Recurring issues identified in first audit of Bourbon-Nicholas regional jail

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FRANKFORT, Ky. (WTVQ/Press Release) Audits over four fiscal years of the Bourbon County-Nicholas County Regional Jail Authority reveal numerous recurring issues, Auditor Mike Harmon’s office said Tuesday.

“Our data bulletin discovered that the Bourbon-Nicholas Regional Jail Authority had never been audited since it was first formed more than a decade ago. Because our office is dedicated to greater transparency and accountability for all levels of government, we decided to conduct our own audits of the regional jail,” Auditor Harmon said. “What our auditors found was that the regional jail authority has several problem areas that were repeated over the four fiscal years we examined.”

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Auditor Harmon’s office conducted four audits of the regional jail authority for fiscal years 2015 through 2018.  The following 13 findings are from the 2018 audit, but the same issues were found in each of the four audited years:

  1. The Bourbon County – Nicholas County Regional Jail Authority did not develop and update an adequate policy and procedure manual as required by 501 KAR 3:020: The policy and procedure manual utilized by the Bourbon County – Nicholas County Regional Jail Authority (regional jail) for the fiscal year under audit was last updated in fiscal year 2013.  Various policies within the manual were changed throughout the year, however, the entire manual was not reviewed and adopted annually by the board.  In addition, while the policy and procedure manual did address fiscal management, it was not adequate to address significant areas of the jail, such as payroll and human resources, inventory and capital assets, or discussion of the minimum requirements for the handling of public funds as discussed in the Department for Local Government’s (DLG) County Budget Preparation and State Local Finance Officer Policy Manual.
  1. The Bourbon County – Nicholas County Regional Jail Authority did not maintain a capital asset schedule or inventory listing of equipment nor did they adopt a capital asset policy: The Bourbon County – Nicholas County Regional Jail Authority (regional jail) never formally adopted a capital asset policy in the jail board minutes.  The jail administrator informed the auditors that the regional jail adheres to the Bourbon County Fiscal Court capital asset policy, however, this was not documented in the jail board minutes.  Also, they lacked internal controls over capital assets because they did not maintain a capital asset schedule or inventory listing of equipment purchased by the jail.  
  1. The Bourbon County – Nicholas County Regional Jail Authority did not adequately segregate duties over the commissary and inmate accounts: The regional jail did not have adequate segregation of duties over the accounting functions related to the jail commissary and inmate accounts.  For the commissary account, the chief deputy was responsible for depositing the funds and for recording the receipt.  For the inmate account, the chief deputy was responsible for recounting the funds deposited into the jail kiosk, preparing and depositing the funds into the inmate bank account and also for recording those receipts to the inmate account (primarily for amounts inmates had on them at the time of booking).  For disbursements, the chief deputy was responsible for reviewing the invoice and preparing the check.  Dual signatures were required, however, no documented review of the invoice was noted.
  1. The Bourbon County – Nicholas County Regional Jail Authority did not maintain proper accounting records or prepare financial statements for the jail commissary and inmate accounts: The regional jail failed to maintain the minimum accounting records prescribed by the state local finance officer pursuant to KRS 68.210 and the Department for Local Government’s (DLG) County Budget Preparation and State Local Finance Officer Policy Manual for jail commissary funds, including detailed receipts and disbursements ledgers.  The information maintained on the commissary account did not accurately reflect the monthly activity of the commissary, but reported the transactions that cleared the bank each month. For example, if a check was written in July and cleared in September, the check would not be recorded until September. 

In addition, the ledgers did not report receipts or disbursements in sufficient detail. Receipts were noted as deposits with no classification and disbursements were not classified. Furthermore, descriptions for disbursements were not always provided for each transaction to identify the purpose of the transaction.

No receipt or disbursement information was provided for the month of September and had to be obtained from the bank statement. Because accounting records were not maintained, the regional jail also failed to prepare financial statements for the jail commissary and inmate accounts. Inmate account financial information was maintained in the accounting software of the commissary service provider. There were no receipts or disbursements ledgers for the inmate account.

“Because the regional jail failed to keep even the minimum account records needed for review, our auditors have issued a disclaimed opinion on the jail’s commissary and inmate accounts,” said Auditor Harmon. “In a nutshell, what that means to taxpayers is the regional jail didn’t have enough information for our office to determine the full financial picture of both accounts.  That is troubling to our office, and should be concerning to those whose tax dollars fund the regional jail.”

  1. The regional jail administrator did not prepare or submit an annual commissary report as required per KRS 441.135(2) or present accurate monthly reports to the board: The regional jail administrator reported to the Bourbon County-Nicholas County Regional Jail Authority (regional jail) Board, on a monthly basis, the receipts and disbursements of the commissary account that cleared the bank, instead of reporting all the activity of the commissary.  In addition, no annual commissary report was prepared or submitted to the regional jail board.  The regional jail administrator was not aware of the requirement for a year-end report. The monthly reports were inaccurate because true receipts and disbursements ledgers were not maintained.
  2. The Bourbon County – Nicholas County Regional Jail Authority did not properly reconcile the payroll revolving account: The regional jail uses a clearing bank account for payroll processing.  Payroll revolving accounts are established in order to process individual payroll transactions and should zero out or reconcile to a minimal carrying balance. Deposits are made into the bank account from the jail’s operating account to pay for salaries, taxes, matching portion of taxes, retirement, health insurance, and other payments to benefit vendors.  Monthly reconciliations were not prepared and the payroll account was not properly reconciled to zero.  As of June 30, 2018, a balance of $10,927 existed in the account.
  1. The Bourbon County – Nicholas County Regional Jail Authority did not properly handle disbursements: The following issues were noted when testing disbursements for the Fiscal Year 2018 audit: 

o   Seven instances where a purchase order was not issued for an expenditure.

o   35 instances where a purchase order was not issued due to recurring, pre-approved payments that the jail board did not realize that a purchase order needed to be issued for.

o   16 instances invoices were not paid timely.

o   One instance where late charges in the amount of $38 were paid.

o   Encumbrances were not identified for fiscal year 2018.

The regional jail board did not issue purchase orders for all reoccurring, and/or reimbursement expenditures.  The regional jail board was unaware that purchase orders needed to be issued for all expenditures.  The board was also unaware that encumbrances needed to be identified at year end.  Incurring expenses prior to regional jail board approval and without ensuring adequate funding is available could lead to financial strains on the regional jail due to overspending.

Without this information, management is unable to determine potential issues with spending before the expense is already incurred, creating the opportunity for waste, fraud, or abuse.

  1. The Bourbon County – Nicholas County Regional Jail did not have the proper policies and procedures in place or maintain documentation for bids: While testing disbursements it was noted that the Bourbon County – Nicholas County Regional Jail Authority (regional jail) did not have the proper policies and procedures or documentation for bids.  Upon review of the regional jail’s policy and procedure manual there was no written guidance on how to properly handle disbursements and bids.  The auditor inquired about bid procedures and was informed that bids were obtained, however, no documentation was maintained and bids were not mentioned in the regional jail board minutes.  During testing for the Fiscal Year 2018 audit, it was found one contract with a vendor needed to be bid with disbursements totaling $318,227.
  1. The Bourbon County – Nicholas County Regional Jail Authority did not have proper controls over payroll resulting in noncompliance: When testing payroll, two payroll periods, December 14, 2017 and April 5, 2018, were selected.  The auditor was given a box of timecards from multiple years that included the information of month, day, and time, but no year.  The time cards were not sorted by year and the auditor could not determine which timecards where for fiscal year 2018 other than a few that had hand written dates.  The following issues were noted when testing payroll:
  • 16 instances where timecards were not properly maintained. The auditor was given a box of timecards that included Fiscal Years 2015, 2016, 2017, and 2018; however most did not include dates and the auditor could not decipher which timecard went to each fiscal year.
  • Two instances where a time card and timesheet summary that the jail treasurer prepared were present however did not match payroll summary, leading to wages being calculated incorrectly.
  • Six instances where the timesheet summary did not match the payroll summary leading to wages being calculated incorrectly.
  • Two instances where employees were considered salary and did not track daily hours worked.
  • Eight instances where holiday pay was paid, however, there is no policy in the Administrative code on how holiday hours should be paid.  These eight employees were paid two times their hourly rate.
  • Three instances during the test of retirement where retirement was not paid timely to the deferred comp plans.
  • The regional jail does not have an adequate policy and procedure manual documenting how overtime, holiday pay, lunch breaks, and leave time should be handled. 
  1. The Bourbon County – Nicholas County Regional Jail Authority did not have adequate controls over commissary disbursements: During review and testing of 301 jail commissary fund disbursements, the following exceptions were noted:
  • 261 transactions were made by debit card which totaled $30,615.
  • 212 transactions that were not in compliance with KRS 441.135; of these 212 transactions:

o   103 transactions, totaling $32,056, were made from the commissary fund that do not meet the criteria for a commissary purchase and should have been paid by the jail’s operating account; these purchases included items, such as, inmate supplies (toiletries, bunks, mattresses, clothing), cleaning supplies, office supplies, hotels for conferences, and tools.

o   78 transactions totaling $9,148 that are questioned due to the lack of adequate documentation or no clear indication of how the transaction was for the direct benefit of the inmates; of these 78 transactions, 16 transactions, totaling $1,238, were noted as work meetings, lunch for deputies or food for drug busts on jail records.

o   31 transactions, totaling $4,466, for the purchase of stamps provided to all inmates at no charge.

  • 123 transactions where sales tax was paid.
  • Nine transactions, totaling $82, were for fraudulent charges that were never refunded.
  • No documented review or approval process was present for debit card transactions prior to the purchase being made.  Checks were to contain dual signatures, however, five tested checks did not contain dual signatures and no documented review of invoices was noted.
  1. The Bourbon County – Nicholas County Regional Jail Authority did not have adequate controls over inmate account disbursements: The Bourbon County-Nicholas County Regional Jail Authority (regional jail) maintained an inmate account, which is used to account for inmates’ monies, as well as, commissary sales, purchase of commissary inventory, and payment of sales tax. During review and testing of 40 inmate account disbursements, the following exceptions were noted:
  • 27 transactions, totaling $41,953, that were not properly supported due to the lack of an invoice.
  • Nine exceptions, totaling $2,036, that should have been paid out of the operating account; the regional jail paid these transactions from fees collected from the sale of phone cards and e-cigarettes, as well as fees collected for drug tests.  These fees should have been paid to the operating account maintained by the county treasurer.
  • One transaction totaling $327 that should have been paid out of the commissary account.
  • Two transactions that were not allowable totaling $110 for the purchase of bereavement gifts.
  1. The Bourbon County – Nicholas County Regional Jail Authority Did Not Properly Handle Daily Receipts: Receipts collected from March 5, 2018 through March 9, 2018 were tested for the Fiscal Year 2018 audit.  Based on this review, it was noted that receipts are not batched or reported on daily checkout sheets.  For the week tested, it was noted that commissary receipts were not deposited into the commissary account but were maintained in the inmate account.  The commissary company prepared a check for commissary commissions that was paid to the commissary account on a monthly basis.  Furthermore, the daily reports on the inmate account did not meet the criteria for a daily checkout sheet per the Department for Local Government’s (DLG) manual.  The reports did not categorize receipts or provide a breakdown of the cash and checks collected for each day.  As noted in Finding 4, the regional jail did not maintain a receipts ledger for the commissary or the inmate account.
  2. The Bourbon County-Nicholas County Regional Jail Authority Did Not Collect Sales Tax on Commissary Sales: The Bourbon County – Nicholas County Regional Jail Authority (regional jail) did not charge or collect sales tax on prepaid phone cards, e-cigarettes, or indigent packs sold to inmates through the commissary.  No records were maintained that documented the number of these items sold.  Per the regional jail administrator, they just had never charged sales tax before.  As a result, the regional jail is out of compliance with state sales tax laws and could result in penalties and interest accruing on unpaid taxes.