Sea Breeze Vicinity Water
Transcript of Sea Breeze Vicinity Water
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DIVISIONOF LOCAL GOVERNMENT
& SCHOOL ACCOUNTABILITY
O F F I C E O F T H E N E W YO R K ST A T E C O M P T R O L L E R
Report of Examination
Period Covered:
January 1, 2007 January 20, 2010
2010M-66
Sea Breeze andVicinity Water District
Internal Controls OverBilling and Collections
Thomas P. DiNapoli
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Page
AUTHORITY LETTER 2
INTRODUCTION 3
Background 3
Objective 3
Scope and Methodology 3
Comments of District Officials and Corrective Action 3
BILLING AND COLLECTIONS 5
Segregation of Duties 5
Cash Receipts 6
Account Adjustments 7
Recommendations 8
APPENDIX A Response From District Officials 9
APPENDIX B OSC Comment on the District Officials Response 12
APPENDIX C Audit Methodology and Standards 13
APPENDIX D How to Obtain Additional Copies of the Report 14APPENDIX E Local Regional Office Listing 15
Table of Contents
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2 OFFICEOFTHE NEW YORK STATE COMPTROLLER2
State of New York
Office of the State Comptroller
Division of Local Government
and School Accountability
August 2010
Dear Water District Officials:
A top priority of the Office of the State Comptroller is to help local government officials manage
government resources efficiently and effectively and, by so doing, provide accountability for
tax dollars spent to support government operations. The Comptroller oversees the fiscal affairs of
local governments statewide, as well as compliance with relevant statutes and observance of good
business practices. This fiscal oversight is accomplished, in part, through our audits, which identify
opportunities for improving operations and Board governance. Audits also can identify strategies to
reduce costs and to strengthen controls intended to safeguard local government assets.
Following is a report of our audit of the Sea Breeze and Vicinity Water District, entitled Internal
Controls Over Billing and Collections. This audit was conducted pursuant to Article V, Section 1 of
the State Constitution and the State Comptrollers authority as set forth in Article 3 of the General
Municipal Law.
This audits results and recommendations are resources for local government officials to use in
effectively managing operations and in meeting the expectations of their constituents. If you have
questions about this report, please feel free to contact the local regional office for your county, as listed
at the end of this report.
Respectfully submitted,
Office of the State Comptroller
Division of Local Government
and School Accountability
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Background
Introduction
Objective
Scope and
Methodology
Comments of
District Officials and
Corrective Action
The Sea Breeze and Vicinity Water District (District) was createdin 1914 to finance, construct, operate and maintain a watersupply system for the benefit of the residents of Sea Breeze and
the surrounding area. The District provides water services forapproximately 9,900 residents of the Sea Breeze neighborhood andthe surrounding area in the Town of Irondequoit (Town), MonroeCounty. The District is governed by an elected three-member Boardof Commissioners (Board). The Town Supervisor acts as the DistrictsTreasurer. The Water Superintendent is responsible, along with otherstaff, for the Districts day-to-day management under the direction ofthe Board.
The District maintains approximately 80 miles of water main and270 fire hydrants. For the 2009 fiscal year, the District reported
revenues totaling $854,000, operating expenses totaling $927,000,and unappropriated fund balance of $216,000. District revenuesare primarily generated from water usage charges, but also includeapproximately $120,000 from cellular antennae rentals. Operatingexpenses of the District include payroll, employee benefits, power,purchased water, maintenance and operating costs.
The objective of our audit was to review the Districts controls overthe billing and collection of water charges. Our audit addressed thefollowing related question:
Are internal controls over billed receivables appropriatelydesigned and operating effectively to adequately safeguardDistrict assets?
We reviewed relevant records and reports, and observed processesrelative to the Districts billing and collection of water charges for theperiod January 1, 2007 to January 20, 2010.
We conducted our audit in accordance with generally acceptedgovernment auditing standards (GAGAS). More information on suchstandards and the methodology used in performing this audit areincluded in Appendix C of this report.
The results of our audit and recommendations have been discussedwith District officials and their comments, which appear in AppendixA, have been considered in preparing this report. District officialsgenerally agreed with our recommendations and indicated they havetaken or plan to initiate corrective action. Appendix B includes ourcomment on the issue raised in the Districts response letter.
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4 OFFICEOFTHE NEW YORK STATE COMPTROLLER4
The Board has the responsibility to initiate corrective action. A
written corrective action plan (CAP) that addresses the findings and
recommendations in this report should be prepared and forwarded
to our office within 90 days, pursuant to Section 35 of the General
Municipal Law. For more information on preparing and filing your
CAP, please refer to our brochure, Responding to an OSC Audit
Report, which you received with the draft audit report. We encourage
the Board to make this plan available for public review in the Clerks
office.
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Billing and Collections
District officials are responsible for establishing an internal control
system consisting of policies and procedures to provide reasonable
assurance that billings are properly initiated, approved, documented,
and recorded. It also provides mechanisms for ensuring that cashreceipts are deposited timely and intact, and that cash is safeguarded
to prevent loss or theft. Key duties (e.g., maintenance of accounting
records, cash custody, bank reconciliations) must be adequately
segregated so that the same individual is not controlling most or all
phases of a transaction, particularly when there is limited supervisory
oversight. Town Law also provides a key control for cash collections
by requiring that the Receiver of Taxes and Assessments (Receiver)
collect all water rents within the Town.1 With good internal controls,
District officials can enhance the safeguarding of cash assets,
mitigate the risk of misappropriation and mistakes, and help ensurecompliance with applicable laws.
We identified significant weaknesses in internal controls over water
billing and cash collections. District officials have not established and
adopted written policies and procedures governing billed receivables.
As a result, the billing clerk did not have adequate guidelines for
preparing or adjusting bills, and for recording and depositing cash
receipts. In addition, the billing clerk is directly responsible for
most aspects of the billing and collection process. Finally, we also
found that the billing clerk did not deposit moneys intact and made
adjustments to customer accounts without management approval.Without adequate segregation of duties and management oversight,
there is an increased risk that errors and irregularities will not be
detected and corrected in a timely manner.
An important component of any internal control system is proper
segregation of duties, ensuring that no one person controls all
phases of a transaction. Concentrating key duties (i.e., authorization,
recordkeeping and custody) with one individual with little or no
oversight weakens internal controls and significantly increases the
risk that errors and/or irregularities might occur and go undetected
and uncorrected. Another important component is management
oversight.
The District bills users quarterly in January, April, July and October.
The billing clerk is directly responsible for the majority of the billing
and collection process. Her responsibilities include preparing and
collecting meter reading cards, entering meter readings into the
Segregation of Duties
1 The Receiver does not have responsibilities for billing or recordkeeping.
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computer, preparing and printing bills, collecting payments, preparing
deposits, entering receipts into the computer system, maintaining
customer detail accounts and making account adjustments. She also
has the ability to change the water rate within the computerized
billing system. While the Town Accountant maintains all control
accounts, prepares monthly and year-end financial reports and
prepares bank reconciliations, the information the Town Accountant
uses is based solely on reports and other information that is provided
by the billing clerk.
Due to the inadequate segregation of duties, we reviewed 15 late
payments to ensure amounts due included penalties. We also
compared meter reading cards from eight customer accounts to the
October 2009 billing to ensure accuracy and we compared billed
amounts on master billings to amounts posted to customer accounts.
Additionally, we reviewed 14 receipts from the April 2009 billing to
ensure that they had been properly recorded and deposited. While we
found significant weaknesses with cash collections, the weaknessescan be easily eliminated by relinquishing the cash collection
responsibilities to the Receiver, as required by Town Law.
Good management practices require that cash receipts be recorded in
a cash receipts journal to provide a detail of the amount received, the
date received, the type of payment, and the payee. This information
becomes a summary of the amounts deposited in the bank. It is
important that collections be deposited in the bank and credited to
the customers accounts in a timely manner. When the billing clerk
receives a payment, she records only the amount and the customer
account number and does not record the date received or whetherthe payment was by cash or check. Deposit slips are not properly
itemized to show the individual checks included. Normally, after
she receives 100 payments,2 the billing clerk prepares a deposit and
credits the customers accounts in the computer system accordingly.
While this generally results in daily deposits during the first month of
a collection cycle, deposits in the final two months were on average
only once per week. Therefore, she does not credit customer accounts
or secure collections in the bank on a timely basis.
Because of the lack of documentation, we requested depositcompositions from the bank for several deposits. We determined
that deposits were not made intact. Because the District has not
established a change fund, there is no set cash amount in the
drawer after each deposit. Instead, the billing clerk withholds several
receipt stubs and the corresponding amount of cash from the days
collection (which were paid by check) totaling between $200 and
Cash Receipts
2 Near the end of a billing cycle, she will make a deposit after 25 payments are
received.
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$250. She deposits those checks but does not credit those accounts in
the computerized billing system until she makes the next deposit. For
example, while preparing her April 23, 2009 deposit, the billing clerk
withheld cash totaling $220.85 (which she kept in the cash drawer
as a change fund), which was the total of four check payments she
had received. She deposited those four checks in the April 23, 2009
deposit, but did not credit the corresponding customer accounts until
the next deposit date (April 24, 2009.) Similarly, she credited six
customer accounts ($225.78) in the computer on the April 23, 2009
deposit date, for checks which had actually been included in the April
21, 2009 deposit.
When cash receipt records are not accurate and complete, and cash
receipts are not deposited intact, the risk is increased that funds
could be misappropriated without detection. In addition, because
of inadequate segregation of duties in preparing and adjusting bills,
collecting and depositing receipts, and maintaining customer records,
there is an increased risk of the loss or unauthorized use of Districtfunds, and of errors or irregularities occurring and going undetected
and uncorrected. These conditions emphasize why the duties of
collecting water revenues should be transferred to the Receiver, as
provided in Town Law.
Effective controls over District revenue require management review
and approval of adjustments to customer accounts, including the
rationale for such changes. In addition, prudent management practices
include, at a minimum, a written agreed-upon policy with strong
internal controls, including a segregation of incompatible duties and
a specific authorization process.
Due in part to the Districts lack of enforcement of its meter reading
system, a large number of billing adjustments are made each
quarter. The District sends out meter reading cards each quarter,
approximately six weeks prior to the billing cycle. Each customer is
responsible for reading their meter and either returning the card by
mail or calling the District with the reading. When a customer fails to
read their meter, the billing system estimates their water consumption
based upon prior readings.3 With each successive estimate, the
computer increases the estimated consumption. Consequently,billings based on estimated usage could be significantly higher or
lower than they should be based upon actual metered usage.
District officials generally do not authorize adjustments made to
customer accounts.4 The billing clerk makes all adjustments to
customer records. She handles customer phone calls and makes
Account Adjustments
3 The billing clerk has the ability to override the computers estimate.4 The District requires authorization for a one-time 50 percent leak adjustment.
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8 OFFICEOFTHE NEW YORK STATE COMPTROLLER8
adjustments at her own discretion, without prior authorization. These
changes appear in a system-generated adjustments report which
she prints periodically. However, District officials had not adopted
policies and procedures to provide the billing clerk with guidance,
such as authorization limits on adjustments she could preapprove,
and no one from the District reviews or approves the adjustments
reports she prepared.
For the period December 16, 2008 through January 6, 2010, the billing
clerk made 225 adjustments in the billing and collection system,
which lowered customer account balances by a total of $15,000. Of
the 225 adjustments, 129 (57 percent) were because of overestimates,
24 (11 percent) were due to computer billing errors and the remaining
72 were for various other reasons, including underestimates (9),
misreads (8), bad checks (8) and having the envelope postmarked
by the due date (5). Ten (4 percent) adjustments had no explanation
listed. Only one of the 225 adjustments had prior approval according
to the Districts One Time 50 percent Leak Adjustment.
We found that a majority of the account adjustments resulted from
customers calling in with an actual meter reading after receiving a
very high estimated bill. By refraining from making such adjustments
after the bills are mailed, the District could significantly reduce
the number of account adjustments needed and further encourage
customers to send accurate and timely readings. Instead, the District
could wait until the following billing cycle to make the proper
correction, based on an accurate and timely meter reading. At the
end of our fieldwork, the Board established a minimal fee to attempt
to encourage customers to submit timely meter readings. EffectiveAugust 15, 2010, an estimated read fee of $10 will be charged if the
District does not receive an actual reading at least once annually by
August 15.
The combination of the lack of segregation of duties in billing and the
adjustment of accounts, lack of approval of adjustments, and the lack
of management oversight increases the risk that the District may not
generate the proper amount of water rent revenues because customers
are not properly billed.
1. Water rents should be collected by the Receiver.
2. The Board should adopt a written policy requiring that all customer
account adjustments be properly documented and approved by
the Board or an appropriate designee.
Recommendations
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APPENDIX A
RESPONSE FROM DISTRICT OFFICIALS
The District officials response to this audit can be found on the following pages.
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See
Note
Page
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APPENDIX B
OSC COMMENT ON THE DISTRICT OFFICALS RESPONSE
Note 1
We have revised our report to address the concern that District officials raised in their response.
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1313DIVISIONOF LOCAL GOVERNMENTAND SCHOOLACCOUNTABILITY
APPENDIX C
AUDIT METHODOLOGY AND STANDARDS
Our overall goal was to assess the adequacy of the internal controls put in place by officials tosafeguard District assets. To accomplish this, we performed an initial assessment of the internalcontrols so that we could design our audit to focus on those areas most at risk. Our initial assessmentincluded evaluations of the following areas: financial condition, cash receipts and disbursements, andpurchasing.
During the initial assessment, we interviewed appropriate District officials, performed limited testsof transactions and reviewed pertinent documents such as District policies and procedures manuals,Board minutes and financial records and reports. Further, we reviewed the Districts internal controlsand procedures over the computerized financial databases to help ensure that the information producedby such systems was reliable.
After reviewing the information gathered during our initial assessment, we determined whereweaknesses existed, and evaluated those weaknesses for the risk of potential fraud, theft and/orprofessional misconduct. We then decided upon the reported objective and scope by selecting for auditthe area most at risk. We selected billed receivables for further audit testing.
During the course of our audit, we examined the Districts records and reports for the period January1, 2007 to January 20, 2010. To accomplish our audit objective and obtain relevant audit evidence, ourprocedures included the following:
We interviewed the Water Superintendent and the billing clerk to obtain an understanding ofthe water operations and controls in place. We reviewed the Annual Drinking Water Quality
Report for 2008.
We reviewed the minutes of the Board of Commissioners meetings to obtain informationrelated to the Boards oversight.
We reviewed bank statements and deposit slips.
We compared meter reading cards from eight customer accounts to the October 2009 billing.
We compared the billed amount on the October 2009 master to amounts posted on 22 customeraccounts.
We reviewed 14 receipts from the April 2009 billing to ensure that they had been properlyrecorded and deposited.
We conducted this performance audit in accordance with generally accepted government auditing
standards (GAGAS). Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objective.
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APPENDIX D
HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT
Office of the State Comptroller
Public Information Office
110 State Street, 15th Floor
Albany, New York 12236
(518) 474-4015
http://www.osc.state.ny.us/localgov/
To obtain copies of this report, write or visit our web page:
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APPENDIX E
OFFICE OF THE STATE COMPTROLLER
DIVISION OF LOCAL GOVERNMENT
AND SCHOOL ACCOUNTABILITY
Steven J. Hancox, Deputy Comptroller
John C. Traylor, Assistant Comptroller
LOCAL REGIONAL OFFICE LISTING
ALBANY REGIONAL OFFICE
Kenneth Madej, Chief Examiner
Office of the State Comptroller
22 Computer Drive West
Albany, New York 12205-1695
(518) 438-0093 Fax (518) 438-0367
Email: [email protected]
Serving: Albany, Columbia, Dutchess, Greene,
Schenectady, Ulster counties
BINGHAMTON REGIONAL OFFICE
Patrick Carbone, Chief Examiner
Office of the State Comptroller
State Office Building, Room 1702
44 Hawley Street
Binghamton, New York 13901-4417
(607) 721-8306 Fax (607) 721-8313
Email: [email protected]
Serving: Broome, Chenango, Cortland, Delaware,
Otsego, Schoharie, Sullivan, Tioga, Tompkins counties
BUFFALO REGIONAL OFFICE
Robert Meller, Chief Examiner
Office of the State Comptroller
295 Main Street, Suite 1032
Buffalo, New York 14203-2510
(716) 847-3647 Fax (716) 847-3643
Email: [email protected]
Serving: Allegany, Cattaraugus, Chautauqua, Erie,
Genesee, Niagara, Orleans, Wyoming counties
GLENS FALLS REGIONAL OFFICE
Karl Smoczynski, Chief ExaminerOffice of the State Comptroller
One Broad Street Plaza
Glens Falls, New York 12801-4396
(518) 793-0057 Fax (518) 793-5797
Email: [email protected]
Serving: Clinton, Essex, Franklin, Fulton, Hamilton,
Montgomery, Rensselaer, Saratoga, Warren, Washington
counties
HAUPPAUGE REGIONAL OFFICE
Ira McCracken, Chief Examiner
Office of the State Comptroller
NYS Office Building, Room 3A10
Veterans Memorial Highway
Hauppauge, New York 11788-5533
(631) 952-6534 Fax (631) 952-6530
Email: [email protected]
Serving: Nassau, Suffolk counties
NEWBURGH REGIONAL OFFICE
Christopher Ellis, Chief Examiner
Office of the State Comptroller
33 Airport Center Drive, Suite 103
New Windsor, New York 12553-4725
(845) 567-0858 Fax (845) 567-0080
Email: [email protected]
Serving: Orange, Putnam, Rockland,
Westchester counties
ROCHESTER REGIONAL OFFICEEdward V. Grant, Jr., Chief Examiner
Office of the State Comptroller
The Powers Building
16 West Main Street Suite 522
Rochester, New York 14614-1608
(585) 454-2460 Fax (585) 454-3545
Email: [email protected]
Serving: Cayuga, Chemung, Livingston, Monroe,
Ontario, Schuyler, Seneca, Steuben, Wayne, Yates counties
SYRACUSE REGIONAL OFFICE
Rebecca Wilcox, Chief ExaminerOffice of the State Comptroller
State Office Building, Room 409
333 E. Washington Street
Syracuse, New York 13202-1428
(315) 428-4192 Fax (315) 426-2119
Email: [email protected]
Serving: Herkimer, Jefferson, Lewis, Madison,
Oneida, Onondaga, Oswego, St. Lawrence counties