OFFICE OF THE STATE AUDITOR PHIL BRYANT Auditor POST OFFICE BOX 956 •JACKSON, MISSISSIPPI 39205 • (601) 576-2800 • FAX (601) 576-2687 January 18, 2005 Financial Audit Management Report Honorable Tate Reeves, State Treasurer State Treasury Department P. O. Box 138 Jackson, Mississippi 39205 Dear Mr. Reeves: Enclosed for your review are the financial audit findings for the State Treasury Department for the Fiscal Year 2004. In these findings, the Auditor’s Office recommends the State Treasury Department: 1. Strengthen controls over the statewide collateral pool; 2. Strengthen controls over the use of the signature stamp; 3. Support contractual services with written agreements; and 4. Perform supervisory review of arbitrage schedules. Please review the recommendations and submit a plan to implement them by February 8, 2005. The enclosed findings contain more information about our recommendations. During future engagements, we may review the findings in this management report to ensure procedures have been initiated to address these findings. This report is intended solely for the information and use of management and Members of the Legislature and is not intended to be and should not be used by anyone other than these specified parties. However, this report is a matter of public record and its distribution is not limited. I hope you find our recommendations enable the State Treasury Department to carry out its mission more efficiently. I appreciate the cooperation and courtesy extended by the officials and employees of the State Treasury Department throughout the audit. If you have any questions or need more information, please contact me. Sincerely, Phil Bryant State Auditor Enclosures This is trial version www.adultpdf.com State Treasury Department January 18, 2005 Page 2 The Office of the State Auditor has completed its audit of selected accounts included on the financial statements of the State Treasury Department for the year ended June 30, 2004. These financial statements are consolidated into the State of Mississippi's Comprehensive Annual Financial Report. The Office of the State Auditor's staff members participating in this engagement included Karlanne Coates, CPA, Tonya Bierman, Kayla Jackson, Terry Laughlin, Rebecca Wilson, Oliver Strange, and Lucreta Walker. The fieldwork for audit procedures and tests was completed on November 30, 2004. These procedures and tests cannot and do not provide absolute assurance that all state legal requirements have been met. In accordance with Section 7-7-211, Miss. Code Ann. (1972), the Office of the State Auditor, when deemed necessary, may conduct additional procedures and tests of transactions for this or other fiscal years to ensure compliance with legal requirements. Internal Control over Financial Reporting In planning and performing our audit of selected accounts included on the financial statements, we considered the State Treasury Department’s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on these accounts and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. However, we noted other matters involving the internal control over financial reporting that require the attention of management. These matters are noted under the heading IMMATERIAL WEAKNESSES IN INTERNAL CONTROL. Compliance As part of obtaining reasonable assurance about whether selected accounts included on the financial statements of the State Treasury Department are free of material misstatement, we performed tests of compliance with certain provisions of laws, regulations, contracts and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. We are pleased to report the results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. This is trial version www.adultpdf.com State Treasury Department January 18, 2005 Page 3 IMMATERIAL WEAKNESSES IN INTERNAL CONTROL Internal Controls over the Statewide Collateral Pool Should Be Strengthened Finding: Testwork on the statewide collateral pool at the State Treasury Department revealed the following: • The Public Funds Guaranty Pool Rules state the average daily balance should be used to determine a bank’s required collateral pledging level. Six instances were noted in which agency personnel did not use the average daily balance to determine the guaranty pool bank’s required collateral pledging level. Agency personnel used either the higher of month end or average daily balance or month end balance. These errors resulted in two bank’s deposits being understated by $2,613,014 and $1,450,120 on the spreadsheet used by agency personnel to monitor each bank’s deposits and related collateral. However, these errors did not cause the banks to be under collateralized. • A bank’s monthly deposit information and Federal Deposit Insurance Corporation (FDIC) coverage is used in determining its required collateral pledging level. Eight instances were noted in which FDIC calculations were in error. These errors ranged from an understatement in FDIC coverage of $4,016,308 to three overstatements of $100,000. However, these differences did not cause the banks to be under collateralized. • Agency personnel have developed a spreadsheet for monitoring each bank’s deposits and related collateral to determine if each bank is adequately collateralized. In verifying the accuracy of deposit information on the spreadsheet, one instance was noted in which an entity on the bank’s monthly report was not an allowable public entity. Thus, this entity’s deposit information in the amount of $4,545 should not have been included in determining the required pledging level of the bank. Good internal controls require the required collateral pledging level of the guaranty pool banks be determined based on guidelines approved by the Guaranty Pool Board. Also, good internal controls require the deposit information and FDIC coverage used to determine the required collateral pledging level of banks within the statewide collateral pool be accurate. Failure to properly determine the required pledging level of individual banks could result in banks being under collateralized. Recommendation: We recommend the State Treasury Department strengthen internal controls over the statewide collateral pool to ensure the required collateral pledging level of guaranty pool banks is properly determined based on rules approved by the Guaranty Pool Board. Also, the deposit and FDIC information used in determining the required collateral pledging level for banks within the statewide collateral pool should be accurate. This is trial version www.adultpdf.com State Treasury Department January 18, 2005 Page 4 Internal Controls over the Use of the Signature Stamp Should Be Implemented Finding: During fiscal year 2004, the State Treasury Department utilized a signature stamp to sign checks in the absence of personnel authorized to sign checks. We noted the following weaknesses during our review of internal controls governing the use of the signature stamp: • The signature stamp was not properly safeguarded. The employee responsible for maintaining the signature stamp was not aware that other agency personnel used the stamp to apply the State Treasurer’s signature to checks. • For checks signed using the signature stamp, the agency’s practice required that at least two people witness the stamping. This was documented by a Director or the Internal Auditor initialing the Daily Bank Reconciliation (DBR) which authorizes the issuance of a check. During our review of 11 payments in which the signature stamp was used to sign checks on a bank account, eight instances were noted in which the DBR was not properly initialed to indicate a second employee witnessed the use of the signature stamp. Good internal controls require the signature stamp be properly safeguarded and verification procedures over the use of the stamp be performed and documented to deter improper usage. Improper usage of the signature stamp could result in a check being fraudulently written, stamped and issued. Recommendation: We recommend the State Treasury Department implement internal control procedures over the use of the signature stamp to ensure the stamp is properly safeguarded. We further recommend verification procedures over the use of the stamp be performed and documented. Contractual Services Should Be Supported by Written Agreements Finding: The State Treasury Department contracted with several individuals to perform various services for the agency. Review procedures performed on 15 contractual service payments revealed two payments totaling $11,598 were made to individuals for services rendered without written contractual agreements. Without written contracts, duties and costs to the parties involved were not adequately documented. Prudent business practices mandate the execution of written contractual agreements binding the parties in costs and duties. Recommendation: We recommend the State Treasury Department obtain written contractual agreements which document services to be performed by individuals and/or organizations. The contracts should be signed by both parties and should document agreed upon costs, as well as duties to be performed. This is trial version www.adultpdf.com State Treasury Department January 18, 2005 Page 5 Supervisory Review of Arbitrage Schedules Should Be Performed Finding: Our review of arbitrage schedules for two of the 12 bond issues with an arbitrage calculation due in fiscal year 2004 at the State Treasury Department revealed the agency did not perform a supervisory review of the schedules which were used in rebate calculations to ensure they were properly prepared. Good internal controls require a supervisory review be performed and documented to ensure the arbitrage requirement is met. A penalty may be imposed on the State Treasury Department by the Internal Revenue Service for failure to comply with tax laws if the arbitrage calculations were not prepared and it was determined later that a rebate payment was due. Recommendation: We recommend the State Treasury Department strengthen controls over the arbitrage rebate requirement by ensuring a supervisory review of the arbitrage schedules is performed and documented. End of Report This is trial version www.adultpdf.com . OFFICE OF THE STATE AUDITOR PHIL BRYANT Auditor POST OFFICE BOX 956 •JACKSON, MISSISSIPPI 39205 • (601) 576-2800 • FAX (601) 576-2687 January 18, 2005 Financial Audit Management Report. Phil Bryant State Auditor Enclosures This is trial version www.adultpdf.com State Treasury Department January 18, 2005 Page 2 The Office of the State Auditor has completed its audit. audit of selected accounts included on the financial statements of the State Treasury Department for the year ended June 30, 2004. These financial statements are consolidated into the State of