Internal Audit of

Maricopa Agricultural Center Revenue Accounts

March 2003

Submitted to: Eugenc G. Sander, Vice Provost and Dean,

College of Agriculture and Life Scienccs Colin Kaltenbacli, Vice Dcan and Director,

College of Agriculture and Life Scienccs Rohert L. Roth, Resident, Director, Maricopa Agricultural Ccntcr

Copies to: Audit Coninlittee. Arizona Board of Regcnts Peter W. Likens, President George H. Davis, Senior Vice President, Provost Joel D. Valdez, Senior Vice President for Business Affairs Charles E. Ingram, Assistant Vice President F inancia l Scrviccs Office

Issued by: Franccs Foy, CPA, C I ~ , CGFM. ChicTAuditor Inte~lial Audit Department

Internal Audit of Marico~a Agricultural Center Revenue Accounts

Executive Summary

I. Purpose The University of Arizona's internal auditors conducted an audit of the Maricopa Agricultural Center's ("MAC") revenue transactions for the period July 1, 2001 through December 17, 2002. The vice provost and dean of the College of Agriculture and Life Sciences requested the audit, which was conducted by Senior Auditor Leslie Clark, Jr. All eniployccs contacted coopcratcd fully with the auditor. The Executive Summary gives the audit highlights and is followed by the audit details.

11. Objectives The primary audit objectives were:

to evaluate and test the adequacy of the department's system of internal controls, to evaluate business practices and test financial transactions for the proper recording and use of funds, to test compliance with University and departmental policies and procedures, and to provide recommendations that seek to improve controls, accountability, and the efficiency of business operations, at reasonable cost.

The departmental administration is responsible for establishing and maintaining thc internal control structure. Because of inherent limitations in any internal control structure, errors or irregularities may occur and not be detected.

111. Scope The audit objectives were accomplished through:

detailed review of departmental schedules, cash (currency) log, and postings to rcvcnuc object codes in the three main FRS accounts (176000,246450 and 246960) for FY02 and FY03 through 12117102, the site visit date; review food expenses for the above accounts and period; review of applicable University policies and departmental procedures relating to revenue recordation and cash handling, e.g., Facility Use Agreements, Farm Sen~ices Agreements, dormitory receipts, and food-cost postings consistent with the audit request; review MAC employees' responses to self-assessment questionnaires, i.e., Controls Assessme~zt Tool and Departnzental Responsibility Assignnlents Review, covering thc financial aspects of MAC'S operation; discussions with MAC employces that included a two-day site visit on December 17 & 18,2002; review the results of the Financial Services Office ("FSO") examination of calendar year 2002 MAC food purchases made with the purchasing card; the 2002 approved-exccption was up for renewal, and discussions with Agriculture and Financial Services departmental employees.

Internal Audit of Maricopa Agricultural Center Revenue Accounts .. ~~ - -- - -

1V. Results In summary, thc audit identified opportunities for MAC to iniprovc busincss practices that lead to (a) incrcascd rcvenue collections, (b) the reduction of risks associated with cash handling and deposit activities, and (c) better control over food costs. Throughout the audit proccss, MAC employees were very responsive and open to process improvement, e.g., their critical review of existing business processes as they completed our Controls Assessn~ent Tool.

A. Increase Revenue Collections Controls are not adequate to ensure that all revenues earned by MAC arc identified, recorded, billed timely and collccted. The most significant rcvcnues are thc rcsult of activities covered by Fucility Use Agreements and/or Furni Services Ag~eenrents. Early tracking of these revenues and a formalized accounts receivable system does not exist to facilitate controls over revenue and its ultimate collection. Duties associated with miscellaneous revenue from non-student dormitory units rentals arc not adequately segregatcd, amounts duc arc not billed and collected timcly. and discrepancies were identified.

Recommendations 1 . Establish controls over the financial aspects of Facililv Use Agreenzents and firnl

Sewices Agreenients; bill timely, and use a database where charges, payments, terms, and balances due are tracked, by customer, and age reccivablcs to facilitate collection efforts.

2. Scgrcgate the dormitory reservation/occupancy activity from direct receipt of tenant payments and rollow existing procedures; reconcile donnitory data to deposits and FRS rcvcnue; and, routinely invoice tenants and actively collect any delinquent balanccs.

Management Response We concur. A database was initiated on March 3, 2003, to track the financial aspects, e.g., charges, payments, etc., of Facility U w Agreements and Farm Services Agreonents; any financial changes to an agreement will be noted and the initials of all parties obtained. As of February 20, 2003, duties were segregated; tenant dormitory payments are now made directly to the Business Office.

B. Cash Handling and Deposit Risks Several important provisions of the Cash ur~d Non Cask Receipts Polirv arc not followed, among them, restrictive check endorsement at time of receipt, a receipts log for checks, and timely bank dcposits. Exccptions require Bursar's Office approval.

Recommendation Dcvclop and implcmcnt cash rcceipts procedurcs with assistance From the assistant director of bursar services, to bring MAC into compliance with lhc University's Cclsh clrrtl No11 C N S ~ Receipts Policy. FRS #8.10.

Internal Audit of Maricopa -- Agricultural Center Revenue Accounts

Management Response We concur. As of January 10,2003, all checks received are immediately endorsed with a restrictive endorsement stamp and are entered into a chccks log. Effective March 5, 2003, bank deposits are made weekly, unless accumulated cash rcccivcd exceeds $500, in which case the deposit will be made by the next business day.

C. Food Costs and Billing One employee handles all duties associated with food purchases, preparation, storage and determination of amounts for billing purposes; this employee pays a kitchen fee when it is used for personal catering activities.

Recommendation Where practical, include an employee independent of the officc supervisor in the food cost and billing process to reduce the risk for any unauthorized purchases, cnsurc that all billable events are accurately billed to cover costs, where applicable, and to provide an increased lcvel of monitoring.

Management Response Wc concur. It isn't practical to include an employee independent of the officc supervisor to obscrve the food costs and billing process; however, the Business Office will monitor all expenditures and revenues by reference to the "On-Time" calendar and MAC'S mastcr calendar with billing invoices. The resident director will continue to monitor all food related expenditures and revenues on an annual basis.

, /' I:'. ($!J'- Q

'Leslie C. Clark, Jr., CPA, CGFM, Senior Auditor -

Details of the audit's results and recommendations are set forth on the following pagcs.

Internal Audit of Maricopa Agricultural Center Revenue Accounts .- -- - --

V. Background The Maricopa Agricultural Center ("MAC") is comprised of approximately 1,500 farniahle acres designated as the demonstration farm and 500 farmable acres as the research farm, located twenty miles south of Phoenix and twenty miles northwest of Casa Grande, Arizona. The Center is an integral and essential part of the research, extension and teaching resources of the College of Agriculture at the University of Arizona in Tucson. (Per website http://ag.arizona.edu/aeslmae/indcx.htm)

Revenues recorded in the three main accounts (FRS 176000,246450 and 246960) consist of the following.

Farm Sales ' Farm Services

2. Includes land use income, office space rental, testing fees, cultural activities

$7,936

(bringing the seed or seedling through to harvest), and food receipts, etc 3. Includes income from dormitory units, insurance recovery, etc.

$676,347 $384,397

$1 7,695

VI. Billing and Collection Efforts We reviewed the control systems over farm service revenue and dormitory revenue that totaled $749K and $12K, respectively, for the 17 months ended November 30,2002.

$1 17,662 364,249

Good Blr.sine.s.s Procticcx: Rillfir all goo(1.s and services renclered to nl~thorizeti c1rstonzer.s in (1 tirrle!~~ rt~crtlner. Recor(l all hillirtgs mccurute!y and cornpletely. Plrrstre collectio~t of accotints receivnhle in accorrlance with estahlishedpolicies. Provide irzfi)rrrtntion ~litlt respect to amounts hilled to crzrlhorized intli1~idunl.s to permit collectiort nrrd 1 0 encthle rnurtngernerit to g(~uge the effecth~eriess of its cre(1it policies. Safhgunrd collection.s,frorn loss clue to,fraud or other irregular acts by emnplo~~ees and other.^. Dh,itle re.sponsihi1itie.s so tlrat no one person has coiitrol over nll ph(rses of cr trtrnsnction. (FRS Drpurtmerrtol Manlral. Policy #19.01)

$1,068,680

A. Facilities Use Agreements and Farm Service Agreements Procedures

Individuals or companies that utilize MAC land or office space for rescareh co~iiplete a FocilitJ, Use Agreement ("FUA") and provide a certificate of insurance. The FUA specifies the chemicals contemplated for use, MAC services and the cost. When land use is involved. the FUA acts as a "reservation" and a separate Frrrnt Services Agreement ("FSA") is prepared that tracks the actual acreage used.

$499,606

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I. Includes $54.791 in FY02 and $7,273 in FY03 from the experimental rarni acrcage.

Internal Audit of Maricopa Agricultural Center Revenue Accounts ---

The farm superintendent maintains a computerized Furn~ Works Progrcr~n that tracks actual costs in support of FSA charges. Numerous changes are made to land use and service agreemcnts as a rcsult of renegotiation and changing conditions over the life of the agreement, which might extend one or more years. Not all changes of a financial nature are annotated on copies of the agreement. MAC officials, e.g., the director, farm supervisor, and farm manager, maintain these agreements without business manager involvement, except to prcparc an invoice when instructed by the director.

Results We found the system of internal controls for farm services revenues are not adequate to ensure that all revenue earned by MAC is identified, rccorded, hilled tinicly, and collected. a. A controlled system has not been implemented to record FUA and FSA financial

details, including modifications that can be used to forecast revenues. b. FSA agreements did not always have dollar amounts entered in money spaces.

Although not annotated on the face of the agreement and initialed, we were informcd these situations arise when researchers verbally commit to use "best-efforts" locating funding for MAC'S normal charges.

c. Customers' invoices are not prepared timely, in accordance with agreemcnt ternis, and there is no accounts receivable system into which invoices are recorded and aged.

d. The Business Office becomcs involved when instructed to prepare an invoice, and not prior.

Recommendation Establish controls over Facility Use Agreements and Farm Services Agreen~ents by utilizing a database, similar to the dormitory customers' database, where charges, payments, terms, and balances due are tracked, by customer, and age receivables to facilitate collection efforts.

Management Response We concur and initiated a database on March 3, 2003 where Facility Use Agreements and Farm Services Agrecrnents are assigned individual control numbers and the revenue information needed to follow charges, payments, billing dates and balanccs due are entcrcd. Administrative and business personnel review all agreements to ensure that all financial information is included. Thc review procedure was initiated on Septembcr 9, 2002 for the Farm Services Agreements and on March 10, 2003 for the Facility Use Agreements. Effective March 10, 2003 any changes to these agreements during the agreement period are noted and initialed by all parties at that timc.

Internal Audit of Maricopa Agricultural Center Revenue Accounts --

B. Non-Student Dormitory Revenue I . Billing Procedures

MAC has a one-story building with ten efficiency housing units that may be rented for $10 per night (single occupancy) by researchers, research lab assistants. etc. Revenues totaled $12K for the 17 months ended November 30,2002.

A system to track reservations and to notify the Business Officc of actual occupancy exists. The Business Office takes no active part in either the billing or the collection of dormitory charges. It does maintain a database from which a Dorni Reivnue Detail Report is produced for management reporting purposes. The office supervisor provides all the information to update the Business Office's database, including a weekly Dorm Usage Trucking Form and copies of cash receipt slips provided to thc tenant, on which the specific dates rclated to the payment are to be annotated.

Results We found the system of internal controls for dormitory revenue is not adequate to ensurc that actual dormitory unit stays are known, all charges are billed, and tenants' payments are delivered timely to the Business Office for deposit. a. There is no segregation of duties over dormitory rental and collection activities to

dccrease the risk of errors or irregularities. A single employee, the office supervisor, controls all aspects of the system, such as, reservations, daily occupancy confim~ation, interdepartmental billing preparation, and collection of tenants' payments, which are oRcn in cash.

b. The weekly Dorm Usage Tracking Form is not submitted to the Business Office on a weekly basis so that dormitory charges can be entered into the database, comparcd to payments, and any discrepancies can be resolved timely. The tracking forms Tor the five months 711102 through 12/1/02 were held and submitted to thc Business Office on 11126102; occupancy dates for the end ofNovember were estimated. Also, scveral forms included the reservation (plan) dates rather than the actual dates of occupancy, which did not always agree to the number of days for which the tenant paid.

c. There is minimal communication bctwecn the of ice supervisor and the business manager to resolve apparent transaction posting differences.

d. Tcnants with outstanding balanccs are not periodically billed; several tenants have vacated without paying.

e. The Business Office printed a Dorm Revenue Detail Report as of December 17, 2002 for our examination that showed 22 current or former tenants owcd a total of $4,410. Details of the $2,090 in discrepancies we found are displayed in the following table.

Internal Audit of Marico~a Agricultural Center Revenue Accounts

There is a $220 discrepancy between the $5,570 shown on the report as dormitory revenue between 7/1/02 and 12/17/02 and the $5,350 that was deposited in FRS for the same period. The understatement does not

No interdepartmental billing (IDB) form had been prepared to charge a

No research had been done regarding charges for three Campus

A tenant's $650 payment was recorded on four cash receipts; however, the database showed only $610 was posted to his account. Three cash

There were 18 instances where a difference existed between the dates of stay recorded on the Dorrn Usage Trnck~ng Forms (which could include estimated rather than actual dates) and dates entered on the tenant's

2. Delivery of Dormitory Payments to the Business Office Policy: Upon receipt offimds ... Proce.~s tile rnortirs DAILY. (FRS #8.10)

Cash payments are not delivered to the Business Office daily for the funds to be secured in the safe and deposited. Throughout calendar year 2002, the office supervisor held hundreds of dollars of cash ($4,672.50 in total) in a locked file cabinet for eight days to more than two months. This practice unnecessarily increased the risks associated with robbery and misuse of funds and denied MAC the use of the fi~nds being held.

Internal ---Pa- Audit of Maricopa Agricultural Center Revenue Accounts - -- ----

Cash (currency) deposits in calendar year 2002 that contained a portion that was rctained by the employee for longer than a week are displayed in the following table'.

Business Office Cash was Retained by the Office Supervisor Cash Receipts Log

Recommendations 1. To providc bettcr control over dormitory revenue, segregate the rcscrvation/dorniitory

occupancy activity handled by the office supervisor from the direct receipt of tenant payments, a Business Office function.

2. Implement procedures and retrain employees to utilize the dormitory rcvenue system as it was intended to be used, that is, track reservations, determine actual occupancy and report it wecklv to the Business Office via the Dorm Usage Tracking Fornu; routinely invoice tenants and actively collect any delinquent balances.

Management Response We concur and have initiated the following changes. Starting February 20, 2003, dormitory reservation and occupancy information is monitored and entered into the database by the officc specialist. Effective Fcbruary 20, 2003 dormitory revenues arc bcing paid directly to the business office. Cash received is logged into the business office cash log and all checks reccived are logged into the checks log by the office specialist. The business officc has been assigned responsibility to collect all unpaid bills.

' The numher of days is the difference between the date on the department's copy of the payee's receipt and the date thc office supervisor transferred custody of the cash to the Business Office, as noted on the Cash Rrcc.ipt.s Log.

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Internal Audit of Maricopa Agricultural Center Revenue Accounts - - I VII. Business Office Cash Receipts

Between January 1,2002 and our December 18,2002 site visit, the Business Office made 17 deposits, totaling $791K. Cash controls were reviewed to assess risks and to test compliance with the University's Crrsh and Non Cash Receipts Policy.

Policy: Upon receipt of fund.7 ... endor.se checks with a restrictive endursetrzent, log receipts. Receipt qf tnonies slrot~ld he divided hetweeri two individz~u1.s. One person opens the iiicril nnd records the receipts iri a log. The otlzer person prepares u Distrihutiorl of Deposit For111 (11DDF1). Coi~iplet~d cask receipts and the log should he cornpared with /he deposit recorc1.s to verxv the deposit q fa l l rrtoriie,~ received ... Process the inonies DAILY (FRS #a. 10) Auditor's Note: Policy exceptions are to be approved by the Bursar's Office.

Procedures Several MAC employees receive cash and check payments from customers, provide the payee with a receipt, and hand deliver payments to the Business Office for processing and deposit. Checks are also received via U.S. Mail. The Business Office maintains a C(tsk Receipts Log where the receipt of cash (currency only) is logged. Both the employee and a Business Office employee sign the log to document thc transfer of cash to the Business Office; checks are not logged. The Business Office secures funds awaiting deposit in a lockbox inside a safe. Deposits are usually made once or twice per month, but may be less frequent. Thc bank is located 19 miles away.

Results We found that several important provisions of the Caslr unrl No11 Gush Receipts Policy are not followed. a. Deposits are not made timely to reduce the risk of loss, e.g., theft, dishonored check.

* 15 deposits ranging from $28,000 to $92,000 were made two to four weeks apart. 2 deposits ($59,279.78 and $56,539.47) represented six weeks worth of receipts.

The assistant director of bursar services advised the auditor that due to MAC'S rural location, it could be granted an exception to make weekly bank deposits. However, if more than $500 in cash is received, the funds are to be deposited by the next day.

b. Checks are not restrictively endorsed upon receipt, e.g. by the receptionist who opcns the mail, to limit their negotiability; rather, they are endorsed when the Business Office prepares the deposit.

c. Neither the Business Office, nor other areas that receive payments, record incoming checks in a log for use in tracking payments and in determining whether all checks receivcd were, in fact, deposited and recorded in FRS.

Recommendations 1. Develop and implement cash receipts procedures that bring MAC into compliance with

the University's Cash and Not1 Clrslsk Receipts Policv, FRS ft8.10, including the restrictive endorsement and logging of checks upon receipt and timely bank deposits.

2. Consult with the assistant director of bursar services for assistance in developing procedures and for cash policy exceptions.

Internal Audit of .Maricopa Agricultural Center Revenue Accounts -. - . . - - - - - - - - - -. - . - - - . -. . - - - -. . - - -

Management Response We concur and have made the following changes. Starting January 10, 2003 all chccks received are immediately endorsed with the restrictive stamp provided by the bursar's office and recorded in a checks log by the office specialist. The office specialist rcvicws the sales rcport, which has been balanced to the deposit, to verify that all chccks havc bccn included from the checks log.

Effcctivc March 5, 2003, weekly bank deposits are made unless the accumulated cash received exceeds 5500 and then a deposit will be made by the next business day. The cash log. initiatcd on June 10, 1999, contains the signatures of thc giver and the reccivcr of any cash. The person making the bank deposit signs the cash log and vcrifies the amount of cash rcccived bcforc making the bank deposit.

VIII. Food Costs, Billing, and Permit MAC purchases, prcpares and serves food in conjunction with numerous meetings. For those meetings not hosted by MAC, it bills outside organizations to recover the food costs. Examplcs of meetings include commodity groups and October's Cotton Field Day, which is co-hosted by MAC and the Arizona Cotton Growers Association. Consistent with the scope of the audit, we reviewed practices regarding food purchases and any related billings. During our Deccmbcr 2002 site visit, we noted thcrc was no food service pcrmit displayed in thc kitchen where food was being prepared for a meeting.

Procedures Visiting groups may arrange through the office supervisor to have meals scrvcd at a negotiated price. The office supervisor handles all aspects, including food purchases, preparation and scrvicc as well as the charges to be billed, and lives on the property with 24-hours access to the facility.2 This individual pays a $25 kitchen fee when used for personal catering activities. If an anlount is to be billed, the office supervisor provides details to the business manager, via c-mail, and an invoice is prepared. Four MAC employees, including the office supervisor, were granted an FSO exception to allow food purchases with their respective University purchasing card. These transactions began in February 2002. The internal accounting sub-system tracks food transactions and annually the director is provided with a rcport of results for review.

One exception noted: food for participants in the AG-Ventures program, e.g., school outreach and seniors programs, is separately purchased and assembled by the agent. 4-H youth development, who also collects fees.

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Internal Audit of Maricopa - Agricultural Center Revenue Accounts

A. Food Costs and Billing Goorl Bzrsiness Pructice.~: Cosfs, e.g., food costs, ure confrolled crrtd morriloretl .for. reusonahlene.ss in type und amount; i f upplicuhle, periodic invenfoty procehrre.~ "re ett~ploj~cci to cletect r~~icrrrthorized trse ofjitrrcho.ses.

We found the system of internal controls for food costs and billings is not adequate to ensure that costs are adequately controlled and are recovered, when appropriate. a. There is no segregation of duties over food purchases and billings to decrease thc risk

of errors, irregularities or unauthorized purchases. A single eniployec, the office supervisor, handles all aspects of food purchases, preparation, storage and determination of amounts for billing purposes.

b. Costs are monitored only at the summary level, annually, by comparison with previous year's results. This does not provide adequate oversight for these costs.

We did, however, find generally good results in our examination of support on filc in thc Business Office for food purchases3. We also noted that FSO's January 2003 review of $5,386 calendar year 2002 MAC purchasing card food transactions (46 transactions) identified several deficiencies, which were reported to MAC. FSO has rencwcd for calendar year 2003 the purchasing card food exception, vested in five MAC employees.

Recommendation Where practical, include an employee independent of the office supervisor in the food cost and billing process to reduce the risk for any unauthorized purchases, ensure that all billable events are accurately billed to cover costs, where applicable, and to provide an increased level of monitoring.

Management Response We concur and only provide food services as a convenience because of the Center's reniotc location in relation to commercial food services. Most groups using these services meet fewer than four times annually. Under our current food service perniit, all food scrvcd at the Maricopa Agicultural Center is prepared at a licensed facility and MAC employecs pick up and servc the food. It isn't practical to include an employee independent of the office supervisor to observe the food costs and billing process since everyone reports to thc oflicc supervisor, except the two business office employees.

All meetings that include morning or afternoon breaks and/or lunches are listed on the "On- Time" calendar and on the Center's master activity calendar. The business office has access to both of these calendars and prcpares the invoices. The business office is responsible for the collecting and depositing all charges related to meeting expenditures. The business office will monitor all expenditures and revenues related to each meeting involving food. The resident director will continue to monitor all food related expenditures and revenues on an annual basis.

'~usiness Oflice employees' notations showed a diligent effort was required to obtain the support, e.g., dctailcd registcr tapes, agendas and participant sign-in sheets.

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B. Food Service Permit Good Business Practice.s: Operations, e .g, food service, are cori~luctcd in acrorti~~nce i ~ i t h applicahlc laws and regulations.

We noted that the MAC kitchen does not have a food service permit that is requircd for food preparation.4 The Pinal County supervising sanitarian informed the auditor by telephone intervicw on January 8,2003, that MAC employees had asserted just bcforc thc summer 2002, the kitchen would cease food-preparation and serve only preparcd food. This action would avoid the requirement for a food service perniit. On January 7, 2003, the supervising sanitarian met with MAC officials, who agreed to prepare the requisite application for a food service permit and to comply with its provisions.

Recommendation Obtain the required food service permit and comply with its provisions

Management Responses We concur. A Food Service Permit (number 54 with an excellent rating) was issued on January 10, 2003 by Pinal County Health Department to the Maricopa Agricultural Ccnter that allows for a scrving kitchen only and not food preparation. If fi~nding becomes available, the Maricopa Agricultural Center intends to make the required corrections to earn a permit that would allow the preparing of food on site.

' Our site visit coincided with an employee holiday potluck event in which the kitchen was in full use: we were informed the kitchen is used frequently to provide food for events that meet at MAC facilities.

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