Management report, Department of Insurance, an organizational unit of the state of Georgia, year ended June 30, 2004

STATE OF GEORGIA
DEPARTMENT OF AUDITS AND ACCOUNTS
Russell W. Hinton State Auditor
MANAGEMENT REPORT DEPARTMENT OF INSURANCE AN ORGANIZATIONAL UNIT OF THE STATE OF GEORGIA
YEAR ENDED JUNE 30, 2004

DEPARTMENT OF INSURANCE MANAGEMENT REPORT -TABLE OF CONTENTS-

LETTER OF TRANSMITTAL
SECTION I
SELECTED FINANCIAL INFORMATION
EXHIBITS
A ANALYSIS OF CHANGES IN FUND BALANCE BUDGET FUND
B SCHEDULE OF FUNDS AVAILABLE AND EXPENDITURES COMPARED TO BUDGET BUDGET FUND

Page
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SECTION II CURRENT YEAR FINDINGS AND QUESTIONED COSTS SCHEDULE OF FINDINGS AND QUESTIONED COSTS

DEPARTMENT OF AUDITS AND ACCOUNTS

254 Washington Street, S.W., Suite 214

RussELL W. HINTON
STATE AUDITOR (404) 656-2174

Atlanta, Georgia 30334-8400

October 15, 2004
Honorable Sonny Perdue, Governor Members of the General Assembly of Georgia
and Honorable John W. Oxendine, Commissioner Department of Insurance
Ladies and Gentlemen:
As part of our audit of the statutory basis financial statements of the State of Georgia presented in the State of Georgia Report of the State Auditor, the basic financial statements of the State of Georgia presented in the State of Georgia Comprehensive Annual Financial Report, and the issuance of a Statewide Single Audit Report pursuant to the Single Audit Act Amendments, as of and for the year ended June 30, 2004, we have performed certain audit procedures at the Department of Insurance. Accordingly, the financial statements and compliance activities of the Department of Insurance were examined to the extent necessary in order to express an opinion as to the fair presentation of the financial statements contained in the foregoing documents and to issue reports on compliance and internal controls as required by the Single Audit Act Amendments of 1996.
This Management Report contains information pertinent to the financial and compliance activities of the Department of Insurance as of and for the year ended June 30, 2004. The particular information provided is enumerated in the Table of Contents.
This report is intended solely for the information and use of management of the State of Georgia and is not intended to be and should not be used by anyone other than these specified parties.
Respectfully submitted,
~~-Ak Russell W. Hinton State Auditor

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SECTION I SELECTED FINANCIAL INFORMATION

DEPARTMENT OF INSURANCE ANALYSIS OF CHANGES IN FUND BALANCE
BUDGET FUND YEAR ENDED JUNE 30, 2004

EXHIBIT"A"

FUND BALANCE - JULY 1, 2003 Reserved Surplus
ADDITIONS Adjustments to Prior Year's Accounts Payable Excess of Funds Available over Expenditures Exhibit"B"
DEDUCTIONS Unreserved Fund Balance (Surplus) Returned to Office of Treasury and Fiscal Services Year Ended June 30, 2003 Adjustments to Prior Year's Accounts Receivable Reserved Fund Balance Carried Over from Prior Year as Funds Available
FUND BALANCE - JUNE 30, 2004
SUMMARY OF FUND BALANCE Reserved Federal Forfeited Property Surplus

$

38,001.22

410,962.34

$

448,963.56

$

-77,994.83

782,735.83

$

704,741.00

$

410,962.34

263,364.65

38,001.22

$

712,328.21

$ =~-=4=41=,37=6.-35-

$

38,001.22

403,375.13

$

441,376.35

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DEPARTMENT OF INSURANCE SCHEDULE OF FUNDS AVAILABLE AND EXPENDITURES
COMPARED TO BUDGET BUDGET FUND
YEAR ENDED JUNE 30, 2004

EXHIBIT"B"

FUNDS AVAILABLE REVENUES
State Appropriation Federal Revenues Other Revenues Retained
CARRY-OVER FROM PRIOR YEAR Transfer from Reserved Fund Balance
EXPENDITURES Personal Services Regular Operating Expenses Travel Motor Vehicle Purchases Equipment Computer Charges Real Estate Rentals Telecommunications Per Diem and Fees
Excess of Funds Available over Expenditures

BUDGET

ACTUAL

VARIANCEFAVORABLE (UNFAVORABLE}

$ 16,427,511.00 $ 16,427,511.00 $

952,607.00

853,032.57

165,650.00

129,428.05

$ 17,545,768.00 $ 17,409,971.62 $

0.00 -99,574.43 -36,221.95
-135,796.38

0.00

38,001.22

38,001.22

$ 17,545,768.00 $ 17,447,972.84 $ _ _ _-9_7-'-,,7_9_5._16_

$ 14,968,455.00 $ 14,343,375.27 $

745,005.00

707,227.21

433,030.00

370,160.13

80,176.00

51,422.36

33,331.00

33,170.00

224,001.00

225,409.43

622,028.00

622,027.44

353,700.00

257,691.26

86,042.00

54,753.91

625,079.73 37,777.79 62,869.87 28,753.64 161.00 -1,408.43 0.56 96,008.74 31,288.09

$ 17,545,768.00 $ 16,665,237.01 $ _ _ _88_0-'-,,5_3_0._99_

$

782,735.83 $ ===78=2=,7=3=5..8...3..

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SECTION II CURRENT YEAR FINDINGS AND QUESTIONED COSTS

DEPARTMENT OF INSURANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
CASH AND CASH EQUIVALENTS Inadequate Bank Reconciliation Procedures Finding Control Number: FS-408-04-01

Condition:
Criteria: Cause:

The Department of Insurance did not perform adequate bank reconciliation procedures on the Premium Tax and Local Tax bank accounts. Exceptions noted were as follows:
(1) There was no supporting documentation for reconciling items in most instances.
(2) There were reconciling items that carried over for extended periods of time without correction.
(3) Auditor prepared reconciliations/cash proofs indicated that reconciling amounts per the Department's reconciliations in many instances were incorrect as well as the adjusted book balance per the reconciliation.
(4) Review and approval function was not effective in preventing or detecting material cash misstatements. Obvious errors and issues were not addressed in the review process.
(5) Reconciliation format is not being employed correctly. For example, the Department routinely listed items as bank adjustments which should have been classified as book adjustments. This problem contributed to the incorrect amount reflected as the adjusted book balance per the reconciliations.
Good internal control practices dictate that bank reconciliations are performed to include the following: adequate supporting documentation, reconciling items correctly identified by description and amount, needed adjustments which are identified and made in a timely manner, accurate adjusted general ledger balances, and evidence of an effective supervisory review and approval function.
These deficiencies were the result of the Department's failure to adequately manage and monitor the Premium Tax and Local Tax bank accounts.

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DEPARTMENT OF INSURANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
CASH AND CASH EQUIVALENTS Inadequate Bank Reconciliation Procedures Finding Control Number: FS-408-04-01 (continued)

Effect:

The Department's bank reconciliations as presented for the Premium Tax and Local Tax bank accounts were incorrect. Extensive work was necessary to determine accurate adjusted general ledger balances for both accounts due to the incorrect application of the reconciliation format used as well as the lack of supporting documentation for reconciling items and other adjustments. The failure to maintain an effective bank reconciliation process increases the risk of material misstatement in the financial statements including misstatement due to fraud.

Recommendation:

The Department of Insurance should implement additional policies and procedures to ensure an effective bank reconciliation process is in place to manage and monitor the Premium Tax and Local Tax bank accounts.

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DEPARTMENT OF INSURANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
REVENUE/RECEIVABLES/RECEIPTS Inadequate Accounting Procedures Finding Control Number: FS-408-04-02

Condition:

The Department's state appropriation receivable did not agree with the amount recorded at the Office of Treasury and Fiscal Services at June 30, 2004.

Criteria: Cause:

State appropriation receivable amounts should agree with records at the Office of Treasury and Fiscal Services.
The Department failed to reconcile the state appropriation receivable to the amount on record at the Office of Treasury and Fiscal Services on a regular basis.

Effect:

The state appropriation receivable is overstated and other related accounts are possibly overstated or understated. An audit adjustment was needed to correct the appropriation receivable amount.

Recommendation:

The Department should implement policies and procedures to ensure that the state appropriation receivable amounts per the Department's general ledger agrees with records at the Office of Treasury and Fiscal Services.

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DEPARTMENT OF INSURANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
GENERAL LEDGER Inadequate Accounting Procedures Finding Control Number: FS-408-04-03

Condition:

The Department of Insurance did not record general ledger transactions in a timely manner. More specifically, issues noted were as follows:
(1) Material premium tax cash and revenue activity from October 2003 to June 2004 had not been recorded in the general ledger.
(2) Material transfers from the Office of Treasury and Fiscal Services for distribution to counties and municipalities via electronic funds transfers were not recorded on a timely basis.
(3) Material electronic funds transfers for local government tax distributions were not recorded on a timely basis.

Criteria: Cause:

Good internal control practices dictate that general ledger activity should be recorded in a timely manner.
These deficiencies were the result of the Department's failure to record premium tax transactions in a timely manner.

Effect:

The Department's failure to record premium tax activity on the general ledger in a timely manner resulted in misstatements to the cash and revenue accounts. Extensive work was necessary to determine accurate adjusted general ledger balances for both cash and revenue accounts due to the delay in recording transactions by the Department. The failure to record transactions in a timely manner increases the risk of material misstatement in the financial statements including misstatement due to fraud.

Recommendation: The Department of Insurance should implement additional policies and procedures to ensure that premium tax transactions are recorded in a timely manner.

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DEPARTMENT OF INSURANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
GENERAL LEDGER Deficiencies in Accounting Procedures Finding Control Number: FS-408-04-04

Condition:

Review of the Department's general ledger indicated that the Department is not using fund source program codes as intended per the Accounting Procedures Manual of the State of Georgia. Various program code trial balances include accounts receivable credit balances, accounts payable debit balances and both debit and credit fund balances. Many of the atypical accounts receivable and accounts payable balances were off set in other program codes. Department personnel could not completely identify why various state and federal program codes maintained certain debit and credit fund balances.

Criteria: Cause:

Per Section Two, page 2-6-1, of the Accounting Procedures Manual for the State of Georgia, the program chart-field is a five digit code used to designate revenue sources and track expenditures made against those revenues. A full set of balanced financial statements is available for a program on the Phoenix System. Program identifiers are also utilized to account for assets, liabilities and fund balances and/or net assets for a specific funding source. For Federal programs, a separate program must be established for each grant received. These fund balances should be reviewed periodically to ensure that the correct program fund balances remain in each program as they flow from accounting year to accounting year.
Failure of Department management to develop and implement procedures to ensure that program codes are used as intended and reflect accurate account balances.

Effect:

Program code trial balances may be overstated or understated. Also, old program codes no longer in use may incorrectly carry over account balances to subsequent fiscal years.

Recommendation:

The Department of Insurance should review its program codes and implement additional policies and procedures to ensure that program codes are used in accordance with the Accounting Procedures Manual for the State of Georgia.

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DEPARTMENT OF INSURANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
GENERAL LEDGER Ending Balances in Balance Sheet Clearing Accounts Finding Control Number: FS-408-04-05

Condition:

Our review of the general ledger balance sheet clearing accounts revealed that four clearing accounts contained balances at June 30, 2004.

Criteria: Cause:

In accordance with the Accounting Procedures Manual for the State of Georgia, Section Three, page 3-4-1, clearing accounts have been provided in the State Chart of Accounts to facilitate the accumulation of transactions, which are subsequently distributed to appropriate accounts. At fiscal year end, no balances should remain in the clearing accounts.
This deficiency was a result of management's failure to ensure that all clearing account balances were properly distributed to appropriate accounts on the general ledger.

Effect:

Balances remaining in these accounts at fiscal year end can misstate the financial statements of the Department and can lead to erroneous decisions by the Department's management.

Recommendation:

The Department should ensure that clearing account balances have been distributed to the appropriate accounts at the end of each accounting period and that no balances remain in the clearing accounts at fiscal year end in accordance with the Accounting Procedures Manual for the State of Georgia.

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DEPARTMENT OF INSURANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
ACCOUNTING CONTROLS (OVERALL) Inadequate Separation of Duties Finding Control Number: FS-408-04-06

Condition:
Criteria: Cause: Effect:

During the performance of our audit procedures, we observed improper separation of duties in the performance of certain accounting functions and related procedures as follows:
(1) On-line banking function (Wachovia Connection) - The Department's users have been granted access to functions non-compatible with their duties which increases the risk of unauthorized entries to change account numbers as well as process electronic funds transfers. The Department's Accounting Manager has access to the Wachovia Connection on-line banking system and has the ability to change vendor information as well as input amounts to be distributed to each vendor. In addition, the Department"s Accounting Manager also has access to the Phoenix Accounting System and prepares the Department's bank reconciliations.
(2) Phoenix Accounting System - The Department has several employees with "super user" access to the statewide Phoenix Accounting System. This allows access to all modules which enables transactions to be made by individuals that can circumvent separation of duties. There were also several employees with access to conflicting modules.
The Accounting Procedures Manual for the State of Georgia. Section V, Pages 5-1-1 and 5-1-2 state in part: "Each state organization is responsible for adopting an internal control frame work that is suitable for the type of service they provide... Each state organization has a responsibility to assess their internal control system and use this information to design, implement, and monitor internal controls that are suitable for their organization."
Limited staff resulted in inadequate separation of duties.
The failure to maintain effective internal control over the on-line banking process and Phoenix Accounting System increases the risk of material misstatement in the financial statements including misstatement due to fraud and the possible misappropriation of the Department's assets.

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DEPARTMENT OF INSURANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS
YEAR ENDED JUNE 30, 2004
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
ACCOUNTING CONTROLS (OVERALL) Inadequate Separation of Duties Finding Control Number: FS-408-04-06 (continued)

Recommendation:

The Department of Insurance should implement additional policies and procedures to ensure that proper segregation of duties are in place and operating effectively to prevent the unauthorized use of the Wachovia Connection on-line banking system and the statewide Phoenix Accounting System.

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