Departmental Budget Monitoring Audit

DEPARTMENTAL BUDGET MONITORING AUDIT

TABLE OF CONTENTS

Section Section Title Page No.

No.

I. PURPOSE AND OBJECTIVE OF THE AUDIT 1

II. SCOPE AND METHODOLOGY 1

III. EXECUTIVE SUMMARY 3

IV BACKGROUND 4

V. FINDINGS AND RECOMMENDATIONS 5

Finding 1: Need for Better Defined Departmental Accountability for 5

Budgetary Performance

Recommendation 1.1 To Budget Office and City Manager: Require 7

Quarterly Budget Projections from Departments

Recommendation 1.2 To City Manager and Budget Office: Issuance of 8

Policy Statement to Department Managers

Finding 2: Minimum Skill Requirements, Written Guidelines – 9

Procedures and Formalized Training for Budget Monitors
Should be Established

Recommendation 2.1 To Budget Office: Develop and Distribute

Departmental Budget Monitoring Guidelines. 9

Recommendation 2.2 To Budget Office: Publish Skills Requirements for

Budget Monitors in Guidelines 10

Recommendation 2.3 To Budget Office: Present Annual Training for

Budget Monitors 11

Finding 3: Expenditure Activity Is Not Up To Date in FUND$

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Recommendation 3.1 To Public Works and Finance:
Establish monthly verification procedures and 7 day closing
Timelines 14
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Recommendation 3.2 To Finance and Payroll Audit: 16

Develop joint written procedures and a five day posting
Timeline

Recommendation 3.3 To Finance and Public Works: 17

Improve planning and testing for upgrades to accounting
software and policy, and chargeback procedures

Finding 4: Adjusting Journal Entries – Timeliness Concerns 18

Recommendation 4.1 To Budget Office and Finance: New

written procedures for adjustments should specify timelines. 21

Recommendation 4.2 To Budget Office and City Manager:

Evaluate qualifications, training needs, staffing adequacy of 22
Budget Monitors in the Departments

Recommendation 4.3 To Finance, Payroll Audit,

Information Systems: Changes should be sufficiently 22
planned and tested; affected staff should be trained.

Finding 5: Adjusting Journal Entries – Lack of Documented Review and

Approval 24

Recommendation 5.1 To Finance: Improperly

Authorized adjustment requests should be returned to the 26
Initiating departments.

Recommendation 5.2 To Finance: Departments should be 27

Reminded of requirements for supporting documentation.

Finding 6: Need to Establish and Adhere to Timelines Standards for 28

Budget Office Updating of Budget Modifications

Recommendation 6.1 To Budget Office: Turnaround time on budget

modifications should be tracked and reported, to improve timeliness
28
Recommendation 6.2 To Budget Office and Finance
A timeline should be established for reported plans to
change the chart of accounts for purposes of streamlining
budget modification process. 29

VI. CONCLUSION 30
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I. PURPOSE AND OBJECTIVE OF THE AUDIT

The financial operations of the City of Berkeley are controlled by the Annual Appropriations Ordinance
of the City Council. The City Manager is responsible for assuring that departments operate within the
limits set by the ordinance, which sets appropriations by fund. In the course of recent audit work, we
have noted that many expenditure transactions have not been properly recorded by the initiating
departments. We have become concerned about the quality of budgetary control and monitoring in City
departments as a result of these observations. Accordingly, after discussing City needs with the City
Manager, we included a review of departmental budget monitoring in our work plan for fiscal 2000.
The objective of this audit was to determine whether expenditures were being monitored against
departmental budget authorizations, using proper methods and procedures.

For the purposes of this audit, budget monitoring is the process of:

1. Reviewing actual revenues and expenses for correct and timely posting, and timely
correction of errors.

2. Comparing budgeted revenues and expenses with year-to-date actual and projected year-
end revenues and expenses, and analyzing areas of concern. Potential budget variances and
the causes are reported to management for corrective action.

We did not address departmental management compliance with the annual Appropriations Ordinance.
Compliance is a legal requirement of the ordinance. Additionally, the overall financial condition of the
City and the fairness of financial statement presentation is reviewed and attested to by the City’s outside
CPA firm annually. To place our audit scope and results in context, it should be remembered that the
City annually receives the Government Financial Officers Association Certificate of Achievement for
Excellence in Financial Reporting and Distinguished Budget Presentation; and that the City holds an Aaa
bond rating, the highest possible, according to Moody’s 1999 municipal bond report. For these
reasons, and to make optimum use of audit resources, we narrowed the scope of this review to an
assessment of budget monitoring in City departments.

II. SCOPE AND METHODOLOGY

Audit work was performed in accordance with Government Auditing Standards as prescribed by the
Comptroller General of the United States, except for a potential impairment to our independence which
is discussed below. The following steps were taken during the audit process:

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1. We reviewed City policies and procedures, the City Charter, the adopted budget for fiscal year
1998 and 1999, and the Annual Appropriations Ordinance (AAO) for fiscal year 1999.

2. We obtained and reviewed information from budget monitors, their supervisors, the Office of
Budget and Financial Management (Budget Office) manager, and other City staff, using
questionnaires and interviews.

3. We reviewed relevant budget and accounting records.

Our independence was potentially impaired because both General Audit and Payroll Audit Divisions
report to the City Auditor. The City Auditor and Deputy City Auditor for Payroll Management had
direct involvement with a change in the process for correcting labor distribution errors in the City’s
automated accounting system, FUND$. FUND$ is the City’s name for the HTE, Incorporated financial
system software used by the City. Finding 4 addresses our concerns about implementation of the new
procedure. Care was taken to maintain independence in audit work performed in this area. We do not
believe the potential impairment to our independence had a negative impact on the audit.

We examined budget and financial activity during fiscal year 1998 and the first 10 months of fiscal year
1999. Audit test work concluded during May 1999. The audit focused on budget monitoring activity in
the following departments:

1. Fire
2. Housing
3. Parks and Waterfront (Parks)
4. Planning
5. Office of Budget and Fiscal Management (Budget Office)

The Health and Human Services (HHS) and the Public Works (PW) departments were also included in
some tests because of timeliness of transaction processing concerns, and the volume of budgetary
adjustment activities. We did not examine the City’s monitoring of community agency budgets or City
funding of community agencies during this audit.

We conducted a limited purpose audit. Consequently, we did not evaluate the overall internal control
structure of the budget monitoring process in the departments audited. However, during the course of
our fieldwork, some internal control problems, which could have a material effect on the City’s ability to
monitor the budget, came to our attention. These problems are outlined in the executive summary and
discussed in detail in the findings section of this report.

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III. EXECUTIVE SUMMARY

The City Manager is responsible for ensuring that City spending does not exceed spending limits
established in the City’s Annual Appropriations Ordinance, which sets expenditures by fund. The City
Manager has assigned The Office of Budget and Fiscal Management (Budget Office) responsibility for
the day-to-day control of the budget. The Budget Office’s ability to perform this function would be
improved if departments reported on projected year-end expenses in comparison with budget at least
quarterly. (Finding 1) Overall control would also be improved if department managers informed the
Budget Office of any unusual or extraordinary resource needs as soon as they occur, and any planned
action to address these occurrences.

The City has not established minimum skills requirements for budget monitors, or developed monitoring
guidelines or procedures. Currently, employees with many different job titles are budget monitors. We
are concerned that some budget monitors may not have the background necessary to perform budget
monitoring duties properly. A large number of budget monitors stated that guidelines and training would
help them be better monitors. (Finding 2)

Expenditure information in FUND$ is too often not up to date or accurate, making it more difficult to
properly compare actual expenses with departmental appropriations or budget projections. During
fiscal year 1999, some bi-weekly payroll expense and some internal service charges were not timely
recorded in the general ledger. Five instances were noted when it took from 38 to 50 calendar days to
record payroll expenses in the general ledger. During these periods, FUND$ did not include payroll
expense for two or three pay periods totaling from $9.4 million to $14.1 million. (Finding 3)

Adjusting journal entries to correct accounting errors were often not timely prepared. This condition
materially affects the accuracy of the data in FUND$ during the year, making it more difficult to
effectively monitor the budget. There were a number of instances where labor was charged to the
wrong accounts for the entire fiscal year. The responsible departments did not correct the errors until
after the fiscal year had ended. In one instance, a group of related labor distribution adjustments totaling
$495,000 was not made until more than five months after the 1998 fiscal year had ended. (Finding 4)

During fiscal year 1999, departments were not able to make labor distribution corrections in FUND$
for the first nine to ten months of the year while software and procedures were changed. (Finding 4)
This was because changes intended to ultimately improve the accuracy of the financial system were in
process. This condition also affected the accuracy of the year-to-date payroll data in FUND$.

The Budget Office was not always timely recording budget modifications in FUND$. (Finding 6) Also
adjusting journal entries were too often recorded in FUND$ by Finance without evidence that they had

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been properly reviewed and approved in the originating department (reviewed by an authorized
individual other than the person preparing the adjustment). (Finding 5) Such documented approval is
required by the written policies and procedures.

IV. BACKGROUND

The City’s adopted fiscal year 1999 budget authorizes expenditures of $222,845,814. The budget for
the departments we included in the audit scope were as follows:
Fire $15,194,345
Housing 11,171,159
Parks and Waterfront 9,719,537
Planning 6,825,943
Public Works 65,649,336
Health and Human Services 20,686,115
$129,246,435

Departments submit their detailed budget requests to the City Manager annually. The City Manager
then develops a balanced budget proposal for submission to the Mayor and City Council. Section 53
of the City Charter requires the City Manager to submit a tentative budget to Council by the first week
of May each year. The City Council adopts a budget which starts July 1, the beginning of the City’s
fiscal year, through the passage of an adopting ordinance (Annual Appropriations Ordinance (AAO)).
The ordinance sets expenditure limits at the fund level. A fund is a separate fiscal and accounting entity
with separate accounting records. For example, the general fund is used to account for the ordinary
operations of the City that are financed from taxes and other general revenue. An example of a special
fund is the Sanitary Sewer Fund. This fund is financed through a special assessment, and assessment
revenues may be used only for operating and maintaining the sanitary sewer system.

Budget information in comparison with year-to-date expenditure data is available in FUND$. This
information is available at the account level, as well as at the project, unit, division, department and fund
level.

The Budget Office is responsible for ensuring that citywide expenditures are within levels authorized by
the Annual Appropriations Ordinance. Within the departments, staff with various job titles are also
monitoring actual revenue and expenditure activity relative to the budget.

Budget modifications are accounting entries, which transfer budgeted money from one account to
another in FUND$. Specific employees in each department are authorized to enter budget
modifications into FUND$. Once this is done, a copy of the budget modification is printed, initialed by
the data entry person, signed by the department-authorized employee, then sent to the Budget Office.

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After the budget modification is approved, the modification is updated in FUND$ by Budget Office
staff. Updating causes budgeted money to be moved from one account to another.

Adjusting journal entries are accounting entries, which generally transfer actual revenues and expenses
from one account to another in FUND$. They are also used by the City to post payroll and fringe
benefit expenditures, and interdepartmental charges. Specific employees in each department are
authorized to enter adjusting journal entries into FUND$. Once this is done, a copy of the adjusting
journal entry is printed, signed by the data entry person and department authorized employee, and sent
to Finance. Finance reviews the adjustment and checks support documents for reasonableness. A
Finance Department representative approves and signs the adjustment. The adjustment is then posted
in the general ledger.

V. FINDINGS AND RECOMMENDATIONS

Finding 1: Need for Better Defined Departmental Accountability for Budgetary

Performance

City departments do not periodically report projected year-end revenues and expenses in
comparison with budget allocations to the Budget Office or the City Manager. The Budget
office relies on information in FUND$ for citywide monitoring purposes. As a result,
department directors are not held sufficiently accountable for their department’s budgetary
performance throughout the year.

The City Manager and Budget Office are responsible for advising the City Council on the
financial condition of the City, and controlling spending within the Annual Appropriations
Ordinance. However, current reporting mechanisms, primarily FUND$ reports and discussions
with department representatives, too often do not provide accurate financial information timely.
Even when the timeliness and accuracy of FUND$ information is improved (See Finding 3 and
4 for more information), the best revenue and expenditure projection information, for use in
monitoring the budget, will always come from the departments. This is because they should be
expected to have first hand knowledge of their operations or operating conditions, and would
be in the best position to estimate future revenues and expenditures. Providing the Budget
Office with accurate and timely year-to-date revenue and expenditure information, as well as
well developed year-end revenue and expenditure projections, will allow better monitoring of
the City’s compliance with the Annual Appropriation Ordinance. Departments will also be
more accountable for their budgetary performance throughout the year.

The Budget Office currently accomplishes budget oversight responsibilities as follows:

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i. The Budget Office uses information in FUND$ to monitor revenues and

expenditures by fund and by department relative to budget throughout the year.

Information in the accounting system is too often not current or accounted for
properly. (Finding 3 and 4) The Budget Manager stated that information obtained
from this process is generally used to initiate budget modifications and budget
amendments as needed.

ii. Finance and the Budget Office prepare a 2nd and 3rd quarter report for the City
Council and the City Manager, which compares budgeted revenues and expenses
for the general fund with year-to-date and projected year end expenses and
revenues. This report is prepared only for the general fund, and does not analyze
the status of the City’s other operating funds.

Budget Office projections are generally high level and do not take into account
significant details known in the departments. Large variances between budgeted
and projected year-end revenues and expenses are discussed with responsible
department representatives.

iii. The Budget Office reviews and approves all budget modifications.

iv. The Budget Manager stated that before departments can create an additional
employee position (when funding for the position is not in the departmental budget),
the department must identify a viable funding source and get Budget Office - City
Manager approval. The Budget Manager was asked to provide supporting
documentation for his statement, but none was provided.

The effectiveness of the Budget Office’s ability to detect material variances from the budget and
help departments correct them, could be significantly improved. For example, departments
could periodically provide the Budget Office with detailed budget versus projected actual
information, and explain significant variances. Departments should already be developing this
information for their own use. Review of this work outside the departments should further
encourage departments to stay within their approved budget allocations.

The National Advisory Council on State and Local Budgeting recommends that municipalities
require their managers not to exceed their budget, and to identify appropriate rewards and
penalties for their budgetary performance. Although budget managers and department directors
may be aware that this is a requirement in the City of Berkeley, it has not been formalized. The
Advisory Council considers this a simple but important mechanism for detecting and correcting
budget variances.

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Public Works Response to Finding

The Public Works Department reviews actual versus budgeted revenues and expenditures on a
monthly basis. Monthly financial reports are submitted to and reviewed by division management
staff. Revenue and expenditure adjustments are prepared and submitted throughout the year.
During the budget preparation process, revenue projections are reviewed and revised. The
department prepares five year financial plans for its key funds which show fund beginning and
ending balances, baseline revenues, projected expenditures by category, fund pressures, and
proposed balancing measures. The five year plans are submitted with the department’s annual
budget request and are reviewed by the Budget Office and the City Manger.

Any proposed adjustments to either the revenue or expenditure authorizations must be approved
by either the Budget Office, the City Manager, and the City Council (in the case of amendments
to the Appropriations Ordinance.)

Recommendations for the Budget Office and the City Manager

1.1. We recommend that department directors provide the Budget Office with sufficiently detailed
budgeted versus projected year-end revenue and expense information quarterly. We also
recommend that significant variances between budgeted and projected revenues and expenses be
explained, including any corrective action taken or planned.

Budget Office Response to Recommendation

Agree. The Budget Office currently prepares quarterly expenditure projections and significant
variances are reviewed with appropriate departments, City Manager and City Council. By
requesting that departments provide their own forecasts variances may be identified sooner.
Quality of those forecasts will depend upon developing sufficient staff technical capacity within
the departments. Reconciliation of any variances could result in improved understanding by
either the Budget Office or the department(s) regarding underlying expenditure trends. Target
Date: 1st Quarter FY 2000.

Public Works Response to Recommendation

Agree. This recommendation should be revised to reflect that if budget-to-actual reports are to
be prepared, they be done on BOTH an organizational as well as fund basis. The Budget Office
should take the lead on developing policy on “balancing strategies” for the shared funds.

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Parks and Waterfront Response to Recommendation

We agree with the recommendation that each department provide the Budget Office with
quarterly expenditure and revenue reports. However, the Budget Office should define the
structure and format of these reports. Depending on the complexity and volume of any
additional reporting requirements, additional staffing resources may be required.

Recommendations for City Manager and the Budget Office

1.2 We recommend issuance of a general policy statement requiring department managers to operate
within their annual budget allocations. We also recommend a policy statement regarding action to
be taken when unforeseen events cause budgets to be exceeded.

Budget Office Response to Recommendation

It is agreed that departments should not exceed authorized budget levels. City expenditures are
formally governed at the fund level through the Annual Appropriations Ordinance. The City’s
budget allocates spending authority within fund across operating departments. Departmental
responsibility to spend within authorized levels is evidenced via nearly every management
discussion of issues with fiscal implications, the existing financial reporting and review process
as well as in year-end review of departmental results and, ultimately, performance review of
department directors. Articulation of these actions in a policy statement would be appropriate.

Departmental operations are expected to be managed within budgets and, when projected
variances arise, these are brought to the immediate attention of the City Manager, and the City
Council through periodic financial reports. Corrective action is necessarily taken on a case-by-
case basis, depending on the extent to which projected departmental variances impact overall
expenditure authority at the fund level as authorized in the Annual Appropriation Ordinance.
Examples of typical corrective action include requiring vacant positions to go unfilled, deferring
discretionary operating expenditures, transferring of inter-fund appropriations across City
departments, and/or requesting amendment to the annual Appropriation Ordinance. In addition,
budget management becomes a factor in performance review.

Public Works Response to Recommendation

Partially agree. Language should be added regarding exceptions for unplanned emergencies
that may cause funds to go out of balance (such as the Clean Storm Fund did as a result of the
1998 El Nino Storm event for which the City will not be fully reimbursed for all response and
remediation costs).

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Parks and Waterfront Response to Recommendation

We are in full agreement that departments should not exceed their budget appropriations. In
addition, the implementation of positive incentives for budgetary performance warrants further
discussion.

Finding 2: Minimum Skill Requirements, Written Guidelines - Procedures and Formalized

Training For Budget Monitors Should be Established.

The City has not established the minimum skill requirements for budget monitors. Guidelines for
the tasks typically performed by a budget monitor, how to perform these tasks, and when to
perform them, are not available. Formal training for budget monitors has not been developed.

i. No minimum skill requirements for the budget monitor. The Budget Office
recommends that budget monitors have basic accounting knowledge and basic skills
in budget principles. Some budget monitors did not appear to have the minimum
skills required for the task. We reached this conclusion after review of the
Personnel Department’s position qualifications for job classifications currently held
by budget monitors, and after we reviewed the lists of qualifications which budget
monitors stated qualified them for the assignment. Employees with a wide range of
job titles identified themselves as budget monitors, or were identified as budget
monitors by their departments.

ii. No Written Guidelines. Currently, written procedures on budget monitoring only

address how to prepare budget modifications. There were no guidelines describing
the tasks typically to be performed by a budget monitor; how to perform these
tasks; and when to perform them. Budget monitors and supervisors throughout the
City generally are left to develop their own procedures. As a result, monitoring may
not be meeting the needs or expectations of City management.

iii. No Formal Budget Monitoring Training. Many budget monitors interviewed stated
that HTE reports and query skills, and fund accounting training, or additional training
would be beneficial. When budget monitors were asked to identify what changes
they would like to see which would improve their ability to monitor their
department’s budgets, the most common response was to improve the FUND$
system. The second most common response was a request for more useful
FUND$ reports (easier to get; more information). The third most frequent
response was budget training.

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Recommendations for the Budget Office

2.1. We recommend that the Budget Office develop written guidelines describing the tasks which a
budget monitor should typically perform, and how and when they should be performed.
Distribute the guidelines to all department heads and budget monitors.

Budget Office Response to Recommendation

Agree. The Budget Office will develop and distribute general guidelines and tasks for staff
assigned as “budget monitors.” In addition, the Budget Office recommends that comprehensive
financial procedures and instructions be developed and/or updated through a collaborative effort
on the part of the Budget Office, Finance Department, Auditor’s Office and department
directors. The proper processing of day-to-day transactions requires basic understanding of
several financial sub-systems administered by a variety of City departments. These systems
include: payroll (City Auditor), purchasing (Finance), workorders (Finance/IS), general ledger
(Finance), contract payment processing (City Auditor) and financial reporting (Budget/Finance).
Target Date: General Guidelines / Tasks issued November 1999

Auditor Disposition

We agree with the Budget Office concern regarding written procedures. While several of these should
be currently under revision as a result of recommendations of our other audits, we suggest that a status
report from each responsible department be included in the City Manager’s follow-up report to Council
on the Budget Monitoring Audit.

Public Works Response to Recommendation

Agree

Parks and Waterfront Response to Recommendation

We are in general agreement with the recommendation that the Budget Office provide basic
written guidelines for the duties typically performed by a budget monitor.

Recommendation for the Budget Office

2.2. We recommend that the Budget Office state the minimum skills requirements for budget monitors
in the guidelines for budget monitoring.

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Budget Office Response to Recommendation

Agree. The Budget Office will develop written guidelines and tasks related to budget monitoring
(see recommendation 2.1). These guidelines will include minimum knowledge requirements. In
general, familiarity with governmental accounting, budgeting and the City’s multiple financial
systems should be encouraged for all staff responsible for budget monitoring functions. Specific
job requirements (and classifications) will, however, depend on the size and complexity of the
departmental budget as well as specific departmental requirements. The City Manager has
asked for an organizational impact assessment of this recommendation. Target Date: November
1999

Public Works Response to Recommendation

Agree

Recommendation for the Budget Office

2.3. We recommend that the Budget Office develop and present an annual training class or a series of
training classes for budget monitors covering:

• Budget principles (including City policy and practices).

• How to obtain commonly needed information from FUND$
• Budget monitoring tasks to be performed, their frequency, and how to perform them.

Budget Office Response to Recommendation

Agree. The Budget Office has included development of a training class on budget principles and
City budgeting policies and practices as part of its FY2000 work plan. In addition, more
comprehensive training covering the full array of budget monitoring tasks needs to be developed
in conjunction with the Finance Department and the City Auditor’s Office. A variety of trainings
in the area of fiscal management will also be developed as part of the Citywide training
program. Target Date: Ongoing

Auditor’s Disposition

For audit follow-up purposes, the auditors will assume that the first class on budget principles and
practices will be held by June 30, 2000.

We concur that the Budget Office may require assistance from other departments in conducting training
on specialized FUND$ reports, but we strongly recommend that the Budget Office take lead on
providing this training by June 30, 2000. Regarding budget monitoring tasks, we strongly recommend
that the Budget Office provide this class by June 30, 2000 as well. Establishing guidelines is the

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responsibility of the Budget Office.

Public Works Response to Recommendation

Agree

Parks and Waterfront Response to Recommendation

Additional budget training is always welcome!

Finding 3. Expenditure Activity Is Not Up To Date in FUND$

During the first 10 months of fiscal year 1999 expenditure information was often not up to date
in FUND$. When FUND$ transaction data is not timely, it is difficult for departments to
monitor their budgets. Staff must spend time identifying and estimating expenses that have been
incurred but not recorded in order to monitor budget to actual performance.

The following expenses were often not recorded timely:

i. Labor expenditures and fringe benefits were often not timely posted in the general
ledger during the first and second quarter. We observed five instances during the
year when biweekly payroll expenses were not recorded in the general ledger for
38 to 50 calendar days. During these periods, FUND$ did not include payroll
expense for 2-3 payrolls. A typical biweekly City payroll, including fringe benefits,
is approximately $4.7 million, which is a significant expenditure. A representative
from the Finance Department stated that this condition was caused by the following:

• Policy changes. Effective July 1998, the City began recording actual fringe
benefits rather than an estimated lump sum fringe benefit costs based on a
fringe benefit factor. This change requires additional validation procedures
be performed by Finance.

• An insufficient number of account codes in the general ledger to record

benefits in detail. These codes were to be added so payroll information
could be recorded.

• Discrepancies between the payroll certification, payroll register, and the

interface payroll transactions which must be corrected prior to posting to

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the general ledger.

In recent months, posting of payroll expense was done within 11 calendar days.
However, instances of untimely posting of payroll expenditures in the general ledger
were also identified during fiscal year 1998, indicating untimely posting during fiscal
year 1999 is not an isolated instance. During fiscal year 1998, there were two
biweekly payrolls which took over a month to post. There were also four payrolls
which took about three weeks to post. Written procedures establishing a
procedure and a timeline for posting payroll expenses to the general ledger are not
available.

Also, during the first five months of fiscal year 1999, monthly closing of the general
ledger was completed up to six weeks after the accounting period had ended. We
believe the accounts were held open so that payroll expense for the month could be
recorded in the proper month. However, until a prior month’s accounting period is
closed, adjusting journal activity (used to post many expenses: e.g. payroll, fringe
benefits, and interdepartmental charges) for the current month is not identified as an
expense in demand expenditure reports generated by FUND$. This practice has a
significant negative impact on a budget monitor’s ability to properly monitor the
budget.

Auditor’s Office – Payroll Division Response

Agree with findings. The HTE system creates payroll batches for GMBA at the time that
payroll data is updated, and also when checks are voided or manually issued. Batches were not
created correctly on a few occasions, due to software problems, upgrades, the City’s payroll
modifications to customize the HTE payroll system, and/or human errors. Those problems
were reported to HTE for correction.

Public Works Response

The timely posting of labor is a particular problem. Because data is not timely, the department
has foregone progress billings on some grant-funded projects in favor of doing completion
billings when sufficient time has passed to allow data to “settle”. This can impact the timeliness
of reimbursements, as was pointed out in a previous audit report on grants management.

ii. Charges for some inter-departmental services and some other City charges are too
often not timely recorded in the general ledger.

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• City vehicle fuel and maintenance charges, and vehicle replacement

contribution charges for the period July 1998 - February 1999 were not
charged to departments by Public Works until March 1999 (up to 217
calendar days). Charges for the months of November 1998 - March 1999
represented estimates based on the expense charged for July 1998. A
Public Works representative stated that monthly vehicle charges made
during fiscal year 1998 were also often not timely, being made three to four
months after the month being charged had ended. During fiscal year 1998,
approximately $6.2 million in City vehicle charges were charged to City
departments for City vehicle fuel and/or maintenance charges, and City
vehicle replacement contribution charges.

This is a significant expense which is not being timely charged to the

departments. A Public Works representative stated that problems with the
HTE Fleet Management Module, due to an upgrade for FY 1999, was the
main reason these charges were not timely during fiscal year 1999. During
fiscal year 1998, this representative stated that charges were not timely
because prior to the last HTE upgrade, developing monthly charges was
much more time intensive for staff.

Documentation identifying the basis for monthly charges was generally not
given to departments during FY 1999 or prior years. During the audit, one
department notified us that they were not receiving support documentation
for charges posted to their account timely. The department waited four
months to receive the support documentation after it was requested. They
stated numerous errors were found.

• Some other City charges also were not charged on a timely or regular basis.

Workers compensation expense should be recorded monthly; however,

worker’s compensation for the first six months of fiscal year 1999 was not
charged to departments until December 1998. Workers Compensation
charges for January - March 1999 were not charged until March 1999.
April and May 1999 expenses were charged in the month that these
expenses were incurred.

• Monthly facility maintenance charges took from three calendar days to as

long as 52 calendar days to be posted in FUND$. Thirty calendar days to
post this monthly charge was not uncommon.

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The reasons workers compensation expense and facility maintenance charges

were not timely recorded in the general ledger were not determined.

Recommendations for Public Works and Finance

3.1. We recommend that Finance establish and adhere to a reasonable time line for posting
interdepartmental City charges and payroll expenses. Monthly closings should be completed
within seven working days after the monthly accounting period ends.
We also recommend that support documentation for interdepartmental charges be sent to
departments monthly for verification and reconciliation. These procedures and time lines should
be documented by Finance.

Public Works Response to Recommendation

Agree. We acknowledge the problems with the inter-departmental charges for vehicles and
facility maintenance. In the case of vehicle billings, there is a task force working on improving
the interface between the HTE FLEET module and GMBA, and completing the establishment of
the vehicle replacement budgets for each department. We are also working to completely revise
the way facility charges are developed and applied. In support of true program costing, it is our
purpose to shift to the responsible departments the costs of operating and maintaining the
facilities housing the various programs and services provided. This will be a multi-year task.
For now, we have a billing schedule, the “invoicing” for which is handled by a Finance
Department program.

Finance Department Response to Recommendation

The Finance Department currently closes the accounting period within ten (10) calendar days
after the month and has done so regularly. This is very similar to the City Auditor’s
recommendation of seven (7) working days.

Clearly, incorrect or unverified payroll batches have been a major cause of delays in closing.
Finance is concerned that the source of the delay in correcting batches be accurately identified;
and that Payroll, Finance and Information Systems work jointly to resolve the problems. We
suggest that, within 30 days of this response, the Payroll Manager convene a work group to
tackle the problem (i.e., identify actual causes, define mutually agreed upon solutions and lead
responsibilities, and identify applicable time frames for implementation.)

Finance is always concerned about assuring that all City Departments have support
documentation sufficient for them to determine whether City charges for the month are correct.

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 Departmental Budget Monitoring Audit

Finance will review the procedure to assure that this is happening and will document the
applicable time lines and procedures. The documentation will be available for review by the
Auditor no later than 2-1-00.

We agree that there was an unacceptable delay in recording the fleet charges due to significant
problems with the HTE Fleet Module. This issue is still being worked on and charges will be
included in the June 1999 financial closing. Evidence of the problem being corrected will be
submitted to the City Auditor no later than 3-31-00.

We agree that there was a prior delay in recording Worker’ Compensation and facility
maintenance charges. The situation has been corrected since April 1999. Finance and
Information Systems expended significant resources to make the system charges necessary to
accommodate the revised method of charging fringe benefits.

Auditor’s Disposition

Finance states that monthly closing of the general ledger is done on a regular basis. Our report cited
many instances during the last two years of untimely monthly closings. We strongly encourage Finance
to implement our recommendation to close each monthly accounting period within seven working days
after month end. Other department representatives, including Budget Office management, stated that
implementation of this recommendation is very important for them to monitor their budgets.

While Finance states (and we agree) that monthly closing is currently more timely than it was at the time
of audit fieldwork, we believe that implementation of our recommendation to establish a specific
reasonable timeline (benchmark) is necessary to maintain timeliness.

Budget Office Response to Recommendation

Agree. Timely and accurate posting of financial results is perhaps the single most important
factor in contributing to the City’s ability to effectively monitor, forecast and manage its fiscal
resources.

Parks and Recreation Response to Recommendation

We agree that timelier FUND$ data would allow for increased efficiency.

Recommendations for Finance and Auditor’s Office (Payroll Audit)

3.2. We recommend that Finance and the Payroll Audit Division jointly develop written procedures for

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reconciling bi-weekly citywide payroll expense in GMBA with the Payroll Module and payroll
support documentation. We also recommend that bi-weekly payroll charges be posted to the
general ledger within five working days after each pay date.

Payroll Audit Response to Recommendation

Agree with the Recommendation. Payroll Audit and Finance have been meeting regularly and
have identified a number of causes of delay in payroll posting. The committee will recommend
solutions for improvement. These should be identified and documented, and written procedures
completed by both Finance and Payroll Audit by 11-30-99.

Finance Department Response to Recommendation

We agree that there should be written procedures for reconciling the bi-weekly Citywide payroll
expense. It is clear that the inability to reconcile the bi-weekly payroll affects both Payroll and
Accounting/GMBA. Again, we suggest that the Payroll Manager include this issue in the scope
of work for the above recommended work group.

Auditor’s Disposition

Finance has not agreed to implement our recommendation that bi-weekly payroll charges be posted to
the general ledger within five working days after each pay date. As in the previous recommendation, we
strongly recommend that Finance include a commitment to a specific timeline (benchmark) in their new
procedures. Department representatives stated that timely accounting information is very important for
them to be able to properly monitor their budget.

Public Works Response to Recommendation

Agree

Budget Office Response to Recommendation

Agree. Timely and accurate posting of financial results is perhaps the single most important
factor in contributing to the City’s ability to effectively monitor, forecast and manage its fiscal
resources.

Recommendation for Finance and Public Works

3.3 We recommend that future upgrades to FUND$, changes in accounting policy, and
interdepartmental charge procedures, be sufficiently planned and tested before implementation.
Upgrades and changes should not compromise the accuracy or timeliness of FUND$

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information. Staff should be promptly notified and trained regarding accounting upgrades. (Same
as recommendation 4.3 which is only for Finance, Auditor’s Office and Information Systems.)

Public Works Response to Recommendation

Agree. This section should also be directed to your office (with respect to auditing payroll
activities) and to the Office of Information Systems.

Finance Department Response to Recommendation

This particular finding should be directed to the Budget Office and Information Systems as well
as to Finance and other departments. We believe that upgrade testing is primarily the
responsibility of Information Systems as it relates to developing the protocol, guiding the module
leaders and assuring a completed test. Similarly, changes in accounting policy and-or the
handling of interdepartmental charges often emanate from the Budget Office. We agree with the
finding and will assure its implementation in those areas where Finance has primary
responsibility and control.

Budget Office Response to Recommendation

Agree. Difficulties in effectively implementing upgrades to the FUND$ system is largely

attributable to the city’s decentralized responsibilities for the numerous modules that make up
FUND$. While the Office of Information Systems helps to facilitate understanding of FUND$
issues within the GMBA financial system, there currently exists a lack of understanding of
programming and file structures among assigned module leaders in “user” departments. As
such, it is extremely difficult to effectively monitor and test upgrades - particularly to the extent
that upgrades affect multiple modules.

Auditor’s Disposition

Responses from Finance, Information Systems, Payroll Audit, and Public Works (Recommendation 3.3
and 4.3 are the same recommendation for different departments) all appear to generally agree with the
audit recommendation. However, they also include doubts as to whether it can be implemented. Please
see disposition for recommendation 4.3.

Finding 4: Adjusting Journal Entries - Timeliness Concerns

During fiscal year 1998, the most recently completed fiscal year, several of the larger
departments made most of their adjusting journal entries at the end of the year or after the fiscal
year ended (twelfth–sixteenth months). Additionally, for the first nine to ten months of fiscal

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year 1999 (when fieldwork ended), departments were not permitted to make labor distribution
corrections in FUND$. The overall effect is that the actual expense data in FUND$ has not
been accurate until after year end for the last two fiscal years. As a result, monitoring of year-
to-date revenues and expenses relative to budget in FUND$ is more difficult because year-to-
date information contains significant timing and classification errors.

i. Untimely Adjustments

The Health and Human Services (HHS) and Housing departments made 91 percent
of the their adjustments for the year during the twelfth month, or after the year had
ended. The Public Works department made 67 percent of their adjustments during
the same period. Total dollars adjusted for HHS and Public Works for the year
totaled $1,995,597 and $1,519,064 respectively. The Housing Department also
prepared a very large volume of year-end adjustments. However, Housing provided
a schedule, which showed that these entries were almost solely to correctly record
loan receivable activity (required accounting entries) or to assign project codes to
accounts (improve accountability), and not to correct errors. Housing management
has acknowledged that untimely adjustments are a concern in the department.

Representatives from each of these departments stated that one of the reasons this
condition existed was because staff did not have enough time to do the analysis and
prepare the journal entries earlier in the year. HHS representatives also stated that
delayed revenue contract negotiations, a lack of information regarding appropriate
distribution of expense, and staff on authorized leave, were other causes.

Because the HHS, Public Works, and Housing departments prepared most of their
adjustments at or after fiscal year end, we reviewed some of their larger year-end
adjustments. We had the following concerns about the timeliness of processing
these adjustments:

• Health and Human Services Three of the five year end adjusting journal
entries reviewed could have been prepared much earlier in the year than
they were. Two of the adjustments were to correct salary distribution
errors in FUND$ which occurred over the course of the year for two
employees. The adjustments reallocated $14,675 for one employee and
$44,311 for another. Corrections were made during September 1998 and
early November 1998, three to four months after the 1998 fiscal year
ended. Another of these adjustments was made November 12, 1998 to
correct $207,885 in prior year grant revenue which had originally been
incorrectly posted on September 17, 1997. The employee who prepared
these adjustments, and his supervisor, stated that the adjustments followed

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their normal scope of activities in managing the budgets of the Health

Promotion Division.

Health and Human Services Response

Generally agree, however, the expenditure activity has not often been up to date in the FUND$
system which results in late financial reports being received by the departments. As a result,
Health and Human Services (HHS) has typically made the majority of its adjusting entries during
the year-end closing process in order to clean-up charges in the General Fund and grant
supported programs. HHS’ ability to make adjusting journal entries on a regular basis
throughout the year depends upon the receipt of timely financial reports.

• Public Works. Five adjustments were recorded on December 17, 1998 to

correct $494,900 in salaries and fringe benefits that had been incorrectly
charged to the general fund in fiscal year 1998. This was more than five
months after fiscal year end. In general, salary and fringe benefits had been
incorrectly charged to the general fund for the entire year. The errors were
almost entirely a consequence of payroll default errors, project-account
code errors, and errors in paid leave defaults. Payroll default accounts
represent expense accounts which departments use to automatically account
for an employees’ salary and fringe benefits each payroll. A Public Works
representative stated that this group of adjustments would have typically
been made after the fiscal year ended, but much earlier in the closing
process.

Public Works Response

Public Works has historically made most adjusting journal entries during the year-end financial
closing process. For fiscal 1998 the largest adjusting journal entries were made during the final
phase of year-end closing in November 1998. This was due almost entirely to the fact that there
was no process or procedure in place to allow the department to make these corrections at any
point earlier in the closing process.

• Housing A number of the largest adjustments prepared at or after year-

end were reviewed. They all pertained to the City’s loan programs. As
stated above, these adjustments are a required accounting entry to properly
record loan receivables. Due to the complexity of the loan program and
City accounting practices regarding loan activity, timely and untimely
preparation of adjustments was often not readily apparent.

However, as stated above, Housing management has acknowledged that

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untimely preparation of adjustments is a reason for the large dollar value of

adjustments at year-end. Department representatives stated that this
condition existed because of limited staffing, but do not believe it affects
their ability to monitor their budget.

Housing Response

We concur with the finding. Housing Department will make every effort to prepare necessary
adjusting entries on a timely basis.

Auditor Disposition for HHS, Public Works and Housing Response

It appears reasonable that there are a variety of reasons for late adjustments. We believe that our
recommendations, if implemented, will successfully address the reasons identified by the departments, as
well as the other contributing factors we discussed.

ii. No Procedure for Labor Distribution Adjustments during Fiscal Year 1999

For the first nine to ten months of fiscal year 1999 (when fieldwork ended),
departments were not able to make labor distribution corrections in FUND$. Even
at this late date, staff in some departments were still being trained in how to use a
new program to correct labor distribution errors. This appears to have occurred
because the Finance Department and Auditor’s Office made a decision at the
beginning of the fiscal year not to allow City departments to make labor distribution
corrections until a new distribution program in the FUND$ payroll module was
implemented. Labor and fringe benefits comprise approximately 74 percent of the
City’s general fund expenses. Inability to correct labor distribution errors
throughout most of the year made it difficult to determine actual year-to-date payroll
expenditures, and to properly monitor actual expense relative to budgeted expense
in FUND$.

Recommendations for the Budget Office and Finance

4.1. We recommend that policy and procedure for preparing adjusting journal entries be revised to
specify timeliness guidelines for recording these entries in FUND$.

Finance Department Response to Recommendation

We agree with the recommendation. Written procedures exist. Finance will work with the City
Manager’s Office to determine how we might achieve better compliance prior to year-end FY
2000.

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Budget Office Response to Recommendation

Agree. Timely and accurate posting of financial results is perhaps the single most important
factor in contributing to the City’s ability to effectively monitor, forecast, and manage its fiscal
resources.

Public Works Department Response to the Recommendation

Partially agree. The recommendation does not consider that departments will differ as to the
nature and number of adjusting journal entries necessary. It would be more appropriate to
indicate that adjustments should be done on a regular basis, relative to the significance of the
adjustment.

Housing Department Response to the Recommendation

Agree.

Auditor Disposition

In the auditor’s view, a reasonable date for issuance and distribution of revised procedures is by June
30, 2000.

Recommendations for the Budget Office and City Manager

4.2. We recommend that the Budget Office and the City Manager evaluate staffing adequacy and the
qualifications of budget monitors. We further recommend that increased training or staffing be
considered in this area as necessary.

Budget Office Response to Recommendation

Agree. While Budget Office has agreed to develop and distribute general guidelines and tasks
related to budget monitoring (see recommendation 2.1), how departments choose to assign these
duties among staff members also involves the discretion of the department director. Appropriate
staffing levels and qualifications will depend on the size and complexity of the departmental
budgets. In addition, more resources is only one of many factors affecting the integrity of the
information in the City’s financial system. This is particularly true in an organization which
recently went through several years of budget cuts. It is not uncommon for administrative
functions to suffer relative to other functions performed by the City. However, this is in part a
reflection of the priorities of the City’s decision to have fewer analysts/accountants rather than
cut direct services. Nonetheless, these decisions are not without their costs (i.e. less timely and

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accurate accounting information). The budget office will recommend to the City Manager that
our role in assessing qualifications should be strengthened.

Auditor Disposition

The auditors believe that information about suggested qualifications for budget monitors can be
incorporated into the budget monitoring guidelines that the Budget Office has agreed to issue by
November 1999.

Public Works Department Response to Recommendation

Agree.

Recommendations for Finance, Auditor’s Office (Payroll Audit), and Information Systems

4.3 Future upgrades to FUND$, changes in accounting policy, and interdepartmental charge
procedures, should be sufficiently planned and tested before being implemented so that they do
not prohibit City employees from properly maintaining the accuracy of FUND$ information for an
extended period of time. Staff affected by accounting upgrades should be notified and trained
regarding the accounting upgrade. (Same as recommendation 3.3. applicable to Finance and
Public Works.)

Information System Response to Recommendation

In general, we agree with this recommendation and shall work within our scope of influence to
convince future participants from making decisions that adversely affect the general ability for
user departments to maintain the accuracy of FUND$ information.

Yet it is with this in mind that an executive decision was made to switch to HTE’s payroll-based
labor distribution adjustment feature. Switching meant that we would work with HTE as a beta
site to fine-tune this feature. It also meant that we would be required to abandon our existing
method of adjusting labor and accounting for fringe, which was based on summary adjustments
and estimated fringe (rather than actual).

A calculated risk was taken in an effort to support an overall enhancement request to switch to
an actual cost based accounting interface between payroll and the General Ledger. Due to
resource allocation issues at HTE, the effort took too long and resulted in a reduced ability for
departments to make labor adjusting entries. This task is still on going and HTE has further
reduced their level of support and effort required to properly completing the requested features.

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Although most departments are using this new feature, the process of balancing adjustments is
cumbersome. In hopes of supporting a citywide implementation effort, Information Systems has
pledged programming resources to finalize certain requested features.

Finance Department Response to Recommendation

This particular finding should be directed to the Budget Office and Information systems as well
as to Finance and other departments. We believe that upgrade testing is primarily the
responsibility of Information systems as it relates to developing the protocol, guiding the module
leaders and assuring a completed test. Similarly, changes in accounting policy and/or the
handling of interdepartmental charges often emanate from the Budget Office. We agree with the
finding and will assure its implementation in those areas where Finance has primary
responsibility and control.

Payroll Audit Response to the Recommendation

Agree that planning and testing is important for all modules. For the payroll module, this
recommendation is already the practice. The Payroll Audit division spent four months late last
year testing HTE’s new-5.0 version of the payroll module before it was put into production. All
departmental payroll clerks were briefed at the regular payroll Continuous Service Improvement
(CSI) meeting about the changes in the new version that affect payroll processing.

Regarding the new labor distribution adjustment software in particular, Payroll Audit had
limited involvement in the project. However, the project will impact payroll processing and the
workload for payroll clerks and payroll auditors. My plan is to participate in analyzing the
system and to make recommendations as to whether or not we should continue with the project.

Public Works Department Response to the Recommendation

Agree.

Housing Department Response to the Recommendation

Totally Agree.

Auditor’s Disposition

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Responses from Finance, Information Systems, Payroll Audit, and Public Works (Recommendation 3.3
and 4.3 are the same recommendation for different departments) all appear to generally agree with the
audit recommendation. However, they also include doubts as to whether it can be implemented. These
doubts appear to center around the following:

1. Other departments have primary responsibility for implementing this recommendation.

2. We are doing our job, but other departments are not.
3. If a feature is requested by executive management, normal controls and testing may be
bypassed in order to implement the change.

We strongly recommend that the City Manager’s Office as well as other City Departments resolve these
issues as part of the process for implementing our audit recommendation. We suggest that the module
leaders take lead responsibility when FUND$ modules are involved. If our recommendation is not
implemented, we believe business as usual will result in other large scale accounting problems and
inefficiencies when future upgrades to FUND$ and accounting policy changes are made. Because
assignment of increased responsibility for module leaders may involve reallocation of resources, we
suggest that the City Manager should include a specific directive regarding lead responsibility for
implementing this recommendation in his follow-up report to council.

Finding 5: Adjusting Journal Entries - Lack of Documented Review and Approval

The Finance Department is posting adjusting journal entries which:

i. Were prepared, reviewed, and approved within the originating department by the
same employee. As a result, inappropriate and untimely adjusting journal entries
can go undetected by management in the department that originated the adjustment.

ii. Are often submitted to Finance without support documents as required by written
procedures developed by the Finance Department. Support documentation is
requested by Finance so that the adjustment can be checked by Finance for
reasonableness before it is posted.

Adjusting journal entries are often initiated by the departments. Staff enter adjusting journal
entry information into FUND$, then print an adjusting journal Entry Edit Listing. Written
procedures issued by the Finance Department during July, 1993 require the data entry person,
and department authorized employee (usually the supervisor), to sign the edit printout. Signers
are to print their names under their signatures. The Edit List is sent to Finance, where it is
reviewed for reasonableness. If the entry is accepted, Finance updates FUND$. These written
procedures are not being followed. The Finance Department is posting adjusting journal entries
that were prepared, reviewed and approved within the originating department by the same
employee. They are not being reviewed by a department authorized employee as required by

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the written procedures. It was also observed that signatories are not printing their name under
their signature as called for in the written procedure.

The auditor reviewed eighteen of the larger year-end adjustments for fiscal year 1998. Nine
(50 percent) did not include a signature that documented departmental review and approval by
someone other than the employee who entered the data. The auditor observed that this
condition did not occur with this frequency throughout the year. However, it was still observed
to be a common occurrence. Additionally, Parks and Waterfront representatives confirmed that
none of the adjusting journal entries prepared by their department were reviewed and approved
by someone other than the data entry person within their department prior to submission to
Finance.

Written procedures issued by Finance also require Finance to review department Adjusting
Journal Edit Listings and check support documents for reasonableness. Written procedures
state the type of support documentation that is to be provided for each type of adjustment. The
auditor observed that support documentation for adjustments was often not available in Finance,
prohibiting a proper review for reasonableness in many cases.

Public Works Response to Finding

The department Senior Budget Specialist reviews and signs most – if not all adjusting journal
entries for Public Works. Appropriate supporting documentation is attached and copies are kept
in the departmental files.

Recommendations for Finance

5.1 We recommend that Finance not accept adjusting journal entries until approved by an
authorized reviewer from the department that originated the adjustment. We further recommend
that Finance determine that departmental review was not made by the same person who entered
the adjustment in FUND$. We also recommend that departmental responsibility for adjusting
journal approval be incorporated in written adjusting journal policy and procedure. Additionally,
as required in the written procedures, we recommend that the adjustment preparer and reviewer
print their names under their signatures. We recommend that Finance revise and redistribute the
adjusting journal policy and procedure to the departments.

Finance Department Response to Recommendation

We agree that no adjusting journal entries (AJ’s ) that effect the financial position of the City

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(i.e., change in assets, liabilities or equity of any fund) should be updated without an authorizing
supervisor’s approval. However, sending back AJ’s that might be nothing more than a change
in element-object code is unnecessary and may create worse situations such as failure to close
the accounting period on time and AJ batches left indeterminately in limbo between accounting
periods. Finance will continue to take whatever steps necessary to assure that material AJ’s
(i.e., those that affect the financial position of the City) are posted in a timely fashion with all
supporting documentation in place and according to the existing written procedures.

Auditor’s Disposition
Finance has only agreed to implement our recommendation when the adjusting journal entries affect the
financial position of the City (i.e., change in assets, liabilities or equity of any fund). However, this
practice will allow inappropriate adjusting journal entries to be recorded in the general ledger and go
undetected. For example, the policy recommended by Finance would allow an employee to
inappropriately transfer revenues or expenses from one grant funded project to another without
detection by their supervisor or by Finance since many grants are generally accounted for in the same
fund. Such transfers are almost always in violation of the grant. Supervisory review and approval of
adjusting journal entries is considered a basic and inexpensive internal control to reduce the risk of
inappropriate adjustments being made. We suggest that Finance either implement our recommendation,
or propose and implement an alternative recommendation to clear this finding.

Budget Office Response to Recommendation

Concur with Finance Department response.

Public Works Response to Recommendation

Agree

Parks and Waterfront Response to Recommendation

We agree that adjusting journal entries should be prepared and reviewed-approved by different
individuals. Our staffing configuration has not effectively allowed this to occur. However, the
department will review its current procedures and make the necessary changes so that the same
individual does not complete all of these tasks for the same journal entry.

Recommendation for Finance

5.2. We recommend that Finance remind departments to submit supporting documentation for every
Adjusting Journal Entry Edit Listing sent to Finance for updating in FUND$, in compliance with
written procedure.

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Finance Department Response to Recommendation

We agree that no adjusting journal entries (AJ’s ) that effect the financial position of the City
(i.e., change in assets, liabilities or equity of any fund) should be updated without an authorizing
supervisor’s approval. However, sending back AJ’s that might be nothing more than a change
in element-object code is unnecessary and may create worse situations such as failure to close
the accounting period on time and AJ batches left indeterminately in limbo between accounting
periods. Finance will continue to take whatever steps necessary to assure that material AJ’s
(i.e., those that affect the financial position of the City) are posted in a timely fashion with all
supporting documentation in place and according to the existing written procedures.

Auditor’s Disposition

It appears that Finance has only agreed to implement our recommendation when the adjusting journal
entries affect the financial position of the City (ie., change in assets, liabilities or equity of any fund). This
is contrary to Finance’s written policies and procedures. We recommend that our recommendation be
implemented. In this case, we are simply asking Finance to remind departments to attach supporting
documentation to their adjustments. We suggest that Finance either implement our recommendation, or
propose and implement an alternative recommendation to clear this finding.

Budget Office Response to Recommendation

Concur with Finance Department response.

Public Works Response to Recommendation

Agree

Finding 6: Need to Establish and Adhere to Timeliness Standards for Budget Office
Updating of Budget Modifications

The Budget Office too frequently does not timely update budget modifications submitted by
departments in FUND$.

Written procedures require the Budget Office to update budget modifications, or contact the
department regarding a problem, within two days. However, it is common for the Budget Office
to take four to eight working days to update budget modifications. In some cases it took more
than two weeks to update budget modifications. Departments stated delays are not due to
problems with the budget modifications they submitted for updating. Significant delays in
updating budget modifications can make it more difficult for departments to use FUND$ to

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monitor their budgets. It also delays purchases and contract encumbrances which cannot be
made until after budget modifications are updated.

The Budget Office Manager stated the Budget Office and Finance have been considering
changes to the chart of accounts so that the number of budget modifications required by
departments could be reduced. The changes would allow departments to exceed their budget
for a particular expense account as long as there was sufficient money in the budget to pay for
an expenditure within a range of accounts. The Budget Office Manager stated they would
continue to review and approve certain types of budget modifications, which if inappropriate,
could cause significant problems. The Budget Office Manager stated that Finance
representatives had expressed concerns that changing the chart of accounts may cause
problems with retaining prior year account history. A time line for evaluating and implementing
this project has not been established.

Recommendations for the Budget Office

6.1. We recommend that the Budget Office track the time it is taking to update budget modifications.
We further recommend that performance should be periodically reported to management, and
corrective action taken if budget modifications are not being updated within two days.

We further recommend that the Budget Office use clerical staff to update low risk budget
modifications, a procedure Budget Office management has considered.

Budget Office Response to Recommendation

Agree. The Budget Office has established revised procedures for improving the processing of
budget modifications. Specifically, the office is now able to monitor turn-around time for budget
modification requests and has re-assigned “routine” processing of budget modifications to
appropriate staff. While it is absolutely true that the Budget Office has not strictly adhered to
the 2-day turn-around time, it is not clear that this is necessary or appropriate. In fact, the new
procedure calls for the processing of “routine” budget modifications within 3 working days.
More “complex” budget modifications (those involving personnel, internal services and
overhead line items, and/or requiring amendments to the Appropriation Ordinance) will be
processed and/or returned to departments within 5 working days. While the Budget Office has
not instituted a formal reporting of budget modification turn-around times, the revised process
will enable the reporting of this information, upon request. Finally, it should be noted that the
Budget Office has generally worked closely with departments to prioritize budget modifications
so as to specifically not hamper operations.
Target Date: Completed

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Auditor Disposition

Even though the response is “agree” the Budget Office is not agreeing to the recommendation to
periodically report turn around time to management. We recommend that this aspect of our
recommendation be implemented.

We further recommend that the Budget Office formally notify all City departments in writing about the
new turn-around times for updating budget modifications in FUND$.

Public Works Response to Recommendation

Agree

Recommendations for the Budget Office and Finance

6.2 We recommend that within a month of the issue date of this report, the Budget Office and Finance
establish a time line for evaluating and implementing (if applicable) chart of account changes
currently under consideration which will reduce the number of unimportant budget adjustments
required.

Finance Department Response to Recommendation

We agree with the recommendation. We have not had a chance to coordinate our response with
the Budget Office so cannot commit to a timeline as recommended. We will initiate a meeting
with the Budget Office within 30 days of this response to both develop and agree upon the
recommended timeline, which will be communicated to the City Auditor; or to draft additional
comments explaining why such timeline is not possible or practical at this time.

Budget Office Response to Recommendation

Agree. We are working in conjunction with Finance and IS staff to re-organize the Chart of
Accounts to allow for the establishment of expenditure “categories” which would eliminate the
need for many budget modifications. The effect would be to control expenditures within
categories of appropriations rather than at the line item level. Target Date: Ongoing Project is
included in the Budget Office’s FY2000 workplan and is expected to be implemented July 1,
2000.

Public Works Response to Recommendation

Agree. However, it is our understanding that the Budget Office is considering having the so-
called “low-risk” budget mods updated at the departmental level. We believe this needs to be

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pursued. We have recommended to the Budget Office that guidelines be established for pushing
authority for approval of budget modifications down into the departments, assuming consistent
compliance with rules which guard against inter-fund transfers, the taking of another
department’s funds, and withdrawal of budgets for agreed-upon inter-departmental charges.
The Public Works Department supports and has been a participant in the Chart of Accounts
revision project, headed by the Budget Manager.

VI. CONCLUSION

The most significant issues discussed in this report were:

• The need for budget monitoring guidelines, including the qualifications expected for staff
assigned the budget monitoring function.

• The need to train staff assigned to the budget monitoring function on how to carry out the
assignment.

• The need for accurate and timely recording of all City of Berkeley economic activity in the
financial information system.

• The need for department heads to report quarterly on budgetary performance to the Budget
Manager, the City Manager, and the City Council.

• The need for sound accounting software within the financial information system to assure
accurate and timely reporting.

The importance of requiring that an executive level manager champion the effort to address these needs
cannot be overemphasized. The Budget Manager is the logical person to take on this leadership role.

Because successfully meeting the needs listed must cross departmental lines, the Budget Office should
also coordinate work with the Finance Department and the Office of Information Systems as well as the
work that must be done by staff in the operating departments.

We believe that the infrastructure improvements we recommend in this report are essential for a strong
accountability system for the City.

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