Procedural review of the Apache County Treasurer's Office internal controls over the investment of public monies in effect as of...

              Procedural Review
Apache County
As of February 29, 2012
Financial Audit Division
Debra K. Davenport
Auditor General
A REPORT
TO THE
ARIZONA LEGISLATURE
The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five
senators and five representatives. Her mission is to provide independent and impartial information and specific
recommendations to improve the operations of state and local government entities. To this end, she provides financial
audits and accounting services to the State and political subdivisions, investigates possible misuse of public monies, and
conducts performance audits of school districts, state agencies, and the programs they administer.
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.gov
July 17, 2012
Board of Supervisors
Apache County
Ryan N. Patterson, Interim Treasurer
Apache County, Arizona
Delwin Wengert, County Manager
Apache County, Arizona
We have performed a procedural review of the Apache County Treasurer’s Office internal controls over the
investment of public monies in effect as of February 29, 2012. Our review consisted primarily of inquiries,
observations, and selected tests of internal control policies and procedures, accounting records, and
related documents. The review was more limited than would be necessary to give an opinion on internal
controls. Accordingly, we do not express an opinion on the effectiveness of internal controls or ensure that
all deficiencies in internal controls are disclosed.
Specifically, we verified the mathematical calculations of the unrealized and realized investment losses
and interest distributions to the pool participants for the period July 1, 2008 through February 29, 2012,
and reviewed the County Treasurer’s Office investment policies as of February 29, 2012, to determine
statutory compliance.
As a result of our review, we noted certain deficiencies in internal controls that the Treasurer’s Office
should correct to ensure that it fulfills its responsibility to establish and maintain adequate internal controls.
Our findings and recommendations concerning these deficiencies are described in the accompanying
summary.
Should you have any questions concerning our procedural review, please let us know.
Sincerely,
Debbie Davenport
Auditor General
Office of the Auditor General
TABLE OF CONTENTS
page i
Introduction & Background 1
Finding 1: The County Treasurer’s Office should
allocate all investment earnings, gains, losses, and
management fees to its investment pool participants 3
Finding 2: The County Treasurer’s Office should
have procedures in place to properly account for
negative account balances 6
County Response
Table
1 Unallocated investment losses
by fiscal years prior to 2009 through 2012 4
State of Arizona
page ii
INTRODUCTION
& BACKGROUND
The Apache County Treasurer’s primary responsibility is to manage the public
monies the Treasurer’s Office holds for the County and its political subdivisions.
These political subdivisions consist of school districts, special districts, or other
governmental entities residing in Apache County. As of February 29, 2012, the
County Treasurer held public monies that totaled approximately $127.5 million. Much
like a bank, the Treasurer must keep accurate records of the County’s and the
political subdivisions’ balances, process the warrants issued by the County and
political subdivisions to pay vendors and employees, and prudently invest those
monies not immediately needed to pay vendors and employees. In carrying out
these responsibilities, the Treasurer must safeguard public monies, promote overall
efficiency and effectiveness, and ensure compliance with investment laws specified
in state statute.
The scope of our review was limited because the Deputy Treasurer who was primarily
responsible for the investment function during the period in review had resigned on
April 10, 2012, prior to the commencement of our review on April 27, 2012. In
addition, the Apache County Treasurer was suspended of her duties on May 21,
2012. Further, complete investment records were not available for fiscal periods prior
to 2009.
Office of the Auditor General
page 1
State of Arizona
page 2
The County Treasurer’s Office should allocate all
investment earnings, gains, losses, and management
fees to its investment pool participants
The Apache County Treasurer is responsible for managing and investing public
monies of the County and its related political subdivisions. The County Treasurer
pools and invests public monies held by the Treasurer’s Office. Therefore, the County
and the related political subdivisons are participants in the Treasurer’s investment
pool. The Treasurer’s pool functions in a manner similar to a mutual fund, in which
public monies are pooled together and invested in instruments or securities like U.S.
Treasury bills and bonds. Also, state laws require the Treasurer to maintain accurate
balances of each pool participant’s accounts and monitor those balances. In
addition, the County Treasurer must proportionately allocate pooled investment
earnings, gains, losses, and fees to the pool participants. The County Treasurer
allocates these distributions based on the participants’ average monthly balances.
During the period July 1, 2008 through February 29, 2012, the County Treasurer did
not allocate investment gains, losses, and management fees to pool participants.
Also, from October 1, 2011 through February 29, 2012, interest earnings were not
distributed to pool participants. Additionally, the County Treasurer did not reconcile
its account balances monthly to the bank’s monthly cash and investment account
statements. As a result, the Treasurer’s pooled account balances were overstated by
approximately $5.4 million, primarily because the County Treasurer did not allocate
investment gains, losses, and management fees to the pooled participants’
accounts.
Treasurer’s Investment Losses
On September 15, 2008, Lehman Brothers Holdings Inc. filed for Chapter 11
bankruptcy protection. At that time, the County Treasurer’s investment pool had $3.1
million invested in Lehman Brothers corporate bonds. Due to the bankruptcy, the
chance of recovering the full amount of the investment was unlikely. Therefore, the
County Treasurer should have reduced the balances available to each of its pooled
participants. As of February 29, 2012, the market value of the County Treasurer’s
Lehman Brothers investment was estimated at $824,000, a loss of approximately
Office of the Auditor General
page 3
$2.3 million. However, the County Treasurer’s investment pool’s accounting records
continued to value the investment at its $3.1 million cost. The investment pool should
have been written down to reflect the market value of the investment. Additionally, the
participants’ proportionate shares of the investment should have been identified and
moved into a separate account to help proportionately allocate any recoveries
received through the bankruptcy process.
In addition to the loss noted above, the County Treasurer incurred a loss of
approximately $1.4 million prior to fiscal year 2009. The loss resulted when the
County Treasurer had monies invested in a State Treasurer’s investment pool that
incurred losses from an investment in bonds issued by National Century Financial
Enterprises (NCFE). The State Treasurer informed the County Treasurer of the loss
and recommended that the value of the investment be reduced. Based on available
records, it appears that the value of the investment was not reduced and the loss
was not allocated to participants invested in the County Treasurer’s investment pool.
Further, a net loss of approximately $1.6 million was incurred during fiscal years 2010
through 2012 and resulted from gains, losses, management fees, and interest
earnings on various investment securities purchased by the County Treasurer. The
value of the County Treasurer’s investment pool was not properly adjusted for gains
and losses realized when investment securities were sold and for management fees
incurred during this period. In addition, interest earnings were not distributed to pool
participants from October 1, 2011 through February 29, 2012. The net losses
described above are presented in Table 1 below:
State of Arizona
page 4
Table 1: Unallocated investment losses
by fiscal years prior to 2009 through 2012
Source: Auditor General staff analysis of the State Treasurer’s records for the period prior to fiscal year 2009
and the County Treasurer’s records for fiscal years 2009 through 2012.
Fiscal year
Unallocated
Lehman loss
Unallocated
NCFE loss
Unallocated
gains, losses,
fees, and
interest
Unreconciled
differences
Total
Prior to 2009 $(1,434,891) $(1,434,891)
2009 $(2,348,040) (2,348,040)
2010 (1,622,620) (1,622,620)
2011 (434,768) (434,768)
2012 439,324 $(906) 438,418
Total $(2,348,040) $(1,434,891) $(1,618,064) $(906) $(5,401,901)
Distribution of Investment Losses
In April 2012, the County provided the pool participants with an estimated reduction
to their account balances for the investment losses described above. However, the
losses have not yet been deducted from each pool participant’s accounts. To comply
with state statutes, the County Treasurer’s Office must correct all errors within its
accounting records and notify its pool participants of the final adjustments to their
account balances. It is also important to correct these balances to help ensure the
pool participants have accurate balances of their deposits with the County Treasurer’s
Office so participants can properly budget and manage their accounts. Further, the
adjusted account balances will help the Board of Supervisors and other taxing
authorities accurately assess future tax rates. Lastly, the County Treasurer’s Office still
needs to investigate the unreconciled difference and determine necessary corrections
to its accounting records and pool participants’ account balances.
Written Policies and Procedures
The Treasurer’s Office has written policies and procedures for its investing activities
to help ensure that it complies with state laws. However, the policies were vague and
did not include policies and procedures for several key functions, including
reconciling cash and investment balances to the monthly bank cash and investment
account statements.
Recommendations
To help ensure the accuracy of the County Treasurer account balances and that
investment earnings, gains, losses, and management fees are properly allocated to
its investment pool participants’ accounts, the County Treasurer should develop and
implement the following written policies and procedures that include procedures to:
•• Record all deposit and investment activities in the accounting records.
•• Reconcile pooled and unpooled investment accounts to the bank cash and
investment account statements on a monthly basis. Investigate and correct all
differences in a timely manner.
•• Allocate quarterly all interest earnings, gains, losses, and management fees to
pooled investment accounts based on the pool participants’ average monthly
balances.
•• Organize the accounting records so that pooled investment account balances,
deposits, and withdrawals can be distinguished from unpooled accounts.
•• Separately account for and allocate investment losses to the applicable pooled
participants’ accounts.
Office of the Auditor General
page 5
State of Arizona
page 6
•• Notify pool participants of all changes in their account balances, including
losses, so they can record the changes in their accounting records.
•• Provide the pool participants with both the cost and market value of their
account balances at fiscal year-end.
•• Separate employees’ responsibilities so that no one employee maintains too
much control.
The County Treasurer’s Office should have procedures in
place to properly account for negative account balances
When the Treasurer’s Office allocates the unrecorded investment losses totaling $5.3
million to the individual participants’ investment accounts, it may cause some pool
participants’ accounts to be negative. Many of those accounts will belong to related
political subdivisions, such as school districts, special districts, or other governmental
entities residing in Apache County. Although the County Treasurer cannot directly
loan monies to those political subdivisions, the Treasurer can consider the following
options outlined in state laws to help participants pay for lawful claims and obligations
if they have insufficient monies:
•• Establish a revolving line of credit with the County Treasurer’s servicing bank for
each political subdivision.
•• Establish the ability to register warrants, which are similar to checks, issued by
political subdivisions with the County Treasurer’s servicing bank.
•• Invest in bonds, notes, or other types of indebtedness issued by political
subdivisions.
The County Treasurer should maintain accounting records of and agreements for all
revolving lines of credit, registered warrants, or investments in debt. Additionally, the
County should meet with the pool participants to discuss the options and current
account balances.
COUNTY RESPONSE
Office of the Auditor General
APACHE COUNTY
P.O. BOX 428
ST. JOHNS, ARIZONA 85936-0428
DIRECT LINE: (928) 337-4364
FACSIMILE: (928) 337-7600
July 17, 2012
Debra K. Davenport
Office of the Auditor General
2910 North 44th. Street, Suite 410
Phoenix, AZ 85018
Dear Ms. Davenport,
The Apache County Treasurer’s Office has chosen to respond to the Auditor General’s
procedural review report dated as of February 29, 2012. This review was performed under the
direction and as a request of the Board of Supervisors and our office has begun to implement
the following recommendations.
Finding 1: The County Treasurer’s Office should allocate all investment earnings, gains,
losses, and management fees to its investments pool participants.
Response:
Treasurer’s Investment Losses
The Apache County Treasurer’s Office, as of January, 2012, has begun the process of
reconciling the account balances to the bank’s monthly cash and investment account
statements for 2012. By means of this reconciliation, the amounts not allocated for investment
gains, losses, and management fees to the pooled participants have been identified.
Distribution of Investment Losses
In order to comply with state statute, Apache County Treasurer’s Office will correct all errors
within the accounting records and notify its pool participants of the final adjustments. The
table included in this report will be distributed to the participants along with all
recommendations herein provided by the Office of the Auditor General. Moving forward this
will allow the pooled participants to be able to properly budget and manage their accounts.
Written Policies and Procedures
As identified by the Office of the Auditor General the current policies are vague and did not
include policies and procedures for several key functions, including reconciling cash and
investments. The Apache County Treasurer’s Office is currently working on these Policies and
Procedures in order to meet the recommendation aforementioned.
Recommendations
The Treasurer’s Office has reviewed the OAG’s recommendations to ensure the accuracy of
the account balances and investment pool participants’ accounts and is in the process of
addressing each item as follows:
1. We have secured a financial management software system and will have it in place by
Second Quarter of the fiscal year. At which time deposits and investment activities will
be tracked within the accounting records.
2. Reconciling of investment accounts is now being completed.
3. Allocation of interest earning, gains, losses, and management fees to the pooled
participants is now being done quarterly.
4. Currently there are no unpooled investment accounts.
5. Along with the release of this report all investment losses are accounted for and
allocated to the pooled participants accounts.
6. As noted above, all pool participants are being notified on a quarterly basis of the
changes in their account balances so they can change their accounting records.
7. All participants will be given their cost and market value of their account balances at
fiscal year-end.
8. At this time employees’ responsibilities are being adjusted so that no one employee
maintains too much control.
Finding 2: The County Treasurer’s Office should have procedures in place to properly
account for negative account balances.
Response:
The Treasurer’s Office has worked with a couple of the political subdivisions in establishing a
revolving line of credit with our servicing bank. We are also researching the establishment of
revolving lines of credit for each of the political subdivisions to address any issues they might
have with insufficient monies.
Apache County
Procedural Review
As of February 29, 2012
State of Arizona
Office of the Auditor General