Internal Audit Committee of Brevard County, Florida Internal Audit of Accounts Receivable Function Prepared By: July 11, 2013
Table of Contents Transmittal Letter... 1 Executive Summary... 2 Background... 3-8 Objectives and Approach... 9-10 Issues Matrix... 11-12
Carr, Riggs & Ingram, LLC 215 Baytree Drive Melbourne, Florida 32940 (321) 255-0088 (321) 259-8648 (fax) www.cricpa.com July 11, 2013 The Audit Committee of Brevard County, Florida Viera, Florida 32940-6699 Pursuant to the approved 2012/2013 internal audit plan, we hereby submit our internal audit report covering the Accounts Receivable function. The internal audit of the Accounts Receivable function focused on accurate and proper tracking of aged receivables and amounts due from other governments, reasonableness of the allowance for doubtful accounts and the assumptions used in determining those amounts, proper segregation of duties and other policy compliance issues. We will be presenting this report to the Audit Committee at the next scheduled meeting on August 7, 2013. Our report is organized in the following sections: Executive Summary Background Objectives and Approach Issues Matrix This provides a summary of the issues related to our internal audit of the Account Receivable function. This provides an overview of the Accounts Receivable function. The internal audit objectives and focus are expanded upon in this section as well as a review of the various phases of our approach. This section gives a description of the issues and recommended actions as well as Managements responses. We would like to thank the various departments and all those involved in assisting the Internal Auditors in connection with the review of the Accounts Receivable function. Respectfully Submitted, INTERNAL AUDITORS 1
Executive Summary
Executive Summary The primary objective of this audit was to assess the design and effectiveness of internal controls in place over the Accounts Receivable function and to assess compliance with certain laws, rules and other County policies and procedures. During the course of our work, we discussed the control design and operating deficiencies and any compliance issues with management. Relative risk is an evaluation of the severity of the concern and the potential impact on operations. Items rated as High risk are considered to be of immediate concern and could cause significant operational issues if not addressed in a timely manner. Items rated as Moderate risk may also cause operational issues, however, they do not require immediate attention, but should be addressed as soon as possible. Items rated as Low risk could escalate into operational issues, but can be addressed through the normal course of conducting business. There are many areas of risk to consider including financial, operational, and compliance, to name a few. For public sector organizations, we also consider public perception risk when determining the relative risk rating. Our observations and recommendations for improving controls and operations are described in detail in the Issues Matrix included in this report. A summary of issues identified and their relative risk rating is provided below. Issues Risk Rating 1. Policies and Procedures: Formal written policies and procedures provide the guidelines and instructions for employees to follow and ensures everyone is aware of control procedures to be followed. We noted that the County does have policies and procedures in place over the accounts receivable reconciliation process, where applicable. However, we noted that the County did not have formal written policies and procedures over the process for determining the allowance for uncollectible accounts. Therefore, in the event of turnover, new employees do not have a formal set of procedures to follow as guidance. Moderate 2. Allowance for Uncollectibles: The allowance for uncollectible accounts should be reviewed on an annual basis along with the underlying assumptions that were used to calculate it. Currently, only Fire Rescue and Solid Waste have allowances for uncollectible accounts. The allowance for ambulance fees is currently 35% of open receivables which comes from the third party billing company used by the County based on historical collections. County Finance reviews this percentage biannually to determine if this percentage needs adjustment. Solid Waste s allowance has not been reviewed or revised for several years. The County should take into consideration the collectability of accounts receivable with balances outstanding for more than 1 year. Failure to estimate or review the allowances for uncollectible accounts on an annual basis could lead to recording errors. Moderate 2
Background
Background Overview The Accounts Receivable processing and collection function is the responsibility of County Finance and each department. Fees, fines and assessments charged by departments are approved by the Board of County Commissioners (the Board ). At the department level, Accountant I, Accountant II or Finance Managers prepare customer invoices to send to customers. Finance Managers or Department Directors review customer invoices. The original invoice is sent to the customer and a copy is sent to County Finance. Fund Accountants enter customer invoices into SAP and the entry is automatically posted to SAP. Some departments like Fire Rescue may enter customer invoices into SAP, but the entry is not posted until it is approved by a Fund Accountant in County Finance and is posted by the Assistant Finance Director. Payments come into either the department or County Finance. Mail is opened and a list of payments received is maintained by the department secretary or front desk receptionist in County Finance. Deposits are prepared by the department or Revenue Clerk in Finance and monies are deposited at the bank or transported by armored vehicle. The Revenue Clerk in County Finance enters details of the collection. Monies are kept locked in a safe in a locked room until deposit is sent to the bank. The Revenue Clerk provides a pink copy of the deposit slip and copy of check or check stub to the Fund Accountants who enter the receipts into SAP. The Fund Accountants send the cover sheet with a pink deposit slip to the Revenue Clerk who attaches the bank receipt or proof of bank stamp on the deposit slip. Departments send either the yellow or pink copy of the deposit slip and the bank receipt copy of the check to County Finance. At or near year end, Fund Accountants send transactions details of all open accounts receivables in SAP to Accountants I or II at the departments. The detail is reviewed for any discrepancies and for receivables that need to be written off. The departments must prove due diligence that they have followed up and attempted to collect receivables through certified letters or submission to a collection agency. Fund Accountants in County Finance will then prepare a proposed listing of write-offs which is reviewed by the Assistant Finance Director and a request to the Board for write-offs is prepared. The Board request and supporting documentation is sent to the Board for approval. Once the write-offs are approved by the Board, the Fund Accountants prepare write-off memos which are entered into the system and reviewed by Assistant Finance Director before being posted in SAP to write-off the amounts. Adjustments made during the year are typically for correcting invoices. The departments send an email to the Fund Accountants with details of the adjustment and the Fund Accountants make the corrections. Fund Accountants in County Finance can create new customers. Each department sends an email to the Fund Accountant requesting a new customer identification number. After the customer is created, Fund Accountants send the department the new identification number. Brevard County Fire Rescue (BCFR) uses a third party vendor to manage its Emergency Medical Services (EMS) billings. The third party vendor is responsible for billing the patients receiving EMS services based on reports prepared by BCFR personnel and for tracking receipt of those payments. Patient payments are received directly by BCFR in a bank lockbox and deposited to BCFR s bank account on the same day. Copies of payments received are sent to the third party vendor so they can track the receipt of payments. Delinquent accounts are sent to a collections agency for further pursuit of payment. We reviewed the reconciliations between SAP and the reports provided by the third party vendor, noting no issues. Additionally, we reviewed copies of the independent service auditors report on the suitability of the design and operating effectiveness of the controls at the third party vendor and found no significant deficiencies in their controls. 3
Background - continued Overview - continued Special assessment receivables provide residents with an opportunity to finance specific infrastructure improvements including road resurfacing, water, and sanitary sewer line installation through a cooperative relationship with the County. A lien is placed on each property owners property to ensure payment. Special assessments can be paid in full at the beginning of the assessment or paid in annual installments over a 10-year period. If paid annually, the special assessments are included on the residents annual property tax bill. The Board of County Commissioners approves the annual special assessments billed and the Brevard County Tax Collector is responsible for the collection of the special assessments. Staffing Key personnel from the Accounts Receivable function that are involved in the operations and assisted in the audit are as follows: Name Kathy Prothman Brad Pugh Veronica Krall Anselma Reynolds Donna Hyatt Janet Whittmore Title Assistant Finance Director Fund Accountant General Fund and Information Systems Fund Accountant Fire Rescue, Animal Services and Tourism Fund Accountant Utilities Department and Libraries Fund Accountant FEMA Fund Accountant Risk Management, Valkaria Airport and Transit Services/SCAT 4
Background - continued Summary of Process Flow Approve Fees, Fines, and Assessments Charged by Departments BOARD OF COUNTY COMMISSIONERS DEPARTMENTS Send Original Invoice CUSTOMERS Enter Transaction into Department Billing Software Send Copy of Invoice Send Deposit Supporting Documentation Send Payment COUNTY FINANCE Send Deposit Invoice Approval Deposit Slip Review BANK Fund Accountants Enter Customer Invoices & Receipts Into SAP KEY Invoicing Processes Customer Payment and Deposit Processes 5
Background - continued Selected Statistics The following is a listing of accounts receivable, allowance for uncollectibles and due from other governments balances for the last 5 fiscal years. Governmental Funds* FY 2007-2008 FY 2008-2009 FY 2009-2010 FY 2010-2011 FY 2011-2012 Accounts receivable, gross $13,221,554 $13,704,380 $14,106,156 $13,296,525 $15,081,214 Allowance for uncollectibles 2,917,534 3,310,872 3,392,981 3,162,169 3,876,350 Accounts receivable, net 10,304,020 10,393,508 10,713,175 10,134,356 11,204,864 Allowance as a % of gross A/R 22% 24% 24% 24% 26% Due from other governments 16,800,617 21,425,964 23,334,596 16,599,743 16,215,615 * Includes constitutional officers The increase in due from other governments between FY08 and FY09 was a result of amounts due from FEMA for Tropical Storm Fay and Hurricane Wilma of approximately $3.5 million and $1.2 million, respectively. Due from other governments decreased in FY11, primarily as a result of $2.6 million in Road Stimulus grants, $1.6 million in NSP grants and $1.0 million for the Stormwater Crane Creek grant all being due to the County as of FY10 and collected during FY11. Accounts receivable increased in FY12 primarily as a result of increases in the ambulance billing accounts receivable balance which experienced an increase from the mixture of services provided during FY12 compared to FY11. The increase in the ambulance billing accounts receivable also resulted in an increase in the allowance for uncollectibles as a percentage of gross accounts receivable in FY12. The increase in the percentage of the allowance for uncollectibles in FY09 was a result of a greater percentage of the ambulance billing accounts receivable making up the total accounts receivable balance. Proprietary Funds** FY 2007-2008 FY 2008-2009 FY 2009-2010 FY 2010-2011 FY 2011-2012 Accounts receivable, gross $2,297,287 $1,178,527 $1,079,061 $1,130,383 $1,037,041 Allowance for uncollectibles 105,467 106,567 106,567 106,567 106,567 Accounts receivable, net 2,191,820 1,071,960 972,494 1,023,816 930,474 Allowance as a % of gross A/R 5% 9% 10% 9% 10% Due from other governments 7,374,252 6,523,173 6,921,357 4,678,441 5,835,881 ** Includes internal service funds Accounts receivable decreased in FY09 as a result of a Risk Management receivable for the Retiree Drug Subsidy of approximately $600,000 at the end of FY08 that was collected during FY09. There was no allowance for uncollectbles associated with the Retiree Drug Subsidy, therefore, the allowance as a percentage of gross accounts receivable increased in FY09. Due from other governments decreased in FY11 primarily as a result of the collection of FEMA grants that were recorded in FY10. Due from other governments increased in FY12 because of SCAT reimbursement requests of approximately $950,000 that had not been received by the end of FY12. 6
Background - continued Selected Statistics (continued) Accounts Receivable: Account # Account Description Balance at 09/30/11 Balance at 09/30/12 1150000 Accounts Receivable $ 3,075,506 $ 2,961,016 1150001 Fleet Accounts Receivable 107,345 103,480 1150002 Facilities Accounts Rec 26,665 3,826 1150005 Installment Connection 38,856 25,935 1150006 Septage 74,265 64,593 1150007 SCAT Accounts Receivable 5,141 11,333 1150008 IS/Communications Accounts 6,334 37,771 1150009 Traffic Engineering Accounts 55,391 37,196 1150016 Ambulance Fees ADP 9,035,060 11,075,285 1150017 Service Fees - Mims 26,716 30,618 1150022 Golf Receivables 4,874 4,098 1150024 Service fees-barefoot B 174,654 179,815 1150027 Accounts Receivable- W/ - 147 1150050 NSF Check Receivable 7,566 8,606 1150083 Private Individual & Or 57,835 53,903 1150100 Miscellaneous Accounts 849,932 776,155 1150217 Impact Fees Calendar Year 19,921 15,425 1155000 Gate Receivable 436,380 342,997 1170000 Estimated Uncollectible (3,268,736) (3,982,917) 1210000-073 Assessments Receivable 133,027 178,104 1212540-551 Solid Waste Assessments 94,310 91,447 1215073 SW Assessments, Prorated 32,659 25,742 1250000-059 Interest & Penalty Rec 5,362 5,402 1280002 San Sebastian Rec 34,940 34,940 Total Accounts Receivable $ 11,034,003 $ 12,084,917 Note: These totals are for the Board only. The amounts on pages 5 and 6 of this report include the receivables of the constitutional officers and reclassifications of balances between the Board and the constitutional officers. 7
Background - continued Selected Statistics (continued) Due From Other Governments: Account # Account Description Balance at 09/30/11 Balance at 09/30/12 1330000 Due from Other Government $ 2,277,858 $ 2,045,054 1330005 Due From Sheriff 3,306,162 5,752,684 1330011 Due From Clerk 348,206 234,001 1330012 Due From Tax Collector 3,290,483 2,959,454 1330013 Due From Property Appraiser 397,012 526,246 1330015 Due From Tax Collector 5,385,137 5,192,365 1330034 Due From State of Florida 5,145 355 1330050 COBRA SUBSIDY FED GOVT 1,194 468 1330057 Due From Melbourne Utilities 763,152 748,453 1330058 Due From Cocoa Utilities 1,075,219 1,135,620 1330099 Due From FIND 2,660 34,891 1330331 Due From Federal Government 6,364,147 8,808,493 1330334 Due From State of Florida 9,767,503 8,126,611 1331000 Due From Cities 27,930 29,375 Total Due from other Governments $ 33,011,808 $ 35,594,070 Note: These totals are for the Board only. The amounts on pages 5 and 6 of this report include the receivables of the constitutional officers and reclassifications of balances between the Board and the constitutional officers. 8
Objectives and Approach
Objectives and Approach Objectives The primary purpose of this audit was to assess the design and effectiveness of internal controls in place over Accounts Receivable (including due from other governments) and to assess compliance with certain laws, rules and other County policies and procedures. Objectives of the current internal audit review of Accounts Receivable include the following: Determine that effective policies and procedures are in place to ensure compliance with generally accepted accounting principles. Ensure compliance with internal policies and procedures. Verify accuracy and proper tracking of aged receivables and amounts due from other governments. Review the reasonableness of the allowance for doubtful accounts balance and the assumptions used in determining amounts. Verify proper segregation of duties. Approach Our audit approach consisted of three phases: Understanding and Documentation of the Process During the first phase, we held an entrance conference with the Assistant Finance Director and other personnel to discuss the scope and objectives of the audit work, obtained preliminary data, and established working arrangements. We then conducted interviews with responsible personnel and documented their role in the processes. Detailed Testing The purpose of this phase was performance of testing procedures based on our understanding of the accounts receivable process, applicable County ordinances, and Federal and State statutes. Our procedures included observation and inquiry, walk through and testing of individual transactions. The time period covered by testing was October 1, 2012 through April 30, 2013. We utilized sampling and other auditing techniques, such as inquiry and observation, to meet our audit objectives outlined above: 9
Objectives and Approach - continued Approach (Continued) Detailed Testing (Continued) Obtain an understanding of the accounts receivable process for key receivables including ambulance fees, general and other receivables, due from other governments, payments in lieu of taxes (PILT) and the allowance for uncollectibles and identify critical controls. Determine whether any written policies and procedures are in place over key receivables processes. Determine whether proper segregation of duties exists at all points in the process for key receivables (custody of assets, authorization or approval of related transactions affecting those assets, and recording or reporting of related transactions). Test a selection of 3 monthly reconciliations for ambulance fees between the ADPI reports and SAP reports prepared by County Finance for the following: o Review for unusual reconciling items; o Review for documentation of preparer and reviewer of the reconciliation. Test the most recent annual reconciliation for ambulance fees for the following: o Review for unusual reconciling items; o Review for documentation of preparer and reviewer of the reconciliation. Test a selection of 20 SAP entries to increase accounts receivable and 20 SAP entries to decrease accounts receivable for key receivables including due from other governments for the following: o Review the supporting documentation to determine whether the SAP entry had adequate support and appeared appropriate. Review the latest entry to write off uncollectible amounts for reasonableness and proper Board approval. Test a selection of 20 SAP entries to decrease accounts receivable and all SAP entries to increase accounts receivable for general accounts receivable for the following: o Review the supporting documentation to determine whether the SAP entry had adequate support and appeared appropriate. Review GL detail for Animal Services and test for accuracy of the reported balance in SAP. Review the internally maintained schedule of Federal Emergency Management Agency (FEMA) funds receivable for the following: o Review for reasonableness and collectability and trace to the FEMA status website. Review general compliance with statutes, policies, procedures, administrative orders and bylaws. Reporting At the conclusion of our audit, we documented our understanding of the processes surrounding accounts receivable (including due from other governments) based on our interviews at the County and summarized our findings related to accounts receivable. We conducted an exit conference with Management and have incorporated Management s responses into our report. We prepared our report and related findings and provided copies to appropriate County personnel. 10
Issues Matrix
Accounts Receivable Function Internal Audit Report Issues Matrix Rating Issues Recommendation Management Response Moderate 1 Policies and Procedures Formal written policies and procedures provide the We recommend Brevard County establish Response: County Finance will guidelines and instructions for employees to follow and implement formal written policies and develop written procedures for and ensures everyone is aware of control procedures over the process for evaluating and estimating procedures to be followed. We noted that the determining the allowance for uncollectible allowances for uncollectible County does have policies and procedures in place accounts. accounts, per the auditors over the accounts receivable reconciliation recommendation. process, where applicable. However, we noted that the County did not have formal written policies and Responsible party: procedures over the process for determining the Kathleen Prothman, Assistant allowance for uncollectible accounts. Therefore, in Finance Director the event of turnover, new employees do not have a formal set of procedures to follow as guidance. Estimated completion date: November 30, 2013 Next testing date: April 2014 11
Accounts Receivable Function Internal Audit Report Issues Matrix Rating Issues Recommendation Management Response Moderate 2 Allowance for Uncollectibles The allowance for uncollectible accounts should be We recommend the County review the Response: County Finance staff reviewed on an annual basis along with the allowance for uncollectible accounts and will review allowance for underlying assumptions that were used to calculate underlying assumptions used to calculate uncollectible accounts and it. Currently, only Fire Rescue and Solid Waste them on an annual basis. underlying assumptions and have allowances for uncollectible accounts. The allowance for ambulance fees is currently 35% of open receivables which comes from the third party estimates on an annual basis and will incorporate this process in the procedures referenced in Issue #1. billing company used by the County based on historical collections. County Finance reviews this Responsible party: percentage bi-annually to determine if this Kathleen Prothman, Assistant percentage needs adjustment. Solid Waste s Finance Director allowance has not been reviewed or revised for several years. The County should take into Estimated completion date: consideration the collectability of accounts November 30, 2013 receivable with balances outstanding for more than 1 year. Failure to estimate or review the Next testing date: allowances for uncollectible accounts on an annual April 2014 basis could lead to recording errors. 12