Oregon Agencies Fail ACCTG 101 “year after year”

Of particular concern is the number of findings that continue to be uncorrected year after year.

Figure 5 illustrates compliance requirements that have had control weaknesses or noncompliance for several years. The Department of Human Services is responsible for most of the weaknesses that remain uncorrected. This may not be surprising as the department is responsible for administering many large federal programs. The programs with uncorrected weaknesses at the Department of Human Services represent $2.8 of the $10.6 billion received by the state and affect the following large programs: Foster Care, Adoption Assistance, Temporary Assistance for Needy Families, Supplemental Nutrition Assistance, and some portions of Medicaid. The size of these programs underscores why it is important to correct these weaknesses so they don’t continue from one year to the next.  Figure 5 shows the types of federal requirements that tend to have findings that carry forward from one year to the next.

Corrective action taken on federal findings

Audit findings include recommendations that address noncompliance and internal control weaknesses. In response to audit findings and recommendations, state agencies must design a corrective action plan to submit to the federal granting agency. Federal agencies issue a decision on the findings including the questioned costs the state will be required to repay. During future audit periods, we are required to determine whether agencies have taken corrective, partial, or no action. In fiscal year 2014, we reported on the status of 33 findings from prior years because they remained uncorrected at the end of the fiscal year. The number of uncorrected prior year findings increased by 50% from fiscal year 2013.

Historically, many findings remain uncorrected from one year to the next because the agencies don’t correct the underlying issues leading to noncompliance or control weaknesses. When a finding is not corrected, we must re-issue the finding the next year. Figure 6 presents the action taken over the last five years on prior year findings that remained uncorrected at the end of each the fiscal years shown.

That damning indictment is buried on the exact middle pages — 5 and 6 of 11 — the pages least likely to be read in the new report on state financial accounting performance. The graphic below shows the trend; the darker portions of the bar are the UN-corrected problems that carry from year to year.
Oregon is failing to account for the way it spends federal dollars, and the state appears to be losing the battle, as agencies appear — to the auditors — to become more and more reliant on the audits to find and fix problems than on their own internal processes and expertise. And the agencies with the worst records divert attention away from others–which means there is no assurance that those other agencies are performing any better. It may just be that they are not being looked at because the negative standout agencies are getting all the attention.

“Last year we reported that some agencies appear to rely on auditors to identify mistakes that should be detected by the agency’s control processes.

Background and Statistics
 
Specific procedures, prescribed by the Federal Office of Management and Budget (OMB), are used to determine the federal programs selected for audit each year. High risk programs are required to be audited, which includes programs with prior year findings, and large expenditure programs that have not been audited in the most recent two years. At least 50% of total federal expenditures are required to be audited each year. However, due to internal control and compliance weaknesses, auditors had to increase that coverage for fiscal year 2014 to 74% of the state’s total
federal expenditures in order to meet audit requirements set by the OMB. Figure 7 below shows the five-year history of audited programs.

Programs audited in consecutive years were due to weaknesses identified in a prior year.

When agencies do not correct program weaknesses, we are required to re-audit the program, resulting in diverting audit efforts from other areas that warrant attention.

The introduction to the report does a good job smoothing things over and making it sound as if the recurring errors are a small problem in a big budget, and that things “continue to improve”:

Keeping the State of Oregon Accountable, Fiscal Year 2014
 
As the state’s independent auditors, every year we audit the State of Oregon’s financial statements. Among the billions of dollars of transactions, each year we find errors amounting to millions of dollars due to incorrect coding of financial transactions or misinterpretation of Generally Accepted Accounting Principles (GAAP). We propose adjustments to correct errors and we report findings with recommendations to strengthen controls.
 
The Departments of Education, Administrative Services, and Human Services/ Oregon Health Authority reduced the dollar amount of errors requiring audit adjustments this year, while some other agencies showed increases in the amount of errors. Overall, this year’s audit results showed improvement over last year. While the improvements shown may reflect increased efforts by some agency management to implement better controls over accuracy, we have found that diligence is required to ensure accuracy of accounting records continues to improve.
 
Our annual financial audit provides the state with our professional opinion about the completeness, accuracy and validity of the state’s accounting information. Accurate and reliable accounting data is crucial to ensuring state dollars are properly spent and provides a starting point for the next budget cycle. State agencies use financial data to create budget requests for the Oregon Legislature to allocate the state’s resources. Without an accurate accounting of the revenues, expenditures, assets and liabilities of the state, the Legislature doesn’t have correct information to budget for the future.
 
Our services also include audits of the state’s administration of major federal programs that provide billions of dollars in federal revenue to the State of Oregon. Every year, our audit results show state agencies are out of compliance with federal requirements because the agencies’ controls are not adequate to administer federal programs in accordance with federal requirements. The common errors we find in federal program compliance often continue from year to year and are slow to be resolved.
 
For more information about audit results, see the reports listed on our website:
 
Oregon’s Financial Statements:
http://sos.oregon.gov/audits/Documents/2014-32.pdf
 
Single Audit (including Federal Compliance) Results:
http://sos.oregon.gov/audits/Documents/2015-05post.pdf

But the actual report belies any confidence that things are improving, at least in the big dollar programs, where small deviations mean large amounts of money being spent without proper accountability. Luckily the authors know that most people won’t read past the first page.

Summary of the Financial Statement Audit
 
We reported 11 weaknesses related to internal controls over financial reporting for the fiscal year ended June 30, 2014 and 7 weaknesses from prior years that remained uncorrected. We proposed 26 audit adjustments at nine state agencies to correct about $200 million in financial reporting errors. The proposed adjustments affected 55 different financial statement accounts, with five accounts requiring adjustments of at least $30 million. This year shows improvement over last year when we reported twice as many weaknesses in internal control and several more adjustments that accounted for $1 billion in misstatements.
 
Last year we reported that some agencies appear to rely on auditors to identify mistakes that should be detected by the agency’s control processes. Improvements were noted at a few agencies; for example, management at the Department of Human Services and Oregon Health Authority initiated training this year for financial services staff to better understand the proper application of GAAP. In particular, they implemented procedures to report expenditures in the appropriate year, which resulted in fewer audit adjustments for their agencies. Although there is noticeable improvement, over half of the adjustments proposed for the state’s financial statements were to correct errors in the Department of Human Services and Oregon Health Authority financial information.
 
We issued an unmodified opinion on the state’s financial statements. An unmodified opinion means the state’s financial statements, as corrected, are fairly presented in conformance with GAAP. Figure 1 presents a summary of the state’s financial statements for fiscal year 2014.

Summary of the Single Audit
 
Significant control weaknesses identified in multiple federal programs
We audited 20 federal programs representing $8.5 billion in federal funds
to determine if the state was compliant with federal program requirements.
 
We found the Department of Human Services and Oregon Health Authority did not establish adequate internal controls and were not materially compliant with federal requirements for three programs: Foster Care, Adoption Assistance, and Medicaid. We issued qualified opinions on these three programs in fiscal year 2014.
 
A program receives a qualified opinion if we find a department’s internal controls will not reasonably prevent or detect significant noncompliance in a timely manner. For these programs, we identified control weaknesses and noncompliance in the areas of allowable activities/costs, eligibility, period
of availability, reporting, and special tests and provisions.
 
Figure 2 presents federal programs with qualified opinions over the last five years.

The boilerplate that accompanies each one of these reports is always written in an opaque language that seems to have been expertly chosen to avoid creating any clear picture in the reader’s mind. How much better to say all this than to say “We’re supposed to be able to tell where we spent all the federal money.”

Authority, Purpose, and Scope
 
The State of Oregon’s management is responsible for preparing annual financial statements, preparing a schedule of expenditures of federal awards, maintaining effective internal controls, and being accountable to the citizens of Oregon for its use of public monies.
 
The financial statements provide a comprehensive view of the state’s financial activities during the fiscal year (Statement of Activities) and an overall picture of the state’s financial position at the end of the fiscal year (Statement of Net Position). The management of each state agency is responsible for maintaining effective internal controls over financial reporting and ensuring financial information is complete and accurate. Statewide Accounting and Reporting Services (SARS), part of the Department of Administrative Services, is responsible for preparing the state’s financial statements in accordance with Generally Accepted Accounting Principles, which are numerous and complex. SARS prepares the financial statements by providing guidance and training to agency staff throughout the year, compiling financial information from more than 100 state agencies, and making numerous accounting adjustments to ensure amounts are properly reported.
 
The Secretary of State Audits Division is responsible for expressing opinions on the state’s financial statements. We conduct our work following Government Auditing Standards applicable to financial audits, which require that we plan and perform the work to obtain reasonable assurance about whether the financial statements are materially correct. The work includes examining evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by state management, as well as evaluating whether the financial statements are presented properly. The Audits Division audits the state’s financial statements, schedule of federal awards, and major federal programs on an annual basis. We conduct the annual statewide Single Audit, which is required by the federal government for Oregon to continue to receive federal financial assistance. The purpose of the fiscal year 2014 audit was to:
 
§ Determine if the amounts reported in the State of Oregon’s financial statements were materially correct and adequately supported;

§ Review internal accounting and compliance control procedures;

§ Determine whether the Schedule of Expenditures of Federal Awards (SEFA) is presented fairly in relation to the state’s financial statements; and

§ Evaluate the state’s major federal programs for compliance with applicable laws, rules, and regulations.