PAYROLL PROCESS REVIEW · In addition, CTF inappropriately granted seven employees access to the...

CORRECTIONAL TRAINING FACILITY

Review Report

PAYROLL PROCESS REVIEW

January 1, 2012, through December 31, 2014

BETTY T. YEE California State Controller

June 2017

BETTY T. YEE

California State Controller

June 27, 2017

Shawn B. Hatton, Warden

Correctional Training Facility

P. O. Box 686

Soledad, CA 93960-0686

Dear Mr. Hatton:

The State Controller’s Office reviewed the Correctional Training Facility (CTF) payroll process

for the period of January 1, 2012, through December 31, 2014. CTF management is responsible

for maintaining a system of internal control over the payroll process within its organization, and

for ensuring compliance with various requirements under state laws and regulations regarding

payroll and payroll-related expenditures.

Our limited review identified material weaknesses in internal control over the CTF payroll

process that leave CTF at risk of improper payments if not mitigated. Specifically, CTF lacked

adequate segregation of duties and compensating controls over its processing of payroll

transactions. The lack of segregation of duties and appropriate compensating controls has a

pervasive effect on the CTF payroll process and impairs the effectiveness of other controls by

rendering their design ineffective or by keeping them from operating effectively.

In addition, CTF inappropriately granted seven employees access to the State’s payroll system.

Six employees’ keying access was not immediately removed after transfer to another agency or

change in classification. One manager should not have been allowed keying access to the system

due to the employee’s management status. This control deficiency leaves the payroll data at risk

of misuse, abuse, and unauthorized use.

Our review also found that CTF lacked sufficient controls over the processing of specific

payroll-related transactions to ensure that CTF complies with collective bargaining agreements

and state laws, and that only valid and authorized payments are processed. The control

deficiencies contributed to CTF employees’ excessive vacation and annual leave balances;

improper payments for out-of-class compensation, separation lump-sum pay, overtime

compensation, and premium and award pay; and unrecovered long-outstanding salary advances;

costing the State an estimated total of $856,141. Our review was performed on a limited number

of transactions only; a more extensive review may find that the amount of improper payments is

higher than what we identified.

Shawn B. Hatton, Warden -2- June 27, 2017

If you have any questions, please contact Andrew Finlayson, Chief, State Agency Audits Bureau,

by phone at (916) 324-6310.

Sincerely,

Original signed by

JEFFREY V. BROWNFIELD, CPA

Chief, Division of Audits

JVB/as

Attachment

cc: Scott Kernan, Secretary

California Department of Corrections and Rehabilitation

Ralph Diaz, Undersecretary, Operations


Diana Toche, Undersecretary, Health Care Services


Kenneth J. Pogue, Undersecretary, Administration and Offender Services


Alene Shimazu, Director, Division of Administrative Services


Bryan Beyer, Director, Division of Internal Oversight and Research


Kathleen Allison, Director, Division of Adult Institutions


Connie Gipson, Deputy Director, Division of Adult Institutions


Jeffrey Macomber, Deputy Director, Division of Adult Institutions


Katherine Minnich, Deputy Director, Human Resources


Lori Zamora, Deputy Director, Office of Audits and Court Compliance


Linda Larabee, External Audits Manager, Office of Audits and Court Compliance


Yulanda Mynhier, Director, Health Care Policy and Administration

California Correctional Health Care Services

Janet Lewis, Deputy Director, Policy and Risk Management


Debbie Richardson, Chief of Internal Audits


Michelle Wilson, Personnel Manager

Correctional Training Facility

Mark Rodriguez, Chief, Administrative Services Division

California Department of Human Resources

Correctional Training Facility Payroll Process Review

Contents

Review Report

Summary ............................................................................................................................ 1

Background ........................................................................................................................ 2

Objectives, Scope, and Methodology ............................................................................... 3

Conclusion .......................................................................................................................... 4

Views of Responsible Officials .......................................................................................... 5

Restricted Use .................................................................................................................... 5

Findings and Recommendations ........................................................................................... 6

Attachment—Correctional Training Facility’s Response to Draft Review Report


-1-

Review Report

The State Controller’s Office (SCO) reviewed the Correctional Training

Facility (CTF) payroll process for the period of January 1, 2012, through

December 31, 2014. CTF management is responsible for maintaining a

system of internal control over the payroll process within its organization,

and for ensuring compliance with various requirements under state laws

and regulations regarding payroll and payroll-related expenditures.

Our limited review identified material weaknesses in internal control over

the CTF payroll process that leaves CTF at risk of improper payments if

not mitigated. We found that CTF has a combination of deficiencies in

internal control over its payroll process such that there is a reasonable

possibility that a material misstatement in financial information or

noncompliance with provisions of laws, regulations, or contracts will not

be prevented, or detected and corrected on a timely basis. Specifically,

CTF lacked adequate segregation of duties and compensating controls

over its processing of payroll transactions. The payroll transactions unit

staff performed conflicting duties. The staff performs multiple steps in

processing payroll transactions, including data entry into the State’s

payroll system; auditing employee timesheets; reconciling payroll,

including system output to source documentation; and reporting payroll

exceptions. In addition, the payroll transactions manager had keying

access to the payroll system while being responsible for approving payroll

transactions entered in the system. This control deficiency was aggravated

by the lack of compensating controls, such as management oversight and

review, to mitigate the risks associated with such a deficiency. The lack of

segregation of duties and appropriate compensating controls has a

pervasive effect on the CTF payroll process and impairs the effectiveness

of other controls by rendering their design ineffective or by keeping them

from operating effectively.

In addition, CTF inappropriately granted seven employees access to the

State’s payroll system. Six employees’ keying access was not immediately

removed after transfer to another agency or change in classification. One

manager should not have been allowed keying access to the system due to

the employee’s management status. This control deficiency leaves the

payroll data at risk of misuse, abuse, and unauthorized use.

Our review also found that CTF lacked sufficient controls over the

processing of payroll-related transactions to ensure that CTF complies

with collective bargaining agreements and state laws, and that only valid

and authorized payments are processed. As summarized in the table on

page 2, the control deficiencies contributed to CTF employees’ excessive

vacation and annual leave balances; improper payments for out-of-class

compensation, separation lump-sum pay, overtime compensation, and

premium and award pay; and unrecovered long-outstanding salary

advances; costing the State an estimated total of $856,141.

Summary


-2-

The following table summarizes our review results:

Selections Reviewed Selections with Issues

Finding

Number Issues

Number of

Selections

Reviewed

Selection

Unit

Dollar

Amount of

Selections

Reviewed

Number of

Selections

with Issues

Issues as a

Percentage

of Selections

Reviewed ᵃ

Approxi-

mate Dollar

Amount

Dollar

Amount of

Issues as a

Percentage of

Dollar

Amount of

Selections

Reviewed ᵃ

1 Inadequate segregation of duties

and compensating controls

N/A N/A

N/A

N/A

N/A

N/A

N/A

2 Inappropriate keying access to

the State’s payroll system

26 Employee $ –

7

27%

$ –

–

3 Inadequate controls over annual

and vacation leave balances,

resulting in excessive credits

55 Employee

803,612

55

100%

803,612

100%

4 Inadequate controls over out-of-

class compensation, resulting in

improper and questioned

payments

5 Employee

46,942 4 80% 13,476 29%

5 Inadequate controls over

separation lump-sum pay,

resulting in improper payments,

net

15 Employee

1,071,948

9

60%

18,205

2%

6 Inadequate controls over holiday

credits, resulting in improper

accruals

15 Holiday

credit

transactions

8,876

4

27%

1,589

18%

7 Inadequate controls over

premium, award, and overtime

payments, resulting in improper

and questioned payments

33 Employee

83,192

7

21%

13,027

16%

8 Inadequate controls over salary

advances, resulting in failure to

collect outstanding accounts

5 Salary

advance

transaction

75,665

1

20%

6,232

8%

154 $ 2,090,235 87 $ 856,141 ᵃ All percentages are rounded to the nearest full percentage point.

In 1979, the State of California adopted collective bargaining for state

employees. This created a significant workload increase for the SCO’s

Personnel and Payroll Services Division (PPSD), as PPSD was the State’s

centralized payroll processing center for all payroll related-transactions.

As such, PPSD decentralized the processing of payroll, allowing state

agencies and departments to process their own payroll-related

transactions. Periodic reviews of the decentralized payroll processing at

state agencies and departments ceased due to the budget constraints in the

late 1980s.

In 2013, the California State Legislature reinstated these payroll reviews

to gain assurance that state agencies and departments maintain an adequate

internal control structure over the payroll function, provide proper

oversight over their decentralized payroll processing, and comply with

various state laws and regulations regarding payroll processing and related

transactions.

Background


-3-

Review Authority

Authority for this review is provided by California Government Code

(GC) section 12476, which states, “The Controller may audit the uniform

state pay roll system, the State Pay Roll Revolving Fund, and related

records of state agencies within the uniform state pay roll system, in such

manner as the Controller may determine.” In addition, GC section 12410

stipulates that “The Controller shall superintend the fiscal concerns of the

state. The Controller shall audit all claims against the state, and may audit

the disbursement of any state money, for correctness, legality, and for

sufficient provisions of law for payment.”

The objectives of this review were to determine whether:

Payroll and payroll-related disbursements were accurate and in

accordance with collective bargaining agreements and state laws,

regulations, policies, and procedures.

CTF had established adequate internal control for payroll, to meet the

following control objectives:

o Payroll and payroll-related transactions are properly approved and

certified by authorized personnel;

o Only valid and authorized payroll and payroll-related transactions

are processed;

o Payroll and payroll-related transactions are accurate and properly

recorded;

o Payroll systems, records, and files are adequately safeguarded;

and

o State laws, regulations, policies, and procedures are complied

with regarding payroll and payroll-related transactions.

CTF complied with existing controls as part of the ongoing

management and monitoring of payroll and payroll-related

expenditures.

CTF maintained accurate records of leave balances.

Salary advances were properly administered and recorded in

accordance with state laws, regulations, policies, and procedures.

We reviewed the CTF payroll process and transactions for the period of

January 1, 2012, through December 31, 2014.

To achieve our review objectives, we:

Reviewed state and CTF policies and procedures related to payroll

process to understand the practice of processing various payroll and

payroll-related transactions;

Objectives, Scope,

and Methodology


-4-

Interviewed CTF payroll personnel to understand the practice of

processing various payroll and payroll-related transactions, determine

their level of knowledge and ability relating to the payroll transaction

processing, and obtain or confirm our understanding of existing

internal control over the payroll process and systems;

Selected transactions recorded in the State’s payroll database based on

risk factors and other criteria for review;

Analyzed and tested transactions recorded in the State’s payroll

database and reviewed relevant files and records to determine the

accuracy of payroll and payroll-related payments, accuracy of leave

transactions, proper review and approval of transactions, adequacy of

internal control over the payroll process and systems, and compliance

with collective bargaining agreements and state laws, regulations,

policies, and procedures (errors found were not projected to the

intended population); and

Reviewed salary advances to determine whether they were properly

administered and recorded in accordance with state laws, regulations,

policies, and procedures.

Our limited review identified material weaknesses1 in internal control over

the CTF payroll process that leave CTF at risk of additional improper

payments if not mitigated.

We found that CTF has a combination of deficiencies in internal control

over its payroll process such that there is a reasonable possibility that a

material misstatement in financial information or noncompliance with

provisions of laws, regulations, or contracts will not be prevented, or

detected and corrected on a timely basis. Specifically, CTF lacked

adequate segregation of duties and compensating controls over its

processing of payroll transactions. The payroll transactions unit staff

performed conflicting duties. The staff performs multiple steps in

processing payroll transactions, including data entry into the State’s

payroll system; auditing employee timesheets; reconciling payroll,

including system output to source documentation; and reporting payroll

exceptions. In addition, the payroll transactions manager had keying

access to the payroll system while responsible for approving payroll

1 An evaluation of an entity’s payroll process may identify deficiencies in its internal control over such a process. A

deficiency in internal control exists when the design or operation of a control does not allow management or

employees, in the normal course of performing their assigned functions, to prevent, or detect and correct

misstatements in financial information, impairments of effectiveness or efficiency of operations, or noncompliance

with provisions of laws, regulations, or contracts on a timely basis.

Control deficiencies, either individually or in combination with other control deficiencies, may be evaluated as

significant deficiencies or material weaknesses. A significant deficiency is a deficiency, or a combination of

deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention

by those charged with governance. A material weakness is a deficiency, or combination of deficiencies, in internal

control such that there is a reasonable possibility that a material misstatement in financial information, impairment

of effectiveness or efficiency of operations, or noncompliance with provisions of laws, regulations, or contracts will

not be prevented, or detected and corrected on a timely basis.

Conclusion


-5-

transactions entered in the system. This control deficiency was aggravated

by the lack of compensating controls, such as management oversight and

review, to mitigate the risks associated with such a deficiency. The lack of

segregation of duties and appropriate compensating controls has a

pervasive effect on the CTF payroll process and impairs the effectiveness


from operating effectively.

In addition, CTF inappropriately granted seven employees access to the

State’s payroll system. Six employees’ keying access was not immediately

removed after transfer to another agency or change in classification. One

manager should not have been allowed keying access to the system due to

the employee’s management status. This control deficiency leaves the

payroll data at risk of misuse, abuse, and unauthorized use.

Our review also found that CTF lacked sufficient controls over the

processing of specific payroll-related transactions to ensure that CTF

complies with collective bargaining agreements and state laws, and that

only valid and authorized payments are processed. The control

deficiencies contributed to CTF employees’ excessive vacation and annual

leave balances; improper payments for out-of-class compensation,

separation lump-sum pay, overtime compensation, and premium and

award pay; and unrecovered long-outstanding salary advances; costing the

State an estimated total of $856,141. Our review was performed on a

limited number of transactions only; a more extensive review may find

that the amount of improper payments is higher than what we identified.

We issued a draft review report on May 30, 2017. Shawn B. Hatton,

Warden, responded by letter dated June 14, 2017 (Attachment), and did

not dispute the findings. Mr. Hatton indicated that CTF has taken steps to

correct the deficiencies noted in the findings. We will follow up at the next

payroll review to ensure that the corrective actions were adequate and

appropriate.

This report is solely for the information and use of California Department

of Corrections and Rehabilitation, California Correctional Health Care

Services, CTF, and the SCO; it is not intended to be and should not be

used by anyone other than these specified parties. This restriction is not

intended to limit distribution of this report, which is a matter of public

record.

Original signed by

JEFFREY V. BROWNFIELD, CPA

Chief, Division of Audits

June 27, 2017

Views of

Responsible

Officials

Restricted Use


-6-

Findings and Recommendations

CTF lacked adequate segregation of duties within its payroll transactions

unit to ensure that only valid and authorized payroll transactions are

processed. CTF also failed to implement other controls to compensate for

this risk.

GC sections 13402 and 13403 mandated state agencies to establish and

maintain internal controls, including proper segregation of duties and an

effective system of internal review. Adequate segregation of duties

reduces the likelihood that fraud or error will remain undetected by

providing for separate processing by different individuals at various stages

of a transaction and for independent reviews of the work performed.

Our review found that the CTF payroll transactions unit staff performed

conflicting duties. The staff performs multiple steps in processing payroll

transactions, including data entry into the State’s payroll system; auditing

employee timesheets; reconciling payroll, including system output to

source documentation; and reporting payroll exceptions. For example, the

payroll transactions unit staff keys in regular and overtime pay and

reconciles the master payroll, overtime, and other supplemental warrants.

CTF failed to demonstrate that it implemented compensating controls to

mitigate the risks associated with such a deficiency. For example, we

found no indication that these functions were subjected to periodic

supervisory review.

The lack of adequate segregation of duties and compensating controls has

a pervasive effect on the CTF payroll process and impairs the effectiveness


from operating effectively. These control deficiencies, in combination

with other deficiencies discussed in Findings 2 through 8 represent a

material weakness in internal control over the payroll process such that

there is a reasonable possibility that a material misstatement in financial

information or noncompliance with provisions of laws, regulations, or

contracts will not be prevented, or detected and corrected on a timely basis.

Recommendation

CTF should separate conflicting payroll function duties to the extent

possible. Adequate segregation of duties will provide a stronger system of

internal control whereby the functions of each employee are subject to the

review of another. Good internal control practices require that the

following functional duties should be performed by different work units,

or at minimum, by different employees within the same unit:

Recording transactions. This duty refers to the record-keeping

function, which is accomplished by entering data into a computer

system.

Authorization to execute. This duty belongs to individuals with

authority and responsibility to initiate and execute transactions.

FINDING 1—

Inadequate

segregation of

duties and

compensating

controls over

payroll

transactions


-7-

Periodic reviews and reconciliation of actual payments to recorded

amounts. This duty refers to making comparisons of information at

regular intervals and taking action to resolve differences.

If it is not possible to segregate payroll functions fully and appropriately,

CTF should implement compensating controls. For example, if the payroll

transactions unit staff responsible for recordkeeping also performs a

reconciliation process, the supervisor could perform and document a

detailed review of the reconciliation to provide additional control over the

assignment of conflicting functions. Compensating controls may also

include dual authorization requirements and documented reviews of

payroll system input and output.

CTF should develop formal written procedures for performing and

documenting compensating controls.

CTF lacked adequate controls to ensure that only appropriate staff have

keying access to the State’s payroll system. Of the 26 employees whose

records we reviewed, seven (27%) had improper keying access to the

system. If not mitigated, this control deficiency leaves the payroll data at

risk of misuse, abuse, and unauthorized use.

The SCO maintains the State’s payroll information system. The system is

decentralized, thereby allowing employees of state agencies to access the

system. PPSD has established a Decentralization Security Program that all

state agencies are required to follow in order to access the payroll systems.

The program’s objectives are to secure and protect the confidentiality and

integrity of the data against misuse, abuse, and unauthorized use.

CTF had 26 employees with access to the State’s payroll system at various

times between January 2012 and December 2014. We reviewed the

records of the 26 employees and found that six did not have their keying

access immediately removed after their transfer to another agency or

change in classification.

In addition, a payroll transactions manager had keying access to the

system. The manager’s duties include approving certain payroll

transactions prior to input into the system. The manager also reviews the

work of his or her staff. To properly segregate duties, employees charged

with approving transactions should not be able to input the transactions

that they approve.

The Decentralization Security Program manual states, in part:

The privilege to access the PPSD database poses a significant risk to the

ability for SCO to function. Therefore, that privilege is restricted to

persons with a demonstrated need for such access. Currently, . . .

applications are restricted to Personnel Services Specialists (PSS), or

Payroll Technician (PT) classifications because their need is by

definition a function of their specific job duties, and any change in those

duties requires a reevaluation of the need for access. If the employee’s

duties change, such that the need for access no longer exists, the access

privilege MUST be removed or deleted immediately by a request

submitted by the department. . . .

FINDING 2—

Inappropriate

keying access to the

State’s payroll

system


-8-

A request for an individual in a classification other than in the PSS/PT

series to access (the payroll system) requires a written justification from

the Personnel/Payroll Officer. The justification must describe the

individual’s specific job duties that require the need to each type of

information…as well as the level of access to that application, in order

to perform their Statutory and/or Constitutional duties. . . .

To prevent unauthorized use of a transferred, terminated or resigned

employee’s userid, it is required that the Security Monitor

IMMEDIATELY submit a PSD125A to delete their system access. DO

NOT WAIT until another employee fills this position; this only increases

the chances for breach of security, utilizing and old userid.

The manual, as revised in January 2015, restricts manager classifications

to inquiry access only.

Recommendation

CTF should update the keying access to the payroll system after employees

leave CTF or change classification. CTF’s designated security monitor

should periodically review access to the system to determine that access

complies with the Decentralized Security Program.

CTF failed to implement controls to ensure that it adheres to the

requirement of collective bargaining agreements and state regulations to

limit the accumulation of vacation and annual leave credits. This

deficiency resulted in a liability for excessive leave credits that could cost

the State at least $803,612 as of December 31, 2014. We expect the

liability to increase if CTF does not take action to address the excessive

vacation and annual leave credits.

Collective bargaining agreements and state regulations limit the amount

of vacation and annual leave that most state employees may accumulate to

no more than 80 days (640 hours). The limit on leave balance serves as a

tool for state agencies to manage leave balances and control the State’s

liability for accrued leave credits. State agencies may allow employees to

carry more than the limit only in certain circumstances. For example, an

employee may not be able to reduce accrued vacation or annual leave

hours below the limit because of business needs. When an employee’s

leave accumulation exceeds or is projected to exceed the limit, state

agencies should work with the employee to develop a plan to reduce leave

balances below the applicable limit.

Our review of the leave accounting records found that at December 31,

2014, CTF had 55 employees whose vacation or annual leave balances

exceeded the limit set by collective bargaining agreements and state

regulations. For example, one employee had an accumulated balance of

2,049 hours in annual leave, or 1,409 hours beyond the 640-hour limit.

Collectively, the 55 employees exceeded the limit by more than

19,000 hours in vacation and annual leave credits. These excess hours cost

the State at least $803,612 in liability as of December 31, 2014.

FINDING 3—

Inadequate

controls over

vacation and

annual leave

balances,

resulting in

liability for

excessive credits


-9-

We inquired whether any plans were in place to address excessive vacation

and annual leave credits in accordance with collective bargaining

agreements and state regulations. During the review, CTF and its

employees did not have any plans in place to reduce excessive leave

credits.

If CTF does not take action to reduce the excessive credits, the liability for

accrued vacation and annual leave will likely increase because most

employees will receive salary increases, additional leave credits, or have

other non-compensable leave credits that they can use instead of vacation

or annual leave, increasing their vacation or annual leave balances. In

addition, the state agency responsible for paying these leave balances may

also face a cash flow problem if a significant number of employees with

excessive vacation or annual leave credits separate from state service.

Normally, state agencies are not budgeted to make these lump-sum

payments. However, the State’s current practice dictates that the state

agency that last employed an employee pays for that employee’s

separation lump-sum payment, regardless of where the employee accrued

the leave balance.

Recommendation

CTF should implement controls, including existing policies and

procedures, to ensure that its employees’ vacation and annual leave

balances are maintained within levels allowed by collective bargaining

agreements and state regulations. CTF should conduct ongoing monitoring

of controls to ensure they are implemented and operating effectively.

If the State offers leave buy-back programs, CTF should also participate

in such programs if funds are available.

CTF lacked adequate controls necessary to ensure that payment of out-of-

class compensation complied with collective bargaining agreements and

state policies. CTF made a total of approximately $13,476 in improper and

questioned payments for out-of-class compensation during the review

period. If not corrected, this control deficiency leaves CTF at risk of

additional improper payments.

Payroll records showed that CTF paid out-of-class compensation to

119 employees between January 2012 and December 2014. We reviewed

the out-of-class compensation for five selected employees to determine

whether CTF granted the compensation in accordance with collective

bargaining agreements and state policies. Of the five employees whose

records we reviewed, four received compensation beyond the limits set by

collective bargaining agreements and state policies as follows:

One managerial employee who was excluded from collective

bargaining was improperly paid by a total of $1,536 for the first

90 days of the out-of-class assignment, in violation of CalHR policies.

Two employees who were subject to agreements that restrict an

employee’s out-of-class assignment to 120 days were improperly paid

approximately $5,475 in compensation exceeding the limit.

FINDING 4—

Inadequate

controls over out-

of-class

compensation,

resulting in

improper

payments


-10-

One employee was paid a total of $6,465 in questioned out-of-class

compensation. The employee had dual part-time positions—one that

was subject to a collective bargaining agreement and another that was

excluded from collective bargaining. The out-of-class assignment

from the represented position exceeded the 120-day limit without the

required CalHR approval.

CalHR’s California State Civil Service Pay Scales section 14, Pay

Differential 101 and Policy Memo No. 2007-026 allow managerial out-of-

class compensation beginning on the ninety-first day of assignment.

Policy Memo No. 2007-026 also reminds departments that there are no

exceptions to request extensions of out-of-class assignments beyond the

provisions of collective bargaining agreements for represented employees.

The collective bargaining agreements between the State and Bargaining

Units 1 and 4 restrict represented employees to up to 120 days of out-of-

class assignment within 12 consecutive months. The collective bargaining

agreement between the State and Bargaining Unit 19 allows assignment

beyond 120 days if approved by CalHR (previously the California

Department of Personnel Administration).

Control deficiencies over the processing of out-of-class compensation

GC sections 13402 and 13403 mandated state agencies to establish and

maintain internal controls, including a system of authorization and

recordkeeping procedures over expenditures, and an effective system of

internal review. State agencies should ensure that these controls are

functioning as prescribed. However, our review of out-of-class

compensation found significant control deficiencies that leave CTF at risk

of additional improper payments and practices if not mitigated. We found

that:

CTF failed to implement existing policies and procedures related to

out-of-class assignment and compensation consistently. For example,

the California Department of Corrections and Rehabilitation (CDCR)

Operations Manual and Personnel Operations Manual allow out-of-

class assignments only as provided in collective bargaining

agreements and CalHR policies. However, as described previously,

CTF payroll transactions unit staff processed compensation for out-

of-class assignments even though the assignments exceeded the limits

set by collective bargaining agreements and state policies.

CTF management did not provide adequate oversight to ensure that

the processing of out-of-class compensation complies with collective

bargaining agreements and state policies.

Recommendation

CTF should conduct a review of out-of-class compensation made during

the past three years to ensure that compensation complied with collective

bargaining agreements and state policies. CTF should recover

overpayments made to employees through an agreed-upon collection

method in accordance with GC section 19838.


-11-

To prevent improper out-of-class compensation from recurring, CTF

should:

Implement existing state policies and procedures regarding out-of-

class assignments and compensation;

Conduct ongoing monitoring of controls to ensure they are

consistently implemented and operating effectively; and

Provide adequate oversight to ensure that the payroll transactions unit

staff processes only valid and authorized out-of-class compensation

that complies with collective bargaining agreements and state policies.

CTF lacked adequate controls over the processing of employee separation

lump-sum pay. Of the 15 employees whose records we reviewed, nine

(60%) were improperly paid, resulting in a net total estimated

overpayment of $18,205. Due to the systemic nature of improper

payments, we also questioned the accuracy of the lump-sum payments,

totaling $3,512,814, made to the other 79 Bargaining Unit 6 employees. If

not mitigated, this control deficiency also leaves CTF at risk of additional

improper payments.

Pursuant to collective bargaining agreements and state law, employees are

entitled to receive cash for accrued eligible leave credits when separating

from state employment. Payroll records indicated that CTF had processed

separation lump-sum pay for 264 employees between January 2012 and

December 2014. We reviewed the records of 15 selected employees and

found that nine were improperly paid, as shown in the following table:

Leave Hours Estimated Dollar

Amount of

Overpayment

(Underpayment) Paid Earned

Overpaid

(Underpaid)

Overpayment

Employee A 3,745 3,104 641 $22,161

Employee B 1,587 1,197 390 11,649

Employee C 2,578 2,564 14 504

Employee D 3,018 3,010 8 350

Subtotal 10,928 9,875 1,053 34,664

Underpayment

Employee E 673 1,004 (331) (9,900)

Employee F 3,591 3,682 (91) (3,269)

Employee G 4,341 4,423 (82) (2,831)

Employee H 1,435 1,451 (16) (324)

Employee I 26 33 (7) (135)

Subtotal 10,066 10,593 (527) (16,459)

Net total 20,994 20,468 526 $18,205

Source: State’s payroll system and CTF’s payroll records.

The improper payments resulted from miscalculation of the employees’

accrued leave credits by the payroll transactions unit staff. We found no

indication that the processing of these lump-sum payments was reviewed

by an authorized individual.

FINDING 5—

Inadequate

controls over

employee

separation lump-

sum pay, resulting

in improper

payments


-12-

In the case of employees A, B, C, E, F, and G, the improper payments also

resulted from CTF not complying with policies and procedures for

calculating separation lump-sum pay for employees working under the

provision of Section 7k of the Fair Labor Standards Act (FLSA).

According to the CDCR 7k Manual, the FLSA hourly pay rate for 7k

employee differs from the SCO pay rate due to the difference in the

number of hours required in the same time frame. CTF did not convert the

7k employees’ projected leave credit hours to reflect the correct monetary

amount when reported to SCO. The 7k Manual instructs institutional

personnel offices to convert the total hours of leave credits projected in the

final month.

We also noted two cases of inconsistencies regarding the calculation of

separation lump-sum payments. In the first case, the 7k Manual stated that

the total lump-sum hours to be paid are determined by adding the hours

from the complete pay periods to the converted hours of the final pay

period of projection. However, the manual’s examples of the conversion

process also indicated that the total lump-sum hours to be paid equal the

converted hours from the entire projection period. In the second case, the

7k Manual stated that holidays are paid based on eight hours during the

projection period. However, CTF provided us documentation from CDCR

headquarters indicating that holidays are not included in the projection of

lump-sum hours for posted employees. When we inquired with CDCR

Office of Personnel Services, we also received conflicting views on how

the holidays would be treated for lump-sum pay calculation. According to

the Office of Personnel Services, the 7k Manual has not been updated since

2006; therefore, any changes in the collective bargaining agreement since

then between the State and Bargaining Unit 6 that may affect employee

separation lump-sum payments have not been reflected in the manual.

Recommendation

CTF should:

Establish adequate controls to ensure accurate calculation and

payment of employee separation lump-sum pay;

Conduct a review of employee separation lump-sum payments during

the past three years to ensure that the payments are accurate and in

compliance with collective bargaining agreements and state law; and

Recover overpayments made to separated employees in accordance

with GC section 19838 and State Administrative Manual (SAM)

section 8776.6, and properly compensate those employees who were

underpaid.

CDCR should update the 7k Manual to reflect the most recent

requirements for calculating employee separation lump-sum pay. These

changes should be properly communicated to the institutions.


-13-

CTF lacked adequate controls over its employees’ accrual of holiday

credits. CTF improperly granted 32 holiday credit hours in four (27%) of

15 transactions reviewed, costing the State approximately $1,589. The

control deficiency also leaves CTF at risk of additional improper accruals

of holiday credit if not mitigated.

Collective bargaining agreements and GC section 19853 specify the

number of hours of holiday credit an employee would receive per

qualifying holiday. In our review of 15 selected holiday credit transactions

recorded in the State’s leave accounting system, we determined that four

involved accruals of 32 holiday credit hours that did not comply with

collective bargaining agreements and state law. For all four transactions,

CTF granted a holiday credit in a month with no holidays. We found no

indication that the holiday credit transactions were reviewed by an

individual other than the payroll transactions unit staff responsible for

keying these transactions in the system.

Recommendation

CTF should conduct a review of the leave accounting system to ensure that

the accrual of holiday credits complies with collective bargaining

agreements and state law. CTF should correct any improper holiday credits

in the leave accounting system.

To prevent recording of improper holiday credits in the leave accounting

system, CTF should:

Provide adequate oversight to ensure that payroll transactions unit

staff accurately record leave transactions; and

Provide training to payroll transactions unit staff involved in keying

transactions into the leave accounting system to ensure that they

understand the requirements under collective bargaining agreements

and state law regarding holiday credits.

CTF lacked adequate controls to ensure that the payroll transactions unit

staff processes only valid and authorized premium, award and overtime

payments that comply with collective bargaining agreements and state

law. CTF granted a net total of $13,027 in improper and questioned

payments to seven employees. The control deficiencies leave CTF at risk

of additional improper payments if not mitigated.

Premium and award payments made to employees who did not meet

requirements to receive the pay

Payroll records showed that CTF granted 38 types of premium or award

payments to its employees between January 2012 and December 2014. In

addition to out-of-class compensation, discussed in Finding 4, we

reviewed selected transactions in four types of premium and award

payments. The selections included payments to seven employees for

physical fitness pay, five for housing stipend, three for uniform allowance,

and three for Inmate Worker’s Supervision Pay (IWSP). We found

improper payments for uniform allowance and IWSP, as discussed below.

FINDING 6—

Inadequate

controls over

holiday credits,

resulting in

improper accruals

FINDING 7—

Inadequate

controls over

premium, award,

and overtime

payments, resulting

in improper

payments


-14-

The collective bargaining agreement between the State and Bargaining

Unit 6 allows a permanent employee required to wear a uniform and

uniform accessories on a full-time basis to receive a uniform allowance of

$530 per year. We found that one of the three employees reviewed for

uniform allowance received a duplicate payment exceeding the annual

limit of $530. Accordingly, CTF overpaid one employee by $530 for

uniform allowance.

Pursuant to collective bargaining agreements and CalHR’s California

State Civil Service Pay Scales section 14, Pay Differential 67, employees

assigned to supervise inmates are eligible to receive IWSP if the

employees meet certain requirements. The requirements include that the

employees have regular, direct responsibility for supervising the work of

at least two inmates who must collectively work 173 hours each month,

providing the resident workers with on-the-job training and evaluating the

resident workers’ work performance. In addition, the employees also must

have a valid and approved medical clearance on file.

Our review of the IWSP for three employees found that the employees

were overpaid by a total of $760. Two employees received a total of $380

in duplicate payments. One employee, who did not meet the requirements

to receive the pay during the pay period, received duplicate payments

totaling $380. In addition, the three employees did not have medical

clearances on file, as required. Accordingly, we questioned an additional

$11,970 in IWSP granted to them during the review period.

Overtime compensation improperly paid to employees

Payroll records showed that CTF paid overtime payments to

1,091 employees between January 2012 and December 2014. We

reviewed the overtime payments for 15 of these employees. Of the 15

employees, two were overpaid by a total of $136 and one was underpaid

by $369. The improper payments resulted from miscalculation of the

employees’ overtime hours by the payroll transactions unit staff. We found

no indication that the processing of these overtime payments was reviewed

by an authorized individual.

Control deficiencies over processing of award and overtime payments

GC sections 13402 and 13403 mandate state agencies to establish and

maintain internal controls, including a system of authorization and

recordkeeping procedures over expenditures, and an effective system of

internal review. State agencies are also responsible for ensuring that these

controls are functioning as prescribed. However, the improper premium,

award, and overtime payments demonstrated that CTF lacked adequate

controls to ensure that the payroll transactions unit staff processes only

valid and authorized payments that comply with collective bargaining

agreements and state law and policies.


-15-

Recommendation

CTF should conduct a review of premium, award, and overtime payments

during the past three years to ensure that the payments comply with

collective bargaining agreements and state law and policies. If CTF made

overpayments to employees, it should seek reimbursement through an

agreed-upon collection method in accordance with GC section 19838.

To prevent improper award and overtime payments from recurring, CTF

should:

Establish adequate internal controls to ensure payments for premium,

award, and overtime compensation comply with collective bargaining

agreements and state law. These controls should require payroll

transaction unit staff to verify that a payment does not exceed the

amount set by collective bargaining agreements and state law and

policies.

Provide adequate oversight to ensure that payroll transactions unit

staff process only valid and authorized payments that comply with

collective bargaining agreements and state law and policies; and

Provide training to payroll transactions unit staff to ensure they

understand the requirements under collective bargaining agreements

and state law and policies.

CTF lacked adequate controls over salary advances to ensure that they are

processed in accordance with state law and policies. At December 31,

2014, CTF had $94,357 in salary advances that had been outstanding for

over 120 days. Of the five salary advances reviewed, one, costing

$6,232—the longest outstanding at over 10 years—remained outstanding

due to CTF’s lack of collection effort. The control deficiency leaves CTF

at risk for additional uncollectable salary advances.

GC section 19838 and SAM section 8776.7 allow CTF to collect salary

advances in a timely manner. At December 31, 2014, the CTF’s

accounting records showed 15 outstanding salary advances totaling

$94,357, which were all outstanding for more than 120 days. The longest

outstanding salary advance was over 10 years. Generally, the prospect of

collection diminishes as an account ages. When an agency is unable to

collect after three years, the possibility of collection is remote.

Of the five selected salary advances totaling $75,665 that we reviewed,

one, costing $6,232, was issued in November 2004. CTF could not support

its authorization and collection effort, if any, for this salary advance due

to lack of supporting documentation. SAM section 8776 requires agencies

to maintain proper records of collection efforts.

The lack of adequate controls over salary advances increases the risk of

financial loss, reduces the likelihood of collection, increases the amount

of resources expended on collection efforts, and negatively impacts cash

flow.

FINDING 8—

Inadequate

controls over salary

advances, resulting

in failure to recover

outstanding

accounts


-16-

Recommendation

CTF should ensure that salary advances are recovered in a timely manner

pursuant to GC section 19838 and SAM section 8776.7. If all reasonable

collection procedures do not result in payment, CTF may request

discharge from accountability of uncollectable amounts.

CTF also should maintain documentation of its salary advance

authorization and collection efforts, if any.


Attachment—

Correctional Training Facility’s Response to Draft Review

Report

State Controller’s Office

Division of Audits

Post Office Box 942850

Sacramento, CA 94250-5874

http://www.sco.ca.gov

S15-PAR-9011

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