OFFICE

OF THE

NEW YORK STATE COMPTROLLER D IVISION OF LOCAL GOVERNMENT & SCHOOL ACCOUNTABILITY

Internal Controls Over Treasurers Activities: Mismanagement Allows Theft

Report of Examination
Period Covered: January 1, 2005 December 31, 2010 2011M-150

Charlton Fire District

Thomas P. DiNapoli

Table of Contents

Page AUTHORITY LETTER 2

EXECUTIVE SUMMARY

INTRODUCTION Background Objective Scope and Methodology Comments of District Ofcials and Corrective Action

5 5 6 6 6

TREASURERS ACTIVITIES Purchases Undocumented/Unsupported Payments Payroll Recommendations

7 7 9 10 14

BOARD OVERSIGHT Recommendations

15 18

APPENDIX APPENDIX APPENDIX APPENDIX

A B C D

Response From District Ofcials Audit Methodology and Standards How to Obtain Additional Copies of the Report Local Regional Ofce Listing

19 23 25 26

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State of New York Ofce of the State Comptroller

Division of Local Government and School Accountability September 2011 Dear Fire District Ofcials: A top priority of the Ofce of the State Comptroller is to help local government ofcials manage government resources efciently and effectively and, by so doing, provide accountability for tax dollars spent to support government operations. The Comptroller oversees the scal affairs of local governments statewide, as well as compliance with relevant statutes and observance of good business practices. This scal oversight is accomplished, in part, through our audits, which identify opportunities for improving operations and Board of Fire Commissioner governance. Audits also can identify strategies to reduce costs and to strengthen controls intended to safeguard local government assets. Following is a report of our audit of the Charlton Fire District, entitled Internal Controls Over Treasurers Activities: Mismanagement Allows Theft. This audit was conducted pursuant to Article V, Section 1 of the State Constitution and the State Comptrollers authority as set forth in Article 3 of the General Municipal Law. This audits results and recommendations are resources for local government ofcials to use in effectively managing operations and in meeting the expectations of their constituents. If you have questions about this report, please feel free to contact the local regional ofce for your county, as listed at the end of this report. Respectfully submitted,

Ofce of the State Comptroller Division of Local Government and School Accountability

OFFICE OF THE NEW YORK STATE COMPTROLLER

State of New York Ofce of the State Comptroller

EXECUTIVE SUMMARY

The Charlton Fire District (District) is located in Saratoga County and provides re protection and other emergency services to residents in portions of the Town of Charlton. The District currently has approximately 40 active volunteer members who respond to an average of 150 emergency calls per year. The District is governed by a Board of Fire Commissioners (Board) that comprises ve elected members who are responsible for overseeing the Districts general and nancial affairs. These responsibilities include establishing appropriate internal controls over nancial operations and monitoring the Districts activities to ensure assets are properly safeguarded. Appropriations in the 2011 adopted budget totaled $308,723 to be nanced primarily by property taxes. The Treasurer is the chief scal ofcer for the District whose duties include receiving, depositing, and disbursing funds; maintaining nancial records; preparing monthly nancial reports; and ling an annual report of the Districts revenues and expenditures with the Ofce of the State Comptroller. Scope and Objective The objective of our audit was to evaluate internal controls over the Districts nancial operations for the period January 1, 2005, to December 31, 2010. Our audit addressed the following related questions: Were internal controls over nancial transactions appropriately designed and operating effectively? Did the Board provide adequate oversight of the Treasurers nancial activities?

Audit Results The Treasurer misappropriated as much as $500,000 of District funds. This misappropriation of taxpayer funds was able to occur because of an egregious lack of oversight by the Board. Internal controls over the scal activities were virtually non-existent. The Treasurer was able to make purchases, pay bills, write checks, and process payroll with no oversight. This created an environment where the Treasurer was able to initiate transactions outside of the normal District business cycle without detection. As a result, the Treasurer made non-District related purchases on the Districts store (credit) accounts and paid for them with District funds, issued checks to herself and her husband that they were not entitled to, and paid herself excessive amounts through payroll that the Board had not approved. DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY

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The Board was negligent in the oversight of District nancial operations. Although the Treasurer performed virtually every aspect of the Districts nancial business, the Board did not implement compensating controls. The Board did not oversee purchasing, audit claims, or obtain the required independent audit of the Treasurers nancial records for 2008 and 2009. The Board virtually abdicated its oversight responsibilities, resulting in an extremely weak control environment that left the District at signicantly high risk of misconduct, abuse, and fraudulent acts. Comments of District Ofcials The results of our audit and recommendations have been discussed with District ofcials and their comments, which appear in Appendix A, have been considered in preparing this report. District ofcials generally agreed with our recommendations and indicated they planned to take corrective action.

OFFICE OF THE NEW YORK STATE COMPTROLLER

Introduction
Background The Charlton Fire District (District) is located in Saratoga County and provides re protection and other emergency services to residents in portions of the Town of Charlton. The District, founded in 1922, is an autonomous public corporation that operates as a local government unit distinct from the Town. The District currently has approximately 40 active volunteer members who respond to an average of 150 emergency calls per year. The District is governed by a Board of Fire Commissioners (Board) that comprises ve elected members who have the authority to levy taxes. The Board is responsible for overseeing the Districts general and nancial affairs. These responsibilities include establishing appropriate internal controls over nancial operations and monitoring the Districts activities to ensure assets are properly safeguarded. Appropriations in the 2011 adopted budget totaled $308,723 to be nanced primarily by property taxes. The Board appointed one person to serve as Secretary and Treasurer, and she reported directly to the Board. The Treasurer is the chief scal ofcer for the District whose duties include receiving, depositing, and disbursing funds; maintaining nancial records; preparing monthly nancial reports; and ling an annual report of the Districts revenues and expenditures with the Ofce of the State Comptroller (OSC). Beginning with the 2008 scal year, statute requires that re districts with annual revenues of at least $200,000 obtain an independent audit of their nances. The Treasurer is responsible for the accurate and complete accounting of all moneys received and disbursed on behalf of the District. All disbursements of District money should be supported by suitably documented claims1 and listed on a warrant2 prepared by the Treasurer. The Treasurer should also provide monthly nancial reports to the Board. In January 2005, the Board appointed its Secretary to also serve as the Treasurer; she served in both roles until the Board relieved her of those duties in January 2011.

Claims are bills or invoices submitted by vendors requesting payment for services rendered or materials furnished to the District. 2 A warrant is a report that lists all claims that have been audited by the Board. The warrant usually includes the claim number, vendor, and claim amount.

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Objective

The objective of our audit was to evaluate internal controls over the Districts nancial operations. Our audit addressed the following related questions: Were internal controls over nancial transactions appropriately designed and operating effectively? Did the Board provide adequate oversight of the Treasurers nancial activities?

Scope and Methodology

We examined internal controls over the Districts nancial operations for the period January 1, 2005, to December 31, 2010. We conducted our audit in accordance with generally accepted government auditing standards (GAGAS). More information on such standards and the methodology used in performing this audit is included in Appendix B of this report.

Comments of District Ofcials and Corrective Action

The results of our audit and recommendations have been discussed with District ofcials and their comments, which appear in Appendix A, have been considered in preparing this report. District ofcials generally agreed with our recommendations and indicated they planned to take corrective action. The Board has the responsibility to initiate corrective action. Pursuant to Section 181-b of the Town Law, a written corrective action plan (CAP) that addresses the ndings and recommendations in this report must be prepared and forwarded to our ofce within 90 days. To the extent practicable, implementation of the CAP must begin by the end of the next scal year. For more information on preparing and ling your CAP, please refer to our brochure, Responding to an OSC Audit Report, which you received with the draft audit report. The Board should make the CAP available for public review in the District Secretarys ofce.

OFFICE OF THE NEW YORK STATE COMPTROLLER

Treasurers Activities
It is essential that re districts establish adequate internal controls over accounting activities to ensure that all transactions are accurately accounted for and are for appropriate district business. Key accounting functions must be adequately segregated to the extent possible given the size and complexity of the districts operations. When it is not feasible to adequately segregate accounting functions, mitigating controls, such as increased board oversight, should be implemented. Furthermore, District ofcers and employees are charged with carrying out functions of their positions in a forthright and honest manner. The responsibilities of the Secretary-Treasurer (Treasurer) include preparing meeting minutes and correspondence, receiving and opening mail, maintaining various District records, preparing and recording nancial transactions, initiating purchases and making payments to vendors, reconciling bank statements, processing payroll, and maintaining all nancial records and information. From January 1, 2005, to December 31, 2010, the Treasurer processed 2,430 checks and initiated 10 electronic transfers totaling $1,636,405. As of July 1, 2009, a separate checking account was opened to process payroll. There was a complete lack of internal controls over the scal activities. The Treasurer was able to make purchases, pay bills, write checks, and process payroll with no Board oversight.3 This created an environment where the Treasurer was able to initiate transactions outside of the normal District business cycle without detection. As a result, the Treasurer made non-District related purchases on the Districts store (credit) accounts and paid for them with District funds, issued checks to herself and her husband that they were not entitled to, and paid herself excessive amounts through payroll that the Board had not approved her to receive. These overpayments and improper purchases totaled as much as $500,000. Purchases The objective of a procurement process is to obtain services or materials, supplies, and equipment of the desired quality, in the quantity needed, and at the lowest price, in compliance with applicable Board and legal requirements. This helps ensure that taxpayer dollars are expended in the most effective manner.

The lack of Board oversight is discussed in the next section titled Board Oversight.

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The Treasurer was the primary individual responsible for making purchases for the District. She made numerous purchasing decisions, placed orders with vendors, received the goods, and processed the payments for the purchases. She generally performed these duties with little or no supervision and the Board was not always aware of purchases that were being made and did not audit and approve the vendors claims against the District.4 During our audit period, she made nearly $115,000 in purchases from three vendors using the Districts credit accounts. Some of these purchases were for ofce supplies and were appropriate for the Districts needs. However, many of the purchases were excessive and unnecessary for the District. Furthermore, many of the items that were purchased were unaccounted for. According to the available documentation, District funds were used to pay for $98,181 of the $115,000 in purchases. Additional payments were credited against the Districts accounts that were not made by the District. The documentation was insufcient for determining what specic items the District paid for and the sources of the other payments. Table 1 provides a summary of the total purchases and how much of the purchases were paid for using District funds during the audit period. Table 1: Purchases Purchased Paid With on District District Funds Account
$88,444 $14,431 $11,924 $114,799 $76,824 $11,112 $10,245 $98,181

Vendor
Staples Ofce Max Lowes Total

Paid With Unknown Funds

$11,620 $3,319 $1,679 $16,618

Due to a lack of sufcient documentation, we were unable to ascertain the purpose of all the purchases. However, we were able to determine the following: She purchased 18 printers that totaled $5,899. The District has possession of four of the printers; however, the remaining 14 printers, valued at $4,300, are unaccounted for. She purchased eight laptop computers totaling $5,614. The District has possession of four laptops, but only one of those matched the available purchasing documentation. The remaining seven laptops, valued at approximately $4,615, are unaccounted for.

Board oversight will be discussed further in the section titled Board Oversight.

OFFICE OF THE NEW YORK STATE COMPTROLLER

She purchased seven desktop computers totaling $6,096. The purchasing documentation indicated that two of the desktops were returned after being purchased. We identied one computer at the District. The remaining four computers, valued at about $3,610, remain unaccounted for.

She also spent at least $20,000 on ofce supplies that included more than $3,000 worth of pens and pencils. Additionally, she spent nearly $12,000 on printer ink. Considering that the District employs only one person and the small size of their nancial operations, these amounts are excessive for the Districts needs. Numerous other items purchased were also unaccounted for, and the District received no benet from them. For example, she purchased major appliances including a washer and dryer along with a fouryear extended warranty, refrigerator, and freezer that were not located in District buildings. Furthermore, we contacted the warranty department of the vendor from which the washer and dryer were purchased and were informed that the appliances were covered by a four-year warranty registered under the name of the Treasurer with her home address and phone number listed on the warranty registration. She also purchased digital cameras, photo scanners, global positioning systems, portable media players, an electronic book reader, a portable DVD player, clock radio, portable data assistant, coffee maker, wishing well lawn ornament, 12-bottle wine cooler, backpack, and bird seed. Furthermore, she purchased furniture that included leather chairs, a computer desk, and several le cabinets. The furniture and other numerous purchases totaled approximately $9,300, and these items were not at the District during our eldwork. Undocumented/ Unsupported Payments It is essential to ensure that expenses paid represent actual and necessary charges and that supporting documentation is maintained for all disbursements. Supporting documentation could include invoices or other records providing the date and purpose for each disbursement. The Board is responsible for auditing and approving each claim before payment. The Treasurer made numerous payments to herself, most of which were poorly documented, or were not supported by sufcient documentation of their appropriateness. There was no evidence that the Board approved these payments, or that any of the Commissioners were aware of them. In total, the Treasurer prepared 374 checks that included amounts totaling $50,219 made payable to herself that were not supported by proper documentation. In addition, she prepared 136 checks totaling $40,195 made payable to her DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 9 9

husband, $18,672 of which appear inappropriate because they did not contain adequate supporting documentation. Payments to Herself We found that the Treasurer prepared 374 checks totaling $175,543 made payable to herself from 2005 to 2010. However, $50,219 of the $175,543 did not include any supporting documentation.5 There was no evidence that she submitted any of these payments to the Board for its review and approval, and the Commissioners were unaware of them. We could not nd any documentation that supported the payments or any evidence that otherwise substantiated their legitimacy and appropriateness. Table 2 details the payments that the Treasurer made to herself during each year of our audit period. Table 2: Payments to Self Checks Total Total Number Not Totally Amount of of Checks Supported With Payments Documentation
27 58 88 120 27 $16,833 $35,975 $44,166 $57,313 $8,178 10 27 34 42 21

Year
2005 2006 2007 2008 2009

Amounts Not Supported With Documentation

$1,037 $12,497 $15,731 $6,701 $7,321

2010
Total

54
374

$13,078
$175,543

34
168

$6,932
$50,219

Payments to Husband The Treasurer prepared 136 checks totaling $40,195 to her husband. We determined that some of the payments were appropriate because the Board had contracted with him to clean the re station and perform repairs and routine maintenance on the heating system. He was also the Fire Chief, and other payments included reimbursements for travel to training events. However, we were unable to determine if 50 checks including amounts totaling $18,672 made payable to the Treasurers husband between April 2007 and June 2009 were for legitimate District purposes. There was insufcient documentation supporting these payments. There was no evidence of Board approval for any of the payments made payable to him. Payroll Employees are to receive only the wages, salaries, and fringe benets to which they are entitled. In addition, written job descriptions should be developed to assist employees in understanding the duties to be performed.
5

The 374 checks totaling $175,543 also included legitimate Board-authorized payments and unauthorized or unsupported payments that are discussed later in this report (i.e., payments for salary and other additional work).

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During the audit period, the Treasurer received a Board-approved salary for her work as the Districts Secretary-Treasurer. In addition, she was authorized by the Board to receive hourly wages for additional work relating to the construction of a new rehouse.6 From January 1, 2005, to June 30, 2009, the Treasurer paid herself as an independent contractor of the District. In July 2009, the Treasurer opened a separate checking account to process payroll (payroll account) and began paying herself as an employee.7 In 2005, the Treasurer was authorized by the Board to receive a salary totaling $600 per month, for a total annual salary of $7,200. Subsequent to 2005, the Treasurer received a salary increase of four percent in 2006 and three percent for each ensuing year. However, she was actually paying herself much more than the Board-approved salary. In addition to her salary, in July 2005, the Board authorized the Treasurer to receive payments based on an hourly rate8 for the added work load of the new rehouse.9 This was an unusual arrangement for someone who was already receiving an approved salary as Treasurer, a position that normally handles all nancial recordkeeping and reporting duties for the annually approved salary; however, the meeting minutes indicated that these payments were for additional work hours related to a new rehouse, not her regular duties. The Board did not prepare a written job description distinguishing the regular duties from the additional duties. According to the former District Board Chairman, the additional duties generally included time she spent with outside consultants who were assisting the District with developing plans for a new rehouse. The minutes also indicated that the Treasurer was required to maintain a record of the additional work. However, we saw no indication that the Treasurer ever maintained a record of her time worked. There was no evidence that the Board reviewed and approved any of the additional payments, and the Commissioners were unaware of how much she was paying herself. From 2005 to 2010, the Treasurers Board-approved salary totaled $46,955; however, the Treasurer paid herself $91,026 in salary during that time period, or $44,071 more than she was entitled to. Furthermore, the Treasurer paid herself $272,599 for additional hours worked without adequate documentation supporting that she
6

A Board resolution dated July 6, 2005, approved the additional hours for the new rehouse that were not considered regular duties. 7 During our audit, the Treasurer was the only employee paid through payroll at the District. 8 During the scope of our audit, the hourly rate ranged from $10 per hour in 2005 to $15 per hour in 2010. 9 A Board resolution dated July 6, 2005, approved the additional hours.

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was entitled to this pay. In addition to not being adequately supported, these amounts are excessive when considering the amount of time it would have taken to complete her additional duties. For example, in 2010 the Treasurer paid herself $123,625 for additional hours worked. Based on the Board-approved hourly rate of $15 per hour for that year, the Treasurer would have worked an additional 8,242 hours to earn this amount. Because there are only 8,76010 total hours in one year, it is not possible that the Treasurer was really entitled to that amount of additional pay. Table 3 details the payments the Treasurer made to herself for salary and additional hours during our scope period: Table 3: Salary and Hourly Payments BoardAuthorized Salary
Received 2005 2006 2007 2008 2009 2010 Total $7,200 $7,488 $7,713 $7,944 $8,182 $8,428 $46,955 Unauthorized Salary Received $0 $0 $0 $0 $9,509 $34,562 $44,071 Unsupported Hourly Pay Received $7,560 $15,080 $20,142 $40,331 $65,861 $123,625 $272,599 Total Unauthorized Salary and Unsupported Hourly Pay $7,560 $15,080 $20,142 $40,331 $75,370 $158,187 $316,670 Total Amounts Received $14,760 $22,568 $27,855 $48,275 $83,552 $166,615 $363,625

Year

Table 3 shows a clear upward trend in these additional payments. Comparing these payments to the total re district tax levy provides another perspective that illustrates their magnitude. For example, the $166,615 that the Treasurer received in 2010 was about 55 percent of the $303,393 tax levy for that year; $158,187, the amount the Treasurer paid herself in excess of her $8,428 Board-authorized salary, was more than 50 percent of the tax levy. When we rst initiated contact with the District, the Treasurer did not produce any supporting documentation or invoices related to the additional payments she made to herself.11 When we later commenced our audit, we found that the Treasurer had made an attempt to document support for some of the payments for additional hours worked by creating 141 invoices that totaled $87,352.12 Out of the 141 invoices, 72 totaling $45,293 did not list any hours worked or otherwise explain how the invoiced amounts were calculated. The remaining 69 invoices totaling $42,059 reported certain amounts of
10 11

This calculation is based on 24 hours per day multiplied by 365 days per year. Our initial contact was in 2010. 12 There is no indication that these invoices were ever submitted to the Board for approval.

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hours but included such vague descriptions of the work performed that we were unable to determine if any of the claims were reasonable and appropriate. The remaining payments for additional hours worked totaling $185,247 contained no invoices or supporting documentation. There was no evidence that she submitted any invoices to the Board. The invoices were poorly prepared, providing only vague descriptions of activities without specifying when she performed them. The limited descriptions generally did not explain how she calculated the amounts that she claimed and how the work related to a new rehouse. For example, one invoice indicates that she paid herself $625 for what she documented as two days repairing computer and network, June 5 and 6. At that time, the Board had authorized an hourly rate of $15 for her additional work, meaning that she would have had to spend about 42 hours over two consecutive days working on something seemingly unrelated to a new rehouse. In many instances, the invoices reported activities that were clearly outside her duties. She claimed $3,582 on four separate invoices for re reporting. The current Chairman told us that preparing re reports is never considered one of the Secretary-Treasurers duties.13 Other examples of the poorly documented invoices include the following: An invoice for $2,230 included only the limited description 223 hours. There was no description of activities performed or when they were performed. An invoice for $1,362 included the description 2007 hours. There were no further details. An invoice for $1,250 described 125 hours as partial old hours. The meaning of this is unclear. An invoice for $1,030 noted that she worked 103 hours at $10 per hour for personal services. There is no indication of what work she did, when she did it, or why she considered it work outside her regular duties. An invoice for $800 had the description 80 hours at $10 per hour. There was no additional information given. An invoice for $525 included the vague description chiefs ofce/department. No hours were listed and the meaning of the description is unclear.

13

This is considered a duty of the Fire Chief.

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In addition to the excess pay that the Treasurer received, she also used District funds to pay a portion of her income and other tax obligations. Prior to July 2009, the Treasurer had paid herself as an independent contractor. As such, no income or other payroll related taxes were withheld from these payments. At a later date, the Treasurer computed what her tax liability for income, Social Security and Medicare would be had she paid herself as an employee; she determined her tax liability would have been $15,671. Also, she determined the Districts employer-related tax liability would have been $3,216 for Social Security and Medicare. The Treasurers computed tax liability and the Districts computed obligation for Social Security and Medicare totaled $18,887. The Treasurer paid all of these tax liabilities, including her own, using District funds. Therefore, she used $15,671 of District funds to pay her personal tax obligations. Recommendations 1. The District should develop internal controls to ensure that all cash transactions that are initiated and processed are approved by the Board and are for appropriate District purposes. 2. The District should seek to take possession of all purchases that were made with District funds that are currently unaccounted for or seek reimbursement for these items. 3. The District should seek reimbursement for the $68,891 in payments the Treasurer made to herself and her husband. 4. The District should seek reimbursement for the excess $44,071 in salary that the Treasurer paid herself. 5. The District should investigate and determine if any of the $272,599 in payments for additional hours worked were legitimate and seek reimbursement for all illegitimate payments. 6. The District should seek reimbursement for the $15,671 in payroll taxes that were paid for the Treasurer with District funds.

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Board Oversight
The Board has the duty to manage and oversee the Districts nancial operations and safeguard its resources. These duties include establishing a system of internal controls to provide reasonable assurance that cash and other resources are properly safeguarded; transactions are authorized and properly recorded; and nancial reports are accurate, reliable, and led in a timely manner. The Board must ensure either that no individual controls all aspects of nancial transactions, or that compensating controls are implemented to mitigate risks. Additionally, the Board is responsible for overseeing the Districts purchasing and claims auditing functions to ensure that all claims are proper and include supporting documentation. The Board was negligent in the oversight of District nancial operations. Although the Treasurer performed virtually every aspect of the Districts nancial business, the Board did not implement compensating controls. The Board did not oversee purchasing, audit claims, or obtain the required independent audit of the Treasurers nancial records for 2008 and 2009. The Board virtually abdicated its oversight responsibilities, resulting in an extremely weak control environment that left the District at signicantly high risk of misconduct, abuse, and fraudulent acts. Segregation of Duties Good management practices require that no individual control all aspects of a nancial transaction. To safeguard cash, the same individual should not receive and deposit cash, transfer money between bank accounts, prepare and sign checks, and record transactions in the accounting records. If it is not practicable to adequately segregate nancial duties, the Board should implement compensating controls. Examples of compensating controls include reviews of bank statements, cancelled checks, and bank reconciliations on a monthly basis to ensure that cash receipts are properly accounted for and disbursements agree with Board authorizations. The Board should receive the monthly bank statements and routinely compare check numbers and amounts paid with the claims previously approved by them for payment. Accounting records should be periodically reviewed to ensure they are timely, accurate, and complete. The Board did not implement compensating controls to mitigate risks associated with the Treasurer performing all aspects of the Districts nancial activity. In January 2005, the Board passed a resolution giving the Treasurer full authority over the Districts bank accounts. The Treasurer performed every aspect of nancial transactions DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 15 15

including opening new accounts, receiving and depositing cash, transferring money between accounts, preparing and signing checks, and recording cash transactions. She also received the mail and reconciled the bank statements. The Board did not audit and approve the claims against the District. Although the available documentation indicated that the Board formally approved a small number of claims in 2005 and 2006, one commissioner told us that the Board had grown complacent and lax in its duties to properly oversee the Treasurers activities. We found no documented evidence that the Board was aware of, audited, or approved the hundreds of checks that she prepared for herself throughout the audit scope period. Had the Board performed even a cursory review of her records they would have been alerted to these questionable transactions. Purchasing and Claims Auditing The statutory requirement that the Board review and approve all claims prior to payment by the Treasurer is a critical control in the oversight of District nances. Furthermore, the Board should receive the monthly bank statements and routinely compare check numbers and amounts paid with the claims previously approved by them for payment. In 2005 it appeared that for a short time the Board followed informal procedures for purchasing and claims auditing. One of the commissioners served as purchasing agent, and the District used a written purchase order process. These procedures, however, were not committed to writing and adopted as ofcial policy. During the Treasurers six-year tenure, the Board took actions that weakened the existing controls and no longer followed the purchasing and claims auditing procedures. The Chairman stated that the Board transferred the duties of purchasing agent to the Treasurer in early 2005. In 2007, the Board passed a resolution authorizing the Treasurer to pay any reoccurring bills that are due prior to the regular meeting. The vague wording of this resolution formally empowered the Treasurer to continue functioning under what were already extremely weak internal controls. We found no evidence that the Board audited and approved claims after she was appointed Treasurer. According to the Commissioners, the Treasurer made oral reports to the Board and submitted lists of payments made to vendors. They also said, however, that the lists did not include the checks that the Treasurer made out to herself. Treasurers Compensation The Board is responsible for authorizing compensation for District employees. The Boards authorization of pay rates should be documented in the minutes. The Board is

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responsible to provide written job descriptions, which helps to identify duties expected to be performed. The Board established the salary for the Treasurer in each of the six years she worked for the District. Her original salary for 2005 was $7,200. The Board approved annual increases to her salary which, by 2010, was $8,428. Beginning in 2005, the Board approved, in addition to her salary, payments based on an hourly rate for work in addition to regular duties. This was an unusual arrangement for someone who was already receiving an approved salary. The Board had no written job description of the Treasurers duties, and there was no written explanation describing the additional duties. The Board also did not establish any control procedures for these additional payments that might have included requiring the Treasurer to prepare and submit time sheets with a detailed description of the activities and how they fell outside her regular duties. She was only required to maintain a record of time worked. The Board did not review and approve any of the additional payments, and the Commissioners were unaware that she was not keeping a record of time worked and of how much she was paying herself. Annual Audit The annual audit is a means by which the Board is held accountable to the public for the moneys under its control. Beginning with the 2008 scal year, the Law requires that the Board obtain an annual audit of the Districts records by an independent public accountant.14 The audit must include as a minimum the Districts nancial condition and resources. Districts must use a competitive process when contracting for these audits. The Board is further required to provide copies of these audits to the Ofce of the State Comptroller (OSC) and the Town board. Although the Board members were aware of these requirements, they did not comply with them. The former Chairman told us that he considered an audit too expensive, though he did not provide written evidence that the Board had received quotes for audit services. In failing to fulll the statutory requirements for independent audits, the Board further weakened the control environment. The Board also wasted substantial amounts of taxpayer money, because an audit would have cost far less than the theft of District funds that an audit would have detected. Due to the lack of Board oversight and poor controls, an environment existed where the Treasurer was able to engage in self-dealing
Legislation requires that re districts with annual revenues of $200,000 or more obtain an annual audit by an independent certied public accountant or an independent public accountant.
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transactions without the Boards knowledge and scrutiny, as evidenced in our prior comment. Recommendations 7. The Board should take immediate action to strengthen the Districts control environment and develop, adopt, and implement written policies and procedures to control and monitor District operations. 8. The Board should establish compensating controls to routinely monitor and review the work of the Treasurer as a means to mitigate the risks associated with the lack of segregation of duties. 9. The Board should review the Districts bank statements and reconciliations, claims, cancelled checks, deposit slips, nancial records, and reports. 10. The Board should audit and approve all claims prior to payment to ensure that they contain adequate supporting documentation. 11. The Board should create abstracts and review disbursement documentation to ensure that the Boards audit of claims is properly documented and that the Treasurer has submitted all claims to the Board for audit, as required. 12. The Board should provide a written job description for the Treasurer, and a written explanation describing the additional duties. 13. The Board should ensure that an annual audit is completed and submitted to OSC and the Town Board as required by Law.

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APPENDIX A RESPONSE FROM DISTRICT OFFICIALS

The District ofcials response to this audit can be found on the following pages.

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APPENDIX B AUDIT METHODOLOGY AND STANDARDS

The District was selected for audit based on an initial risk assessment that found weak internal controls over cash transactions, inadequate or missing documentation, and poor Board oversight. The District did not obtain annual independent audits and submit them to OSC as required. During this audit, we examined the records and reports of the Treasurer of the Charlton Fire District for the period January 1, 2005, through December 31, 2010. To accomplish the objective of this audit and to obtain valid audit evidence, our procedures included the following: We interviewed District ofcials and reviewed Board minutes to gather information about the Districts policies and procedures related to claims processing, cash disbursements and payroll. We also gathered information about procedures used to prepare and approve claims and process payroll. We reviewed the Treasurers accounting records and reports to determine if the records were complete, accurate and up-to-date. We also determined if proper bank reconciliations were performed, and if sufcient nancial reports were prepared and led as required. We traced all cash receipts during our audit period from source documentation to bank statements to determine if all receipts were deposited into District bank accounts. We also traced all bank account transfers listed on bank statements to supporting documentation to verify their propriety. We traced all payroll disbursements (144 checks totaling $207,548) from the Districts payroll account to the Treasurers payroll records. We traced all cancelled check images from the Districts operating account (2,296 checks totaling $1,428,856) that were cleared by the bank during our audit period from the Districts bank statements to the invoices/claims to determine if there was an indication that all claims were presented to and audited by the Board. We traced payments made by the District during our audit period for goods purchased totaling $98,181 to three vendors statements. We documented the purchases made by the District from three vendors, totaling more than 3,600 transactions. We inquired to determine if the Board reviewed, or contracted with an independent auditor to audit, the Treasurers nancial records and reports.

We conducted this performance audit in accordance with generally accepted government auditing standards (GAGAS). Those standards require that we plan and perform the audit to obtain sufcient,

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appropriate evidence to provide a reasonable basis for our ndings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our ndings and conclusions based on our audit objective.

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OFFICE OF THE NEW YORK STATE COMPTROLLER

APPENDIX C HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT

To obtain copies of this report, write or visit our web page:

Ofce of the State Comptroller Public Information Ofce 110 State Street, 15th Floor Albany, New York 12236 (518) 474-4015 http://www.osc.state.ny.us/localgov/

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APPENDIX D OFFICE OF THE STATE COMPTROLLER DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY
Steven J. Hancox, Deputy Comptroller Nathaalie N. Carey, Assistant Comptroller

LOCAL REGIONAL OFFICE LISTING

BINGHAMTON REGIONAL OFFICE H. Todd Eames, Chief Examiner Ofce of the State Comptroller State Ofce Building - Suite 1702 44 Hawley Street Binghamton, New York 13901-4417 (607) 721-8306 Fax (607) 721-8313 Email: Muni-Binghamton@osc.state.ny.us Serving: Broome, Chenango, Cortland, Delaware, Otsego, Schoharie, Sullivan, Tioga, Tompkins Counties NEWBURGH REGIONAL OFFICE Christopher Ellis, Chief Examiner Ofce of the State Comptroller 33 Airport Center Drive, Suite 103 New Windsor, New York 12553-4725 (845) 567-0858 Fax (845) 567-0080 Email: Muni-Newburgh@osc.state.ny.us Serving: Columbia, Dutchess, Greene, Orange, Putnam, Rockland, Ulster, Westchester Counties

BUFFALO REGIONAL OFFICE Robert Meller, Chief Examiner Ofce of the State Comptroller 295 Main Street, Suite 1032 Buffalo, New York 14203-2510 (716) 847-3647 Fax (716) 847-3643 Email: Muni-Buffalo@osc.state.ny.us Serving: Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Niagara, Orleans, Wyoming Counties

ROCHESTER REGIONAL OFFICE Edward V. Grant, Jr., Chief Examiner Ofce of the State Comptroller The Powers Building 16 West Main Street Suite 522 Rochester, New York 14614-1608 (585) 454-2460 Fax (585) 454-3545 Email: Muni-Rochester@osc.state.ny.us Serving: Cayuga, Chemung, Livingston, Monroe, Ontario, Schuyler, Seneca, Steuben, Wayne, Yates Counties

GLENS FALLS REGIONAL OFFICE Jeffrey P. Leonard, Chief Examiner Ofce of the State Comptroller One Broad Street Plaza Glens Falls, New York 12801-4396 (518) 793-0057 Fax (518) 793-5797 Email: Muni-GlensFalls@osc.state.ny.us Serving: Albany, Clinton, Essex, Franklin, Fulton, Hamilton, Montgomery, Rensselaer, Saratoga, Schenectady, Warren, Washington Counties

SYRACUSE REGIONAL OFFICE Rebecca Wilcox, Chief Examiner Ofce of the State Comptroller State Ofce Building, Room 409 333 E. Washington Street Syracuse, New York 13202-1428 (315) 428-4192 Fax (315) 426-2119 Email: Muni-Syracuse@osc.state.ny.us Serving: Herkimer, Jefferson, Lewis, Madison, Oneida, Onondaga, Oswego, St. Lawrence Counties

HAUPPAUGE REGIONAL OFFICE Ira McCracken, Chief Examiner Ofce of the State Comptroller NYS Ofce Building, Room 3A10 Veterans Memorial Highway Hauppauge, New York 11788-5533 (631) 952-6534 Fax (631) 952-6530 Email: Muni-Hauppauge@osc.state.ny.us Serving: Nassau and Suffolk Counties

STATEWIDE AND REGIONAL PROJECTS Ann C. Singer, Chief Examiner State Ofce Building - Suite 1702 44 Hawley Street Binghamton, New York 13901-4417 (607) 721-8306 Fax (607) 721-8313

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