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Wa Doc Audit Misappropriated Funds 2000

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Schedule of Audit Findings
Department of Corrections
July 1, 1999 through June 30, 2000
1.

Public funds were misappropriated and accounting records were falsified
and destroyed at the Airway Heights Correction Center.
Background
The Department of Corrections pays each inmate $40 in gate money upon release from a
correctional facility. At the Airway Heights Corrections Center, these payments are made in cash
from an $850 petty cash fund. When the cash fund is periodically replenished, reimbursement
requests must be supported by a signed Release of Funds form for each inmate indicating receipt
of the payment.

Description of Condition
We found that at least $3,920 in public funds was misappropriated from the Airway Heights
Correction Center by an Accountant 1 between November 12, 1999, and August 8, 2000.
Accounting records were falsified and destroyed to conceal these losses. No federal funds were
involved in this case.
The Accountant 1 submitted petty cash reimbursements for fictitious transactions to obtain funds
in excess of current requirements. These extra funds were then taken.
For every inmate released, Institution staff completed a Release of Funds form. This form
documented, among other things, the amount of gate money requested and eventually paid to
each inmate. The form was photocopied at Inmate Banking, marked with a red stamp bearing all
required approval signatures and given to the Accountant 1 for processing. The Accountant 1
retained this copy of the form on file as evidence that gate money had been transferred from the
petty cash fund to an employee at Inmate Banking. Upon release, inmates signed the original
Release of Funds form indicating receipt of the gate money. The original of the Release of Funds
form then was filed at Inmate Banking, while carbon copies of the form were filed in other offices
at the Institution.
The Accountant 1 then used the red stamped photocopy of the Release of Funds form to request
reimbursement of the petty cash fund. For every legitimate payment of gate money to an inmate,
there must be a signed, original form on file, as well as a photocopy of the form with the red
stamp bearing the required approval signatures of the inmate counselor and appropriate Inmate
Banking employees.
During our audit, we reviewed the original and duplicate red stamped Release of Funds forms on
file at the Institution during the period November 12, 1999, through August 8, 2000. These forms
were missing for February and April 2000 and appeared to have been prematurely destroyed.
The Department prepared a list of all inmates released from the Airway Heights Correction Center
during this time for our review.
We found that the Accountant 1 requested petty cash fund reimbursements in excess of current
requirements. While inmates can be paid gate money only once upon release, the Accountant 1
submitted petty cash reimbursement requests more than once for the same inmate on more than
one occasion. Most of the extra transactions represented multiple payments for inmates listed on
prior reimbursement requests.
However, some extra transactions represented duplicate

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payments for one inmate on the same reimbursement request. On several occasions, the
Accountant 1 simply requested reimbursement for the names of more inmates than were actually
released during the month.
During our interview on February 27, 2001, the Accountant 1 denied taking any public funds for
personal use. However, these extra funds were not on-hand in the petty cash fund, and the
Accountant 1 could not provide any reasonable explanation for the missing money. In addition,
the Accountant 1 denied ever having excess funds on-hand in the petty cash fund as a result of
the excess reimbursement transactions identified during this audit, and never officially reported
any shortages in the fund to management officials. The Accountant 1 has resigned employment
at the Institution.
While the Department is insured against losses due to employee dishonesty, this loss did not
exceed the deductible provision of the insurance policy.

Cause of Condition
We found inadequate internal controls over the petty cash fund at the Airway Heights Correction
Center. For example:
•

Duties were not appropriately segregated. The Accountant 1 prepared the petty cash
reimbursement request, attached the supporting documents, prepared the
reimbursement check, presented the check to another individual authorized to sign the
check, received the proceeds from the transaction when the check was cashed, filed the
Release of Funds forms and performed the petty cash fund reconciliation.

•

Petty cash fund reimbursement checks were signed without a thorough review of all
supporting documents.

•

The petty cash funds were not secured in a locked container while stored in the safe. In
addition, several employees had access to the safe.

•

An independent party did not properly monitor petty cash fund operations to determine
whether all funds were properly accounted for and controlled. For example, the original
Release of Funds forms were not used to support requests for reimbursement. Instead,
copies of these forms were used. Additionally, an independent reconciliation of the petty
cash fund was not periodically performed at the Institution.

Effect of Condition
Inadequate internal controls increase the risk of a misappropriation of public funds and impairs
the Department’s ability to prevent or detect errors and irregularities in a timely manner, if at all.
These conditions also allowed an Accountant 1 to circumvent internal controls in the petty cash
fund and misappropriate at least $3,920 in public funds from the Department.

Recommendations
We refer this matter to the Spokane County Prosecuting Attorney for any action deemed
appropriate. We further recommend the Department of Corrections seek recovery of the
misappropriated $3,920 and related audit/investigation costs from the Accountant 1. Any
compromise or settlement of this claim must be approved in writing by the Attorney General and
the State Auditor as directed by RCW 43.09.310.
We also recommend the Airway Heights Correction Center establish effective internal controls
designed to ensure the protection of public assets.

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Department’s Response
This fraud was detected and inadequate controls identified by Department staff performing an
internal audit of the petty cash. The Department is taking steps to improve the internal controls
as recommended by the State Auditor’s Office in this finding.

Auditor’s Remarks
We wish to thank the staff and employees of the Department of Corrections for their cooperation
and for the Department’s timely response to our audit finding. We will review the petty cash
function during our next regularly scheduled audit of the Department. We welcome the
opportunity to assist the Department in evaluating and implementing an effective system of
internal controls over cash receipts.

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Schedule of Audit Findings
Department of Corrections
July 1, 1999 through June 30, 2000
2.

The Department of Corrections did not comply with state laws and
regulations regarding control over local cash accounts.
Description of Condition
The Department of Corrections did not comply with the requirements of the Office of
Financial Management and its own policies and procedures requiring control over local
funds. These are separate authorized funds administered by various institutions and
regional business service centers. The money in these funds is in separate bank
accounts, controlled by these different locations. The Department has in excess of $12
million in commercial institutions outside of the State Treasury. We audited some of
these accounts at six correctional facilities, and discovered the following control
weaknesses:
•

Employees at four of the six locations were not completing bank reconciliations in
a timely manner. Local accounts should be reconciled each month from the
recorded amount in each account register to the bank statement, and also to the
amount in the general ledger. Reconciliations should be designed to catch
mistakes and irregularities. At the McNeil Island Correction Center, Funds 651
and 512 had not been reconciled for all of fiscal year 2000. The Monroe
Correctional Complex also had not reconciled funds 651 and 512 for much of
fiscal year 2000. Reconciliations for funds maintained by the Southwest
Regional Business Service Center and Southeast Regional Business Service
Center were not done in a timely manner.

•

Employees at four of the six locations tested had not updated the general ledger
on a monthly basis for Fund 800 as required. We found this condition at McNeil
Island, Monroe, the Southeast Regional Business Service Center and the
Northeast Regional Business Service Center.

•

For three of six locations, we could not reconcile the petty cash balance to the
authorized amount. We found this at McNeil Island, Monroe and Southeast
Regional Business Service Center.

We reported this condition to management at the conclusion of our last two annual
audits.

Cause of Condition
Several factors contributed to this condition.
•

Conversion to the Trust Accounting System from the Inmate Banking System
with subsequent problems in the new system.

•

Restructuring of Department field and regional offices with corresponding
changes in responsibilities.

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Effect of Condition
Without reconciling these local accounts from the amount in official accounting records to
the bank statements in a timely manner, the Department cannot ensure money in these
accounts is properly safeguarded against loss or misuse, or reported accurately.

Recommendations
We recommend that the Department comply with state laws and regulations and its own
policies and procedures regarding local funds (and accounts).
We also recommend that management establish controls to ensure:
•

Local fund accounts in commercial institutions are reconciled in a timely manner.

•

Petty cash funds are maintained at the authorized level.

•

The general ledger is updated on a monthly basis for Fund 800 activity.

Department’s Response
The Department recognizes the importance of timely bank reconciliation and proper
accounting for local funds, and will ensure compliance with state regulation and internal
policies.

Auditor’s Remarks
We appreciate the actions being taken by the Department. We will review these matters
during the course of our next audit.

Applicable Laws and Regulations
The Office of Financial Management’s State Administrative and Accounting Manual lists
the following accounting and control requirements for local funds in commercial
institutions:
Section 85.50.40.c:
Accounts maintained in commercial institutions (e.g., banks, savings and
loan associations, etc.) including petty cash accounts, are to be promptly
reconciled with agency records on a monthly basis. The balance shown
on the bank statement may not agree with the agency’s book balance.
Variances can occur because of outstanding checks, deposits in transit,
bank service charges, or other adjustments. Adjusting entries may be
required when entries appear on the bank statement without
corresponding entries in the agency’s books. Adjusting entries, if
necessary, are to be promptly prepared and recorded in the agency’s
records.
Section 85.50.60.d.6:
The total cash on hand, plus the amount of disbursements represented
by the documentation, is to equal the authorized amount of the petty
cash account.
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The Department of Corrections Policies and Directives manual lists the following financial
reporting requirements for the Offender Welfare Betterment Account and the Petty Cash
Account:
DOC 200.200.XII.A:
Each facility shall enter all activity into agency Financial Reporting
System (AFRS) by the close of the fiscal month in which the activity
occurred. The activity may be recorded at summary level; however,
revenue and expenditure activities are not to be netted against each
other.
DOC 205.000.V:
The total cash in bank, less outstanding checks, plus the amount of cash
in the change fund, plus unreimbursed expenditures represented by the
documentation, is to equal the amount originally advanced to the petty
cash account.

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Schedule of Audit Findings
Department of Corrections
July 1, 1999 through June 30, 2000
3.

The Department of Corrections did not comply with state laws
and regulations regarding controls over fixed assets.
Description of Condition
The Department of Corrections did not comply with the requirements of the Office of
Financial Management (OFM) and its own policies and procedures regarding controls
over fixed assets. Departmental policy closely follows the requirements of OFM. The
Department has furnishings and equipment in excess of $47 million. We discovered a
lack of controls pertaining to fixed assets or controls in place but not operating effectively.
We reviewed controls at Department headquarters and at seven correctional facilities:
Airway Heights Corrections Center, Cedar Creek Corrections Center, Coyote Ridge
Corrections Center, McNeil Island Corrections Center, Monroe Correctional Complex,
Washington Corrections Center and Washington Corrections Center for Women. We
found the following conditions:
•

Physical inventories for small and attractive assets were not taken or were not
documented within the last two years at Coyote Ridge Corrections Center and
Washington Corrections Center. The physical inventories at McNeil Island
Corrections Center, Monroe Correctional Complex, and Washington Corrections
Center for Women were not conducted by personnel with no direct responsibility
for the fixed assets subject to the count.

•

Reconciliations between the physical count and the Capital Asset Management
System were not completed and documented at Cedar Creek Corrections Center
and Washington Corrections Center for Women.

•

Written instructions for taking inventory were not adequate or were not provided
to employees at Airway Heights Corrections Center, Cedar Creek, and
Washington Corrections Center for Women. In addition, the physical inventory
sheets were not consistently signed at Airway Heights, Monroe and Washington
Corrections Center for Women.

•

Not all assets selected for testing could be traced into the asset management
system at Airway Heights, Cedar Creek, Coyote Ridge, McNeil Island and
Monroe. In addition, assets were not always being tagged at Cedar Creek,
Coyote Ridge, Monroe and Washington Corrections Center, as required for
control purposes.

•

There is no centralized certification of the Department’s assets by the inventory
officer as required by state regulation. The Department inventory officer is
supposed to receive certified (signed) asset management system reports
submitted by the institutions and field offices. However, there is no monitoring to
ensure that all are received or that proper reconciliations have been done by the
institutions and field offices. We found that physical inventories were not
performed, and reconciliations were either not performed or not done properly.

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Without monitoring, it would be difficult for the Department inventory officer to
certify that the Department’s reconciliation is correct.

Cause of Condition
These conditions exist due to limited staff resources and the assignment of a higher
priority to other tasks within the Department. In addition, the reorganization of the
Department has affected workloads and staff at all correctional facilities.

Effect of Condition
Without maintaining complete and accurate fixed asset records and completing regular
physical inventories, the Department cannot ensure that state property and equipment is
properly safeguarded and reported and that employees are accountable for its use.

Recommendations
We recommend:
•

The Department comply with Office of Financial Management regulations and
department policies and procedures for fixed assets.

•

The Department establish controls to ensure that:
Assets are properly tagged, the assets are classified by type and can be
traced into the accounting system and to their physical locations.
Physical inventories are properly performed and documented. Further,
reconciliations from the inventory counts to the asset management
system reports should be done and recorded at all institutions.

•

The inventory officer at Department headquarters should ensure that all asset
management system reports are received and have been reconciled to physical
inventory counts by institutions and field offices. This should be part of certifying
the Department-wide reconciliation of all fixed assets.

Department’s Response
The Department recognizes the importance of maintaining proper controls over fixed
assets and will ensure that the appropriate procedures are implemented.
We appreciate the efforts of you and your staff on our audit. The information you provide
is valuable and, as always, we will work to improve our operations next year.

Auditor’s Remarks
We appreciate the actions being taken by the Department. We will review these matters
during the course of our next audit.

Applicable Laws and Regulations
The Office of Financial Management’s State Administrative and Accounting Manual lists
the following accounting and control requirements for fixed assets:

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Section 30.30.10:
Mark all inventoriable fixed assets upon receipt and acceptance to
identify that the property belongs to the state of Washington.
Section 30.40.40:
Upon receipt and acceptance of an inventoriable fixed asset, the agency
inventory officer is responsible for supervising the addition of the asset to
the inventory system. This includes assigning tagging responsibilities to
specific individuals as well as developing and implementing procedures
to ensure that the necessary information is entered into the fixed asset
inventory records.
Section 30.40.55:
Conduct physical inventories at least once every other fiscal year for all
inventoriable fixed assets.
Section 30.40.60:
In order to ensure objective reporting of inventory items, physical
inventories should be performed by personnel having no direct
responsibility (custody and receipt/issue authority) for assets subject to
the inventory count. If it is not feasible to use such personnel for any
part of the inventory, then those portions are, at least, to be tested and
verified by a person with neither direct responsibility for that portion of
the inventory nor supervised by the person directly responsible.
Section 30.40.65:
Written physical inventory instructions must be documented and
distributed to each person participating in the inventory process. The
procedure that the person counting the assets is to attest to the accuracy
of the count by signing his or her name at the bottom of each inventory
page . . .
Section 30.40.70:
After the physical inventory count is completed, the agency inventory
officer is to conduct the reconciliation process. Reconciliation is defined
as the process of identifying, explaining, and correcting the differences
occurring between the physical count and the inventory records. When
all differences have been identified, and explained, the inventory is
considered reconciled.
After the inventory is reconciled, the agency inventory officer is to certify
the reconciliation with a statement and signature that it is correct and
report this to the supervisor. If the certification cannot be made, the
inventory officer is to disclose that fact and the supervisor is to determine
the appropriate course of action.

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