Get a Handle on Internal Controls

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Get a Handle on Internal Controls

• William D. Miller
• Johnson County Auditor

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Why?

• Internal Control Common Sense
• Fiscal Officers are guardians of taxpayers money
• Think of it as YOUR money, not the governments,
  would you spend the same way

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Its All About Risk

• If money is involved there is risk
• If it can be converted to money, there is risk
• If it can be used for personal gain there is risk
• If it can be misused there is risk

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Common Problems

• Organization attitude
• Internal controls not documented
• Internal control policies not followed
• Failure to review controls for adequacy
• Too much trust in entrusted employees
• Top management oversight is lacking
• Staffing levels impinge on ability to control

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Organization Attitude

• Critical Element
• Does top management pay attention?
• Is the internal control system proactively
  employed or reactive to problems (horse out of
  the barn)?
• Do managers and staff think about internal
  controls?
• Are there systematic reviews of IC systems?

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Documentation and Execution

• Have organization risks been assessed,
  prioritized and targeted for controls?
• Can employees find the policies and procedures
  needed to implement internal controls?
• Do employees have a working knowledge of the
  system?
• Are IC procedures available and do they
  specifically define responsibilities?
• If documented, are they followed?

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Who do you Trust-Johnny Carson?

• Internal Controls Trust
• Trust is the archenemy of internal controls
• Trust is bestowed automatically
• Trust is challenged after the fact
• There are always footprints when internal
  controls are breachedGee, I should have known!

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Top Management Oversight

• Top managers need to make presence known
• Use reporting systems to ensure controls are
  working
• Spot check controls in action
• Review controls to ensure they are working and to
  identify changes over time

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Staffing Requirements

• Not enough staff is not good enough
• Compensating controls can be implemented
• Remote locations require oversight for internal
  controlUse and verify reporting systems and spot
  checks
• If contracted out, require independent audit

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Consequences

• Wastetaxpayer funds spent unwisely
• Abusetaxpayer funded programs improperly managed
  sometimes with harmful consequences
• FraudPerpetrators find weaknesses and exploit
  them for ill-gotten gains

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Contract Change Orders

• Identification of cause for change order
• Assessment of liability for change
• Independent estimate of cost for change
• Comparison of independent estimate to estimate
  provided by contractor
• Development of negotiation strategy

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Change Orders

• Documentation of negotiations
• Review, approval and documentation of agreed upon
  costs
• Verification of accuracy of invoices submitted
  for payment

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INVOICE

• Labor 10 hours _at_ 48.10
  491.00 Materials
  151.36 657.59
• 10 Markup on Materials 15.23
• 3 Small Tools 59.18
• ________
• Amount Due 716.77 WRONG
• 3 of 657.59 19.73
• The internal control was to add up the 4 figures!

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Purchase Cards

• Highly vulnerable for misuse
• Speed of transactions and after the fact review
  and approval
• Good for small purchases and cost saver
• Requires diligence in managing use
• Poor controls lead to big problems

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P-Card Internal Controls

• Establish who needs them- review regularly
• Limits, review authorities chain of review
• Establish appropriate/inappropriate charges
  clearly
• Review invoicesdont rubber stamp
• Cancel the account as well as the card

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Inventory Controls

• Inventory records were poor
• Process was faultyallowed self reporting and not
  at time of purchase
• Not enough information collected
• Falsified dates of purchase (2011, 2012)
• RESULT Missing assets

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DFS Hotline System

• Cited Unable to Investigate When Could
• 18 cases received subsequent call and action was
  takennot so for 313
• 25 of all calls received were treated as unable
  to investigate

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Quality Control IssuesFailure to Respond

• Unable to Investigate Calls
• Many calls could/should have been referred to
  field offices for some type of action
• Out in the cold
• Cage boy
• Hockey stick
• Excrement in home
• Breast feeding

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DFS Reasons

• Call taker cited did not meet a lock out lawa
  law that does not exist
• 38 degrees never killed anyone
• Did not attempt to locate or identify individual
  when could have gone to school
• Could not locate addressaudit found it in DFS
  own system

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Can Fraud Be Far Behind?

• Lack of internal controls can lead to fraud
• Failure to apply established internal controls
  can lead to fraud
• Failure to oversee internal controls can lead to
  fraud

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VA Loan Guaranty Program

• Guarantees up to 56,000
• The purpose of the program is to allow veterans
  to get into homes with no down payment and to
  induce lenders to accept VA loans
• The program is a benefit program, supported by
  Congress, Veterans Groups, and is viewed as an
  entitlement by the veterans

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VA Loan Guaranty Program

• In the event of foreclosure, the VA will either
  pay the lender the guaranty or take the property
  and try to sell it.
• VA's foreclosure rate is about 10. VA took
  possession of most homes
• The loan program had never been audited by
  outside auditors.

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CONDITIONS FOR PROGRAMSource William D.
Miller

• All Favorable
• Houses Sold Well
• Few Complaints
• Foreclosures were Low Compared to Total Program
• Everyone was Satisfied with Program Management
• Situation 3

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AUDIT APPROACH

• Target bad loans with low number of payments
• Compare foreclosure rates to other housing
  programs
• Determine if occupants were veterans
• Determine patterns in foreclosures
• Occurring in same general area
• Specific Regional Offices or Lenders
• Situation 3

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Audit Procedure

• Key on the loan application
• Verify everything on it, income, expenses, number
  of children, savings accounts
• Drive by job locations
• Interview applicants
• Interview employers

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What we found

• Poor underwriting of loans (ties into Mgt
  Philosophy-benefit program)
• Patterns showed suspicious activity in Colorado
• Major fraud against 3 govt agencies discovered

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What was happening

• Condo mgt company was recruiting soldiers and
  spouses to buy their condos
• Condos went into foreclosure when soldiers were
  reassigned
• VA stuck with the guaranty payment

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What was happening

• The condo operation was an elaborate scam to get
  the guaranty money from the government (VA, HUD,
  FHA)
• 5 companies were involved2 loan processing
  companies-1 condo mgt company, 1 financial
  lending company, 1 builder

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How did we prove it

• Developed corporate matrix and tracked players
  (some were silent partners)
• Determined that the 3 key officers in all the
  companies were the same people although the
  companies were in 4 states

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How did we prove it

• Verification of loan app included
• Bank inquiries re amounts in accts
• Interviews with applicants at their homes (could
  see evidence of false info on apps-pictures of
  kids they didnt declare)
• Tracked defaulters to Europe and Okinawa

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How did we prove it

• Reviewed lender files and compared to VA
  filesvery interesting notes in those files
  (required subpoenas)
• Interviewed loan processors and with some
  criminal investigation work cracked a loan
  processor

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Outcome

• Attorney for the firms was disbarred
• Owners and officers plea bargained
• Settled on cases for 13 million dollars
• Shut down the operation
• Thwarted an attempt to establish same operation
  in Pensacola Fla

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MEDICAID PRESCRIPTIONS

• State offers prescription drug services under the
  MEDICAID program. (Optional)
• 420,000 residents obtained 681.4 million through
  the MEDICAID program in 2001
• Funding is split at 60 and 40 between federal
  and state
• State performs drug utilization reviews

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NARCOTICS AND CONTROLLED SUBSTANCES

• Two major therapeutic drug classes (anti-anxiety
  and analgesics/narcotics) have addictive
  qualities that increase potential for
  inappropriate use by recipients
• Oxycodone/Oxycontin products are highly addictive
  and are abused in epidemic proportions

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ABUSE OF MEDICAID PROGRAM

• 3,900 recipients visited 5 or more physicians to
  obtain multiple quantities of controlled
  substances.
• 8.7 million was spent on these drugs
• Not all prescriptions were for legitimate purposes

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OXYCODONE/OXYCONTIN

• Legitimate use for intractable pain
• Legitimate doses can be high
• Illegitimate use, euphoric highs similar to
  cocaine
• Lethal

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OXCONTIN ABUSE

• Oxycontin is a 24-hour time-release capsule
  version of the single dosage oxycodone
• Abusers found that if crush capsule and ingest
  contents it will give cocaine level highs
• Because this is a 24-hour time-release, the act
  of crushing and consuming can have fatal results

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USAGE TREND-OXYCONTIN
Year Number of Prescriptions Number of Recipients
2000 27,842 5,405
2001 45,636 7,860
Increase 64 45
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RECIPIENTS OXYCONTIN ACTIVITY
Number who FY 2000 FY 2001
Visited many doctors and got controlled drugs 1,826 2,074
Obtained 1 or more Oxycontin prescription 661 986
Percent obtaining Oxycontin 36 48
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HOW THEY DID IT

• Recipients
• Visited multiple doctors
• Obtained multiple prescriptions
• Visited multiple pharmacies
• The top 5 potential abusers in 2001 visited
  between 27 and 53 doctors

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ABUSE OF MEDICAID PROGRAM
Number of Prescribers Number of Pharmacies Number of Prescriptions
53 25 92
42 12 76
38 5 92
29 12 56
27 3 92
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ABUSE EXAMPLE

• Drug-Oxycontin
• Recipient visited 10 pharmacies in 90 days
• On 1 day obtained 26 prescriptions
• This activity triggered alerts that showed
  therapeutic duplication

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AUDIT METHODOLOGY

• Analyzed States Medicaid paid prescription drug
  claims for 2 fiscal years
• Matched pharmacies data to paid claims data and
  sorted on dates of issue interviewed pharmacy
  and state staff
• Identified controlled substances subject to high
  abuse (contacted DEA)

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Take Them Serious

• As the examples show, missteps will occur
• Whether innocently or intentionally, failed
  controls lead to extra costs and CRIME
• Management levels HAVE to stay involved
• Use oversight techniques such as trending
  analysis, invoice reviews, reporting and
  verifying systems
• Take immediate action