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Auditor releases report on state’s flawed internal controls

The state’s top auditor says her reviews of state operations in 2007 and 2008 disclosed scores of problems with internal fiscal controls and scores more examples of state agencies failing to comply with federal rules – a critical finding as the state grapples for stimulus dollars from the Obama administration.

State Auditor Elaine Howle’s examination was prompted in part to meet federal guidelines that the state must follow in order to receive and distribute federal money – including some $50 billion in federal stimulus funds through September 2010. Some of her findings are posted on the Bureau of State Audit’s web site; a complete report covering is expected to be released by the end of May.

Howle, in what she described as a “high-level summary” of 20 state agencies, found 216 internal-control problems of varying importance during 2007. In 2008, the deficiencies totaled 236. For both years for the same state agencies, she found more than 160 cases of noncompliance with federal rules.

In her summaries, she identifies the agency, the program and the issue, but few other details and there is no explanation of the dollar magnitude of the problems. Those and other details are scheduled to be included in her final report.

In a government that handles roughly $100 billion annually in spending and revenue, plus half again that amount in federal money, the magnitude of the problems identified by Howle is not yet clear.  Her reports serve as a sort of  score card, and the internal control deficiencies are listed as either “material” or “significant,” with “significant” being the more severe. Non-compliance cases are either “most severe” or “less severe.”

For example, her 2008 summary lists 76 significant internal control problems at the Department of Education, the department with the largest single number of problems. They included eight in the Migrant Education Program, and six each in five programs that include career and technical education, English learning, reading and improving teacher grants. The Department of Public Health had a total of 10 significant internal control deficiencies in four programs, Social Services and Health Care had seven each.

In an earlier sampling of similar findings, the state offices targeted by Howle said the problems she identified had been resolved.
The $787.4 billion economic jump-start package approved by the Democrat-controlled Congress and signed into law by President Obama includes some $81.4 billion for California, including about $35.4 billion in tax breaks and at least $46 billion for programs.

Of the $46 billion, some $29 billion will go to state programs or state-private programs, another $5.8 billion will be shared between federal and non-state entities and the destination of the remaining $12.2 billion has not yet been determined, although it likely will go to state and local agencies.

The state says that 14 agencies are expected to receive federal money immediately, and at least three will each get more than $300 million.  The largest single recipient of federal money is the Medi-Cal Program, a state-federal program that provides health care to 6.7 million Californians, is scheduled to obtain more than $10 billion.

Howle, who reports to a joint committee of the Legislature, is formally defined as an independent auditor by the federal government, which means she is required to review California’s system of handling federal funds, spot problems and recommend changes. On April 22, she declared that system was at a “high risk” for potential errors, a finding that gives her the authority to launch audits of “areas of high risk” across state government.

 The action was necessary to assure the federal government that California knows how to handle its money. The stakes are high “given the vast amount of federal funds that California expects to receive under the (stimulus package and)…the extensive requirements the Recovery Act places on the recipients of those funds,” Howle noted.

Federal law requires what is known as a “single audit,” a comprehensive examination of the state’s money-handling and operations.
According to Howle’s office, the auditors review internal controls of accounting, program policies, management, use of resources, detection of fraud and the veracity of financial reporting. State law requires each state agency to establish and maintain a system of internal accounting and administrative controls.

“In addition to internal controls, the act focuses on the entity’s compliance with laws and regulations governing federal awards. Compliance refers to how well the respective agency receiving federal funds complies with the requirements in federal law, regulations, contracts, and grants applicable to each of its federal programs. At a minimum we review how well the entities comply with the 14 types of requirements applicable to most federal programs,” Howle’s office noted.


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