State auditors, in their latest review of Klickitat County's financial records, found the county's internal controls over accounting and financial statement preparation to ensure accurate reporting are inadequate.
In an audit report of the county's books for fiscal year 2010 dated Sept. 26, 2011, state auditors identified three deficiencies "that, when taken together, result in a significant deficiency in internal controls over financial reporting."
According to auditors, "a deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis."
The report concluded in its Schedule of Audit Findings and Responses section that "the deficiencies in internal controls make it reasonably possible that serious misstatements could continue to occur and not be prevented or detected by the county in future years."
Auditors noted the following deficiencies:
"The county does not have an adequate system to transition the accrual general ledger system used by its departments to the cash-basis reporting model used to report its financial statements. The County Auditor's Office performs significant adjustments of the accounting information for financial statement preparation. Departments do not communicate to ensure required adjustmens are accurate. In addition, the adjustments are not reviewed by a knowledgeable individual to ensure they are accurate and complete."
"The county lacks an adequate process to ensure the reported ending cash and investment balances in its financial statements reconciled with the amounts in the bank. While the county was able to identify the individual funds that did not reconcile, it lacked a process to isolate specific accounting entries that caused the variances."
"The county does not have an adequate process in place to ensure the Schedule of Expenditures of Federal Awards (SEFA) is accurately prepared and reported. The county has no centralized grant management and reporting function. Departments manage the grants and submit information to the County Auditor's Office to prepare the schedule."
Auditors stated in their report that the deficiencies exist because the county "has not prioritized or dedicated the necessary resources to ensure accurate financial reporting. Individuals responsible for submitting information to the County Auditor's Office are not knowledgeable of grant reporting requirements and the County Auditor's Office does not adequately confirm the information submitted."
The effect of allowing the deficiencies to continue resulted in "significant errors, some of which were known and others that were not detected by county management."
Among the errors auditors found in the original financial statements they received for audit were the failure to reconcile ending cash and investments held by financial institutions in the county's name, resulting in an overstatement of cash and investments by $215,402; understatement of revenue and expenses by $624,107 and $196,535 respectively after transitioning adjustments from generally accepted accounting principles to reporting on a cash basis; over-reporting of federal expenditures by $583,731.
In the first instance, auditors attributed much of the difference in cash and investments to the General Fund (minus $2,536), Road Fund (plus $389,982), Senior Services (plus $59,199) and Equipment Rental and Revolving Fund (minus $231,102).
To address their concerns, auditors recommended the county:
Establish a process that ensures accurate and complete financial information is communicated between departments to prepare financial statements in accordance with its elected reporting model.
Ensure sufficient time is spent by a knowledgeable person performing a detailed review to ensure accurate preparation and reporting of the county's financial statements, including ending cash and investment balances.
Implement a process to ensure information received from departments to prepare the Schedule of Expenditures of Federal Awards is complete and accurate.
In their response to the findings and recommendations, county officials indicated "every effort will be made" to address the identified deficiencies.
Their response addressed each finding and recommendation. First, "The process of converting accruals to cash is cumbersome and is a time-consuming, manual process. Financial reports are customarily generated through information gathered directly from electronic data. For Klickitat County, this is not the case. We acknowledge this process is difficult and communication between certain offices has, at times, not been what it could be. Efforts will be made to correct balancing deficiencies."
Second, "The financial report is balanced against documentation submitted to the Auditor's Office. Although the Auditor's staff reviewing the report is qualified and knowledgeable to perform the financial review, access to certain areas of the financial system are not available to audit beyond the documentation presented."
Third, "In the future, every effort will be made to ascertain that all SEFA documentation submitted to the Auditor's Office has sufficient supporting documentation necessary for accurate reporting."
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