STATE OF WEST VIRGINIA

SPECIAL REPORT
ATTORNEY GENERAL'S OFFICE

Deficiencies in Internal Control Within
the Office of the Attorney General Create
a Lack of Overall Accounting Integrity

The Attorney General's Office has Encountered
Problems with Statewide Purchasing Card Usage

The Attorney General's Office Disregarded
Executive Proposal and Legislative Intentions by
Rejecting Across-the-Board Pay Raises for
All Employees

Issue Area 1: Deficiencies in Internal Control within the Office of the Attorney General Create a Lack of Overall Accounting Integrity Due to One Individual Controlling Most Accounting Functions.

The accounting functions of the AG's Office rely too heavily on one individual: its controller.⁽¹⁾ Although it is the nature of any controller position to oversee all accounting functions, it is not the ideal situation for any one person to control all financial operations of an agency or constitutional body. With the spending authority of the AG's Office in excess of $7.1 million, there should be better segregation of duties within that office to ensure more effective control procedures. That is, the Attorney General should adequately design and implement an overall internal control structure which is more dependent on other individuals to fulfill the responsibilities inherent within a proper accounting system.
 

CRITERIA FOR INTERNAL CONTROLS

According to the Codification of Statements on Auditing Standards issued by the American Institute of Certified Public Accountants which is in accordance with generally accepted accounting principles, deficiencies in internal control structure are defined as:
 

• inadequate overall internal control structure design,
• absence of appropriate segregation of duties consistent with appropriate control objectives,
• absence of appropriate reviews and approvals of transactions, accounting entries, or systems output, and
• inadequate provisions for the safeguarding of assets.

In conjunction with the above reference, the WV State Code cites the following in §5A-2-24:
"It is the intent of this section to establish a centralized accounting system for ... each spending unit of state government to ... increase public accountability.

Notwithstanding any provision of this code to the contrary, the secretary [of Administration] shall develop and implement a new centralized accounting system for the planning, reporting and control of state expenditures in accordance with generally accepted accounting principles to be used by ... all spending units. The accounting system shall provide for adequate internal controls, accounting procedures, ..."[Emphasis added].

The underlying theory behind the concept of segregation of duties is that it forces collusion between two or more persons which is believed to decrease the probability of impropriety due to two or more individuals being forced to conspire between themselves. That is, it is believed that individuals are less likely to commit any type of intentional misrepresentation when they are forced to conspire with another individual or individuals in order to do so.

Thus, for an accounting system to be "adequate," it should contain some segregation of duties for certain accounting functions such as purchasing and accounts payable. Hypothetically, the consequences are that an individual could order something, then pay for it and no one else would know about the transaction. Likewise, it should also stand to reason that the person who bills an agency should not be the person who receives the payment for that billing. The consequences are that someone could not record an invoice in Accounts Receivable and then receive the payment for it without anyone having knowledge of the transaction.

LACK OF CONTROLS
The controls in place within the AG's Office are largely dependent upon one individual and, correspondingly, upon the integrity of that individual. Although it is inherent within any controller position to oversee the accounting functions, the AG's controller oversees almost the entire accounting process personally, including purchasing, billing, accounts receivable, payroll, accounts payable and, in part, the mailing of special handled checks. The controller does have three (3) employees assigned to that office who perform many of the data entry transactions. This segregation of duties certainly helps in high risk areas such as billing and accounts payable. However, the mitigating factor concerning these employees is that they are still under the "control" of the controller. Therefore, this tightly controlled system alone must draw a red flag due to the fact that one individual administers and performs most facets of the accounting process.

Interviews with the controller show that he is the person responsible for administering Accounts Receivable, preparing invoices, preparing vouchers (for payment) and verifying documentation, and distributing special-handled checks. The controller further concedes that he is the person chiefly responsible for making purchasing decisions and for administering Accounts Payable. Documents furnished by the State Auditor's Office show the controller being the only signature appearing on the invoice and on the purchase order agreement.

The cause of these lack of controls and dependence upon one individual is uncertain. Management mentions a lack of budgetary spending ability (i.e., shortage of funds) for this governmental unit but, with a total budget exceeding $7.1 million, it appears that either management is unwilling to delegate any accounting responsibility to others or management completely believes and relies on the sole integrity of its controller.

EFFECTS OF INADEQUATE CONTROLS
The effects and risks of the lack of controls and over-reliance on one individual within the AG's Office can be revealed by a number of instances. For example, the Purchasing Card program within the State Auditor's Office has reported problems with the AG's use of the Purchasing Card (this is discussed further in Issue Area 2). Reportable findings include stringing purchases to circumvent the Purchasing Card transaction limit, invoices which are not itemized, allowing the card to be used by someone in the office other than the cardholder, and questionable purchases that are either prohibited or are not business related.

Additionally, the State Auditor's Auditing Division which deals with contracts reports problems regarding invoices from vendors that exceed $10,000 in value. According to West Virginia Code and Purchasing Guidelines, contracts that exceed the value of $10,000 must go through the Purchasing Division and they must go through a competitive bid process. Five of the AG's vendors received payments in excess of $10,000--with one vendor receiving over $38,000--without going through the Purchasing Division's bid process. This sample of five vendors had payments in excess of $102,000. The obvious problem with circumventing the competitive bid process is that the State may have been able to acquire those services at a lower cost, and there is the risk that the vendors were chosen because of a pre-existing relationship in which there is some financial gain to staff of the AG's office.

Other problems cited are invoices which do not reference against a statewide contract and invoices which reference no purchase order. These types of violations require the State Auditor's Office to reject these invoices by sending them back to the agency for corrections and re-submission. In fact, the AG's office has a rejection rate on invoices of 7% to 9% per month. This is considerably higher than the average rejection rate for all state agencies. For example, in the months of April, June and July, 2000, the AG's Office had a rejection rate of 9.4%, 9.0% and 7.3%, respectively, compared to 3.0%, 4.1% and 3.0%, respectively, for the other state agencies. The Auditor's Office has also cited problems with obtaining information when the AG's controller is out of the office.

OTHER REASONS FOR CONCERN

The Attorney General's Office also serves as a trustee for certain funds: the Anti-Trust Enforcement Fund, the Consumer Protection Recovery Fund, the Preneed Burial Contract Regulation Fund, the Preneed Funeral Guarantee Fund, and the AG of West Virginia - Sears Roebuck Settlement 97-C-1941. These fund balances change periodically through funds received and disbursed. These funds have never been audited, and there are no financial statements. Adequate internal controls would justify independent audits on such funds and financial statements, particularly since some of these funds are held in trust for citizens of the State. The Legislative Auditor does, however, intend to perform an audit of these funds.

CONCLUSION
Internal control inadequacies have allowed for a vulnerability of state assets. That is, state funds could be misused due to the lack of proper internal controls within the AG's Office. It can certainly be concluded that several control mechanisms in place by the State Auditor's Office are being either abused or ignored by the AG's Office. At the very least, the tight span of control within the AG's Office should be a cause for alarm.

Recommendation 1:
The AG's Office needs to implement a better system of internal controls whereby there is a segregation of duties within the system of accounting, especially with high risk areas such as purchasing and accounts payable and invoicing and accounts receivable.

Recommendation 2:
Managing Deputies should begin to sign off on all transactions thus creating a level of accountability above the Controller and should also alternate signature responsibilities after certain specified periods of time.

Issue Area 2: The Attorney General's Office has Encountered Problems with Statewide Purchasing Card Usage according to the Guidelines Established by the WV Auditor's Office.

The Attorney General's Office has been cited twice, in October 1999 and in March 2000, for numerous findings by the State Auditor's Office for its misuse of the statewide Purchasing Card Program (P-card). In fact, the AG's Office is in jeopardy of losing usage of the P-card entirely due to its continued problems with the program and for failure to adhere to the guidelines established by the State Auditor's Office and the Purchasing Division.

The State Auditor's Office has performed two audits of the AG's Office. The purpose in performing these audits was to determine if the Purchasing Card was being used to acquire resources effectively and efficiently, and to determine if the Purchasing Card Policies and Procedures were being followed. The findings of the audits were severe enough to place the office on probation. Furthermore, the State Auditor's Office has systematically reduced the number of P-cards made available to the AG's Office from six to three, including taking away the card from the Purchasing Card coordinator, who also is the controller.

The AG's Office has implemented new written procedures concerning P-card usage since their last audit. These new procedures, if followed correctly, should alleviate many of the AG's P-card problems.

PURCHASING CARD POST-AUDIT FINDINGS

The Purchasing Card Post-Audit staff of the State Auditor's Office cited numerous findings in its two audits which the Post-Audit staff termed as "severe." Some of the findings noted were the following:
 

• Late Payments - consistently late payments with delinquent payments over 60 days twice and over 30 days twelve times.

• Cardholders Not Reconciling - individual cardholders did not reconcile their statements.

• Individual Log Sheets not being kept - cardholders not keeping their own log sheets.
• Invoices not itemized - invoices do not show individual items with quantities and price, invoices hand-written by cardholder or invoice missing altogether.
• Tax being charged - sales tax being charged for tax-exempt purchases.
• Stringing of invoices - invoices being "split" (i.e., amount cut in half) and processed as two separate invoices (to apparently circumvent transaction limit).
• Card Security violations - more than one person authorizing transactions using the same P-card (i.e., loaning one's card to another individual).
• Questionable Purchases - purchasing items which were either prohibited or which were questionable in regards to being business related.

The Post-Audit staff has systematically reduced the number of P-cards available to the AG's Office from six (6) cards down to three (3) and has drastically reduced the agency's credit limit from $100,000 down to $13,000. In fact, the AG's Card Coordinator--who is also its controller--does not have a card now although he is still the coordinator.

CONCLUSION

The Attorney General's Office has had a number of conflicts with the Post-Audit staff of the State Auditor's Office concerning its inappropriate usage of the Purchasing Card. Although systematic steps have been taken to rectify the problem, the AG's Office continues to have problems with proper usage and administration of the card. The causes of these violations are in part the result of inadequate controls and, also in part, guidelines not being followed. Use of the P-card is purportedly a cost-saving system whereby governmental agencies can process small dollar amounts more efficiently. The AG's Office may be in jeopardy of losing usage of the P-card entirely if it does not adhere to the established rules as specified in the Purchasing Card Policies and Procedures manual. This would result in increased expense to the State of West Virginia if the cost-savings produced by the P-card are disallowed due to cancellation. However, the new procedures implemented by the AG's Office should alleviate many of the problems if they are enforced correctly.

Recommendation 3:
The controls in place relating to use and administration of the statewide Purchasing Card Program should be followed and adhered to more strictly by the Attorney General's Office.
 

Issue Area 3: The Attorney General's Office Disregarded Executive Proposal and Legislative Intentions by Rejecting Across-the-Board Pay Raises for All Employees for FY 2001. However, The AG's Office Did Give Pay Raises to Certain Individuals.

The fiscal year 2001 budget proposed by the Governor included a $756 pay increase for all full-time employees. The Governor's proposal required most executive spending units, including the Office of the Attorney General, to absorb the pay increases from elsewhere in their budgets. The WV Legislature did not deviate from the Executive's proposal, except for the addition of a line item for the Board of Risk and Insurance Management (BRIM) Premium in each spending unit's account. Thus, it can be reasonably concluded that the Legislature intended for the Attorney General to make the $756 ACROSS-THE-BOARD pay raise per employee. However, the Attorney General's Office chose not to comply with the Legislature's recommendation for the $756 pay raise per employee but did increase the pay for forty-four (44) individuals on July 1, 2000, who were contracted to a particular agency. Meanwhile, the remaining one hundred twenty-eight (128) employees, roughly 74 percent, on the AG's Office payroll did not receive the raise at that time. Subsequent to that time, the AG's Office did grant raises to additional personnel. That notwithstanding, as of December, 31, 2000, the AG's Office still had thirty-nine employees not receiving any additional remuneration for the current fiscal year. This action goes against the intent of the Legislature and creates an inequity for some of the Attorney General's employees.

GOVERNOR'S EXECUTIVE PROPOSAL
During the 2000 Regular Session, the Governor submitted his proposed budget for FY 2001. In the Budget, the Governor included an ACROSS-THE-BOARD SALARY INCREASE for all full-time state employees. This increase was to be financed by increased funding from the line items Personal Services (001) and Employee Benefits (010). However, the Governor did not include any "new" money for this pay raise; the money was to come from the Unclassified line item (099). The Governor submitted this proposal to the Legislature for approval. The WV Legislature approved the Governor's Executive Proposal for the FY 2001 budget with one exception.

ATTORNEY GENERAL'S OFFICE REJECTS PAY INCREASE
The Office of the Attorney General, against the recommendation of the Governor and the Legislature, opted to decline the $756 pay raise for many of its employees. In a written statement to the House Committee on Finance, dated June 22, 2000, the Attorney General's Controller wrote:

At this time, the Office of the Attorney General does not plan to provide the $756 across-the-board raise to our employees. However, subsequent to the filing of our expenditure schedule, 44 of our employees working for the Bureau of Employment Programs have been approved for the across-the-board and about $12,000 of merit increases by our client. Other agency clients have not been contacted in regards to the funding of additional raises yet.

The Attorney General's Office did, therefore, grant the pay raise to certain individuals working in their office-more specifically, those individuals working for the Bureau of Employment Programs. However, the AG's Office did not provide the across-the-board pay raise for ALL employees as recommended by the Governor and the Legislature.

According to the AG's controller, the Attorney General's rationale for not providing its pay raises to all employees was their contention that adequate funding was not available in the budget. That is, they believed that the AG's Office needed the money left in the Unclassified (099) account for other expenditures which made a pay raise prohibitive if money was to be used from thataccount. For this reason, the AG's Office, according to the Controller, requested that the appropriations for pay raises be reversed back into the Unclassified account. In this conversation, the controller did acknowledge that the pay raises for certain individuals was strictly a "management decision" in relation to who would receive the raises.

In the Legislative Auditor's opinion, the funds transfer from the Unclassified (099) account to the Personal Services (001) account and Employee Benefits (010) account were adequate to fund the additional pay raise for the other employees in the AG's Office. The additional money funded to the AG's Office for this pay raise was only for seventy-four employees ($55,944/$756=74). Presumably, additional funding for other personnel was not provided since many employees have all (or most) of their salaries reimbursed from other agencies. However, if this transfer left a shortage within the Unclassified account, the AG did have other options: namely, to request an "Additional Funds Transfer" or to increase billings for the other employees.

CONCLUSION
The Executive proposal authorized by the Governor concerning the across-the-board pay increase was part of a statewide raise intended for all state employees. The Legislature concurred with this increase without exception (other than noted above). Therefore, it can be concluded that West Virginia's executive and legislative branches did indeed deem this pay raise fiscally responsible for all employees and deserved by all employees without exception. To disallow this raise to some personnel creates an unfair distribution to many employees. It also shows a total disregard for the intent of the Governor and the Legislature.

Recommendation 4:
The Office of the Attorney General should comply with the across-the-board pay raises consistent with Executive and Legislative intentions.

1. It is not the intent of the Legislative Auditor to question the integrity of the Attorney General's controller, but merely to question the overall adequacy of the internal controls which rely, in many respects, solely on one individual.