California Rehabilitation Center Payroll Process

CALIFORNIA REHABILITATION CENTER Audit Report PAYROLL AUDIT March 1, 2016, through February 28, 2019 BETTY T. YEE California State Controller August 2021 BETTY T. YEE California State Controller August 20, 2021 Glen E. Pratt, Acting Warden California Rehabilitation Center P.O. Box 1841 Norco, CA 92860 Dear Mr. Pratt: The State Controller’s Office audited the California Rehabilitation Center’s (CRC) payroll process and transactions for the period of March 1, 2016, through February 28, 2019. CRC 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 CRC did not maintain adequate and effective internal controls over its payroll process. CRC lacked adequate segregation of duties and compensating controls over payroll transactions, resulting in improper overtime and separation lump-sum payments. CRC also granted inappropriate keying access to the State’s payroll system. In addition, CRC did not implement controls to limit the accumulation of vacation and annual leave credits, resulting in liability for excessive balances. CRC also did not 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 KIMBERLY TARVIN, CPA Chief, Division of Audits KT/ls Glen E. Pratt, Acting Warden -2- August 20, 2021 cc: Lavelle Parker, Chief Deputy Warden California Rehabilitation Center Pamela Leonti, Institutional Personnel Officer California Rehabilitation Center Kathleen Allison, Secretary California Department of Corrections and Rehabilitation Jennifer Barretto, Undersecretary of Administration California Department of Corrections and Rehabilitation Stacy Lopez, Administrative Services Division Director California Department of Corrections and Rehabilitation Jaclyn Padilla, 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, Administrative Services Division Chief California Department of Human Resources Jil Barraza, Chief Personnel and Payroll Services Division State Controller’s Office Veronica Encinas, Bureau Chief Personnel and Payroll Services Division State Controller’s Office Grant Boyken, Program Chief Personnel and Payroll Services Division State Controller’s Office California Rehabilitation Center Payroll Audit Contents Audit Report Summary ............................................................................................................................ 1 Background ........................................................................................................................ 1 Audit Authority.................................................................................................................. 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 A1 ………………………………………………………………………… Attachment—California Rehabilitation Center’s Response to Draft Audit Report California Rehabilitation Center Payroll Audit Audit Report Summary The State Controller’s Office (SCO) audited the California Rehabilitation Center’s (CRC) payroll process and transactions for the period of March 1, 2016, through February 28, 2019. CRC 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 March 12, 2021. Our audit determined that CRC:  Did not maintain adequate and effective internal controls over its payroll process. CRC lacked adequate segregation of duties and compensating controls over payroll transactions, resulting in improper overtime and separation lump-sum payments. We also found that CRC granted inappropriate keying access to the State’s payroll system;  Did not implement controls to limit the accumulation of vacation and annual leave credits, resulting in liability for excessive balances; and  Did not 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. -1- California Rehabilitation Center Payroll Audit Objectives, Scope, We performed this audit to determine whether CRC: 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 March 1, 2016, through February 28, 2019. The audit population consisted of payroll transactions totaling $352,949,031, as quantified in the Schedule—Summary of Audt Results. To achieve our audit objectives, we:  Reviewed State and CRC policies and procedures related to the payroll process to understand CRC’s methodology for processing various payroll and payroll-related transactions;  Interviewed the CRC payroll personnel to understand CRC’s methodology for processing various payroll and payroll-related transactions, determine the 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 CRC 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. -2- California Rehabilitation Center Payroll Audit Conclusion Our audit determined that CRC:  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 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 CRC 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 overtime payments were calculated correctly and granted for valid overtime hours worked, resulting in improper payments (see Finding 4); o Inadequate controls to ensure that separation lump-sum payments were calculated correctly and paid in a timely manner, resulting in improper and late 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);  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, and regulations, and policies, and procedures: 1 In planning and performing our audit of compliance, we considered CRC’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. -3- California Rehabilitation Center Payroll Audit o Excessive vacation and annual leave balances with a value of at least $2,063,602 as of February 28, 2019 (see Finding 3). On October 20, 2020, the California Department of Human Resources (CalHR) 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 was in effect until the 2020 Personal Leave Program (2020 PLP) ended on June 30, 2021; o Improper payments made for overtime pay (see Finding 4) and improper and late payments made for separation lump-sum pay (see Finding 5), resulting in an estimated net total underpayment of $184,784;  Did not administer salary advances in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures. Four salary advances, totaling $1,359, remained outstanding as of February 28, 2019, due to CRC’s noncompliance with the State’s collection policies and procedures (see Finding 6). There were no prior payroll audits and, consequently, no prior audit Follow-up on findings. Prior Audit Findings Views of We issued a draft audit report on June 8, 2021. Glen E. Pratt, Acting Warden responded by letter dated June 15, 2021 (Attachment), Responsible acknowledging the findings and indicating that CRC has taken steps to Officials correct the noted deficiencies. Restricted Use This audit report is solely for the information and use of CRC, the California Department of Corrections and Rehabilation, 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 KIMBERLY TARVIN, CPA Chief, Division of Audits August 20, 2021 -4- California Rehabilitation Center Payroll Audit Schedule— Summary of Audit Results March 1, 2016, through February 28, 2019 Net Total Number of Number of Dollar Amount Dollar Amount Method of Units of Dollar Amount Selections Selection of Selections of 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 1 9 N/A 19 Employee N/A N/A 2 Regular pay Statistical 4 7,143 $ 285,909,796 105 Transaction $ 687,992 $ - Excess vacation and Targeted 7 7 2,063,602 77 Employee 2,063,602 2,063,602 3 annual leave Overtime pay Statistical and 2 6,355 5 1,310,395 110 Transaction 226,774 (186,847) 4 judgmental Separation lump-sum pay Statistical 2 26 8,458,382 105 Employee 3,954,436 2 ,063 5 Salary advance Targeted 6 3,234 4 Transaction 1 ,359 1 ,359 6 Leave buy-back Statistical 503 8 18,020 105 Employee 329,929 - Uniform allowance Statistical 2,438 2,172,175 105 Transaction 94,484 - Holiday credit Targeted 55,804 2,213,427 34 Transaction 19,683 - $ 352,949,031 $ 7,378,259 $ 1,880,177 -5- California Rehabilitation Center Payroll Audit Findings and Recommendations FINDING 1— CRC lacked adequate segregation of duties within its payroll transactions unit to ensure that only valid and authorized payroll transactions were Inadequate processed. CRC also failed to implement other controls to compensate for segregation of 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 CRC 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. CRC 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 CRC 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 6, represent a material weakness in internal control over the payroll process such that there is a reasonable possibility that a material noncompliance with provisions of laws, regulations, or contracts will not be prevented, or detected and corrected, on a timely basis. Good internal control practices require that the following functional duties be performed by different work units, or at minimum, by different employees within the same unit:  Recording transactions – This duty refers to the record-keeping function, which is accomplished by entering data into a computer system.  Authorization to execute – This duty belongs to individuals with authority and responsibility to initiate and execute transactions.  Periodic review and reconciliation of actual payments to recorded amounts – This duty refers to making comparisons of information at regular intervals and taking action to resolve differences. -6- California Rehabilitation Center Payroll Audit Recommendation We recommend that CRC:  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, CRC should implement compensating controls. For example, if the payroll transactions unit staff member responsible for recordkeeping also performs a reconciliation process, then the supervisor should perform and document a detailed review of the reconciliation to provide additional control over the assignment of conflicting functions. Compensating controls may also include dual authorization requirements and documented reviews of payroll system input and output; and  Develop formal procedures for performing and documenting compensating controls. FINDING 2— CRC lacked adequate controls to ensure that only appropriate staff had keying access to the State’s payroll system. CRC inappropriately allowed Inappropriate three employees keying access to the State’s payroll system. If not keying access to the mitigated, this control deficiency leaves payroll data at risk of misuse, State’s payroll abuse, and unauthorized use. system The SCO maintains the State’s payroll system. The system is decentralized, thereby allowing employees of state agencies to access it. PPSD has established a Decentralized Security Program Manual that all state agencies are required to follow in order to access the payroll system. The program’s objectives are to secure and protect the confidentiality and integrity of payroll data against misuse, abuse, and unauthorized use. CRC failed to follow guidelines set forth in the Decentralized Security Program Manual. We examined the records of 19 CRC employees who had keying access to the State’s payroll system at various times between March 2016 and February 2019. Of the 19 employees, three had inappropriate keying access to the State’s payroll system. Specifically, CRC did not immediately remove or modify keying access for three employees after the employees’ separation from state service, transfer to another agency, or change in classification. For example, a Personnel Specialist left CRC on September 1, 2016; however, CRC did not request to remove the employee’s access until December 12, 2016, 102 days later. The Decentralized Security Program Manual (page 13, “Access Requirements”) states: 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. . . . -7- California Rehabilitation 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. . . . The Decentralized Secuirty Program Manual (page 14, “Letter of Justification”) states: 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. . . . The Decentralized Security Program Manual (page 17, “Revocation and Deletion of User IDs”) states: 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 CRC:  Update keying access to the State’s payroll system immediately after employees leave CRC, 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. FINDING 3— CRC failed to implement controls to ensure that it adheres to the 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 $2,063,602 as of February 28, 2019. We expect the liability to annual leave increase if CRC 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 -8- California Rehabilitation Center Payroll Audit 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. Our examination of CRC’s leave accounting records determined that CRC had 1,130 employees with unused vacation or annual leave credits at February 28, 2019. Of the 1,130 employees, 77 exceeded the limit set by collective bargaining agreements and state regulations. For example, one employee had an accumulated balance of 2,941 hours of vacation, or 2,301 hours beyond the 640-hour limit. Collectively, the 77 employees accumulated 39,794 hours of excess vacation and annual leave, with a value of at least $2,063,602 as of February 28, 2019. 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 CRC employee separated from state service with 4,279 hours in leave credits, including 2,528 hours in annual leave. After adjusting for additional leave credits, the employee was paid for 5,081 hours, or 19% more. We further examined the records of the 77 employees to determine whether CRC complied with collective bargaining agreements and state regulations. We determined that CRC 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 CRC had no plans in place during the audit period to reduce leave balances below the limit. If CRC 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, thus 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 separation lump-sum payment, regardless of where the employee accrued the leave balance. On October 20, 2020, CalHR 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 was in effect until the 2020 PLP ended on June 30, 2021. 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. -9- California Rehabilitation Center Payroll Audit Recommendation We recommend that CRC:  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. CRC lacked adequate segregation of duties within its payroll transactions FINDING 4— unit, as noted in Finding 1, and lacked adequate controls over the Inadequate processing of overtime pay. We identified a net total of $186,847 in controls over underpayments for overtime pay, consisting of $181 in overpayments and overtime pay, $930 in underpayments based on actual transactions examined (“known”); resulting in and $25,135 in overpayments and $211,233 in underpayments based on improper the results of statistical sampling (“likely”). If not mitigated, these control payments deficiencies leave CRC at risk of making additional improper overtime payments. Collective bargaining agreements, and state laws and policies, contain specific clauses regarding overtime pay. Payroll records show that CRC processed 26,355 overtime pay transactions, totaling $51,310,395, between March 2016 and February 2019, as follows: Overtime Payment Type by Group Unit Amount Work Week Group 2 (statistically sampled) 26,134 $ 50,773,341 Work Week Group E and SE (examined six selected payments) 221 537,054 Total population 26,355 $ 51,310,395 _____________ * Amounts in this table are rounded to the nearest dollar. Of the 26,134 overtime pay transactions, totaling $50,773,341, for Work Week Group (WWG) 2 employees, we randomly selected a statistical sample (as described in the Appendix) of 105 transactions, totaling $222,632. Of the 105 transactions, two were overpaid by approximately $110 and one was underpaid by approximately $930. The improper payments represent a net total underpayments of $820. As we used a statistical sampling method to select the overtime pay transactions examined, we projected the amount of likely overpayments to be $25,135 and likely underpayments to be $211,233. The likely improper payments represent a net total underpayments of $186,098. Therefore, the known and likely underpayments totaled a net of approximately $186,918, consisting of $25,245 in overpayments and $212,163 in underpayments. -10- California Rehabilitation Center Payroll Audit The following table summarizes the results of our statistical sampling: Known underpayments, net $ 820 Divide by: Sample 222,632 Error rate for projection (differences due to rounding) 0.37% Population that was statistically sampled 50,773,341 Multiply by: Error rate for projection 0.37% Known and likely improper payments, net (differences due to rounding) 186,918 Less: Known underpayments, net 820 Likely underpayments, net $ 186,098 _____________ * Amounts in this table are rounded to the nearest dollar. Of the 221 overtime pay transactions totaling $537,054, for WWG E and WWG SE employees who normally do not receive overtime pay unless they perform on-call duties, we judgmentally selected five transactions, totaling $4,142. Of the five transactions, one was overpaid by approximately $71. The known improper payments were made because payroll transactions unit staff members miscalculated overtime hours worked; paid for overtime hours worked at the straight-time rate instead of the time-and-a- half rate, or vice-versa; and paid for overtime hours that were not shown on timesheets. Furthermore, CRC 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 CRC:  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, CRC:  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. -11- California Rehabilitation Center Payroll Audit FINDING 5— CRC lacked adequate segregation of duties within its payroll transactions unit, as noted in Finding 1, and lacked adequate controls over the Inadequate processing of employee separation lump-sum pay. CRC lacked adequate controls over supervisory review to ensure accurate and timely processing of separation separation lump- lump-sum pay. If not mitigated, these control deficiencies leave CRC at sum pay, resulting risk of making additional improper and late separation lump-sum in improper and payments, noncompliance with agreements and laws, and liability for late late payments 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 Our examination of separation lump-sum pay determined that CRC made improper payments. Although we deemed the improper payments to be insignificant, the existence of control deficiencies over the processing of separation lump-sum pay presents the risk that CRC will not prevent, or detect and correct, improper payments in a timely manner. Payroll records show that CRC processed separation lump-sum payments, totaling $8,458,382, for 226 employees between March 2016 and February 2019. Of the 226 employees, we randomly selected a statistical sample (as described in the Appendix) of 105 employees who received separation lump-sum payments, totaling $3,954,436. Of the 105 employees, 21 were overpaid by approximately $3,062 and six were underpaid by approximately $2,097. The improper payments represent a net total of $965. As we used a statistical sampling method to select the employees whose separation lump-sum payments were examined, we projected the amount of likely overpayments to be $3,488 and likely underpayments to be $2,390. The likely improper payments represent a net total of $1,098. Therefore, the known and likely net improper payments totaled approximately $2,063, consisting of $6,550 in overpayments and $4,487 in underpayments. The following table summarizes the results of our statistical sampling: Known improper payments, net $ 965 Divide by: Sample 3,954,436 Error rate for projection (differences due to rounding) 0.02% Population that was statistically sampled 8,458,382 Multiply by: Error rate for projection 0.02% Known and likely improper payments, net (differences due to rounding) 2,063 Less: Known improper payments, net 965 Likely improper payments, net $ 1,098 _____________ * 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 for separation lump- sum pay, and improperly included holiday credits when calculating employees’ leave balances for lump-sum pay. CRC also lacked adequate supervisory review to ensure accurate and timely processing of separation lump-sum pay. -12- California Rehabilitation Center Payroll Audit Of the 105 employees whose separation lump-sum payments we examined, two 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. 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 CRC:  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;  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; and  Maintain supporting documentation for payments pursuant to retention policies. FINDING 6— CRC lacked adequate segregation of duties within its payroll transactions Inadequate unit, as noted in Finding 1, and lacked adequate controls over salary advances to ensure that advances were recovered in accordance with state controls over law and policies. Four salary advances, totaling $1,359, remained salary advances, outstanding as of February 28, 2019, due to CRC’s noncompliance with resulting in failure the State’s collection policies and procedures. These control deficiencies to recover leave CRC at risk of failing to collect further salary advances if not outstanding mitigated. amounts At February 28, 2019, CRC’s accounting records showed six outstanding salary advances, totaling $3,234, including four balances, totaling $1,359, which had been outstanding for more than 120 days. Generally, 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. We examined the four salary advances, totaling $1,359, that had been outstanding for more than 120 days. We noted that CRC did not comply with the State’s collection policies and procedures for the four salary advances. CRC did not send collection notices. 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. -13- California Rehabilitation Center Payroll Audit GC section 19838 and SAM sections 8776 and 8776.7 describe the State’s collection policies and procedures, which require CRC to collect salary advances in a timely manner and maintain proper records of collection efforts. Recommendation We recommend that CRC ensure that it recovers salary advances in a timely manner, pursuant to GC section 19838 and SAM sections 8776 and 8776.7. -14- California Rehabilitation 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 4 7,143 $ 2 85,909,796 Transaction Computer-generated 90% 5% 2 (1.75%) 105 Yes simple random Overtime pay Compliance 2 6,134 50,773,341 Transaction Computer-generated 90% 5% 2 (1.75%) 105 Yes 4 simple random Separation lump-sum pay Compliance 2 26 8 ,458,382 Employee Computer-generated 90% 5% 2 (1.75%) 105 Yes 5 simple random Leave buy-back Compliance 5 03 818,020 Employee Computer-generated 90% 5% 2 (1.75%) 105 Yes simple random Uniform allowance Compliance 2,438 2 ,172,175 Transaction Computer-generated 90% 5% 2 (1.75%) 105 Yes simple random 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 fewer than 250 items, we determined the sample size using a calculator that uses a hypergeometric distribution. For populations of 250 items or more, we determined the sample size using a calculator that uses 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. -A1- California Rehabilitation Center Payroll Audit Attachment— California Rehabilitation 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 S20-PAR-0004