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DIVISIONOF LOCAL GOVERNMENT

& SCHOOL ACCOUNTABILITY

O F F I C E O F T H E N E W YO R K ST A T E C O M P T R O L L E R

Report of Examination

Period Covered:

January 1, 2007 January 20, 2010

2010M-66

Sea Breeze andVicinity Water District

Internal Controls OverBilling and Collections

Thomas P. DiNapoli


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11DIVISIONOF LOCAL GOVERNMENTAND SCHOOLACCOUNTABILITY

Page

AUTHORITY LETTER 2

INTRODUCTION 3

Background 3

Objective 3

Scope and Methodology 3

Comments of District Officials and Corrective Action 3

BILLING AND COLLECTIONS 5

Segregation of Duties 5

Cash Receipts 6

Account Adjustments 7

Recommendations 8

APPENDIX A Response From District Officials 9

APPENDIX B OSC Comment on the District Officials Response 12

APPENDIX C Audit Methodology and Standards 13

APPENDIX D How to Obtain Additional Copies of the Report 14APPENDIX E Local Regional Office Listing 15

Table of Contents


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2 OFFICEOFTHE NEW YORK STATE COMPTROLLER2

State of New York

Office of the State Comptroller

Division of Local Government

and School Accountability

August 2010

Dear Water District Officials:

A top priority of the Office of the State Comptroller is to help local government officials manage

government resources efficiently 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. This fiscal oversight is accomplished, in part, through our audits, which identify

opportunities for improving operations and Board 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 Sea Breeze and Vicinity Water District, entitled Internal

Controls Over Billing and Collections. This audit was conducted pursuant to Article V, Section 1 of

the State Constitution and the State Comptrollers authority as set forth in Article 3 of the General

Municipal Law.

This audits results and recommendations are resources for local government officials 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 office for your county, as listed

at the end of this report.

Respectfully submitted,


Division of Local Government

and School Accountability


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Background

Introduction

Objective

Scope and

Methodology

Comments of

District Officials and

Corrective Action

The Sea Breeze and Vicinity Water District (District) was createdin 1914 to finance, construct, operate and maintain a watersupply system for the benefit of the residents of Sea Breeze and

the surrounding area. The District provides water services forapproximately 9,900 residents of the Sea Breeze neighborhood andthe surrounding area in the Town of Irondequoit (Town), MonroeCounty. The District is governed by an elected three-member Boardof Commissioners (Board). The Town Supervisor acts as the DistrictsTreasurer. The Water Superintendent is responsible, along with otherstaff, for the Districts day-to-day management under the direction ofthe Board.

The District maintains approximately 80 miles of water main and270 fire hydrants. For the 2009 fiscal year, the District reported

revenues totaling $854,000, operating expenses totaling $927,000,and unappropriated fund balance of $216,000. District revenuesare primarily generated from water usage charges, but also includeapproximately $120,000 from cellular antennae rentals. Operatingexpenses of the District include payroll, employee benefits, power,purchased water, maintenance and operating costs.

The objective of our audit was to review the Districts controls overthe billing and collection of water charges. Our audit addressed thefollowing related question:

Are internal controls over billed receivables appropriatelydesigned and operating effectively to adequately safeguardDistrict assets?

We reviewed relevant records and reports, and observed processesrelative to the Districts billing and collection of water charges for theperiod January 1, 2007 to January 20, 2010.

We conducted our audit in accordance with generally acceptedgovernment auditing standards (GAGAS). More information on suchstandards and the methodology used in performing this audit areincluded in Appendix C of this report.

The results of our audit and recommendations have been discussedwith District officials and their comments, which appear in AppendixA, have been considered in preparing this report. District officialsgenerally agreed with our recommendations and indicated they havetaken or plan to initiate corrective action. Appendix B includes ourcomment on the issue raised in the Districts response letter.


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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 office 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 Clerks

office.


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Billing and Collections

District officials are responsible for establishing an internal control

system consisting of policies and procedures to provide reasonable

assurance that billings are properly initiated, approved, documented,

and recorded. It also provides mechanisms for ensuring that cashreceipts are deposited timely and intact, and that cash is safeguarded

to prevent loss or theft. Key duties (e.g., maintenance of accounting

records, cash custody, bank reconciliations) must be adequately

segregated so that the same individual is not controlling most or all

phases of a transaction, particularly when there is limited supervisory

oversight. Town Law also provides a key control for cash collections

by requiring that the Receiver of Taxes and Assessments (Receiver)

collect all water rents within the Town.1 With good internal controls,

District officials can enhance the safeguarding of cash assets,

mitigate the risk of misappropriation and mistakes, and help ensurecompliance with applicable laws.

We identified significant weaknesses in internal controls over water

billing and cash collections. District officials have not established and

adopted written policies and procedures governing billed receivables.

As a result, the billing clerk did not have adequate guidelines for

preparing or adjusting bills, and for recording and depositing cash

receipts. In addition, the billing clerk is directly responsible for

most aspects of the billing and collection process. Finally, we also

found that the billing clerk did not deposit moneys intact and made

adjustments to customer accounts without management approval.Without adequate segregation of duties and management oversight,

there is an increased risk that errors and irregularities will not be

detected and corrected in a timely manner.

An important component of any internal control system is proper

segregation of duties, ensuring that no one person controls all

phases of a transaction. Concentrating key duties (i.e., authorization,

recordkeeping and custody) with one individual with little or no

oversight weakens internal controls and significantly increases the

risk that errors and/or irregularities might occur and go undetected

and uncorrected. Another important component is management

oversight.

The District bills users quarterly in January, April, July and October.

The billing clerk is directly responsible for the majority of the billing

and collection process. Her responsibilities include preparing and

collecting meter reading cards, entering meter readings into the

Segregation of Duties

1 The Receiver does not have responsibilities for billing or recordkeeping.


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computer, preparing and printing bills, collecting payments, preparing

deposits, entering receipts into the computer system, maintaining

customer detail accounts and making account adjustments. She also

has the ability to change the water rate within the computerized

billing system. While the Town Accountant maintains all control

accounts, prepares monthly and year-end financial reports and

prepares bank reconciliations, the information the Town Accountant

uses is based solely on reports and other information that is provided

by the billing clerk.

Due to the inadequate segregation of duties, we reviewed 15 late

payments to ensure amounts due included penalties. We also

compared meter reading cards from eight customer accounts to the

October 2009 billing to ensure accuracy and we compared billed

amounts on master billings to amounts posted to customer accounts.

Additionally, we reviewed 14 receipts from the April 2009 billing to

ensure that they had been properly recorded and deposited. While we

found significant weaknesses with cash collections, the weaknessescan be easily eliminated by relinquishing the cash collection

responsibilities to the Receiver, as required by Town Law.

Good management practices require that cash receipts be recorded in

a cash receipts journal to provide a detail of the amount received, the

date received, the type of payment, and the payee. This information

becomes a summary of the amounts deposited in the bank. It is

important that collections be deposited in the bank and credited to

the customers accounts in a timely manner. When the billing clerk

receives a payment, she records only the amount and the customer

account number and does not record the date received or whetherthe payment was by cash or check. Deposit slips are not properly

itemized to show the individual checks included. Normally, after

she receives 100 payments,2 the billing clerk prepares a deposit and

credits the customers accounts in the computer system accordingly.

While this generally results in daily deposits during the first month of

a collection cycle, deposits in the final two months were on average

only once per week. Therefore, she does not credit customer accounts

or secure collections in the bank on a timely basis.

Because of the lack of documentation, we requested depositcompositions from the bank for several deposits. We determined

that deposits were not made intact. Because the District has not

established a change fund, there is no set cash amount in the

drawer after each deposit. Instead, the billing clerk withholds several

receipt stubs and the corresponding amount of cash from the days

collection (which were paid by check) totaling between $200 and

Cash Receipts

2 Near the end of a billing cycle, she will make a deposit after 25 payments are

received.


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$250. She deposits those checks but does not credit those accounts in

the computerized billing system until she makes the next deposit. For

example, while preparing her April 23, 2009 deposit, the billing clerk

withheld cash totaling $220.85 (which she kept in the cash drawer

as a change fund), which was the total of four check payments she

had received. She deposited those four checks in the April 23, 2009

deposit, but did not credit the corresponding customer accounts until

the next deposit date (April 24, 2009.) Similarly, she credited six

customer accounts ($225.78) in the computer on the April 23, 2009

deposit date, for checks which had actually been included in the April

21, 2009 deposit.

When cash receipt records are not accurate and complete, and cash

receipts are not deposited intact, the risk is increased that funds

could be misappropriated without detection. In addition, because

of inadequate segregation of duties in preparing and adjusting bills,

collecting and depositing receipts, and maintaining customer records,

there is an increased risk of the loss or unauthorized use of Districtfunds, and of errors or irregularities occurring and going undetected

and uncorrected. These conditions emphasize why the duties of

collecting water revenues should be transferred to the Receiver, as

provided in Town Law.

Effective controls over District revenue require management review

and approval of adjustments to customer accounts, including the

rationale for such changes. In addition, prudent management practices

include, at a minimum, a written agreed-upon policy with strong

internal controls, including a segregation of incompatible duties and

a specific authorization process.

Due in part to the Districts lack of enforcement of its meter reading

system, a large number of billing adjustments are made each

quarter. The District sends out meter reading cards each quarter,

approximately six weeks prior to the billing cycle. Each customer is

responsible for reading their meter and either returning the card by

mail or calling the District with the reading. When a customer fails to

read their meter, the billing system estimates their water consumption

based upon prior readings.3 With each successive estimate, the

computer increases the estimated consumption. Consequently,billings based on estimated usage could be significantly higher or

lower than they should be based upon actual metered usage.

District officials generally do not authorize adjustments made to

customer accounts.4 The billing clerk makes all adjustments to

customer records. She handles customer phone calls and makes

Account Adjustments

3 The billing clerk has the ability to override the computers estimate.4 The District requires authorization for a one-time 50 percent leak adjustment.


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adjustments at her own discretion, without prior authorization. These

changes appear in a system-generated adjustments report which

she prints periodically. However, District officials had not adopted

policies and procedures to provide the billing clerk with guidance,

such as authorization limits on adjustments she could preapprove,

and no one from the District reviews or approves the adjustments

reports she prepared.

For the period December 16, 2008 through January 6, 2010, the billing

clerk made 225 adjustments in the billing and collection system,

which lowered customer account balances by a total of $15,000. Of

the 225 adjustments, 129 (57 percent) were because of overestimates,

24 (11 percent) were due to computer billing errors and the remaining

72 were for various other reasons, including underestimates (9),

misreads (8), bad checks (8) and having the envelope postmarked

by the due date (5). Ten (4 percent) adjustments had no explanation

listed. Only one of the 225 adjustments had prior approval according

to the Districts One Time 50 percent Leak Adjustment.

We found that a majority of the account adjustments resulted from

customers calling in with an actual meter reading after receiving a

very high estimated bill. By refraining from making such adjustments

after the bills are mailed, the District could significantly reduce

the number of account adjustments needed and further encourage

customers to send accurate and timely readings. Instead, the District

could wait until the following billing cycle to make the proper

correction, based on an accurate and timely meter reading. At the

end of our fieldwork, the Board established a minimal fee to attempt

to encourage customers to submit timely meter readings. EffectiveAugust 15, 2010, an estimated read fee of $10 will be charged if the

District does not receive an actual reading at least once annually by

August 15.

The combination of the lack of segregation of duties in billing and the

adjustment of accounts, lack of approval of adjustments, and the lack

of management oversight increases the risk that the District may not

generate the proper amount of water rent revenues because customers

are not properly billed.

1. Water rents should be collected by the Receiver.

2. The Board should adopt a written policy requiring that all customer

account adjustments be properly documented and approved by

the Board or an appropriate designee.

Recommendations


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APPENDIX A

RESPONSE FROM DISTRICT OFFICIALS

The District officials response to this audit can be found on the following pages.


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See

Note

Page


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APPENDIX B

OSC COMMENT ON THE DISTRICT OFFICALS RESPONSE

Note 1

We have revised our report to address the concern that District officials raised in their response.


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APPENDIX C

AUDIT METHODOLOGY AND STANDARDS

Our overall goal was to assess the adequacy of the internal controls put in place by officials tosafeguard District assets. To accomplish this, we performed an initial assessment of the internalcontrols so that we could design our audit to focus on those areas most at risk. Our initial assessmentincluded evaluations of the following areas: financial condition, cash receipts and disbursements, andpurchasing.

During the initial assessment, we interviewed appropriate District officials, performed limited testsof transactions and reviewed pertinent documents such as District policies and procedures manuals,Board minutes and financial records and reports. Further, we reviewed the Districts internal controlsand procedures over the computerized financial databases to help ensure that the information producedby such systems was reliable.

After reviewing the information gathered during our initial assessment, we determined whereweaknesses existed, and evaluated those weaknesses for the risk of potential fraud, theft and/orprofessional misconduct. We then decided upon the reported objective and scope by selecting for auditthe area most at risk. We selected billed receivables for further audit testing.

During the course of our audit, we examined the Districts records and reports for the period January1, 2007 to January 20, 2010. To accomplish our audit objective and obtain relevant audit evidence, ourprocedures included the following:

We interviewed the Water Superintendent and the billing clerk to obtain an understanding ofthe water operations and controls in place. We reviewed the Annual Drinking Water Quality

Report for 2008.

We reviewed the minutes of the Board of Commissioners meetings to obtain informationrelated to the Boards oversight.

We reviewed bank statements and deposit slips.

We compared meter reading cards from eight customer accounts to the October 2009 billing.

We compared the billed amount on the October 2009 master to amounts posted on 22 customeraccounts.

We reviewed 14 receipts from the April 2009 billing to ensure that they had been properlyrecorded and deposited.

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 sufficient,

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.


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APPENDIX D

HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT


Public Information Office

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:


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APPENDIX E

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

ALBANY REGIONAL OFFICE

Kenneth Madej, Chief Examiner


22 Computer Drive West

Albany, New York 12205-1695

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

Email: [email protected]

Serving: Albany, Columbia, Dutchess, Greene,

Schenectady, Ulster counties

BINGHAMTON REGIONAL OFFICE

Patrick Carbone, Chief Examiner


State Office 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

BUFFALO REGIONAL OFFICE

Robert Meller, Chief Examiner


295 Main Street, Suite 1032

Buffalo, New York 14203-2510

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


Serving: Allegany, Cattaraugus, Chautauqua, Erie,

Genesee, Niagara, Orleans, Wyoming counties

GLENS FALLS REGIONAL OFFICE

Karl Smoczynski, Chief ExaminerOffice of the State Comptroller

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

HAUPPAUGE REGIONAL OFFICE

Ira McCracken, Chief Examiner


NYS Office Building, Room 3A10

Veterans Memorial Highway

Hauppauge, New York 11788-5533

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


Serving: Nassau, Suffolk counties

NEWBURGH REGIONAL OFFICE

Christopher 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

ROCHESTER REGIONAL OFFICEEdward 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

Rebecca Wilcox, Chief ExaminerOffice of the State Comptroller

State Office 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

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