FINANCIAL AND COMPLIANCE AUDIT
Summary of Findings:
WILLIAM G. HOLLAND
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DEPARTMENT OF PUBLIC AID
FINANCIAL AND COMPLIANCE AUDIT
For The Year Ended June 30, 1998
|SELECTED ACTIVITY MEASURES||
|During Audit Period:
Mr. Robert W. Wright (July 1, 1997 - September 30, 1997)
Ms. Linda Renee-Baker (October 1, 1997 - November 23, 1997)
Ms. Joan Walters (November 24, 1997 - July 30, 1998)
Ms. Ann Patla
Lack of written procedures delayed preparation of agency financial statements and
submission of information to the State Comptroller
Material adjustments made to agency financial statements
Appropriate supporting documentation for an estimated $1.5 billion in accounts
receivable was not provided
Monitoring requirements are higher for subrecipients than for vendors
Year end accounts receivable documentation missing
Violation of federal regulations - lack of supporting documentation for $1.5 billion
accounts receivable balance
Financial reporting module not implemented
Department estimates there were 850,000 child support cases at June 30, 1998
Department was unable to support amount reported for accounts receivable
No documented plan for internal control review
Department personnel were unaware of requirement
Overpayments to Long Term Care facilities
Audits disclose $6,302,570 of overpayments were made to LTC facilities
Written policies and procedures on cash management and cost allowability were not
Charges for unallowable claims were made
Approximately $6.4 million in unallowable reimbursements
Reimbursement claimed for approximately $1.3 million on unallowable costs
$10.3 million drawdown of funds in excess of immediate needs
$80,000 owed to federal government
Salary costs charged were not allowable under federal regulations
Improper preparation of time certifications
Lack of federal approval
FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
LACK OF POLICIES AND PROCEDURES FOR THE PREPARATION OF GAAP PACKAGES AND
The Department did not have written policies and procedures regarding the preparation of year end financial information submissions to the State Comptroller (GAAP packages) and financial statements.
The Department experienced difficulties preparing the GAAP packages and financial statements on a timely basis. Further, it did not have policies and procedures in place to assist in the preparation of year end financial information. (Finding 98-1, page 17)
We recommended the Department develop and implement written procedures designed to provide clear instruction and guidance on the preparation of financial statements and related disclosures.
Department officials accepted our recommendation and stated an individual will be hired to develop and implement written procedures for the preparation of financial statements and related disclosures.
INADEQUATE FINANCIAL STATEMENT PRESENTATION
The Department's record-keeping procedures did not allow for the complete, accurate, and timely presentation of financial statements, supplemental schedules, and footnotes.
There were numerous material adjustments made to the financial statements. These included the following:
Also, as discussed in a subsequent finding, as of the end of our fieldwork, the Department was unable to provide appropriate supporting documentation for the accounts receivable balances presented in the Child Support Enforcement Trust Funds (Funds 957 and 1957). At June 30, 1998, the total of these accounts receivable was estimated to be $1.5 billion. These two funds were omitted from the financial statements, and our auditors qualified their opinion on the Department's financial statements. (Finding 98-2, page 18) (See also Finding 98-5, page 25)
We recommended the Department devote adequate resources and training to individuals responsible for records, books, accounts and preparation of the financial statements.
The Department accepted our recommendation and stated that two individuals will be hired in the Bureau of Fiscal Operations to prepare the financial statements.
The Department did not recognize and supervise subrecipients of federal funds and consequently did not monitor the use of the funds as required by federal regulations.
The Department entered into interagency agreements with other State agencies which permit or require these agencies to perform duties and expend funds that qualify for federal reimbursement under the Medical Assistance Program. The Department obtained reports on a quarterly basis from these agencies and claimed reimbursement from the United States Department of Health and Human Services for allowable costs at the applicable reimbursement rate for such expenditures totaling approximately $172.9 million. The reimbursements received by the Department were deposited into the General Revenue fund and into Special Revenue funds as required by State laws.
Our review of the terms of the interagency agreements and application of the relevant federal regulations indicate that a subrecipient rather than a vendor relationship exists between the Department and each of these other State agencies. Department officials had viewed the relationships as being vendor relationships. The Department's monitoring duties are significantly higher with respect to subrecipients than to vendors. Subrecipients are responsible for program decision making and interpreting and complying with applicable federal program requirements whereas vendors have no such duties. Vendors simply provide goods or services in exchange for cash. (Finding 98-3, pages 20-21)
We recommended the Department develop and implement policies and procedures requiring all contracts and interagency agreements to be reviewed to determine whether a subrecipient relationship exists.
Department officials accepted our recommendation and stated that they will establish a monitoring unit within the Office of Interagency Coordination and will develop policies and procedures to identify and monitor subrecipients as required by federal law and regulations.
LACK OF SUPPORTING DOCUMENTATION FOR CHILD SUPPORT ENFORCEMENT RECEIVABLES
The Department failed to comply with federal requirements by being unable to provide supporting documentation for the Child Support Enforcement Program accounts receivable balance.
During the fiscal year 1998, the Department maintained detailed support for the Child Support Enforcement Accounts Receivable on the Federal Family Information System (FFIS). The Department began a conversion from the FFIS to a new Key Information Delivery System (KIDS) in July 1997. The FSIS maintains the month end balance reports on a print image for 60 days. After 60 days the FSIS system automatically purges the print image of the accounts receivable report from the system. The Department failed to print out the June 30, 1998 accounts receivable report within the 60 day time frame and the data was lost.
Federal regulations require that financial records, supporting documents, statistical records and all other records pertinent to an award shall be retained for a period of three years from the date of submission of the final expenditure report or, for awards that are renewed quarterly or annually, from the date of the submission of the quarterly or annual financial report. The Department was, however, unable to provide documentation to support the June 30,1998 accounts receivable balance.
The lack of supporting documentation is a violation of federal regulation and has resulted in noncompliance with federal regulations and the inability to provide documentation of the $1.5 billion accounts receivable balance. (Finding 98-5, page 25)
We recommended the Department implement policies and procedures to ensure that financial records are maintained in accordance with federal record retention requirements.
Department officials accepted our recommendation and stated the lack of accounts receivable documentation is being addressed by the establishment of an internal financial accountability workgroup. This workgroup has the responsibility to ensure that reporting requirements are met and that supporting documentation for these financial records are maintained in accordance with federal record retention requirements.
LACK OF A FINANCIAL REPORTING MODULE FOR KEY INFORMATION DELIVERY SYSTEM
The Department did not have a financial reporting module in its "Key Information Delivery System" (KIDS).
The Department was federally mandated to implement a computerized Child Support Enforcement System. The system is required to control, account for, and monitor all the factors in the support collection and paternity determination process under the State Plan. In designing the Key Information Delivery System (KIDS) the Department did not include a financial reporting module. A financial reporting module would be capable of producing detailed support for the accounts receivable balance on a summary basis and would enable the Department to accurately report the accounts receivable balance and provide an audit trail.
The KIDS system did not have a financial reporting module, and the Department was unable to provide a detailed listing accounts receivable of child support cases that were converted from the Federal Family Information System (FFIS). The Department estimates there were approximately 850,000 child support cases as of June 30, 1998.
Federal regulations require, at a minimum, each State's computerized support enforcement system established under the Title IV-D State Plan to maintain accounts receivable on all amounts owed, collected and distributed. The Department stated that the financial reporting side of the system was overlooked when the KIDS system was designed in order to expedite the program side of the system. This has led to the Department's inability to support accounts receivable balances as reported. (Finding 98-6, page 26)
We recommended the Department devote adequate resources to ensure a financial reporting module modification is completed immediately.
Department officials accepted our recommendation and state a workgroup has been established to ensure the financial reporting module modification is promptly completed.
MEDICAL MANAGEMENT INFORMATION SYSTEM INTERNAL CONTROL REVIEWS
The Department did not have documentation that a formalized plan had been established to ensure that an internal control review, risk analysis, and systems security review was conducted in compliance with federal regulations for the Medical Management Information System (MMIS).
According to federal regulation (45 CFR 95.621), the Department should develop a program for an Automated Data Processing (ADP) review. At a minimum the ADP review should be conducted on a biannual basis and should contain the following: 1) a security plan; 2) a program for conducting periodic risk analysis; and 3) written reports of the ADP system security reviews.
The Department relies on the MMIS to process approximately 24 million transactions per year. Lack of reviews on this critical system could result in incorrect payments made to providers of medical services being undetected. Failure to conduct ADP reviews has resulted in noncompliance with Federal Regulations. (Finding 98-7, page 28)
We recommended the Department establish and implement a program of ADP reviews in accordance with federal regulations for the Medical Assistance Program.
Department personnel indicated they were unaware of the ADP review requirement. They stated they have accepted our recommendation and intend to hire a full time data security manager to provide the necessary resources to establish and implement a program of ADP reviews as required by federal regulations.
INADEQUATE INTERNAL CONTROLS OVER PAYMENTS MADE TO LONG TERM CARE FACILITIES
The Department did not have sufficient internal controls to safeguard against overpayments to Long Term Care (LTC) facilities.
The Department has implemented two additional controls designed to reduce the time between the date of an overpayment and the date of reconciliation of the overpayment to the Long Term Care providers account. However, the Department did not develop a system which detects overpayments in advance.
We performed tests of records of long-term care recipient cases and noted that it took longer than 90 days for the Department's records to be updated for 57 out of 158 long-term care cases closed. In our sample of cases reviewed, it took from 96 to 647 days after the recipient's date of death for the agency to update its records. After its records are updated, the Department makes adjustments to future payments to recover any overpayments made. Overpayments of $735,968 were made in relation to these cases and the Department has recovered $494,109 (67%).
The Department has an appropriation to contract with certified public accounting firms to conduct audits of LTC facilities. The results of the audits conducted during the fiscal year disclosed that a total of $6,302,570 of overpayments were made to LTC facilities. (Finding 98-8, pages 29-30)
We recommended the Department continue its efforts to implement a system to detect overpayment situations prior to payment.
Department officials accepted our recommendation and stated beginning November 1, 1998, the Department of Human Services (DHS) began matching active cases on the State's On-Line Query (SOLQ) which is on-line access to records from Social Security. Further, DHS and the Department are currently evaluating the possibility of using the Bendex file to match against closed cases to identify recipients who are deceased. It is anticipated that this process will reduce the amount of overpayments to LTC providers.
LACK OF POLICIES AND PROCEDURES AS REQUIRED BY FEDERAL REGULATIONS
The Department did not have formal written policies and procedures as required by federal regulations for cash management and allowability of costs charged to federal programs.
According to federal regulations (45 CFR 74.21(6)) the recipient's financial management systems shall provide for written procedures for determining the reasonableness, allocability, and allowability of costs in accordance with the provisions of the applicable federal cost principles and the terms and conditions of the award. (Finding 98-9, page 31)
We recommended the Department develop and implement policies and procedures regarding cash management and cost allowability in accordance with federal regulations.
Department officials accepted our recommendation and stated that procedures are currently being written for the Fed/State Unit in the Bureau of Fiscal Operations.
UNALLOWABLE CLAIMS MADE DUE TO CODING ERRORS
The Department erroneously claimed Federal Financial Participation (FFP) for unallowable claims.
The Department's Bureau of Internal Audit identified that the Department erroneously claimed $9,681,927 at 66% Federal Financial Participation (FFP). The claim was the result of transactions in the Public Aid Accounting System (PAAS) being coded incorrectly. Specifically, voucher payments made regarding IV-D Co-Operative Agreements were incorrectly coded with the wrong reporting category.
Failure to identify the erroneous claims in a timely fashion resulted in approximately $6.4 million of unallowable reimbursements from HHS. When the Department detected the error an adjustment was made to a subsequent quarterly report and a subsequent draw down to reimburse the U.S. Department of Health and Human Services. (Finding No. 98-10, page 32)
We recommended the Department implement controls sufficient to prevent unallowable claims.
Department officials accepted our recommendation and noted that it is in the process of writing procedures for the Fed/State Coordination Unit in the Bureau of Fiscal Operations. These include reviewing the detail expenditure reports for potential miscoding and looking for extraordinary variations in specific claiming lines. Also, staff are currently reviewing reports for potential coding errors. Further, special reports have been created to help find errors, and training materials will be developed to help eliminate errors.
FUND TRANSFER CHARGED TO FEDERAL GRANT
The Department claimed reimbursement for costs of approximately $1.3 million under the Medical Assistance Program which were not allowable under federal cost principles.
In our sample of administration costs charged to the Medical Assistance Program we noted that a fund transfer was erroneously charged at a 50% federal matching rate.
According to Department personnel, the transfer in question was miscoded. The Department does not have formal policies and procedures requiring that expenditures be reviewed prior to charging them to federal grants. (Finding 98-11, page 33)
We recommended that the Department develop and implement sufficient controls including policies and procedures requiring that all expenditures be properly coded and reviewed prior to charging them to federal grant programs.
Department officials accepted our recommendation and stated, in part, that procedures are being written for the Federal/State Coordination Unit of the Bureau of fiscal Operations. These include reviewing the detail expenditure reports for potential miscoding and looking for extraordinary variations in specific claiming lines. Also, staff are currently reviewing reports for potential coding errors, and discussions have taken place with coders in other Divisions as to the methodology behind the reporting categories and the errors that have been found.
The Department drew down federal funds in excess of immediate needs.
The Department drew down funds for the Child Support Title IV-D Program twice per month in accordance with the Treasury State Agreement. The Department identified in October of 1997 a total of $10.3 million in excess funds drawdown from previous quarters due to clerical errors. The Department, however, did not identify the clerical error in a timely fashion to avoid the excessive draw down.
The Department asserted that it was aware of the situation but did not believe that the condition resulted in an interest accrual because the excess federal funding was due to an error. The drawdown of funds in excess of immediate needs resulted in an estimated interest liability of $80,000 due to the federal government. (Finding 98-12, pages 35-36)
We recommended the Department establish internal review procedures to ensure cash draws of federal funds do not exceed their immediate needs.
Department officials did not accept our finding and recommendation. The Department noted the funds in question were drawn per the Cash Management Improvement Act (CMIA) agreement process; therefore, it contends interest cannot be owed. The Department also asserted the CMIA Agreement states the draw will be the lesser of one-sixth of each quarter's grant funds or the amount estimated to be spent that quarter. Estimates may be too high or too low, but when the actual expenditures become known, the adjustment is made on the next possible drawdown with no interest due to, or from, the federal government.
In an auditor's comment, we pointed out that, although the Department followed the CMIA agreement, the error resulted in the Department drawing down $10.3 million in excess funds. Since the error was not discovered by the Department in a timely manner and the estimate was based on an error, the Department held excess funds for 90 days and interest is owed to the federal government. On December 24, 1998 this information was presented to a representative of the U.S. Department of Health and Human Services, and he concurred that the Department owes interest on the excess funds.
LACK OF TIME REPORTING
The Department claimed reimbursement for salary costs that were not allowable under federal regulations.
We noted the Department claimed reimbursement under the Medical Assistance program for salary costs matched at 75% for two nurses who qualified as skilled professional medical personnel. However, the personnel in question were assisting the Illinois Department of Public Health in surveying, licensing, and certification of Long Term Care facilities, and these duties did not qualify for 75% reimbursement. According to federal regulations, Federal Financial Participation is to be prorated for staff time that is split among functions reimbursed at different rates. We also noted that the Department did not have a time reporting system in place to allocate time for all personnel with varying tasks.
Failure to document costs charged to a federal program has resulted in non-compliance with federal regulations and questioned costs of $16,517. (Finding 98-13, pages 37-38)
We recommended the Department implement clear, formal policies and procedures that require time reporting for all staff with varying tasks that impact claims for reimbursement under federal programs.
Department officials did not accept our finding and recommendation. They stated that time reporting for all staff would be an unnecessary burden. Time reporting is utilized for special programs or enhanced federal financial participants rates. The nurses included in the loan program to the Department of Public Health were to be identified by the Bureau of Long Term Care and Public Health and their costs omitted from the Skilled Professional Medical costs included on the HCFA-64. An adjustment to the HCFA-64 was to be made in the quarter ended March 31, 1999 report for the two nurses included in the sample.
In an auditor's comment, we pointed out the Department should require timely reporting for all employees with varying tasks that impact claims for federal reimbursement. This is required by federal regulations. Whether this places an unnecessary burden on staff is irrelevant.
The Department did not properly prepare time certifications for all departmental employees to properly charge personnel costs to federal programs in accordance with federal regulations.
We noted the Department allocated personnel costs based on: 1) cases completed rather than on time spent on specific types of cases, 2) time studies performed in 1983 instead of on a quarterly basis, and 3) time certifications that were not properly certified by employees or supervisors as required by federal regulations. (Finding 98-15, pages 40-42)
We recommended that the Department develop and implement sufficient systems and controls to reasonably ensure that federal programs are charged for personnel costs that are supported by accurate, valid books and records in compliance with federal regulations.
Department officials did not accept our finding and recommendation. They stated the use of cases completed and the reference to the "1983 time study" involved the quarterly certification submitted by the Bureau of Quality Control. The Bureau of Fiscal Operations has reviewed this methodology and considers it to be an acceptable substitute system to allocate their costs. This methodology has been used for years with no apparent concern from the cognizant federal agencies, according to the Department.
In an auditor's comment, we pointed out that according to OMB Circular A-87, a "substitute system" must be approved by the cognizant federal agency. The substitute system referred to in this finding may have been approved internally. However, it was not approved by the federal cognizant agency as required by federal regulations.
INCOMPLETE RECIPIENT FILES
Certain recipient files were incomplete or missing for recipients of Medical Assistance and recipients of Child Support.
The Department no longer maintains recipient eligibility files; this function was passed to the Illinois Department of Human Services (DHS). However, the Department is required to supervise the maintenance of these recipient records. Additionally, the Department did not have documentation concerning the supervision or the content requirements of these files.
Failure to maintain complete recipient files is a violation of federal regulations and could result in the disallowance of claims made to the Federal government. (Finding 98-17, page 44)
We recommended the Department supervise the Illinois Department of Human Service's maintenance of recipient files as required by federal regulations.
Department officials did not accept our finding and recommendation and stated it is their position that the policies and procedures to supervise the maintenance of eligibility records for recipients of medical assistance is already in place.
In an auditor's comment, we pointed out the Department has an adequate system for the Medicaid Eligibility Quality Program in accordance with federal regulations 42 CFR 431.810 through 431.865. However, the Department does not have policies and procedures regarding the maintenance of records in accordance with federal regulations 42 CFR 431.17 and 45 CRF 302.15. On July 1, 1997 the Department transferred the responsibility of eligibility determination for the Medical Assistance program to the Illinois Department of Human Services. The Department did not have policies and procedures in place to supervise the maintenance of eligibility records as required by federal regulations.
The remaining findings are reportedly being given attention by the Department. We will review the progress towards the implementation of our recommendations in our next compliance audit.
Ms. Mary Fritz, Acting Chief Internal Auditor for the Department, provided written responses to our findings and recommendations on March 18, 1999.
Our auditors stated the Department's financial statements as of June 30, 1998 were fairly presented except for the effects of such adjustments, if any, as might have been determined to be necessary had they been able to examine evidence regarding year 2000 disclosures. Further, the financial statements did not include the Child Support Enforcement Trust Funds, which should be included in order to conform with generally accepted accounting principles.
SPECIAL ASSISTANT AUDITORS
Pandolfi, Topolski, Weiss & Co., Ltd. were our special assistant auditors for this audit.