EPA audit faults state drinking water loan fund

A report issued in February by the Environmental Protection Agency’s Office of the Inspector General cites deficiencies in the way the state Department of Environmental Services handled the accounting of a loan fund for municipal drinking water improvements.

For the audit report, the Inspector General reviewed the 2005 financial statements of the New Hampshire Drinking Water Revolving Fund managed by DES and found what it called “material weaknesses in internal controls.”

The U.S. EPA awards grant money to New Hampshire’s Drinking Water Revolving Fund to help the state make low-interest loans to public and private community water systems in improving their facilities.

While the EPA said in the report it “rendered an unqualified opinion” on the NHDES’ practices, the federal agency did say that it based its opinion on regulations requiring that the state match certain costs that were “under funded by $228,436” and other set-aside costs that were not “separated and identifiable” by the actual costs.

The audit report delineated a number of shortcomings in the state’s accounting of the fund:

• The state did not make adjustments for the identified discrepancies to cash and investment balances in the fund’s general ledger. This resulted in cash being overstated by $3,941,721 and short-term investments understated by $4 million as of June 30, 2005.
• The state did not compare the general ledger to original source documentation, resulting in numerous unrecorded transactions and errors going undetected.
• The state made incorrect journal entries. For example, the year-end reclassifying journal entries for federal funds and the fund balance were overstated by $9.5 million and understated by the same amount in the DWSRF general ledger.
• The state miscalculated match funding. For example, the required state match was under-funded by $228,436 due to the state using the wrong percentage to calculate the required matching funds. The state calculated its share at 17 percent of the capitalization grants instead of the required percentage, which was 20 percent.
• Amortization schedules for five of the 13 loans executed during the last two fiscal years until June 30, 2005, were prepared incorrectly. Two of those five loans resulted in improper accounting for principal forgivenesses and the principal amounts.
• The state did not record several loan payments.
• The state materially misstated cash balances and short-term investments. For example, a $2 million short-term investment was not recorded and a $4 million short-term investment was understated. A $500,000 short-term investment was under recorded at its maturity and another $500,000 short-term investment in another instance was over recorded at its maturity because, according to the report, of a lack of coordination with the state treasurer.

The EPA said the deficiencies could affect the DES’ ability to “record, process and report financial data consistent with the assertions of management in the DWSRF financial statements.”

Many of the problems with the fund’s accounting appear to stem from the stand-alone Microsoft Excel spreadsheet system DES was using.

The report noted that DES was aware of some of these issues before the EPA made its audit and was developing its own corrective actions, specifically improving its accounting system and reconciliation methods.

Jim Martin, public relations office for DES, said the state is working closely with the EPA to address the issues.

“We had been working with an antiquated accounting system. All state departments, including DES, are implementing a new system over the next several months,” he said. “It will create better transparency for this kind of audit.”

Martin said the department’s next steps will be the rollout of and training on a new enterprise-wide system, which includes other modules that dovetail different functions together. such as human resources in addition to accounting.

“We hope it will eliminate these kinds of issues,” he said.

A copy of the report with a memo dated Feb. 26, 2007, was also addressed to Robert Varney, director of the EPA’s New England office.

Dave Deegan, a spokesperson the EPA’s Region I office, said his agency was currently working with both the federal government and DES in going over the program and the findings of the report.

“We’re getting together with the state to see where changes can be made,” he said.

Although the copy of the audit report available to the public on the EPA’s Web site was dated Feb. 26, 2007, an independent auditor’s note was dated May 24, 2006, suggesting the report was completed several months ago.

DES was apparently notified some time after May 24, 2006, since several excerpts in the report referred to the state’s reply to the EPA dated Feb. 14, 2007, including this statement:

“With regards to the comments on the accounting system, DES is in the middle of a system conversion from our manual, Excel spreadsheet based, system to a general ledger system. When this system conversion is complete, the majority of the posting and reconciliation issues will be resolved as we will have one integrated accounting package. All appropriate staff will be trained on using this system including accountants, accounting manager and program managers.

“Procedures have been developed for preparing accounting entries and for their appropriate management review and approval and for the reconciliation of subsidiary schedules to the general ledger.

“Concerning the State Treasury, we are working with that department to improve the timely receipt of SRF documents from them in order for DES to perform our reconciliations and postings in a timely manner.”

The U.S. EPA’s Office of the Inspector General said in its report it found the state’s response to be acceptable.

The federal agency included a list of recommendations to NHDES in the audit report, including:

• Coordinate with the state treasury to obtain current cash and investment statements
• Accounting training for all appropriate loan fund managers and staff
• Develop and implement procedures for appropriate review and approval of accounting entries and reporting from the DWSRF-specific accounting system, including year-end closing and reporting.

A copy of the EPA’s audit report may be viewed at http://epa.gov/oig/reports/water.htm

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