Christian Sturgeon, PLLC has completed the audit of the Jackson County Fiscal Court for fiscal year ended June 30, 2019. The Jackson County Fiscal Court had total receipts of $8,428,059, an increase of $607,072, disbursements of $8,796,313, an increase of $1,004,317, and ending fund balances of $263,555, a decrease of $238,476 from the prior year. The auditor’s report contained 11 comments. Judge Gabbard and the fiscal court were given an opportunity to provide explanatory responses to those comments. A brief summary of the comments and the responses are as follows:
Comment # 2019-001 The Jackson County Fiscal Court’s Annual Financial Statement Contained Inaccuracies
This is a repeat finding and was included in the prior year report as finding 2018-001. The Jackson County Fiscal Court’s annual financial statement was not supported by the appropriation condition report for the general fund, jail fund, transfer station fund. The sum of the line item detail for the appropriation condition report had a mathematical difference of $25,759 when compared to the disbursement amount reported for the general fund, a mathematical difference of $10,116 when compared to the disbursement amount reported for the jail fund, and a mathematical difference of $49,537 when compared to the disbursement amount reported for the transfer station fund. Auditors were able to identify where the differences were by using check register detail from the county’s software.
The errors relating to posting differences were caused by issues with the county’s financial reporting software. It is unknown if the errors were due to a failure in the software or due to user error. Regardless of the underlying cause, the county did not have adequate procedures to identify that the discrepancy had occurred. This has resulted in the financial reporting errors for county funds.
KRS 68.360(2) states “[t]he county judge/executive shall, within fifteen (15) days after the end of each quarter of each fiscal year, prepare a statement showing for the current fiscal year to date actual receipts from each county revenue source, the totals of all encumbrances and expenditures charged against each budget fund, the unencumbered balance of the fund, and any transfers made to or from the fund.” Those encumbered balances are required to be reported on the county’s annual financial report.
The auditor recommended that Jackson County Fiscal Court improve procedures over financial reporting to ensure accurate reporting of the county’s financial status.
County Judge/Executive’s Response: Due to miscoding by staff. However, it is now corrected.
2019-002: The Jackson County Fiscal Court Had A Deficit Balance In The Transfer Station Fund
This is a repeat finding and was included in the prior year report as finding 2018-002. The financial statement for the Jackson County Fiscal Court reflects a deficit balance in one fund. The transfer station fund balance was ($8,611). The Jackson County Fiscal Court failed to adequately monitor the budget to ensure the county maintained expenditures within available revenues. Expending more money than is available could result in the Jackson County Fiscal Court not being able to meet monthly obligations, thereby jeopardizing daily operations of the county.
KRS 68.110(1) states, “[t]he fiscal court shall not in any year expend any money in excess of the amount annually levied and collected for that year or levied, collected or appropriated for any special purpose.”
The auditor recommended that the Jackson County Fiscal Court closely monitor the annual budget and maintain expenditures within the county’s available revenues.
County Judge/Executive’s Response: Due to lack of funding.
2019-003 The Jackson County Fiscal Court Had An Unbalanced Budget
This is a repeat finding and was included in the prior year report as finding 2018-003. The Jackson County Fiscal Court had an unbalanced budget at the end of fiscal year 2019. The original budget and the budget amendments balanced, but the budget transfers did not balance, creating a difference of $16,600. The difference in total was a budgeted negative change in fund balance, and it created a budgeted deficit in the road fund of $188,125 and a budgeted deficit in the jail fund of $65,127.
The Jackson County Fiscal Court transferred budget appropriation from fund to fund in an attempt to ensure the county did not expend more than what the budget allowed for. At some point, transferred amounts did not balance and was not identified by staff. This could have also been caused by the same issues identified in finding 2019-001. This left the fiscal court not compliant with KRS 68.300, which states, “Any appropriation made or claim allowed by the fiscal court in excess of any budget fund, and any warrant or contract not within the budget appropriation, shall be void. No member of the fiscal court shall vote for any such illegal appropriation or claim. The county treasurer shall be liable on his official bond for the amount of any county warrant willfully or negligently signed or countersigned by him in excess of the budget fund out of which the warrant is payable.”
When a county fails to establish a balanced budget, this could result in funds being spent that are not available leading to financial strains on the county due the lack of funds to cover necessary expenditures.
Per KRS 68.220, “[t]he county budget shall provide for all the funds to be expended by the county from current revenue for each fiscal year.” In summary, the disbursements estimated for the county should not exceed the estimated receipts the county expects to receive for that fiscal year and should balance by fund. The auditor recommended the county strengthen management oversight with regard to the budgeting process to ensure a balanced and accurate budget is maintained throughout the fiscal year.
County Judge/Executive’s Response: This is due to lack of funding and road conditions.
2019-004 The Jackson County Fiscal Court Did Not Have Adequate Procedures For Reporting County Liabilities
This is a repeat finding and was included in the prior year report as finding 2018-004. The Jackson County Fiscal Court had posting errors related to debt service payments. The principal and interest relating to debt service payments were not classified correctly when the payments were issued. The liabilities section of the financial statement was misstated. Of the five debts listed, the principal balance for three of the debts were not reported correctly, resulting in a difference of $486,192. The interest balance on all five debts were different, resulting in a difference of $1,114,436.
This has resulted in the misstatement of county liabilities, making it difficult for management to easily determine where the county’s debt balances stand. KRS 68.210 gives the state local finance officer the authority to prescribe a uniform system of accounts. The County Budget Preparation and State Local Finance Officer Policy Manual requires officials to report all liabilities of the county, even when related to unbudgeted funds. The schedules should be reported with correct balances. Procedures should be in place at the fiscal court to ensure that all liabilities held at fiscal year-end are reported on the liabilities schedule and have accurate ending balances.
The auditor’s recommended that the county improve procedures to ensure proper reporting of all county liabilities on the financial statement. They also recommended that the county ensure that debt service payments are properly recorded on the disbursement ledgers.
County Judge/Executive’s Response: Software isn’t counting each payment.
2019-005 The Jackson County Fiscal Court Did Not Have Strong Internal Controls Over Handling Of Disbursements
This is a repeat finding and was included in the prior year report as finding 2018-005. Internal controls over disbursements were not operating as intended during fiscal year 2019. Proper procedures were not followed over disbursements; supporting documentation was not maintained and appropriate, purchase orders were issued after the item was purchased, and haul tickets were not maintained for asphalt. The following exceptions were noted:
- Seventeen (17) disbursements did not have invoices, numerous disbursements were missing purchase orders, twelve (12) disbursements had purchase orders issued after the date of the invoice. Also, fortythree (43) were not paid within 30 days of invoice.
As a result of not monitoring controls in place, it allowed for the deficiencies to occur. These deficiencies could result in inaccurate reporting and misappropriation of assets. KRS 68.210 gives the State Local Finance Officer the authority to prescribe a uniform system of accounts. Per the County Budget Preparation and State Local Finance Officer Policy Manual, issued by the Department for Local Government (DLG) “Purchases shall not be made without approval by the judge/executive (or designee)
and/or department head. Purchase requests shall indicate the proper appropriation account number to which the claim will be posted.” The manual also states the appropriation ledger should include the original budget, increases/decreases by amendment or transfer, and the remaining balance. KRS 65.140 (2) states, “Unless the purchaser and vendor otherwise contract, all bills for goods or services shall be paid within thirty (30) working days of receipt of a vendor’s invoice except when payment is delayed because the purchaser has made a written disapproval of improper performances or improper invoicing by the vendor or by the vendor’s subcontractor.”
The auditor recommended the fiscal court implement proper internal controls over disbursements and ensure they are operating effectively.
County Judge/Executive’s Response: Lack of # of employees.
2019-006 The Fiscal Court Lacks Adequate Segregation Of Duties Over Receipts, Record Keeping, Report Preparation, And Reconciliations
This is a repeat finding and was included in the prior year report as finding 2018-006. Segregation of duties did not exist over the fiscal court receipts process including collection and processing, record-keeping, report preparation, and reconciliations. The county treasurer and assistant treasurer perform all receipting functions, including preparing and depositing receipts, positing to ledgers, preparing reports, and performing bank reconciliations. The county has implemented compensating controls, including the county judge/executive reviewing deposits and bank reconciliations; however, these reviews are not documented.
The fiscal court operates with a small staff, making it very difficult to adequately segregate responsibilities. This deficiency increases the risk of misappropriation of assets, errors, and financial reporting going undetected. The segregation of duties over various accounting functions such as collecting receipts, preparing deposits, report preparation, and bank reconciliations are essential for providing protection from asset misappropriation and inaccurate financial reporting. Additionally, proper segregation of duties protects employees in the normal course of performing their daily responsibilities. The auditor recommended the fiscal court separate the duties in preparing and depositing receipts, recording transactions, preparing reports, and reconciling bank accounts. If any of these duties cannot be segregated due to limited staff or budget, strong oversight should be provided over the employee responsible. The employee providing the oversight should document this by signing or initialing the supporting documentation.
County Judge/Executive’s Response: Small staff.
2019-007 The Jackson County Fiscal Court Lacks Internal Controls Over Occupational Taxes
This is a repeat finding and was included in the prior year report as finding 2018-008. The Jackson County Fiscal Court does not have adequate controls over occupational tax collections. The occupational tax administrator performs all duties associated with occupational taxes. All receipts are collected, recorded, and deposited by the occupational tax administrator and the occupational tax administrator makes payments to the fiscal court on an as needed basis. The payments do not relate to the actual receipts collected over any defined period and there is a lack of segregation of duties related to the occupational tax office. According to personnel, the County Judge Executive does review monthly bank statements and deposits, but this review is not documented. This has been caused by the fiscal court’s failure to establish internal controls to mitigate the risk involved with collection of occupational tax receipts. Without proper internal controls, the county is exposed to the risk of not receiving all occupational license taxes and erroneous recording of receipts. Also, without occupational taxes being paid periodically and being supported by receipts documentation, it is impossible for the treasurer to
determine if amounts being transferred are complete or accurate.
Appropriate internal controls would have additional personnel involved in the occupational tax process. With only one person involved in the process with no evidence of review or management oversight, it is impossible for the county to be able to detect errors, waste, fraud, and abuse.
KRS 68.210 gives the state local finance officer the authority to prescribe a uniform system of accounts.
The County Budget Preparation and State Local Finance Officer Policy Manual dictates that, “[t]he county treasurer is the sole officer bonded to receive and disburse county funds and could be liable on the county treasurer’s bond if correct records are not maintained and the procedures are not followed as required by law.”
Without adequate support for occupational tax funds received, it is impossible for the treasurer to determine if the amount being deposited to the general fund is complete or accurate.
The auditor recommended that the fiscal court implement internal controls over the receipt and disbursement of occupational license taxes. The fiscal court should also ensure that occupational tax receipts are paid over to the fiscal court on a regular periodic basis and supported by receipt documentation to ensure the completeness of the transfer.
County Judge/Executive’s Response: Continue to work to improve internal controls over occupational tax.
2019-008 The Jackson County Fiscal Court Did Not Have Adequate Controls Over Payroll Processing
This is a repeat finding and was included in the prior year report as finding, 2018-010. The Jackson County Fiscal Court did not have adequate controls over payroll processing. The lack of adequate controls resulted in the following issues:
- Employee authorizations for payroll deductions were not up to date in personnel files.
- Fiscal Court did not set and approve the salaries of all county officials in accordance with KRS
64.530(1). The fiscal court did approve the total amounts of payroll that were to be charged to each
fund, however, the approved document did not list individual employees and wages.
- Differences were identified between the monthly retirement reporting and the supporting payroll report documentation.
Weak internal controls have allowed issues with the payroll process to go unnoticed. This has allowed for
insufficient supporting documentation for payroll has been maintained and issues of non-compliance were noted with regard to the Jackson County Administrative Code and Kentucky Revised Statutes.
Timesheets should be reviewed and approved by a designated authorizing supervisor prior to being paid in order to ensure that time compensated for is accurate.
Jackson County Fiscal Court’s occupational license tax ordinance states “[c]ompensation means wages, salaries, commissions” and also “(b) includes any amounts contributed by an employee to any welfare benefit, fringe benefit or other benefit plan made by salary reduction … including but not limited to Section 125.” The Jackson County Fiscal Court’s personnel policy, Section 3.44 G. states “[v]acation may be accumulated to 10 days. All vacation accumulated beyond 10 days will not be granted to the employee.” Section 3.44 H. states “[t]he County Treasurer shall keep complete records of vacation leave. An employee fraudulently obtaining vacation leave or a department head falsely certifying vacation leave allowance may be suspended or dismissed.” Without proper time reporting, it is impossible for the fiscal court to uphold its own policy. Employee deduction authorizations should be maintained and current in order to ensure correct amounts are withheld on behalf of the employee. This protects both the employee being paid and the employee charged with payroll processing.
KRS 64.530(1) states “the fiscal court of each county shall fix the reasonable compensation of every county officer and employee except the officers named in KRS 64.535 [county judge/executive, clerk, jailer who operates a full service jail, and sheriff] and the county attorney and jailer.” Gross wages for each employee should be posted as budgeted to the proper financial statement line item. Monthly payroll reporting should be reconciled to payroll documents to identify differences and ensure accuracy.
The auditor recommended the Jackson County Fiscal Court improve procedures over payroll by ensuring all timesheets are approved by a supervising official, ensuring local occupational taxes are calculated based upon the correct wages, ensuring leave balances are properly maintained, ensuring all employee deductions are adequately supported, and establishing an approved salary schedule fixing the compensation for every county officer and employee. We also recommend that each payroll run be examined to ensure that gross wages have been posted to the ledger properly and that monthly retirement reporting be reconciled to underlying payroll documents to ensure accuracy.
County Judge/Executive’s Response: Lack of staff.
2019-009 The Jackson County Fiscal Court Did Not Maintain Accurate Capital Asset Records Or Properly Insure Assets
This is a repeat finding and was included in the prior year report as finding 2018-011. The Jackson County Fiscal Court did not accurately maintain a capital assets listing. During the course of the audit, auditors noted the following material differences in the capital asset schedule provided for FYE 6/30/2019:
- Infrastructure (Black Top) was misstated by $33,825 due to duplicated assets being included on the list, and FY 2019 additions of $453,754 were not added to the capital asset listing.
Vehicles and Equipment was misstated by $113,718 due to assets from prior years that were not included on the capital asset listing and $43,500 of FY 2019 additions that were not added to the capital asset listing. The listing also included $141,450 of duplicated assets.
The fiscal court lacks sufficient internal control procedures over capital assets. Physical inventory controls have not been established to maintain an accurate listing of capital assets. By not maintaining an accurate schedule, capital assets may not be insured or the county could pay for insurance on assets no longer in use or owned by the county. Capital assets that are not properly insured expose the county to potential loss. Not maintaining an accurate schedule can also lead to over and under valuation of capital assets and an inability to plan for longterm asset replacement.
The Department for Local Government, under the authority of Kentucky Revised Statute 68.210, gives the state local finance officer the authority to prescribe a uniform system of accounts. This uniform system of accounts, as outlined in the Department for Local Government’s County Budget Preparation and State Local Finance Officer Policy Manual, capital asset records are necessary for proper valuation, adequate and accurate insurance coverage, internal control, and long range planning for property replacement. The manual states that capital asset records should include a description of the asset, historical cost, date of acquisition, date of disposal, useful life of the asset, salvage value, depreciation expense, accumulated depreciation, and proceeds from sale or disposal of assets. In addition, the manual states that a capital asset record should be prepared for each acquisition.
The auditor recommended the Jackson County Fiscal Court implement internal control procedures over capital assets and maintain an accurate capital asset listing. Additionally, policies should be implemented that will identify and track additions and deletions for the purpose of the capital asset schedule and required insurance coverage. In addition, fiscal court should complete a physical inventory at least yearly to ensure all assets meeting the fiscal court’s capitalization policy threshold are included.
County Judge/Executive’s Response: Due to lack of staff. However, other staff members are working to correct this issue.
2019-010 The Jackson County Jailer Lacks Adequate Internal Controls Over The Jail Commissary Processes
This is a repeat finding of the prior year audit finding 2018-012. The jail bookkeepers are responsible for
collecting receipts, preparing deposits, preparing daily checkout sheets, posting to ledgers, and performing bank reconciliations. The bookkeepers are also responsible for purchases, preparing checks, and signing checks. No supervisory review procedures are in place over these processes. The jailer or another employee did not document oversight of bank reconciliations.The jailer failed to implement adequate internal controls when the commissary was established. This deficiency increases the risk of misappropriation of assets, errors, and inaccurate financial reporting. The segregation of duties over various accounting functions such as preparing deposits, preparing daily checkout sheets, and issuing cash receipts is essential for providing protection from asset misappropriation and inaccurate financial reporting. Good internal controls further dictate that duties of preparing purchase orders, preparing
checks, signing checks, posting to ledgers, and reconciliations of ledgers to bank accounts be segregated.
Additionally, proper segregation of duties protects employees in the normal course of performing their daily responsibilities.
The auditor recommended the jailer segregate duties over receipts, bank reconciliations, and disbursements. At a minimum, the jailer should implement compensating controls and supervisory reviews.
County Judge/Executive’s Response: Reviewing all invoices from multiple supervisors.
2019-011 The Jackson County Jailer Did Not Have Adequate Controls Over Disbursements
This is a repeat finding of the prior year audit finding 2018-014. During testing of disbursements, the auditor
noted the following issues related to disbursements:
- One of the disbursements tested was not paid within thirty working days.
- Five of the disbursements tested did not include documentation of supervisory and/or management review.
- Invoices are not being properly cancelled.
The jailer has failed to establish internal controls over the disbursement process. Without management review, disbursements could be made for unnecessary and/or unapproved items and improperly canceled invoices could lead to invoices being paid multiple times. Good internal controls include properly canceling invoices and documented management review. Additionally, claims against the county are required to be paid within 30 working days pursuant to KRS 65.140.
The auditor recommended the jailer implement internal controls over the disbursement process, including properly canceling invoices, documented review of invoices, and ensuring invoices are paid timely.
County Judge/Executive’s Response: Working on documenting signatures from multiple supervisors.