Legislative Audit Division State of Montana Report to the Legislature Financial-Compliance Audit November 2004 For the Two Fiscal Years Ended June 30, 2004 State Auditor's Office This report contains six recommendations to the office related to: (cid:23) Insurance examiner conflict of interest (cid:23) Insurance company assignment of deposit requirements (cid:23) Accurately recording financial information on the state’s accounting system Direct comments/inquiries to: Legislative Audit Division Room 160, State Capitol PO Box 201705 04-20 Helena MT 59620-1705 Help eliminate fraud, waste, and abuse in state government. Call the Fraud Hotline at 1-800-222-4446 statewide or 444-4446 in Helena. FINANCIAL-COMPLIANCE AUDITS Financial-compliance audits are conducted by the Legislative Audit Division to determine if an agency’s financial operations are properly conducted, the financial reports are presented fairly, and the agency has complied with applicable laws and regulations. In performing the audit work, the audit staff uses standards set forth by the American Institute of Certified Public Accountants and the United States Government Accountability Office. Financial-compliance audit staff members hold degrees with an emphasis in accounting. Most staff members hold Certified Public Accountant (CPA) certificates. Government Auditing Standards, the Single Audit Act Amendments of 1996 and OMB Circular A-133 require the auditor to issue certain financial, internal control, and compliance reports. This individual agency audit report is not intended to comply with these reporting requirements and is therefore not intended for distribution to federal grantor agencies. The Legislative Audit Division issues a statewide biennial Single Audit Report which complies with the above reporting requirements. The Single Audit Report for the two fiscal years ended June 30, 2005, will be issued by March 31, 2006. The Single Audit Report for the two fiscal years ended June 30, 2003, was issued on March 23, 2004. Copies of the Single Audit Report can be obtained by contacting: Single Audit Coordinator Legislative Audit Division Office of Budget and Program Planning Room 160, State Capitol State Capitol PO Box 201705 Helena MT 59620 Helena MT 59620-1705 Phone (406) 444-3616 MEMBERS OF THE LEGISLATIVE AUDIT COMMITTEE Senator John Cobb Representative Dee Brown Senator Mike Cooney Representative Tim Callahan Senator Jim Elliott, Vice Chair Representative Hal Jacobson Senator John Esp Representative John Musgrove Senator Dan Harrington Representative Jeff Pattison, Chair Senator Corey Stapleton Representative Rick Ripley LEGISLATIVE AUDIT DIVISION Scott A. Seacat, Legislative Auditor Deputy Legislative Auditors: John W. Northey, Legal Counsel Jim Pellegrini, Performance Audit Tori Hunthausen, IS Audit & Operations James Gillett, Financial-Compliance Audit November 2004 The Legislative Audit Committee of the Montana State Legislature: This is our financial-compliance audit report on the State Auditor’s Office (office) for the two fiscal years ended June 30, 2004. Included in this report are recommendations concerning compliance with state law pertaining to conflict of interest for insurance examiners, custodial deposit assignments, and recording financial information on the state’s accounting records. The office’s written response to the audit recommendations is included in the audit report beginning on page B-3. We thank the State Auditor and his staff for their assistance and cooperation during the audit. Respectfully submitted, (Signature on File) Scott A. Seacat Legislative Auditor Room 160, State Capitol Building PO Box 201705 Helena, MT 59620-1705 Phone (406) 444-3122 FAX (406) 444-9784 E-Mail [email protected] Legislative Audit Division Financial-Compliance Audit For the Two Fiscal Years Ended June 30, 2004 State Auditor's Office Members of the audit staff involved in this audit were Pearl M. Allen, John Fine, Hollie Koehler, and Sonia Powell. Table of Contents Elected and Administrative Officials........................................................ii Report Summary....................................................................................S-1 Introduction.................................................................................................................................................1 General......................................................................................................1 Office Background and Organization.......................................................1 Prior Audit Recommendations..................................................................2 Findings and Recommendations................................................................................................................5 Insurance Regulation................................................................................5 Insurance Examiner Conflict of Interest..............................................5 Insurance Securities Not Assigned......................................................6 Accounting Errors.....................................................................................7 Stamping Fees Not Recorded...................................................................8 Federal Forest Reserve Funds.................................................................10 Delays in Forest Reserve Distribution...............................................10 Subrecipient Monitoring Requirement..............................................11 Independent Auditor’s Report & Office Financial Schedules............................................................A-1 Independent Auditor’s Report..............................................................A-3 Schedule of Changes in Fund Balances & Property Held in Trust for the Fiscal Year Ended June 30, 2004........................A-5 Schedule of Changes in Fund Balances & Property Held in Trust for the Fiscal Year Ended June 30, 2003........................A-6 Schedule of Total Revenues & Transfers-In For the Fiscal Year Ended June 30, 2004.............................................A-7 Schedule of Total Revenues & Transfers-In For the Fiscal Year Ended June 30, 2003.............................................A-8 Schedule of Total Expenditures & Transfers-Out For the Fiscal Year Ended June 30, 2004.............................................A-9 Schedule of Total Expenditures & Transfers-Out For the Fiscal Year Ended June 30, 2003...........................................A-10 Notes to the Financial Schedules........................................................A-11 State Auditor’s Office Response............................................................................................................B-1 State Auditor.........................................................................................B-3 Page i Elected and Administrative Officials State Auditor’s Office John Morrison, State Auditor David Hunter, Deputy State Auditor Karen Powell, Deputy Securities Commissioner Alicia Pichette, Deputy Insurance Commissioner John Huth, Central Services Administrator For additional information concerning the State Auditor’s Office, contact John Morrison at: State Auditor’s Office PO Box 4009 Helena MT 59604-4009 (406) 444-2040 e-mail: [email protected] Page ii Report Summary State Auditor's Office This report contains the results of our financial-compliance audit of the State Auditor’s Office (office) for the two fiscal years ended June 30, 2004. This report contains six recommendations directed to the office concerning compliance with state law pertaining to conflict of interest for insurance examiners, custodial deposit assignments, and recording financial information on the state’s accounting records. An unqualified opinion on the office’s financial schedules was issued, which means the reader may rely on the financial information and supporting data on the state’s accounting records. The listing below serves as a means of summarizing the recommendations contained in the report, the office's response thereto, and a reference to the supporting comments. Recommendation #1 We recommend the office comply with state law by only appointing examiners that do not have a conflict of interest with the insurance company being examined.................................... 6 Agency Response: Concur. See page B-3. Recommendation #2 We recommend the office develop procedures to comply with the custodial deposit assignment requirements, as specified in state law......................................................................... 7 Agency Response: Concur. See page B-4. Recommendation #3 We recommend the office perform additional supervisory review of infrequent and year-end accounting transactions to improve the accuracy of the accounting records............................... 8 Agency Response: Concur. See page B-4. Page S-1 Report Summary Recommendation #4 We recommend the office work with the Department of Administration to record the financial activity and financial position related to the Surplus Lines Advisory Organization in the state’s accounting records..................................................... 10 Agency Response: Concur. See page B-4. Recommendation #5 We recommend the office apportion forest reserve funds within 30 days of receiving final payment from the federal government, as required by state law.............................................. 11 Agency Response: Concur. See page B-5. Recommendation #6 We recommend the office follow up on local government audit findings communicated to the office, as required by federal law....................................................................................... 12 Agency Response: Do not concur. See page B-5. Page S-2 Introduction General We performed a financial-compliance audit of the State Auditor's Office (office) for fiscal years 2002-03 and 2003-04. The objectives of our audit were to: 1. Determine if the office complied with applicable laws and regulations. 2. Make recommendations for improvement in management, internal controls, and financial operations. 3. Determine if the office's financial schedules present fairly the results of operations for the two fiscal years ended June 30, 2004. 4. Determine the implementation status of prior audit recommendations. This report contains six recommendations to the office. Other areas of concern deemed not to have a significant impact on the successful operations of the programs within the State Auditor's Office are not specifically included in the report, but have been discussed with management. In accordance with section 5-13-307, MCA, we analyzed and disclosed the cost, if significant, of implementing the recommendations. Office Background and The State Auditor's Office was established by Article VI, Section 1 Organization of the Montana Constitution. The State Auditor is the ex-officio Commissioner of Insurance and the ex-officio Commissioner of Securities. The State Auditor licenses and regulates insurance companies and agents within the state, and regulates and registers securities dealers. The State Auditor also serves as a member of the State Land Board and the Crop Hail Insurance Board. Total full- time equivalent (FTE) positions of the office as of June 2004 are 71.5. The office currently has 13.0 exempt positions. Page 1 Introduction The office is organized as follows: 1. The Central Management Division is responsible for the administrative, budgeting, personnel, and accounting functions of the office. The division also provides support for the State Auditor as he fulfills his duties on the State Land Board and the Crop Hail Insurance Board. (10.0 FTE) 2. The Insurance Division regulates the insurance industry in Montana. Its duties include resolving insurance consumer inquiries and complaints about agents, coverage, and companies; licensing and reviewing the rates and financial condition of insurance companies; collecting the insurance premium tax; approving forms used by insurance companies; licensing, testing, and administering a continuing education program for insurance agents; and investigating insurance code and rule violations. (48.5 FTE) 3. The Securities Division is responsible for the administration and enforcement of the Securities Act of Montana. The division is responsible for the registration of securities issuers, salespeople, investment advisers, broker-dealers, and investment adviser representatives. It also investigates instances of unregistered or fraudulent securities transactions. (13.0 FTE) The office is responsible for distributing a portion of insurance premium taxes to the Montana Public Employees' Retirement Administration and to fire and police departments in qualifying Montana cities and towns. The office also distributes federal forest reserve moneys to Montana counties. Prior Audit The prior financial-compliance audit of the office for the two fiscal Recommendations years ended June 30, 2002 contained four recommendations to the office. During the current audit, we determined the office implemented one of the recommendations, partially implemented two recommendations, and did not implement one recommendation. One recommendation that was partially implemented dealt with recording the proper amount for additions and reductions to property held in trust and is discussed on page 7. The other partially implemented prior audit recommendation, pertaining to recording fees in the correct account, was substantially implemented by fiscal year end 2003-04, so we make no further recommendation at this Page 2