Department of Childrens Servicesformerly the Department of Finance and Administrations Office of

Childrens Services Administration, the Department of Youth Development,and certain functions transferred from the Department of Health and the

Department of Human Services

For the Year EndedJune 30, 1996

Arthur A. Hayes, Jr., CPADirector

Barbara K. White, CPAAssistant Director

Lea Ann Boucher, CPA Gregory L. Hawkins, CPAAudit Manager In-Charge Auditor

Katrina BernardiniChrista L. Martin

Brian S. TurnerAndrea Warhurst, CPA Leslie Bethea

Staff Auditors Editor

July 1, 1997

The Honorable Don Sundquist, Governorand

Members of the General AssemblyState CapitolNashville, Tennessee 37243

andThe Honorable George Hattaway, CommissionerDepartment of Childrens ServicesCordell Hull Building, Seventh FloorNashville, Tennessee 37243

Ladies and Gentlemen:

We have conducted a financial and compliance audit of selected programs and activities which includedthe former Department of Finance and Administrations Office of Childrens Services Administration, theDepartment of Youth Development, and certain functions of the Departments of Human Services and Health thattransferred to the Department of Childrens Services for the year ended June 30, 1996.

We conducted our audit in accordance with generally accepted government auditing standards. Thesestandards require that we obtain an understanding of management controls relevant to the audit and that wedesign the audit to provide reasonable assurance of the Department of Childrens Services compliance with theprovisions of laws, regulations, contracts, and grants significant to the audit. Management of the Department ofChildrens Services is responsible for establishing and maintaining the internal control structure and for comply-ing with applicable laws and regulations.

Our audit disclosed certain findings which are detailed in the Objectives, Methodologies, and Con-clusions section of this report. The departments administration has responded to the audit findings; we haveincluded the responses following each finding. We will follow up the audit to examine the application of the pro-cedures instituted because of the audit findings.

We have reported other less significant matters involving the departments internal controls and/or in-stances of noncompliance to the Department of Childrens Services management in a separate letter.

Very truly yours,

W. R. SnodgrassComptroller of the Treasury

WRS/tp96/128

State of Tennessee

A u d i t H i g h l i g h t sComptroller of the Treasury Division of State Audit

Financial and Compliance Audit

Department of Childrens Servicesformerly the Department of Finance and Administrations Office of

Childrens Services Administration, the Department of Youth Development,and certain functions transferred from the Department of Health and the

Department of Human Services

For the Year Ended June 30, 1996

AUDIT SCOPE

We have audited various programs and activities that transferred to the Department ofChildrens Services for the period July 1, 1995, through June 30, 1996. Our audit scope includedthose areas material to the Tennessee Comprehensive Annual Financial Report for the year endedJune 30, 1996, and the Tennessee Single Audit Report for the same period. In addition to thoseareas, our primary focus was on managements controls and compliance with policies, procedures,laws, and regulations in the areas of deferred and contingent revenue, computer programming,and recording of federal grant expenditures and revenues (Department of Finance and Administra-tions Policy 20). The audit was conducted in accordance with generally accepted governmentauditing standards.

AUDIT FINDINGS

Duplicate Payments of Approximately $2.1 Million Made to Vendors**The department issued many duplicate payments and overpayments to vendors for goods andservices provided to childrens plan recipients. Vendors voluntarily made over 718 refundstotaling approximately $2 million and returned over 247 original checks totaling approximately$130,000 (page 5).

No Formal Procedures for Identifying and Collecting Overpayments to Foster Care andAdoption Assistance Parents and to VendorsWhen the department is notified of an overpayment, subsequent payments to that vendor are re-duced to collect the overpayment. However, no procedures are in place to collect overpaymentsif subsequent payments are not made or to promptly collect from adoption assistance and fostercare parents (page 6).

Controls Over Processing of Medical Payments Are Inadequate**Invoices were not reviewed for appropriateness or checked for previous submission prior to pay-ment, and payments to vendors for medical services were not appropriately authorized by a stateofficial (page 8).

Untimely Federal Reporting*The Department of Childrens Services did not always provide the Department of Human Serv-ices with the information necessary to prepare the Title IV-E Foster Care Quarterly Report in atimely manner (page 9).

Controls Over Disbursements Were Weak**The department did not have sufficient controls to ensure the proper processing of disbursements.Among the many problems in the Childrens Services disbursements process were lack ofsupporting documentation, late payments, insufficient approval, and failure to follow standardprocessing procedures (page 10).

Status Changes for Foster Children Are Not Processed Timely**Former Department of Human Services caseworkers did not notify Childrens Services central of-fice personnel of changes in placement status for foster care children in a timely manner (page 12).

Procedures Related to Funding Payments With Title IV-E Grant Funds NeedImprovement*The procedures used by Childrens Services to determine which payments made on behalf of Chil-drens Plan recipients can be funded with federal Title IV-E Foster Care funds need improvement(page 13).

Untimely Journal Voucher ProcessingThe department prepares journal vouchers to record expenditure and revenue transactions be-tween other state agencies and departments. However, the department did not always processthese journal vouchers promptly (page 14).

Social Security Administration Trust Fund Accounts Should Be Reconciled WithAccounting Records Promptly**The department has not resolved and corrected the $1.7 million difference that accumulated be-tween the social security trust fund account balances and STARS from 1987 to 1992. For the lasttwo years, Childrens Services has been working on this problem, but as of December 1996, it hasnot been remedied (page 16).

Untimely Transfer of Deferred RevenueThe Department is not researching and transferring some items from the deferred revenue accountin a timely manner. Three of ten items were not transferred until 14 months after receipt. Sevenof the ten had not been transferred as of December 1996, but had been received between October1995 and June 1996 (page 17).

Controls Over Computer Programming and Payment Processing Are Not Adequate**Controls associated with the payment system and computer programming are not adequate. Untilthe Comprehensive Childrens Services Information System is designed and implemented, currentprograms used by the department will allow a single user to modify the program, manipulate files,enter data, and prepare reports (page 19).

The Client Operation and Review System Does Not Ensure Data Integrity and UserAccountability*Procedures have not been implemented to detect duplicate, incorrect, or invalid data. The abilityto add, change, or delete client information is not appropriately limited to ensure only authorizedchanges are made. In addition, periodic password changes are not required to reduce the risk ofunauthorized access (page 20).

Childrens Services Should Improve Disaster Contingency Planning*Childrens Services does not have a contingency plan to provide continuity of administrative,clerical, and operational functions in case its office and related work areas are damaged ordestroyed (page 21).

* This finding is repeated from the prior Department of Finance and Administration audit.** This finding is repeated from prior Department of Finance and Administration audits.

Audit Highlights is a summary of the audit report. To obtain the complete audit report which containsall findings, recommendations, and management comments, please contact

Comptroller of the Treasury, Division of State Audit1500 James K. Polk Building, Nashville, TN 37243-0264

(615) 741-3697

Audit ReportDepartment of Childrens ServicesFor the Year Ended June 30, 1996

TABLE OF CONTENTS

Page

INTRODUCTION 1

Post-Audit Authority 1

Background 1

AUDIT SCOPE 2

OBJECTIVES, METHODOLOGIES, AND CONCLUSIONS 2

Areas Related to Tennessees Comprehensive Annual Financial Report andSingle Audit Report 2

Finding 1 - Duplicate payments and overpayments of approximately$2.1 million were made to vendors 5

Finding 2 - The department has no formal procedures to identifyand collect overpaymentsuncollected overpaymentswhich total at least $805,097.62 are due from fostercare and adoption assistance parents, and overpaymentsto other vendors are not determinable 6

Finding 3 - Controls over processing of medical payments are inadequate 8

Finding 4 - Childrens Services should ensure timely federal reporting forthe Title IV-E Foster Care Program 9

Finding 5 - Controls over disbursements were weak 10

Finding 6 - Status changes for foster children are not processed timely 12

Finding 7 - Procedures related to funding payments with Title IV-Egrant fun