Two important process and procedure issues are not being addressed by County officials. The first deeply concerning issue is a breakdown or an ignoring of policies and procedures between the County Commissioners, the Clerk of Court and the County Coordinator. The second has been reported in the annual audit for a dozen years, and that’s a failure to comply with Separation of Duties by the Sheriff and Clerk of Court.
The first has to do with policies and procedures regarding buying goods and services whether classified as operating or capital expense. A good example of this failure is Audit Finding Lease-Purchase of Equipment – Board 2020-001 on page 67.
From an accounting standpoint, the lease-purchase should have been recorded at the gross purchase price at the time the lease was signed. In the audit under the finding “Cause”, it says the Accounting staff didn’t know they had to record the lease-purchase as a fixed asset purchase at its full value. This accounting practice has been in place for several years. The consequence of Accounting’s failure was the Commissioners could not see its major negative impact on the finances.
However the broader and more concerning issue is a breakdown of procedural steps between the three parties. What the audit says is:
Equipment purchased through lease-purchase financing arrangements was not properly recorded (in the accounting system);
Payments on the debt were not properly charged to principal and interest’
The amounts were not budgeted’
No Board approval was documented’ and
The extent of the activity was over $900,000 a year in purchased equipment.
What should have happened is something like the following. County purchasing policy should have been followed, because the acquisition was well over the $10,000 limit. So, three bids should have been formally presented in writing to the Board with a recommendation. Next, the Board would have evaluated and debated the pros and cons of spending so much money, and what alternatives might be available. If the Board approved the acquisition, an associated budget amendment would have to be made by the Board to cover the cost. After Legal’s review of the contract terms and conditions to protect the County against possible legal issues, the contract would have been signed by the Board Chair, and the Clerk informed. Once informed, the full lease-purchase amount should have been recorded in the accounting system as a purchase of fixed assets. All subsequent invoices should have been signed as approved for payment, and forwarded to the finance department to cut checks and enter the transactions into the accounting system.
The second area of concern is Separation of Duties, an audit finding since at least 2008. The Clerk and Sherriff have both said in their written response, there isn’t sufficient staff or funds, and there isn’t sufficient cost benefit to justify implementing.
What exactly is the issue with Separation of Duties? In its simplest form, the person who approves an invoice for payment is different from the person who writes the check. Although the audit did not identify any fraud, the potential risk exists. Fully employing Separation of Duties can reduce the risk. Yes, it is possible for two people to collaborate, commit fraud and beat the separation of duties, but, when found out; they are both dealt with as criminals.
The Property Appraiser’s and Tax Collector’s offices have implemented a satisfactory process to produce a paper trail of their internal financial transaction flows. Their processes include giving the transaction a log number at each step as it passes from one person to the next until it is complete. Neither one had to increase their budget or staff because of implementing separation of duties. It can be done!
The audit recommendation related to Audit Finding Lease-Purchase of Equipment – Board 2020-001 on page 67 further states, “The Board should get control of the process through the approval of the budget for capital outlay and the incurrence of debt financing.” The key phrase for me is “get control.”
More formality and rigor need to be applied across all the policies and procedures at every level of County organization. If individuals or organizations deliberately ignore or accidently fail to follow good business practices, the Commissioners should apply discipline up to and including termination.
Phil Calandra