KNOX COUNTY, TENNESSEE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) For the Year Ended June 30, 2012 Section II - Financial Statement Findings Prior Year Audit Finding: 2011-1 GENERAL GOVERNMENT, Financial Reporting at the Trustee's Office: The Trustee's Office (Trustee) has oversight responsibility related to the processing of approximately $800 million in transactions annually, and it closely coordinates these efforts with the Finance Department. These transactions are reported on various schedules presented in the County's CAFR. Further, it is responsible for reconciling approximately 30 bank accounts monthly. During FY 2011, we observed the following: a. The Trustee's Office was unable to produce the schedules required for the CAFR timely. The final schedules which appropriately balanced were not submitted to the Finance Department until approximately four months after year-end. b. The draft schedules produced by the Trustee's Office at various iterations through the closing process did not balance. c. The system generated reports documenting the preparation of the monthly bank statement reconciliations indicates that bank reconciliations were not prepared timely throughout FY 2011. We recommend that the Trustee's Office, in close coordination with the Finance Department, develop detailed procedures documenting the production of the schedules to be provided for CAFR preparation. These procedures should be very specific, including documenting the format and content of the various system generated reports needed to support these schedules. These procedures should further document the system generated information necessary to perform the monthly bank reconciliations within 30 days of year end. Finally, given that this finding has been recurring in nature as it relates to the Combined Schedule of Assets and Liabilities, Combined Schedule of Cash Receipts, Disbursements and Balances, and Combined Analysis of Fee and Commission Accounts schedules which are provided for CAFR reporting purposes (CAFR schedules), we recommended that the Audit Committee: ? Review and approve the newly developed policies and procedures over the Trustees Office closing process: and ? Require that the Trustees Office provide the Audit Committee with the CAFR schedules at least quarterly during the fiscal year and provide verification that the monthly bank reconciliations have been completed timely to ensure that the newly established policies and procedures are operating effectively. Management Prior Year Response ? The Trustee's Office agrees that the final balanced CAFR schedules required for the CAFR were not submitted to the Finance Department until approximately four months after year-end. The schedules were, however, submitted within a timeframe that allowed for timely issuance of the Knox County financial statements taken as a whole. While there were agreed upon deadlines for the submission of these schedules between KPMG and the Finance Department, we would point out that the statutory and GFOA deadlines for publication and submission of the County's CAFR without requesting an extension are six months after fiscal year end or st December 31 for Knox County. 21 KNOX COUNTY, TENNESSEE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) For the Year Ended June 30, 2012 Section II - Financial Statement Findings (Continued) Prior Year Audit Finding (Continued): 2011-1 GENERAL GOVERNMENT, Financial Reporting at the Trustee's Office (Continued): FY 2011 was a transition year with the implementation of new financial accounting software by Knox County. During this transition, finalizing all reconciliations and schedules took more time and a lot more effort than anyone anticipated, and given this the Trustee's Office chose to err on the side of accuracy versus internal deadlines. Finally, both the Finance Department and this office were posting necessary changes to multiple accounts until at least the end of October so earlier submission of finalized schedules was not possible. ? ? The Trustee's Office agrees that several of the draft schedules produced by this office were out of balance but these issues were noted and further investigated. This involved a line by line review of several thousands of lines of transactions posted external to this office. As mentioned previously, this was a transition year due to the new financial system implementation and as a result of this implementation this office did not have access to the County fund side of the system until the end of September 2011 and thus investigation of this sort was almost impossible until that access was finally put in place. The majority of eliminations and reclassifications to bring the CAFR schedules into balance related to items posted outside this office that needed to be investigated as described. The Trustee's Office agrees that not all bank accounts were reconciled in a timely fashion during fiscal year 2011. While this was not an issue in the previous fiscal year, as mentioned previously the transition to the County's new financial system made the bank reconciliation process substantially more difficult and required significantly more time. During this transition period resulting from implementation, we have had to completely redesign the bank reconciliation process and further implement additional posting process changes for both this office and the County Finance Department. Again, however, the reconciliations were completed within a timeframe that allowed for timely issuance of the Knox County financial statements taken as a whole. With regard to the recommendations the Trustee's Office will work closely with the Finance Department as indicated to develop appropriate documentation related to the closing process. We will also work diligently to enhance interoffice communications with the Finance Department. This office has already drafted CAFR schedules for the quarter ended September 30, 2011 and will present those schedules and the CAFR schedules for the quarter ending December 31, 2011 to the Audit Committee at its January 2012 meeting. Bank reconciliations for the month ended two months prior to the Audit Committee meeting date will be offered for inspection if the Committee so requests, as the immediate preceding month's bank reconciliations will still be in process. Additionally, the Trustee's Office has already assigned an additional staff member to help with monthly reconciliations and is in the process of hiring an additional accountant to allow for a 'Cash Manager' who can oversee and troubleshoot the bank reconciliations and reconciliation process. We are also now working directly with the software vendor support for the County's financial accounting system to identify both system settings and process modifications necessary to eliminate the remaining issues with the bank reconciliations. We anticipate further posting process changes and enhancements that will impact both the Finance Department and this office, but should ultimately reduce the extensive amount of additional time now required in the bank reconciliation process. Current Year Status - During FY 2012 items (a) and (b) were improved. Item (c) was not corrected. See additional comments in the current year finding 2012-1. 22 KNOX COUNTY, TENNESSEE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) For the Year Ended June 30, 2012 Section II - Financial Statement Findings (Continued) Current Year Audit Findings: 2012-1 Bank and Investment Account Reconciliations - Trustee's Office Criteria or Specific Requirement - The Knox County Trustee is the treasurer of Knox County and as required by the County Charter (section 4.05) is responsible for receiving, depositing, disbursing and investing all County funds. Good internal controls require that all bank and investment accounts be reconciled to the accounting records of the Trustee's Office and the general ledger fund accounting records in the Finance Department within a timely manner. The Trustee's Office and Finance Department utilize several internal transfer accounts within the Trustee's accounting records during the year-end closing process, which complicates the reconciliation process. However, effective internal controls would suggest that bank and investment reconciliations be reviewed and approved within 30 days of the prior month. Condition - During the audit it was noted that the Trustee's monthly bank reconciliations were not completed, reviewed or approved in a timely manner. The bank reconciliations for June 2012 were not completed until September 18, 2012. Also during FY 2012 several other month's reconcilements were not completely reconciled for several months. There was a current year audit adjustment resulting in a decrease of $868,005 in the Trustee's and general fund's cash balance for June 30, 2012 resulting from an uncorrected error in a prior year. In addition, there was another overstatement of $522,766 in the Trustee's and general fund's cash balance for June 30, 2012 resulting from an uncorrected error in a prior year which the County will correct in fiscal year 2013. Cause and Effect - The Trustee's monthly bank and accounting records were not reconciled within a timely manner. Failure to timely reconcile the bank and investment accounts to accounting records could result in undetected discrepancies, material errors or limit the County's ability to dispute possible contested items or transactions with various financial institutions. Recommendations - We recommend the following: a. Monthly bank and investment reconciliations be completed, reviewed and approved by the Trustee's Office within 30 days of the prior month. b. Copies of the monthly bank and investment reconciliations should be provided to the County Finance Department as part of the monthly accounting closing process and ongoing financial reporting. c. The Trustee's Office should evaluate the practicability and need of maintaining over 30 different bank accounts. This review could result in the combining or closing of several bank accounts which could help simplify and streamline the reconciliation process. d. The Trustee's Office, in conjunction with the County Finance Department, should review their monthly and year-end closing processes in order to limit or eliminate the number of reconciling items. In addition, reconciling items should be addressed each month and adjusting entries recorded as appropriate. The Trustee's Office, in conjunction with the County Finance Department, should review the possibility of utilizing electronic fund transfers (EFT's) to pay accounts payable disbursements which could significantly reduce outstanding checks and streamline the bank reconciliation process. e. The Trustee's Office should report to the audit committee the status of this finding until it has been corrected. 23 KNOX COUNTY, TENNESSEE SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Continued) For the Year Ended June 30, 2012 Section II - Financial Statement Findings (Continued) Current Year Audit Findings (Continued): 2012-1 Bank and Investment Account Reconciliations - Trustee's Office (Continued) Management's Planned Corrective Actions We agree with the audit comment. The Trustee's Office did not have all bank account reconciliations fully completed within 30 days of the prior month. Since the implementation of the County's current financial system this office has expended great effort to bring the bank reconciliation process into compliance with good, effective internal controls so that all bank reconciliations can be completed within 30 days of the prior month. Although not completed within 30 days due to issues outside the control of this office, all June 30, 2012 bank reconciliations were completed by mid-September prior to submission of draft financial statements for audit review. This is the result of a tremendous effort that has included obtaining additional access to inquiry screens for revenue items posted outside of this office, working with County Finance staff to modify their revenue posting procedures to eliminate posting of transactions outside of the period being reconciled, as well as identifying all unposted transactions and uncorrected errors originating outside this office. We have also hired additional staff and reallocated current staffing resources to help us timely reconcile all bank accounts. All bank reconciliations are currently begun as soon as bank statements become available. In conjunction with County Finance, County-wide posting procedures for banking transactions are being modified so that all bank transactions for one banking day are posted no later than the end of the subsequent business day. Additionally, County Finance will reiterate with County departments and other offices the importance of submitting deposit documentation to Finance within two days of deposit. The revised posting processes and enforcement of documentation submission timelines should alleviate the remaining issues the Trustee's Office has been unable to address that prevent this office from having "completed" reconciliations within 30 days of the end of the prior month. Additionally, all monthly bank reconciliations will be completed no later than the end of the following month, and those completed bank reconciliations will be provided to County Finance as part of the monthly accounting closing process and ongoing financial reporting. We believe that the revised County-wide posting procedures for banking transactions mentioned above will significantly reduce if not eliminate all reconciling items. We are also in the process of reviewing all current bank accounts for possible elimination or combination in order to simplify and streamline the reconciliation process. The Trustee's Office has worked with County Finance to implement electronic funds transfers (EFT's) to pay certain accounts payable disbursements on a trial basis. We will continue to work with County Finance to expand the EFT program to help reduce outstanding checks and further streamline the reconciliation process. The two prior period errors originated with the implementation of the previous County financial system. These items have been fully resolved and should not recur in the future. All accounts will be monitored to ensure that no further problems arise. The Trustee's Office will report to the Audit Committee on the status of this finding until it has been fully corrected. 24