to limit the accumulation of vacation and annual leave credits. These controls over deficiencies resulted in liability for excessive leave balances with a value vacation and of at least $517,382 as of January 31, 2018. We expect the liability to annual leave increase if the DSH – Coalinga does not take action to address the balances, resulting excessive vacation and annual 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 examination of DSH – Coalinga’s leave accounting records determined that DSH – Coalinga had 1,739 employees with unused vacation or annual leave credits at January 31, 2018. Of those employees, 51 exceeded the limit set by collective bargaining agreements and state regulations. For example, one employee had an accumulated balance of 2,257 hours in annual leave, or 1,617 hours beyond the 640-hour limit. Collectively, the 51 employees accumulated 8,529 hours in excess vacation and annual leave, with a value of at least $517,382 as of January 31, 2018. This estimated liability does not adjust for salary rate -9- California Department of State Hospitals – Coalinga Payroll Audit increases and additional leave credits.3 Accordingly, we expect that the amount needed to pay for the liability will be higher. For example, a DSH – Coalinga employee separated from state service with 892 hours in leave credits, including 600 hours in annual leave. After adjusting for additional leave credits, the employee was paid for 1,058 hours, or approximately 19% more. We further examined the records of 51 employees to determine DSH – Coalinga’s compliance with collective bargaining agreements and state regulations. DSH – Coalinga 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 also found that DSH – Coalinga had no plans in place during the audit period to reduce leave balances below the limit. If DSH – Coalinga 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 DSH – Coalinga:  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. DSH – Coalinga lacked adequate controls over the processing of overtime FINDING 4— pay. We identified $887,567 in overpayments and $459,477 in Inadequate controls underpayments for overtime, consisting of $6,956 in overpayments and over overtime pay, $3,601 in underpayments based on actual transactions examined resulting in (“known”); and $880,611 in overpayments and $455,876 in improper payments underpayments based on the results of statistical sampling (“likely”). If 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. -10- California Department of State Hospitals – Coalinga Payroll Audit not mitigated, these control deficiencies leave DSH – Coalinga at risk of additional improper payments for overtime. Collective bargaining agreements, and state laws and policies, contain specific clauses regarding overtime pay. Payroll records show that DSH – Coalinga processed 78,908 overtime pay transactions, totaling $61,700,119, between February 2015 and January 2018. Of the 78,908 overtime pay transactions, we randomly selected a statistical sample (as described in the Appendix) of 125 transactions, totaling $483,538. Of the 125 transactions, DSH – Coalinga overpaid 22 by approximately $6,956 and underpaid seven by approximately $3,601. The known improper payments totaled a net of approximately $3,355. As we used a statistical sampling method to select the overtime pay transactions examined, we projected the amount of likely overpayments to be $880,611 and likely underpayments to be $455,876. The likely improper payments totaled a net of approximately $424,735. Therefore, the known and likely improper payments totaled a net of approximately $428,090, consisting of $887,567 in overpayments and $459,477 in underpayments. The following table summarizes the results of our statistical sampling: Known improper payments, net $ 3,355 Divide by: Sample 483,538 Error rate for projection (differences due to rounding) 0.69% Population that was statistically sampled 61,700,119 Multiply by: Error rate for projection 0.69% Known and likely improper payments, net (differences due to rounding) 428,090 Less: Known improper payments, net 3,355 Likely improper payments, net $ 424,735 _____________ * Amounts in this table are rounded to the nearest dollar. The known improper payments were made because the payroll transactions unit staff members miscalculated overtime hours worked; incorrectly paid hours worked at the time-and-a-half rate instead of the straight-time rate or vice-versa; and incorrectly entered overtime pay into the payroll system. DSH – Coalinga also lacked adequate supervisory review to ensure accurate processing of overtime pay. GC sections 13402 through 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. Recommendation We recommend that DSH – Coalinga:  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 -11- California Department of State Hospitals – Coalinga Payroll Audit  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 and questioned payments for overtime pay from recurring, DSH – Coalinga:  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. DSH – Coalinga lacked adequate controls over the processing of employee FINDING 5— separation lump-sum pay. We identified $20,023 in overpayments, Inadequate controls $18,243 in underpayments, and $42,699 in questioned payments for over separation separation lump-sum pay, consisting of $7,100 in overpayments, $6,468 lump-sum pay, in underpayments, and $15,140 in questioned payments based on actual resulting in transactions examined (“known”); and $12,923 in overpayments, $11,775 improper payments in underpayments, and $27,559 in questioned payments based on the results of statistical sampling (“likely”). If not mitigated, these control deficiencies leave DSH – Coalinga at risk of additional improper separation lump-sum 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 DSH – Coalinga processed payments for separation lump-sum pay, totaling $1,656,957, for 285 employees between February 2015 and January 2018. Of the 285 employees, we randomly selected a statistical sample (as described in the Appendix) of 105 employees who received separation lump-sum pay, totaling $587,524. Our examination of lump-sum payments made to these 105 employees found that DSH – Coalinga overpaid 15 of them by approximately $7,100 and underpaid 11 of them by approximately $6,468. Our review of lump- sum payments also showed a lack of supporting documentation for payments, totaling $15,140, made to two employees. Without the required documentation, there is no record of calculation and approval of payments for separation lump-sum pay. Therefore, we could not determine the validity, accuracy, and propriety of the payment made to these employees. As a result, we questioned these payments. These payments resulted in net total improper and questioned payments of $15,772. 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 $12,923, likely underpayments to be $11,775, and likely questioned payments to be $27,559. These payments resulted in net total improper and questioned payments of $28,707. Therefore, the known and likely improper and questioned payments totaled a net of approximately $44,479, consisting of $20,023 in -12- California Department of State Hospitals – Coalinga Payroll Audit overpayments, $18,243 in underpayments, and $42,699 in questioned payments. The following table summarizes the results of our statistical sampling: Known improper and questioned payments, net $ 15,772 Divide by: Sample 587,524 Error rate for projection (differences due to rounding) 2.68% Population that was statistically sampled 1,656,957 Multiply by: Error rate for projection 2.68% Known and likely improper and questioned payments, net (differences due to rounding) 44,479 Less: Known improper and questioned payments, net 15,772 Likely improper and questioned payments, net $ 28,707 _____________ * Amounts in this table are rounded to the nearest dollar. The known improper payments were made because payroll transactions unit staff members miscalculated leave balances paid. DSH – Coalinga 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 DSH – Coalinga:  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. DSH – Coalinga lacked adequate controls over the processing of MOD FINDING 6— pay. We identified $7,875 in overpayments for MOD pay, consisting of Inadequate controls $2,388 based on actual transactions examined (“known”) and $5,487 over Medical Officer based on the results of statistical sampling (“likely”). If not mitigated, this of the Day pay, control deficiency also leaves DSH – Coalinga at risk of additional resulting in improper payments. overpayments The collective bargaining agreement between the State and Bargaining Unit 16 and the California Department of Human Resources’ California State Civil Service Pay Scales, section 14, Pay Differential 76 allow compensation for MOD work shifts of at least eight continuous hours in addition to the employee’s regularly scheduled work week. -13- California Department of State Hospitals – Coalinga Payroll Audit Payroll records show that DSH – Coalinga processed 365 MOD payment transactions, totaling $4,034,198, between February 2015 and January 2018. Of the 365 transactions, we randomly selected a statistical sample (as described in the Appendix) of 105 transactions, totaling $1,223,187. Of the 105 transactions, DSH – Coalinga overpaid five by $2,388. As we used a statistical sampling method to select the transactions examined, we projected the amount of likely overpayments to be $5,487. Therefore, the known and likely overpayments $7,875. The following table summarizes the results of our statistical sampling: Known overpayments $ 2,388 Divide by: Sample 1,223,187 Error rate for projection (differences due to rounding) 0.20% Population that was statistically sampled 4,034,198 Multiply by: Error rate for projection 0.20% Known and likely overpayments (differences due to rounding) 7,875 Less: Known overpayments 2,388 Likely overpayments $ 5,487 _____________ * Amounts in this table are rounded to the nearest dollar. The known overpayments were made because payroll transactions unit staff members granted MOD pay to ineligible employees. DSH – Coalinga also lacked adequate supervisory review to ensure accurate processing of MOD pay. Recommendation We recommend that DSH – Coalinga:  Establish adequate controls to ensure proper payment of MOD pay;  Conduct a review of payments for MOD pay made during the past three years to ensure that the payments were accurate and in compliance with collective bargaining agreements and state policy; and  Recover overpayments made to employees through an agreed-upon collection method in accordance with GC section 19838. DSH – Coalinga lacked adequate controls over salary advances to ensure FINDING 7— that advances were recovered in accordance with state law and policies. Inadequate controls Twenty-four salary advances, totaling $16,400, remained outstanding as over salary advances, of January 31, 2018, due to DSH – Coalinga’s noncompliance with the resulting in failure to State’s collection policies and procedures. The oldest unrecovered salary recover outstanding advance was outstanding for over 10 years. This control deficiency leaves amounts DSH – Coalinga at risk of further failures to collect salary advances if not mitigated. At January 31, 2018, DSH – Coalinga’s accounting records showed 49 outstanding salary advances totaling $86,731, including 24 balances, totaling $16,400, that had been outstanding for more than 90 days. -14- California Department of State Hospitals – Coalinga Payroll Audit Generally, the prospect of collection diminishes as an account ages. When an agency fails to initiate collection of the overpayment within three years, the possibility of collection is remote. GC section 19838 and SAM sections 8776 and 8776.7 describe the State’s collection policies and procedures, which require DSH – Coalinga to collect salary advances in a timely manner and maintain proper records of collection efforts. We examined the 24 outstanding salary advances that had been outstanding for more than 90 days. Based on this examination, we noted that DSH – Coalinga did not comply with the State’s collection policies and procedures for all of them. DSH – Coalinga did not send collection notices promptly, or did not send the notices at all. The lack of adequate controls over salary advances reduces the likelihood of collection, increases the amount of resources expended on collection efforts, and negatively impacts cash flow. Recommendation We recommend that DSH – Coalinga ensure that it recovers salary advances in a timely manner pursuant to GC section 19838 and SAM sections 8776 and 8776.7. DSH – Coalinga lacked adequate controls over the processing of holiday FINDING 8— credit transactions. We identified approximately $3,930 in improper Inadequate controls holiday credits. If not mitigated, this control deficiency leaves DSH – over holiday credit Coalinga at risk of additional improper holiday credits. transactions, resulting in GC section 19853 specifies the compensation that an eligible employee is improper credits entitled to receive when required to work on a qualifying holiday. The collective bargaining agreements between the State and Bargaining Units 7, 17, 18, and 19 include similar provisions regarding holiday compensation for represented employees. We examined 11 holiday credit transactions, with an estimated value of $4,161, because they involved unusual credits. Of the 11 transactions, 10 involved improper credits, with an estimated value of $3,930. The improper holiday credit transactions occurred because payroll transactions unit staff members granted holiday credits to employees during pay periods with no holidays. DSH – Coalinga 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. -15- California Department of State Hospitals – Coalinga Payroll Audit Recommendation We recommend that DSH – Coalinga:  Conduct a review of holiday credits granted during the past three years to ensure that credits complied with collective bargaining agreements and state law;  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. DSH’s Response . . . . Given the platform and the process to input information into the [California Leave Accounting System (CLAS)], DSH-Coalinga uses the tools available including SCO exception reports. However, DSH would appreciate the SCO providing more audit tools (exception reports) that could help DSH in the CLAS input process. SCO Comment PPSD periodically provides the Leave Activity & Balances report and exception reports to state agencies. These reports can assist state agencies in verifying the accuracy and completeness of the data entered into CLAS. -16- California Department of State Hospitals – Coalinga Payroll Audit Appendix— Audit Sampling Methodology February 1, 2015, through January 31, 2018 We used attributes sampling for tests of compliance. The following table outlines our audit sampling application for audit areas that included errors: Results Expected Projected to Audit 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 Overtime pay Compliance 7 8,908 $ 6 1,700,119 Payment Computer-generated 95% 5% 2 125 Yes 4 transactions simple random (1.50%) Separation lump-sum pay Compliance 2 85 1 ,656,957 Employee Computer-generated 90% 5% 2 105 Yes 5 simple random (1.75%) MOD pay Compliance 3 65 4 ,034,198 Payment Computer-generated 90% 5% 2 105 Yes 6 transactions simple random (1.75%) ______________________ 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- California Department of State Hospitals – Coalinga Payroll Audit Attachment— California Department of State Hospitals’ 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-0001