FIRST JUDICIAL DISTRICT OF PENNSYLVANIA AUDITOR S REPORT FISCAL YEARS

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1 FIRST JUDICIAL DISTRICT OF PENNSYLVANIA AUDITOR S REPORT FISCAL YEARS

2 November 14, 2011 Honorable Pamela Pryor Dembe, President Judge First Judicial District of Pennsylvania Court of Common Pleas Room 386 City Hall Philadelphia, PA We have examined the financial affairs and operations of the First Judicial District for fiscal years 2007 through 2009 pursuant to the requirements of Section (c) of the Philadelphia Home Rule Charter. A synopsis of the results of our work is provided in the executive summary to the report. The conditions giving rise to the findings and recommendations in this report related to fiscal years 2007 and 2008 and the first half of fiscal year 2009 occurred under the previous chairperson. We discussed our findings and recommendations with you and your staff at an exit conference and included your written response to our comments as part of the report. Our recommendations have been numbered to facilitate tracking and follow-up in subsequent years. We believe that, if implemented by management, these recommendations will improve internal controls and the effectiveness and efficiency of your agency s operations. We would like to express our thanks to you and your staff for the courtesy and cooperation displayed toward us during the conduct of our work. Very truly yours, ALAN BUTKOVITZ City Controller cc: Honorable Michael A. Nutter, Mayor Honorable Anna C. Verna, President and Honorable Members of City Council Honorable Members of the Administrative Governing Board David C. Lawrence, Court Administrator Members of the Mayor s Cabinet

3 FIRST JUDICIAL DISTRICT EXECUTIVE SUMMARY Why the Controller s Office Conducted the Examination Pursuant to the requirements of Section (c) of the Philadelphia Home Rule Charter, we examined the financial affairs of the First Judicial District of Pennsylvania (FJD) as part of our audit of the City of Philadelphia s basic financial statements. The focus of our examination was limited to determining if department management had suitably designed and placed in operation internal controls and complied with any laws and regulations related to its revenue, payroll, other expenditure, and cash activity. What the Controller s Office Found While the FJD maintained its own separate computerized payroll system to track employee attendance and leave balances, the FJD s biweekly payroll procedures did not require an independent test of the attendance information posted to this system by comparison to daily sign-in sheets. Also, there was no independent spot check of the attendance entries posted to the city s payroll system by reference to reports from FJD s payroll system. Lastly, we discovered that the FJD human resources personnel who posted attendance information to the city s payroll system improperly shared each other s access passwords. As a result, the FJD was at an increased risk for undetected errors and fraud in payroll and employee leave balances. Reported traffic fines receivable information was still incomplete. While Traffic Court reported the amount of traffic fines receivable due to the city, it did not provide the corresponding estimate of allowance for doubtful accounts required by the Office of the Director of Finance for inclusion in the city s financial statements. Oversight of the jury payroll account continued to require strengthening. The FJD did not comply with city regulations regarding unclaimed monies. We identified $187,159 in outstanding checks that were transferred to the Unclaimed Monies Fund six to twelve months late. There also remained $91,882 in checks outstanding for more than one year which still awaited transfer to the Unclaimed Monies Fund. Lastly, bank reconciliations for the account did not contain evidence of an independent supervisory review and approval. The FJD change fund balance recorded on the city s accounting records remained inaccurate, being overstated by $3,220. FJD management asserted that they were working with the Office of the Director of Finance to resolve this discrepancy. What the Controller s Office Recommends The Controller s Office has developed a number of recommendations to address these findings. The recommendations can be found in the body of the report.

4 CONTENTS INTRODUCTION Page Background...1 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS...3 FINDINGS AND RECOMMENDATIONS Payroll Processing Procedures Required Improvement to Prevent Error or Fraud...5 Traffic Court Still Did Not Provide Complete Fines Receivable Data...7 Oversight of Jury Payroll Account Still Needed Strengthening...8 Change Fund Balances Remained Inaccurate...9 AGENCY S RESPONSE Honorable Pamela Pryor Dembe, President Judge, First Judicial District of Pennsylvania...10

5 INTRODUCTION BACKGROUND Powers and Duties The Philadelphia court system originates in various Commonwealth of Pennsylvania laws. The Pennsylvania Constitution of 1968 and the Judiciary Act of 1976 established Common Pleas and Municipal Courts. Philadelphia Traffic Court was authorized and established under Article V, Section 1 and 6 (c) of the Constitution of Pennsylvania, as amended in 1968, and under Section 301 (42 Pa. C.S. 301) and 1321 (42 Pa. C.S. 1321) of the Judicial Code. These courts are part of the state s unified judicial system and constitute Pennsylvania's First Judicial District (FJD). Among the primary responsibilities of the FJD are trial jurisdiction for civil and criminal cases and adjudication of traffic violations. Other responsibilities include domestic relations matters, juvenile cases, estate and trust matters, landlord and tenant matters, and code enforcement cases. Effective March 4, 2010, based on an Administrative Order from the Supreme Court of Pennsylvania, all duties and functions of the office of the Clerk of Quarter Sessions were absorbed and assumed by the FJD. Responsibilities of the Clerk of Quarter Sessions included creation and management of the records in criminal cases, as well as bail collection for the Philadelphia court system. Management An eight-member administrative governing board consisting of three president judges, four administrative judges, and the state court administrator is responsible for the daily operations of the FJD. As of the close of fiscal year 2009 (excluding judges and certain other employees whose salaries are funded by the Commonwealth of Pennsylvania), the FJD employed approximately 2,500 employees. Internal Control Management has responsibility for establishing and maintaining internal controls to safeguard the financial resources for which it is accountable. Internal controls are designed to (1) prevent or timely detect unauthorized acquisition, use, or disposition of assets; (2) ensure the reliability of financial reporting; and (3) help make certain there is compliance with applicable laws and regulations. Financial Resources For the fiscal years under examination, FJD management was accountable for the following appropriations, estimated revenues and assets: 1

6 INTRODUCTION Appropriations General Fund $ 111,142,641 $ 114,552,203 $ 114,552,203 Grants Revenue Fund 40,494,258 43,393,720 45,624,144 Total Appropriations $ 151,636,899 $ 157,945,923 $ 160,176,347 Estimated Revenues Non-Tax Revenue $ 36,610,000 $ 37,771,000 $ 38,100,000 From Other Governments 54,235,000 56,988,000 59,139,000 Total Estimated Revenues $ 90,845,000 $ 94,759,000 $ 97,239,000 Assets (Reported Balances) Cash and Fiduciary Funds $ 23,226,056 $ 23,418,146 $ 23,240,411 Personal Property Items 17,622,711 18,095,040 18,269,916 Total Assets $ 40,848,767 $ 41,513,186 $ 41,510,327 2

7 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS We annually audit the basic financial statements of the City of Philadelphia, Pennsylvania, as of and for its June 30 fiscal year end and issue a report thereon. Those statements include financial transactions of various city agencies. We conduct our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we consider the City of Philadelphia s centralized and agency internal controls over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City of Philadelphia s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City of Philadelphia s internal control over financial reporting. A control deficiency 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 misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects an agency s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the city s financial statements that is more than inconsequential will not be prevented or detected by the agency s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by an agency s internal control. Our consideration of the First Judicial District of Pennsylvania s internal control over financial reporting was limited to determining if its internal control components for revenue, payroll, other expenditure, and cash activity were suitably designed and placed in operation during fiscal years 2007 through 2009, and would not necessarily identify all deficiencies in the internal control over financial reporting that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as described above. 3

8 C I T Y O F P H I L A D E L P H I A O F F I C E O F T H E C O N T R O L L E R Compliance and Other Matters As part of obtaining reasonable assurance about whether the City of Philadelphia s financial statements are free of material misstatement, we perform centralized and agency tests of compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. Our consideration of the First Judicial District of Pennsylvania s compliance with certain provisions of laws, regulations and contracts was limited to tests of revenue, payroll, other expenditure, and cash activity during fiscal years 2007 through Grant compliance was tested and reported on as part of our single audit in accordance with Office of Management and Budget Circular A-133. Our agency tests disclosed no instances of noncompliance or other matters by the First Judicial District of Pennsylvania that are required to be reported under Government Auditing Standards. We noted certain other conditions that are not required to be reported under Government Auditing Standards, but nonetheless represent deficiencies in internal control over financial reporting that should be addressed by management. These conditions are listed in the table of contents and included in the findings and recommendations section of the report. The First Judicial District of Pennsylvania s response to the findings identified in our audit is included in the accompanying agency response section of the report. We did not audit the First Judicial District of Pennsylvania s response and, accordingly, we express no opinion on it. This report is intended solely for the information and use of the management of the City of Philadelphia, the First Judicial District of Pennsylvania, and City Council and is not intended to be and should not be used by anyone other than these specified parties. October 22, 2010 GERALD V. MICCIULLA, CPA Deputy City Controller 4

9 FINDINGS AND RECOMMENDATIONS PAYROLL PROCESSING PROCEDURES REQUIRED IMPROVEMENT TO PREVENT ERROR OR FRAUD Our review of the First Judicial District of Pennsylvania s (FJD s) procedures for processing its $117 million payroll 1 revealed the following deficiencies that increased the risk for undetected errors and fraud: No established procedures requiring an independent review of (1) employee attendance information entered by timekeepers into the FJD s computerized payroll system, and (2) data entered by FJD human resources personnel into the city s payroll system. Improper sharing of city payroll system access passwords among FJD human resources personnel. No Independent Review of Payroll Postings The FJD maintains its own computerized payroll system which tracks employees attendance and leave balances the Sage ABRA Human Resources Management System (ABRA System). Unit supervisors review and approve daily employee sign-in sheets and then forward them to the division timekeepers, who post the attendance information into the ABRA System and retain the sign-in sheets. While employee leave balances are maintained on the ABRA System, FJD employee paychecks are generated by the city s payroll system, which operates on a negative reporting basis for the FJD (i.e. reporting only leave without pay occurrences). Designated FJD human resources personnel are responsible for entering leave without pay data into the city s payroll system. A widely practiced procedure by many city departments and agencies is to require an independent test of payroll data entry by someone not connected with payroll preparation. 2 The test validates entries posted to the computerized payroll system by reference to source document attendance records such as daily employee sign-in sheets. Such a practice reduces the risk of undetected errors in payroll and employee leave balances. Our audit found that the FJD had not established a procedure requiring an independent test of the employee attendance information posted to the ABRA System by comparison to the sign-in sheets. Instead, according to its Time Records and Payroll Procedures policy, the FJD relied on employees to detect errors in their paychecks and leave balances. We made inquiries of timekeepers and managers from four selected FJD divisions and were informed that only two divisions were making independent checks of ABRA System attendance entries. However, neither of these two divisions had documented the check while one division s manager was unaware that the former timekeeper was performing such a review. 1 According to the city s FAMIS accounting system, FJD payroll expenditures for fiscal year 2009 amounted to $117 million. 2 This practice is encouraged by Standard Accounting Procedure E-9101 of the city s Finance Office. 5

10 FINDINGS AND RECOMMENDATIONS In addition, there was no independent check on the leave without pay entries posted to the city s payroll system by comparison to source documentation, such as the ABRA System leave without pay report. Although we did not encounter any incorrect data entry of employee time as part of our limited testing of payroll transactions, we believe that the FJD will continue to be at a higher risk for such errors in the future. Recommendations: We recommend that FJD management modify existing bi-weekly payroll procedures to require that each division designate someone independent of payroll preparation to perform a comparison of the division s ABRA System attendance entries to the daily sign-in sheets, at least on a test basis. This procedure should be documented in writing by the reviewer in order to provide an audit trail and fix responsibility for the review [ ]. Additionally, we recommend that FJD management establish an independent spot check of the leave without pay entries posted to the city s payroll system by comparison to source documentation, such as the ABRA System leave without pay report. The responsible employee should document the performance of this review in writing [ ]. Improper Sharing of Payroll System Access Passwords The three FJD human resources employees responsible for entering and approving attendance entries in the city s payroll system improperly shared access passwords with each other. This practice violated the city s prohibition against password sharing, in which it has been declared that passwords must never be shared or revealed to anyone else besides the authorized user. 3 The sharing of passwords compromises the integrity of the audit trail and makes it difficult to affix accountability. Also, the authorized user is exposed to responsibility for actions that the other party takes with the password, including errors in data entry, unauthorized changes, and even fraudulent activity. Human resources personnel stated they shared passwords to limit the number of employees with access to the city s payroll system. If one of these three individuals was absent on the payroll processing due date, the other employee used the access password of the absent individual. Human resources personnel asserted they employed this practice because they believed that different individuals had to perform each of the three steps required by the city s payroll system data entry, supervisor approval, and executive approval. However, after meeting with us, they contacted the Office of the Director of Finance (Finance Office), and learned, while the established procedure is that a different employee perform each step, the payroll system does allow users with supervisor and executive approval authority to also perform the step(s) below their authorization level in the event of absences. 3 The Division of Technology s Information Security Policy Number 10.00: Access Control prohibits all city information system users from sharing passwords. 6

11 FINDINGS AND RECOMMENDATIONS Recommendation: FJD human resources personnel informed us that, effective September 17, 2010, the practice of sharing passwords ceased and all three individuals changed their access passwords. We recommend that, in the future, FJD management monitor compliance with the city s policy prohibiting password sharing [ ]. TRAFFIC COURT STILL DID NOT PROVIDE COMPLETE FINES RECEIVABLE DATA For the last several audits, 4 we reported that Traffic Court officials did not provide traffic fines receivable in the format required by the Finance Office for inclusion in the city s annual financial statements. They also did not provide an estimate of the allowance for doubtful accounts. 5 These conditions created additional follow-up work, which in turn contributed to delays in the preparation of the city s financial statements. Our current audit revealed that Traffic Court did report the portion of fines receivable due to the city for inclusion in the city s June 30, 2010 financial statements. However, Traffic Court did not provide an estimate of the allowance for doubtful accounts. This condition appeared to result from a misunderstanding between Traffic Court and the Revenue Department. 6 Traffic Court officials asserted that a Revenue Department manager told them it was unnecessary to provide the allowance for doubtful accounts estimate, citing an from this manager to document their assertion. However, our review of this and inquiry of Revenue Department management revealed that the Revenue Department manager was actually instructing Traffic Court to defer submission of receivable write-offs to the city s Accounts Review Panel for approval. 7 We reviewed the accuracy of the reported June 30, 2010 fines receivable by (1) recalculating the total receivable using a copy of the Traffic Court s receivable database file and (2) selecting a sample of individual receivable amounts from the database file for comparison to source documents (e.g. original traffic citations). Our recalculation of the total fines receivable agreed with Traffic Court s reported amount. However, for two of the ten individual receivable amounts tested by us, Traffic Court did not provide us with documentation to support the reported receivable. Good internal control requires that complete records of billings and collections be maintained by Traffic Court to substantiate the reported traffic fines receivable. Recommendations: We recommend that Traffic Court officials meet with Revenue Department management to clarify the city s reporting needs with respect to traffic fines receivable and take the necessary steps to provide all required data, including an estimate of the allowance for doubtful accounts 4 See First Judicial District Auditor s Report Fiscal 2003, Fiscal 2004, and Fiscal 2006 & The allowance for doubtful accounts is a contra-asset account which represents the estimated amount of reported receivables for which future collection is considered unlikely. 6 The Revenue Department is the city agency designated by the Finance Office to receive and compile accounts receivable data from the various city agencies for inclusion in the city s annual financial statements. 7 Receivable write-offs are specific receivables that have been deemed uncollectible. Once approved by the city s Accounts Review Panel, the write-offs are deducted to arrive at the receivable amounts reported in the city s annual financial statements. 7

12 8 See First Judicial District Auditor s Report Fiscal 2004 and Fiscal 2006 & FINDINGS AND RECOMMENDATIONS [ ]. In addition, management should ensure that adequate documentation is retained to support the reported traffic fines receivable [ ]. OVERSIGHT OF JURY PAYROLL ACCOUNT STILL NEEDED STRENGTHENING In our prior two reports, 8 we commented that the FJD had not complied with the city s Standard Accounting Procedure (SAP) E-4351 concerning unclaimed money. The SAP requires that all monies which remain unclaimed more than one year be deposited with the Revenue Department for inclusion in the city s Unclaimed Monies Fund. Not following the SAP increased the risk that uncashed jury payroll amounts would not be forwarded timely to the state. Also, carrying large outstanding check balances unnecessarily complicated the bank reconciliation process. The FJD s practice of tracking outstanding checks on adding machine tapes further increased the cumbersomeness of this process. During our current review, we identified jury payroll checks totaling $187,159, outstanding for more than one year, that were transferred to the Unclaimed Monies Fund six to twelve months late. Subsequent to our fieldwork, the FJD informed us that there remained $91,882 in checks outstanding for more than one year that had not yet been transferred to the Unclaimed Monies Fund. We also noted that outstanding checks were still tracked on adding machine tapes. In addition, we previously reported that the jury payroll account custodian performed the incompatible duties of opening the mail (including returned checks), maintaining the disbursement journal, reconciling the bank account, submitting checks for signature, and mailing checks to jurors. As a result, there was an increased risk for undetected errors and fraud. While FJD management mitigated this control weakness by having someone independent of the jury payroll process review and approve the bank reconciliations, the prior audit s testing of reconciliations did not provide evidence of this process, such as the reviewer s initials or signature and the date of the review. Our current review of jury payroll account bank reconciliations revealed this condition remained uncorrected. We examined bank reconciliations for fiscal years 2007 through 2010 and found no evidence of supervisory review and approval on any of the reconciliations. We also noted that the account custodian was using an outdated reconciliation form which did not have spaces for the reviewer to sign and date. We provided FJD management with the Finance Office s updated reconciliation form which did contain spaces for the reviewer s approval. FJD management agreed to start using the updated form to prepare the bank reconciliations. Recommendations: To improve controls over the jury payroll account, we again recommend that the FJD: Implement procedures to ensure that all checks outstanding over one year are deposited timely with the Revenue Department for inclusion in the city s Unclaimed Monies Fund as required by the city s SAP E-4351 [ ]. Track outstanding checks on a computer file, rather than on adding machine paper tapes [ ].

13 FINDINGS AND RECOMMENDATIONS Require the reviewer of the bank reconciliations to sign and date the reconciliation form to provide evidence of the review [ ]. CHANGE FUND BALANCES REMAINED INACCURATE Previously, we reported 9 there was a lack of accountability over the FJD s change funds. The city s accounting records indicated a $3,260 change fund for the Common Pleas Court Domestic Relations and a $50 change fund for Common Pleas Court at 1301 South Broad Street. The prior audit s change fund count revealed that the Domestic Relations change fund was only $90, and the change fund at 1301 South Broad Street did not exist because the Common Pleas Court was no longer at this location. FJD was unable to provide documentation supporting the return of the change funds to the Finance Office. Consequently, the change fund balance on the city s accounting records for the FJD was overstated by $3,220. Our current review disclosed that the city s accounting records still reflected the inaccurate change fund balances for Domestic Relations and 1301 South Broad Street. FJD management provided us with Domestic Relations cashiering procedures, prepared in 1993, which stated the change fund balance was $90, and informed us that the 1301 South Broad Street location had been closed since the late 1960s. FJD management stated that they are currently working with the Finance Office to resolve the change fund balance discrepancy. Recommendation: We recommend that FJD management continue working with the Finance Office to ensure that the city s accounting records are adjusted to reflect the actual amount of change funds in the FJD s possession [ ]. 9 See First Judicial District Auditor s Report Fiscal 2006 and

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