Alaska Division of Legislative Audit
Audit Report #04-1461-99

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March 16, 1999

Members of the Legislative Budget and Audit Committee:

In accordance with the provisions of Title 24 of the Alaska Statutes, the attached report is submitted for your review.

DEPARTMENT OF REVENUE
For The Fiscal Year Ended June 30, 1998
Audit Control Number
04-1461-99

This report addresses our review of the Department of Revenue’s (DOR) financial activity and selected state compliance issues for the period ending June 30, 1998. We reviewed general fund and permanent fund dividend fund authorizations, expenditures, encumbrances, and general fund revenues to determine whether the reported information was materially complete and accurate. We also reviewed compliance with certain state laws and regulations. We expressed an opinion on DOR’s financial schedules and made recommendations in areas needing improvement.

The audit was conducted in accordance with generally accepted government auditing standards. Fieldwork procedures utilized in the course of developing the findings and discussion presented in this report are discussed in the Objectives, Scope, and Methodology section.

Pat Davidson, CPA
Legislative Auditor

OBJECTIVE, SCOPE, AND METHODOLOGY

ORGANIZATION AND FUNCTION

INDEPENDENT AUDITOR'S REPORT

Financial Schedules:

General Fund

Schedule of Operating Expenditures and Encumbrances Compared with Appropriations

Schedule of Capital Expenditures, and Encumbrances Compared with Appropriations

Schedule of Operating Restricted Revenues, Budget and Actual

Schedule of Capital Restricted Revenues, Budget and Actual

Permanent Fund Dividend Fund

Schedule of Expenditures and Encumbrances Compared with Appropriations

Notes to the Financial Schedules

Independent Auditor’s Report on Compliance And Internal Control Over Financial Reporting Based on the
Audit of the Financial Schedules Performed in Accordance with Government Auditing Standards

FINDINGS AND RECOMMENDATIONS

AUDITOR'S COMMENTS

AGENCY RESPONSE

Department of Revenue

In accordance with Title 24 of the Alaska Statutes, we conducted a financial review of the Department of Revenue (DOR) for the fiscal year ending June 30, 1998. Our review also included assessing the department’s compliance with state laws and regulations governing fiscal procedures.

The objective of this review was to determine whether financial activity of the department is materially complete and accurate as reported in the state accounting system and to express an opinion on whether that activity is reported in accordance with generally accepted accounting principles.

Our review also included an assessment of whether transactions were being processed in accordance with state laws and regulations governing fiscal procedures. As part of this review, we reviewed transactions to determine whether expenditures were charged to the correct appropriation.

Our review encompassed FY 98 financial activity recorded in general fund and permanent fund dividend fund appropriations under the control of DOR. This included both operating and capital appropriations.

This excluded the following activities administered by DOR:

• Treasury Division investment services charged to pension and other funds.
• Income and Excise Audit Division revenue collections for other funds.
• Activities of public corporations associated with DOR.

Methodology

Our review included analytical procedures and examination of specific transactions selected on a random and judgmental basis. We also conducted interviews with agency personnel throughout the audit. Tests of internal controls over the processing of financial transactions were performed at both Juneau and Anchorage DOR offices. Budgetary documents and other information were also obtained and reviewed as necessary.

Under the provisions of Title 43 of the Alaska Statutes, the Department of Revenue is empowered to act as tax collector and treasurer for the State. It is the department’s responsibility to administer and enforce the collection of state taxes and to ensure proper custody and investment of funds received by the State. In addition, the department provides the administrative support to boards, corporations, and authorities. The following provides an overview by division and function of the department.

The Treasury Division (treasury) manages the State’s financial assets. Treasury’s mission is to prudently manage the state treasury and state pension funds, and to facilitate the issuance of debt at the lowest cost possible. Activities include collection and disbursement of all state funds, investment of funds under the fiduciary control of the commissioner of the Department of Revenue, the retirement funds under the fiduciary control of the Alaska State Pension Investment Board (ASPIB) and the issuance and oversight of all state debt. Treasury also serves as staff to ASPIB, the State Bond Committee, and the Alaska Municipal Bond Bank Authority.

The Income and Excise Audit Division (IEAD) has offices in Juneau and Anchorage. The division establishes policies in tax matters covering 16 different tax programs, processes business permits and licenses, oversees the filing of tax returns, seeks to promote voluntary compliance and prepares revenue forecasts. IEAD has four sections: operations, audit and investigations, appeals, and research.

The Oil and Gas Audit Division (OGAD) is responsible for collecting state tax revenue from the oil and gas production tax and oil surcharge, the oil and gas property tax, and the conservation tax. OGAD is also responsible for forecasting oil and gas royalties and production tax revenue. OGAD has five sections: processing, audit, appeals, property tax, and economic research.

The Child Support Enforcement Division (CSED) ensures that Alaskan children receive financial support from both parents by helping children obtain support from non-custodial parents. CSED also requires parents to reimburse the State for children on the Alaska Temporary Assistance Program (ATAP), Medicaid and foster care, and establishes the paternity relationship between fathers and their children. CSED has three sections: operations, support services, and the director’s office.

The Permanent Fund Dividend Division (PFDD) is responsible for distributing permanent fund dividend checks to each Alaskan resident who applies and qualifies for the dividend. The division receives the statutorily determined share of investment income from the Alaska Permanent Fund Corporation in order to make the distributions from the permanent fund dividend fund (PFDF). In addition, PFDF funds the division’s administration of the program. The division is organized into four units: operations, dividend review, appeals, and data processing.

The commissioner’s office main roles are to assist the operating divisions in the department in achieving their stated goals and finding new and innovative ways to provide services to the public. In addition, the appeals section of the commissioner’s office hears formal appeals for the Permanent Fund Dividend Division and the Child Support Enforcement Division.

The central goal of the Administrative Services Division is efficient internal operation of the Department of Revenue by providing centralized support services, formulating operating policies, and developing and implementing management procedures for the department. Administrative Services has three sections: human resources, fiscal and budget, and data processing.

The Alcoholic Beverage Control (ABC) Board is responsible for control of manufacture, barter, possession and sale of alcoholic beverages within the State of Alaska. This control is achieved through Board review and consideration of liquor license applications for renewal, issuance, and transfer. The board is charged with enforcing compliance of alcoholic beverage statutes. Staff activities include processing license applications and fees, contacting local governments, inspecting all licensed premises, and investigating alleged violations. In addition, the staff conducts public interest hearings on licensing matters at the direction of the board. As a quasi-judicial body, the board may suspend or revoke licenses and deny applications. The board may also adopt regulations.

The ABC Board is in the Department of Revenue for administrative purposes only, in accordance with statute. The governor appoints the five board members for overlapping three-year terms. The board’s financial activity is reported in the General Fund.

The following entities are administratively associated with DOR:

1. The Alaska State Pension Investment Board.
2. The Alaska Permanent Fund Corporation.
3. The Alaska Housing Finance Corporation.
4. The Alaska Municipal Bond Bank Authority.
5. The Alaska Mental Health Trust Authority.

Members of the Legislative Budget and Audit Committee:

We have audited the financial schedules of the State of Alaska, Department of Revenue for the fiscal year ended June 30, 1998, as listed in the table of contents. These financial schedules are the responsibility of the agency’s management. Our responsibility is to express an opinion on these financial schedules based on our audit.

Except as discussed in the following paragraph, we conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial schedule presentation. We believe our audit provides a reasonable basis for our opinion.

The State’s Y2K Project Office publishes monthly reports on the Y2K readiness of each state department. These reports are available through the internet at http://www.state.ak.us/y2000/.

Because of the unprecedented nature and scope of the Y2K issue, its effects and the success of related remediation efforts will not be fully determinable until the year 2000 and thereafter. Management cannot assure that the Department of Revenue is or will be year 2000 ready, that DOR’s remediation efforts will be successful in whole or in part, or that parties with whom DOR does business will be year 2000 ready.

Independent Auditor’s Report on Compliance
And on Internal Control Over Financial Reporting
Based on the Audit of the Financial Schedules Performed in
Accordance with Government Auditing Standards

Members of the Legislative Budget and Audit Committee:

We have audited the financial schedules of the State of Alaska, Department of Revenue for the fiscal year ended June 30, 1998 as listed in the table of contents, and have issued our report thereon dated February 10, 1999. As discussed in the report, the financial schedules are only for specified elements and are not intended to present fairly the financial position and results of operations for any fund types in the State of Alaska, Department of Revenue. The report was qualified because insufficient audit evidence exists to support the disclosures with respect to the year 2000 issues. Except as discussed in the preceding sentence, we conducted our audit in accordance with generally accepted audit standards and the standards applicable to financial-related audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.

As part of obtaining reasonable assurance about whether the State of Alaska, Department of Revenue’s financial schedules are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grants, noncompliance with which could have a direct and material effect on the determination of the financial schedule amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed an instance of noncompliance that is required to be reported under Government Auditing Standards which is described in Recommendation No. 1 of the Findings and Recommendations section.

In planning and performing our audit, we considered the State of Alaska, Department of Revenue’s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial schedules and not to provide assurance on the internal control over financial reporting. However, we noted certain matters involving the internal control over financial reporting and its operation that we consider to be reportable conditions. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control over financial reporting that, in our judgment, could adversely affect the State’s ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial schedules. Reportable conditions are discussed in Recommendation No. 2 of the Findings and Recommendations section.

A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial schedules being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.

Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses. However, we believe that the reportable condition noted above is not a material weakness.

This report is intended for the information of the State’s and the department’s management and members of the Alaska Legislature. However, this report is a matter of public record and its distribution is not limited.

Pat Davidson, CPA
Legislative Auditor

February 10, 1999

Recommendation No. 1

The Department of Revenue’s (DOR) directors of the Administrative Services Division and the Child Support Enforcement Division (CSED) should take measures to resolve a revenue shortfall issue.

The State Budget Act provides that if actual collections fall short of appropriated program receipts, an agency is required to reduce its budget by the estimated reduction in collections. One DOR FY 97 appropriation has been identified as having a potential revenue shortfall. Specifically:

DOR believes all related revenues have been collected, therefore the department is pursuing a supplemental appropriation during the current legislative session.

The Department of Revenue director of the Administrative Services Division should implement policies and procedures to comply with AS 37.05.160 and the state property accounting manual.

DOR’s controls for safeguarding assets are deficient. State property appears to be missing and the property control list contains other errors. DOR has not maintained the department’s property control system and has failed to perform an annual physical count of inventory as required by the Department of Administration (DOA).

Fifteen microcomputers and a docking station from the department’s property list were selected for testing. We did not find the docking station in the stated location. Of the 15 computers, only four were located. One of these four was found in a division other than recorded on the property list. The property custodian did not have documentation to evidence the equipment loan. The agency found documentation indicating it had surplused only one of the 11 missing computers. However, no one had updated the property listing for the surplused item.

Several assets on the property listing were misclassified. Although not material, such misclassifications indicate a lack of dedication to system integrity or inadequate reviews of system reports. In addition, seven assets on the department’s system-generated inventory list were classified as "undefined." Such status means that the division, custodian and location assigned to the asset are unknown.

DOA utilizes an online property control system to maintain accountability for all controlled assets. Each department has a department property officer charged with maintaining their respective department’s assets on the system. Maintenance primarily involves identifying and tagging controlled property, and performing system entries necessary to record asset acquisitions, transfers and disposals. Lost, stolen or damaged property must also be accounted for. In addition, each division usually has one property custodian to maintain accountability for assets assigned to the division’s care. However, most DOR property custodians did not have a custodian handbook for guidance. Consequently, they were unaware of appropriate property control procedures, such as having a signed property receipt form on file for all assets on loan to another division or agency.

Additionally, DOR has not performed an annual physical count of inventory since FY 95. Without a physical inventory the department is unable to determine if assets on the property list are still in state possession, whether purchased property has been properly recorded or when missing property may have been misallocated. A properly conducted annual inventory could help compensate for some of the other control weaknesses previously mentioned.

We recommend that the department perform a comprehensive physical count of property on an annual basis and a division-wide physical count when there are personnel changes within the property custodian positions. In addition, we recommend that all property transfers, including surplused property, be documented and maintained on file by the applicable property custodian until such property is returned or removed from the property list.

The 1998 Legislature established missions or program goals and specific performance measures for some state programs in the FY 99 budget. Missions and measures were identified for two of DOR’s divisions, the Alcohol Beverage Control (ABC) Board and the Child Support Enforcement Division (CSED). Our purpose here is to present DOR’s progress in implementing missions and measures.

The ABC Board agreed to the mission as set forth by the legislature, to protect the health, safety and welfare of Alaskans by limiting the misuse of alcohol. The following performance measures were included in the operating budget for the ABC Board:

1. The average time between notice of violations of the Alaska Statutes, Title 4 – Alcoholic Beverages.
2. Percentage of servers trained in compliance for one full year.
3. Percentage of licensees in compliance for one full year regarding serving to minors, serving to "drunken" persons, and server training.

The ABC Board has modified the performance measures it is tracking from those identified by the legislature. The board is implementing two performance measures. The last of the performance measures listed above (No. 3) and the following measure will be addressed for FY 99:

1. The extent to which licensed establishments violate the hours of operation laws, both federal and state.

The ABC Board staff has a system in place to collect and maintain the data for the performance measures it has chosen to track. This information is included in the ABC Board’s FY 2000 budget documents.

CSED is addressing its mission statement and performance measures. CSED restated its mission for the FY 2000 budget as follows: to help children by establishing, modifying, and enforcing financial support obligations in a fair and equitable manner, to help people use our services; and to promote the responsibility of parents in supporting their children. While not changing the intent, this mission provides more specific goals.

The following performance measures were included in the FY 99 operating budget for CSED:

1. The total amount collected for current support obligations as a percentage of the total current amount due.
2. Arrearage cases in collections compared total arrearage cases.
3. Current collections for government (state and federal) compared to current total government obligations.
4. Government arrearage cases in collections compared to total government arrearage cases.
5. Percentage of complaints found to have worker errors.
6. Current cases compared to total cases.

CSED has adopted four performance measures for FY 00. Of the above listed performance measures provided by the legislature, CSED is tracking three. CSED adopted an additional measure of its own due to its relevance to operations. The performance measures that CSED adopted include:

1. The percentage of cases with child support orders.
2. The total amount collected for current support obligations as a percentage of the total current amount due.
3. The percentage of cases with arrears payments.
4. The percentage of case party complaints attributable to employee error.

CSED believes its new computer system will have the ability to provide the data for the performance measures that have been adopted.

April 8, 1999

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