Duchesne County Water Conservancy District Audit

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AUSTON G. JOHNSON, CPA

UTAH STATEAUDITOR

DUCHESNE COUNTYWATERCONSERVANCYDISTRICT

Keeping UtahFinancially Strong

Findings and RecommendationsFor the Period July 2007 through August 2010

Report No. 10-SSD-L


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Auston G. Johnson, CPAUTAH STATE AUDITOR

STATE OF UTAH

Office of the State AuditorUTAH STATE CAPITOL COMPLEX

EAST OFFICE BUILDING, SUITE E310

P.O. BOX 142310

SALT LAKE CITY, UTAH 84114-2310

(801) 538-1025

FAX (801) 538-1383

DEPUTY STATE AUDITOR

Joe Christensen, CPA

AUDIT DIRECTORS:

Van H. Christensen, CPA

Deborah A. Empey, CPA

Stan Godfrey, CPA

Jon T. Johnson, CPA

REPORT NO. 10-SSD-L

May 25, 2011

Duchesne County Water Conservancy District

c/o Moreen Henderson, Board Chairman

275 West 800 South

Roosevelt, Utah 84066

Dear Chairman Henderson:

We have performed the procedures described below to certain aspects of the internal control at theDuchesne County Water Conservancy District (the District) for the period July 2007 through August2010. The purpose of these procedures was to investigate several allegations of poor internalcontrols at the District that allegedly resulted in nepotism/favoritism and inappropriate or excessivereimbursements to a District employee. We performed the following procedures at the District.

1. We reviewed cash disbursing duties for adequacy of separation of duties for internal controlpurposes.

2. We tested a sample of cash disbursements for propriety, reasonableness, and compliancewith certain internal and State purchasing policies.

3. We reviewed the Districts compliance with certain laws and policies and proceduresregarding personnel and payroll issues, such as nepotism.

Our procedures were more limited than would be necessary to express an audit opinion oncompliance or on the effectiveness of the Districts internal control or any part thereof. Accordingly,we do not express such opinions. Alternatively, we have identified the procedures we performed

and the findings resulting from those procedures. Had we performed additional procedures or hadwe made an audit of the effectiveness of the Districts internal control, other matters might havecome to our attention that would have been reported to you.

Our findings resulting from the above procedures are included in the attached findings and

recommendations section of this report. We feel that Finding No. 1 is a material weakness to the

District and Finding Nos. 2 through 5 are significant deficiencies. A material weakness is a

deficiency, or combination of deficiencies, in internal control, such that there is a reasonable

possibility that inappropriate transactions that could be material to the financial activity of the


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District will not be prevented or detected and corrected on a timely basis. A significant deficiency isa deficiency, or combination of deficiencies, in internal control that is less severe than a materialweakness, yet important enough to merit attention by those charged with governance.

This report is intended solely for the information and use of the District and is not intended to be and

should not be used by anyone other than this specified party. However, the report is a matter ofpublic record and its distribution is not limited.

By its nature, this report focuses on exceptions, weaknesses, and problems. This focus should not beunderstood to mean there are not also various strengths and accomplishments. We appreciate thecourtesy and assistance extended to us by the personnel of the District during the course of theengagement, and we look forward to a continuing professional relationship. If you have anyquestions, please call Debbie Empey, Audit Director, at 801-538-1342.

Sincerely,

Auston G. Johnson, CPAUtah State Auditor

cc: Reed R. Murray, Program Director, CUP Completion Act Office, DOI


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DUCHESNE COUNTY WATER CONSERVANCY DISTRICT

FOR THE PERIOD JULY 2007 THROUGH AUGUST 2010

TABLE OF CONTENTS

Page

FINDINGS AND RECOMMENDATIONS:

1. SEPARATION OF DUTIES WEAKNESSES (Material Weakness) 12. POTENTIAL VIOLATIONS OF THE PUBLIC EMPLOYEES ETHICS ACT (Significant Deficiency) 13. INADEQUATE PURCHASING POLICIES AND PROCEDURES (Significant Deficiency) 24. OVERPAYMENTS TO THE DISTRICT MANAGER (Significant Deficiency) 45. PROBLEMS PERTAINING TO HIRING RELATIVES OF A DISTRICT EMPLOYEE 5

(Significant Deficiency)

DUSCHESNE COUNTY WATER CONSERVANCY DISTRICTS RESPONSE

TO AUDIT FINDINGS Attachment 1


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FINDINGS AND RECOMMENDATIONSFOR THE PERIOD JULY 2007 THROUGH AUGUST 2010

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1. SEPARATION OF DUTIES WEAKNESSES (Material Weakness)The District Secretary has access to checks, both before and after they are signed by theDuchesne County Water Conservancy District Board (Board), maintains the Districtsaccounting records, and prepares the bank reconciliation. Inadequate separation of duties existswhen the same individual has access to assets, access to the accounting records, and/or reconciliationresponsibilities. Inadequate separation of duties could allow errors and fraud to occur withoutdetection. The District should separate the duties of handling the checks from the recording andreconciling duties. In situations where it is impractical to separate duties due to the small number ofemployees, additional controls should be implemented. In this case, a detailed review of the bankreconciliation, including a review of the check images processed by the bank, by an individual whodoes not handle the checks would help compensate for the separation of duties weakness.

Recommendation:

We recommend that the District separate the duties. If separation is not possible due to the

limited number of employees, we recommend that the compensating control mentioned above

be implemented.

2. POTENTIAL VIOLATIONS OF THE PUBLIC EMPLOYEES ETHICS ACT(Significant Deficiency)

The District allowed the Manager to provide services to the District outside of his normal duties,

thereby creating potential violations of Utah Code 67-16, the Utah Public Officers andEmployees Ethics Act, as follows:

a. The District Manager acted as a private contractor for the District by providingconstruction services for which he was paid personally. The District paid the DistrictManager $21,168 for the construction of flight decks and tool houses needed for theHigh Mountain Lakes project (Project) over a three-year period from July 2007 throughAugust 2010. It is a potential conflict of interest for an employee to also act as acontractor, especially since the District did not attempt to obtain competing bids forconstruction of these items (see Finding No. 3). The District should have attempted toobtain bids from independent contractors or should have built the items in-house. Also,

there is a risk that this arrangement could violate or give the appearance of violation ofUtah Code 67-16-4(1)(c) which prohibits an employee from using his position to furthersubstantially the employees personal economic interest or secure special privileges forhimself or others.

b. The District Manager provided personal tools, equipment, and other property to theDistrict for the Project, as well as other projects, and was reimbursed for the Districtsuse of the items. For the three-year period, the District reimbursed the District Manager


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$18,810 for these items. The rates of reimbursement were set by the District Manager

and were not always consistent from billing to billing. The Board had not discussed norformally approved the rental rates charged for these items, nor had the Board ensuredthat the rates were reasonable by obtaining bids or by other means (see Finding No. 3).Reimbursement rates for business use of personal items should be based on rates thathave been approved by the governing body.

c. The District Manager provided all of the food for the temporary workers while on siteduring the Project and then personally received payment from the workers. Since theManager represents the District, it is inappropriate and creates a potential conflict ofinterest for him to also provide food service as a private individual to the employees.Utah Code 67-16-8 states no public officer or public employee shall participate in his

official capacity or receive compensation in respect to any transaction between the stateor any of its agencies and any business entity as to which such public officer or publicemployee is also an officer, director, or employee or owns a substantial interest, unlessdisclosure has been made as provided under Section 67-16-7. Since we found nomention of this arrangement in the District minutes until after the project was completed,it does not appear that proper disclosure was made to the Board. Further, the Districtrepresented that the employment agreement with the temporary workers required eachworker to provide their own food during the project. However, we found that no writtenemployment agreement exists and it could be unreasonable and inefficient for theDistrict to require each employee to provide their own food for extended periods of timein a wilderness setting.

When the Board allows violations or even the appearance of a violation of the Public EmployeesEthics Act, it weakens the public faith and confidence in the integrity of government. It alsocreates an environment where waste and abuse of public funds could occur.

Recommendation:

We recommend that the Board strengthen their policies and practices to ensure

compliance with State law.

3. INADEQUATE PURCHASING POLICIES AND PROCEDURES(Significant Deficiency)We reviewed the Districts purchasing policies and found the following inadequacies:

a. Current Policy Does Not Require Bids for Purchases Under $15,000 The Districts bidlevel is deemed to be too high to effectively safeguard public funds. According to theDistricts procurement policies and procedures, bids are required for purchases of$15,000 or more and there is no requirement for phone bids, quotes, etc. for purchases


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less than $15,000. As a comparison, the States purchasing policy requires at least two

phone quotes for purchases between $1,000 $5,000 and additional requirements suchas bids for purchases over $5,000. The District should develop and implement apurchasing policy that requires the District to obtain competitive quotes or bids atreasonable dollar levels for the size of their entity. We were told that the Districtobtained price comparisons in some situations; however, we were unable to verifywhether that was the case since there was no documentation retained. As a result of theDistricts inadequate purchasing policies and procedures, and in conjunction with theethical concerns in Finding No. 2, we have concerns with the following disbursementsnoted during our testwork:

The District obtained trucking services in excess of $3,000 in relation to the HighMountain Lakes project. The District did not retain evidence that any effort wasmade to obtain bids or award the services competitively.

All items listed in Finding No. 2 above. Long-term horse rental as described in Finding No. 5.

b. Purchase Requisitions and Purchase Orders Not Used The District does not utilizerequisitions or purchase orders as required in the Districts Administrative Code. UtahCode 17B-1-618 requires that all purchases by a district be made according to thepurchasing procedures established by each district by resolution and only on an order or

approval of the person duly authorized. Therefore, the District should either follow theircurrent policies or change the policies to reflect policies and procedures they determineare appropriate.

c. Insufficient Supporting Documentation for Disbursement The District reimbursed theDistrict Manager $525 for materials and services that he had obtained or used on behalfof the District. There was no supporting documentation for the disbursements except ahandwritten note requesting reimbursement. The District should require sufficient andreliable documentation that indicates proof of the amount and timing of the purchase andevidence of efforts to obtain bids and cost comparisons.

Inadequate purchasing policies and procedures can result in bias and conflicts of interest. Thelack of sufficient documentation could result in misuse of District funds.

Recommendation:

We recommend that the District implement adequate purchasing policies and procedures

and require supporting documentation to support disbursements.


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4. OVERPAYMENTS TO THE DISTRICT MANAGER (Significant Deficiency)The District paid a total of $37,558 in overtime pay to the District Manager during the period ofMay 2008 through December 2009. Of this amount, $6,173 was overpaid to the DistrictManager for work on construction-related projects. The District Manager tracked the hoursworked, determined the overtime rate, calculated the pay, and submitted the payment request tothe District.

The District paid the overtime partly on the belief at the time that overtime pay was required bythe Federal Fair Labor Standards Act (FLSA), even though the District Managers employmentagreement does not allow for overtime pay. Although the District has since reported that theybelieve the FLSA does not apply, we believe that there is some evidence to suggest that the

FLSA may apply in this situation since the District Manager was performing construction-related duties. However, FLSA laws are complex and the District should determine withcertainty whether or not this situation is subject to the law to ensure compliance. If FLSA isapplicable in this situation, the calculation error noted in d. below would be considered non-compliance with FLSA.

We noted the following errors in seven overtime payments:

a. Vacation time payout The District Manager was paid for 120 hours of vacation payoutin the amount of $5,926 at overtime rates. The Manager did not take this vacation timeand District policy does not allow for vacation time to be cashed out when not actually

used. Also, any vacation time claimed should be paid at the regular hourly rate and notat the overtime rate.

b. Overcharge for Holiday Hours The District Manager was overpaid for one holiday (8hours) in the amount of $399 because he claimed the same holiday on two consecutivemonths timesheets.

c. Addition errors In three instances, addition errors were made resulting in a netunderpayment of $152 to the District Manager for 3 hours of overtime.

d. Overtime Rate Not Calculated Correctly The District Manager calculated the overtimerate at roughly 1.5 times the regular hourly wage and then deducted the FICAwithholding rate from the overtime pay rate, which resulted in an incorrect pay rateaccording to the FLSA. As discussed above, because it is not certain whether FLSAapplies, we did not calculate the effect of this error and it is not included in the netoverpayment above.


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The Districts internal controls over the review and approval of disbursements were not

sufficient to detect these errors. The District should ensure that disbursements are reviewedsufficiently to detect and correct these types of errors. The lack of proper review resulted inoverpayments and possible non-compliance with the FLSA.

Recommendation:

We recommend that the District strengthen the review and approval process over

disbursements. We also recommend that the district determine whether the FLSA applies

for employees and, if so, determine the correct rate for overtime pay. Finally, we

recommend that the District seek reimbursement for the overpayments to the District

Manager.

5. PROBLEMS PERTAINING TO HIRING RELATIVES OF A DISTRICTEMPLOYEE (Significant Deficiency)

The District has hired the District Managers relatives as temporary employees for the past threesummers (2008, 2009, 2010) to work on the High Mountain Lakes Project (the Project) fundedby the Federal Government. As many as five relatives of the District Manager have been paid acombined total of total $240,990 for the three summers in wages and per diem. When a relativeis supervised by another relative, there is an inherent conflict of interest as well as a high riskthat the public could perceive the situation as a conflict of interest and an unfair benefit to the

District Manager and his relatives. We noted that the federal requirements attached to thisproject required the Board to establish safeguards to prohibit employees from using theirpositions for a purpose that constitutes or presents the appearance of personal or organizationalconflict of interest, or personal gain. Furthermore, Utah Code 67-16-4 prohibits a public officerfrom using his position to further substantially the officers personal economic interest or tosecure special privileges or exemptions for himself or others. Since the amount of moneyinvolved is substantial, the District has an even greater duty to ensure that the pay rate isreasonable and that the hiring process is fair. We noted the following issues pertaining to thissituation:

a. The Board did not vote to approve the pay rates for the temporary workers in 2010.Although there is evidence of some discussion of the pay rates among the Board, therewas no formal approval of the rates in a Board meeting. The pay rates were $26 perregular hour; $39 per overtime hour; and $5.50 per hour bonus upon successfulcompletion of the project. Since a majority of the temporary employees are the DistrictManagers relatives and the District Manager supervises his relatives, the situation givesthe appearance that the District Manager determined pay rates for his relatives.


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b. The District Manager was present during the evaluation of the applicants for thetemporary positions, which could have potentially caused inappropriate influence onhiring decisions. The District Manager should not be present while his relatives areevaluated.

c. The relatives of the District Manager worked more hours in 2009 and 2010 than workersnot related to the District Manager. The relatives were paid the same hourly rate butearned more in total due to the higher number of hours worked. This adds to theappearance of favoritism toward the District Managers relatives.

d. The District reimbursed four relatives of the District Manager, three of whom were alsoworking on the project, a total of $25,700 for the use of their horses between June 2008

and August 2010. The District did not document efforts to find cost comparisons andjustification for the rates of reimbursement for the use of the horses. Since other, non-relative, employees were not given the option of providing their own horses, thisarrangement appears to give unfair advantage to the relatives of the District Manager.The Board should ensure that the rate of reimbursement is reasonable and well-supportedby cost comparisons or other data. We also acknowledge that there are likely some validreasons that the District allowed the District Manager to utilize horses with which he wasfamiliar and that it would have cost significantly more to rent horses from an outsidevendor. Regardless, when there is the appearance of favoritism and conflict of interest, itcould weaken the public faith and confidence in the integrity of government.

For 2008, the District Manager hired the temporary employees, including his relatives, withoutpublicly advertising the positions or using a competitive process. However, in 2009 and 2010the District advertised the positions. Also, in 2010 the District implemented an evaluationcommittee and obtained a legal opinion confirming that the process did not constitute nepotism.We acknowledge these efforts to improve the hiring process.

While the District likely met the standards of the law pertaining to the hiring of relatives, weencourage the Board to be very cautious to avoid the appearance of a conflict of interest and ofunfair personal gain to the District Manager and his relatives on these projects.

Recommendation:

We recommend that the Board make hiring decisions that do not give rise to the

appearance of a conflict of interest and/or favoritism. We also recommend that the Board

formally approve the pay rate for temporary workers and more thoroughly document the

justification for the rate of reimbursement for the use of personal horses.


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Duchesne County Water Conservancy District Audit

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