Audit Division

Audit Summary

 

Internal Controls in State Government

LA02-14

 

Results in Brief

 

            The Legislature has demonstrated its commitment to effective internal controls by passing laws to strengthen controls at state agencies.  In addition, the Legislature created the Office of Financial Management, Training and Controls (FMTC) to provide training and technical assistance to agencies regarding their systems of internal control.  Despite these efforts, managementís commitment to internal controls in state government is lacking.  Agency managers have not always established strong internal control systems and have not always implemented recommendations designed to improve controls.  As shown in recent legislative audits, the failure to establish sound controls has a significant cost to the State.  On the other hand, when weaknesses identified in audits have been addressed, the State has seen significant improvements and millions of dollars in cost savings.

            Over the past 5 years, employees throughout state government have attended training sessions provided by FMTC.  This training has resulted in improved written policies and procedures related to general control requirements applicable to state agencies.  However, as agencies fulfill the requirements for written policies and procedures, FMTC can expand the other types of assistance it provides to agencies.  This assistance can include working more extensively with agencies to strengthen controls over high-risk processes, which have not been addressed through the general training provided.

           Internal control standards applicable to state agencies have recently been updated by the Department of Administration.  These standards emphasize the importance of internal controls to managers in running their agencies.  However, the guidance provided to assist agencies in meeting the standards also needs updating.  Consequently, the existing guidance does not address all elements of a strong system.

 

Principal Findings

 

            Some agencies have been aware of internal control weaknesses for years but have not taken action to correct the problems.  Several recent legislative audit reports included findings and recommendations that had been included in previous audits of the agencies.  For example, although a 1993 audit had recommended the Division of Child and Family Services establish a written system of internal control, the recommendation was not implemented at the time a subsequent audit was conducted in 1999.  In addition, a 2000 audit found the Real Estate Division had not adequately strengthened internal controls over cash as recommended in a 1994 auditdespite the identification of an embezzlement in a previous audit.  (page 11)

            Agencies have not always implemented recommendations made by FMTC to strengthen internal controls.  FMTC makes recommendations based on training sessions, and reviews and evaluations of agency policies and procedures.  However, FMTC records indicate that as of June 2000, 37% of agencies receiving training and assistance had not adequately implemented recommendations.  (page 12)

            Although statutes require agency heads to periodically review their internal controls, the reviews are not always performed.  As of July 1, 2000, only 67% of state agencies reported conducting a review of their control systems.  Although this is an improvement over the 54% reported in 1998, it still means that 47 agencies did not comply with the law.  (page 13)

            A reason weaknesses continue to occur is that many agency employees do not have a sufficient level of knowledge to design and implement internal control systems.  In the past, state financial management positions have not always been filled with qualified personnel.  A 1996 audit of the Department of Personnel found that in most cases work experience could be substituted for a college degree, and formal examinations were often waived when there were few qualified applicants.  The audit noted that half of the stateís accounting personnel who were in positions requiring a college degree or college credits did not meet the current minimum qualifications for their positions.  (page 14)

            Effective internal controls can save the State millions of dollars.  Agencies implementing audit recommendations to strengthen internal controls have achieved significant savings for the State.  For example, by revising its policy for delinquent account collection, we estimate the Division of Parole and Probation increased its collection of offender supervision fees by $800,000 in fiscal year 2000.  In addition, based on audit recommendations the Department of Prisons strengthened controls over utilization of outside medical care.  We estimate the improved controls saved the State approximately $3 million during fiscal years 1999 and 2000.  (page 15)

            During fiscal years 1996 through 2000, over 1,400 state employees participated in FMTC internal control training.  The training sessions focused on financial and administrative requirements applicable to state agencies.  Although agencies have developed written policies and procedures as a result of the training, some agencies have fallen short in the development of adequate controls in specific areas.  These weaknesses often occur in areas related to unique aspects of an agencyís function.  For example, the Nevada Equal Rights Commission had not implemented sufficient controls to manage its investigations.  On average, it took 371 days to investigate a discrimination charge for cases closed in fiscal year 2000.  Therefore, agencies would benefit by having FMTC provide more extensive assistance in establishing controls over specific, high-risk processes.  (page 17)

            In May 2001, the Board of Examiners approved changes to the State Administrative Manual updating the definitions and standards of internal control.  As a result of the control standards being updated, the guidance provided to assist agencies in meeting the standards also needs updating.  (page 19)

 

 


Internal Controls in State Government

 

Agency Response

to Audit Recommendations

 

Recommendation

Number

 

Accepted

 

Rejected

 

 

 

 

 

1

Re-emphasize to agency heads the importance of establishing strong internal controls

X

 

 

 

 

 

 

 

2

Work with agency heads to help ensure the internal control requirements of the State Administrative Manual are adhered to

X

 

 

 

 

 

 

 

3

Focus more attention on providing assistance to agencies in high-risk areas that significantly impact operations

 

 

X

 

 

 

 

 

4

Update internal control guidance to incorporate the current internal control standards contained in the State Administrative Manual

X

 

 

 

 

 

 

 

 

      TOTALS

3

 

1

 


Internal Controls in State Government

 

Auditorís Comments on Departmentís Response

 

            The Department of Administration, in its response, does not agree with certain of our findings, conclusions, and recommendations.  The following identifies the section of the report where the Department has taken exception to our position.  We have provided our comments on the issues raised in the Departmentís response to assure the reader that we believe our findings, conclusions, and recommendations as stated in the report, are appropriate.

 

            The Department rejected our recommendation that it focus more attention on providing assistance to agencies in high-risk areas that significantly impact operations.  The Department indicates that the Audit Section of the Division of Internal Audits is already providing this type of assistance and that to have the Financial Management, Training and Controls Section also do this would be a duplication of effort.  In addition, the Department believes that a shift in focus from working with agencies in all areas of accounting and administrative controls to only agency specific areas, may result in a reduction in the level of agency implementations thereby posing a greater risk.  The Department also indicates that the turnover rate of state employees continues to diminish the effects of training.  (See page 26)

 

Legislative Auditorís Comments

 

            As stated on page 8, the Legislature created the Office of Financial Management, Training and Controls (FMTC) to help agency administrators develop systems of control to comply with the stateís control standards.  This was to be carried out through training, reviews and evaluations of internal control systems, and technical assistance in the development of systems.  As discussed on page 18, FMTC has the expertise to work directly with agency managers to provide extensive assistance in developing and documenting controls in specific areas.  Therefore, we believe FMTC is in a position to provide the necessary technical assistance to help agencies implement controls.  This would not be a duplication of effort, but would more fully accomplish the Legislatureís purpose for creating FMTC.

 

            Contrary to the Departmentís response, we did not recommend a shift to only agency specific areas; instead, our recommendation was to focus more attention on such areas.  We believe that a greater level of concern exists when agencies lack strong controls over high-risk areas.  As discussed on page 17, weaknesses of this nature are well documented in recent legislative audit reports.  Finally, we recognize the potential negative effects of turnover.  However, once sound internal control systems are established, the need for continued training on developing such systems is reduced.