DUCHESNE COUNTY WATER CONSERVANCY DISTRICT

Findings and Recommendations For the Period July 2007 through August 2010

Report No. 10-SSD-L

Financially Strong

Keeping Utah

AUSTON G. JOHNSON, CPA UTAH STATE AUDITOR

STATE OF UTAH

DEPUTY STATE AUDITOR:

Joe Christensen, CPA

AUDIT DIRECTORS:

Office of the State Auditor

UTAH STATE CAPITOL COMPLEX EAST OFFICE BUILDING, SUITE E310 P.O. BOX 142310 SALT LAKE CITY, UTAH 84114-2310 (801) 538-1025 FAX (801) 538-1383

Auston G. Johnson, CPA

UTAH STATE AUDITOR

Van H. Christensen, CPA Deborah A. Empey, CPA Stan Godfrey, CPA Jon T. Johnson, CPA

REPORT NO. 10-SSD-L May 25, 2011

Duchesne County Water Conservancy District c/o Moreen Henderson, Board Chairman 275 West 800 South Roosevelt, Utah 84066 Dear Chairman Henderson: We have performed the procedures described below to certain aspects of the internal control at the Duchesne County Water Conservancy District (the District) for the period July 2007 through August 2010. The purpose of these procedures was to investigate several allegations of poor internal controls at the District that allegedly resulted in nepotism/favoritism and inappropriate or excessive reimbursements to a District employee. We performed the following procedures at the District. 1. We reviewed cash disbursing duties for adequacy of separation of duties for internal control purposes. 2. We tested a sample of cash disbursements for propriety, reasonableness, and compliance with certain internal and State purchasing policies. 3. We reviewed the Districts compliance with certain laws and policies and procedures regarding personnel and payroll issues, such as nepotism. Our procedures were more limited than would be necessary to express an audit opinion on compliance or on the effectiveness of the Districts internal control or any part thereof. Accordingly, we do not express such opinions. Alternatively, we have identified the procedures we performed and the findings resulting from those procedures. Had we performed additional procedures or had we made an audit of the effectiveness of the Districts internal control, other matters might have come to our attention that would have been reported to you. Our findings resulting from the above procedures are included in the attached findings and recommendations section of this report. We feel that Finding No. 1 is a material weakness to the District and Finding Nos. 2 through 5 are significant deficiencies. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that inappropriate transactions that could be material to the financial activity of the

District will not be prevented or detected and corrected on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. This report is intended solely for the information and use of the District and is not intended to be and should not be used by anyone other than this specified party. However, the report is a matter of public record and its distribution is not limited. By its nature, this report focuses on exceptions, weaknesses, and problems. This focus should not be understood to mean there are not also various strengths and accomplishments. We appreciate the courtesy and assistance extended to us by the personnel of the District during the course of the engagement, and we look forward to a continuing professional relationship. If you have any questions, please call Debbie Empey, Audit Director, at 801-538-1342. Sincerely,

Auston G. Johnson, CPA Utah State Auditor cc: Reed R. Murray, Program Director, CUP Completion Act Office, DOI

DUCHESNE COUNTY WATER CONSERVANCY DISTRICT

FOR THE PERIOD JULY 2007 THROUGH AUGUST 2010 TABLE OF CONTENTS Page

FINDINGS AND RECOMMENDATIONS:

1. SEPARATION OF DUTIES WEAKNESSES (Material Weakness) 2. POTENTIAL VIOLATIONS OF THE PUBLIC EMPLOYEES ETHICS ACT (Significant Deficiency) 3. INADEQUATE PURCHASING POLICIES AND PROCEDURES (Significant Deficiency) 4. OVERPAYMENTS TO THE DISTRICT MANAGER (Significant Deficiency) 5. PROBLEMS PERTAINING TO HIRING RELATIVES OF A DISTRICT EMPLOYEE
(Significant Deficiency)

1 1 2 4 5

DUSCHESNE COUNTY WATER CONSERVANCY DISTRICTS RESPONSE TO AUDIT FINDINGS

Attachment 1

DUCHESNE COUNTY WATER CONSERVANCY DISTRICT

FINDINGS AND RECOMMENDATIONS FOR THE PERIOD JULY 2007 THROUGH AUGUST 2010 1. SEPARATION OF DUTIES WEAKNESSES (Material Weakness) The District Secretary has access to checks, both before and after they are signed by the Duchesne County Water Conservancy District Board (Board), maintains the Districts accounting records, and prepares the bank reconciliation. Inadequate separation of duties exists when the same individual has access to assets, access to the accounting records, and/or reconciliation responsibilities. Inadequate separation of duties could allow errors and fraud to occur without detection. The District should separate the duties of handling the checks from the recording and reconciling duties. In situations where it is impractical to separate duties due to the small number of employees, additional controls should be implemented. In this case, a detailed review of the bank reconciliation, including a review of the check images processed by the bank, by an individual who does not handle the checks would help compensate for the separation of duties weakness.
Recommendation: We recommend that the District separate the duties. If separation is not possible due to the limited number of employees, we recommend that the compensating control mentioned above be implemented.

2.

POTENTIAL VIOLATIONS OF THE PUBLIC EMPLOYEES ETHICS ACT (Significant Deficiency) The District allowed the Manager to provide services to the District outside of his normal duties, thereby creating potential violations of Utah Code 67-16, the Utah Public Officers and Employees Ethics Act, as follows: a. The District Manager acted as a private contractor for the District by providing construction services for which he was paid personally. The District paid the District Manager $21,168 for the construction of flight decks and tool houses needed for the High Mountain Lakes project (Project) over a three-year period from July 2007 through August 2010. It is a potential conflict of interest for an employee to also act as a contractor, especially since the District did not attempt to obtain competing bids for construction of these items (see Finding No. 3). The District should have attempted to obtain bids from independent contractors or should have built the items in-house. Also, there is a risk that this arrangement could violate or give the appearance of violation of Utah Code 67-16-4(1)(c) which prohibits an employee from using his position to further substantially the employees personal economic interest or secure special privileges for himself or others. b. The District Manager provided personal tools, equipment, and other property to the District for the Project, as well as other projects, and was reimbursed for the Districts use of the items. For the three-year period, the District reimbursed the District Manager 1

DUCHESNE COUNTY WATER CONSERVANCY DISTRICT

FINDINGS AND RECOMMENDATIONS FOR THE PERIOD JULY 2007 THROUGH AUGUST 2010 $18,810 for these items. The rates of reimbursement were set by the District Manager and were not always consistent from billing to billing. The Board had not discussed nor formally approved the rental rates charged for these items, nor had the Board ensured that the rates were reasonable by obtaining bids or by other means (see Finding No. 3). Reimbursement rates for business use of personal items should be based on rates that have been approved by the governing body. c. The District Manager provided all of the food for the temporary workers while on site during the Project and then personally received payment from the workers. Since the Manager represents the District, it is inappropriate and creates a potential conflict of interest for him to also provide food service as a private individual to the employees. Utah Code 67-16-8 states no public officer or public employee shall participate in his official capacity or receive compensation in respect to any transaction between the state or any of its agencies and any business entity as to which such public officer or public employee is also an officer, director, or employee or owns a substantial interest, unless disclosure has been made as provided under Section 67-16-7. Since we found no mention of this arrangement in the District minutes until after the project was completed, it does not appear that proper disclosure was made to the Board. Further, the District represented that the employment agreement with the temporary workers required each worker to provide their own food during the project. However, we found that no written employment agreement exists and it could be unreasonable and inefficient for the District to require each employee to provide their own food for extended periods of time in a wilderness setting. When the Board allows violations or even the appearance of a violation of the Public Employees Ethics Act, it weakens the public faith and confidence in the integrity of government. It also creates an environment where waste and abuse of public funds could occur. Recommendation: We recommend that the Board strengthen their policies and practices to ensure compliance with State law.

3.

INADEQUATE PURCHASING POLICIES AND PROCEDURES (Significant Deficiency) We reviewed the Districts purchasing policies and found the following inadequacies: a. Current Policy Does Not Require Bids for Purchases Under $15,000 The Districts bid level is deemed to be too high to effectively safeguard public funds. According to the Districts procurement policies and procedures, bids are required for purchases of $15,000 or more and there is no requirement for phone bids, quotes, etc. for purchases 2

DUCHESNE COUNTY WATER CONSERVANCY DISTRICT

FINDINGS AND RECOMMENDATIONS FOR THE PERIOD JULY 2007 THROUGH AUGUST 2010 less than $15,000. As a comparison, the States purchasing policy requires at least two phone quotes for purchases between $1,000 $5,000 and additional requirements such as bids for purchases over $5,000. The District should develop and implement a purchasing policy that requires the District to obtain competitive quotes or bids at reasonable dollar levels for the size of their entity. We were told that the District obtained price comparisons in some situations; however, we were unable to verify whether that was the case since there was no documentation retained. As a result of the Districts inadequate purchasing policies and procedures, and in conjunction with the ethical concerns in Finding No. 2, we have concerns with the following disbursements noted during our testwork: The District obtained trucking services in excess of $3,000 in relation to the High Mountain Lakes project. The District did not retain evidence that any effort was made to obtain bids or award the services competitively. All items listed in Finding No. 2 above. Long-term horse rental as described in Finding No. 5.

b. Purchase Requisitions and Purchase Orders Not Used The District does not utilize requisitions or purchase orders as required in the Districts Administrative Code. Utah Code 17B-1-618 requires that all purchases by a district be made according to the purchasing procedures established by each district by resolution and only on an order or approval of the person duly authorized. Therefore, the District should either follow their current policies or change the policies to reflect policies and procedures they determine are appropriate. c. Insufficient Supporting Documentation for Disbursement The District reimbursed the District Manager $525 for materials and services that he had obtained or used on behalf of the District. There was no supporting documentation for the disbursements except a handwritten note requesting reimbursement. The District should require sufficient and reliable documentation that indicates proof of the amount and timing of the purchase and evidence of efforts to obtain bids and cost comparisons. Inadequate purchasing policies and procedures can result in bias and conflicts of interest. The lack of sufficient documentation could result in misuse of District funds. Recommendation: We recommend that the District implement adequate purchasing policies and procedures and require supporting documentation to support disbursements.

DUCHESNE COUNTY WATER CONSERVANCY DISTRICT

FINDINGS AND RECOMMENDATIONS FOR THE PERIOD JULY 2007 THROUGH AUGUST 2010 4. OVERPAYMENTS TO THE DISTRICT MANAGER (Significant Deficiency) The District paid a total of $37,558 in overtime pay to the District Manager during the period of May 2008 through December 2009. Of this amount, $6,173 was overpaid to the District Manager for work on construction-related projects. The District Manager tracked the hours worked, determined the overtime rate, calculated the pay, and submitted the payment request to the District. The District paid the overtime partly on the belief at the time that overtime pay was required by the Federal Fair Labor Standards Act (FLSA), even though the District Managers employment agreement does not allow for overtime pay. Although the District has since reported that they believe the FLSA does not apply, we believe that there is some evidence to suggest that the FLSA may apply in this situation since the District Manager was performing constructionrelated duties. However, FLSA laws are complex and the District should determine with certainty whether or not this situation is subject to the law to ensure compliance. If FLSA is applicable in this situation, the calculation error noted in d. below would be considered noncompliance with FLSA. We noted the following errors in seven overtime payments: a. Vacation time payout The District Manager was paid for 120 hours of vacation payout in the amount of $5,926 at overtime rates. The Manager did not take this vacation time and District policy does not allow for vacation time to be cashed out when not actually used. Also, any vacation time claimed should be paid at the regular hourly rate and not at the overtime rate. b. Overcharge for Holiday Hours The District Manager was overpaid for one holiday (8 hours) in the amount of $399 because he claimed the same holiday on two consecutive months timesheets. c. Addition errors In three instances, addition errors were made resulting in a net underpayment of $152 to the District Manager for 3 hours of overtime. d. Overtime Rate Not Calculated Correctly The District Manager calculated the overtime rate at roughly 1.5 times the regular hourly wage and then deducted the FICA withholding rate from the overtime pay rate, which resulted in an incorrect pay rate according to the FLSA. As discussed above, because it is not certain whether FLSA applies, we did not calculate the effect of this error and it is not included in the net overpayment above.

DUCHESNE COUNTY WATER CONSERVANCY DISTRICT

FINDINGS AND RECOMMENDATIONS FOR THE PERIOD JULY 2007 THROUGH AUGUST 2010 The Districts internal controls over the review and approval of disbursements were not sufficient to detect these errors. The District should ensure that disbursements are reviewed sufficiently to detect and correct these types of errors. The lack of proper review resulted in overpayments and possible non-compliance with the FLSA. Recommendation: We recommend that the District strengthen the review and approval process over disbursements. We also recommend that the district determine whether the FLSA applies for employees and, if so, determine the correct rate for overtime pay. Finally, we recommend that the District seek reimbursement for the overpayments to the District Manager.

5.

PROBLEMS PERTAINING TO HIRING RELATIVES OF A DISTRICT EMPLOYEE (Significant Deficiency) The District has hired the District Managers relatives as temporary employees for the past three summers (2008, 2009, 2010) to work on the High Mountain Lakes Project (the Project) funded by the Federal Government. As many as five relatives of the District Manager have been paid a combined total of total $240,990 for the three summers in wages and per diem. When a relative is supervised by another relative, there is an inherent conflict of interest as well as a high risk that the public could perceive the situation as a conflict of interest and an unfair benefit to the District Manager and his relatives. We noted that the federal requirements attached to this project required the Board to establish safeguards to prohibit employees from using their positions for a purpose that constitutes or presents the appearance of personal or organizational conflict of interest, or personal gain. Furthermore, Utah Code 67-16-4 prohibits a public officer from using his position to further substantially the officers personal economic interest or to secure special privileges or exemptions for himself or others. Since the amount of money involved is substantial, the District has an even greater duty to ensure that the pay rate is reasonable and that the hiring process is fair. We noted the following issues pertaining to this situation: a. The Board did not vote to approve the pay rates for the temporary workers in 2010. Although there is evidence of some discussion of the pay rates among the Board, there was no formal approval of the rates in a Board meeting. The pay rates were $26 per regular hour; $39 per overtime hour; and $5.50 per hour bonus upon successful completion of the project. Since a majority of the temporary employees are the District Managers relatives and the District Manager supervises his relatives, the situation gives the appearance that the District Manager determined pay rates for his relatives.

DUCHESNE COUNTY WATER CONSERVANCY DISTRICT

FINDINGS AND RECOMMENDATIONS FOR THE PERIOD JULY 2007 THROUGH AUGUST 2010 b. The District Manager was present during the evaluation of the applicants for the temporary positions, which could have potentially caused inappropriate influence on hiring decisions. The District Manager should not be present while his relatives are evaluated. c. The relatives of the District Manager worked more hours in 2009 and 2010 than workers not related to the District Manager. The relatives were paid the same hourly rate but earned more in total due to the higher number of hours worked. This adds to the appearance of favoritism toward the District Managers relatives. d. The District reimbursed four relatives of the District Manager, three of whom were also working on the project, a total of $25,700 for the use of their horses between June 2008 and August 2010. The District did not document efforts to find cost comparisons and justification for the rates of reimbursement for the use of the horses. Since other, nonrelative, employees were not given the option of providing their own horses, this arrangement appears to give unfair advantage to the relatives of the District Manager. The Board should ensure that the rate of reimbursement is reasonable and well-supported by cost comparisons or other data. We also acknowledge that there are likely some valid reasons that the District allowed the District Manager to utilize horses with which he was familiar and that it would have cost significantly more to rent horses from an outside vendor. Regardless, when there is the appearance of favoritism and conflict of interest, it could weaken the public faith and confidence in the integrity of government. For 2008, the District Manager hired the temporary employees, including his relatives, without publicly advertising the positions or using a competitive process. However, in 2009 and 2010 the District advertised the positions. Also, in 2010 the District implemented an evaluation committee and obtained a legal opinion confirming that the process did not constitute nepotism. We acknowledge these efforts to improve the hiring process. While the District likely met the standards of the law pertaining to the hiring of relatives, we encourage the Board to be very cautious to avoid the appearance of a conflict of interest and of unfair personal gain to the District Manager and his relatives on these projects. Recommendation: We recommend that the Board make hiring decisions that do not give rise to the appearance of a conflict of interest and/or favoritism. We also recommend that the Board formally approve the pay rate for temporary workers and more thoroughly document the justification for the rate of reimbursement for the use of personal horses.