Department of Audit 2019 Annual Report Justin P. Wilson Comptroller of the Treasury Jason E. Mumpower Deputy Comptroller Department of Audit 1 Comptroller of the Treasury Justin P. Wilson Comptroller of the Treasury Jason E. Mumpower Deputy Comptroller State Audit Deborah V. Loveless, CPA, CGFM, CGMA Director Local Government Audit Jim Arnette, CISA, CGFM Director Investigations Jeff Puckett Director Department of Audit 2 Justin P. Wilson Comptroller Jason E. Mumpower Deputy Comptroller January 7, 2020 The Honorable Bill Lee, Governor State Capitol Nashville, Tennessee 37243 The Honorable Randy McNally, Lt. Governor The Honorable Cameron Sexton, Speaker of the House Members of the 110th General Assembly Cordell Hull Building 425 Fifth Avenue North Nashville, TN 37243 Ladies and Gentlemen: The 2019 Annual Report of the Department of Audit is submitted herewith in accordance with Section 4-3-304, Tennessee Code Annotated. The Department of Audit conducts audits, or ensures that audits are conducted, of state, county, and municipal governments; utility districts; internal school funds; and other local government authorities and agencies. Audits are also performed of state grants to nongovernmental organizations and of numerous federal programs for state and local governments. The work we do results in a better government, which in turn will improve the lives of all Tennesseans. Sincerely, Justin P. Wilson Comptroller of the Treasury JPW/ab State Capitol Department of Audit Nashville, Tennessee 37243 3 Contents Department of Audit........................................................................................... 1 Department of Audit Organizational Chart............................................................... 2 Auditing Standards.................................................................................................... 3 Peer Review............................................................................................................... 3 Division of State Audit......................................................................................... 4 Information Systems................................................................................................. 4 Medicaid/TennCare.................................................................................................. 5 State Agency Audits................................................................................................... 5 Single Audit of the State of Tennessee........................................................................ 5 Audit Reports Released.............................................................................................. 6 Other Activities......................................................................................................... 7 Division of Local Government Audit................................................................... 8 Financial and Compliance Audits.............................................................................. 8 Information System Reviews..................................................................................... 9 Contract Audits......................................................................................................... 9 Other Services......................................................................................................... 10 Division of Investigations.................................................................................. 12 Fraud, Waste & Abuse Hotline........................................................................... 13 Results of Hotline Notifications.............................................................................. 13 Analysis of Substantive Hotline Notifications, Fiscal Year 2019............................... 16 About the Department of Audit......................................................................... 17 Professional Staff..................................................................................................... 17 Staff Certifications .................................................................................................. 17 Department of Audit Expenditures......................................................................... 18 Contact Information............................................................................................... 19 Department of Audit 4 Department of Audit 2019 ANNUAL REPORT The General Assembly created the Department of Audit in 1937. The authority to audit state, county, municipal and other local governmental entities as well as recipients of grant funds is established in Tennessee Code Annotated. The department is required to: • Perform currently a post-audit of all accounts and other financial records of the state . . . in accordance with generally accepted auditing standards and . . . such procedures as may be established by the comptroller . . . • Make annually, and at such other times as the general assembly shall require, a complete report on the post-audit . . . • Certify to the fund balance sheets, operating and other statements, covering the condition of the state’s finances, as prepared by the department of finance and administration, or by the state treasurer, . . . • Serve as a staff agency to the general assembly, or to any of its committees, in making investigations of any phase of the state’s finances . . . • Establish minimum standards for the performance of audits by the internal audit staffs of local governments, special taxing districts, utility districts, political subdivisions, state departments, boards, commissions, institutions, agencies, authorities or other entities of the state . . . • Ensure that the audits of municipalities, utility districts, emergency communications districts, internal school funds, charter schools, public housing authorities, human resource agencies, development districts, and other special purpose governments are prepared in accordance with generally accepted governmental auditing standards and the minimum standards as prescribed by the Comptroller of the Treasury. In addition, Tennessee Code Annotated authorizes the Department of Audit to conduct investigations. Section 9-3-212(b) states that the Comptroller: • Make annually an audit of all the records of the several counties of the state . . . May require any audit required of any such agency, or any investigative or review work in addition to such audit which, in the exercise of the comptroller’s discretion, the comptroller believes necessary to ascertain or correct • Require that audits to be performed by the internal audit errors, irregularities, or defaults in the management staffs of grantees or the internal audit staffs of state and disbursement of funds controlled by such agency, to departments, boards, commissions, institutions, agencies, be conducted by the department of audit. authorities or other entities of the state shall be coordinated with the office of the comptroller . . . with The Department of Audit comprises two divisions—State Audit standards established by the comptroller . . . and Local Government Audit—and employs approximately 300 people. Each division is administered by a director who • Require that all persons, corporations or other entities is responsible for the audit function and addresses audit receiving grants from or through this state shall cause concerns and issues in the division. a timely audit to be performed, in accordance with auditing standards prescribed by the comptroller . . . Both divisions coordinate with the Comptroller’s Division of Investigations, which conducts investigations that support the Financial and Compliance Audit and Single Audit report timelines of State Audit and Local Government Audit. • Perform economy and efficiency audits, program results audits and program evaluations . . . 1 Department of Audit Department of Audit Organizational Chart Tennessee General Assembly Comptroller of the Treasury Department of Audit Division of State Audit Division of Investigations Division of Local Government Audit State Agency Audits Financial and Compliance Information Systems Information Systems Medicaid/TennCare Contract Audits Administration Special Audits and Limited Reviews Departmental Training Program Federal Programs For additional information, go to www.comptroller.tn.gov Department of Audit 2 The Department of Audit is a post-audit agency. As such, it audits an entity’s basic financial statements; its compliance with applicable statutes, grant agreements, rules, and regulations; and/or its past record of efficiency and effectiveness at the end of a fiscal period. Pre-audits, in contrast, are performed by an entity’s staff to prevent fraud and errors, detect problems, and suggest improvements. The most important distinction is that post-audits are independent of the audited entity. In this respect, the Department of Audit is comparable to an independent certified public accounting firm in the private sector. Because independence is so important in a post-audit agency, the Department of Audit is in the legislative branch of state government. The department is accountable to the General Assembly and provides information to assist the legislature in overseeing the use of public funds and the efficient operation of government. The peer review for the year ended June 30, 2018, rendered a rating of pass on the department’s system of quality control. Audit organizations can receive a rating of pass, pass with deficiency(ies), or fail. In the opinion of the quality assessment team, “the system of quality control of the State of Tennessee, Office of the Comptroller of the Treasury, Department of Audit in effect for the period July 1, 2017 through June 30, 2018 has been suitably designed and was complied with during the period to provide the audit organization with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects.” The next review is scheduled for July 2020. audit Auditing Standards The Department of Audit performs audits in accordance with auditing standards generally accepted (GAAS) in the United States of America and generally accepted government auditing standards promulgated by the American Institute of Certified Public Accountants (AICPA) and issued by the Comptroller General of the United States, respectively. Government Auditing Standards (GAS or Yellow Book) applies to financial and performance audits and attestation engagements. For financial audits and attestation engagements, the Yellow Book incorporates by reference the AICPA Statements on Auditing Standards and the Statements on Standards for Attestation Engagements. The Department of Audit conducts its Single Audit in accordance with the Single Audit Act as amended by the 1996 Single Audit Act amendments; and Office of Management and Budget (OMB) 2 CFR 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). An audit is an independent, objective quality assurance activity designed to aid management of an organization to accomplish its objectives and improve its effectiveness. –Defining Tennessee Audit: A Glossary of Audit Terms https://comptroller.tn.gov/office-functions/stateaudit/resources/glossary.html accountability Accountability is the acknowledgment and assumption of responsibility for actions and decisions, and the obligation to report and respond to resulting consequences. According to Government Auditing Standards (also referred to as the Yellow Book), management and officials of government programs are responsible for providing reliable, useful, and timely information to ensure transparency and accountability of their programs. Peer Review To comply with Section 8-4-102, Tennessee Code Annotated, the Speakers direct the Department of Audit to undergo a quality assessment review under the auspices of the National State Auditors Association. The most recent review was performed in August 2018 by certified public accountants and other federal and state government professionals. The purpose was to ensure the department is following auditing standards generally accepted in the United States of America and Yellow Book standards. –Defining Tennessee Audit: A Glossary of Audit Terms https://comptroller.tn.gov/office-functions/stateaudit/resources/glossary.html 3 Department of Audit Division of State Audit The Division of State Audit conducts financial and compliance audits, performance audits, information systems audits, and attestation engagements. It also performs special studies to provide the General Assembly, the Governor, and the citizens of Tennessee with objective information about the state’s financial condition and the performance of the state’s agencies and programs. This division thus aids the legislature in ensuring that state government is accountable to the citizens of Tennessee. In fulfilling this audit function, the division issued 52 reports during the year ended June 30, 2019; an additional 85 audits were in progress at year-end. This division includes three audit sections: Information Systems, Medicaid/TennCare, and State Agency Audits. Highlights of the division’s work from July 1, 2018, through June 30, 2019, are presented. Complete reports are available at comptroller.tn.gov/office-functions/ state-audit.html. In addition to auditing, the division reviews and comments on due process documents from professional organizations and conducts technical research and training. The division also assists the Comptroller in the formulation of state policy and regulations, either directly with representatives of state agencies or indirectly by submitting comments about proposed policies and procedures. Information Systems The IS review staff are responsible for obtaining and documenting an understanding of the internal control structure in the computerized accounting and management information systems of entities undergoing an audit. These entities include state agencies, colleges, and universities. The IS audit staff review the general and application controls within data processing systems when those systems significantly affect the auditee’s operations. The results of this work are included in the state agency audit reports. In the Information Systems (IS) section, the data retrieval staff provide information for audit field work. They write computer programs to provide information from the state’s centralized accounting system, individual agency application systems, and college and university transaction files. Various statistical sampling techniques, together with stratification and summary reports, provide the auditors a basis on which to evaluate an entity’s operations. Data retrieval staff also produce lists and perform comparisons and other procedures to detect errors or irregularities. Working closely with other audit staff, data retrieval staff develop new computer-assisted audit techniques. Division of State Audit In the area of computer forensic analysis, evidence of fraud and abuse may be found on subjects’ computers, and the IS section works in support of the Comptroller’s Office investigators, Office of General Counsel, and individual state agencies to acquire, identify, and analyze this evidence. The section uses specialized software and hardware to recover evidence of official misconduct by state employees and in support of civil or criminal action against persons or entities engaging in illegal activities resulting in damages to the state. 4 Medicaid/TennCare Tennessee Code Annotated), which requires the Joint Government Operations Committee to review each entity at least once every eight years to determine whether the entity should be continued, restructured, or terminated. Our audit reports are intended to aid the committee in its deliberations, as are our staff’s presentations of the findings at public hearings, when requested by the committee. Under an agreement with the Department of Finance and Administration, the Medicaid/TennCare section staff perform the following attestation and rate-setting functions for the state’s TennCare program: • Reimbursable cost computation and examinations for nursing home facilities participating in the Medicaid Program. A limited number of other performance audits are conducted based on the identification of risks in statewide processes and programs or agency-specific operations and activities. • Reimbursable rate computation and examinations for intellectual and developmental disabilities facilities participating in the Medicaid Program. Financial and Compliance Audits • Computations of reimbursement settlements and prospective rates for federally qualified health centers, federally qualified health center look-alikes, and rural health clinics as required by the Benefits Improvement and Protection Act of 2000. • to consider the entity’s internal control over financial reporting as a basis for designing auditing procedures to express an opinion on the financial statements; • Examinations of TennCare managed care contractors, who contract with the state to provide medical services under the program, performed jointly with the Department of Commerce and Insurance. The objectives of financial and compliance audits are • to determine the fairness of the presentation of the • Cost settlements for state-operated developmental centers financial statements; and serving individuals with intellectual disabilities. • to recommend appropriate actions to correct deficiencies. • Technical, financial, and budgeting support to TennCare from paid claims extracts. Single Audit of the State of Tennessee During the year ended June 30, 2019, a major endeavor of the division was the Single Audit of the State of Tennessee for the year ended June 30, 2018, conducted in accordance with the Uniform Guidance. The Single Audit Report reflected federal awards of approximately $14.4 billion. State Agency Audits The State Agency Audits section conducts performance audits and financial and compliance audits of state departments, agencies, and institutions. Performance Audits A performance audit is an independent examination of the extent to which agencies and departments of state government are faithfully carrying out their programs. The audit reports assist the General Assembly and agency management by We noted instances of noncompliance that resulted in qualified opinions on compliance for 3 of the state’s 24 major federal programs. In addition, we noted other instances of noncompliance that met the reporting criteria contained in the Uniform Guidance. We also noted material weaknesses and significant deficiencies in internal control over compliance with compliance requirements related to federal programs. As a result of testing the state’s compliance with the requirements • assessing the extent to which state agencies have fulfilled of laws, regulations, contracts, and grant agreements applicable their statutory mandate and the efficiency and effectiveness to each major federal program, costs of over $6.4 million were questioned. of management’s organization and use of resources; • developing recommendations for management or legislative The Single Audit included an audit of the state’s basic financial action that might improve the efficiency and effectiveness statements. This audit resulted in an unmodified opinion on the basic financial statements of the State of Tennessee for the of the agencies’ operations; and year ended June 30, 2018. The audit also determined that the Schedule of Expenditures of Federal Awards was fairly stated, • providing program and financial data. in all material respects, in relation to the basic financial statements taken as a whole. Most of the performance audits are done to comply with the Tennessee Governmental Entity Review Law, commonly known as the Sunset Law (Section 4-29-101 et seq., 5 Division of State Audit Audit Reports Released Performance Reports In addition to the Single Audit Report, separate audit reports were issued on many agencies and institutions of state government. The separate audits of the departments, agencies, and institutions are not meant to serve as organization-wide audits as described in the Single Audit Act as amended in 1996 and the Uniform Guidance. Some, however, serve as segments of the organization-wide audit of the State of Tennessee; therefore, they include the necessary tests for compliance with applicable laws, regulations, contracts, and grant agreements and the required consideration of the internal control. • • • • • • • • • • • • • • • • • State Agency Audits The division released 49 state agency reports during the year ended June 30, 2019. Of the 49 reports, 27 were financial and compliance reports, 17 were performance reports, and 5 were special reports. Financial and Compliance Reports • • • • • • • • • • • • • • • • • • • • • • • • • • • Austin Peay State University Clean Water State Revolving Fund Department of the Treasury East Tennessee State University Endowment for Educational Excellence: Tennessee State University Foundation Local Government Group Insurance Fund Middle Tennessee State University Nashville State Community College Northeast State Community College Pellissippi State Community College Roane State Community College Roane State Community College Foundation State of Tennessee Single Audit Teacher Group Insurance Fund Tennessee Board of Regents Central Office Tennessee Consolidated Retirement System Tennessee Education Lottery Corporation Tennessee Housing Development Agency Tennessee Rehabilitative Initiative in Correction Tennessee Residence Foundation Tennessee State University Tennessee State Veterans’ Homes Board Tennessee Student Assistance Corporation The Office of the Governor The University of Memphis The University of Tennessee Walters State Community College Division of State Audit Comptroller of the Treasury Department of Commerce and Insurance Including the Peace Officer Standards and Training Commission and the Commission on Firefighting Personnel Standards and Education Department of Education, State Board of Education, Energy Efficient Schools Council, and Tennessee Public Television Council Department of Environment and Conservation, Air Pollution Control Board, and Board of Groundwater Management Department of Health and Related Health Advisory Entities Department of Human Resources, the Board of Appeals, and the Employee Suggestion Award Board Department of Labor and Workforce Development and Related Entities Department of State Division of TennCare and TennCare Pharmacy Advisory Committee Douglas Henry State Museum Commission Including the Tennessee State Museum Private Probation Services Council Sam Davis Memorial Association, Board of Trustees Tennessee Council on Developmental Disabilities Tennessee Emergency Management Agency and Related Compacts Tennessee Historical Commission and Tennessee Wars Commission Tennessee Secondary School Athletic Association Tennessee State Veterans’ Homes Board Single Audit The Single Audit is a rigorous, organization-wide audit or examination of an entity that expends $750,000 or more of federal financial assistance (commonly known as federal funds, federal grants, or federal awards). –Defining Tennessee Audit: A Glossary of Audit Terms https://comptroller.tn.gov/office-functions/stateaudit/resources/glossary.html 6 audit report Special Reports • • • • • Annual Report on the Status of Submission of Title IX Implementation Plans Division of TennCare Examination of Expenditures From the Maintenance of Coverage Trust Fund Single Audit Report Summary TNReady Teacher Survey Comments Underground Utility Damage Enforcement Board Letter The purposes of audit reports are to (1) communicate the results of audits to those charged with governance, the appropriate officials of the audited entity, and the appropriate oversight officials; (2) make the results less susceptible to misunderstanding; (3) make the results available to the public, unless specifically limited; and (4) facilitate follow-up to determine whether appropriate corrective actions have been taken. Medicaid/TennCare Reports –Defining Tennessee Audit: A Glossary of Audit Terms https://comptroller.tn.gov/office-functions/stateaudit/resources/glossary.html The division completed examinations of the following nursing facilities: • Beverly Park Place Health and Rehab, Knoxville, Tennessee • Life Care Center of Columbia The division completed an examination of the following federally qualified health center look-alike: sunset hearing • When an entity reaches its termination date specified in statute, the subcommittees of the Joint Government Operations Committee hold sunset public hearings. The subcommittees review and take action on sunset audit reports and agency responses to questions issued by Comptroller’s Office auditors to determine whether the entity should be continued, restructured, or terminated. ProHealth Rural Health Services, Inc., Franklin, Tennessee Other Activities At the 10 Government Operations Committee public hearings held on 62 entities in the year ended June 30, 2019, Division of State Audit staff presented 13 audit reports covering 34 entities. Another 28 entities submitted written responses to staff-prepared questions based on the entities’ statutory authority and responsibility. Additionally, the committee held a follow-up hearing on 4 entities and held 1 special hearing to review the results of Single Audit work. –Defining Tennessee Audit: A Glossary of Audit Terms https://comptroller.tn.gov/office-functions/stateaudit/resources/glossary.html Audits in Progress At June 30, 2019, the following audits were in progress: performance audit • • • • Unlike financial and compliance audits, which test for compliance with laws and audit financial statements, performance audits evaluate whether state agencies and departments are effectively administering their programs. 38 financial and compliance audits, 17 Medicaid/TennCare examinations, 16 performance audits, and 14 information systems audits. –Defining Tennessee Audit: A Glossary of Audit Terms https://comptroller.tn.gov/office-functions/stateaudit/resources/glossary.html 7 Division of State Audit Division of Local Government Audit Through the Division of Local Government Audit, the Department of Audit is responsible for the audits of all local governmental entities with statutory audit requirements as well as certain nonprofit and for profit organizations that are publicly funded. The division may conduct the audit for governmental entities or accept an audit prepared by a certified public accountant provided the audit meets minimum standards established by the Comptroller of the Treasury. The division conducts the annual audits for 90 of the state’s 95 counties. Through a contractual process with independent certified public accounting firms, the division ensures the performance of over 1,600 audits for the state’s remaining counties, municipalities, public internal school funds, charter schools, utility districts, housing authorities, local government created entities, quasi-governmental organizations, and other government-funded agencies. Financial and Compliance Audits The division presently conducts audits in 90 counties. These audits are assigned to teams that audit the various offices and/ or departments and entities of county government. The audit staff is divided into four geographical areas: East, Mideast, Middle, and West. Each area is under the supervision of an audit manager who is responsible for audit planning and supervision. • determines the appropriateness of disbursements by examining budget authorization, paid invoice files, purchasing files, payroll records, and other financial records; • determines the authorization for transactions by reviewing the minutes of meetings of county commissions, school boards, highway commissions, and various committees such as budget and finance, and purchasing; • determines compliance with federal regulations and state and local laws; • obtains management’s representations with respect to the financial statements, as well as the supporting accounting data, and other items of disclosure; The Audit Process • evaluates financial statement presentation to determine conformity with accounting principles generally accepted in the United States of America; and The Division of Local Government Audit performs the following general procedures as part of the financial and compliance audit process: • evaluates the validity of all evidence obtained throughout the audit process to formulate an opinion on the financial statements. • evaluates the entity’s existing internal controls in the appropriate areas of operation; • confirms the accountability for receipts by examining, for example, tax rolls, state and federal revenue data, and letters of inquiry; Division of Local Government Audit 8 Scope of Activity Post-Audit of County Governments Scope of Activity Information System Reviews The Division of Local Government Audit conducted audits in 90 of the state’s 95 counties for the fiscal year ended June 30, 2018. A minimum of ten offices or departments in each county was audited: As required by the division’s annual audit plan, information system related controls were evaluated in 90 counties during the year ended June 30, 2019. To assist the financial and compliance audit staff, two IS specialists work with the county governments’ software vendors to obtain information from each county’s accounting system. This information along with software tools developed by the IS specialists is used for audit fieldwork. 1. County Trustee 2. County Mayor 3. Department of Education 4. Department of Highways 5. County Clerk 6. Circuit Court Clerk 7. General Sessions Court Clerk 8. Chancery Court Clerk and Master 9. Register 10. Sheriff Contract Audits The division fulfills its audit responsibility through a contractual process with independent certified public accounting firms who perform the audits for the following Tennessee local governments: Counties • 5 of the state’s 95 counties • 281 county-related entities Municipalities • 342 municipalities • 71 municipal-related entities Quasi Governments • 175 utility districts • 84 housing authorities and 3 housing authority-related entities • 18 human resource agencies and development districts • 108 other quasi-governmental entities Schools • 148 public internal school funds • 60 charter schools and 2 charter school-related entities • 15 special school districts The audit field work in each county is conducted by an audit team. The size of the team is determined by the complexity of the assignment. Approximately ten weeks of field work are required, including audit review and supervision by a senior auditor and/or an audit manager. The draft audit reports are reviewed in the Nashville office and released. The division also performs special audits and reviews as requested or as deemed necessary. Results of Audits The division’s audits of the 90 counties revealed new cash shortages of $94,923 leaving a balance of outstanding cash shortages of $585,574 at June 30, 2018. Details of the latest cash shortage report are available on the Comptroller’s website at www.comptroller.tn.gov/office-functions/la.html. The audits disclosed a total of 293 audit findings in 78 counties. Twelve counties did not have any audit findings for the year ended June 30, 2018: Blount, Coffee, Fayette, Franklin, Gibson, Lincoln, Loudon, Marshall, Meigs, Putnam, Roane, and Sevier. scope Information System Reviews Most county government offices and departments in Tennessee have automated all or a portion of their daily operations. The division’s eight information systems (IS) auditors are responsible for evaluating the general and application controls of each county’s computerized accounting system. Findings resulting from this evaluation are discussed with the appropriate officials and included in the county’s annual financial report. 9 Scope defines the subject matter that auditors will assess and report on, such as a particular program; the necessary documents or records; the period of time reviewed; and the locations that will be included. –Defining Tennessee Audit: A Glossary of Audit Terms https://comptroller.tn.gov/office-functions/stateaudit/resources/glossary.html Division of Local Government Audit The division further ensures that approximately 254 nonprofit and for-profit organizations are audited as required by state contracts and agreements. The entities use standard contracts, prepared by the Comptroller of the Treasury, which must be approved by the Comptroller’s designees in the Division of Local Government Audit before audit work begins. These audits must be performed in accordance with generally accepted government auditing standards and certain other minimum requirements prescribed by the Comptroller of the Treasury. In addition, the auditor must comply with other federal and state provisions. For the five counties, the division monitors the contract audits in accordance with a four-year monitoring plan, which includes a review of working papers prepared by certified public accountants. The Division of Local Government Audit approves the audit contracts of the certified public accountants and reviews each audit report to verify that it adheres to applicable reporting requirements. If a local governmental unit fails or refuses to have an audit, the Comptroller may direct the Division of Local Government Audit, or may appoint a certified public accountant, to perform the audit. If a nonprofit or for-profit organization refuses to have an audit, the division works in connection with the respective state funding agency to obtain an audit. The division evaluates the audit working papers of certified public accounting firms that audit the entities. The objective of this review is to ensure that in addition to standards prescribed by the American Institute of Certified Public Accountants and Government Auditing Standards issued by the United States Comptroller General, standards prescribed by the Comptroller of the Treasury have been followed. If the firm’s audit working papers are deemed substandard, the Comptroller of the Treasury takes appropriate action, which might include referral to the State Board of Accountancy. internal control The division will monitor audits of five county governments during the next four years. The audit of Hamilton County was monitored for the year ended June 30, 2018, and the audit of McMinn County will be monitored for the year ended June 30, 2019. For the year ended June 30, 2019, the division reviewed 1,585 audit reports submitted by certified public accountants for audits of local governments and other publicly funded entities. Other Services Technical Assistance In addition to the basic audit function and the monitoring and review of audits by certified public accountants, the division provides other services, which include: • providing information and assistance to facilitate implementation of new auditing and accounting standards; • submitting federal program data to the federal clearing house on behalf of county governments; • requesting technical data for pension and other postemployment benefits note disclosures from the State of Tennessee; • maintaining the uniform chart of accounts used by county governments; and • participating in the review of notifications made to the Comptroller’s Fraud Hotline. The division also provides, upon request, assistance to counties in resolving current problems with financial administration, as well as answering questions on various local governmental matters. The division provides fiscal reviews of new legislation related to county governments and works closely with the state legislature on the passage of new statutes for county governments. Statutory Referral of Utility Systems Internal control is a process, affected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance. Sections 68-221-1010(a) and 7-82-703(a), Tennessee Code Annotated, require the Comptroller to refer financially distressed municipal water and/or wastewater systems and public utility districts to the state’s Water and Wastewater Financing Board and/or the Utility Management Review Board. Sections 68-221-1010(d) and 78-82-401(h) of Tennessee Code Annotated require the Comptroller to refer water systems with excessive unaccounted for water losses. After the Division of Local Government Audit refers applicable facilities to the appropriate board, the respective board obtains and reviews a proposed plan for correction by the facility. If the board finds the facility’s plan unacceptable, the board will recommend an alternate course of action. –Defining Tennessee Audit: A Glossary of Audit Terms https://comptroller.tn.gov/office-functions/stateaudit/resources/glossary.html Division of Local Government Audit Scope of Activity Monitoring and Review of Contract Audits 10 During the year ended June 30, 2019, the division referred 105 utility systems to the Water and Wastewater Financing Board and/or the Utility Management Review Board. As a result, several utility districts and municipal utility systems are now operating or are on their way to operating on a financially sound basis and/or are in the process of taking measures to decrease their water loss rates. Reviews of Funds Administered by District Attorneys General During 2019, the division conducted reviews of District Attorney General Funds, Judicial District Drug Task Force Funds, and other funds the district attorneys general administer in the state’s 31 judicial districts. Each review covered the period July 1, 2017, through June 30, 2018. The scope of each review was limited to the transactions of the individual funds and did not include the overall operation of the district attorneys’ offices. Generally Accepted Government Auditing Standards Generally Accepted Government Auditing Standards (GAGAS) are the professional standards and guidance, issued by the U.S. Government Accountability Office (GAO), which provide a framework for conducting high quality audits with competence, integrity, objectivity, and independence. –Defining Tennessee Audit: A Glossary of Audit Terms https://comptroller.tn.gov/office-functions/stateaudit/resources/glossary.html Citizens and agencies are encouraged to report fraud, waste, or abuse in State and Local government. NOTICE: This agency is a recipient of taxpayer funding. If you observe an agency director or employee engaging in any activity which you consider to be illegal, improper, or wasteful, please call the state Comptroller’s toll free Hotline: 1-800-232-5454 Notifications can also be submitted electronically at: www.comptroller.tn.gov/hotline Updated July 2019 Authorization No. 307377 11 Division of Local Government Audit Division of Investigations The Comptroller’s Division of Investigations investigates allegations of fraud, as well as certain allegations of waste and abuse of public funds. These cases frequently result in criminal prosecution. Investigations are performed as a result of allegations received through the toll-free Fraud, Waste & Abuse Hotline; statutorily required fraud reporting forms; misappropriations or other significant issues indicative of fraud noted during routine audit work or audit report reviews; information received from certified public accountants, other state agencies, and concerned citizens and/or officials; and requests received from local District Attorneys General, Tennessee’s Office of the Attorney General, the Federal Bureau of Investigation, and other prosecutorial and law enforcement agencies. Results of investigations are presented in reports or letters that document occurrences of improper activity. Reports are forwarded to Tennessee’s Office of the Attorney General, the local District Attorney General, and, when applicable, the local Office of the United States Attorney for any legal action deemed necessary. The division’s investigators frequently work with local District Attorneys General, Tennessee’s Office of the Attorney General, the Office of the United States Attorney, the Tennessee Bureau of Investigation, the Federal Bureau of Investigation, and local law enforcement. The division’s investigations also include an assessment of internal controls and compliance with applicable laws relative to the issues investigated. Investigators have often found that weak internal controls or ineffective management were contributing factors in losses incurred as a result of fraud. In the resulting reports or letters, the division identifies these internal control and compliance deficiencies and recommends corrective action. The investigations point out to officials the importance of sound internal controls and compliance with applicable laws and regulations. The investigators also share the information with State Audit and Local Government Audit for consideration in audits of the affected entity. During the fiscal year ended June 30, 2019, the division released 48 investigative reports and letters revealing losses of at least $1,422,804 due to fraud and cited an additional $1,242,099 in waste and/or abuse. As a result of these investigations, 28 public officials were indicted on 177 felony counts. Most investigations also revealed deficiencies in (or the absence of ) internal controls; lack of compliance with applicable laws and regulations; or other problem areas that created an environment conducive to fraud, waste, and abuse. abuse fraud In the use of government funds or property, abuse is behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary given the facts and circumstances. Abuse includes the misuse of authority or position for personal interests. Acts of fraud, waste, or abuse impact the resources of state government and its agencies. Fraud is any intentional act by one or more individuals (including management, those charged with governance, employees, or third parties) involving the use of deception that violates a law or the public trust to obtain an unjust or illegal advantage. –Defining Tennessee Audit: A Glossary of Audit Terms https://comptroller.tn.gov/office-functions/stateaudit/resources/glossary.html –Defining Tennessee Audit: A Glossary of Audit Terms https://comptroller.tn.gov/office-functions/stateaudit/resources/glossary.html Division of Investigations 12 Fraud, Waste & Abuse Hotline The Fraud, Waste & Abuse Hotline received 1,102 notifications between July 1, 2018, and June 30, 2019. For fiscal year 2019, the hotline received 752 telephone calls and the online reporting website received 350 submissions. Of the 1,102 total notifications, 613 concerned substantive allegations of fraud, waste, or abuse. These notifications concerned a wide range of entities, including municipalities, counties, state agencies, federal agencies, and nonprofit recipients of government funds. A more detailed analysis is below. Substantive notifications are investigated by Comptroller staff or are referred to the appropriate agency or program. Of the 613 notifications referred for action, responses have been received on 278, and these are considered closed. The remaining 335 are considered open. The remaining 489 notifications were not assigned for review because they were either repeat notifications or were not relevant to the purpose of the hotline. Notifications in the latter group include wrong numbers, hang-ups, general inquiries about the hotline, and requests for services provided by other agencies, such as benefits assistance. Where applicable, the person making the notification is referred to the appropriate agency or department that can provide assistance. Results of Hotline Notifications executive director was indicted on 48 counts as a result of this investigation. The following summaries are the results of hotline calls upon which corrective action was taken for the year ended June 30, 2019. Each summary is preceded by the reviewing entity and the allegation. Reviewed by Comptroller of the Treasury – Misappropriated Funds The notification alleged a not-for-profit organization received a building at no cost. The notification also indicated that the organization’s director wrote a “hot check” on the organization and that $300,000 worth of nonprofit funds was missing. The subsequent investigation determined that the organization’s executive director misappropriated at least $46,335. Multiple deficiencies were noted within the organization including inadequate separation of duties, inadequate supporting documentation for disbursements, unmanaged bank records and accounts, and violations of the travel and expense reimbursement policy. The former Reviewed by Comptroller of the Treasury – Misuse of Insurance Benefits The notification alleged misuse of government funds for insurance for a former employee’s spouse. The ensuing investigation determined that a lack of management oversight contributed to payroll deficiencies and deficiencies related to credit card purchases. Town officials indicated that they have corrected or will correct these deficiencies. Reviewed by Comptroller of the Treasury – Improper Invoices The notification alleged improper labeling of invoices by county officials as well as inflated billing practices by contractors. The investigation determined that an HVAC vendor overbilled the county for the sale and installation of air conditioners. The vendor was indicted as a result of this investigation. 13 Fraud, Waste & Abuse Hotline Reviewed by Comptroller of the Treasury – Improper Use of Booster Funds The notification alleged an improper use of booster funds, with no accountability of funds. The investigation determined that members were charged for fees not approved by the board of education, school funds were deposited in the booster club account, and required documentation of concession collection was not remitted to the school by booster club officials. Officers of the booster club as well as school officials indicated they have corrected or intend to correct these deficiencies. Reviewed by Comptroller of the Treasury – Fraudulent Invoices The notification alleged that a soil conservation district office staff member created fraudulent invoices, inflating the cost of projects. The investigation found that a board member misappropriated district funds totaling $2,713. Although the board member admitted he knew he was supposed to be reimbursed for only 75% of the cost of the work, he had requested reimbursement for 100% of the cost. This board member was indicted on one count of Theft Over $2,500. Reviewed by the Comptroller of the Treasury – Lack of Management Oversight The notification alleged county inmates and sheriff’s officers sold scrap metal to a private vendor for personal gain while on litter patrol. The investigation found that the county did not have a formal policy on the handling of recyclable materials and that the lack of management oversight in the sheriff’s office, lack of a formal recyclable materials policy, and failure to follow state law resulted in lost revenue for the county. The sheriff’s office now deposits proceeds from the sale of scrap metal with the county trustee. Reviewed by the Comptroller of the Treasury – Misappropriation of Funds The notification alleged discrepancies in a volunteer fire department’s funds. The subsequent investigation determined that the former fire chief used department funds for unauthorized personal purchases and used the department laptop for personal use. Additionally, the investigation uncovered that the department treasurer did not reconcile bank statements on a regular basis. The former fire chief was indicted for theft. Reviewed by the Comptroller of the Treasury – Fraudulent Purchase Orders The notification alleged that employees used fraudulent purchase orders for electronics. The resulting investigation determined that the former information technology clerk misappropriated utilities funds for personal purchases including purses, bags, wallets, earphones, headphones, speakers, and woodworking tools by using deceptive descriptions on purchasing documents. Management failed to adequately scrutinize purchases. City officials indicated that they have corrected or intend to correct these deficiencies. Reviewed by the Comptroller of the Treasury – Unauthorized Checks The notification alleged that a booster club vice president wrote an unauthorized check from the booster club bank account. The investigation determined that the former booster club treasurer, who admitted to having financial trouble and withholding cash collections to pay living expenses, misappropriated funds totaling at least $4,927. The former booster club treasurer was indicted on one count of Theft Over $2,500. Fraud, Waste & Abuse Hotline 14 Reviewed by the Comptroller of the Treasury – Improper Vehicle Purchase The notification alleged that a rescue squad director transferred a county vehicle to his name for personal use and also that rescue squad equipment was used for personal purposes. The investigation found that insufficient records and a lack of proper oversight of time charges resulted in questionable expenses totaling $61,067. In addition, the investigation also found that the rescue squad failed to document a vehicle sale to the squad captain and squad assets were not properly identified. It was recommended that county owned vehicles be clearly marked and storage of personal equipment on county property be discontinued. Further, all financial transactions should be adequately documented, and assets should be disposed of in a public competitive sale to ensure compliance with policy. Reviewed by the Comptroller of the Treasury – Time Fraud and Misuse of County Electronics The notification accused a county ambulance service billing clerk of time fraud. Additionally, it was alleged that county employees used county paid wireless Internet devices, cell phones, and other electronics for personal use. An additional allegation involved Medicare recipients being charged fees by the ambulance service. The investigation determined that a wireless device assigned to the director had questionable amounts of usage and that the ambulance service did not comply with the county’s personnel policy regarding compensatory time. Recommendations were that the service monitor its wireless jetpack usage, that the service follow the county’s personnel policy for compensatory time, and that the payroll department review all activity to ensure compliance. Reviewed by the Comptroller of the Treasury – Questionable Payments The notification alleged that board members improperly used funding for vacations, mileage, and meals. The investigation determined that the district made a questionable payment totaling $15,000 to the director. Other questionable purchases totaled $891.76 for food. Additionally, it was found that the district had deficiencies related to travel. The investigation recommended that the district follow all bylaws, written policies, and revenue standards. Reviewed by Department of Children’s Services – Time Fraud The notification alleged employees were committing time fraud by talking all day. Further, employees were alleged to work from home but could not show proof of work completed and the supervisor did not check. The review found that the complaints were unsubstantiated as the alleged employees were some of the most trusted workers. The supervisors going forward are requiring proof of all work completed while working an alternate work schedule as this will provide a checks and balances accountability for all individuals involved. Reviewed by Middle Tennessee State University – Waste of University Funds The notification alleged that the university was hiring staff for the Tech Center who were not beneficial for the university and were not meeting job expectations. The review of this allegation found that the Help Desk is managed by experienced employees and has a positive reputation on campus for providing good customer service. The Help Desk is not considered wasteful. Additionally, no control deficiencies were found. The allegation was unsubstantiated. Reviewed by Department of General Services – Misuse of State Vehicle The notification alleged the misuse of a state vehicle that was parked for an entire day. The review determined that the vehicle in question was assigned to a center in the area where the vehicle was parked and that the vehicle was used to transport persons in that region of the state. In reviewing the specific date, investigators found that the vehicle was being used for business purposes. The notification was unsubstantiated. Reviewed by Tennessee State University – Lack of Proper Compensation The notification alleged that a university professor was not compensated for work performed. The professor filed a report with the university. Further, the notification stated that the university was not correcting this lack of payment. Upon review of this notification, the university spoke with the Payroll Manager. The former professor was paid in full, and the matter was closed. Reviewed by Department of Health – Time Fraud The notification alleged time fraud by an employee, including extended lunches, extensive breaks, and not completing a full workday. Investigators determined that the employee was within their initial probationary period. As such, the employee was issued a dismissal letter and was unable to appeal the separation. Reviewed by Department of Intellectual and Developmental Disabilities – Neglect The notification alleged the neglect of clients while a home manager completed a home inspection. Additionally, the notification described that senior staff members were insulting to a home manager in front of clients. The notification details claimed that the director was notified but did not complete any follow-up. A review of this allegation did not find evidence that the clients were without proper supervision. The allegation of neglect was unsubstantiated. Following this allegation, the home developed an internal plan for internal controls. Reviewed by Department of Mental Health and Substance Abuse Services – Neglect The notification alleged that an agency was neglectful and taking advantage of people who are mentally ill. Further, it was reported that the faculty was doing nothing but collecting a check to go shopping and conduct personal business. When investigators conducted an on-site visit at the agency, they noted that numerous staff were present, some of whom were leading a therapeutic group. The facility and surrounding area were in general order. The allegation was unsubstantiated and closed. 15 Reviewed by Tennessee State University – Improper Use of Funds The notification alleged that the university did a budget adjustment for The Early Learning Center. Money was allotted to hire additional student aides as well as for training and membership fees, but the notification went on to say that the department did not follow through on the adjustment and the funds have been used for other departments. Review of this allegation determined that the Learning Center director had full authority to use the funds at her discretion. Additionally, there were funds in the account for use by the Learning Center going forward. There was no loss for the Learning Center or the university. segregation of duties Segregation of duties is the division of responsibilities within an organization in order to reduce the potential for fraud or theft. For example, management should assign different people the responsibilities of authorizing transactions, recording transactions, and maintaining custody of assets. –Defining Tennessee Audit: A Glossary of Audit Terms https://comptroller.tn.gov/office-functions/stateaudit/resources/glossary.html Fraud, Waste & Abuse Hotline Analysis of Substantive Hotline Notifications FISCAL YEAR • 2019 Reviewing Agency Notifications Open Closed Administrative Office of the Courts 1 1 0 Adult Protective Services 2 2 0 Agriculture 1 1 0 Austin Peay State University 1 1 0 Board of Regents 2 2 0 Children’s Services 3 3 0 Commerce and Insurance 2 2 0 535 267 268 Correction 1 1 0 Economic and Community Development 1 1 0 Education 5 2 3 Environment and Conservation 8 7 1 Finance and Administration 7 6 1 General Services 3 3 0 Health 2 1 1 Higher Education Commission and Student Assistance Corporation 1 1 0 Human Services 4 4 0 Intellectual and Developmental Disabilities 3 3 0 Mental Health and Substance Abuse Services 3 2 1 Middle Tennessee State University 1 1 0 Military 2 2 0 Revenue 3 2 1 Safety and Homeland Security 2 2 0 TennCare 3 2 1 Tennessee Bureau of Investigation 2 2 0 Tennessee Housing Development Agency 5 4 1 Tennessee State University 3 3 0 Tennessee Technological University 2 2 0 Transportation 1 1 0 University of Memphis 2 2 0 University of Tennessee 2 2 0 613 335 278 STATE AND LOCAL GOVERNMENT Comptroller of the Treasury Total Fraud, Waste & Abuse Hotline 16 About the Department of Audit Professional Staff The Department of Audit’s professional staff perform a wide variety of audit work requiring different types of training and experience. Therefore, members of the staff have degrees in fields such as accounting, public administration, information systems, law, political science, criminal justice, education, and nursing. More than 80 of the professional staff have advanced degrees. The department encourages its employees to pursue professional certifications such as Certified Public Accountant, Certified Information Systems Auditor, Certified Fraud Examiner, and Certified Government Financial Manager. As of June 30, 2019, more than 150 employees of the department had received one or more professional certifications. The department ensures its auditors receive the required continuing professional education to meet certification standards and Government Auditing Standards. Auditors participate in the department’s in-house training program as course developers, presenters, and participants. Over 15,000 hours of training were completed during the fiscal year ended June 30, 2019. The Department of Audit fully supports its staff’s active participation in local and national professional organizations, recognizing that these organizations contribute to the staff’s continued growth. Staff Certifications As of June 30, 2019 100 90 80 70 60 50 40 30 20 10 0 CFE CPA CGFM State Audit   CISA CGMA CPS ACDA Local Government Audit   Certified Fraud Examiner (CFE), Certified Public Accountant (CPA), Certified Government Financial Manager (CGFM), Certified Information Systems Auditor (CISA), Chartered Global Management Accountant (CGMA), Certified Professional Secretary (CPS), and ACL Certified Data Analyst (ACDA). 17 About the Department of Audit Deparment of Audit Expenditures Fiscal Year Ended June 30, 2019 OTHER (supplies, training, etc.) $562,049.35 2% TRAVEL $1,069,407.46 4% SERVICES (from other agencies) $364,302.60 1% SALARIES AND BENEFITS $26,418,323.73 93% LOCAL GOVERNMENT AUDIT $10,642,106.56 37% STATE AUDIT $17,771,976.58 63% STATE AUDIT About the Department of Audit LOCAL GOVERNMENT AUDIT 18 Office of the Comptroller of the Treasury State Capitol Nashville, Tennessee 37243 615.741.2501 Tennessee Comptroller of the Treasury division of state audit Cordell Hull Building 425 Fifth Avenue North Nashville, Tennessee 37243 615.401.7897 Tennessee Comptroller of the Treasury division of local government audit Cordell Hull Building 425 Fifth Avenue North Nashville, Tennessee 37243 615.401.7841 Tennessee Comptroller of the Treasury division of investigations Cordell Hull Building 425 Fifth Avenue North Nashville, Tennessee 37243 615.401.7907 To report fraud, waste, or abuse of government funds and property, contact the Comptroller’s Hotline at 1.800.232.5454 or www.comptroller.tn.gov/hotline Department of Audit 19 Comptroller of the Treasury, Authorization No. 307379, January 2020, 75 copies. This public document was promulgated at a cost of $4.49 per copy.