Background

The Office of the County Auditor has completed a follow-up engagement with the County of Hawaiʻi’s Department of Water Supply (DWS) Cash Handling. We initiated the audit as we believe cash receipts are an inherently high-risk process. The initial audit identified incomplete and inaccurate policies and procedures over the water receipts cash handling process, which resulted in significant internal control weaknesses. These weaknesses included inadequate segregation of duties and insufficient independent review and monitoring. Based on the conditions at the time, seven recommendations were made. The purpose of this follow-up audit was to determine if DWS implemented the prior recommendations.

Subsequently, in January 2020, the Department of Water Supply upgraded its customer service and billing system to Northstar CIS, and manual receipts became obsolete and were no longer used to process payments.

In this follow-up, we tested seven recommendations to determine if DWS implemented our cash handling recommendations. We determined five recommendations were implemented, one was resolved, and one was partially implemented. We found:

Conclusion

We commend the Department of Water Supply for its efforts to improve cash handling. To further strengthen internal controls over the cash handling process, we’ve identified some opportunities DWS should:

Disseminate updated policies and procedures to clarify:

• Deleting receipts
• Making change for payment overages
• Providing ongoing training when policies and procedures have been updated

Mission

It is our mission to serve the Council and citizens of Hawai‘i County by promoting accountability, fiscal integrity, and openness in local government. Through performance and/or financial audits of County agencies and programs, the Office of the County Auditor examines the use of public funds, evaluates operations and activities, and provides findings and recommendations to elected officials and citizens in an objective manner. Our work is intended to assist County government in its management of public resources, delivery of public services, and stewardship of public trust.

Audit Authority

Hawai‘i County Charter §3-18 establishes an independent audit function within the Legislative Branch through the Office of the County Auditor.

Purpose

The purpose of this engagement is to follow up and monitor the responses to audit recommendations by audited entities by evaluating if internal controls over water receipts at all Department of Water Supply cash receipting locations are preventing, detecting, and deterring fraudulent transactions, whether these internal controls are following best practices, and if receipts are deposited timely and intact.

Performance Audit Definition

Performance audits provide objective analysis, findings, and conclusions to assist management and those charged with governance and oversight with, among other things, improving program performance and operations, reducing costs, facilitating decision-making by parties responsible for overseeing or initiating corrective action, and contributing to public accountability.

Objective

Did the Department of Water Supply implement the 2017 cash handling audit recommendations?

Scope

The prior audit evaluated DWS’ Hilo Office cash handling from November 2015 to December 2015 and May 2016 to June 2016. The Waimea, Kona, and Kau Offices were not included in the original scope because all work was reviewed, and final cash receipting system reports were posted through the Hilo Office.

The follow-up audit evaluated cash handling practices from July 2022 to August 2022 at the Hilo, Waimea, and Kona Offices. The Kau Office no longer receipts cash and, therefore, was not in scope.

The audit engagement began in August 2020. Subsequently, the audit was suspended in October 2020 due to implementing the Northstar CIS system (customer service and billing system) and resumed in July 2022.

This follow-up audit was limited to reviewing and reporting on the implementation of outstanding audit recommendations. We did not consider new or previous issues that did not relate to our original recommendations.

Methodology

To verify the Department of Water Supply implemented the 2017 cash handling recommendations, we:

• Corroborated information with appropriate staff to follow up on the responses to audit recommendations
• Reviewed applicable laws and other relevant governance
• Performed tests of internal controls and transactions over the cash handling process
• Conducted site visits to verify monitoring and oversight practices
• Was mindful of potential fraud, waste, and abuse during the audit
• Noted exceptions and identified areas for improvement

We conducted this performance audit in accordance with generally accepted government auditing standards. 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 objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Implemented:  Department has fully completed the audit recommendation. We reviewed sufficient and appropriate evidence to support all aspects of the recommendation.

Resolved:  Although the department did not implement the audit recommendation, it implemented an alternative solution/mitigating/compensating control that fully addressed the applicable audit finding or risk.

Partially Implemented:  Department has made significant progress. We reviewed sufficient and appropriate evidence to support key aspects of the recommendation.

Not Implemented:  Sufficient and appropriate evidence was unavailable to support key aspects of the recommendation, or the department has no plans to implement the recommendation.

Not Applicable:  The risk associated with the recommendation no longer exists or is no longer applicable.

Segregation of Duties

Condition and Cause

One employee had complete control over the cash handling process. The same employee had full administrative computer access to record/adjust transactions in the public utility billing system (PUBS) and the general ledger (GL), reconciled bank statements, and made daily bank deposits.

Effect of the Condition

The lack of segregation of duties made adjustments difficult to detect.

Recommendation 1

“We recommend that Department of Water Supply management separate incompatible duties. One individual should not be in charge of all of these cash handling elements: physical custody of cash, depositing cash, recording/adjusting transactions in the system, and reconciling the bank statements. If duties cannot be sufficiently segregated, mitigating controls, such as removing administrator computer access rights to the cash receipting system and/or a lower level of detailed supervisory review, could be implemented.”

Department Action

To meet this recommendation, in 2017, DWS reassigned duties to segregate incompatible duties over:

• Physical custody of cash
• Receipting cash transactions
• Reconciling cash receipts
• Reconciling monthly bank statements
• Recording/adjusting transactions in the systems
• Making daily bank deposits
• Investigating variances

Audit Activity

To verify status, we observed cash receipting, reconciliation, and safeguarding practices and found no exceptions. We found various staff performed different functions to ensure adequate segregation of duties for those responsible for handling cash (i.e., cashiers/customer service representatives, supervisors, clerks, accountants, and management).

Status:  Implemented

Implementing Monitoring and Oversight

Condition and Cause

Receipts and daily deposits posted in PUBS were not reviewed for accuracy.

Effect of the Condition

The lack of oversight made the reconciliation of deposits difficult to monitor.

Recommendation 2

“We recommend the Department of Water Supply management perform ongoing monitoring of their internal control system as part of the normal course of operations. Ongoing monitoring includes regular management and supervisory activities, daily reconciliation of adjustments and cash receipts, and other routine actions.

Department Action

To meet this recommendation, DWS implemented:

• Daily reconciliation of cash receipts and bank deposits
• End-of-the-month reconciliation of journal entries to the general ledger and bank statements
• Scheduled surprise cash counts
• Monitoring and investigating variances

Audit Activity

To verify status, we conducted site visits to observe monitoring and oversight practices, including reconciliations between cash receipts, bank deposits and statements, adjustments, and various tracking reports, corroborated with staff, and found no exceptions.

Status:  Implemented

Condition and Cause

Surprise cash counts were not addressed in 2010 cashier procedures or performed at all cash receipting locations. Supervisors counted the daily beginning balance of the cash drawer at the Hilo Office.

Effect of the Condition

Monetary variances may go undetected, and management may not know if revenue was misappropriated.

Recommendation 5

“We further recommend that the Department of Water Supply Customer Service Branch conduct surprise cash counts at all cash receipting locations.”

Department Action

To meet this recommendation, supervisors developed a schedule, conducted surprise cash counts, reconciled petty cash receipts, and verified cash cans. During the pandemic, surprise cash counts were conducted via webcam.

Audit Activity

To verify status, we reviewed surprise cash count schedules and worksheets, corroborated with staff, and found surprise cash counts were conducted for the Hilo, Kona, and Waimea Offices.

Status: Implemented

Update and Enforce Policies and Procedures

Condition and Cause

DWS’ 2010 cashier procedures were outdated and incomplete and not followed and enforced.

Effect of the Condition

DWS was unable to enforce compliance with incomplete and outdated policies and procedures.

Recommendation 6

“We recommend the Department of Water Supply management clarify and enforce internal controls in County policy and procedures to ensure consistency throughout the department and with industry best practices, including but not limited to:

• Provide clear guidance on independent review and monitoring procedures.

  These procedures may include:

  • reconciling adjustments in PUBS with approved debit/credit memos;
  • reconciling cash receipts in PUBS to the general ledger system;
  • reviewing manual receipts posted in PUBS for accuracy and completeness;
  • independently reviewing the bank reconciliation; and
  • performing surprise cash counts at all locations.

• Provide guidance and clarification on individual job duties to ensure adequate segregation of duties exists.
• Clarify or add policies regarding any updated procedures to reflect current processes. Updated policies should also include:
  •  endorsing checks immediately upon receipt;
  • require all adjustments are supported with an approved debit/credit memo; and 
  • fraud reporting guidance."

Department Action

DWS said existing policies and procedures are currently being revised and streamlined to incorporate Northstar CIS system.

Audit Activity

To verify status, we conducted a site visit to observe cash receipting activities, compared DWS’ Revised Cashier Procedures dated January 2010 to Internal Guidelines - Cash Receipts (draft) policy dated July 2022, and found policies and procedures have not been updated by management in twelve years.

To strengthen policies and procedures, DWS should clarify:

• Deleting receipts
• Making change for payment overages
• Providing ongoing training when policies and procedures have been updated

To meet this recommendation, DWS should review policies and procedures at least annually, update accordingly, disseminate, provide training, and have staff acknowledge receipt to ensure employees who handle revenue understand and comply with written policies and procedures.

Status: Partially Implemented

Provide Training

Condition and Cause

Employees who handled revenue were not continuously trained.

Effect of the Condition

Unclear and outdated written policies and procedures resulted in inefficiencies and frustrations among staff and management.

Recommendation 7

“We recommend the Department of Water Supply management provide ongoing cash handling and internal controls training for all DWS employees who handle revenue.”

Department Action

To meet this recommendation, cash receipts training was provided during orientation by a supervisor. In Fall 2019, staff received training on the new customer service and billing system (Northstar CIS). Staff also receives continuous on-the-job training.

Audit Activity

To verify status, we reviewed training material, corroborated with staff, and found although staff had individual desk procedures, staff should be provided ongoing training when policies and procedures have been updated to ensure they understand and are consistently applied.

Status:  Implemented

Government auditing standards require that we remain mindful and document instances of fraud, waste, and abuse.

Management and staff did not identify any instances of fraud or misappropriations during the engagement. We did not identify specific issues during the audit.

There are inherent risks associated with the implementation of the cash handling processes. If no internal controls exist, or if they exist but are not enforced, the risks related to the process increase, thereby increasing the risk exposure to the County.

On a national level, employee misappropriation of cash is the most common type of fraud. According to the Association of Certified Fraud Examiners (ACFE) 2022 Report to the Nations on Occupational Fraud, organizations lose an estimated five percent of revenues to fraud each year.  [1]  (Attachment 1) “The most common employee occupational frauds of misappropriation of cash include: check tampering, revenue skimming, fraudulent disbursements by fake invoicing, payroll schemes, and billing scams.”  [2]  To improve government accountability, the Office of the County Auditor identified opportunities to further strengthen internal controls over cash handling.

Internal controls are broadly defined as a process affected by management. They are designed to provide reasonable assurance on the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. Internal controls can help achieve performance targets and prevent loss of resources.

By identifying gaps in policies and procedures, DWS can identify where effective controls need to be placed, where to provide sufficient detail for new and existing procedures, and clarify unclear procedures so that they are easier to follow. To meet our recommendations, DWS should disseminate updated policies and procedures to clarify:

• Deleting receipts
• Making change for payment overages
• Providing ongoing training when policies and procedures have been updated

In closing, to improve government accountability and ensure audit recommendations are implemented or resolved, we will continue to monitor the department’s pending status using our remediation tracking tool.

We commend the Department of Water Supply’s cooperation and its commitment to improving internal controls over cash handling.

ACFE’s Impact of Fraud Findings