State Auditor Mike Harmon has released the audit of the financial statement of the Clinton County Fiscal Court for the fiscal year ended June 30, 2018. State law requires annual audits of county fiscal courts.

The audit and it’s accompanying report was for the period of July 1, 2017, through June 20, 2018, during the administration of Clinton County Judge/Executive Richard Armstrong.

Auditing standards require the auditor’s letter to communicate whether the financial statement presents fairly the receipts, disbursements, and changes in fund balances of the Clinton County Fiscal Court in accordance with accounting principles generally accepted in the United States of America. The fiscal court’s financial statement did not follow this format. However, the fiscal court’s financial statement is fairly presented in conformity with the regulatory basis of accounting, which is an accepted reporting methodology. This reporting methodology is followed for 115 of 120 fiscal court audits in Kentucky.

As part of the audit process, the auditor must comment on noncompliance with laws, regulations, contracts, and grants. The auditor must also comment on material weaknesses involving internal control over financial operations and reporting.

(Editor’s Note: Due to the length of the 16-page audit letter, only highlights of the noncompliance and material weaknesses listed in the audit findings are published in this article. A full audit report can be found on the state auditor’s website.)

The audit contains the following comments:

The fiscal court lacks adequate segregation of duties over all accounting functions. This is a repeat finding and was included in the prior year audit report.

County Judge/Executive’s Response: This comment was based on findings from the past administration. Due to the size of the county total segregation of all duties is challenging. The current administration will require accounting duties to be reviewed and acknowledged by at least two employees.

The fiscal court’s disbursements exceeded budgeted appropriations: This is a repeat finding and was included in the prior year audit report. Disbursements exceeded approved budget appropriation for the general, jail, and occupational tax funds as follows:

General fund-administration by $6,576; jail fund-protection to persons and property by $80,410; Occupational Tax fund-administration by $27,384.00.

We recommend the fiscal court and the county treasurer monitor the budget closely and amend the fiscal court’s budget or transfer necessary appropriations in order to prevent the fiscal court from exceeding the budget. We also recommend the county judge/executive or his designee not approve purchase orders or claims that exceed the budge appropriations. We further recommend the fiscal court not vote to approve payment of claims that would cause a line item to exceed the budget.

County Judge/Executive’s Response: The official did not provide a response.

The fiscal court lacks internal controls over cash transfers. This is a repeat finding and was included in the prior year audit report. The court did not approve the following cash transfers:

Road to general fund on August 18, 2017 for $90,588; general fund to disaster and emergency services on September 19, 2017 for $10,000; occupational fund to LGEA fund on November 17, 2017 for $3,000; occupational tax fund on January 19, 2018 for $10,000; occupational fund to jail fund on April 20, 2018 for $30,000; occupational fund to general fund on April 20, 2018 for $30,000; occupational fund to ambulance fund on April 20, 2018 for $30,000; occupational fund to forestry fund on April 20, 2018 for $1,500.00.

We recommend the fiscal court implement stronger internal controls over the cash transfer process to ensure all cash transfers are approved by the fiscal court and properly recorded to the financial statements.

County Judge/Executive’s Response: This comment was based on findings from the past administration. The current administration requires all transfers to be reviewed and approved by the fiscal court.

The fiscal court had overdrawn bank balances in numerous bank accounts during fiscal year 2018. This is a repeat finding and was included in the prior year report. The fiscal court had negative bank balances in numerous bank accounts due to checks being written for disbursements and submitted for payments that exceeded the available cash in the bank account.

This practice resulted in over 70 negative cash balances on various dates within bank accounts for the general fund (16 instances); jail fund (21 instances); DES fund (six instances); ambulance fund (seven instances); payroll account (14 instances), and LGEA fund (nine instances).

The report noted that purchase orders for goods and services were approved without determining if there was available cash in the bank accounts to cover all disbursements. The invoices were presented to the fiscal court, checks were issued, and the finance officer/deputy judge/executive and county treasurer signed each check.

Due to submitting payments that exceeded the balances of their accounts, the county was charged a total of $1,307 in service charges from the financial institutions.

We recommend the fiscal court refrain from issuing payments for disbursements when there is no available cash in bank accounts to cover those disbursements. We also recommend the county treasurer comply with all applicable requirements outlined in the DLG’s (Department of Local Government’s) County Budget Preparation and State Local Finance Officer Policy Manual concerning countersigning of checks.

County Judge/Executive’s Response: This comment was based on findings from the past administration. Procedures have been implemented to monitor bank accounts. This is reviewed at least weekly by the County Judge/Executive.

The fiscal court’s payroll account was not properly reconciled. This is a repeat finding and was included in the prior year audit report.

Deposits are made into the bank account from the fiscal court’s general, road, jail, LGEA, DES, ambulance, occupational tax and 911 funds for salaries, taxes, fiscal court matching portion of taxes, retirement, health insurance, and other payments to benefit vendors. The payroll account should reconcile to zero every month because the total amount consistently prepared inaccurate reconciliations on this account and a reconciled balance existed on June 30, 2018 of $2,046, which includes a prior year outstanding liability to the Internal Revenue Service (IRS) that has not been paid.

According to the county treasurer, the former judge/executive’s administrative assistance inaccurately reconciled the payroll account. The county treasurer stated the outstanding IRS liability just didn’t get paid. As a result, the fiscal court had an underpayment of $17,062 of federal taxes due to the IRS from June 2017.

We recommend the fiscal court reconcile the payroll revolving bank account to a zero balance each month. In addition, we recommend the fiscal court reconcile all reports for federal taxes, state taxes, local taxes, retirement, and health insurance to determine the correct amounts are deducted, reported, paid, and agree with the amounts deposited into the payroll account. We also recommend the fiscal court contact the IRS and resolved the outstanding liability of $17,062.

County Judge/Executive’s Response: This comment was based on findings from the past administration. The current administration will review the payroll account by at least two employees to ensure proper reconciliation.

The fiscal court did not have proper internal controls over disbursements. This is a repeat finding. The fiscal court did not follow proper procedures and requirements for disbursements of county funds. The report listed 10 different instance of deficiencies and non-compliances in its report.

The deficiencies and noncompliance resulted in line items over budget, bank accounts overdrawn, claims possibly being paid not related to the fiscal court, inaccurate reporting, and potential misappropriation of assets.

We recommend the fiscal court implement policies and procedures to ensure disbursements are in compliance with applicable statutes and regulations. Additionally we recommend the fiscal court put into place internal controls to monitor that these polices and procedures are operating effectively.

County Judge/Executive’s Response: This comment was based on findings from the past administration. The current administration will require at least two employees to review disbursements.

The fiscal court was not in compliance and did not have adequate internal controls over the Local Government Economic Assistance (LGEA) fund. This is a repeat finding. The adopted budget included $20,576 of revenues expected from LGEA for mineral tax. However, when the fiscal court received payments from the DLG, the monies were deposited, spent from, and posted to the general fund in numerous account codes.

We recommend the fiscal court ensure all LGEA funds are deposited and expended from the LGEA bank account on allowable disbursements and reported properly on the financial statement. We also recommend the fiscal court ensure a public hearing is held on the disbursement of funds received for mineral tax to be in compliance with KRS 42.455.

County Judge/Executive’s Response: This comment was based on findings from the past administration. The current administration will implement internal controls over the Local Government Economic Assistance (LGEA) Fund.

The fiscal court lacked adequate internal controls over payroll. This is a repeat finding. Eight instances of deficiencies pertaining to the payroll was listed in the auditor’s report.

With a documented copy of a salary schedule and without ensuring employees sign their time sheets, employees could have been under or overpaid.

Strong internal controls over payroll and time keeping are vital in ensuring that payroll amounts are calculated for properly and ensuring that the county’s assets are safeguarded, the report states.

We recommend fiscal court strengthen its internal controls by including a copy of the approved salary schedule with fiscal court minutes. Additionally, the county should ensure all time sheets/cards are signed by the corresponding employee and his/her supervisor, by ensuring all employees’ withholdings are being computed correctly and by ensuring that employees are receiving additional benefits if they are paying for them. And the fiscal court should correctly code “on call” time worked as wages earned. Furthermore, we recommend the fiscal court update its personnel ordinance to ensure these policies are followed.

County Judge/Executive’s Response: This comment was based on findings from the past administration. The current administration has implemented procedures to provide internal controls over payroll. Payroll will be reviewed by the Finance Officer, Treasure and County Judge/Executive prior to posting payroll.

The fiscal court did not properly reconcile retirement reports with payroll reports, a repeat finding.

Four deficiencies were noted, including:

* $129,551 of full time employee wages were not reported and $88,365 of employee full time wages were reported in excess of actual wages earned.

* $2,363,900 total wages (part-and full time) were paid out but only $2,004,540 were reported leaving $359,360 unreported.

* $112,164 was withheld from employee pay for the employee share of retirement but only $97,137 was paid leaving $15,027 still due to CERS (County Employees Retirement System).

Some employees were over reported and some under reported and not all of the employee share of retirement has been paid.

We recommend the fiscal court put procedures in place to ensure wages are reported to CERS correctly. We also recommended the detailed retirement reports be printed each month from CERS website. Furthermore, we recommend fiscal court contact CERS concerning the $15,207 of employee share of retirement not paid during the fiscal year 2018. These findings shall be reported to CERS.

County Judge/Executive’s Response: This comment was based on findings from the past administration. The current administration has implemented procedures to ensure reconciliation is performed with accurate retirement reports and payroll reports. We have been in contact with the Kentucky Retirement Board to correct errors.

The fiscal court did not pay tax liabilities timely. During fiscal year 2018, withholdings and employer contributions were not reported timely to the IRS or DOR (Kentucky Department of Revenue.)

Federal and state taxes were not remitted in accordance with the required withholding deposit schedules. As a result, the fiscal court could incur penalties and interest.

We recommend the fiscal court implement internal controls over tax liabilities. Additionally, the fiscal court should implement strong oversight over tax payments to state and federal entities to ensure those payments are made timely.

County Judge/Executive’s Response: The official did not provide a response.

The fiscal court lacks internal controls over capital assets. We recommend the fiscal court maintain a complete and accurate capital asset schedule to comply with DLG’s requirements.

County Judge/Executive’s Response: This comment was based on findings from the past administration. The current administration will assign an employee to ensure proper controls over capital assets.

The jail commissary does not have strong internal controls over disbursements. This is a repeat finding. Receipts collected from inmates for booking, housing, and medical fees are deposited into the commissary account each month, but are not paid to the fiscal court timely, with five instances of inmate fees being turned over late.

In addition, taxes are collected on all applicable jail commissary sales, but are not being paid to the Kentucky Department of Revenue on a monthly basis with 11 such late payments noted from July 2017 through May 2018.

These deficiencies could result in inaccurate reporting and misappropriation of assets. Additionally, failure to submit all sales tax as required will result in penalties and interest being charged.

We recommend the jail commissary implement internal controls over disbursements by turning over all inmate fees to the county within 30 working days of collection and that the jailer collect and submit sales tax to DOR monthly.

County Judge/Executive’s Response: The official did not provide a response.

County Jailer’s Response: The official did not provide a response.

The former jailer did not deposit receipts daily, a repeat finding. We recommend the jailer make daily deposits.

County Judge/Executive’s Response: The official did not provide a response.

County Jailer’s Response: The official did not make a response.

The former jailer lacked adequate segregation of duties over the jail commissary fund, and the jail inmate account, a repeat finding.

Neither the (current) county judge/executive or jailer made a response.

The full audit report can be found on the auditor’s website.