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HomeMy WebLinkAbout2223-8 FinanceTax Controls over receipts (Final 4-19-23)Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Finance/Tax Department – Controls over receipts To request this information in an alternate format, please call (541) 330-4674 or send email to internal.audit@Deschutes.org Deschutes County, Oregon The Office of County Internal Audit David Givans, CPA, CIA – County Internal Auditor Aaron Kay – Performance Auditor internal.audit@deschutes.org Audit committee: Daryl Parrish, Chair - Public member Jodi Burch – Public member Joe Healy - Public member Scott Reich - Public member Summer Sears – Public member Stan Turel - Public member Patti Adair, County Commissioner Charles Fadeley, Justice of the Peace Lee Randall, Facilities Director Take survey by clicking HERE Recommendations 4 Finance/Tax Department – Controls over receipts #22/23-8 April 2023 TABLE OF CONTENTS: 1. INTRODUCTION .......................................................................................................................................... 1 1.1. BACKGROUND ON DEPARTMENT ................................................................................................................. 1 2. FINDINGS AND OBSERVATIONS ................................................................................................................ 4 2.1. FINDINGS ......................................................................................................................................................... 5 3. MANAGEMENT RESPONSE ....................................................................................................................... 11 Finance/Tax Department .................................................................................................................................. 11 APPENDIX A: OBJECTIVE, SCOPE, AND METHODOLOGY ............................................................................. 13 I. OBJECTIVES AND SCOPE .................................................................................................................................. 13 II. METHODOLOGY .............................................................................................................................................. 13 Finance/Tax Department – Controls over receipts #22/23-8 April 2023 HIGHLIGHTS Why this audit was performed: A periodic review of internal controls over receipts. What was recommended: Recommendations include: • developing controls over cash handoffs between staff; • exploring elimination of a bank account providing duplicate services; • resuming audits of transient room taxpayers; and • implementing and documenting periodic management review of property tax system adjustment reports. Finance/Tax Department – Controls over receipts The focus of the review was on internal control over receipts. What was found Overall, the Finance/Tax department performed well in providing fiscal control over receipts. Recommendations were developed to assist the Finance/Tax department comply with County policy or prudent business practices for receipts. The areas identified for further improvement include: • accountability for the movement of funds between people; • efficiency for daily bank reconciliations; • audits of transient room taxpayers; and • management review of adjustments to the property tax system. The County could improve management of petty cash and change cash funds. Prior audit recommendations to address these areas remain unresolved. County policy F-14, General Financial Policies, increased the Finance/Tax departments authority to manage and approve changes to bank accounts, but did not designate authority for petty and change cash. Office of County Internal Audit Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 1 1. Introduction Audit Authority: The Deschutes County Audit Committee authorized the review of fiscal controls for the Finance/Tax Department in the Internal Audit Program Work Plan for 2022-2023. Internal audits of fiscal controls are routinely performed for identified County departments. Audit objectives, scope, and methodology can be found in Appendix A. 1.1. BACKGROUND ON DEPARTMENT Graph I Composition of collection activities FY22 (“Other” is comprised of dog licensing, tax fees, and finance fees) The Finance/Tax Department manages all financial activities of the County including annual budget coordination, financial planning, internal and external financial reporting, general accounting, payroll, capital asset records, distribution of property taxes to all taxing districts, cash management and investments, dog licensing and administration, collection and administration of the transient room tax and administration of the County’s long-term debt 1. 1 Deschutes County Adopted Budget FY23 Pg. 170 Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 2 Graph II Five-year trend of unsegregated tax collections in millions (FY2018- FY2022 Actual) Graph III Seasonality of quarterly tax payment collections for Fiscal Year ending 6/30/2023 Property Tax Collections As seen in Graph I, the department receives a vast majority of its receipts in unsegregated tax collections. Unsegregated taxes refer to the lump sum receipt of tax payments prior to categorization and distribution to taxing districts. These tax payments are predominantly paid by check, with a surge in volume typically observed leading up to tax payment deadlines. It is worth noting, Deschutes County’s allocated portion is approximately 17% of the unsegregated taxes, while passing on the remaining 83% to other taxing districts. Seasonality As previously discussed, unsegregated property tax collections make up a majority of the receipts within the department. Increased collection volumes align with tax deadlines in November, February, and May. Graph III shows the highest volume of payments occurring in November to take advantage of discounts offered through the Oregon property tax system. The sharp increase creates some challenges with the timing of payment Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 3 Graph IV Two-year average composition of property tax payment methods (FY2022-2023) (E-checks and credit cards were combined within the credit card category) postings, leading to the department’s use of temporary staffing to assist in processing payments received before the deadlines. Payment Methods Methods of property tax payments include cash collected at the counter, checks (both mailed-in and counter), e-checks, credit cards, lockbox services, and electronic transfers from mortgage companies. Graph IV indicates more than half of the payments received come in as checks. According to a recent survey 2 “received check payments cost between $1-$2 and have the highest labor cost of all payment methods”. The department has made some efforts to encourage taxpayers and mortgage companies towards lower cost methods of payment and should continue to promote the benefits of electronic payment. Transient Room Tax (TRT) Collections Transient room taxes are applicable to any hotel, motel, inn, tourist home or accommodation, lodging house, dormitory, private home, mobile home space, trailer park, or camp site in the unincorporated areas of the County 3. The tax rate for Deschutes County is 8% of the total gross rent. Owners must file regular reports of gross rent either monthly or quarterly depending on the guidelines set forth by the County. Reporting is required even if the tax was collected and remitted by a third-party intermediary such as Airbnb or VRBO. TRT revenues have increased over the last two fiscal years from the growth in tourism. Currently, there are 3,270 active TRT accounts registered with the County. The requirements 2 Association of Financial Professionals 2022 Payments Cost Benchmarking Survey 3 Deschutes County Transient Room Tax FAQ Webpage Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 4 Graph V Five-year trend of TRT revenues in millions (FY2018- FY2022 Actual) to administer these tax accounts have grown with the activity, leading to the approval of additional staff in the FY23 budget for the Finance/Tax department. Organizational Cooperation Finance/Tax staff have created a shared informational repository between both the Assessor’s Office and the Finance/Tax Department. The repository contains individual tax account records of any adjustments to account calculation, refunds, exemptions, and appeals over the last three years. The information is updated regularly and used when discussing property taxpayers’ inquiries for both assessment and taxation. This type of collaboration between department and office leads to better customer service and should be commended. 2. Findings and Observations The audit included limited procedures to understand the systems of internal control around revenues. No significant deficiencies were found in this audit. A significant deficiency is defined as an internal control deficiency that could adversely affect the entity’s ability to initiate, record, process, and report financial data consistent with the assertions of management in the financial Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 5 statements. The findings noted were primarily compliance and efficiency matters. Audit findings result from incidents of non-compliance with stated procedures and/or departures from prudent operation. The findings are, by nature, subjective. The audit disclosed certain policies, procedures and practices that could be improved. The audit was neither designed nor intended to be a detailed study of every relevant system, procedure, or transaction. Accordingly, the opportunities for improvement presented in the report may not be all-inclusive of areas where improvement may be needed and does not replace efforts needed to design an effective system of internal control. Management has responsibility for the system of internal controls, including monitoring internal controls on an ongoing basis to ensure that any weaknesses or non-compliance are promptly identified and corrected. Internal controls provide reasonable but not absolute assurance that an organization’s goals and objectives will be achieved. 2.1. FINDINGS Overall, the Finance/Tax department performed well in providing fiscal controls over collected monies. Each department in the County has unique work environments. The following observations and recommendations are tailored to the Finance/Tax department with consideration of staffing levels, business demands, and operational challenges and are intended to further improve the procedures put into place. Additional controls are needed over cash receipts. Cash is not recounted during turnover of daily collections in the presence of both the accounting technician and the tax specialist. An effective control during cash handoffs is having both employees or an independent witness present when cash is recounted. Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 6 For the internal controls to work effectively, they need to be monitored periodically and designed to handle the types of transactions encountered. The County’s cash handling policy (F-11) indicates that there should be adequate accountability for the movement of funds between people. In the absence of sufficient cash controls, if a discrepancy occurred, it would be a matter of each staff person’s opinion. The last update to the departmental procedure used to reconcile receipts and prepare the deposit occurred in 2018. The Finance/Tax department has consolidated technician duties and customer payment windows in recent years but has not revised written procedures to reflect the changes. It is recommended the Finance/Tax department develop and document controls over cash handoffs. This could include either the technicians or an independent party witnessing the specialist’s recount of cash at the time of turnover. Bank account duplicates existing controls. A bank account was created to control refund or return transactions from the room tax and property tax accounts. It limited the County’s exposure of the larger tax collection accounts to any attempts at fraud. The account had unreconciled daily transactions from November and December within the January reconciliation documentation. Reconciliation between the accounting systems used for room tax, property tax, the County’s general accounting system, and the bank statement is an effective control to identify inconsistencies between systems and ensure the accuracy and integrity of the accounting systems. This bank account has added an additional step to both the accounting and the reconciliation of the Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 7 room and property tax funds. It combines refunds/returns from the two tax fund accounts into a summary account. One contracted third-party payment processor was identified who does not provide any identifying information to determine which account the refund/return was generated. During high volume payment activity in November thousands of payments are received, so efforts to identify and investigate individual refund/return transactions is made more difficult. The account was opened at least 23 years ago, prior to the creation of positive pay as a banking service. The County now has positive pay on its accounts as a fraud prevention measure. Positive Pay works by matching the dollar amount of each check, the check number and the account number that is presented for payment against checks that have been previously authorized and issued by the business. Based on today’s bank relationships and accounting system this bank account may no longer be needed. It is recommended the Finance/Tax department explore elimination of the bank account providing duplicate services. The County should resume audits of transient room taxpayers. External audits of entities who make transient room tax report filings and payments have not occurred since 2020. The County contracts with an outside firm to audit entities on a rotational basis to evaluate both large taxpayers and individuals equally. These could include individual homeowners, property management companies, or short-term rental providers. The objective of the audit is to assess adherence to County Code 4.08, including reporting requirements, tax calculation, and record keeping. Past audits have led to the identification of underpayments and, in some cases, overpayment. In the absence of regular audits, it becomes challenging to assess compliance. The County is reliant Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 8 Graph VI Ten-year trend for the number of transient room taxpayers audited by fiscal year. on taxpayers to self-report rental activity, which makes it problematic to verify whether these entities are accurately accounting and reporting all collected rent and fees. The tax collection software vendor has changed in recent years. The new software has been well received and now provides some comfort towards expected collection efforts. The software identifies taxable entities in the County through a combination of geomapping and a search of internet rental listings, providing a more reliable expectation. It is recommended the Finance/Tax department resume audits of transient room taxpayers. County Internal Audit and the Finance/Tax department are discussing whether internal audit could perform these audit services. Additional oversight needed for adjustments to the property tax system. The review process for property tax system adjustment reports was lost during transitions in department heads, resulting in the current CFO being unaware of its existence. During the February 2005 audit report (#04/05-5), Finance Department – Review of Internal Controls Over Receipts and Investments, a recommendation was made to develop reports which list unusual or exception type transactions, including adjustments and system changes, which would be reviewed Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 9 by the Finance Director (now the CFO). The prior Finance Director had established a review process for adjustments within the tax software system along with supporting documentation to satisfy the audit recommendation, but the process was not included in the written department policies and procedures. Communication is an essential component of internal controls. Written policies and procedures are effective controls over accounting and financial matters. Well-designed and maintained policies and procedures enhance accountability and consistency. The lack of comprehensive written accounting procedures can lead to inadequately planned controls, inadequate supervision, poor and inadequate training, and lack of adherence to stated control procedures. The Finance/Tax department has undergone several personnel changes since the 2005 audit. In this case, the review process was not continued due to lack of documentation. All examined adjustments were well supported through documentation and found to be appropriate. It is recommended the Finance/Tax department implement and document periodic management review of property tax adjustment reports. The review could include unusual type transactions, exceptions, reversals, and changes to the tax system. Prior audit recommendations on change cash funds and petty cash have not been addressed. Authority for petty cash and change cash funds could be addressed more clearly by the County. Currently, the petty cash policy (F-8) requires a Board of County Commissioners order for the establishment or increase of funds, but it does not have a provision for closing them. Additionally, the County does not have a policy in place that addresses the administration of change cash funds. Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 10 County policies do not address change funds or the conversion between types. While the County's policy (F-14) authorizes the Finance/Tax department to manage and approve changes to bank accounts, it does not provide any guidance on managing cash funds. County Internal Audit has issued two prior unresolved audit report recommendations developed with the Finance/Tax department to address these issues with two departments: 1. Community Development Department – Cash Handling #19/20-10 (issued June 2020) It is recommended the County consider updating fiscal policy to allow Finance the authority to manage increases and decreases in petty cash. 2. 2021 County Fair – Ticketing and selected areas #21/22-1 (issued September 2021) It is recommended for Finance to develop a change policy (possibly through an amendment to the petty cash policy F-8) to address the requirements for change cash issuance and its accountability. Unclear County fiscal policies led to interpretation by the prior CFO. The Finance/Tax department currently has $1,400 in change funds, which exceeds the amount approved by past Board resolutions for both change funds and petty cash. It appears the petty cash fund was converted to a change cash fund, and there was an increase of $100 using Munis approval workflow. While the prior CFO cited County policy (F-14) to support the authorization of this increase, it was not formally approved by the Board. Nonetheless, all balances are accurately recorded and maintained in the County's accounting system. The County has long-established practices for departments to receive authorization of petty cash and change funds through the Board. The conversion of petty cash to change cash was not anticipated in policy, but transitioning from one fund type to another is not consistent with past practice. The audit recommendations were made during the tenure of the prior CFO. The current CFO is currently working to update County fiscal policies. Resolution of both prior audit recommendations through revision of policy (as recommended above) will address the authority to manage cash funds, closing petty cash funds, and noted conversion between fund types. Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 11 3. MANAGEMENT RESPONSE Finance/Tax Department, Robert Tintle, Chief Financial Officer Date: April 18, 2023 To: David Givans, County Internal Auditor Aaron Kay, Performance Auditor From: Robert Tintle, Chief Financial Officer Re: CFO Response to Audit Report #22/23-8 Thank you for the internal audit of the Finance/Tax Department controls over receipts. I appreciate your effort in this area as we work together to address the results of the audit. Below are responses to the internal audit recommendations. 1) It is recommended the Finance/Tax department develop and document controls over cash handoffs. Agree. Finance will review department procedures used to reconcile receipts and prepare the deposit, and update as necessary. Witnessing the specialist’s recount of cash at the time of turnover was implemented immediately after the audit. Documentation update anticipated completion date of June 2023. Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 12 Finance/Tax Department, Continued 2) It is recommended the Finance/Tax department explore elimination of the bank account providing duplicate services. Agree. Finance will review the controls on the bank account, consider merging the transactions with the associated revenue type bank account (room or property tax), and determine if eliminating the account is cost beneficial. Anticipated completion date of June 2023. 3) It is recommended the Finance/Tax department resume audits of transient room taxpayers. Agree. Finance will resume audits of transient room taxpayers. Depending on the auditor selected to perform the examinations (internal or external), the anticipated start date is October 2023, if not sooner. 4) It is recommended the Finance/Tax department implement and document periodic management review of property tax adjustment reports. Agree. Finance will review department procedures and update as necessary. The CFO will begin reviewing and signing off on the “Voucher Summary Report” monthly, as provided by the Tax Office, beginning May 2023. Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 13 Appendix A: Objective, Scope, and Methodology The Office of County Internal Audit was created by the Deschutes County Code as an independent office conducting performance audits to provide information and recommendations for improvement. “Audit objectives” define the goals of the audit. i. OBJECTIVES and SCOPE Objectives included: 1) Review of internal controls over receipts within the Finance/Tax Department as outlined in the County Finance policy for cash handling (F-11). Additionally, review management of any change cash, petty cash, receipts, credit cards and billings, as applicable. 2) Be aware of identifying areas for improvement. 3) Be aware of any issues with compliance with federal and state regulations and requirements, as may be applicable. Scope and timing: The audit occurred in February 2023 and included a review of fiscal controls for the Finance/Tax Department primary operating in Fund 630 and 11-850. The audit also included collection of monies for Fund 350, Dog Control, Funds 801& 805, Tax Distribution and Fiduciary, and Funds 160 & 170, Transient Room Tax. The department has change funds and checking accounts, but no petty cash. The scope of the audit did not include all aspects of the internal controls employed. Investment receipt controls were reviewed as part of the Treasurer Transition report (#21/22-12) and were not included in this audit. ii. METHODOLOGY Audit procedures included: Finance/Tax Department – Controls over receipts #22/23-8 April 2023 Page 14 “Audit procedures are created to address the audit objectives” • Analyzing transaction detail for various revenue sources; • Reviewing departmental policies and procedures; • Reviewing tax system reports and supporting documentation; • Observing handling of receipted payments; and • Interviewing departmental staff. We conducted this performance audit in accordance with generally accepted government auditing standards. 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 objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. (2018 Revision of Government Auditing Standards, issued by the Comptroller General of the United States.) {End of Report} Please take a survey on this report by clicking on the attached link: https://www.surveymonkey.com/r/2223-8 If you would like to receive future reports and information from Internal Audit or know someone else who might like to receive our updates, sign up at http://bit.ly/DCInternalAudit.