new york state comptroller audit of the town of neversink

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DIVISION OF LOCAL GOVERNMENT

& SCHOOL A CCOUNTABILITY

O F F I C E O F T H E N E W Y O R K S T A T E C O M P T R O L L E R

Report of Examination

Period Covered:

January 1, 2008 — December 1, 2009

2010M-24

Town of Neversink

Internal Controls Over Payrolland Justice Court Operations

Thomas P. DiNapoli



11DIVISION OF LOCAL GOVERNMENT AND SCHOOLACCOUNTABILITY

Page

AUTHORITY LETTER 2

EXECUTIVE SUMMARY 3

INTRODUCTION 5

Background 5

Objective 5

Scope and Methodology 5 Comments of Local Of ficials and Corrective Action 6

PAYROLL 7

Segregation of Duties 7

Personnel Policies 8

Recommendations 9

JUSTICE COURT 10

Accountability 10 Annual Audit 11

Recommendations 11

APPENDIX A Response From Local Of ficials 13

APPENDIX B Audit Methodology and Standards 15

APPENDIX C How to Obtain Additional Copies of the Report 17

APPENDIX D Local Regional Of fice Listing 18

Table of Contents



2 OFFICE OF THE NEW YORK STATE COMPTROLLER2

State of New York

Of fice of the State Comptroller

Division of Local Government

and School Accountability

April 2010

Dear Town Of ficials:

A top priority of the Of fice of the State Comptroller is to help local government of ficials manage

government resources ef ficiently and effectively and, by so doing, provide accountability for tax

dollars spent to support government operations. The Comptroller oversees the fiscal affairs of local

governments statewide, as well as compliance with relevant statutes and observance of good business

practices. Thisfiscal oversight is accomplished, in part, through our audits, which identify opportunities

for improving operations and Town governance. Audits also can identify strategies to reduce costs and

to strengthen controls intended to safeguard local government assets.

Following is a report of our audit of the Town of Neversink, entitled Internal Controls Over Payroll

and Justice Court Operations. This audit was conducted pursuant to Article V, Section 1 of the State

Constitution and the State Comptroller’s authority as set forth in Article 3 of the General Municipal

Law.

This audit’s results and recommendations are resources for local government of ficials to use in

effectively managing operations and in meeting the expectations of their constituents. If you have

questions about this report, please feel free to contact the local regional of fice for your county, as listed

at the end of this report.

Respectfully submitted,


Division of Local Government

and School Accountability




Of fice of the State ComptrollerState of New York

EXECUTIVE SUMMARY

The Town of Neversink (Town) is located in Sullivan County and is governed by an elected Town

Board (Board), which consists of the Town Supervisor (Supervisor) and four Board members. The

Board is responsible for the general management and control of Town operations. The Supervisor

is the Town’s chief executive of ficer and chief fiscal of ficer and is responsible for the Town’s daily

operations, including maintaining accounting records and preparing and distributing various financial

reports to the Board. The Town employs a bookkeeper who is responsible for processing the Town’s

computerized payroll.

The Town Justice Court (Court) operates with two Town Justices (Justices) and one part-time Court

clerk. The Justices’ principal duties involve adjudicating legal matters within the Court’s jurisdiction

and administering moneys collected from bails, fines, surcharges, civil fees and restitutions, with

assistance of the Court clerk. The Board is charged with overseeing the Court’s financial activity.

Scope and Objective

The objective of this audit was to determine if Town of ficials properly managed Town operations for

the period January 1, 2008 to December 1, 2009. Our audit addressed the following related questions:

• Did Town of ficials ensure that internal controls over payroll were adequately designed?

• Did the Board and Justices provide adequate oversight of the Court’s financial activity?

Audit Results

Town of ficials did not ensure that internal controls over payroll were adequately designed. During our

audit period, the bookkeeper was responsible for all aspects of the payroll process with no oversight.

The Supervisor did not review the completed payrolls or certify that they were accurate. There was

only one collective bargaining agreement in the Town, which covered highway employees. There werelimited guidelines regarding the benefits of employees not covered by this agreement. In addition,

these non-highway employees were responsible for tracking their own leave time. As a result, there

was an increased risk that employees could receive wages, salaries and benefits to which they are not

entitled.

The Board and Justices did not provide adequate oversight of the Court’s financial activity. For

instance, the Justices did not ensure that the Court clerk prepared monthly bank reconciliations and

accountability analyses. In addition, the Board did not provide for an annual audit of the Court. As a




result, the Court had $2,964 in unidentified funds that went unnoticed until our audit, and of ficials have

since turned this money over to the Of fice of the State Comptroller (OSC).

Comments of Local Of ficials

The results of our audit and recommendations have been discussed with Town of ficials and their

comments, which appear in Appendix A, have been considered in preparing this report. Town of ficials

generally agreed with the findings and recommendations in our report and indicated they have initiated

corrective action.




Background

Introduction

The Town of Neversink (Town) is located in Sullivan County and

has a population of 3,561.1 The Town’s 2009 total appropriations

for all budgeted funds totaled approximately $3.9 million. The

Town provides various services to its residents, including generalgovernment support, street maintenance and improvements, snow

removal and code enforcement. Town operations are financed

primarily by real property taxes and State aid.

An elected five member Town Board (Board) is the legislative

body responsible for the general management and control of Town

operations. The Board consists of the Town Supervisor (Supervisor)

and four Board members. The Supervisor is the Town’s chief

executive of ficer and chief fiscal of ficer and is responsible for the

Town’s daily operations, including maintaining accounting recordsand preparing and distributing various financial reports to the Board.

The Town employs a bookkeeper who is responsible for processing

the Town’s computerized payroll.

The Town Justice Court (Court) operates with two Town Justices

(Justices) and one part-time Court clerk. The Justices’ principal

duties involve adjudicating legal matters within the Court’s

jurisdiction and administering moneys collected from bails,

fines, surcharges, civil fees and restitutions, with the Court clerk’s

assistance. The Board is charged with overseeing the Court’s financial

activity.

The objective of this audit was to determine if Town of ficials properly

managed Town operations. Our audit addressed the following related

questions:

• Did Town of ficials ensure that internal controls over payroll

were adequately designed?

• Did the Board and Justices provide adequate oversight of the

Court’s financial activity?

We examined financial records and internal control practices for the

payroll and Court operations of the Town for the period January 1,

2008 to December 1, 2009.

We conducted our audit in accordance with generally accepted

government auditing standards (GAGAS). More information on

Objective

Scope and

Methodology

1 2007 estimate, U.S. Census Bureau




Comments of

Local Of ficials and

Corrective Action

such standards and the methodology used in performing this audit is

included in Appendix B of this report.

The results of our audit and recommendations have been discussed

with Town of ficials and their comments, which appear in Appendix

A, have been considered in preparing this report. Town of ficials

generally agreed with the findings and recommendations in our report

and indicated they have initiated corrective action.

The Board has the responsibility to initiate corrective action. A

written corrective action plan (CAP) that addresses the findings and

recommendations in this report should be prepared and forwarded

to our of fice within 90 days, pursuant to Section 35 of the General

Municipal Law. For more information on preparing and filing your

CAP, please refer to our brochure, Responding to an OSC Audit

Report , which you received with the draft audit report. We encourage

the Board to make this plan available for public review in the Clerk’s

of fice.




Payroll

The primary objective of internal controls over payroll is to ensure

that employees are only paid wages and salaries, and provided fringe

benefits, to which they are entitled. The Board is responsible for

approving written policies and procedures to delineate employeeresponsibilities for preparing and disbursing payroll checks, reviewing

and certifying payrolls, and providing guidance for employee

entitlements, including the accrual and use of leave time.

Town of ficials did not ensure that internal controls over payroll

were adequately designed. For the fiscal year ended December 31,

2009, the Town spent approximately $1.4 million on salaries. The

Town’s bookkeeper was responsible for all aspects of the payroll

process during our audit period with no oversight, and the Supervisor

did not review the completed payrolls or certify that they wereaccurate. Town of ficials entered into a six-year collective bargaining

agreement (agreement) with its highway employees on January 1,

2007. However, Town of ficials provided limited guidance regarding

the fringe benefits to be provided to Town employees who were not

covered by this agreement. In addition, employees not covered by the

collective bargaining agreement were responsible for tracking their

own leave time. As a result, there was an increased risk that these

employees could receive wages, salaries and fringe benefits to which

they were not entitled.

The Board is responsible for establishing policies and proceduresover the payroll process, and the Supervisor is responsible for

ensuring the proper implementation of these established controls.These policies and procedures should ensure that no one individualcontrols most or all phases of a transaction. In addition, each user’saccess rights to the payroll software must be restricted based on hisor her job function to prevent unauthorized changes from occurring.For example, the same person should not be capable of, or beresponsible for, creating, updating and deleting employee records;activating new employees after their information is initially entered;inputting all payroll changes; collecting timesheets; entering hours

worked or salaries paid, and printing and distributing paychecks. If itis not feasible to segregate duties, the Supervisor should implement

compensating controls, such as having someone independent of the

payroll process review completed payrolls. Further, the Supervisor

is required to certify completed payrolls. This certification should

include verifying that payrolls are based on actual hours/days

worked or authorized leave time, employees are paid in accordance

with Board-authorized rates, and net payrolls agree with the payroll

journals.

Segregation of Duties




The Board did not establish policies and procedures to ensure that

internal controls over the payroll process were appropriately

designed. We found that the bookkeeper was responsible for virtually

all aspects of the payroll process, such as creating, updating and

deleting employee records; activating new employees after their

information is initially entered; inputting all payroll changes;

collecting timesheets; entering hours worked or salaries paid;

and printing and distributing payroll checks. Furthermore, Town

of ficials did not restrict users’ access rights to only those areas of the

payroll software needed to complete their job duties. For example,

the Supervisor’s assistant had access to all areas of the payroll

process, including the ability to make changes to salary rates and

add employees, even though it was not her responsibility to do so.

In addition, the Supervisor did not implement compensating controls

to minimize the risk associated with the lack of segregation of duties

and did not certify completed payrolls.

The Supervisor told us that the bookkeeper had always performedall phases of the payroll process without oversight, and that he was

unaware that completed payrolls required certification. Prior to our

audit, Town of ficials were unaware that the payroll software was

capable of limiting user access rights; as a result, the Supervisor’s

assistant was granted full user access rights to the payroll software in

order to prepare payrolls in the bookkeeper’s absence.

Due to the lack of segregation of duties, we reviewed payroll

reports and personnel files2 and the payroll records of 27 employees

to determine if wages paid in 2008 and 2009 were in accordance

with Board-authorized rates. Our review did not identify anysignificant deficiencies; however, there is an increased risk that

errors or irregularities could occur and go undetected without proper

segregation of duties.

The Board must clearly define and authorize compensation toensure that employees receive only the salary and fringe benefitsthat the Board intends for them to receive. The Board may establishpolicies or pass annual resolutions for employees that are not coveredby individual employment contracts or collective bargainingagreements. Specifics regarding fringe benefits, such as a detailedleave accrual system,3 should be included in these policies. A goodleave accrual system must have supervisory oversight to ensurethat the accrual and use of leave is authorized and approved. Anemployee’s leave time accumulation and use should be stipulated byhis or her employment contract, collective bargaining agreement, orpolicy.

Personnel Policies

2 We compared the names and Social Security numbers of all active employees

from the Town’s payroll software to the Federal Social Security database.3 Leave accruals represent time-off earned by employees.




The Board did not clearly define and authorize compensation for all

Town employees. Only the highway employees have a collective

bargaining agreement. This agreement did not include any other

Town employees, such as elected, appointed and civil service

positions. In addition, the Board did not establish any policies to

address employees’ fringe benefits for those employees not covered

by the collective bargaining agreement, such as the accumulation and

use of leave time. Instead, Town of ficials used various parts of the

highway employees’ collective bargaining4 agreement as guidance

for all employees’ fringe benefits. In addition, employees not covered

by the collective bargaining agreement were responsible for tracking

their own leave time accruals and usage and were able to use leave

without prior supervisory approval.

The Supervisor told us that the Town has not had any problems with

employees’ fringe benefits and has not needed any other employment

contracts, collective bargaining agreements, or policies in the past.

The Supervisor also said that leave time had always been on thehonor system, and that he trusted his employees. In addition, he stated

that most Town employees have been employed for a long period of

time and know what benefits they are eligible for. Town of ficials were

working on an employee handbook to address some limited payroll

and personnel issues while we were on site.

Due to this lack of Board-provided guidance, we reviewed eight

employees’ (three highway and five non-highway employees) leave

time records for four pay periods (three in 2008 and one in 2009) to

determine if leave time earned was in accordance with the highway

employees’ agreement and whether all leave used was deducted fromthe employees’ leave time records. We found minimal deficiencies

that we communicated to local of ficials.

1. The Board should adopt payroll policies and procedures to

address segregation of incompatible duties in the payroll process.

2. The Board should adopt policies, resolutions, employment

contracts or collective bargaining agreements for all Town

employees that, at a minimum, address employees’ fringe benefits

such as leave time accrual and usage.

3. The Board should establish policies to ensure that each employee’s

leave time record is authorized and approved by Town of ficials to

ensure time earned is allowed and that all leave taken is deducted

from the leave time record.

Recommendations

4 Highway employees are entitled to five days of personal leave and 12 days of sick

leave per year. In addition, they are entitled to between six and 31 days of vacation

leave depending on how many years they have worked at the Town.




Justice Court

A well-designed system of internal controls is necessary to ensure

that Court activity is properly recorded and reported. Justices are

responsible for adjudicating cases brought before their Court

as well as accounting for and reporting all Court-related financialactivities. To meet that responsibility, they must maintain complete

and accurate accounting records and safeguard all money collected.

Justices are responsible for the timely depositing of all money

collected and reconciling Court collections to the corresponding

liabilities (accountability analysis). Routine bank reconciliations

comparing adjusted bank balances to accounting records enable

Court personnel to verify the accuracy of financial records and

establish control over cash. Furthermore, it is the responsibility of the

Justices to oversee the duties of the Court clerk and see that internal

controls are in place and working effectively, particularly when thereis limited segregation of duties. Court personnel should prepare an

accountability analysis and share this information with the Justices.

The Board has certain powers and duties with respect to overseeing

the financial affairs of the Court. These powers and duties include

performing, or hiring an independent auditor to perform, the audit of

the records and dockets of each Town Justice at least annually.

The Board and Justices did not provide adequate oversight of the

Court’s financial activity. For instance, the Justices did not ensure

that the Court clerk prepared monthly bank reconciliations or

accountability analyses, or retained the detailed listing of liabilities.In addition, the Board does not provide for an annual audit of the

Court. The Town had $2,964 in unidentified funds that were turned

over to OSC as a result of our audit. The lack of monthly bank

reconciliations and accountability analyses together with the lack of

an annual audit are contributing causes for the unidentified moneys

that went unnoticed until our audit.

It is important for Court personnel to verify the accuracy of financial

records and establish controls over cash by reconciling bank

accounts. Court personnel should also prepare an accountability

analysis by comparing the amount of cash on hand plus the amount

on deposit in the bank with the detailed listings of amounts due to the

Justice Court Fund (JCF) plus any other liabilities. In addition, Court

personnel should retain a detailed listing of liabilities (bail records)

to facilitate accountability analysis preparation and help ensure

that liabilities can be easily identified in the future. Preparing bank

reconciliations and accountability analyses are critical procedures

that serve to document the status of money held by the Court at

Accountability




any point in time. This documentation also provides a means to

demonstrate that the Court is appropriately addressing its custodial

responsibilities.

During our audit period, the responsibility for completing monthly

bank reconciliations and the accountability analysis was delegated to

the Court clerk. We found that the Court clerk did not perform proper

accountability analyses, retain bail records, or prepare accurate bank

reconciliations. In addition, the assets exceeded the liabilities. Due

to the lack of records showing the Town’s liabilities, the Justices

were unable to reconcile the accounts or determine how long the

differences went unnoticed. In October 2009, the Court clerk had

performed an accountability analysis and determined that cash

exceeded liabilities by $2,144 for one Justice and $820 for the other

Justice. The Court clerk then turned the unidentified funds totaling

$2,964 for both Justices over to the JCF. As of November 2009, the

accounts for both Justices reconciled.

Until October 2009, the Court clerk did not correctly perform

accountability analyses or bank reconciliations and was unaware

that she was required to retain bail records. The Justices did not

provide oversight to ensure that the Court clerk was performing

her duties accurately. The lack of monthly bank reconciliations and

accountability analyses was a contributing cause for the unidentified

moneys that went unnoticed.

Town Justices are required to present their records and dockets to

their governing boards (i.e., Town Board) for audit at least once each

year. After the Board audits, or hires someone to audit, the financialrecords and reports of the Court, the Town Clerk should enter the

results of that audit into the minutes of the Board’s proceedings. This

review will help the Board fulfill its oversight responsibilities by

developing appropriate safeguards to protect public assets from loss

or abuse.

The Board did not audit, or hire someone to audit, the Court’s

financial records during our audit period. According to the Court clerk

and the Supervisor, the Court clerk provided the Board with all the

required information, but the Board did not review it. The Supervisortold us that he was unaware the Board was required to review the

Court’s financial records. If the Board had performed the annual

audit, as required, they may have detected that the bank account was

not reconciled.

4. Court personnel should retain bail records and prepare monthly

bank reconciliations, including an analysis of the monthly

liabilities and a comparison to the available cash on hand. The

Annual Audit

Recommendations




Justices should review these reconciliations and promptly

identify, investigate, and correct any differences noted.

5. The Board should monitor the financial activities of the Court

on an ongoing basis and audit, or hire someone to audit, Court

records annually.




APPENDIX A

RESPONSE FROM LOCAL OFFICIALS

The local of ficials’ response to this audit can be found on the following page.




APPENDIX B

AUDIT METHODOLOGY AND STANDARDS

The objective of this audit was to determine if Town of ficials properly managed Town operations.

More specifically, we determined whether the internal controls over the payroll process were

adequately designed and if the Board and Justices provided adequate oversight over the Court’s

financial activity. To achieve our audit objective and obtain valid audit evidence, we performed the

following audit procedures:

For Payroll –

• We gained an understanding of the payroll process and the current internal control system.

• We reviewed the payroll records of 27 employees to determine if wages were paid in

accordance with Board-authorized rates and if employees’ withholdings and benefits were

authorized and accurate for ten of the 27 employees.

• We reviewed four health insurance buyouts to determine if the buyouts were accurate,

supported, and in accordance with the authorized policies.

• We reviewed direct deposits for two pay periods to determine if payments were properly

authorized and made accurately.

• We reviewed leave records for eight employees to determine if the accruals and usage were

accurate, recorded and approved.

For Court –

• We gained an understanding of the Court process and the existing internal control system.

• We reviewed accounting records to determine if they were complete, accurate, and up-to-date.

• We compared recorded cash receipts and disbursements to supporting documentation, such as

press-numbered duplicate receipt forms, case files, records of bail transactions, and reports to

OSC, to determine if cash receipts were properly maintained, recorded and deposited and if

cash disbursements were properly supported.

• We reviewed transactions as detailed on the bank statements and recorded in the Court’s

records to determine if they were for legitimate Court-related purposes and supported by

appropriate documentation.

• We reviewed bank account reconciliations to determine if cash balances per the accounting

records reconciled to adjusted bank account balances and to known court liabilities.




• We reviewed and compared Court activity to Traf fic Safety Law Enforcement and Disposition

(TSLED) reports prepared by and received from the New York State Department of Motor

Vehicles (DMV) to determine if cases reported to the DMV represented actual Court activity.

We conducted this performance audit in accordance with generally accepted government auditing

standards (GAGAS). Those standards require that we plan and perform the audit to obtain suf ficient,

appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit

objective. We believe that the evidence obtained provides a reasonable basis for our findings and

conclusions based on our audit objective.




APPENDIX C

HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT


Public Information Of fice

110 State Street, 15th Floor

Albany, New York 12236

(518) 474-4015

http://www.osc.state.ny.us/localgov/

To obtain copies of this report, write or visit our web page:




APPENDIX D

OFFICE OF THE STATE COMPTROLLER

DIVISION OF LOCAL GOVERNMENT

AND SCHOOL ACCOUNTABILITY

Steven J. Hancox, Deputy Comptroller

John C. Traylor, Assistant Comptroller

LOCAL REGIONAL OFFICE LISTING

BUFFALO REGIONAL OFFICE

Robert Meller, Chief Examiner


295 Main Street, Suite 1032

Buffalo, New York 14203-2510

(716) 847-3647 Fax (716) 847-3643

Email: [email protected]

Serving: Allegany, Cattaraugus, Chautauqua, Erie,

Genesee, Niagara, Orleans, Wyoming counties

ROCHESTER REGIONAL OFFICE

Edward V. Grant, Jr., Chief Examiner


The Powers Building

16 West Main Street – Suite 522

Rochester, New York 14614-1608

(585) 454-2460 Fax (585) 454-3545


Serving: Cayuga, Chemung, Livingston, Monroe,

Ontario, Schuyler, Seneca, Steuben, Wayne, Yates

counties

SYRACUSE REGIONAL OFFICE

Eugene A. Camp, Chief Examiner


State Of fice Building, Room 409

333 E. Washington Street

Syracuse, New York 13202-1428

(315) 428-4192 Fax (315) 426-2119


Serving: Herkimer, Jefferson, Lewis, Madison,

Oneida, Onondaga, Oswego, St. Lawrence counties

BINGHAMTON REGIONAL OFFICE

Patrick Carbone, Chief ExaminerOf fice of the State Comptroller

State Of fice Building, Room 1702

44 Hawley Street

Binghamton, New York 13901-4417

(607) 721-8306 Fax (607) 721-8313


Serving: Broome, Chenango, Cortland, Delaware,

Otsego, Schoharie, Sullivan, Tioga, Tompkins

counties

GLENS FALLS REGIONAL OFFICE

Karl Smoczynski, Chief Examiner


One Broad Street Plaza

Glens Falls, New York 12801-4396

(518) 793-0057 Fax (518) 793-5797


Serving: Clinton, Essex, Franklin, Fulton, Hamilton,

Montgomery, Rensselaer, Saratoga, Warren, Washington

counties

ALBANY REGIONAL OFFICE

Kenneth Madej, Chief Examiner


22 Computer Drive West

Albany, New York 12205-1695

(518) 438-0093 Fax (518) 438-0367


Serving: Albany, Columbia, Dutchess, Greene,

Schenectady, Ulster counties

HAUPPAUGE REGIONAL OFFICEIra McCracken, Chief Examiner


NYS Of fice Building, Room 3A10

Veterans Memorial Highway

Hauppauge, New York 11788-5533

(631) 952-6534 Fax (631) 952-6530


Serving: Nassau, Suffolk counties

NEWBURGH REGIONAL OFFICEChristopher Ellis, Chief Examiner


33 Airport Center Drive, Suite 103

New Windsor, New York 12553-4725

(845) 567-0858 Fax (845) 567-0080


Serving: Orange, Putnam, Rockland, Westchester

counties

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