Audit raises more red flags

LIHUE — A trio of annual, independent audit reports released last week found that Kauai County officials should do more to address several recurring financial and record keeping deficiencies.

Those audits, conducted by Honolulu-based accounting firm N&K CPAs, Inc. on transactions made during the 2013 fiscal year, found a total of five countywide issues, ranging from inaccuracies in county purchasing procedures to inaccurate vacation and sick leave records.

Two of those findings, according to the reports, date back to 2012, when an audit by the same firm raised three times as many red flags.

“The County of Kauai has made significant strides in addressing a majority of the previous findings … and should be commended for the work done in the past year,” Council Chair Jay Furfaro wrote in a previously confidential Dec. 10 County Council memo made public last week. “The current findings, however, should not be overlooked and work must begin immediately to address the county’s deficiencies.”

One recurring issue, according to the reports, were mistakes with the county’s purchase card (pCard) system, which was rolled out early last year to several departments and agencies for handling transactions less than $1,500.

The county’s policy requires employees with the cards to document quotes for purchases over $500 and preapprove any card purchase through a designated coordinator.  

Errors were found in 14 of the 40 card transactions from the 2013 fiscal year examined randomly by auditors, including seven instances where purchases were verbally approved and five more where there was no evidence that approval was given.

In one case, there was no evidence that the procurement process was followed before a purchase was made. Approval, in yet another case, was given after a purchase was made.

“I think the red flag here is the more and more people we give the courtesy of having a pCard, the larger the exposure is for abuse,” Furfaro said.

The county, according to the reports, conducted training sessions on using cards, issued formal policies and procedures, and required card-holding employees to self-report violations to the Division of Purchasing.

What the county is lacking, however, is “a monitoring control to ensure that the departments and agencies are following the purchasing procedures,” the report read. It didn’t say that the purchases themselves were inappropriate, only that oversight was lacking.

“I believe, on the pCard side, with the growth in use, the overall controls over that process needs to be pretty strong,” N&K CPAs, Inc. Principal Blake Isobe said at a Dec. 17 special council meeting, when the results of the audits were released.

“I know one of the larger expenses for the county is payroll, but aside from that are your non-payroll transactions,” Isobe added. “If you’re going to use the pCards for a large percentage of the transactions, then a strong system and control over that process probably needs to be in place.”

Another area earmarked for improvement is the county’s method for gathering and maintaining vacation and sick leave records.

Each county department uses a different manual process to maintain and report vacation and sick leave records, which “resulted in errors in the amount of hours and dollars reported to the Department of Finance,” according to the reports.

Out of the 60 random samples tested by auditors, there were four instances where vacation or sick leave hours from the employees leave log did not agree with the department’s summary sheet. An estimate of how many hours or pay that differed between the two wasn’t available.

Although this issue first surfaced in last year’s audit, Councilwoman JoAnn Yukimura said it has been an ongoing issue for about five to six years.

“It’s a longstanding problem that I think has huge consequences when you think about payroll over the years and how that factors into pension funds,” Yukimura said. “If there are errors either way by penalizing the employee or making improper use of county money, it’s a serious problem.”

Finance Director Steve Hunt said his staff and Department of Personnel Services officials are working on a solution that will automate and integrate the county’s hiring, personnel and attendance records now maintained by three separate computer programs.

It is a process that, Hunt said, could take up to two fiscal years to complete.

“The ultimate goal is to convert our currently manual accrual recording system to an online accrual system that will be interfaced with the payroll and personnel system,” Hunt wrote in a response to the audit.

In his response to the audit, Budget and Purchasing Director Ernest Barreira wrote that he agreed with the accounting firm’s findings but explained many of the findings happened before formal pCard training sessions took place in June.

“We believe that the formal training will show tangible results during the 2014 fiscal year audit in terms of a more comprehensive understanding of and compliance with the small purchase requirements,” Barreira wrote.

Although there was only one less pCard error identified this year compared a 2012 audit, Barreira said the number of cards issued has also “expanded greatly throughout our county departments as has the number of transactions.”

“As a percentage of card holders and transaction count, there has been a proportionate improvement in the exercise of this payment method,” Barreira wrote.

To address the errors identified in this past year’s audit, Barreira said the county’s information technology department has developed an automated process to properly document the purchases made.

Department officials, he said, will continue refining the system and eventually roll it out countywide to streamline the reporting process and “eliminate the cumbersome paper-driven process that is currently in use by most departments.”