Audit Report Office of Administrative Hearings March 2006 OFFICE OF LEGISLATIVE AUDITS DEPARTMENT OF LEGISLATIVE SERVICES MARYLAND GENERAL ASSEMBLY
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March 24, 2006 Senator Nathaniel J. McFadden, Co-Chair, Joint Audit Committee Delegate Charles E. Barkley, Co-Chair, Joint Audit Committee Members of Joint Audit Committee Annapolis, Maryland Ladies and Gentlemen: We have audited the Office of Administrative Hearings (OAH) for the period beginning May 13, 2002 and ending November 3, 2005. Our audit disclosed that OAH did not always collect the proper hearing fees provided for in State law, resulting in a loss of income to the State s General Fund during fiscal year 2005 of approximately $215,000. In addition, proper internal controls were not established over the processing of certain purchasing and disbursement transactions and cash receipts. Finally, we noted that OAH did not ensure the reliability of certain information recorded in its case management system. Respectfully submitted, Bruce A. Myers, CPA Legislative Auditor
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Table of Contents Background Information 4 Agency Responsibilities 4 Current Status of Findings From Preceding Audit Report 4 Findings and Recommendations 5 Cash Receipts Finding 1 The Office Did Not Always Collect the Proper Hearing Fees 5 Specified in State Law Finding 2 Adequate Internal Control Had Not Been Established Over 5 Certain Collections Purchases and Disbursements * Finding 3 Proper Internal Controls Were Not Established Over 6 Purchasing and Disbursement Transactions Caseload Management * Finding 4 The Office Did Not Ensure the Accuracy of Caseload Data 7 Recorded on Its Case Management System Audit Scope, Objectives, and Methodology 8 Agency Response Appendix * Denotes item repeated in full or part from preceding audit report 3
Background Information Agency Responsibilities The Office of Administrative Hearings (OAH) was established to provide an unbiased and objective forum for contested cases involving State agencies that regulate certain actions of businesses and citizens. According to OAH s records, during fiscal year 2005, OAH disposed of 64,944 cases. The majority of cases heard by OAH relate to the Motor Vehicle Administration, the Department of Health and Mental Hygiene, and the Department of Human Resources. OAH s fiscal year 2006 appropriation provided for 122 employee positions, including 56 administrative law judges. According to the State s records, during fiscal year 2005, OAH s expenditures totaled approximately $11.3 million. Current Status of Findings From Preceding Audit Report Our audit included a review to determine the current status of the four findings included in our preceding audit report dated September 26, 2002. We determined that OAH satisfactorily addressed two of these findings. The remaining two findings are repeated in this report. 4
Findings and Recommendations Cash Receipts Finding 1 OAH did not always collect the proper hearing fees specified in State law, resulting in a loss of income to the State of approximately $215,000. Analysis OAH did not always collect the proper hearing fees provided for in State law. Specifically, effective July 1, 2004, State law increased the hearing fees from $15 for all hearings to $125 for Motor Vehicle Administration hearings and $50 for all other hearings. However, our review disclosed that, as of November 2005, OAH had continued to collect the $15 hearing fee for certain hearings. For example, our test of 20 hearing fees collected during fiscal year 2005 disclosed that 11 of the fees were for the incorrect amounts. According to OAH records, OAH collected the improper fee for 2,050 cases during fiscal year 2005, resulting in a loss of income to the State s General Fund of approximately $215,000. We were advised by OAH management personnel that the improper fees were collected because, after July 1, 2004, the State agencies related to cases heard by OAH continued to distribute hearing request forms to the public specifying the $15 fee. However, OAH could not document that it took any action subsequent to July 1, 2004 to require State agencies to distribute the revised hearing request forms specifying the correct fees. Recommendation 1 We recommend that OAH ensure that the proper hearing fees are collected, as required by State law. Finding 2 Adequate internal controls were not established over certain collections. Analysis OAH lacked adequate segregation of duties over hearing and subpoena fee collections. Specifically, two employees responsible for either processing or depositing the collections also had the ability to process waivers for hearing and subpoena fees on the case management system, and such waivers were not reviewed or verified to supporting documentation by supervisory personnel. Consequently, these employees could misappropriate hearing and subpoena fees 5
and the related hearing could still be scheduled without detection. During fiscal year 2005, OAH s hearing and subpoena fee collections totaled approximately $2 million. Recommendation 2 We recommend that hearing and subpoena fee waivers processed on the system be reviewed and approved by an employee independent of the collection and deposit functions. We advised OAH on accomplishing the necessary separation of duties using existing personnel. Purchases and Disbursements Finding 3 Proper internal controls were not established over the processing of certain purchasing and disbursement transactions. Analysis OAH did not fully use the security features available on the State s Financial Management Information System (FMIS) to restrict user access and to prevent unauthorized purchase and disbursement transactions. Specifically, three employees could initiate and process certain purchasing or disbursement transactions without independent approval. As a result, these employees could process unauthorized transactions which may not be readily detected. Similar conditions were commented upon in our three preceding audit reports dating back to February 1997. According to the State s accounting records, OAH used FMIS to process disbursements totaling approximately $2 million during fiscal year 2005. Recommendation 3 We again recommend that OAH fully use the available FMIS security features by establishing independent on-line approval requirements for all critical purchasing and disbursement transactions. 6
Caseload Management Finding 4 OAH did not ensure that caseload data maintained on its case management system were accurate. Analysis OAH did not ensure that caseload data reflected in its automated case management system were reliable. As a result, management was not able to effectively monitor the status of cases. As of June 30, 2005, the case management system reflected a total of 5,652 open cases. Specifically, our test of 25 cases reported as open in OAH s system as of November 3, 2005 disclosed that 9 of these cases had been closed for periods ranging from 1 month to 22 months. The accuracy of caseload data was commented upon in our three preceding audit reports. Since caseload data are reported in OAH s annual budget submission to the General Assembly and are used by OAH management to monitor caseload activity, it is important that such data be accurately maintained. Recommendation 4 We again recommend that OAH ensure that caseload data maintained on the automated case management system are accurate. 7
Audit Scope, Objectives, and Methodology We have audited the Office of Administrative Hearings (OAH) for the period beginning May 13, 2002 and ending November 3, 2005. The audit was conducted in accordance with generally accepted government auditing standards. As prescribed by the State Government Article, Section 2-1221 of the Annotated Code of Maryland, the objectives of this audit were to examine OAH s financial transactions, records and internal control, and to evaluate its compliance with applicable State laws, rules, and regulations. We also determined the current status of the findings included in our preceding audit report. In planning and conducting our audit, we focused on the major financial-related areas of operations based on assessments of materiality and risk. Our audit procedures included inquiries of appropriate personnel, inspections of documents and records, and observations of OAH s operations. We also tested transactions and performed other auditing procedures that we considered necessary to achieve our objectives. Data provided in this report for background or informational purposes were deemed reasonable, but were not independently verified. Our audit scope was limited with respect to OAH s cash transactions because the Office of the State Treasurer was unable to reconcile the State s main bank accounts during the audit period. Due to this condition, we were unable to determine, with reasonable assurance, that all OAH cash transactions were accounted for and properly recorded on the related State accounting records as well as the banks records. OAH s management is responsible for establishing and maintaining effective internal control. Internal control is a process designed to provide reasonable assurance that objectives pertaining to the reliability of financial records, effectiveness and efficiency of operations including safeguarding of assets, and compliance with applicable laws, rules, and regulations are achieved. Because of inherent limitations in internal control, errors or fraud may nevertheless occur and not be detected. Also, projections of any evaluation of internal control to future periods are subject to the risk that conditions may change or compliance with policies and procedures may deteriorate. Our reports are designed to assist the Maryland General Assembly in exercising its legislative oversight function and to provide constructive recommendations for improving State operations. As a result, our reports generally do not address activities we reviewed that are functioning properly. 8
This report includes conditions that we consider to be significant deficiencies in the design or operation of internal control that could adversely affect OAH s ability to maintain reliable financial records, operate effectively and efficiently, and/or comply with applicable laws, rules, and regulations. Our report also includes a finding regarding a significant instance of noncompliance with applicable laws, rules, or regulations. OAH s response to our findings and recommendations is included as an appendix to this report. As prescribed in the State Government Article, Section 2-1224 of the Annotated Code of Maryland, we will advise OAH regarding the results of our review of its response. 9
The Honorable Nathaniel J. McFadden, Chairman The Honorable Charles E. Barkley, Chairman March 21, 2006 Page 2 When structural changes are made to the form through legislation, MVA is the agency responsible for producing and distributing the new form. MVA advises all law enforcement agencies, by way of an official letter, of the new form and directs that older copies discontinue being used. MVA receives a copy of every completed form, so they are aware that outdated forms are still being used. On April 29, 2004, I along with members of my staff, met with Mr. David Hugel, MVA Administrator, and members of his staff to discuss the fee increase that was to take effect on July 1, 2004. A follow up letter dated April 30, 2004 to Mr. Hugel reiterated that OAH would not reject any hearing request which comes to OAH with an MVA form containing the old fee amount of $15.00. OAH is the repository for the fees, but is not the agency responsible to ensure that the correct fees are submitted by an appellant. Since MVA is the responsible agency for producing and distributing the form, it is they who must ensure that law enforcement agencies use the appropriate form. Finding 2: Adequate internal controls were not established over certain collections. Agency Response: Supervisory reviews had been established within the Finance Section in an effort to have a second individual approve all requests for hearing and subpoena fee waivers. The Auditors reviewed the procedures and noted that the approvals should be by an employee independent of the collection and depositing function. Future waivers will be reviewed by the Director of Administration as recommended by the Auditors. Finding 3: Proper internal controls were not established over the processing of certain purchasing and disbursement transactions. Agency Response: OAH periodically reviews the procedures regarding the processing of purchase and disbursement transactions. Due to the staffing size of Administration and the different types of financial transactions that occur, it is not possible to completely separate some duties. To establish internal controls, all purchasing and disbursement transactions are reviewed and approved by a supervisor. As a result of this issue, OAH reviewed approval verifications in FMIS. OAH has
AUDIT TEAM Mark A. Ermer, CPA Audit Manager Channel D. Sumpter Senior Auditor Julie R. Newton Staff Auditor