The Iowa Department of Agriculture and Land Stewardship (IDALS) has not acted on advice to improve its management of financial transactions and databases "to prevent losses from employee error or dishonesty."
For ten years running, under three different state auditors, reports have warned Iowa Secretary of Agriculture Mike Naig or his predecessor Bill Northey that the IDALS accounting system does not conform to best practices and does not ensure that some divisions are collecting and depositing fees appropriately.
IDALS leaders have responded to each report with boilerplate excuses and non-sequiturs, instead of changing internal procedures to address the concerns.
"WE BELIEVE CORRECTIVE ACTION IS NECESSARY"
Staff in the State Auditor's office review the operations of every state agency annually. The latest Report of Recommendations for IDALS was released on October 17 and covers the fiscal year ending on June 30, 2018. State Auditor Rob Sand's cover letter to Secretary of Agriculture Mike Naig noted, "In conducting our audits, we became aware of certain aspects concerning the Department’s operations for which we believe corrective action is necessary."
The problems fall into two categories. First, some employees are performing too many tasks.
A good system of internal control provides for adequate segregation of duties so the authorization, custody and recording of transactions are not under the control of the same employee. This segregation of duties helps to prevent losses from employee error or dishonesty.
In contrast, the agriculture department routinely assigns various accounting responsibilities to one person.
A related issue: no one independently verifies that certain fees are handled properly.
Although an initial listing of receipts is prepared by most Bureaus, it is not compared to the deposit by an independent person. In addition, a reconciliation of receipts deposited to Bureau records is not performed to determine the appropriate fees were received and deposited. Additionally, several Bureaus utilize databases to record and track receipts. However, database access for certain Bureaus is not controlled.
IDALS employs some 345 people working in more than a dozen areas. The auditors highlighted potential problems in five bureaus.
Dairy, Commercial Feed and Fertilizer, and Animal Industry
In the Dairy Bureau, the Commercial Feed and Fertilizer Bureau, the Animal Industry Bureau, one person is responsible for opening mail, recording receipts in the Bureau’s database, preparing the deposit and taking the deposit to Accounting. They do not prepare a reconciliation of Bureau records to determine whether the appropriate fees were received and deposited. In the Dairy Bureau and Animal Industry Bureau, an independent reconciliation of collections to deposits is not performed. Also, in the Dairy Bureau, fees received are not re-calculated for accuracy, at least on a test basis.
A considerable amount of money passes through those units.
According to a report the department submitted last year to the Iowa legislature's Agriculture and Natural Resources appropriations subcommittee, the Dairy Bureau collected approximately $770,000 in fees during fiscal year 2017 and $870,000 in fees the following fiscal year.
The Commercial Feed and Fertilizer Bureau collected a little less than $5.2 million in fees in each of those fiscal years.
The Animal Industry Bureau collected more than $1.1 million during FY2017, which dropped to about $1 million in FY2018.
Weights and Measures
In the bureau where staff "license and inspect commercial weighing and measuring devices" and "administer the Fuel Quality Assurance Program," auditors found,
In the Weights and Measures Bureau, one person is responsible for opening mail, recording receipts in the Bureau’s database, preparing the deposit and taking the deposit to Accounting. The Bureau performs a reconciliation of collections to deposits, but there is no evidence the reconciliation is reviewed by an independent person. The person who collects the fees is also responsible for mailing renewal notices for licenses, updating the outstanding license listing and mailing past due notices. The Bureau does not perform a reconciliation of licenses issued to fees collected.
Fees collected by that bureau, mostly from scale tags and gas pumps, amounted to roughly three-quarters of a million dollars in each of the last two fiscal years.
The auditors' report also commented, "Databases should have controls to ensure proper collection and mitigate the risk of human error. The Weights and Measures Bureau and the Dairy Bureau maintain a database without adequate controls to ensure accuracy."
In the Pesticide Bureau, the mail opener does not prepare an initial listing of receipts. The individual who collects fees for licenses, certifications and product registrations is responsible for mailing licenses, certifications and product registrations and is responsible for mailing renewal forms. The Bureau reconciles licenses, certifications and product registrations issued to fees collected, but there is no evidence the reconciliation is reviewed by an independent person. Additionally, for dealer license renewals and product registration renewals based on gross retail sales, the Bureau does not verify annual gross retail sales, at least on a test basis.
That bureau collected around $5.9 million annually in fiscal years 2017 and 2018. The pesticide product registration fee accounted for the largest portion (about $4.2 million each year), followed by dealer license renewals ($1.1 million in FY2017, about $1 million the next year).
A BROKEN RECORD OF RECOMMENDATIONS
After recounting issues identified in its review of IDALS for fiscal year 2018, the auditors recommended the following:
The Department should review procedures in the Bureaus to ensure duties are segregated to the extent possible. The initial listing of receipts should be compared to the deposits by an independent person. In addition, the Bureaus should reconcile collections per the Accounting Bureau to licenses issued to determine whether the appropriate fees were received and deposited. Access to the Bureaus’ databases should be limited to the individuals who need access to perform their duties. Also, data entered in the databases should be reviewed to ensure accuracy. The Dairy Bureau should re-calculate fees remitted for accuracy, at least on a test basis. The Pesticide Bureau should consider verifying gross retail sales information, at least on a test basis, for dealer license renewals and product registration renewals.
I wondered whether state auditors had noticed any of those problems before. Indeed, reports submitted to IDALS every year since 2010 (covering fiscal year 2009) flagged the problems in the Dairy, Weights and Measures, and Commercial Feed and Fertilizer bureaus. All of those reports are enclosed at the end of this post as Appendices 1 through 10.
Beginning in 2011, auditors added the Pesticide Bureau to the list of IDALS subdivisions where "one person is responsible for opening mail, recording receipts to the Bureau database, preparing the deposit and taking the deposit to accounting." Animal Industry joined the party in 2012.
Also in 2012, annual reports began mentioning that the Dairy and Weights and Measures bureaus "utilize databases to record and track receipts," but without "adequate controls to ensure accuracy."
The same advice Auditor Sand sent to Secretary Naig last month--IDALS should "ensure duties are segregated to the extent possible," "Databases should have controls to ensure proper collection and mitigate the risk of human error"--was repeated verbatim in seven previous reports from Auditor David Vaudt and his successor Auditor Mary Mosiman. Northey served as secretary of agriculture until early 2018, when he was confirmed to a federal post and his deputy Naig was appointed to replace him. Iowans elected Naig to a four-year term last November.
Each report includes a response from IDALS. Its first sentence has been unchanged for eight years: "Funding limitations constrict full segregation of duties; however, the Department has made changes to some of the departmental processes which will help further segregate some of the duties discussed in this comment."
For the past three years, the response added, "The incoming mail is being opened by the Department receptionist for many of the Bureaus."
Communications director Keely Coppess did not answer Bleeding Heartland's follow-up question: Is the receptionist opening mail for any of the five bureaus auditors mentioned in this context? (Dairy, Commercial Feed and Fertilizer, Animal Industry, Weights and Measures, or Pesticide)
Since 2011, IDALS has touted new technology.
In addition, in fiscal year 2012, the Department will implement a new desktop deposit system. This new deposit system will allow for deposits to be done on an overnight process rather than a weekly deposit of fees. This deposit system will close the loop between the program staff and accounting staff. When fee batches are sent to accounting a copy of the cash receipt will be returned to the individual Bureaus with a copy of the batch spreadsheet. This will allow for better reconciliation between the Bureaus and accounting.
The response submitted the following year was nearly identical, except the first sentence was revised to read, "In addition, during fiscal year 2012, the Department implemented a new desktop deposit system."
I was puzzled to find this passage in the report from 2013, covering fiscal year 2012: "the Department has implemented a new desktop deposit system for several bureaus and hopes to fully implement this system by the end of SFY14."
The same paragraph was adapted a year later: "the Department has implemented a new desktop deposit system for several Bureaus and has nearly fully implemented this system in State fiscal year 2014."
How did that go? IDALS reported, "the Department has implemented a new desktop deposit system for several bureaus and has nearly fully implemented this system in State fiscal year 2015."
A slightly new version appeared in 2016: "the Department has implemented a desktop deposit system for most bureaus within the Department and has hopes of transitioning all remaining bureaus to desktop deposit at some point in the near future." The cut-and-paste job continued in IDALS responses from 2017 and last year.
Are we there yet? Apparently not. From last month: "the Department has implemented a desktop deposit system for most Bureaus within the Department and has hopes of transitioning all remaining Bureaus to desktop deposit at some point in the near future."
Coppess did not reply to Bleeding Heartland's inquiries over the past four weeks: When did IDALS implement desktop deposit for most bureaus? Which bureaus have not yet transitioned? When will the process be complete?
A better question might be: why did IDALS keep bringing up this desktop deposit system, which was irrelevant to auditors' comments about segregation of duties and failure to reconcile accounts?
WHY IT MATTERS
Current accounting practices could hinder the department's "ability to prevent or detect and correct misstatements, errors or misappropriation on a timely basis by employees," auditors wrote in the latest report of recommendations.
In fact, the agriculture department has belatedly discovered embezzlement twice this decade. The secretary for the Mahaska County Soil and Water Conservation District made some $280,000 in "improper disbursements and undeposited collections" over a seven-year period before anyone noticed discrepancies. Had she not stopped payment on a check in July 2013, she might have gone on misusing funds.
IDALS issued a memo in August 2013 that was supposed "to improve segregation of duties" in the soil and water conservation districts. Nevertheless, an IDALS employee who worked in Black Hawk and Bremer counties was responsible for improprieties exceeding $440,000 over seven years, ending in 2017. Her actions were discovered only after an employee of the state's main pension fund looked into delinquent payments from the Black Hawk district.
In both cases, the IDALS employee collected receipts, made bank deposits, handled disbursements and supporting documentation, maintained accounting records, reconciled monthly bank statements, and prepared regular financial reports for the soil and water conservation districts. Because no one independently verified the financial transactions, no one noticed records were being altered or falsified to conceal crimes. UPDATE: Another special investigation in 2018 revealed about $22,000 in misspent funds by a conservation assistant at the Jasper County Soil and Water Conservation District.
Even when employees are acting in good faith, mistakes can happen. Segregation of duties reduces the chance they will go unnoticed.
After Mosiman released the special investigation of the Black Hawk and Bremer soil and water conservation districts in August 2018, an IDALS spokesperson told the Des Moines Register that misuse of funds is “completely unacceptable,” adding that the agriculture department "has launched a review of further financial policy safeguards to prevent future fraud."
Yet IDALS had long disregarded advice on improving its accounting procedures.
IS THERE A BETTER WAY?
"Segregation of duties is continually reviewed to determine if any further segregation can be accomplished for the duties discussed," IDALS has told auditors again and again. For reasons communications staff declined to explain, despite two scandals involving hundreds of thousands of misspent dollars, Northey and Naig don't appear to have encouraged staff to explore ways to address concerns auditors raised.
What if IDALS simply doesn't have sufficient staff to adopt best practices?
Randy Bauer is a former Iowa state budget director and current director for the national consulting firm Public Financial Management. He told Bleeding Heartland on November 13, "The issue of small staff, lack of qualified staff and the need for segregation of duties is a problem for governments at all levels. With relatively small bureaus, divisions and departments, this issue crops up all the time."
In the fall of 2018, Naig's first year as secretary of agriculture, IDALS staff told auditors the department
is exploring an e-payment option that will be tested in the Pesticide Bureau with the hope of eventually fully implementing an e-payment process throughout the whole Department. This will reduce the number of checks received by the Department and free up time to allow for proper segregation of duties.
The latest report said the department is "pursuing" e-payment options to be tested in the Pesticide Bureau and used department-wide if successful. Whether that transition will happen faster than the shift to desktop deposit, or will save enough time "to allow for proper segregation of duties," is anyone's guess.
Bauer mentioned another possibility.
One approach that has been used in local, state and federal government is to create "shared services" agencies that take responsibility for a variety of technical functions for other agencies or departments in local, state and federal government. Shared services models have been established for a variety of "back office" functions, including accounting, HR, IT, payroll and purchasing. In this model, other departments enter into service level agreements (SLAs) with the shared service agency, which includes the levels of service to be provided and the charges for those services. The State of Iowa already uses this model for some services (such as HR and procurement) through the Department of Administrative Services.
Bauer added that Georgia, Oklahoma, and Pennsylvania are among the states using shared services for other functions, such as accounting. Iowa could adopt a similar approach "to cover some of the issues identified by the Auditor’s findings" regarding IDALS, he said.
Iowa leaders should find a way to create checks and balances in state agencies that process millions of dollars in fees each year.
P.S.-For at least the last ten years, state auditors have reminded secretaries of agriculture that Iowa law "requires the department to conduct a qualifying examination prior to issuing a commercial weighing and measuring servicer license." IDALS has no such exam. Several replies from IDALS explained that the $5 annual fee for such licenses "does not cover the cost to conduct an exam." In 2010, the department told auditors and Northey assured the public that IDALS was working with a national body to create an exam, which the department would implement.
Beginning in 2014, IDALS stopped promising to use the national exam, citing cost concerns. Instead, "Iowa will communicate with neighboring states and reexamine our options." Starting in 2015, that part of the response was revised again: "In communicating with other states to determine how they administer tests, Iowa is now considering options to have an outside vendor administer the exam."
Identical words remained in the replies to auditors from 2016, 2017, 2018, and this year. Is the department still considering that approach, or just reproducing a throwaway line?
State agencies should either follow Iowa Code or ask the legislature to remove legal requirements deemed unimportant or too costly. Copying and pasting excuses for non-compliance year after year is substandard management.
Appendix 1: Report of Recommendations covering fiscal year 2018
Appendix 2: Report of Recommendations covering fiscal year 2017
Appendix 3: Report of Recommendations covering fiscal year 2016
Appendix 4: Report of Recommendations covering fiscal year 2015
Appendix 5: Report of Recommendations covering fiscal year 2014
Appendix 6: Report of Recommendations covering fiscal year 2013
Appendix 7: Report of Recommendations covering fiscal year 2012
Appendix 8: Report of Recommendations covering fiscal year 2011
Appendix 9: Report of Recommendations covering fiscal year 2010
Appendix 10: Report of Recommendations covering fiscal year 2009
I find this especially interesting...
...because I have friends in a few counties who are serving as Iowa Soil and Water Conservation District Commissioners, and they tell me that SWCDs have been required to go through all kinds of paperwork heck during the past few years to make sure SWCDs are protected against financial mistakes and misdeeds. And given the understaffed and volunteer nature of SWCDs, I also get the impression that what they are having to go through is much harder than it would be for a large agency like IDALS which has far more funding.
a friend on a SWCD confirms
they are supposed to perform some fiduciary duties now, supposedly as a way to prevent misuse of funds by staff.
It's hard for me to understand why IDALS can't assign different people to open mail, enter receipts in the database, reconcile accounts, etc.
Small staff is no excuse
I work for one of the state universities in a small department that has limited accounting staff. The university has procedures in place so that small units can "swap" accounting duties — in other words, Unit A prepares deposits and/or reconciles for Unit B, and vice versa. It's hard to believe that IDALS couldn't implement something similar among its bureaus if it really wanted to.
Are there no repercussions at all for failing to follow auditor recommendations year after year? If not, what's the point of even doing it?
the State Auditor's office
does not have the authority to require agencies to implement recommendations. I still think it's worthwhile to keep pointing out vulnerabilities in the system--you never know when an agency may get new leadership or become newly interested in solving these problems.
Good point about the potential to swap accounting tasks.