Valley State Prison Payroll Process

VALLEY STATE PRISON Audit Report PAYROLL AUDIT March 1, 2016, through February 28, 2019 BETTY T. YEE California State Controller June 2021 BETTY T. YEE California State Controller June 29, 2021 Raythel Fisher Jr., Warden Valley State Prison P. O. Box 99 Chowchilla, CA 93610 Dear Mr. Fisher: The State Controller’s Office audited the Valley State Prison’s (VSP) payroll process and transactions for the period of March 1, 2016, through February 28, 2019. VSP 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 VSP did not maintain adequate and effective internal controls over its payroll process. VSP lacked adequate segregation of duties and compensating controls over payroll transactions, resulting in improper regular, overtime, and separation lump-sum payments. VSP also granted inappropriate keying access to the State’s payroll system. In addition, VSP did not implement controls to limit the accumulation of vacation and annual leave credits, resulting in liability for excessive balances. VSP administered salary advances in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures. 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/as Raythel Fisher Jr., Warden -2- June 29, 2021 cc: Matthew McVay, Chief Deputy Warden Valley State Prison Stephanie Torres, Acting Associate Warden, Business Services Valley State Prison Steve Pottratz, Correctional Business Manager I Valley State Prison Nancy Clark, Institutional Personnel Officer Valley State Prison Kathleen Allison, Secretary California Department of Corrections and Rehabilitation Jennifer Barretto, Undersecretary of Administration California Department of Corrections and Rehabilitation Stacy Lopez, Director, Division of Administrative Services 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, Chief, Administrative Services Division California Department of Human Resources Jil Barraza, Chief, Personnel and Payroll Services Division State Controller’s Office Veronica Encinas, Bureau Chief, Personnel and Payroll Operations Bureau Personnel and Payroll Services Division State Controller’s Office Grant Boyken, Program Chief, Division Initiatives and Strategic Coordination Personnel and Payroll Services Division State Controller’s Office Valley State Prison 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—Valley State Prison’s Response to Draft Audit Report Valley State Prison Payroll Audit Audit Report Summary The State Controller’s Office (SCO) audited the Valley State Prison’s (VSP) payroll process and transactions for the period of March 1, 2016, through February 28, 2019. VSP 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 10, 2021. Our audit determined that VSP:  Did not maintain adequate and effective internal controls over its payroll process. VSP lacked adequate segregation of duties and compensating controls over payroll transactions, resulting in improper regular, overtime, and separation lump-sum payments. We also found that VSP 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  Administered salary advances in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures. Background In 1979, the State of California adopted collective bargaining for state employees. This created a significant workload increase for the SCO’s Personnel and Payroll Services Division (PPSD), as PPSD was the State’s centralized payroll processing center for all payroll-related transactions. PPSD decentralized the processing of payroll, allowing state agencies and departments to process their own payroll-related transactions. Periodic 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. -1- Valley State Prison Payroll Audit 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 VSP: 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 $287,933,832, as quantified in the Schedule. To achieve our audit objectives, we:  Reviewed State and VSP policies and procedures related to the payroll process to understand VSP’s methodology for processing various payroll and payroll-related transactions;  Interviewed the VSP payroll personnel to understand VSP’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 VSP 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 -2- Valley State Prison Payroll Audit 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 VSP:  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 VSP 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 payments for regular pay were calculated correctly and adjusted properly for absences, resulting in overpayments (see Finding 4); o Inadequate controls to ensure that overtime payments were calculated correctly, granted for valid overtime hours worked, and supported with adequate documentation, resulting in improper and questioned payments (see Finding 5); o Inadequate controls to ensure that separation lump-sum payments were calculated correctly, supported with adequate documentation, and paid in a timely manner, resulting in improper, questioned, and late payments (see Finding 6); 1 In planning and performing our audit of compliance, we considered VSP’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- Valley State Prison Payroll Audit  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 Excessive vacation and annual leave balances with a value of at least $2,069,947 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 will be in effect until the 2020 Personal Leave Program (2020 PLP) ends, or July 1, 2022, whichever is sooner; o Improper payments made for regular pay (see Finding 4); improper and questioned payments made for overtime pay (see Finding 5); and improper, questioned, and late payments made for separation lump-sum pay (see Finding 6); costing an estimated net total of $1,563,086; and  Administered salary advances in accordance with collective bargaining agreements and state laws, regulations, policies, and procedures. 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 April 26, 2021. Raythel Fisher, Jr., Warden responded by letter dated May 6, 2021 (Attachment), Responsible acknowledging the findings and indicating that VSP has taken steps to Officials correct the noted deficiencies. This final audit report includes VSP’s response. Restricted Use This audit report is solely for the information and use of VSP, the California Department of Corrections and Rehabilitation, 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 June 29, 2021 -4- Valley State Prison 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 5 N/A 15 Employee N/A N/A 2 Excess vacation and Targeted 8 0 $ 2,069,947 80 Employee $ 2,069,947 $ 2,069,947 3 annual leave Regular pay Statistical 3 8,618 249,880,091 77 Transaction 498,906 1,147,629 4 Overtime pay Statistical, 1 8,379 25,635,142 152 Transaction 334,517 334,571 5 targeted and judgmental Separation lump-sum pay Statistical 2 10 5,488,991 76 Employee 1,860,111 8 0,886 6 Salary advance Targeted 111 2 03,554 21 Transaction 38,770 - Holiday pay and credit Statistical and 11,978 4,656,107 146 Transaction 58,027 - targeted $ 287,933,832 $ 4,860,278 $ 3,633,033 -5- Valley State Prison Payroll Audit Findings and Recommendations FINDING 1— VSP lacked adequate segregation of duties within its payroll transactions unit to ensure that only valid and authorized payroll transactions were Inadequate processed. VSP 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 errors 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 VSP 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. VSP 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 VSP 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- Valley State Prison Payroll Audit Recommendation We recommend that VSP:  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, VSP 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. VSP lacked adequate controls to ensure that only appropriate staff had FINDING 2— keying access to the State’s payroll system. VSP inappropriately allowed Inappropriate five employees keying access to the State’s payroll system and failed to keying access to the immediately notify SCO of three employee classification changes with State’s payroll eligible keying access. If not mitigated, this control deficiency leaves system payroll data at risk of misuse, abuse, and unauthorized use. 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 15 VSP employees who had keying access to the State’s payroll system at various times between March 2016 and February 2019. Of the 15 employees, five had inappropriate keying access to the State’s payroll system. Specifically, VSP did not immediately remove or modify keying access for four employees after the employees’ transfer to another agency or change in classification. For example, a Senior Personnel Specialist changed to an ineligible classification on April 1, 2016; VSP did not request to remove the employee’s access until June 1, 2016 (61 days later). VSP also did not notify PPSD that three employees, which includes two of the four employees described above, were on extended leave of absence so that PPSD can temporarily lock the employees’ keying access. VSP failed to follow guidelines set forth in the Decentralized Security Program Manual. 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. . . . -7- Valley State Prison 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. . . . If a user will be on an extended leave of absence (LOA), notify the PPSD Decentralized Security Administrator immediately with the users name, user id and time frame so the user id can be locked temporarily and not deleted. When the user returns to work and notify [sic] the PPSD Decentralized Security Administrator to reactivate. . . . 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 VSP:  Update keying access to the State’s payroll system immediately after employees leave VSP or change classifications; and  Periodically review access to the system to verify that access complies with the Decentralized Security Program Manual. VSP 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 $2,069,947 as of February 28, 2019. We expect the liability to annual leave increase if VSP 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 -8- Valley State Prison Payroll Audit 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 VSP’s leave accounting records determined that VSP had 1,022 employees with unused vacation or annual leave credits at February 28, 2019. Of the 1,022 employees, 80 exceeded the limit set by collective bargaining agreements and state regulations. For example, one employee had an accumulated balance of 2,593 hours of annual leave, or 1,953 hours beyond the 640-hour limit. Collectively, the 80 employees accumulated 37,187 hours of excess vacation and annual leave, with a value of at least $2,069,947 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 VSP employee separated from state service with 3,114 hours of leave credits, including 1,223 hours of vacation leave. After adjusting for additional leave credits, the employee was paid for 3,613 hours, or 16% more. We further examined the records of the 80 employees to determine whether VSP complied with collective bargaining agreements and state regulations. We determined that VSP 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 VSP had no plans in place during the audit period to reduce leave balances below the limit. If VSP 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 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. -9- Valley State Prison Payroll Audit Recommendation We recommend that, after the 2020 PLP ends, or July 1, 2022, whichever is sooner, VSP:  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. VSP 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 regular pay. We identified a total of $1,147,629 in controls over overpayments for regular pay, consisting of $2,291 based on actual regular pay, transactions examined (“known”) and $ $1,145,338 based on the results of resulting in statistical sampling (“likely”). If not mitigated, these control deficiencies overpayments leave VSP at risk of making additional improper payments for regular pay. Collective bargaining agreements, and state laws and policies, contain specific clauses regarding regular pay. Payroll records show that VSP processed 38,618 regular pay transactions, totaling $249,880,091, between March 2016 and February 2019. Of the 38,618 regular pay transactions, we randomly selected a statistical sample (as described in the Appendix) of 77 transactions, totaling $498,906. Of the 77 transactions, three were overpaid by $2,291. As we used a statistical sampling method to select the regular pay transactions examined, we projected the amount of likely overpayments to be $1,145,338. Therefore, the known and likely overpayments totaled $1,147,629. The following table summarizes the results of our statistical sampling: Known overpayments $ 2,291 Divide by: Sample 498,906 Error rate for projection (differences due to rounding) 0.46% Population that was statistically sampled 249,880,091 Multiply by: Error rate for projection 0.46% Known and likely overpayments, (differences due to rounding) 1,147,629 Less: Known overpayments 2,291 Likely overpayments $ 1,145,338 _____________ * Amounts in this table are rounded to the nearest dollar. The known improper payments occurred because payroll transactions unit staff members failed to reduce, or incorrectly recorded reductions in, leave balances for absences in the leave accounting system. VSP also lacked adequate supervisory review to ensure accurate processing of regular pay. -10- Valley State Prison Payroll Audit 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 VSP:  Conduct a review of payments for regular pay made during the past three years to ensure that the payments complied with collective bargaining agreements and state laws and policies; and  Recover overpayments made to employees through an agreed-upon collection method in accordance with GC section 19838. We further recommend that, to prevent improper payments for regular pay from recurring, VSP:  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. VSP lacked adequate segregation of duties within its payroll transactions FINDING 5— unit, as noted in Finding 1, and lacked adequate controls over the Inadequate processing of overtime pay. We identified a net total of $334,571 in controls over improper overtime payments, consisting of $784 in known overpayments, overtime pay, $1,635 in known underpayments, $4,905 in known questioned payments; resulting in and $78,972 in likely overpayments, $7,788 in likely underpayments, and improper and $259,333 in likely questioned payments. If not mitigated, these control questioned deficiencies leave VSP at risk of making additional improper overtime payments payments. Collective bargaining agreements, and state laws and policies, contain specific clauses regarding overtime pay. Payroll records show that VSP processed 18,379 overtime pay transactions, totaling $25,635,142, between March 2016 and February 2019, as follows: Overtime Payment Type by Group Unit Amount Work Week Group 2 (statistically sampled) 18,134 $25,057,427 Work Week Group E (items examined 100%) 31 35,413 Work Week Group SE (examined 16 selected payments) 214 542,302 Total population 18,379 $25,635,142 _____________ * Amounts in this table are rounded to the nearest dollar. Of the 18,134 overtime pay transactions, totaling $25,057,427 for Work Week Group (WWG) 2 employees, we randomly selected a statistical sample (as described in the Appendix) of 105 transactions, totaling $141,041. Of the 105 transactions, three were overpaid by approximately -11- Valley State Prison Payroll Audit $447 and one was underpaid by approximately $44. We also questioned six payments, totaling $1,468, because VSP could not provide the supporting documentation. Without the required documentation, there is no record of calculation or approval of payments for overtime pay. Therefore, we could not determine the validity, accuracy, and propriety of the payments made to the employees. As a result, we questioned these payments. The known improper and questioned payments represent a net total of $1,871. As we used a statistical sampling method to select the overtime pay transactions examined, we projected the amount of likely overpayments to be $78,972, likely underpayments to be $7,788, and likely questioned payments to be $259,333. The known improper and questioned payments represent a net total of $330,517. Therefore, the known and likely improper and questioned payments totaled a net of approximately $332,388, consisting of $79,419 in overpayments, $7,832 in underpayments, and $260,801 in questioned payments. The following table summarizes the results of our statistical sampling: Known improper payments, net $ 1,871 Divide by: Sample 141,041 Error rate for projection (differences due to rounding) 1.33% Population that was statistically sampled 25,057,427 Multiply by: Error rate for projection 1.33% Known and likely improper payments, net (differences due to rounding) 332,388 Less: Known improper payments, net 1,871 Likely improper payments, net $ 330,517 _____________ * Amounts in this table are rounded to the nearest dollar. We also examined all 31 overtime pay transactions, totaling $35,413, for WWG E employees who normally do not receive overtime pay unless they perform on-call or call-back assignments or duties. Of the 31 transactions, three were underpaid by approximately $906. We also questioned two payments, totaling $972, because VSP could not provide the supporting documentation. Without the required documentation, there is no record of calculation or approval of payments for overtime pay. Therefore, we could not determine the validity, accuracy, and propriety of the payments made to the employees. The improper and questioned payments represent a net total of $66. Of the 214 overtime pay transactions, totaling $542,302, for WWG SE employees who are eligible to receive pay for on-call assignments, we judgmentally selected 16 overtime pay transactions, totaling $158,063. Our examination of the 16 transactions determined that two were overpaid by approximately $337 and one was underpaid by approximately $685. We also questioned one payment, totaling $2,465, because VSP could not provide the supporting documentation. Without the required documentation, there is no record of calculation or approval of payment for overtime pay. Therefore, we could not determine the validity, -12- Valley State Prison Payroll Audit accuracy, and propriety of the payment made to the employee. As a result, we questioned this payment. The improper and questioned payments represent a net total of $2,117. As we examined only a judgmental selection, there could be additional improper payments. The known improper payments were made because payroll transactions unit staff members miscalculated overtime hours worked, and paid for overtime hours worked at the straight-time rate instead of the time-and-a- half rate, or vice-versa. Furthermore, VSP 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 VSP:  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, VSP:  Establish adequate internal controls to ensure that payments are accurate and comply with collective bargaining agreements and state laws and policies;  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; and  Maintain supporting documentation for payments pursuant to retention policies. VSP lacked adequate segregation of duties within its payroll transactions FINDING 6— unit, as noted in Finding 1, and lacked adequate controls over the Inadequate processing of employee separation lump-sum pay. We identified a net total controls over of $80,886 in improper and questioned separation lump-sum payments, separation lump- consisting of $19,218 in known overpayments, $7,627 in known sum pay, resulting underpayments, and $15,820 in known questioned payments; and $37,492 in improper, in likely overpayments, and $14,880 in likely underpayments, and $30,863 questioned and late in likely questioned payments. VSP also did not make separation lump- payments sum payments to eight employees in a timely manner. If not mitigated, these control deficiencies leave VSP at risk of making additional improper and late separation lump-sum payments, noncompliance with agreements and laws, and liability for late payments. -13- Valley State Prison Payroll Audit GC section 19839 allows lump-sum payment for accrued eligible leave credits when an employee separates from state employment. Collective bargaining agreements include similar provisions regarding separation lump-sum pay. Payroll records show that VSP processed separation lump-sum payments, totaling $5,488,991, for 210 employees between March 2016 and February 2019. Of the 210 employees, we randomly selected a statistical sample (as described in the Appendix) of 76 employees who received separation lump-sum payments, totaling $1,860,111. Of the 76 employees, 16 were overpaid by approximately $19,218 and 12 were underpaid by approximately $7,627. We also questioned three payments, totaling $15,820, because VSP could not provide the supporting documentation. 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 payments made to these employees. The improper and questioned payments represent a net total of $27,411. 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 $37,492, likely underpayments to be $14,880, and likely questioned payments to be $30,863. The improper and questioned payments represent a net total of $53,475. Therefore, the known and likely improper and questioned payments totaled a net of approximately $80,886, consisting of $56,710 in overpayments, $22,507 in underpayments, and $46,683 in questioned payments. The following table summarizes the results of our statistical sampling: Known improper and questioned payments, net $ 27,411 Divide by: Sample 1,860,111 Error rate for projection (differences due to rounding) 1.47% Population that was statistically sampled 5,488,991 Multiply by: Error rate for projection 1.47% Known and likely improper and questioned payments, net (differences due to rounding) 80,886 Less: Known improper and questioned payments, net 27,411 Likely improper and questioned payments, net $ 53,475 _____________ * 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. VSP also lacked adequate supervisory review to ensure accurate and timely processing of separation lump-sum pay. Of the 76 employees whose separation lump-sum payments we examined, eight 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. -14- Valley State Prison Payroll Audit 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 VSP:  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 section 8776.6, and properly compensate those employees who were underpaid; and  Maintain supporting documentation for payments pursuant to retention policies. -15- Valley State Prison 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 both high and low 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 3 8,618 $ 249,880,091 Transaction Computer-generated 90% 5% 1 (1.25%) 77 Yes 4 simple random Overtime pay Compliance 1 8,134 2 5,057,427 Transaction Computer-generated 90% 5% 2 (1.75%) 105 Yes 5 simple random Separation lump-sum pay Compliance 2 10 5 ,488,991 Employee Computer-generated 95% 5% 2 (0.95%) 76 Yes 6 simple random Holiday pay Compliance 5,901 2 ,246,114 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- Valley State Prison Payroll Audit Attachment— Valley State Prison’s Response to Draft Audit Report State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 http://www.sco.ca.gov S20-PAR-0003