CALIFORNIA DEPARTMENT OF
CORRECTIONS AND REHABILITATION
Audit Report
ADMINISTRATIVE AND INTERNAL ACCOUNTING
CONTROLS OVER THE OFFICE REVOLVING FUND
July 1, 2009, through July 31, 2010

JOHN CHIANG
California State Controller

July 2011

JOHN CHIANG
California State Controller
July 20, 2011

Matthew Cate, Secretary
California Department of Corrections and Rehabilitation
1515 S Street
Sacramento, CA 95814
Dear Mr. Cate:
This report presents the results of the State Controller’s Office (SCO) audit of the California
Department of Corrections and Rehabilitation’s (CDCR) administrative and accounting controls
over its office revolving fund (ORF) for the period of July 1, 2009, through July 31, 2010.
We conducted our review pursuant to Government Code sections 12410 and 12418.
Government Code section 12410 stipulates that the State Controller shall audit disbursements
from the state treasury to ensure legality and propriety of payments. Government Code section
12418 stipulates that the State Controller shall direct and superintend the collection of money
due the State.
Our audit found the CDCR effort to collect overpayments of salary and travel advances from
employees to be grossly inadequate. In addition, as a result of severe internal control
deficiencies, there is a high potential for fraud and misappropriation of public funds. Our audit
also disclosed insufficient ORF policies and procedures, inadequate effort to discharge longoutstanding receivables from accountability, and inappropriate use of the ORF to pay for other
program expenses.
We are encouraged by your department’s response acknowledging the issues identified in our
report and stating that you have already begun action to implement the audit recommendations.
We are particularly pleased to note that you have fully implemented 22 of the 36
recommendations and have initiated a vigorous effort to collect outstanding debts.
Your response indicated that your department is preparing a six-month corrective action plan.
We would appreciate receiving a copy of the plan upon completion. In addition, please be
advised that we intend to conduct a follow-up review in approximately 12 months to assess the
progress.

Matthew Cate, Secretary

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July 20, 2011

If you have any questions, please call Andrew Finlayson, Chief, State Agency Audits Bureau, at
(916) 324-6310 or e-mail him at afinlayson@sco.ca.gov.
Sincerely,
Original signed by
JEFFREY V. BROWNFIELD
Chief, Division of Audits
JVB:wm
cc: Martin Hoshino, Undersecretary
Administration & Offender Services
California Department of Corrections and Rehabilitation
Scott Carney, Director, Administrative Services
California Department of Corrections and Rehabilitation
Georgia Johas, Associate Director, Budget Management
California Department of Corrections and Rehabilitation
Linda Wong, External Audits Manager
Office of Audits and Court Compliance
California Department of Corrections and Rehabilitation

California Department of Corrections and Rehabilitation

Administrative and Internal Accounting
Controls Over the Office Revolving Fund

Contents
Audit Report
Summary ............................................................................................................................

1

Audit Authority..................................................................................................................

1

Background ........................................................................................................................

1

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

3

Conclusion ..........................................................................................................................

4

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

5

Restricted Use ....................................................................................................................

5

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

6

Appendix—Outstanding ORF Receivables Aging Report ................................................. 24
Attachment—Department’s Response to Draft Audit Report

Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

Audit Report
Summary

The State Controller’s Office (SCO) audited the California Department
of Corrections and Rehabilitation’s administrative and internal
accounting controls over its office revolving fund (ORF) for the period
of July 1, 2009, through July 31, 2010.
Our audit found serious internal control deficiencies over the
department’s system of internal controls and procedures for processing
ORF transactions. These deficiencies could lead to waste, fraud, and
misappropriation of funds. Specifically, we identified the following
concerns:
• Inadequate collection efforts resulted in delayed collection of millions
of dollars in receivables from employee salary and travel advances.
• The department has serious internal control deficiencies relate to ORF
transactions that could lead to fraud, abuse, and misappropriation of
funds.
• Invalid receivables related to salary advances and travel advances
were not adjusted in a timely manner.
• The department does not have sufficient written policies and
procedures for using the ORF.
• Discharges from accountability were not filed, and discharges were
made internally without proper authority.
• The department used the ORF to pay for other program expenses.
The severity of internal control deficiencies identified in this audit raises
concerns about the adequacy of administrative and internal accounting
controls in other aspects of the department’s fiscal operations.

Audit Authority

Under Government Code section 12418, the State Controller is to direct
and superintend the collection of all money due the State. In addition,
Government Code section 12410 stipulates that the State Controller shall
audit all claims against the State, and may audit the disbursement of any
State money for correctness and legality and for sufficient provision of
law for payment.

Background

The mission of the California Department of Corrections and
Rehabilitation is to enhance public safety through safe and secure
incarceration of offenders, effective parole supervision, and rehabilitative
strategies to successfully reintegrate offenders into California
communities. The department currently operates 33 adult correctional
institutions, 5 juvenile facilities, 47 juvenile and adult conservation/fire
camps, and 13 adult community correction facilities in California,
housing approximately 168,000 adult offenders and approximately 1,200
juvenile offenders. Furthermore, the department manages 187 parole
offices and sub-offices located throughout the State, and oversees six
out-of-state correctional facilities.
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Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

Overview of the Department’s Office Revolving Fund
In accordance with Government Code section 16400, an agency may
establish an office revolving fund (ORF) from any appropriation made to
it subject to the following limitations:
•

No approval is required if the revolving fund will not exceed 3% of
the total appropriation.

•

Approval of the Department of Finance budget analyst is required if
the revolving fund will exceed 3% but not 10% of the total
appropriation.

•

Approval of the Department of Finance Program Budget Manager
and the SCO is required if the ORF will exceed 10% of the
appropriation.

In accordance with law, ORFs drawn under the provisions of
Government Code section 16400 may be used only for payment of
compensation earned, traveling expenses, traveling expense advances, or
where immediate payment is otherwise necessary (Government Code
section 16401).
The department’s ORF had appropriations of $55,150,109 as of
June 30, 2010.
The accounting function of the ORF is decentralized to eight locations of
seven regional accounting offices (RAO) and a Sacramento accounting
office as follows:
Sacramento Accounting Office
Bakersfield RAO
Central Coast RAO
Corcoran RAO
Central Valley RAO
El Centro RAO
Juvenile Justice North RAO
Southern California RAO
Personnel functions, including authorizations and collections of salary
advances, are also decentralized to the locations of institutions/facilities/
offices (collectively referred to in this report as “institutions”). Each
RAO is designated with a number of institutions for which to perform
fiscal and administrative functions.
In November 2008, the department implemented SAP (Systems,
Applications, and Products in Data Processing), an enterprise application
software. The recording of salary advances and vendor payments related
to the ORF is in SAP, while travel advances are posted in the CalSTARS
accounting system and subsequently transferred to SAP.

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Administrative and Internal Accounting
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California Department of Corrections and Rehabilitation

Objectives, Scope,
and Methodology

The audit was performed in accordance with generally accepted
government auditing standards. These standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and recommendations. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
The objectives of the audit were to determine whether the department has
administrative and internal accounting controls in place to ensure that:
• Sufficient written policies and procedures exist for properly
administering and controlling the ORF;
• ORF regulations, policies, and guidelines are properly followed;
• The amount advanced to the ORF does not exceed authorized
amounts;
• The ORF is used for authorized purposes only;
• The ORF receivables are collected in a timely manner;
• Collection effort is adequate and supported by appropriate
documentation;
• Claims for reimbursement of the ORF are processed in a timely
manner and are supported by appropriate documentation;
• ORF receipts are deposited in a timely and economical manner;
• Monthly reconciliations are performed accurately and in a timely
manner; and
• Discharge of accountability is performed in a timely manner on stale
and uncollectable ORF items.
The scope of our audit included a review of government and
departmental policies, processes, procedures, and practices relative to its
general office revolving fund for the period of July 1, 2009, through
July 31, 2010. We did not audit the financial statements of the California
Department of Corrections and Rehabilitation. We did not review the
department’s practices and procedures relative to its petty cash accounts,
permanent advances related to postage, or the inmate welfare fund, as the
amounts involved do not appear to be material.
We performed the following procedures:
• Reviewed pertinent statutes, regulations, and written policies and
procedures as they relate to the ORF.
• Reviewed and analyzed relevant audit reports issued by the
department’s Internal Audits Office, including a report on the ORF
and a Financial Integrity and State Managers Accountability Act
(FISMA) report.

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California Department of Corrections and Rehabilitation

• Documented a description of the internal controls over the ORF using
an internal control questionnaire, walk-through, and flowcharting of
the various ORF processes.
• Reviewed and analyzed aging reports of the department’s outstanding
ORF transactions.
• Interviewed responsible officials at all locations via in-person
conversations or through written questionnaires.
• Performed tests of transactions for the period of July 1, 2009, through
July 31, 2010, to ensure that advances to the ORF were properly
administered, the fund was used for authorized purposes only,
accountability was maintained, the fund was reimbursed in a timely
manner, and reimbursement claims were properly supported.
• Selected a sample of outstanding travel receivables from each of eight
accounting offices to determine if the travel advances were collected
in accordance with the State Administrative Manual (SAM).
• Selected seven personnel offices and chose a sample from the ORF
salary advance outstanding receivable report for each of the seven
offices to determine compliance with relevant policies and procedures
for salary advance receivables.
• Selected a sample of ORF disbursements from each of the eight
accounting offices to determine if the ORF was used for permissible
purposes, and if the ORF was replenished in a timely manner.
• Selected a sample from the outstanding vendor payment receivables
to determine if the ORF was used for permissible purposes.
• Reviewed the deposits by several accounting offices to determine if
deposits were made in a timely manner.
• Reviewed bank reconciliations and accountability reconciliations to
determine if the reconciliations were performed accurately and in a
timely manner.

Conclusion

Our audit disclosed that the California Department of Corrections and
Rehabilitation does not ensure that outstanding office revolving fund
amounts are recorded, collected, and processed accurately and in a
timely manner. Additionally, the department lacks proper internal
controls in the areas of coordination between offices, written policies
and procedures, discharges from accountability, check approvals,
maintenance of supporting documentation, permissible use, and
monthly reconciliations.

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California Department of Corrections and Rehabilitation

Views of
Responsible
Officials

We issued a draft report on June 10, 2011. Martin Hoshino,
Undersecretary, Administration & Offender Services, responded by letter
dated July 5, 2011 (Attachment). Mr. Hoshino stated that the department
agrees with the audit recommendations..

Restricted Use

This report is solely for the information and use of the California
Department of Corrections and Rehabilitation 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
Chief, Division of Audits
July 20, 2011

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California Department of Corrections and Rehabilitation

Findings and Recommendations
FINDING 1—
Inadequate collection
efforts resulted in
delayed collection of
millions of dollars in
receivables from
employee salary and
travel advances.

The department did not collect office revolving fund (ORF) receivables
in a timely manner. As almost all ORF receivables consist of employee/
former employee salary and travel advances, there should be a minimal
amount of ORF receivables outstanding. According to a report generated
by the department’s accounting office, it had a total of $6,195,027 in
outstanding receivables related to salary advances and travel advances as
of June 30, 2010. Using this data, the SCO generated an aging report
(Appendix) and found that $4,062,009 (65.6%) of the total $6,195,027
was outstanding for longer than 60 days. Of this amount, $465,029
(7.5%) had been outstanding for more than three 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.
For salary advance receivables testing, we selected seven personnel
offices and chose a sample from the ORF salary advance outstanding
receivable report for each of the seven offices. For travel advance
receivables testing, we selected one sample from the ORF travel advance
outstanding receivables report for each of the seven regional accounting
offices and the Sacramento Accounting Office. All 15 sites reported
outstanding ORF transactions/receivables that have not been cleared or
collected within 60 days. An ORF Receivable Aging Schedule prepared
by the SCO (Appendix A) disclosed the age of receivables for each
location in categories of 0 to 60 days, 61 days to three years, and more
than three years. For salary advances, the Headquarters Office of
Personnel Services (OPS), the California Institution for Men, and the
California Correctional Center reported the largest amounts of ORF
receivables more than 60 days old. For travel advances, the Sacramento
Accounting Office, Bakersfield Regional Accounting Office (RAO), and
Corcoran RAO disclosed the largest amount of ORF receivables more
than 60 days old.
Our review found that the department did not adhere to collection
guidelines prescribed in the State Administrative Manual (SAM). The
detailed results of our audit are stated below:
• At 4 of the 15 sites, we found instances in which an SCO payroll
warrant was not withheld to offset with the correlated salary advance.
Therefore, an employee received both a salary advance and an SCO
warrant, and site staff failed to initiate collection efforts promptly.
In one instance, an employee served by the Headquarters OPS was
terminated on May 22, 2010. The former employee received a lumpsum check in the amount of $14,950 from the ORF to meet the
required timeline. The Headquarters OPS did not instruct the RAO to
withhold the SCO warrant, and the former employee received both a
salary advance and an SCO warrant, resulting in an overpayment of
$14,950. The collection process to recover the overpayment had not
been initiated as of November 1, 2010.

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California Department of Corrections and Rehabilitation

• Of the 15 sites, 11 did not consistently deduct the amount of
outstanding travel advances and salary advances from an employee’s
next regular payroll warrant when the employee was still employed
with the department. When an overpayment occurred, a payroll
deduction should have been performed to recover the receivables in a
timely manner.
In one instance, an employee served by Headquarters OPS was issued
a salary advance in the amount of $8,311 on January 1, 2008, and an
SCO payroll warrant in the same period. Although the employee
continued working for the department, the department failed to
recover the overpayment through payroll deduction as of
November 1, 2010.
• Staff at 9 of the 15 sites did not consistently send the overpayment
notification or three collection letters for overdue receivables, or did
not send the letters in a timely manner. For example, a retiring
employee was issued an SCO payroll warrant on December 19, 2008,
for a lump-sum payment of $25,953. The employee claimed that the
warrant was not received and, thus, a salary advance check in the
amount of $25,953 was issued via ORF on January 16, 2009, resulting
in a duplicate payment. As of November 1, 2010, no collection letters
were sent to the former employee to recover the overpayment, even
though the receivable in the amount of $25,953 had been recorded on
the books for almost two years.
• Personnel office staff at 5 of the 15 sites did not consistently verify
departing employees’ outstanding travel advances and salary
advances with RAO staff during the exit clearance process to ensure
that any outstanding receivables were offset with the final salary
warrant. Many of the outstanding receivables could have been
recovered if the personnel office staff had verified the employees’
outstanding receivable and offsetting with the final warrant.
For example, on October 31, 2008, an employee from California
Correctional Center was issued an incorrect amount on an SCO
payroll warrant and an ORF salary advance as replacement in the
amount of $4,500. Both the warrant and salary advance were released
to the employee in error. The employee subsequently separated. The
outstanding advance was not verified with accounting during the exit
clearance. The employee’s last payroll warrant was not withheld to
offset the outstanding amount. The outstanding amount of $4,500 had
not been collected as of November 1, 2010.
• Staff from six of the eight RAOs in the sample did not consistently
send, or did not send in a timely manner, a periodic statement to
notify employees who have travel advances but have not submitted a
travel expense claim (TEC) to substantiate the travel expenses, and/or
to return any unspent travel advance amounts.
For example, an employee served by the Bakersfield RAO was issued
a travel advance in the amount of $1,131 on December 31, 2009.
A periodic statement requesting that the employee submit the TEC
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California Department of Corrections and Rehabilitation

and/or return any unspent travel advance amounts was not sent to the
employee during his employment at the site. The employee was later
transferred to another site within the department. The department did
not perform any collection effort, including sending out the periodic
statement, as of the audit date of November 1, 2010, even though the
receivable of $1,131 had been recorded on the books for almost a
year.
We believe the following factors contributed to the conditions described
above:
• There is a lack of coordination between the personnel offices and the
respective RAOs. The collection and clearance of outstanding
advances requires close coordination by the personnel offices and
their designated RAOs. We observed that, in general, the entities lack
a cohesive process, significantly delaying their ability to collect and
clear outstanding advances in a timely manner.
In one instance, the Southern California RAO sent a notification letter
of overpayment to an employee who owed a travel advance; the
employee did not respond. The Southern California RAO then sent
three memos to the designated institution personnel office to perform
a payroll deduction. The institution’s personnel office did not
intercept the employee warrant and perform a payroll deduction until
the fourth request. In addition, several RAO staff members stated that
the institution’s personnel office is lagging in providing requested
information. A copy of the initial collection letter is often not
provided to the RAO, and the RAO is not able to proceed with
subsequent collection letters, tax-offsets, and discharges.
• The roles and responsibilities of the RAOs, the Sacramento
Accounting Office, and the OPS are not specific and well-defined for
the collection function.
For example, Sacramento OPS staff members are not sure who is
responsible for the salary collection function for separated employees.
In another example, a personal check to clear a travel advance was not
deposited for five months because staff did not know whether the
RAO or Sacramento Accounting Office should perform the deposit.
The personal check was sent back and forth between the RAO and
Sacramento Accounting Office prior to being deposited in the bank.
The lack of clear roles and responsibilities for the RAO, the
Sacramento Accounting Office, and OPS has resulted in confusion for
employees and delays in the collection and recording processes.
• The department lacks adequate procedures to ensure collection of
advances when an employee transfers from one unit to another. A
department staff member stated that it is not uncommon for the
personnel office to not follow up on salary advances when an
employee has changed institutions or goes to another state agency.

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California Department of Corrections and Rehabilitation

For example, in 2008, a San Quentin employee who owed a salary
advance in the amount of $5,486 transferred to the Plata Support
group within the department. The personnel office at the Plata
Support group was supposed to collect the advance. Personnel at the
Plata Support group failed to collect the advance, and it remains
uncollected as of the audit date of November 1, 2010, even though the
employee still works at the department.
• The ORF collection process is highly decentralized, with little
oversight and monitoring by the department’s headquarters. Even
though all ORF checks related to the general fund are drawn from the
same appropriation account, the travel advance receivable collection
is decentralized in each of the eight accounting offices and salary
advance receivables collection is decentralized to each personnel
office. Therefore, it is the ultimate responsibility of each accounting
office or each personnel office to collect receivables. When the
accounting office or personnel office fails to collect, there is no
further oversight function to monitor the collection task.
• The ORF receivable reports produced by SAP for outstanding salary
advances and travel advances are not accurate or user-friendly. The
ORF receivable reports do not include the balance due amount for
each debtor. To obtain the amount owed by each debtor, the user must
make separate calculations of the advance amount against the
repayment amount. In addition, RAO staff members stated that the
ORF receivables reports were not sent to them from September 2009
to August 2010.
• The personnel offices often do not verify the information on the SAP
receivable reports and provide feedback to the accounting offices to
correct incorrect information.
For example, when an employee switches sites within the department,
the receivables reports might not reflect the accurate code for the
responsible personnel office. The responsible personnel office’s
receivable report does not include the employee’s outstanding
receivable if the non-responsible personnel office where the
receivable is included does not correct the code.
Government Code section 19838 requires reimbursement to the State of
overpayments made to employees.
SAM section 8116.2 (Substantiation of Travel Expense for Temporary
Travel Advances) states, in part, “A periodic statement must be sent no
less frequently than bi-monthly (e.g. on February 1, April 1, June 1,
August 1, October 1, and December 1) to notify employees who have
travel advances but have not submitted a TEC to substantiate the travel
expenses and/or have not returned any excess travel advance
amount. . . .”

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SAM section 8776.7 (Employee Accounts Receivable) states that
departments must notify employees (in writing) of overpayments and
provide them an opportunity to respond.
SAM section 8776.6 (Nonemployee Accounts Receivable, Collection
Letters) states, “Once the address of the debtor is known, the accounting
office will send a sequence of three collection letters at 30 day intervals.
If a reply or payment is not received within 30 days after sending the first
letter, the accounting office will send a second letter. This follow-up
letter will reference the original request for payment letter and will be
stated in a stronger tone. If a response is still not received from the
debtor, a third letter will be sent 30 days later. This last letter will include
references to prior letters and will state what further actions may be taken
in the collection process.”
SAM section 8776.6 (Nonemployee Accounts Receivable) states that if
the three collection letters are unsuccessful, departments must prepare an
analysis to determine what additional collection efforts should be made.
SAM section 8580.4 (Employee Separations) states, “Salary warrants
will not be distributed to separating employees until the department had
verified that all travel and salary advances have been paid (cleared). The
verification must be provided by office revolving fund staff.”
SAM section 8116.3 (Recovery of Temporary Travel Advances) states,
“If an employee does not submit TECs to substantiate the travel expenses
within 30 calendar days of the periodic statement date, the total travel
advance amount must be deducted from the next regular payroll
warrant(s).”
SAM section 8776.7 (Employee Accounts Receivable) states that “if the
employee does not agree to repay an overpayment or does not respond to
the written overpayment notification by the afforded time, departments
will collect overpayments by installment through payroll deduction. . . .”
SAM section 20050 (Internal Control) states, in part, “State entity heads,
by reason of their appointments, are accountable for activities carried out
in their agencies. This responsibility includes the establishment and
maintenance of internal accounting and administrative controls. Each
system an entity maintains to regulate and guide operations should be
documented through flowcharts, narratives, desk procedures, and
organizational charts. The ultimate responsibility for good internal
control rests with management.”

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California Department of Corrections and Rehabilitation

Recommendation
The department should comply with SAM requirements and ensure that
its RAOs and personnel offices:
• Review their ORF receivables reports on a monthly basis and ensure
that outstanding amounts are collected and cleared in a timely
manner. Personnel offices and RAOs should include a status update
on each outstanding receivable transaction.
• Ensure that periodic statements are sent out in a timely manner to
notify employees who have travel advances but who have not
submitted a travel expense claim that they must substantiate expenses.
• Develop a process by which to ensure that collection letters and
overpayment notification letters are sent out in accordance with SAM
sections 8776.6 and 8776.7.
• Develop procedures by which to ensure that written analyses are
performed to determine what collection efforts will be made after the
three collection letters are unsuccessful in recovering the receivables.
• Develop a process by which to ensure that salary and travel advances
are cleared within 30 days by a TEC and that advances not cleared
within 30 days are deducted from an employee’s next payroll warrant
in accordance with applicable bargaining unit agreements.
• Direct staff members to ensure that any outstanding employee
advances are cleared during the exit clearance process, and if the
advance is not cleared, to deduct the amount due from the final
payroll warrant.
• Provide sufficient training to staff members to ensure that a request is
sent to withhold SCO warrants so that employees/separating
employees do not receive both an SCO warrant and an ORF salary
advance.
• Develop a training program for SAP and provide training to staff.
• Develop a cohesive process for the accounting office and personnel
offices to use for the collection function.
• Define roles and responsibilities regarding ORF for the accounting
offices and institutions.
• Develop a process by which to ensure that, when employees change
positions within the department, a notification of outstanding
advances is sent to the correct office.
• Develop more useful and easier-to-understand ORF receivables
reports, including monthly aging reports.
• Develop an oversight function for both the accounting offices and
institutions to ensure proper follow-up of outstanding advances.
• Review outstanding ORF reports for accuracy and ensure that reports
reconcile.

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FINDING 2—
Serious internal control
deficiencies related to
ORF transactions could
lead to fraud, abuse, and
misappropriation of
funds.

We found the department’s internal controls over ORF transactions to be
critically weak. The combined effect of the following control
deficiencies raises serious concerns about whether such a system could
be relied upon to deter and prevent fraud, abuse, and misappropriation of
public funds.
• The system could not provide departmental management with current,
accurate, and reliable data to effectively monitor the ORF transactions
or the progress of collection efforts. We found no evidence that the
departmental management had requested or used reports to monitor
the ORF transactions. Even if they had, it is doubtful that the system
could produce meaningful data on a timely basis, as evidenced by the
following examples:
o We requested a report of the outstanding vendor payment

receivables file on July 16, 2010, and did not receive the correct
file until more than four months later, on November 30, 2010.
Department staff lacked proper training in generating reports from
SAP.
o The balance of receivables related to salary and travel advances

varied from report to report. For example, in August 2010, the
accounting staff produced reports showing $6,195,027 in
receivables from salary and travel advances as of June 30, 2010.
On November 11, 2010, the department prepared an ORF
appropriation accountability reconciliation showing $9,501,171 in
such receivables. On February 7, 2011, the accounting staff
provided documentation indicating the total amount to be
$8,244,977. It is questionable whether any of the above amounts
are accurate, as later the staff found $1,167,300 in receivables
related to travel advances that was recorded twice in SAP.
• The department has not prepared a proper bank reconciliation for its
two ORF accounts, one related to salary advances and vendor
payments (Account #158) and the other related to travel advances
(Account #057), since the inception of SAP in November 2008. Bank
reconciliation is a critical element of the internal control system, as it
provides an independent check on the accuracy and completeness of
recorded transactions and validates the actual amount of cash
available. We reviewed the two main bank reconciliations related to
the ORF and found that they were not prepared properly or in a timely
manner. Specifically, we noted the following issues:
o Department staff apparently made little effort to resolve
reconciliation items identified by the SAP’s bank reconciliation
process for Account #158. The process is automated within SAP; it
identifies reconciling items, such as errors and unposted items, in
the bank balances and the book balances. Departmental staff was
to review and investigate each reconciling item on a monthly basis
and, when necessary, make adjustments to the department’s
records or take other appropriate actions. We found that, since the
inception of SAP in November 2008, departmental staff has not
devoted adequate effort to resolving the reconciling items. As of
June 30, 2010, the unresolved reconciling items for the bank
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California Department of Corrections and Rehabilitation

balance and the book balance have accumulated to a total
of $27,332,382 and $31,289,854, respectively. We found that
figures in the reconciliation were unsupported.
For example, the June 30, 2010 reconciliation reported a net
deposit in transit of $14,955,000 and a net outstanding check of
$56,322,738. Departmental staff could not provide documentation
to support these two balances. With unresolved reconciling items
of this magnitude, anyone who had access to ORF check stocks
could have fraudulently issued checks with little likelihood of
being detected.
o We found numerous discrepancies in the bank reconciliations for
Account #057. For example, in each of the six monthly
reconciliations we reviewed, we found that departmental staff
could not fully reconcile the balances and had resorted to using an
arbitrary amount (a plug-in figure) to reconcile the bank balances
to the book balances. Over the six-month period, the figure ranged
between $461,147 to negative $583,561 without any support or
explanation. Other discrepancies noted include:
ƒ The balances in the bank reconciliations did not agree with the
amounts in the department’s accounting records. Rather than
using the general ledger balances, the preparer maintained a
separate schedule to substitute for the general ledger. Therefore,
the pre-adjusted balances of general cash and revolving fund
cash on the bank reconciliation do not agree with balances in
the department’s accounting systems (CalSTARS). For
example, the pre-adjusted balance of general cash was
$7,090,640 as of June 30, 2010, on the bank reconciliation, but
the general cash balance on CalSTARS G01 as of June 30,
2010, was $7,000,780, a variance of $89,860.
ƒ The supporting schedule for a reconciling item named “Deposit
at Bank-Not on Books” did not agree with the amount on the
bank reconciliation. The bank reconciliation reported
$13,750,469, while the supporting schedule showed
$14,966,355.
ƒ The department did not maintain supporting schedules or
supporting documents for most of the reconciling items.
Reconciling items were not resolved in a timely manner; some
were dated 2009. Some items on the supporting schedule for the
reconciling items contained no explanation as to why they were
included.
ƒ Some transactions were not posted, while others were posted
twice. In addition, there were considerable delays in the posting
of certain transactions. For example, a transfer of $15,000,000
from Account #057 to Account #158 occurred on September 3,
2009, but the transaction was not recorded until July 2010.
There is no written procedure to instruct users where to record
the transaction prior to implementation of SAP.

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Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

o The required monthly reconciliations were not prepared in a timely
manner and completed with preparer and reviewer signatures.
ƒ The bank reconciliation on Account #158 for the month ended
June 30, 2010, was prepared on September 3, 2010, two months
late.
ƒ The bank reconciliation on Account #057 for the month ended
June 30, 2010, was not dated.
ƒ There was no evidence that reconciliations were reviewed and
approved by a reviewer to ensure that they were properly and
accurately prepared. In light of the discrepancies noted above, it
would be difficult for any reviewer to conclude that these
reconciliations were properly prepared.
The department is required by SAM section 8193 to reconcile its ORF
appropriation on a monthly basis. The department had not prepared the
appropriation accountability reconciliation of $55,150,109 to properly
account for the ORF authorized appropriation since the implementation
of SAP in November 2008. Finally, in November 2010, at our request,
the department prepared a reconciliation for the month ended June 30,
2010. According to the department staff, the two-year delay in the
reconciliation was caused by the transition from CalSTARS to the SAP
system.
The following table is the appropriation accountability reconciliation
prepared by the department for the month ended June 30, 2010:
Revolving Fund Cash
Cash on Hand in Agency
Due From Other Funds/Appropriations
(pending ORF replenishments)
Expense Advances (permanent advances)
Travel Advances
Salary Advances
Total Appropriations

$ 21,387,129
417,197
22,171,284
1,673,329
2,058,910
7,442,261
$ 55,150,110

Our review of the above reconciliation found it to be inaccurate,
unreliable, and unsupported by factual data. Specifically, we found the
following discrepancies:
• The revolving fund cash of $21,387,129 did not include cash in

Account #057 and in other old bank accounts.
• The Due From Other Funds/Appropriations in the amount of

$22,171,284 was not supported by a detailed schedule. According to
management, the department is working to clear some old pending
ORF replenishments.
• The Travel Advances balance of $2,058,910 was overstated by

$1,167,300. The overstatement was due to the old travel advances
being recorded twice in SAP during the consolidation of organization
codes.

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Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

• The Salary Advances Receivable of $7,442,261 on the reconciliation

should be $7,445,261, according to the supporting schedule.
• In our testing of the disbursement file, we observed that two of five
ORF checks that exceeded $15,000 and required two signatures did
not have dual signatures. SAM section 8041 requires two signatures
for additional approval on checks drawn in excess of $15,000.
• Documentation to substantiate ORF payments was inadequate. At 9 of
the 15 sites, departmental staff could not provide all requested
documents to support the ORF payments. Without adequate
supporting documentation, we were not able to determine if such
transactions were legitimately processed in accordance with ORF
guidelines. Examples include:
o From the outstanding vendor receivables file that contained vendor
payments made through ORF that had not yet been reimbursed, we
judgmentally selected and requested supporting documents for 25
payments that appeared to be unusual or had been outstanding for a
prolonged period. In 13 of the 25 cases, representing $190,215 in
payments, departmental staff could not produce the supporting
documents such as the ORF requests and the vendors’ invoices.
Without these documents, we were unable to determine whether
these payments constitute legitimate use of the ORF. Moreover,
without the vendors’ invoices, the department has no means by
which to file a claim schedule with the SCO to seek reimbursement
to the ORF for those payments.
o From the disbursement files that contain vendor payments, we
judgmentally selected 43 payments for review. Departmental staff
could not provide supporting invoices for six of the payments
totaling $23,992.
o The department was not complying with its own internal
procedures. The SCO paycheck calculator to compute the amount
of salary advance amount was not retained as required by the
department’s Personnel Services Operations Manual for all
personnel offices. In addition, contrary to department procedures,
the signed “Authorization for Prepayment of Payroll Revolving
Fund/Hardship Salary Advance” was not consistently retained.
This form authorizes the department to withhold payroll to pre-pay
overpayments.
SAM section 20050 specifies that the elements of a satisfactory system
of internal accounting and administrative controls shall include, but are
not limited to, a system of authorization to provide effective accounting
control over assets, liabilities, revenues, and expenditures.
SAM section 20050 (Internal Control) states, in part, that “State entity
heads, by reason of their appointments, are accountable for activities
carried out in their agencies. This responsibility includes the
establishment and maintenance of internal accounting and administrative
controls. Each system an entity maintains to regulate and guide

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Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

operations should be documented through flowcharts, narratives, desk
procedures, and organizational charts. The ultimate responsibility for
good internal control rests with management.”
SAM section 8193 (Reconciliations) states, “Two monthly
reconciliations are required for revolving fund transactions. (See SAM
Section 7920 [Types of Reconciliations].) The Revolving Fund Cash
Book balance plus the general ledger balance of Account No. 1110,
General Cash, and Account No. 1120, Agency Trust Fund Cash, will be
reconciled to the General Checking Account in the centralized State
Treasury System. Also, the revolving fund resources will be reconciled
with the amount of cash advanced as shown in Account No. 1130 of the
funds concerned.”
SAM section 7923 (Bank Reconciliation) states, “The person reconciling
the bank statement will trace every reconciling item between the bank
and the agency’s records and include an explanation [of each item] on
the reconciliation.”
SAM section 7901 (Reconciliations–General) states, “The accuracy of an
agency’s accounting records may be proved partially by making certain
reconciliations and verifications. . . . Corrections to errors should be
made before financial reports are prepared to partially ensure the
accuracy of an agency’s financial reports. Properly prepared
reconciliations also help to audit the agency’s accounting records.
SAM section 7901 (Reconciliations–General) requires that “All
reconciliations be prepared monthly within 30 days of the preceding
month. . . .”
SAM section 7908 (Signatures Required on Reconciliation) states that all
reconciliations must show the preparer’s name, date prepared, and date
reviewed.
SAM section 8041 (Checks) states that “Any check drawn in excess of
$15,000 will require two authorized signatures. . . .”
The Department of General Services’ General Records Retention
Guidelines state that the receivable source documents (e.g., invoices) and
documents of collection efforts should be retained for at least four years
after the receivable has been paid.
The salary advance section of the department’s Personnel Services
Operations Manual states that any employee being issued a salary
advance must sign the “Authorization for Repayment of Payroll
Revolving Fund/Hardship Salary Advance.” It further states that a copy
of the paycheck calculator is printed and used to complete the salary
advance request form 1004 once the paycheck calculator has been
correctly completed.

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Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

Recommendation
The department should:
• Define roles and responsibilities regarding the ORF for the accounting
offices and institutions.
• Review outstanding ORF reports for accuracy and ensure that reports
reconcile.
• Develop an internal control to ensure that duplicate data cannot be
posted in SAP.
• Develop a training program for SAP and provide training to staff.
• Develop an effective bank reconciliation method that reconciles the
book balance to the bank balance in order to ensure the accuracy of
the ORF cash book balance.
• Review and resolve the stale reconciling items and develop a new
process by which to ensure that reconciling items are resolved in a
timely manner.
• Ensure that reconciliations are prepared within 30 days and that the
reconciliations are reviewed and signed off on by appropriate
managers.
• Ensure that ORF request forms are properly authorized and that there
are two authorized signatures for checks exceeding $15,000.
• Develop procedures to ensure that the accounting offices retain
accounts receivable source documents and documentation of
collection efforts for at least four years after the receivable has been
paid.
• Ensure that the accounting offices retain the SCO paycheck calculator
and that the “Authorization for Repayment of Payroll Revolving
Fund/hardship Salary Advances” is signed by the employee and is
retained.

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Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

FINDING 3—
Invalid receivables
related to salary and
travel advances were not
adjusted in a timely
manner.

The receivable balances included some items caused by procedural errors
rather than actual overpayment. For example, an employee served by
Headquarters OPS was issued a salary advance on April 21, 2010, in the
amount of $4,506 due to incorrect pay on the warrant. Headquarters OPS
had not sent Form 674 to the SCO to reissue a warrant and clear the
outstanding amount of $4,506 as of November 1, 2010.
Another example concerns an employee at California State Prison,
San Quentin who was issued a salary advance in the amount of $1,548 on
January 28, 2009. The salary advance was collected on February 6, 2009;
however, the collection was not posted by accounting as of November 1,
2010.
In short, the department’s personnel and accounting staff failed to take
timely action to correct the errors and adjust its records, which resulted
in an overstatement of the receivables balances. The untimely clearing of
receivables was a result of the departmental staff:
• Not requesting SCO warrants to be offset with salary advances;
• Not depositing warrant/personnel checks to clear overpayments;
• Not correcting PAR data;
• Not requesting stop payments on lost checks;
• Not clearing voided transactions by the accounting offices;
• Not correcting data in the ORF receivable aging report;
• Duplicate posting of the advance by the check writer or CalATERS
conversion; and
• Not taking action in the garnishment stage.
SAM section 8776 states that the agencies must ensure that receivables
are recorded promptly and accurately into the accounting system.
Recommendation
The department should perform the following functions in a timely
manner to ensure the promptness and accuracy of its accounting records:
• Request SCO warrants to be offset with salary advances;
• Deposit warrant/personnel checks to clear overpayments;
• Correct PAR data;
• Request stop payments on lost checks;
• Clear voided transactions:
• Correct data in the ORF receivable aging report;
• Post the advance only once; and
• Take action in the garnishment stage.

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Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

FINDING 4—
The department does not
have sufficient written
policies and procedures
for the ORF.

Formal SAP procedures have not been developed since the
implementation of SAP in November 2008. The ORF unit developed its
own written desk procedures at a low level specific to the processes of
activities and transactions.
The department has department-wide salary advance procedures
contained in sections 711 and 712 of the department’s Personnel Services
Operations Manual. However, the manual does not include the collection
actions stated in SAM sections 8776.7 and 8776.6. More specifically, the
manual does not state that the department will notify employees in
writing of salary advance overpayments and provide them an opportunity
to respond. In addition, the manual does not state the collection action for
separated employees.
Sacramento OPS procedures state that an electronic log of salary
advances is generated for management to monitor the outstanding salary
advances. However, Sacramento OPS does not maintain the electronic
log; therefore, Sacramento OPS is not following its own procedure.
Maintaining the electronic log of salary advances would help
management monitor the uncollected items and verify the accuracy of the
aging report sent from the Sacramento Accounting Office.
SAM section 8776.6 (Nonemployee Accounts Receivable) states, “Each
department will develop collection procedures that will assure prompt
follow-up on receivables.”
SAM section 8776.7 (Employee Accounts Receivable) states that
departments will notify employees (in writing) of overpayments and
provide them an opportunity to respond.
SAM section 8776.6 (Nonemployee Accounts Receivable, Collection
Letters) states, “Once the address of the debtor is known, the accounting
office will send a sequence of three collection letters at 30 day intervals.”
SAM section 20050 (Internal Control) states, in part, that, “State entity
heads, by reason of their appointments, are accountable for activities
carried out in their agencies. This responsibility includes the
establishment and maintenance of internal accounting and administrative
controls. Each system an entity maintains to regulate and guide
operations should be documented through flowcharts, narratives, desk
procedures, and organizational charts. The ultimate responsibility for
good internal control rests with management.”
The Salary Advance Logs and Procedures provided by the Sacramento
OPS states that a report for the most recent outstanding salary advances
receivable and accounts receivable will be generated for management
review.

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Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

Recommendation
The department should:
• Develop formal procedures for SAP to ensure that all SAM revolving
fund and collection regulations are specified and enforced and provide
appropriate training to staff on an ongoing basis.
• Update the Personnel Services Operations Manual to include the
collection actions required by SAM sections 8776.6 and 8776.7.

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Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

FINDING 5—
Discharge from
accountability was not
filed and discharges
were performed
internally without
proper authorization.

The department did not consistently file a request for discharge from
accountability of uncollectable amounts due from private entities when
all reasonable collection procedures did not result in payments. Failure to
implement reasonable collection efforts precludes the department from
discharging uncollectable receivables. The department is required by
SAM to review the receivables no less than quarterly to identify
receivables for discharge. The following table shows $465,030 in
outstanding items older than three years that might have been discharged
if reasonable collection efforts had been performed:
Accounting Office

Salary advances:
HQ OPS (Acct. #065 and Acct. #061)
California Institution for Men (Acct. #080)
California Correctional Center (Acct. #068)
California Medical Facility (Acct. #076)
Substance Abuse Treatment Facility (Acct. #587)
California State Prison, San Quentin (Acct. #095)
Deuel Vocational Institution (Acct. #106)
Others
Total salary advances
Travel advances:
HQ Sacramento Accounting Office
Bakersfield Regional Accounting Office (RAO)
Corcoran RAO
El Centro RAO
Central Valley RAO
Central Coast RAO
Southern California RAO
JJ North RAO
Blank
Total travel advances
Combined salary advances and travel advances

Receivable More
Than Three Years

$

70,592
114,868
16,797
7,338
4,237
6,952
2,574
192,151
415,510

836
241
36,037
496
1,341
6,825
—
3,744
—
49,520
$ 465,030

One departmental accounting office has a practice of discharging
internally any ORF outstanding receivable that is less than $1,000
without filing the outstanding receivables with the SCO and the
California Victim Compensation and Government Claims Board
(VCGCB). The department provided the delegation from VCGCB;
however, the delegation does not cover ORF travel advances and salary
advances. Therefore, the department internally discharged ORF
receivables without proper authority.
Government Code section 13940 states, “Any state agency or employee
required to collect any state taxes, licenses, fees, or money owing to the
state for any reason that is due and payable may be discharged by the
board from accountability for the collection of taxes, licenses, fees, or
money if the debt is uncollectible or the amount of the debt does not
justify the cost of its collection.”
Government Code section 13941 states, “The application for a discharge
under this chapter shall be filed with the Controller. . . .”

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Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

SAM section 8776.6 states, in part, “If all reasonable collection
procedures do not result in payment, departments may request discharge
from accountability of uncollectable amounts due from private entities.
Departments will review their accounts receivable no less than quarterly
to identify receivables for discharge. If departments have identified
receivables for discharge, departments will file an Application for
Discharge from Accountability form, STD. 27, with the SCO, Division
of Accounting and Reporting, no less than quarterly. . . .”
Recommendation
Departmental accounting offices should strictly follow SAM collection
rules and submit uncollectible amounts to the SCO for discharge from
accountability after all collection efforts have been performed.

-22-

Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

FINDING 6—
The department used
the ORF to make
payment in excess of its
appropriation.

After using the ORF to make payments, the department is to file a claim
schedule with the SCO on at least a monthly basis to reimburse the ORF
for the amount disbursed. We found that, as of November 30, 2010, the
department still has not requested reimbursement for $3,502,788 in
payments that were made prior to June 30, 2010. Further review
disclosed that a majority of these payments were for Fiscal Year (FY)
2009-10 expenditures in which the department had already exhausted its
appropriations. These payments—such as parolees’ gate money—appear
to be legitimate expenditures (the predetermined amount of money given
to eligible inmates upon discharge from state prison). However, when its
appropriation is exhausted, the department has no legal authority to make
such payments. The department, in essence, circumvented appropriation
control by using its ORF to make such payments.
The departmental accounting staff could not explain why it has not
requested reimbursement for some payments for expenditures incurred
prior to FY 2009-10. For example, according to its records, on
October 13, 2008, the department issued a revolving fund check in the
amount of $60,000 to the U.S. Postal Office. As of November 30, 2010,
the department still has not filed a reimbursement claim and its staff
could not provide explanation or documentation for not seeking
reimbursement.
SAM section 8110 states that sufficient spending authority must exist for
the related fiscal year of the revolving fund disbursement.
Recommendation
The department should monitor closely the budget in general fund and
medical cost programs to ensure that sufficient funding is available prior
to issuing disbursements from the ORF.

-23-

Administrative and Internal Accounting
Controls Over the Office Revolving Fund

California Department of Corrections and Rehabilitation

Appendix—

Outstanding ORF Receivables Aging Report
Salary Advances and Travel Advances

Accounting Office

Total
Receivables

0 to 60 Days

61 Days to
Three Years

0 to 60
Days

61 Days
to Three
Years

More
Than
Three
Years

70,592

19.7%

73.4%

6.9%

114,868

12.8%

51.7%

35.5%

16,797

9.5%

85.9%

4.5%

7,338

54.1%

43.0%

2.9%

4,237

46.4%

51.7%

1.9%

6,952

63.9%

29.6%

6.6%

2,574
192,151

13.5%
38.4%

84.3%
55.2%

2.2%
6.4%

415,509

32.3%

60.0%

7.7%

836

57.6%

42.2%

0.2%

241
36,037
496
1,341
6,825
—
3,744
—

19.9%
17.4%
53.5%
50.8%
42.3%
60.8%
27.8%
0.0%

79.8%
30.4%
45.7%
45.6%
36.4%
39.2%
13.7%
100.0%

0.3%
52.1%
0.8%
3.6%
21.3%
0.0%
58.6%
0.0%

49,520

48.7%

45.1%

6.3%

465,029

34.4%

58.1%

7.5%

More Than
Three Years

Salary advances:
HQ OPS (Acct. #065 and
Acct. #061
$ 1,022,077 $ 201,451 $ 750,033 $
California Institution for Men
(Acct. #080)
323,511
41,466
167,178
California Correctional Center
(Acct. #068)
369,230
35,243
317,191
California Medical Facility
(Acct. #076)
251,135
135,780
108,017
Substance Abuse Treatment
Facility (Acct. #587)
219,216
101,707
113,273
California State Prison, San
Quentin (Acct. #095)
105,859
67,605
31,302
Deuel Vocational Institution
(Acct. #106)
118,855
16,082
100,198
All others
2,993,781
1,148,476
1,653,154
Total salary advances
5,403,664
1,747,809
3,240,346
Travel advances:
HQ Sacramento Accounting
Office
474,073
273,083
200,154
Bakersfield Regional
Accounting Office (RAO)
78,346
15,580
62,526
Corcoran RAO
69,147
12,058
21,052
El Centro RAO
63,347
33,902
28,949
Central Valley RAO
36,879
18,740
16,799
Central Coast RAO
31,979
13,527
11,628
Southern California RAO
27,230
16,546
10,684
JJ North RAO
6,392
1,775
873
Blank
3,970
—
3,970
Total travel advances
791,363
385,210
356,634
Combined salary advances
and travel advances
$ 6,195,027 $ 2,133,019 $ 3,596,980 $

Source: Compiled from a report provided by the California Department of Corrections and Rehabilitation.

-24-

California Department of Corrections and Rehabilitation

Administrative and Internal Accounting
Controls Over the Office Revolving Fund

Attachment—

Department’s Response to Draft Audit Report

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)1)-6001.

State Controller’s Office
Division of Audits
Post Office Box 942850
Sacramento, CA 94250-5874
http://www.sco.ca.gov

S11-SAA-001