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Wasco State Prison–Reception Center’s (wsp-rc) Payroll Process
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WASCO STATE PRISON–
RECEPTION CENTER
Audit Report
PAYROLL AUDIT
August 1, 2015, through July 31, 2018
BETTY T. YEE
California State Controller
December 2020
BETTY T. YEE
California State Controller
December 10, 2020
John Sutton, Warden
Wasco State Prison–Reception Center
Post Office Box 8800
Wasco, CA 93280
Dear Mr. Sutton:
The State Controller’s Office audited the Wasco State Prison–Reception Center’s (WSP-RC)
payroll process and transactions for the period of August 1, 2015, through July 31, 2018.
WSP-RC 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.
Our audit determined that WSP-RC did not maintain adequate and effective internal controls
over its payroll process. WSP-RC lacked adequate segregation of duties and compensating
controls over payroll transactions that resulted in improper separation lump-sum and overtime
payments and improper holiday credits. WSP-RC also granted inappropriate keying access to the
State’s payroll system.
In addition, WSP-RC did not implement controls to limit the accumulation of vacation and
annual leave credits, resulting in liability for excessive balances. WSP-RC also did not always
promptly collect salary advances from its employees.
If you have any questions, please contact Andrew Finlayson, Chief, State Agency Audits Bureau,
by telephone at (916) 324-6310, or by email at afinlayson@sco.ca.gov.
Sincerely,
Original signed by
JIM L. SPANO, CPA
Chief, Division of Audits
JLS/as
John Sutton, Warden -2- December 10, 2020
cc: Ericka Clark, Institution Personnel Officer
Wasco State Prison–Reception Center
Kathleen Allison, Secretary
California Department of Corrections and Rehabilitation
Jennifer Barretto, Undersecretary of Administration
California Department of Corrections and Rehabilitation
Katherine Minnich, Deputy Director of Human Resources
California Department of Corrections and Rehabilitation
Mai Lee Vang, External Audits Manager
California Department of Corrections and Rehabilitation
Brendan Murphy, Chief of Administrative Services Division
California Department of Human Resources
Jil Barraza, Chief of Personnel and Payroll Services Division
State Controller’s Office
Wasco State Prison–Reception Center 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 Audit Results ................................................................................. 5
Findings and Recommendations ........................................................................................... 6
Appendix—Audit Sampling Methodology
Attachment—Wasco State Prison–Reception Center’s Response to Draft Audit Report
Wasco State Prison–Reception Center Payroll Audit
Audit Report
Summary The State Controller’s Office (SCO) audited the Wasco State Prison–
Reception Center’s (WSP-RC) payroll process and transactions for the
period of August 1, 2015, through July 31, 2018. WSP-RC 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
June 10, 2020.
Our audit determined that WSP-RC did not:
Maintain adequate and effective internal controls over its payroll
process. WSP-RC lacked adequate segregation of duties and
compensating controls over payroll transactions that resulted in
improper separation lump-sum and overtime payments and improper
holiday credits. WSP-RC also granted inappropriate keying access to
the State’s payroll system;
Implement controls to limit the accumulation of vacation and annual
leave credits, resulting in liability for excessive balances; and
Promptly collect salary advances from its employees.
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
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.
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Wasco State Prison–Reception Center Payroll Audit
Objectives, Scope, We performed this audit to determine whether WSP-RC:
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 August 1, 2015, through July 31, 2018.
The audit population consisted of payroll transactions totaling
$384,415,770, as quantified in the Schedule.
To achieve our audit objectives, we:
Reviewed state and WSP-RC policies and procedures related to the
payroll process to understand WSP-RC’s methodology for processing
various payroll and payroll-related transactions;
Interviewed the WSP-RC payroll personnel to understand WSP-RC’s
methodology for processing various payroll and payroll-related
transactions, determine employees’ 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;
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 WSP-RC
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.
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Wasco State Prison–Reception Center Payroll Audit
Conclusion Our audit determined that WSP-RC:
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 Inadequate segregation of duties and a lack of compensating
controls over payroll transactions (see Finding 1);
o Inappropriate keying access to the State’s payroll system
(see Finding 2);
o Failure to implement controls to ensure that WSP-RC adhered 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 balances (see
Finding 3);
o Inadequate controls to ensure that separation lump-sum payments
were calculated correctly and paid in a timely manner, resulting in
improper, questioned, and late payments (see Finding 4);
o Inadequate controls to ensure that overtime payments were
calculated correctly and granted to eligible employees, resulting
in improper payments (see Finding 5);
o Inadequate controls to ensure that salary advances were collected
in a timely manner, resulting in failure to recover outstanding
amounts (see Finding 6); and
o Inadequate controls to ensure that holiday credits were granted to
eligible employees and supported with documentation, resulting
in improper and questioned credits (see Finding 7);
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:
1 In planning and performing our audit of compliance, we considered WSP-RC’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; it was not designed to identify all deficiencies in internal control over compliance that might be
material weaknesses or significant deficiencies. As discussed in 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 over compliance 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.
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Wasco State Prison–Reception Center Payroll Audit
o Excessive vacation and annual leave balances with a value of at
least $2,061,192 as of July 31, 2018 (see Finding 3).
Although an October 20, 2020 directive from California
Department of Human Resources (CalHR) does not affect the
dollar value of this finding, we are disclosing this directive
because it affects our recommendation. CalHR has directed
departments to immediately suspend policies that require leave
balances to be reduced below the limit, and that require employees
to implement leave-reduction plans. This suspension will be in
effect until the 2020 Personal Leave Program (2020 PLP) ends or
July 1, 2022, whichever is sooner;
o Improper and late payments made for employee separation
lump-sum pay (see Finding 4), improper payments made for
overtime pay (see Finding 5), and improper and questioned
holiday credits (see Finding 7), costing an estimated net total of
$629,855; and
Did not administer salary advances in accordance with collective
bargaining agreements and state laws, regulations, policies, and
procedures. Five salary advances, totaling $4,284, remained
outstanding as of July 31, 2018, due to WSP-RC’s noncompliance
with the State’s collection policies and procedures (see Finding 6).
Follow-up on The California Department of Corrections and Rehabilitation’s Office of
Audits and Court Compliance issued a report in September 2016 for its
Prior Audit
Business Services Review of WSP-RC from August 22, 2016, through
Findings
August 25, 2016. The Business Services Review report included findings
regarding inadequate documentation for separation lump-sum payments
and uncollected salary advances. Based on the work performed during our
current audit, we noted similar findings (see Findings 4 and 6).
Views of We issued a draft audit report on September 23, 2020. John Sutton,
Warden, responded by letter dated October 1, 2020 (Attachment),
Responsible
acknowledging the findings and indicating that WSP-RC has taken steps
Officials
to correct the noted deficiencies. This final audit report includes
WSP-RC’s response.
Restricted Use This audit report is solely for the information and use of WSP-RC, the
California Department of Corrections and Rehabilitation, CalHR, 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
December 10, 2020
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Wasco State Prison–Reception Center Payroll Audit
Schedule—
Summary of Audit Results
August 1, 2015, through July 31, 2018
Total Dollar
Number of Number of Dollar Amount Amount of
Method of Units of Dollar Amount Selections Selection of Selections Known and Finding
Audit Area Tested Selection Population of Population Examined Unit Examined Likely Issues Number
Segregation of duties N/A N/A N/A N/A N/A N/A N/A 1
System access Targeted 2 7 N/A 27 Employee - - 2
Excess vacation and annual leave Targeted 7 3 $ 2,061,192 73 Employee $ 2,061,192 $ 2,061,192 3
Regular pay Statistical 5 2,405 325,970,691 77 Transaction - -
Separation lump-sum pay Targeted 2 36 6,829,047 102 Employee 5,272,822 195,163 4
Overtime pay Statistical 2 6,945 43,879,716 165 Transaction 397,928 342,974 5
and targeted
Salary advance Targeted 2 1 42,822 8 Transaction 11,562 4 ,284 6
Holiday credit Targeted 8,909 3,629,355 338 Transaction 119,894 9 1,718 7
Uniform allowance Targeted 2,993 2,002,947 2 ,993 Transaction - -
$ 384,415,770 $ 7,863,398 $ 2,695,331
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Wasco State Prison–Reception Center Payroll Audit
Findings and Recommendations
FINDING 1— WSP-RC lacked adequate segregation of duties within its payroll
transactions unit to ensure that only valid and authorized payroll
Inadequate
transactions were processed. WSP-RC also failed to implement other
segregation of
controls to compensate for this risk.
duties and lack of
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 WSP-RC 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. WSP-RC failed to
demonstrate that it 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 WSP-RC 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 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.
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Wasco State Prison–Reception Center Payroll Audit
Recommendation
We recommend that WSP-RC:
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, WSP-RC 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.
WSP-RC lacked adequate controls to ensure that only appropriate staff had
FINDING 2—
keying access to the State’s payroll system. WSP-RC inappropriately
Inappropriate
allowed seven employees keying access to the State’s payroll system. If
keying access to the
not 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 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.
We examined the records of 27 WSP-RC employees who had keying
access to the State’s payroll system at various times between August 2015
and July 2018. Of the 27 employees, seven had inappropriate keying
access to the State’s payroll system. Specifically, WSP-RC did not
immediately remove or modify keying access for six employees after the
employees’ separation from state service, transfer to another agency, or
change in classification. For example, a Personnel Specialist promoted to
an ineligible classification on January 31, 2018; WSP-RC did not request
to remove the employee’s access until April 3, 2018 (62 days later). In
addition, one employee had keying access to the system while appointed
to the Staff Services Analyst classification, which is ineligible to have
keying access to the State’s payroll system without the required
justification; WSP-RC could not provide the justification letter for this
employee.
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. . . .
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Wasco State Prison–Reception Center Payroll Audit
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.
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. . . .
A request to grant access to an individual in a classification other than in
the Personnel Specialist/Payroll Technician series to access PIMS,
HIST, KEYM, PIP, LAS, MPC and/or ACAS requires a written
justification from the Authorizing Manager. The justification must
describe the individual's specific job duties requiring the need to access
system information (i.e., PIMS = Employment History, HIST=Payroll
History, LAS=Leave Accounting System, etc.) as well as level of access
to that application, in order to perform their regular daily duties. . . .
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 WSP-RC:
Update keying access to the State’s payroll system immediately after
employees leave WSP-RC, transfer to another unit, or change
classifications; and
Periodically review access to the system to verify that access complies
with the Decentralized Security Program Manual.
WSP-RC 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 $2,061,192 as of July 31, 2018. We expect the liability to increase
annual leave
if WSP-RC does not take action to address the excessive vacation and
balances, resulting 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 to 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 to reduce leave
balances below the applicable limit.
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Wasco State Prison–Reception Center Payroll Audit
Our examination of WSP-RC’s leave accounting records determined that
WSP-RC had 1,515 employees with unused vacation or annual leave
credits at July 31, 2018. Of those employees, 73 exceeded the limit set by
collective bargaining agreements and state regulations. For example, one
employee had an accumulated balance of 2,400 hours in vacation, or
1,760 hours beyond the 640-hour limit.
Collectively, the 73 employees accumulated 29,504 hours of excess
vacation and annual leave, with a value of at least $2,061,192 as of
July 31, 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. For example, a
WSP-RC employee separated from state service with 3,902 hours in leave
credits, including 2,188 hours in annual leave. After adjusting for
additional leave credits, the employee should have been paid for
4,658 hours, or 19% more.
We judgmentally selected 10 of the 73 employees for examination to
determine whether WSP-RC complied with collective bargaining
agreements and state regulations. We determined that WSP-RC 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 WSP-RC had no
plans in place during the audit period to reduce leave balances below the
limit.
If WSP-RC 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.
Although an October 20, 2020 directive from CalHR does not affect the
dollar value of this finding, we are disclosing this directive because it
affects our recommendation. CalHR has directed departments to
immediately suspend policies that require leave balances to be reduced
below the limit, and that require employees to implement leave-reduction
plans. This suspension will be in effect until the 2020 PLP ends, or July 1,
2022, whichever is sooner.
2 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.
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Wasco State Prison–Reception Center Payroll Audit
Recommendation
We recommend that, after the 2020 PLP ends, or July 1, 2022, whichever
is sooner, WSP-RC:
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.
WSP-RC lacked adequate segregation of duties within its payroll
FINDING 4—
transactions unit, as noted in Finding 1, and lacked adequate controls over
Inadequate
the processing of employee separation lump-sum pay. We identified
controls over
$202,413 in overpayments, $10,845 in underpayments, and $3,595 in
separation lump-
questioned payments for separation lump-sum pay. We also found that
sum pay, resulting
WSP-RC did not make separation lump-sum payments to four employees
in improper, in a timely manner. If not mitigated, these control deficiencies leave
questioned, and WSP-RC at risk of making additional improper and late separation
late payments lump-sum payments, noncompliance with agreements and laws, and
liability for late 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 WSP-RC processed separation lump-sum
payments, totaling $6,829,047, for 236 employees between August 2015
and July 2018, as follows:
Separation Lump-Sum Pay Group Unit Amount
Section 7(k) employees (examined 100%) 93 $ 3,917,551
Non-section 7(k) employees (examined nine highest payments) 143 2,911,496
Total population 236 $ 6,829,047
_____________
* Amounts in this table are rounded to the nearest dollar.
We examined the separation lump-sum pay, totaling $3,917,551, for all
93 employees who were covered by the provisions of Section 7(k) of the
Fair Labor Standards Act. Of the 93 employees, 63 were overpaid by an
approximate total of $201,863 and two were underpaid by an approximate
total of $1,529. Our examination of lump-sum payments also showed a
lack of supporting documentation for payments, totaling $3,595, made to
three employees. Without the required documentation, there is no record
of calculation or 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.
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Wasco State Prison–Reception Center Payroll Audit
Of the remaining 143 employees who were not covered by the provisions
of Section 7(k) of Fair Labor Standards Act and granted separation
lump-sum pay, totaling $2,911,496, we selected nine employees who were
granted the highest payments, totaling $1,355,271. The payments for these
selections represent 47% of the total separation lump-sum payments to
non-Section 7(k) employees. Of these nine employees whose payments we
examined, one was overpaid by approximately $550 and six were
underpaid by an approximate total of $9,316.
Of the 102 employees whose separation lump-sum payments we
examined, four were not paid in a timely manner, in violation of collective
bargaining agreements and state laws, as summarized in CalHR’s Human
Resources Manual, section 1703.
The known overpayments to Section 7(k) employees were made because
payroll transactions unit staff members miscalculated leave balances paid,
and improperly included holiday credits that should not have been
included when calculating employees’ leave balances for lump-sum pay.
The known underpayments to Section 7(k) employees occurred because
the payroll transactions unit staff members miscalculated leave balances
paid. The improper payments to non-Section 7(k) employees were made
because Personnel Specialists miscalculated leave balances paid. WSP-RC
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 WSP-RC:
Establish adequate controls to ensure accurate and timely separation
lump-sum payments;
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.
WSP-RC lacked adequate segregation of duties within its payroll
FINDING 5—
transactions unit, as noted in Finding 1, and lacked adequate controls over
Inadequate
the processing of overtime pay. We identified $343,159 in overpayments
controls over
and $185 in underpayments for overtime, consisting of $2,443 in
overtime pay,
overpayments and $185 in underpayments based on actual transactions
resulting in
examined (“known”); and $340,716 in overpayments based on the results
improper of statistical sampling (“likely”). If not mitigated, these control
payments deficiencies leave WSP-RC at risk of making additional improper
overtime payments.
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Wasco State Prison–Reception Center Payroll Audit
Collective bargaining agreements, and state laws and policies, contain
specific clauses regarding overtime pay. Payroll records show that
WSP-RC processed 26,945 overtime pay transactions, totaling
$43,879,716, between August 2015 and July 2018, as follows:
Overtime Payment Type by Group Unit Amount
Work Week Group 2 and SE – Paid for less than 250 hours per transaction
between August 2015 and June 2018 (statistically sampled) 26,885 $ 43,648,502
Work Week Group 2 and SE – Paid for at least 250 hours per transaction
between August 2015 and June 2018 (items examined 100%) 9 194,633
Work Week Group 2 and SE – Paid for in July 2018 (items examined 100%) 12 20,215
Work Week Group E (items examined 100%) 39 16,366
Total population 26,945 $ 43,879,716
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* Amounts in this table are rounded to the nearest dollar.
Of the 26,885 overtime pay transactions, totaling $43,648,502, for Work
Week Group (WWG) 2 and WWG SE employees who were paid for less
than 250 hours of overtime per transaction between August 2015 and
June 2018, we randomly selected a statistical sample (as described in the
Appendix) of 105 transactions, totaling $166,714. Of the 105 transactions,
five were overpaid by approximately $1,306. As we used a statistical
sampling method to select the overtime pay transactions examined, we
projected the amount of likely overpayments to be $340,716. Therefore,
the known and likely overpayments totaled approximately $342,022.
The following table summarizes the results of our statistical sampling:
Known overpayments $ 1,306
Divide by: Sample 166,714
Error rate for projection (differences due to rounding) 0.78%
Population that was statistically sampled 43,648,502
Multiply by: Error rate for projection 0.78%
Known and likely overpayments (differences due to rounding) 342,022
Less: Known overpayments 1,306
Likely overpayments $ 340,716
_____________
* Amounts in this table are rounded to the nearest dollar.
We also examined all nine overtime pay transactions, totaling $194,633,
for WWG 2 and WWG SE employees who were paid for at least 250 hours
of overtime per transaction between August 2015 and June 2018. Our
examination of the transactions found no exceptions.
In addition, we examined all 12 overtime pay transactions, totaling
$20,215, for the pay period of July 2018. We examined these transactions
due to a change in the calculation of an employee’s regular rate of pay for
overtime purposes effective July 1, 2018, pursuant to CalHR’s Human
Resources Manual section 1713. Of the 12 transactions, two were
overpaid by $359 and one was underpaid by $120.
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Wasco State Prison–Reception Center Payroll Audit
Furthermore, we examined all 39 overtime pay transactions, totaling
$16,366, for WWG E employees who are not eligible to receive overtime
pay under normal circumstances. Of the 39 transactions, three were
overpaid by a total of $778 and one was underpaid by $65.
The known improper payments were made because payroll transactions
unit staff members miscalculated overtime hours worked or on-
call/callback hours; paid for overtime hours worked at the straight-time
rate instead of the time-and-a-half rate, or vice-versa; failed to verify
whether employees were eligible for compensation of “travel time”; or
incorrectly entered the overtime hours worked into the payroll system.
Furthermore, WSP-RC lacked adequate supervisory review to ensure
accurate processing of overtime pay.
GC sections 13400 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 WSP-RC:
Conduct a review of overtime payments 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, and properly
compensate those employees who were underpaid.
We further recommend that, to prevent improper overtime payments from
recurring, WSP-RC:
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.
WSP-RC lacked adequate segregation of duties within its payroll
FINDING 6—
transactions unit, as noted in Finding 1, and lacked adequate controls over
Inadequate
salary advances to ensure that advances were recovered in accordance with
controls over
state law and policies. Five salary advances, totaling $4,284, remained
salary advances,
outstanding as of July 31, 2018, due to WSP-RC’s noncompliance with
resulting in failure
the State’s collection policies and procedures. The oldest unrecovered
to recover salary advance was outstanding for nearly four years. If not mitigated,
outstanding these control deficiencies leave WSP-RC at risk of failing to collect
amounts additional salary advances.
At July 31, 2018, WSP-RC’s accounting records showed 21 outstanding
salary advances, totaling $42,822, including eight balances, totaling
$11,562, which had been outstanding for more than 60 days. Generally,
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Wasco State Prison–Reception Center Payroll Audit
the prospect of collection diminishes as an account ages. When an agency
does not initiate collection within three years from the date of
overpayment, 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 WSP-RC to collect
salary advances in a timely manner and maintain proper records of
collection efforts.
We examined the eight salary advances that had been outstanding for more
than 60 days. Based on this examination, we noted that WSP-RC did not
comply with the State’s collection policies and procedures for five salary
advances, totaling $4,284. WSP-RC did not send collection notices
promptly, or did not send the notices at all. For example, in January 2018,
WSP-RC issued a salary advance to a separating employee, and then
improperly issued the separation lump-sum pay, resulting in an
overpayment. WSP-RC sent the first collection letter in March 2018, about
two months later.
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 WSP-RC ensure that it recovers salary advances in a
timely manner, pursuant to GC section 19838 and SAM sections 8776 and
8776.7.
WSP-RC lacked adequate segregation of duties within its payroll
FINDING 7—
transactions unit, as noted in Finding 1, and lacked adequate controls over
Inadequate controls
the processing of holiday credit transactions. We identified approximately
over holiday credit
$1,825 in improper holiday credits and $89,893 in questioned holiday
transactions,
credits. If not mitigated, these control deficiencies leave WSP-RC at risk
resulting in
of granting additional improper holiday credits.
improper and
questioned credits
GC section 19853 specifies the compensation that an eligible employee is
entitled to receive when required to work on a qualifying holiday.
Collective bargaining agreements between the State and Bargaining
Units 6, 15, 18, and 19 include similar provisions regarding holiday credit
and holiday pay for represented employees.
Leave accounting records show that WSP-RC processed 8,909 accrual
transactions of holiday credit. We examined 65 of these transactions, with
an estimated value of $30,001, because they involved unusual credits. Of
the 65 transactions, nine involved improper credits, with an estimated
value of $1,825. The improper holiday credit transactions were made
because payroll transactions unit staff members granted holiday credits to
employees during pay periods with no holidays. WSP-RC also lacked
adequate supervisory review to ensure proper and accurate processing of
holiday credits.
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We also examined an additional 273 holiday credit transactions, with an
estimated value of $89,893, because they appeared to be holiday credits
granted to ineligible employees. We requested supporting documentation
to determine whether these holiday credits were allowable compensation
that had been misclassified in the State’s payroll system. For example,
employees may be eligible for a personal holiday or holiday pay (instead
of holiday credit). WSP-RC failed to provide the requested supporting
documentation. Without the required documentation, there is no record of
the nature or approval of these holiday credits. Therefore, we could not
determine the validity, accuracy, and propriety of the holiday credits made
to the employees. As a result, we questioned these 273 holiday credit
transactions.
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 WSP-RC:
Conduct a review of holiday credits granted during the past three years
to ensure that credits are properly supported with documentation, and
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.
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Wasco State Prison–Reception Center Payroll Audit
Appendix—
Audit Sampling Methodology
We used attributes sampling for tests of compliance. The sample design was chosen because:
It follows the American Institute of Certified Public Accountants (AICPA) guidelines;
It allows us to achieve our objectives for tests of compliance in an efficient and effective manner; and
Audit areas included high volumes of transactions.
The following table outlines our audit sampling application for all audit areas where statistical sampling was utilized:
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) ᵃ Size ᵇ Population Number
Regular pay Compliance 5 2,405 $325,970,691 Transaction Computer-generated 90% 5% 1 (1%) 77 Yes
simple random
Overtime pay Compliance 2 6,885 4 3,648,502 Transaction Computer-generated 90% 5% 2 (1.75%) 105 Yes 5
(Work Week Groups simple random
2 and SE)
_______________
ᵃ 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 1.0 error.
ᵇ For populations of 250 items and above, we determined the sample size using a calculator that utilizes a binomial distribution. As stated in Technical Notes on the AICPA Audit
Guide: Audit Sampling (March 1, 2012), page 5, although the hypergeometric distribution is the exactly correct distribution to use for attributes sample sizes, the distribution
becomes unwieldy for large populations unless suitable software is available. Therefore, more convenient approximations are frequently used instead.
Wasco State Prison–Reception Center Payroll Audit
Attachment—
Wasco State Prison–Reception Center’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-0009