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HomeMy WebLinkAbout1516-4 WEBCO report (Final 2-29-2016)WEBCO report #15/16-4 J-rEs c � Deschutes County, Oregon February 2016 David Givans, CPA, CIA, CGMA Deschutes County Internal Auditor PO Box 6005 1300 NW Wall St, Suite 200 Bend, OR 97708-6005 (541)330-4674 David. Givans(abDeschutes. org Wellness &Education Board of Central Oregon (WEBCO) Click = to take �� Survey on this report Audit committee: Shawn Armstrong, Chair - Public member Chris Earnest - Public member Lindsey Lombard — Public member Michael Shadrach - Public member Jennifer Welander - Public member Anthony DeBone, County Commissioner Nancy Blankenship, County Clerk Dan Despotopulos, Fair & Expo Director ®® WITo request this information in an alternate format, please call (541) 330-4674 or send email to David. GivanskDeschutes.org WEBCO report #15/16-4 February 2016 {This page left blank) WEBCO report #15/16-4 February 2016 TABLE OF HIGHLIGHTS CONTENTS: 1. INTRODUCTION 1.1. Background on Audit.................................................................... 1 1.2. Objectives and Scope................................................................ 1-2 1.3. Methodology............................................................................... 2 2. BACKGROUND........................................................................... 2-3 3. FINDINGS 3.1. External auditor recommendations — unresolved ............................. 3-5 3.2. Fiscal observations................................................................. 5-11 3.3. Compliance with laws and regulations ....................................... 12-13 3.4. Future issues for resolution..................................................... 13-14 4. MANAGEMENT RESPONSES 4.1. WEBCO management........................................................ 15-17 WEBCO report #15/16-4 HIGHLIGHTS Why this audit was performed: To review fiscal areas with WEBCO to aide in the transition of executive leadership as well as organization changes. Significant recommendations included: addressing the weaknesses in developing accounting information for financial statement preparation; having significant fiscal matters reviewed with an established executive committee; billing counties for their respective obligations with sub -capitation; assessing fiscal impacts of fee changes and having them approved by the Board; exploring how accounting and reporting could occur through one accounting system; documenting their accounting policies and procedures; segregating duties in receivables function; implementing procedures to comply with local budget law; coordinating how resources are aligned with services; and establishing a policy for the level of unrestricted fund balance. February 2016 Wellness & Education Board of Central Oregon (WEBCO) WEBCO is an intergovernmental entity of Crook, Deschutes, and Jefferson counties between the Coordinated Care Organization (CCO) and County Health and Behavioral Health departments for services. Crook County acts in a fiduciary responsibility to safe keep all monies for WEBCO and handles the underlying disbursements and accounting. What was found The external auditors have indicated that WEBCO does not have sufficient knowledge of generally accepted accounting principles (GAAP) for financial reporting. They have assessed this as a material weakness and this weakness has not been addressed. A lack of sufficient fiscal oversight in reconciliation of county sub -capitation payments results in improper financial treatment for FY 2015. The 2013 sub -capitation reconciliation resulted in monies owing to WEBCO from the counties for $250 thousand. The audit identified material modifications to the presented FY 2015 financial statements from WEBCO incurring these costs on behalf of the counties. WEBCO management reduced their fees charged without Board approval and appropriate due diligence. The rate charged on sub -capitation was reduced from 4.6% in August 2015 to 2.6%. It is estimated this reduced fees for FY 15/16 by $175 thousand. As a relatively new organization, there were areas to be considered for additional controls and oversight. These include: accounting system and reporting design; disbursement oversight documentation; and written policies and procedures; process to calculate fees. segregation of duties over receivables; It appears that WEBCO may now be subject to local budget law under ORS 294.900 due to new services provided to individuals for the Early Learning Hub program. The audit identified that future issues to be resolved include addressing WEBCO reserves, member distribution policies, and fiscal sustainability. Deschutes County Internal Audit WEBCO report #15/16-4 February 2016 1. Introduction Audit Authority: The Deschutes County Audit Committee authorized the review of Wellness & Education Board of Central Oregon (WEBCO) in the Internal Audit Program Work Plan for FY 15/16. The County Internal Auditor has authority under County Code 2.14 to conduct audits for Deschutes County. The internal audit was proposed and accepted by WEBCO's Board (of which Deschutes County is part). WEBCO transitioned to new executive director leadership at the beginning of 2016. Deschutes County's internal audit program has a practice of performing basic fiscal level internal audits for turnovers of identified department leadership. This practice has been endorsed by the County Audit Committee. These audits are particularly useful for the incoming leadership and help assure that selected objectives are addressed proactively so there will be limited questions later on. Objectives for these transition audits are identified in advance and are generally tied to compliance and financial areas. Objectives: The audit objectives included: 1) Inquiry of the external auditors about any outstanding audit recommendations while performing the financial audit. 2) Inquiry and observations regarding fiscal matters, including: a) Review of organizational documents; b) Review of policies and procedures around budget and financial reporting; c) Review of accounting and fiscal policies and procedures (including handling of deposits and safekeeping of checking accounts, petty cash and change monies held); d) Review of procedures around disbursements (includes recent executive director authorized transactions); e) Inquire as to any assets assigned directly to the executive director; and f) Other inquiries as deemed necessary. 3) Becoming aware of any issues with compliance with federal and state regulations and requirements, as may be applicable. Scope: A majority of internal audit fieldwork was completed in December 2015 and January 2016. The scope includes observations and interviews with WEBCO executive director and staff thorough the transition. Page 1of17 WEBCO report #15/16-4 February 2016 2. Background There was a review of selected disbursements from July through October 2015. The audit looked at functions and practices in place at the time of interviewing staff. It is anticipated that WEBCO's services might change over time. The audit did not address the quality or extent of services provided by the organization. Internal audit was aware of past material weakness statements in prior external audit reports and it was not clear that WEBCO had addressed. It was hoped that through the internal audit work performed that a potential solution would be identified to address the material weakness. Audit procedures included: ■ Observations and discussions with the executive director and staff of WEBCO; ■ Review of contractual documents outlining the organization and the services provided; ■ Review of external financial report; ■ Selected disbursements and other items from disbursements for additional review, noting authorization and supervision; ■ Obtained and reviewed financial information on WEBCO; • Obtained and analyzed sub -capitation reconciliation for 2013 and 2014 transacted in the most recent fiscal year; and ■ Reviewed Oregon rules on local budget law and potential application to WEBCO. 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. (2011 Revision of Government Auditing Standards, issued by the Comptroller General of the United States.) WEBCO was formed in 2011 as an intergovernmental entity of Crook, Deschutes, and Jefferson counties. WEBCO collaborates and manages resources on behalf of the Central Oregon region. WEBCO seeks to manage resources efficiently and effectively, in collaboration with local and state governments, the hospital system, local providers, private insurers, health collaborative and the communities and the people they serve. The Board is comprised of an appointed County Commissioner Page 2 of 17 WEBCO report #15/16-4 February 2016 3. Findings from each of the three counties as well as a representative of the High Desert Education Service District. WEBCO has an executive director who manages and oversees the efforts of the organization. WEBCO has been an organization that was between the Coordinated Care Organization (CCO) and County Health and Behavioral Health departments for services. State monies are passed through (sub - capitated) by the CCO through WEBCO and down to the counties based on the clients estimated to be served by each county. WEBCO retains part of these sub -capitated monies (up to 4.6%) to cover the service performed on behalf of the CCO and the counties. Manaaement transition WEBCO's interim executive director for the last 20 months was set to depart at the end of December 2015. The Board completed their search for a new executive director in the beginning of 2016. Organization transition As of January 2016, WEBCO is no longer an intermediary between the CCO and counties for capitation payments. WEBCO has ceased receiving sub -capitation amounts from the CCO and can no longer extract a service fee. It is still unclear what services WEBCO will provide and how much they will be paid. 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. 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 statements. The internal audit findings noted were primarily compliance and efficiency matters and would not generally be framed as or considered to be significant deficiencies. However, the external auditors (Price Fronk & Co. LLP) in their communications to the Board in the FY 2015 audit (noted as well as in earlier financial audits) indicated the organization's limited knowledge of GAAP for financial reporting was a material weakness. Please see further discussion of this weakness in the findings that follow. Page 3 of 17 WEBCO report #15/16-4 February 2016 The material weakness identified by the external auditors has not been addressed. The external auditors (Price Fronk & Co. LLP) for WEBCO have indicated that WEBCO does not have sufficient knowledge of generally accepted accounting principles (GAAP) for financial reporting. They have assessed this as a material weakness. A material weakness is a deficiency or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected on a timely basis. WEBCO Management and Board have the responsibility for ensuring that WEBCO's financial statements are prepared in conformance with GAAP including adequate disclosures and proper application of accounting standards. Adequate internal control over financial reporting requires that management meet these responsibilities through individuals in the organization or where appropriate outside consultants, excluding its independent auditor. Fiscal areas similarly identified in the internal audit findings below that corroborate the significance of the weakness, include: a lack of understanding of impacts for accounting activity passed through the organization, incomplete fiscal controls within the organization, insufficient written accounting policies and procedures, and a lack of developed oversight at the management level of the organization on fiscal matters. The external auditors indicated this kind of identified material weakness was common with small non-profit organizations. Management has continued to rely on the external auditors and has indicated the costs of compliance outweigh the benefits at this time. In the absence of sufficient fiscal controls over the financial statements, the statements might be materially misstated. The external auditors have indicated that this risk of material misstatement is reasonably possible. The organization should not be reliant on the auditors to identify and fix accounting issues. Management explored solutions but has not been able to address this material weakness. An internal audit finding below identified county sub -capitation expenses that were included as WEBCO expenses. This finding was developed after the issuance of the FY 2015 financial statements. This issue overstates expenses (understates change in net position) by $250 thousand. This exceeded the external Page 4 of 17 WEBCO report #15/16-4 February 2016 auditors' materiality and they are restating the financials for FY 2015. The significant and numerous county sub -capitation transactions moving through WEBCO makes the financial statement presentation more complicated than typical pass through monies. Note: See next finding and recommendation. Limited risk of this situation continuing as WEBCO no longer will receive sub -capitation monies. External Auditor (Price Fronk & Co. LLP) Recommendation - Reiterated: "It is recommended that the Organization consider its options for improving or outsourcing is expertise in GAAP and financial reporting and weigh the related costs with the benefits that could be derived from correcting this matter. We understand that management has determined that the costs outweigh the benefits at this time." It is recommended for WEBCO, with proper financial advice, develop an approach to addressing the weaknesses in developing accounting information for financial statement preparation. This might be addressed through assembling input/resources from its member county organizations or contracting for assistance of an external consultant (likely another CPA firm). A lack of sufficient fiscal oversight in reconciliation of county sub -capitation payments results in improper financial treatment. The accounting and fiscal treatment for county sub -capitation reconciliations for 2013 and 2014 handled through WEBCO did not follow an appropriate and consistent accounting treatment for resolution with the counties. As alluded to above, the 2013 reconciliation of sub -capitation expenses will likely result in a restatement of the issued financial statements for FY 2015 for the overstated expense of $250,825. The result is that WEBCO will need to recover from the counties these amounts. Counties are obligated to pay for their individual share of certain claims paid by the CCO. The CCO attempts to retain sufficient monies from the sub -capitated amounts passing through WEBCO. WEBCO is the intermediary for reconciling these claims with the CCO. WEBCO periodically performs this reconciliation by comparing the actual claims reported by the CCO to the monies withheld from the counties. Counties are individually obligated or owed monies based on the reconciliation. Page 5of17 WEBCO report #15/16-4 TABLE l: Sub -capitation impacts by county and year (2013 and 2014) The summary of impacts to the Counties is as follows: 2014 2014 Sub -capitation amounts due from (due to) CCO amounts refunded and paid to Deschutes 2014 Sub -capitation amounts due from (due to) 2013 2013 Sub -capitation amounts due from (due to) Total due from counties February 2016 TOTAL Crook Deschutes Jefferson $(108,140) 108,140 $ 95,828 - $ (244,302) 108,140 $ 40,334 - - 1 95,828 1 (136,162) 40,334 250,825 52,051 222,087 (23,313) $ 250,825 $147,879 $ 85,925 $ 17,021 Some explanation of the accounting treatment is as follows: The 2014 reconciliation, which occurred in FY 2015, indicated there was an overall refund from the CCO (even though two counties owed additional money). The refund from the CCO was received and forwarded to Deschutes County that had overpaid. Management did not take any action to bill the other counties to pay the additional amounts owing to Deschutes of $136,162. This had a limited impact on the position of WEBCO presented on the FY 2015 financial statements as it is mostly a due to and due from the counties. The 2013 reconciliation indicated that monies were due to the CCO from the counties (even though one county was due a refund). Management decided to pay this overall expense of the counties as though it was its own. They did not make payment to Jefferson for the refund owed. WEBCO's organizational documents do not allow them to pay the expenses of the counties. This was done in FY 2015 and results in an overstatement of WEBCO expenses by $250,825. It was not clear the WEBCO Board or WEBCO finance committee had sufficient understanding of the proposed accounting treatment to understand that WEBCO could not incur county expenses. WEBCO should have billed Deschutes and Crook and refunded monies to Jefferson as indicated in the reconciliation. The past executive director was not aware that WEBCO could not pay county expenses. They also did not have a process to share the reconciliations that identified the county obligations or refunds with the finance committee or Board. It was not clear the implications of the accounting treatment were identified by management or shared with those that might have awareness. WEBCO's consultant was not in the position to review or challenge the accounting treatment. The Counties did not appear to have a sufficient Page 6 of 17 WEBCO report #15/16-4 February 2016 role in overseeing these transactions either through their participation in the finance committee or on the Board. In addition to the prior recommendation, it might be useful to have significant fiscal matters reviewed with an established executive committee that would obtain and review pertinent facts and accounting treatment for recommendation to the Board. It is recommended the counties be billed/repaid for their respective obligations/overpayments from the settlement of the 2013 and 2014 sub -cap reconciliations. It is understood that WEBCO on being made aware of the 2014 reconciliation issues has taken steps to bill Crook and Jefferson counties and refund Deschutes County. Note: The 2015 sub -cap reconciliation is expected to occur in June/July 2016. WEBCO is no longer receiving or distributing sub -capitation payments. WEBCO management reduced their major revenue resource without Board approval and appropriate due diligence. WEBCO significantly modified their fee assessed on county sub -capitation payments passed through the organization part way through FY 15/16. The rate was reduced from 4.6% in August 2015 to 2.6%. This appears to have occurred without a process to understand the fiscal impacts and without Board approval. The contract with the CCO allows WEBCO to take a fee on the gross sub -capitation dollars passed through the organization of up to 4.6%. This amount was determined to be satisfactory to provide the required services and provide for the start-up of the organization. The past executive director modified the fee with the general understanding that the organization had sufficient resources to allow more monies to flow through to the counties. Though this is something that should be periodically reviewed, it should not be put in place until the impact to budget and resources can be assessed. This change significantly affected the potential resources of the organization and should have been approved by the Board. It is estimated the reduction in fees for the five months of FY 15/16 will amount to nearly $175 thousand. This impact is limited since WEBCO no longer received sub -capitation payments starting January 2016. Page 7of17 WEBCO report #15/16-4 February 2016 As discussed later, the fiscal future of WEBCO from this change in fiscal model has not been fully addressed or the change to services. It is recommended for significant fiscal changes be assessed for fiscal impacts (and reviewed by an executive committee, if implemented) and be approved by the Board. Areas were identified requiring addition controls and oversight. WEBCO is a relatively new organization. Staff have an understanding of accounting processes but have not started establishing written procedures and practices of how they operate their business functions. Business functions include budgeting, billing, receipting, disbursements and financial reporting. An additional component of these is who will be doing what to assure appropriate segregation of duties. Currently, much of the internal financial reporting is handled by outside parties. The coordination of this work has not been developed and documented. Areas identified requiring additional control and oversight include: Design of accounting system to address needs of organization; Insufficient written accounting policies and procedures; Insufficient segregation of duties issue on billing, receivables and collections; Insufficient process for oversight of disbursements as well as specific types of disbursements encountered for which there may be a conflict of interest; Insufficient segregation of oversight of executive director payments; Process to calculate fees on sub -capitation; and Process to recover call center costs passed through to counties. Communication is an essential component of internal controls. Establishing written policies and procedures can provide controls that are more effective. Well-designed and maintained policies and procedures enhance accountability and consistency. The resulting documentation is also useful for training and cross -training personnel. The processes and procedures identified that needed improvement and the associated impacts include: Design and development of accounting and associated reporting is not centralized. Currently, management utilizes reports that have been modified from the accounting performed at one of the counties. It is not clear why WEBCO does not have all of its accounting and reporting needs from Page 8 of 17 WEBCO report #15/16-4 February 2016 one place. There is a lack of oversight and continuity in how these reports are prepared. Management is changing ways it allocates costs as well as exploring indirect costs without underlying developed procedures. Users of those statements are not aware of the changes going on. There is a potential risk for inconsistent accounting treatment and presentation. o Partly because of the above, noted inadequate accrual adjustments for conversion of cash basis to accrual in internal statements. The financial consultant did not adjust for reversals of prior period accruals. This was evident in that fund balances did not agree with prior year audited fund balances. Impacts of this in the period reported can vary significantly depending on the prior period accruals. WEBCO staff do not handle most revenues, but there is some limited billing and receipting that occurs. For this limited activity, there is a lack of developed controls over billings, receivables and collections due to the centralization of these duties with one person. Received checks are not restrictively endorsed on receipt. o No specific issues noted, but without proper segregation, monies may not be properly accounted for. There is a lack of oversight by management on the disbursement process. o Documentation of overall disbursement approval could be improved. An overview tracking document is prepared and could be a useful document for documenting an overall review. o Credit card transactions are not overseen by someone separate from the purchases. o The executive director approved their own disbursements, o Insufficient tracking and control over prepaid gift cards purchased through WEBCO and handled by counties. There is an inadequate understanding of application of WEBCO management fee on subcapitation payments. o WEBCO charged the fee on gross capitation (which included withheld incentive monies) and then charged a fee again against the incentive fees when returned to the counties. WEBCO assessed a duplicated fee of $29 thousand on the $771 thousand paid to the Counties as incentives in FY 2015. This might have occurred going back further. There is a lack of process to agree call center expenses to the sub -capitation calculations. o Noted relatively minor variances in amount charged to counties. It is possible that WEBCO has not received sufficient support in fiscal and accounting practices. The staff and management have not established accounting policies and practices. Management has not explored what is the most effective and efficient accounting practices they need for operation. In the absence of sufficient controls in these areas, Page 9 of 17 WEBCO report #15/16-4 February 2016 The Board and management may make decisions on internal financial statements that do not correctly represent the activity of the organization. Reporting and accounting may not be performed in a consistent and accurate manner utilizing a minimum of resources. It may be difficult to identify in a timely manner whether all monies have been collected and deposited. Appropriate control over disbursements may not be exercised. The lack of written accounting procedures can lead to inadequately planned controls, inadequate supervision, poor and inadequate training, and lack of adherence to stated control procedures. Issues on segregation of duties can allow the overriding of controls. WEBCO does not appear to be getting sufficient accounting support for its needs. As previously discussed, it is recommended for significant fiscal practices be reviewed by an executive committee that can address fiscal and accounting matters. It is recommended that WEBCO explore how it could accomplish and retain all accounting and reporting through one accounting system. o It is recommended for WEBCO to consider the process for developing accrual adjustments and reporting. This should include reconciliation to beginning fund balance on the method of presentation. It is recommended that WEBCO staff document their accounting policies and procedures. These policies and procedures should be available to all employees and should include, in detail, the responsibilities of each employee. It is recommended that WEBCO management develop some segregation and oversight around the billing, receivable and collection function. It is recommended for WEBCO to have an endorsement stamp to restrict deposit to their account. It is recommended for WEBCO management to improve the documentation process for disbursements. o It is recommended that disbursements be reviewed and authorized in total for each Page 10 of 17 WEBCO report #15/16-4 February 2016 period of submittal. These disbursements should be reconciled back to what was disbursed. It is recommended for the executive director to sign off on credit card transactions (not their own). o It is recommended for any executive director disbursements or those with any potential conflict of interest be provided approved by an appropriate oversight body of the Counties. o It is recommended for WEBCO in coordination with the County departments determine how it can assure accountability for purchased prepaid gift cards. This could be through establishing sufficient safeguards for oversight and control of the prepaid gift cards or discontinuing this practice. Detailed receipts should be obtained for all purchases made by staff with prepaid gift cards. It is recommended the fee withheld on sub -capitation incentives be reversed. The adjustments by county could be reflected in amounts owing from Counties on sub -capitation. It is recommended that sub -capitation expenses be reviewed in total for agreement to actual call center costs paid. Additional transition procedures performed and observations without issues. 1. Inquire about checking accounts, petty cash and change monies held. Observation- WEBCO has no checking accounts, petty cash or change. Crook County acts in a fiduciary responsibility to safe keep all monies for WEBCO and handles the underlying disbursements and accounting. No additional inquiry was made of Crook County accounting processes. 2. Inquire as to any assets assigned directly to the executive director. Observation: The executive director had an assigned laptop but the asset never left the facility. No issues identified. Page 11 of 17 WEBCO report #15/16-4 TABLE H Local budget law conditions (ORS 294.900) February 2016 WEBCO was not aware of how added services have influenced application of local budget law. WEBCO has previously been exempted from Oregon budget law under exceptions provided under statute so long as they did not provide services directly to individuals. In late 2014, WEBCO took on activity for the Early Learning Hub that appears to provide services to individuals. It now appears the organization must comply with Oregon budget law under ORS 294. The application of local budget law to WEBCO as a council of governments would be subject to certain budaetary reauirements if it meets the followina conditions: (a) Is operating under an intergovernmental agreement, Yes (b) Functions under the direction and control of more than one member government; Yes and (c) Provides services directly to individuals. Yes "Services directly to individuals" means any act performed, without working (Early Learning through another governmental unit, through contracts with a private entity to Hub program) provide a service. (OAR 150-294.900) Oregon's Local Budget Law has two important objectives: It establishes standard procedures for preparing, presenting, and administering the budget, and It provides for citizen involvement in preparing the budget and public exposure of the budget before its formal adoption. It is not clear the WEBCO Board or management identified the change to budgetary requirements stemming from changes to their operation. Implications are that the organization may not have been compliant in their budget adoption for FY 15/16. The FY 15/16 compliance with state regulations will be reviewed by the external auditors in their audit of FY 15/16. Highlights of selected local budget law requirements under ORS 294.900 include: 1. Establishing a budget committee (294.905); 2. Budgeting expenditure estimates by personnel services, materials and services, and capital outlay by activity (294.910); Page 12 of 17 WEBCO report #15/16-4 February 2016 3. Providing public notice of budget committee meeting (294.915); 4. Providing public hearing on budget (294.920); 5. Maintaining copies of budget, notices and resolution adopting budget for two years following end of fiscal year (294.930); and 6. Sending certified copy to the State within 15 days of adoption. It is recommended for WEBCO to develop and implement procedures for FY 16/17 to comply with local budget law under ORS 294.900. WEBCO fiscal sustainability is still unresolved. WEBCO operates at the discretion of the County members and the CCO who purchase services from WEBCO. Under the prior sub -capitation arrangement a significant level of services were paid for and obtained through WEBCO. WEBCO has established an infrastructure based on prior services provided. It is unclear the extent of services to be provided under new arrangements with the counties and the CCO since those have not been finalized. This puts WEBCO in an uncomfortable situation, as they will need to consider how they will approach delivering a level of services the counties want provided. As information unfolds, it will be necessary to see whether the organization can develop an approach that addresses the needs of the counties in a cost effective manner. It is recommended for WEBCO and the counties coordinate how resources are distributed to align with services to be provided. It is recommended that decisions minimize the overlap of services, seek efficiencies and minimize overhead costs. This should require financial forecasts be developed for whether service payments under a revised fee structure and underlying resources (fund balances) can sustain the organization. Page 13 of 17 WEBCO report #15/16-4 February 2016 WEBCO reserves and member distribution policies should be developed. Given the concern with fiscal sustainability, it is unclear to what extent the WEBCO reserve level (unrestricted fund balance) is adequate on a go forward basis. It could be too high or too low. Balancing reserve levels can sometimes allow for distributions to initiating members. The current operational documents for WEBCO allow only distributions for withdrawing members and in dissolution. It is essential that governments maintain adequate levels of fund balance to mitigate current and future risks (e.g., revenue shortfalls and unanticipated expenditures) and to ensure stability. In the absence of a provision for distributions of unrestricted funds to members, excess funds cannot easily be disbursed. It is recommended that WEBCO establish a formal policy on the level of unrestricted fund balance that should be maintained for GAAP and budgetary purposes. Such a guideline should be set by the WEBCO Board and articulate a framework and process for how the government would increase or decrease the level of unrestricted fund balance over a specific time period. In particular, governments should provide broad guidance in the policy for how resources will be directed to replenish fund balance should the balance fall below the level prescribed. Factors in the reserve policy to consider include: Predictability of revenues and volatility of expenses Exposure to one-time outlays Commitments. It is recommended that WEBCO establish distributions in their organizational documents that would allow distribution of excess reserves identified. Page 14 of 17 WEBCO report #15/16-4 4. Management Responses — Lionel `Chad' Chadwick, PhD INEBCO Executive Director Jeffrey Davis, Prior Interim Executive Director February 2016 Management concurs with all recommendations. To: David Givans, County Internal Auditor From: Jeffrey Davis Re: Management response to Audit report Recommended the WEBCO develop approach to address weakness in developing accounting procedures with proper financial advice. a. Concur b. This has been an issue for a long time that WEBCO lacked the financial expertise. WEBCO needs to contract with someone or hire someone to help develop financial system. Recommended the counties be billed/repaid for the respective obligations/overpayment for the settlement of the 2013 and 2014 sub -cap reconciliations. a. Disagree b. The reconciliations have not been handled consistently. In this case the decisions were made to use reserves to cover the reconciliation as the pay back at that time was better spent on increasing services at the county level. The reserve was seen as a way to support the county's services and that was how it was used. The pay back now will enhance WEBCO reserves and reduce county reserves in case local reserves are needed for services. {Auditor response. A number of options were explored with these transactions prior to reviewing the organizational documents. The sentiment about supporting county services is appreciated, but first a mechanism needs to be developed. First and foremost, the amounts from the reconciliation vary from amounts owing to counties Page 15 of 17 WEBCO report #15/16-4 February 2016 and amounts owing from counties. This occurred because claims paid by the CCO for each county varies from the amount of monies each county reserved for such claims. This necessitates a settling up through proper accounting among the counties to address the internal equity of the reconciliations. To do so in total fails to recognize the difference in each county's activity. Those amounts were detailed in Table 1. Without a completed reconciliation, some counties will be giving up their rights to funds and/or not paying their fair share. After settling those reconciliations, the next question is how to get monies to the counties (if that is desired). This could occur through paying monies to the counties for services or they can be a return of excess funds in the form of a distribution. Services would imply that WEBCO is getting something for the payment and these could be aligned in a way different from the way the money was received. A distribution to the counties can preserve the proportions to the way the monies were received. The counties currently have specific rights to fund balance based on enrolled population. The operational documents only offer mechanisms for distributions on withdrawals and on dissolution. What is needed (and is recommended) is a method to make optional and relative distributions to counties. The mechanism for these could be calculated on a weighted percentage of enrolled population up through the distribution to keep things simple. As noted in the recommendations, the Board and management would need to assess the amount to be distributed in context with the current unrestricted fund balance and forecasted needs of the organization. The net result can be similar in total dollars but continues to provide accountability by county and return funds based on the way received. These approaches can be explored more fully with the assistance of legal counsel. ) Recommended for significant fiscal changes be assessed for fiscal impacts and reviewed and approved by the board and executive committee. a. Concur/disagree b. I do not agree that the fiscal assessment which was reduced from 4.6% to 2.6% in August 2015 be repaid. The decision was made to give the counties more money for services. The history of the 4.6% fee to build a sustainable reserve was not known at the time. Since the sub -cap is not flowing through WEBCO, pay back again reduces or could reduce some services. The reduction in the fee was brought to the attention of the finance committee. {Auditor response: The recommendation was focused on the transparency, oversight and Page 16 of 17 WEBCO report #15/16-4 February 2016 planning for these decisions. The recommendation did not include assessing additional fees.) Recommended for WEBCO to develop and implement procedures for complying the budget law. a. Concur b. It was originally conceived that all 9 Commissioners would serve as the budget committee and believe it is in the by-laws, but it was never implemented. {End of Report} Please take a survey on this report by clicking on the attached link: https://www.surveymonkey.com/r/WEBCO 1516-4 Page 17 of 17