Department of Business and Economic Development

Transcription

1 Audit Report Department of Business and Economic Development August 2001

2 This report and any related follow-up correspondence are available to the public and may be obtained by contacting the Office of Legislative Audits or the Department of Legislative Services Office of the Executive Director, 90 State Circle, Annapolis, Maryland. Alternate formats may be requested by contacting the Office of Legislative Audits at , (voice), or (toll-free voice), or (fax), and (Maryland Relay Service). Audit reports can also be viewed or downloaded from the Internet. Our web site address is

3 August 15, 2001 Delegate Samuel I. Rosenberg, Co-Chair, Joint Audit Committee Senator Nathaniel J. McFadden, Co-Chair, Joint Audit Committee Members of Joint Audit Committee Annapolis, Maryland Ladies and Gentlemen: We have audited the Department of Business and Economic Development for the period beginning October 1, 1997 and ending September 30, Our audit disclosed that the Department did not have an effective procedure for verifying employment data, such as the number of jobs retained or created, reported by recipients of loans from the Economic Development Opportunities Program Fund. The accuracy of this data is critical since it often serves as the basis for forgiving all or part of the recipient s loan. The Department also had not adopted regulations establishing criteria for determining whether certain applicants seeking financing assistance from programs of the Maryland Small Business Development Financing Authority qualify under the economic disadvantage provision of the Authority s law. Our audit also disclosed that requirements associated with grants issued by the Department, such as the timely submission of financial reports by grant recipients, were not always complied with. In addition, the Department s procedures for billing and collecting insurance and guarantees fees were insufficient. Finally, sufficient controls were not established over cash receipts and purchases and disbursements, and equipment records were not adequately maintained. Respectfully submitted, Bruce A. Myers, CPA Legislative Auditor

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5 Table of Contents Executive Summary 5 Background Information 7 Agency Responsibilities 7 Current Status of Findings From Preceding Audit Report 7 Findings and Recommendations 9 Economic Opportunities Development Program Finding #1 An Effective Mechanism Had Not Been Established for 9 Verifying Employment Data Reported by Loan Recipients Maryland Small Business Development Financing Authority Finding #2 Regulations Establishing Criteria for Determining 10 Economic Disadvantage Had Not Been Adopted * Finding #3 - The Department Did Not Adequately Monitor Its 11 Management Services Contract State Grants Finding #4 - Grant Recipients Did Not Always Comply with 12 Grant Requirements Loan Administration Finding #5 Loan Insurance and Guarantee Fees Were Frequently 13 Received Late or Not at All Cash Receipts Finding #6 Sufficient Controls Had Not Been Established Over 13 Cash Receipts Purchases and Disbursements * Finding #7 Proper Internal Controls Were Not Established Over 14 Purchasing and Disbursement Transactions * Denotes item repeated in full or part from preceding audit. 3

6 Equipment * Finding #8 - Records Were Not Adequately Maintained and 15 Results of Physical Inventories Were Not Fully Resolved Audit Scope, Objectives and Methodology 17 Agency Response Appendix * Denotes item repeated in full or part from preceding audit. 4

7 Executive Summary Legislative Audit Report on the Department of Business and Economic Development August 2001 The Department did not have an effective mechanism for verifying employment data reported by recipients of loans from the Economic Development Opportunities Program Fund. The accuracy of this data is critical since loan agreements often provide for the forgiveness of all or a portion of the loan if a certain number of jobs are retained and/or created. Loan amounts totaling approximately $5.4 million were forgiven during fiscal years 1999 and The Department should establish adequate procedures for verifying reported employment data. The Department had not adopted regulations establishing criteria for determining economic disadvantage relative to activity of the Maryland Small Business Development Financing Authority. In addition, the Department did not adequately monitor the contractor hired to administer certain aspects of the Authority s financing programs. The Department should adopt regulations for determining economic disadvantage, and should adequately monitor its management services contract. Grant recipients did not always comply with grant requirements, such as the timely submission of financial reports. In addition, funds for current grant years were often disbursed to grantees prior to receipt of all required reports for preceding grant years. For example, our test of 20 recipients of fiscal year 2000 and 2001 grants disclosed 15 who received $1.5 million in funding toward their fiscal year 2001 grant even though required final reports for fiscal year 2000 had not yet been received. The Department should ensure that all grant requirements are complied with on a timely basis. 5

8 Procedures for billing and collecting annual loan insurance and guarantee fees, which totaled approximately $200,000 during fiscal year 2000, were inadequate. For example, our test of 20 fees disclosed that 9 totaling approximately $22,600 were collected between 20 and 315 days late, and that several fees due as long ago as June 1998 had not been collected as of December The fees are assessed to lenders for loans insured or guaranteed by the Department. The Department should ensure that all loan insurance and guarantee fees are properly billed and collected. Sufficient controls were not established over cash receipts or purchases and disbursements. In addition, equipment records were not adequately maintained, and the results of physical inventories of equipment were not adequately resolved. Cash receipts should be properly verified to deposit, and security features available on the State s Financial Management Information System should be fully utilized. In addition, the Department should comply with the Department of General Services requirements regarding the maintenance of equipment records and the resolution of physical inventory results. 6

9 Agency Responsibilities Background Information The Department of Business and Economic Development is a principal department of State government and operates in accordance with Article 83A of the Annotated Code of Maryland. The Department s mission is to stimulate and strengthen the Maryland economy. The Department develops policies and implements programs that will generate new jobs with family-supporting wages and investment by attracting businesses to the State, by facilitating the expansion and retention of existing companies, and by promoting Maryland s strategic assets. Current Status of Findings from Preceding Audit Report Our audit included a review to determine the current status of the 14 fiscal/compliance findings contained in our preceding audit report dated December 10, We determined that 11 of these findings were satisfactorily resolved. The remaining 3 findings are repeated in this report. 7

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11 Findings and Recommendations Economic Development Opportunities Program Finding #1 The Department did not have an effective mechanism for verifying employment data reported by loan recipients. Analysis The Department s procedures for verifying employment data submitted by recipients of loans from the Economic Development Opportunities Program Fund were not effective. The accuracy of this data is critical since loans from the Fund frequently provide for forgiveness of all or a portion of the loan if certain performance requirements are met, including the creation and retention of a specific number of jobs. Consequently, inaccurate data could result in loans being forgiven although the related performance requirements were not met. During fiscal years 1999 and 2000, loan amounts totaling approximately $5.4 million were forgiven. To help verify reported employment data, the Department contracted with a State University to provide independent statistical reports of employment information relating to loan recipients. The University uses data provided by the State s Department of Labor, Licensing and Regulation to develop its reports. However, we found that employment totals in the reports often differed from the corresponding totals reported by recipients. Specifically, our review of data submitted by 11 recipients disclosed differences of between 715 and 3,839 employees for 6 of the recipients. There may be legitimate reasons why such differences occur, such as when a recipient reports employment data only for the one location relevant to their loan, and the statistical reports include employment data for all of the recipient s locations within the State. However, the differences in employment data underscore the importance of establishing effective procedures for verifying reported employment data in all circumstances in which such data serves as the basis for waiving loan repayments. Recommendation #1 We recommend that the Department, in conjunction with the University, modify the statistical reports so that they can be effectively used to verify employment totals reported by loan recipients, or establish other procedures for verifying the accuracy of employment-related data reported by recipients prior to forgiving any related loans. 9

12 Maryland Small Business Development Financing Authority The Maryland Small Business Development Financing Authority was created to promote business growth in the State by providing various types of financing assistance (for example, direct loans, loan guarantees) to businesses owned by socially or economically disadvantaged persons. The Department has contracted with a private entity for the purpose of administering certain aspects (for example, loan underwriting) of the Authority s financing programs. The current contract expires June 30, 2002, and it includes a five-year renewal option, as well as certain contractor performance standards and reporting requirements. During fiscal year 2000, the contractor was paid approximately $1.1 million in management and monitoring fees. Finding #2 The Department had not adopted regulations that establish criteria for determining economic disadvantage. Analysis As of May 25, 2001, the Department had not adopted regulations to establish criteria for determining economic disadvantage. The law states that one of the purposes of the Authority is to assist businesses owned by economically disadvantaged individuals. In our preceding audit report, we recommended that the Department request an opinion from the Office of the Attorney General to clarify the intent of the law regarding the eligibility requirements for the Authority s financing programs. In an Opinion dated October 13, 2000, the Attorney General concluded that the law relating to the Authority expresses intent to provide financial assistance for economically disadvantaged business owners who cannot reasonably obtain the type of financing they seek due to social or economic impediments beyond their control. In this regard, the Opinion also states that the Department has the authority to identify by regulation the criteria under which a determination of economic disadvantage is made. The Attorney General recommended that the Department adopt such regulations to establish criteria for determining economic disadvantage. We were advised that the Department is working with the Office of the Attorney General to adopt the required regulations. Recommendation #2 We recommend that the Department adopt regulations for inclusion in the Code of Maryland Regulations in accordance with the aforementioned recommendation of the Attorney General. 10

13 Finding #3 The Department did not adequately monitor, or in some cases did not document its monitoring efforts with respect to the management services contract. Analysis The Department s efforts to monitor the activity of the contractor who administered the Authority s financing programs were either not sufficient or were not adequately documented. Specifically, we noted the following: Although the contract provides that the Department will conduct periodic audits of the contractor to review documentation associated with the analysis and administration of the Authority s programs, no such audits have been performed. The Department had not received all reports of contract activity, such as the number and status of transactions closed and in progress, in a timely manner. Our review of 20 reports due between August 1999 and November 2000 disclosed that 9 were received 30 to 80 days late, and 3 did not include all required information. The performance standards in the contract did not adequately measure the impact of the financing activities administered by the contractor, nor did they promote improved performance. In this regard, the standards are not outcome-based since they measure the level of activity (such as annually closing and funding a minimum of 20 transactions, and having substantive contacts with at least 600 businesses) rather than the effectiveness of the program. Accordingly, the standards do not measure the number of jobs created or retained as a result of Authority s financing transactions or the resultant impact on the Maryland economy. A similar condition was commented upon in our preceding audit report. Although the Department concluded that the contractor had met the established performance standards for fiscal year 1999, there was a lack of documentation to support the basis for certain decisions critical to that conclusion. Specifically, there was no documentation to support a determination that increased financings to three current program participants qualified as new financing transactions. This decision was critical because without the aforementioned transactions the contractor would not have met all the performance standards for fiscal year

14 Recommendation #3 We recommend that the Department conduct periodic audits of the contractor as called for by the contract. We also recommend that the Department ensure that the contractor submits the required monthly and quarterly reports, including all required information, on a timely basis. In addition, we again recommend that the Department incorporate into the contract relevant outcome-based performance standards, and that the contractor s performance be periodically evaluated relative to these standards. Furthermore, we recommend that the basis for the Department s decisions with respect to whether or not contract performance standards were met be adequately documented. State Grants Finding #4 Grant recipients did not always comply with grant requirements. Analysis Recipients of the Department s grant funds, which totaled approximately $30 million during fiscal year 2000, did not always comply with related grant requirements. For example, required grant reports were often submitted late, or in some cases not at all. We also noted that funds for current grant years were often disbursed to grantees prior to the receipt of all required reports for the preceding grant year. In this regard, our test of 20 organizations awarded grants for fiscal years 2000 and 2001 disclosed 15 instances in which grant funds for fiscal year 2001 totaling approximately $1.5 million were disbursed prior to receipt of the organization s final report for fiscal year For 7 of these cases totaling $172,000, the final reports still had not been received as of the time of our review in December In another example, grant expenditures incurred by one grantee periodically exceeded the corresponding budget amounts initially approved by the Department, and prior approval for these differences was not obtained from the Department as required. Recommendation #4 We recommend that the Department ensure that all grant requirements are met on a timely basis, and that grant funds for subsequent years be withheld until all such requirements have been met by the grantee. 12

15 Loan Administration Finding #5 Loan insurance and guarantee fees were frequently received late and in some cases were not received at all. Analysis Procedures for billing and collecting loan insurance and guarantee fees under two of the Department s financing programs were inadequate. These annual fees, which totaled approximately $200,000 during fiscal year 2000, were normally assessed to lenders (banks) in accordance with guarantee agreements under which the Department insures or guarantees loans made to program participants. Our test of 20 such loans and the related fees disclosed the following: 8 fees due between June 30, 1998 and November 20, 2000 had not been collected as of December 7, fees totaling $22,646 were received between 20 and 315 days late 1 of the aforementioned 9 fees was billed incorrectly, resulting in a loss of $4,866 2 fees were not paid by their due dates, the borrowers subsequently paid the remaining loan balances and the Department never collected the fees Recommendation #5 We recommend that the Department ensure that loan insurance and guarantee fees are calculated and billed properly, and that the Department take appropriate action to collect such fees in a timely manner. We also recommend that the Department follow-up on the aforementioned uncollected fees, including the loss of $4,866, to ensure that they are collected. Cash Receipts Finding #6 Sufficient controls had not been established over cash receipts. Analysis The Department had not established adequate controls over cash receipts at two divisions with fiscal year 2000 collections of approximately $24.5 million. Specifically, the procedures used by the divisions to verify recorded collections to subsequent deposit were ineffective since the initial record of collections, such as the initial check log, was not used in the verification process. In addition, the 13

16 employee who performed the verification at one of the divisions also had access to the related collections. Furthermore, we noted that the automated check log used by one of the divisions resided on a shared database that could be accessed and modified by eight employees who did not require such access, including the employee who verified the deposit and the employee who took the deposit to the bank. Under these conditions, errors or irregularities could occur and remain undetected. Recommendation #6 We recommend that an employee without access to cash receipts verify that all recorded collections were deposited, and that the initial record of collections be used in this verification process. In addition, we recommend that the Department restrict modification access to the automated check log to only those employees whose job responsibilities require such access. Purchases and Disbursements Finding #7 Proper internal controls were not established over the processing of purchasing and disbursement transactions. Analysis The Department did not fully use the security features available on the State s Financial Management Information System (FMIS) to establish proper internal controls over purchases and disbursements. Consequently, unauthorized transactions could be processed that may not be readily detected. During fiscal year 2000, the Department used FMIS to process disbursements totaling approximately $82 million. Our review disclosed that independent on-line approval requirements had not been established for certain critical FMIS transactions. In this regard, we noted ten employees who could initiate and process certain disbursement transactions without being subject to independent online review and approval. In addition, two of these employees could release disbursement transactions to the Comptroller of the Treasury General Accounting Division for payment. A similar condition was commented upon in our preceding audit report. Recommendation #7 We again recommend that the Department fully utilize the available FMIS security features by establishing independent on-line approval requirements for all critical purchasing and disbursement transactions. 14

17 Equipment Finding #8 Equipment records were not adequately maintained or reconciled and the results of physical inventories were not fully resolved. Analysis Our review of the inventory and record keeping procedures over the Department s equipment disclosed several deficiencies. For example, the equipment control account was not adequately reconciled with the related detail records. Although a reconciliation had been performed as of June 30, 2000, an unexplained difference of approximately $82,000 remained as of October In addition, we noted that over 100 items in the detail records, including computer and other electronic equipment, had not been assigned costs, and that cost data assigned to several other items tested was incorrect. Furthermore, as of January 11, 2001, the results of the physical inventory conducted during February and March 2000 had not been fully resolved. Specifically, the Department had not determined the disposition, such as lost or stolen, of 83 items totaling approximately $105,000 that could not be located during the physical count. The failure to maintain adequate equipment records was commented upon in our two preceding audit reports. As of June 30, 2000, the reported book value of the Department s equipment totaled approximately $3.7 million. The Department of General Services' Inventory Control Manual requires that a control account and detail records be properly maintained for all equipment items and that the detail records be adequately reconciled with the related control account balance. In addition, the Manual requires that the results of physical inventories be reconciled to the detail records, and that discrepancies be resolved. Recommendation #8 We again recommend that the Department comply with the requirements of the Department of General Services' Inventory Control Manual. 15

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19 Audit Scope, Objectives and Methodology We have audited the Department of Business and Economic Development for the period beginning October 1, 1997 and ending September 30, The audit was conducted in accordance with generally accepted government auditing standards. As prescribed by the State Government Article, Section of the Annotated Code of Maryland, the objectives of this audit were to examine the Department s financial transactions, records and internal control, and to evaluate its compliance with applicable State laws, rules, and regulations. We also determined the current status of the findings included in our preceding audit report. In planning and conducting our audit, we focused on the major financial related areas of operations based on assessments of materiality and risk. Our audit procedures included inquiries of appropriate personnel, inspection of documents and records, and observation of the Department s operations. We also tested transactions and performed other auditing procedures that we considered necessary to achieve our objectives. The Department s management is responsible for establishing and maintaining effective internal control. Internal control is a process designed to provide reasonable assurance that objectives pertaining to the reliability of financial records, effectiveness and efficiency of operations including safeguarding of assets, and compliance with applicable laws, rules and regulations are achieved. Because of inherent limitations in internal control, errors or fraud may nevertheless occur and not be detected. Also, projections of any evaluation of internal control to future periods are subject to the risk that conditions may change or compliance with policies and procedures may deteriorate. Our reports are designed to assist the Maryland General Assembly in exercising its legislative oversight function and to provide constructive recommendations for improving State operations. As a result, our reports generally do not address activities that are functioning properly. This report includes findings relating to conditions that we consider to be significant deficiencies in the design or operation of internal control that could adversely affect the Department s ability to maintain reliable financial records, operate effectively and efficiently and/or comply with applicable laws, rules and regulations. Our report also includes findings regarding significant instances of noncompliance with applicable laws, rules, or regulations. 17

20 The Department s response to our findings and recommendations is included as an appendix to this report. As prescribed in the State Government Article, Section of the Annotated Code of Maryland, we will advise the Department regarding the results of our review of its response. 18

21

22 Department of Business & Economic Development s Response to the Legislative Auditor s Draft Report (For the Period Beginning October 1, 1997 and Ending September 30, 2000) August 16, 2001

23 Attachment A Department of Business and Economic Development s Response to the Legislative Auditor s Draft Report I. DIVISION OF FINANCING PROGRAMS ECONOMIC DEVELOPMENT OPPORTUNITIES PROGRAM FUND Finding #1 Sunny Day - The Department did not have an effective mechanism for verifying employment data reported by loan recipients. RESPONSE TO FINDING #1 We concur with the finding in concept. As the Legislative Auditor correctly indicates, the Department has made significant strides in verifying employment criteria. The Department has contracted with the Jacob France Center of the University of Baltimore (Jacob France) to provide aggregate analysis and statistical reports relating to recipients. While there are still some reporting hurdles we must conquer in Jacob France s reporting methodology, one of the most troublesome areas concerns verifying employment data from borrowers with multi-establishment facilities. Since establishing the independent verification process through DLLR - Jacob France, the Department has found the practical application of accurately verifying employment data from borrowers with multi-establishment facilities to be problematic when the incentive itself centers on only one (or less than all) of the recipient s facility locations. It should be duly noted that the type of situation cited in the analysis is not the normal one, as it would occur only in situations in which a company has multiple locations, but in which the project affects only one part of the state. We continue to try to work with Jacob France to improve the reporting information in this area, but both the Department and Jacob France are somewhat limited in what they can do. It must be noted that the Bureau of Labor Statistics (BLS) report needed to prepare an accurate analysis is prepared by employers strictly on a voluntary basis and the Department cannot require it be prepared. If an employer opts not to prepare the BLS report, Jacob France analysis will not be able to segregate employment totals at individual locations for multi-establishment employers. Again, the best way to get this multi-establishment information is from the BLS Report, but it must be reiterated that no employer must complete this form -- it is a strictly voluntary form.

24 2 In response to this area of concern, however, we have elected to modify our general application to try to get a recipient to provide BLS data if it has multiple establishments in the state. If we are unsuccessful in attempts to have recipients provide the voluntary BLS information we will structure an alternate verification process. Regardless, the Department will continue to work with Jacob France to improve the statistical and employment reporting. The Department will provide Jacob France with the accounts that are multi-establishments and request that Jacob France research the Bureau of Labor Statistics (BLS) reports to identify any of the DBED transactions. If this were successful for a particular borrower, this would provide DBED with the employment count at a specific location and better support the information provided by the Borrower and the determination by the Department for forgiveness of the conditional loan or grant. However, it must be recognized that in the numerous instances in which the BLS report is not completed, DBED will have to rely on the Employer reports. Even conducting audits or head counts is problematic because the HR records themselves may not accurately reflect an employee s physical location. DBED will explore recommendations from outside sources on how best to set up such acceptable administrative procedures and would welcome specific suggestions from the Legislative Auditors. II. DIVISION OF FINANCING PROGRAMS MARYLAND SMALL BUSINESS DEVELOPMENT FINANCING AUTHORITY Finding #2 MSBDFA - The Department had not adopted regulations that established criteria for determining economic advantage. RESPONSE TO FINDING #2 The Department agrees with the recommendation to adopt regulations that establish criteria for determining economic disadvantage and is currently working with the Office of the Attorney General to complete this task. The criteria require the Contractor to assess economic disadvantage by examining a potential client s educational background, personal financial capacity, geographical location of the business and level of personal net worth. Attached is a copy of the regulations in draft form. However, it is important for the auditors to understand recent action by the Legislature that further resolves the eligibility issue. During the most recently completed session of the Maryland General Assembly, House Bill No. 945 and Senate Bill No. 789 modified the MSBDFA statute concerning eligibility. The program s potential client base has been broadened to include practically all businesses rather than only those that are determined to be economically disadvantaged. The statute has been expanded to include small

25 3 businesses that do not meet the established credit criteria of financial institutions, and consequently are unable to obtain adequate business financing on reasonable terms through normal financing channels. Finding #3 MSBDFA - The Department did not adequately monitor, or in some cases did not document its monitoring efforts with respect to the management services contract. RESPONSE TO FINDING #3 The Department agrees with the recommendation for a periodic audit. The Department will engage our Office of Internal Audits to conduct an audit of the MSBDFA programs every other year or on an as needed basis. The Department and the Contractor have clarified this issue in the contract amendment executed July 3, The Department agrees with the recommendation to obtain required reports in a timely manner. The Department and the Contractor understand the seriousness of this situation. In the contract amendment executed July 3, 2001, the Department will have authority to withhold payment of a portion of the quarterly management fee if the contractor fails to comply with reporting requirements. In the future, the Department will ensure that the Contractor submits the required monthly and quarterly reports in a timely manner. The Department concurs with the finding. However, the contract performance measurements are viewed by the Department as being adequate indicators of MMG's effectiveness at contract specific administration. As we discussed in our previous response to this issue, these performance standards provide meaningful minimum acceptable levels of program activity. The auditors are encouraged to recall that the primary goal of the MSBDFA programs is to aid small businesses, i.e. provide a financing resource for small businesses that are otherwise unable to access adequate levels of capital and credit to support their operations. The Department maintains that the best measures to evaluate the Contractor's performance involve assessing the number of businesses directly impacted. The Department's economic development mission focuses resources to a variety of initiatives such as job creation and retention, capital investment and access to capital. As such, the MSBDFA Program is designed to support the latter. The Department does believe that there are additional performance measures that the program uses as a broader gauge of overall program effectiveness and economic impact. The performance measures which were created for and approved by the Department of Budget and Management

26 4 (DBM) as part of the Department's Managing for Results (MFR) initiative are attached. The Department proposes to add these performance measures to our Divisional Policy and Procedures Manual that provides guidance for financing program operations, and with which the Contractor is required to comply. The Department would like to further point out that while there are two distinct methods to measure performance: 1) "Program Activity Levels" and 2) "Managing for Results" (MFRs)." The contract performance standards utilized by the Department are the former method, and therefore address minimum acceptable levels of program activity. As such, the occurrence of a performance related default would trigger action by the Department to correct the situation. Conversely, the MFRs are the performance measures that justify and substantiate the MSBDFA Program's existence and they are evaluated by the General Assembly. If the Contractor for the MSBDFA Program fails to achieve performance at the minimum acceptable level, the General Assembly holds the power to make adjustments to the program's budget. Consequently, the Department believes there are sufficient checks and balances in place to ensure adequate contract performance. The Department agrees with the recommendation to thoroughly document the annual review of the Contractor's efforts in attaining the contract performance standards. We assure that in the future, the process of annual performance review will be documented in a thorough and comprehensive manner. In addition, to clarify a decision to allow an increase in financing to an existing client to qualify as a new financing transaction, the Department will add the following definition to our Divisional Policy and Procedures Manual that provides procedural guidance for financing program operations: "Significant Increase" - the Department's guidelines generally qualify a significant increase in exposure as one that equates to the lesser of $100,000 or 25%. III. DIVISION OF TOURISM, FILM, AND THE ARTS MSAC AND DIVISION OF BUSINESS DEVELOPMENT - MBCC Finding #4 State Grants - Grant recipients did not always comply with grant requirements.

27 5 RESPONSE TO FINDING #4 We concur with the recommendations and the findings and will take appropriate corrective actions. Our response is organized by Division. First, we will comment on the finding and recommendation on the Division of Business Development (DBD). DBD s grant to the Maryland Business Center China, Inc. (MBCC) is referenced in the finding. The report states that MBCC did not obtain prior approval from the Department when their grant expenditures.exceeded the corresponding budget amounts initially approved by the Department. The extent to which MBCC s funds allocated by category exceed by more than 10% their line item is an ongoing matter of discussion with the contractor. We have not been advised in advance in writing that these fluctuations are anticipated. We commit to more closely monitoring the final audit and reminding the contractor of this requirement. Next, we will comment on the findings and recommendations on the Division of Tourism, Film, and the Arts (DTFA). DTFA s grants through the Maryland State Arts Council are referenced in the finding. MSAC agrees that its grantee organizations did not always comply with the grant requirements for reports, as specified in the grant agreements. To correct this deficiency, the MSAC will initiate, for FY 2001grants that have a reporting deadline of August 31, 2001, a revised schedule for the more timely solicitation of overdue reports. In addition, we will notify grantees that effective with the reports due for the current grant period, (July 1, 2001 to June 30, 2002) we will not release grant payments for subsequent years until the final reports are received. IV. DIVISION OF FINANCING PROGRAMS LOAN ADMINISTRATION UNIT Finding #5 Loan Administration Unit - Loan insurance and guarantee fees were frequently received late and in some cases were not received at all. RESPONSE TO FINDING #5 We concur with the finding and basic recommendation. We have been in contact with our Office of the Attorney General for guidance on suggested tenor of dunning letters and are attempting to create an Access database for dunning purposes from which letters would be generated under this basic format below.

28 days prior to an anniversary date of the insurance or guarantee, a letter would be generated informing DBED s client (the financial institution) that the anniversary was upcoming and an insurance premium would be due. 2. If no response was received by 15 days after the anniversary date (45 days after the first letter) a second letter would be generated mandating payment with in two weeks or that the insurance provided would be terminated. 3. If there is no response to that second letter, a third letter would go out informing the client that the insurance guarantee had been terminated and the previous insurance was null and void. We anticipate this system should fully be in place by October 1, The Legislative Auditor suggests that the Department take appropriate actions to collect such fees in a timely manner. It is important to note that these credit enhancements are guaranty agreements, not loan agreements and that DBED s client is the bank involved, not the company getting the bank loan. Therefore, the Department cannot declare the loan to be in default. The remedy, however, could be to terminate the insurance agreements in such situations. The Department will begin operating under the schedule as proposed above, and will consider, if appropriate, a termination of the guaranty. The Legislative Auditor s analysis cites one situation in which a fee was billed incorrectly, resulting in a loss of $4,866 to the Department. In this instance, a fee payment was made by the borrower, but incorrectly applied and a refund was initiated in error. We have been in continuous contact with the borrower in this situation attempting to get it to remit payment again. While we have been unsuccessful in this endeavor to date, we continue to pursue payment for the appropriate fees but have terminated insurance due to non-payment of full premium. Finding #6 Cash Receipts Sufficient controls had not been established over cash receipts. RESPONSE TO #6 General Comment While the Department concurs with the auditors overall finding, it does, however, feel compelled to note the Department has not had any incidences or problems regarding any cash processing, and therefore does not fully agree with the Legislative Auditors characterization that the verification processes were inadequate. It is also important to note that verifications are performed both before and after the deposits

29 7 are made to the bank. The Department believes performing two-part verification (before and after the deposit) significantly reduces the chance of either an intentional or unintentional error. The Department believes the procedures now instituted and outlined below provide adequate accountability over the cash collection and deposits process. First Recommendation of the Legislative Auditors We concur with the recommendation that the verification of collections to deposits be strengthened. The Department had already adopted a process to address the finding, modifying the cash collection and deposit verification process to comply with the Legislative Auditor s concerns regarding the segregation of responsibilities. These procedures were originally instituted pursuant to a memo from the former manager of Loan Administration to the parties involved in the cash receipts process. The , which was dated December 12, 2000, was entitled New Check Deposit Process and was previously distributed to, and reviewed by, the Legislative Auditors. After considering the subsequent comments received from the Legislative Auditors, the Department has again modified this procedure and has implemented the one outlined below. =============================================================== COMMERICAL ACCOUNTING SECTION Cash Receipts Process Due to the Legislative Auditors concerns on independence of cash handling, effective immediately the following process should be adhered to for all daily Bank Deposits: Step 1. Step 2. The Check Log Recorder (CLR) will first stamp each check with the Department s For Deposit Only stamp. The CLR makes copies of all the checks and records into the automated check log information for all checks originally received by the Division. This information will include account name, check amount, and the deposit ticket number(s). The Check Log Recorder prints out the Daily Deposit Report for each program from the check log. The CLR also prints out the Daily Total Deposit Report All Programs which came from the check log and lists all checks received regardless of program. The CLR then reviews the Daily Deposit Report against the checks received to ensure all have been accounted for, and prepares the individual Bank Deposit Tickets for bank run. (The bank runner will subsequently sign off on the receipt of each check taken to the bank.) An accountant is then given the actual checks, the deposit tickets, and the Daily Deposit Report and the Daily Total Deposit Report All Programs for review. An accountant will review the deposit ticket(s) for amounts paid by client, totals and errors in recording information from the Daily

30 8 Deposit Report to the deposit ticket. The reviewing accountant will initial or sign the Daily Deposit Report once these items are confirmed as accurate. The items are returned to the CLR who then gives the bank documents to the bank runner. Step 3. Step 4. Step 5. Step 6. Step 7. Step 8. As mentioned in step one, the bank runner places his/her initials by each confirmed check on the Daily Deposit Report, verifying each check is part of the total deposit. After signing off on the Daily Deposit Report that he/she has verified and accepted the checks, the bank runner will take the checks and deposit ticket to the Bank for deposit. Upon return from the Bank with the bank packet ( the packet ), which includes copies of the checks, the deposit tickets, cashiers checks and the Daily Deposit Record and the Daily Total Deposit Report All Programs, the bank runner gives the Check Log Recorder any cashier s checks which were cut to return excess or surplus funds to clients. These cashier s checks are then put into the safe and will either be picked up by the client (acknowledgement of distribution will be a completed receipt form) or sent by overnight mail (copy of the overnight envelope kept as a receipt). The bank packet is then given to the person posting the payments into the Division s billing and collection system. The person posting the payments also verifies the validated deposit ticket to the Daily Deposit Report for each program, indicating that the checks that were deposited to the bank are the same as those submitted and signs or initials the Daily Deposit Report for each program documenting the report to that effect. The bank document packet is then compared to the daily Daily Total Deposit Report All Programs (which came from the check log and lists all checks received regardless of program). The person posting the payment transaction information into LA PRO then initials the Daily Total Deposit Report All Programs. Once the transactions are posted into LA PRO, a Daily Transaction Report, which details the day s postings to the LA PRO system billing and collection system, is generated. In addition to this Daily Transaction Report, which notes the deposit ticket date, payment allocation and program acknowledgement, the bank packet is then given to the Manager of LAU for review. After review, the Manager of LAU will return the bank documents to the CLR for copying the verified deposit tickets and filing the Daily Transaction Report and the Daily Total Deposit Report-All Programs. Another packet of the validated deposit ticket(s), the Daily Transaction Reports for each program and copies of checks are taken to the Division of Administration on 15 th floor (for data entry into FMIS). A third packet

31 9 goes to another member of LAU for input into the Access Dbase (Cash Receipts Journal) and is subsequently filed in a monthly folder of program activity. Second Recommendation of Legislative Auditors The Department also concurs with the recommendation that all the employees should not have the ability to modify the check log. While it is correct that the Division of Financing Programs employees do have read capability to view the check log, only a few have the ability to modify the log. The only four employees accorded write access are specifically: 1. the person who inputs the checks, 2. the person identified above s backup, 3. the person who designed/created/administers the Access database check log, and 4. the person identified above s backup.. V. OFFICE OF ADMINISTRATIVE SERVICES BUDGET AND FINANCE Finding #7 Purchases and Disbursements Proper internal controls were not established over the processing of purchasing and disbursement transactions. RESPONSE TO #7 The Financial Management Information System (FMIS) has been changed to Applications Systems Management (ASM). The Department has made the adjustments to the ASM online security features that existed when the security test of procurement and disbursement capabilities was conducted by the Legislative auditors. Our review of the ADPICS and R*STARS employee ASM capabilities only disclosed one employee with ASM capabilities that would allow them to process a transaction through the system without collusion occurring. We will continue our efforts to perform periodic reviews and evaluations of the access capabilities using our existing resources. And, we will continue our efforts to utilize available ASM security features to provide adequate controls over procurement and disbursement transactions. We feel that it would be helpful if the Legislative Auditor would make the test software available to the ASM security unit within the Department of Budget and Management

32 10 (DBM). This would be a statewide service improvement if the DBM security unit can run this test bi-monthly and advise all Departments, Commissions and Boards of the possible security access problems to allow for a timely correction of potential problems. We would like to thank the Legislative Auditors for bringing this problem to our attention and hope that they would be amenable to helping the entire State government improve in this area by assisting DBM in acquiring the test software. VI. OFFICE OF ADMINISTRATIVE SERVICES GENERAL SERVICES Finding #8 Equipment Equipment records were not adequately maintained or reconciled and the results of physical inventories were not fully resolved. RESPONSE TO #8 The Department agrees with the Legislative Auditors findings and recommendations and will comply with the requirements of the Department of General Services Inventory Control Manual. Specifically, the Department is now properly maintaining a control account and detailed records for all equipment items, and the detailed records are currently being reconciled with the related control account balance. We are also currently in the process of reconciling the results of our physical inventory with the detailed records. Any discrepancies will be resolved.

33 ATTACHMENT (Per Response to Finding #2) Underlined language is new; brackets indicate deletions Small Business Development Contract Financing Fund.04 Eligible Applicants A. The Authority shall be satisfied that the following requirements to qualify for financial assistance have been met by applicants who are sole proprietors and by the owners of at least 70 per cent of business enterprises that are not sole proprietorships: (1)-(4)(c) (text unchanged) (c)(i) The applicant's owner may establish the economic impediment of lack of formal education by demonstrating that the applicant's owner has not achieved the type or level of academic or vocational training that in the Authority's determination is typical of business owners in the industry in which the applicant is operating. (c)(ii) The applicant or owners of the applicant may establish the economic impediment of lack of financial capacity by demonstrating that the applicant or owners of the applicant do not have the collateral, working capital, positive credit history, or financial experience, training, or expertise that in the Authority's determination is typical of businesses that are able to obtain financing through normal channels. (c)(iii) The applicant may establish the economic impediment of regional economic distress by demonstrating that the applicant is located or operates in areas defined as economically distressed by the State or federal government, or a local government, including Designated Neighborhoods, as designated by the Department of Housing and Community Development pursuant to Article 83B section 4-202; Enterprise Zones, as designated by the Secretary pursuant to Article 83A section 5-401; and Empowerment Zones, as designated by the federal government pursuant to 26 U.S.C. section (5) (text unchanged)