OPSA ANNUAL REPORT FY 2004
Public Auditor's Message
This annual report is being prepared in compliance with the requirement of the State Law N0.1L-10-79, Section 9 that Public Auditor of the State Government shall submit an annual report to the Legislature in January of each year of the audits and examinations conducted by him for the immediately preceding fiscal year.
The year 2004 was a meaningful year knowing that we had just begun another phase of the Compact of Free Association with the United States of America.
The first Compact of Free Association with the United States commenced in FY-1986-2001 for a duration of 15 years. A provision was made for further two years of funding through FY-2003, for the renegotiation of the expiring economic sections of the Compact of Free Association at the average level of funding during the first 15 years.
The actual implementation of the economic provisions of the Amended Compact of the Free Association came into force in FY-2004. The new Amended Compact of Free Association required new additional standards of financial audit reporting requirements.
3rd FSM Economic Summit for Amended Compact
Before implementation of the new Amended Compact starting in fiscal year 2004, the President of the Federated States of Micronesia Hon. Joseph J. Urusemal and Congress Speaker, Hon. Peter M. Christian called for the 3rd FSM Economic Summit for the FSM leaderships to convene the FSM summit and formulate a Strategic Plan for the economic development of the whole nation during the Amended Compact of Free Association. It was attended by leaders and delegates from the four States of Micronesia, Pohnpei, Kosrae, Chuuk, and Yap as well as the FSM National Government. In conclusion of the summit, the participants adopted a new policy for high growth scenario as our model for economic development during the Amended Compact.
The FSM Strategic Plan is necessary for the implementation of the Amended Compact of the Free Association. The Amended Compact focuses on the United States grant assistance. The specific grants are important to creating an environment for growth and development instead of having the United States supporting all activities of the government. The Amended Compact funding is limited to the following 6 sectors:
The sector grant approach limits the use of Compact of Free Association funding. Not all of the activities of FSM State and National governments are eligible for the United States support. Activities outside the sector grants, such as operational costs of government, must be funded from local revenues. Thus, it is important for the FSM governments to plan now in order to decide how to increase tax receipts and other local revenues to pay for operations and the programs that remain necessary, and to cut operations that are not truly necessary. The Amended Compact focuses closely on measuring the results and tracking the performance of the sectors.
- Public Sector Capacity Building
- Private Sector Development and
The Amended Compact established a newly negotiated standard for the financial management of Compact funds that the FSM and USA are pledged to follow. The new Fiscal Procedures Agreement (FPA) described in detail the types and frequency of financial reporting, standards for contracting and procuring goods and services, the timing of payments from the U.S. Treasury, and the scope of audit authority. The FPA also includes sanctions to ensure compliance with its terms.
The new additional standards required in the new Fiscal Procedures Agreement under the Amended Compact are more stringent and more challenging than the one under the original Compact. The FSM government under the Amended Compact shall submit quarterly performance reports on each sector grant. At the same time submit a financial cash transaction report for each sector grant 90 days after the end of the fiscal year. A financial and compliance audit shall be performed for each fiscal year, and be available not later than the beginning of the 3rd fiscal quarter following the end of the fiscal year under review. The Amended Compact fiscal procedures agreement contains several new preparatory requirements and a different timetable to be adhered to in the development of National and State budgets. These have taken effect in fiscal year 2004 and will continue for the 20 years term of the Amended Compact.
Joint Economic Management Committee (JEMCO) under Amended Compact
The FSM and USA will annually meet and agree on the distribution and purposes for which Compact funds will be spent. This will be accomplished through the Joint Committee process of consultation and agreement. The JEMCO will approve the final annual grant plans of the FSM States and the National Government. The development plans submitted establishes the various priorities and goals. The JEMCO will have significant oversight and monitoring responsibilities. The successful implementation of these strengthened reporting and monitoring measures will require sustained commitment and appropriate resources from the USA and FSM.
One tool that should be used for ensuring accountability over the Amended Compact assistance is the annual audits required by the Amended Compact. The Fiscal Procedures Agreement for implementing the Compact requires that financial and compliance audits be conducted in accordance with the provision of the Single Audit Act. This act is intended to, among other things, promote sound financial management, including effective internal controls with respect to use of federal awards. The audit programs shall be made by an independent auditor in accordance with generally accepted accounting principles (GAAP) covering financial and compliance audits.
The auditee (grantee) is responsible for the following financial functions:
The auditee's financial statement must reflect its financial position, results of operations or changes it net asset, and where appropriate, cash flows for the fiscal year audited.
- Planning for single audit
- Prepare financial statements and
- Prepare schedule of expenditures of Federal Awards
Following up on Audit Findings
In addition to preparing the financial statements and schedule of expenditures of Federal Awards, the auditee also must follow up and take corrective action on audit findings.
The auditee is responsible for providing the grantor and the auditor with proposed corrective action plans on the findings presented.
Cost Sharing of Single Audit
The Pohnpei State Auditor participated in the FSM Audit committee last November, 2004 to review the Request for Proposal (RFP) and hire a qualified accounting firm to audit the FSM National and state governments for the fiscal year 2004. The CPA firm known as Deloitte Touche Tohmatsu was selected. Starting with the FY-2004, the cost for the annual single audit for the FSM Government both the national and state Government will be shared between the United States Government and the FSM Governments. The United States maximum share of the cost is at $500,000 per audit year.
The fiscal year 2004 is a significant year starting the Amended Compact of Free Association. The sector grant funding have been available to fund the various activities focused on the economic development for FSM but with stringent financial reporting requirements which creates a challenge to our Office of Public Auditor, given a limited staff and training opportunities. However, we will do our best in achieving our goals and objectives even with limited resources.
I would like to take this opportunity to express my appreciation to all the OPSA staff for their dedication and support in accomplishing the goals and objectives of the OPSA during the year 2004. I would encourage them to continue their dedicated service now and in the years to come.
Annes H. Leben, BSA, MBA
Pohnpei State Auditor
YEAR IN REVIEW
Auditing for good governance
Our mission is to serve the citizens of Pohnpei by conducting independent audits that promote accountability, fiscal integrity, and transparency in the State and local governments; and to assist the State Government with timely recommendations to improve its operations and performance in terms of improving services, reducing costs and increasing customer and public satisfaction.
The Office of the Pohnpei State Auditor is a constitutional office established by the Pohnpei State Constitution, under Article 11, Section 8 which authorizes the auditor's office to conduct audits of all accounts kept by or for all departments, offices, and instrumentalities of the Government of Pohnpei and of the local governments.
The enabling legislation of the Office of the Pohnpei State Auditor of Pohnpei State Government is State Law N0.1l-10-79 as amended by State Law N0.5L-08-00. The enabling legislation prescribes its powers, duties and authorizes its appropriations.
The Office of the Pohnpei State Auditor (OPSA) shall conduct all audits required for or sought by Pohnpei State Agencies in accordance with generally accepted auditing standards. To comply with the requirement of the Fiscal Procedures Agreement of the Amended Compact of the Free Association and the State Law, the Office of the Pohnpei State Auditor shall follow the Government Auditing Standards for the audit of government, including those standards issued by the American Institute of Certified Public Accountants (AICPA) Known as Generally Accepted Accounting Principles (GAAP) as well as the Government Auditing Standards Board (GASB).
The Office of the Pohnpei State Auditor (OPSA) shall annually prepare the budget which shall be submitted by the Public Auditor, to the State Legislature through the Governor.
The sum authorized for appropriation shall be administered and expended by the OPSA, solely for the support of the OPSA activities. The budget authorized for the OPSA during FY-04 was $224,683.00. The office expended the total amount.
In the performance of his duties, the Pohnpei State Auditor may employ the services of one or more certified public accountants or accounting firms, and such other assistants and clerical workers as may be necessary; provided the cost thereof shall not exceed such sums as may be available out of the appropriation provided by law for the conduct of his duties; and provided further, that such accountants, firms and assistants are entirely independent of the departments, offices and agencies of the State and its political subdivisions whose affairs are subject to audit by the Office of the Public Auditor. In the establishment of the salary of each employee, the Auditor shall consult with the Division of Personnel and shall follow as closely as possible the recommendations of the Division. The Auditor and his/her full time staff shall be entitled to participate in the State Government employee benefit program privileges.
The Office of the Pohnpei State Auditor now has a staff of nine (9). Three of the staff are graduates of a four-year college course, and are all Certified Public Accountants. One of our staff with MBA from graduate school and another with MAPA. Two are graduates of college with Bachelor of Science degree in Business Administration and another employee has an Associate of Science degree also in Business Administration. The two staffs have two years of college course with many audit working experiences.
The total man-hours available for the year were 18,720 hours. The man-hours are calculated based on 40 hours per week for 52 weeks for a standard of 2,080 hours. These hours were allocated accordingly in Figure 1.
HIGHLIGHTS OF FY 2004 ACTIVITIES
Quality Control Review
In order to comply with the requirement of the Government Auditing Standards (GAS), the GAS requires audit organization to have an external peer review at least once every three years.
According to the external peer review team in November 27, 2002, the Office of the Pohnpei State Auditor was in compliance with government auditing standards during the period under review. According to the GAS requirement, the same peer review exercise will be repeated after three years from the issuance of the peer review report which means that in year 2005, OPSA will be subjected to another peer review.
Association of the Pacific Islands Public Auditors (APIPA)
The Association of the Pacific Islands Public Auditors 15th annual conference and workshop was hosted by Office of the Auditor-General, Republic of the Marshall Islands from July 26-30, 2004. Over 180 participants have participated in the audit workshop. Three OPSA staff were among the participants.
Similar to prior conference, the training sessions include an auditor track, a supervisory track, and a finance track. The participants who completed all of the sessions earned 40 continuing professional education (CPE) credits toward meeting their annual CPE requirements.
Since 1991, the Graduate School, USDA's Pacific Islands Training Initiative (PITI) has provided the instructors for the APIPA training. The PITI program has been funded by the Technical Assistance Program of the U.S. Department of the Interior's Office of Insular Affairs (DOI/OIA).
The next APIPA annual conference will be in the Republic of Palau hosted by the Office of the Public Auditor. We will ensure that OPSA staff will participate in this upcoming APIPA annual conference.
The College of Micronesia has a business internship program for the college students.
Ever since the creation of this internship program, the Office of the Pohnpei State Auditor has actively taken part in accommodating the college students on their job training in our accounting fieldwork and computer tutorship job and also auditing.
During the year 2004, the Office of Pohnpei State Auditor sponsored and trained four COM students who were taking accounting and computer courses. They where certified upon completion of the required 96 hours on the job training.
The Department of the Interior, Office of the Insular Affairs sponsored a workshop in performance audit at Palikir, Pohnpei from February 18-19, 2004 for the Office of the National and State Public Auditors.
Eight of our auditors were able to participate in the performance audit program with twelve hours of Continue Professional Education (CPE) upon completion.
Supervisory & Management training for Human Resources
The Pacific Islands Training Initiative conducted a supervising and managing human resources training for the National and State Finance Offices and Auditor's offices from October 25-29, 2004 in Pohnpei.
All of the OPSA supervisors were able to participate in this supervisory and human resources workshop.
Federal Bureau of Investigation
The Office of the Pohnpei State Auditor was able to send one auditor who participated in the FBI training in Guam held last September 29, 2004 to October 01, 2004.
This particular FBI training was sponsored and fully paid by U.S. Department of Interior, Office of the U.S. Inspector General.
Previously, we have sent three of our staff auditors to the South Pacific Association of Supreme Audit Institution (SPASAI) who attended the compliance and financial audit workshop. The financial audit training program in the South Pacific was sponsored and fully paid by the SPASAI.
For this fiscal year 2004, one of our junior Public Auditors was able to participate in a financial audit workshop in Suva, Fiji from November 17-28, 2003. This particular workshop was sponsored and paid by SPASAI.
Office of the Pohnpei State Auditor was also able to participate in the 8th SPASAI congress workshop and learned how to prepare future training plan for SPASAI in Samoa from May 24-28, 2004.
Pohnpei State Auditor participated in the strategic planning seminar for leadership of the Executive Branch. This strategic planning seminar was conducted by Mr. Allan N. Mackey and Associate to enable participants to identify objectives and prepare action plans. This firm provides managing, consulting and organizational development services in line with the required economic development plan to be developed by the State under the Amended Compact.
The Pohnpei State Auditor participated in the Island Government Finance Officers Association (IGFOA) workshop conducted by the U.S. Department of Interior's Office of Insular Affairs (DOI/OIA) from 11/29/04-12/04/04 in Maui, Hawaii. Participants at this function provides insular leaders important opportunities for professional development, as well as opportunities for discussing insular financial management issues, sharing knowledge and resources, identifying regional/insular initiatives, and influencing future directions of financial management policies and practices, all with the intent to improve financial management performance in the insular governments.
For audit resolution, the instructions were given to the participants on how to resolve the prior year outstanding audit findings and questioned costs that the insular governments have not resolved. Audit findings and qualifications are addressed in the new compacts with the FSM, with the possibility of restrictions if the insular governments are not responsible.
Summaries of Office of the Pohnpei State Auditor (OPSA) Activities
In the fiscal year 2004, OPSA issued eight (8) audit reports. By State law, OPSA sent follow-up letter to State Government, agencies and local government for non-resolution of the deficiencies cited in the audit reports. We also encourage the auditees to correct deficiencies found in the audit reports and request correction as well as action plans to resolve prior year findings that remained unresolved. Further, we raised concerns for weaknesses in internal control over cash and fixed assets and weaknesses in the overall accountability over compact funds. We requested immediate corrective actions no later the 6 months. A summary of the audit reports issued by the Office of the Pohnpei State Auditor as follows:
||Kapingamarangi Municipal Government, 09/30/2002 & 2001
||Pohnpei Transportation Authority, 09/30/2002 & 2001
||Mwoakilloa Municipal Government, 09/30/2001 & 2000
||Nukuoro Municipal Government, 09/30/2001 & 2000
||Pohnpei Economic Development Authority, 09/30/2002 & 2001
||5th Micronesian Games, 09/30/2002
||Division of Revenue and Taxation, 09/30/2002
||Small Business Guarantee and Finance Corporation, 09/30/2003
Summaries of the findings and recommendations of OPSA's Audit Reports to be included in the annual report to the Legislature as mandated by the State Law are as follows:
1. Kapingamarangi Municipal Government, years ended Sempember 30, 2002 and 2001. This is a non-financial audit.
- The Municipality did not set up an accounting system applicable to government entity that would permit the preparation of its financial statements.
- Collections received from Pohnpei State appropriations were not receipted and not recorded. Collections from local revenues, although receipted and recorded, were not deposited to the Municipality's bank account in Kolonia.
- Cash on hand were used as advances to employees and also used to pay for some expenditures of the Municipality.
- The Municipality did not perform bank reconciliation of its bank account/s.
- 58% of the Municipality's disbursements were not supported by appropriate documents such as purchase orders or miscellaneous request forms, official receipts, vendors' invoices, timesheets or payroll summary sheets, and travel authorizations. All disbursements did not also show prior approval by responsible officers before payment.
- The Municipality issued some checks payable to "cash".
- In two (2) occasions, all of the Municipality's employees were given two (2) and three (3) months payroll advances.
- The Municipality did not maintain a record of fixed assets nor did it conduct periodic inventory of its fixed assets.
- The Municipality exceeded its budget for "consumable Goods" in both fiscal years.
- The Municipality did not provide the auditors with a schedule of project revenue and expenditure. Furthermore, some of the checks that were identified for projects were not supported.
- In the subsequent period, the Chief Magistrate appears to be in complete control of the authorization, receipt, disbursement, and recording of transactions.
2. Pohnpei Transportation Authority (PTA), years ended September 30, 2002 and 2001. This is a financial audit report.
- The Chief Magistrate should exert effort to establish an accounting system in the Municipality that is applicable to local governments and ensure that its personnel are trained on the proper recording of transactions.
- The Chief Magistrate should ensure that all collections are receipted, recorded and deposited to the bank intact and as timely as possible.
- The Chief Magistrate should ensure that the Treasurer keeps the cash on hand in a secure place and should not be used as advances to employees. Likewise, the Chief Magistrate should authorize a petty cash fund that will be used by the Treasurer to pay for minor expenditures for the daily operations of the Municipality. Cash on hand in excess of the petty cash fund should be deposited to the bank intact and as promptly as possible.
- The Chief Magistrate should designate a responsible person to reconcile its bank account monthly in order to ensure the Municipality's correct cash balance and also detect possible errors and irregularities.
- The Chief Magistrate and Treasurer should ensure that all disbursements are supported, verified, and approved prior to payment. We also recommend that the Chief Magistrate should instigate the preparation and adoption of its Financial Management Regulations (FMR) that will serve as guide to its employees in the disbursement of funds.
- The Chief Magistrate should direct the Treasurer or designee to issue checks only to legitimate vendors/suppliers.
- The Chief Magistrate should ensure the payroll advances are prohibited, except maybe for emergency situations.
- The Chief Magistrate should develop guidelines and controls on fixed assets that would include procedures on proper authorization and recording, custody and safeguarding of assets, purchase and disposal, movement or transfer, and periodic physical inventory of assets. The Treasurer or designee should also maintain a schedule of fixed assets.
- We recommend that the Municipality should operate within its approved budget and ensure that all anticipated expenditures are fully considered in the budget before submitting them to the Council for approval. It should also maintain a schedule of budget against actual expenditures to monitor the expenditures.
- The Chief Magistrate should direct the Treasurer to account for project and program funds separately from operations. The Magistrate should also direct the Public Works Office to take charge of administering and monitoring all municipal projects and ensure that all project payments are based on project completed as certified by the project inspector.
- The Chief Magistrate should delegate responsibilities to his staffs in such a way that no person is in complete control of cash-related functions.
Highlights of the Report:
3. Mwoakilloa Municipal Government for the years ended September 30, 2001 and 2000. This is a performance audit.
- PTA received unqualified opinion in its financial statements as of September 30, 2002 and 2001.
- For the two-year period, PTA partially paid $1,363,543 of its advances from Pohnpei State Treasury. The balance as of September 30, 2002 is $597,178.
- Deficits of $589,262 in fiscal year 2001 and $143,264 in fiscal year 2002 were incurred due to losses from operations.
- The audit disclosed fifteen (15) findings, which were detailed on pages 12 to 28. On page 23 of the report, we disclosed an immaterial instance of noncompliance related to travel. Out of fourteen (14) internal control findings, eight (8) were considered to be material weaknesses per finding numbers 1 to 8 and 15. Among the findings were:
a) PTA neither performed reconciliation of accounts with State Finance nor maintained ledgers to support the amounts in the financial statements.
b) Management did not monitor and follow up collection of delinquent construction services accounts worth $560,459 in fiscal year 2002.
c) Controls to safeguard inventory of supplies and material costing $181,573 in fiscal year 2002 were not established.
d) Title to fully paid heavy equipment amounting to $50,000 is not yet secured and transferred to PTA.
e) The lack of controls on credit extension and approval had led to a heightened risk of receivables from sales of property and equipment rentals totaling $64,326 might not be collected.
f) Nine (9) prior year findings remain unresolved. These weaknesses hinder PTA's compliance with laws and regulations and effective internal control.
- The Municipality, due to lack of knowledgeable staff, did not prepare its financial statements for fiscal years ended September 30, 2000 and 2001.
- Except for the budget acts, the Municipality does not have any other written regulations and policies and procedures for its operation. Duties are performed based on past practices.
- Bank reconciliation has not been performed for the three bank accounts of Mwoakilloa Municipal Government.
- The Municipality lacks control policies and procedures for its fixed assets. Consequently, its fixed assets were not being accounted for in accordance with the generally accepted accounting principles.
- The Municipality has inadequate control policies and related procedures over the administration of its personnel. Consequently, personnel files were not prepared and maintained.
- The Municipality has ineffective controls over cash receipts and employees have not been trained to assume the responsibility. This led to collections not properly receipted and recorded.
- The Municipality has not established effective controls to ensure that all disbursements are properly made. Disbursements were not properly approved, supported and recorded.
- The Municipality has not ensured that compatible duties are segregated. The Treasurer therefore assumes most of the financial responsibilities to include receiving and disbursing funds, recording, has custody of assets and signing of the checks.
- Monitoring control used by the Municipality is not adequate to ensure expenditures are within the approved amounts, thus over run of budget were noted for the fiscal years ended September 30, 2000 and 2001.
- The Municipality did not plan adequately for all expected expenditures of the government. Therefore fixed asset, which was not budgeted, was purchased without documentation to justify or support the expenditure. Amount budgeted for employee benefit was not sufficient to cover the annual contribution of employer.
- The Municipality is compensating its Chief Representative who is a full time employee of the Pohnpei State Government.
- The Municipality's documentation and records for its projects are not adequate or complete.
4. Nukuoro Municipal Government for the years ended September 30 2001 and 2000. This is a performance audit.
- We recommend that the Municipality should prioritize the training and orienting of its Treasurer on proper accounting and financial reporting to enable her to prepare the Municipality's financial statements in accordance with the generally accepted accounting principles applicable to local governments.
- We recommend that the Chief Magistrate should ensure that pertinent manuals of policies and procedures are established to provide guidance to the Municipality's employees in performing their assigned duties and responsibilities.
- We recommend that the Municipality should train its Treasurer on how to perform bank reconciliation so that she can assume this responsibility.
- We recommend that the Municipality should account for its fixed assets in accordance with the generally accepted accounting principles (GAAP). The capitalization policy should be established for properly identifying capital assets and a schedule or a list of those assets should be prepared and updated periodically.
- We recommend that good internal controls must always be exercised to ensure that policies and procedures are adequate in the administration of its personnel. The Municipality should create and maintain personnel files of its employees.
- We recommend that the Municipality should be cognizant of its responsibility and train its employees on effective controls relating to cash collections and receipts and the recording of such.
- We recommend that the Municipality should establish policies and procedures relating to cash disbursements and train its employees to fulfill the duties and responsibilities.
- We recommend that the Municipality should exercise good internal control and ensure that no one employee is solely responsible for collecting, disbursing, recording and has custody of funds.
- We recommend that the Municipality should adequately monitor its budget to ensure that expenditures are kept within the approved amounts.
- We recommend that the Municipality should exercise good planning of its budget so that approved amounts are sufficient to cover expected or unforeseen expenditures.
- We recommend that the Municipality should not allow dual compensation.
- We recommend that the Municipality should maintain adequate records of its projects to justify and support disbursements of funds
- The Nukuoro Municipal Government did not maintain any books of accounts to permit the preparation of financial statements.
- There were advances taken by the former Chief Magistrate for fiscal years 2000 and 2001. The aggregate amount was significant and there was no assurance if the amount were subsequently liquidated.
- For payroll, the NMG did not keep timesheets to support payment of salaries, payroll advances were also allowed and yet some payments were made for unpaid payroll.
- The Municipality did not prepare bank reconciliation.
- NMG operates under an outdated charter.
- The Nukuoro Black Pearl Corporation operation is being handled by the municipality.
- The NMG did not maintain record of its fixed assets.
- The Municipality did not keep record of its disbursements. In addition, the Municipality's files were in disarray to permit audit trail.
- The Municipality has outstanding liabilities that remain unpaid due to lack of funds
5. Pohnpei Economic Development Authority for the years ended September 30, 2002 and 2001. This is a financial audit.
- The Nukuoro Municipal should set up its accounting system and ensure that the staffs are properly trained to perform the functions.
- The Chief Magistrate must refrain from taking advances purportedly for official use. Instead the Municipality should prepare and disburse the payments directly to the vendors.
- Payroll should be properly documented, approved and paid on time. Payroll advances should not be allowed. In addition, personnel files must be maintained and kept intact.
- The Municipality should reconcile its bank account in a timely manner.
- NMG should prioritize the formulation and adoption of its own Constitution.
- The Municipality should handle the affairs of the corporation separate from that of the local government.
- The Chief Magistrate should initiate the immediate physical count of the Municipality's fixed assets. In addition, a schedule of these assets should be maintained to monitor the acquisition and disposal of the Municipal's fixed assets.
- The Municipality should keep record of its disbursement by keeping the cash disbursement journal. In addition, files should be kept in an orderly manner and within the retention period of the Municipality.
- The Chief Magistrate should immediately seek funding to pay the amount of its liabilities.
Highlights of the Report
6. The Fifth Micronesian Games for the year ended September 30, 2002. This is a performance audit.
- We have qualified our opinion on the Authority's financial statements based on the following:
a. The carrying values of the donated fishing boats namely, Senyavin, Usuhran, Miss Pohnpei, Boat 1 and 2 and the cold storage facilities have remained unvalued and unrecorded as assets of the Authority. The documents and records on these assets are not available.
b. We are uncertain that an investment of $500,000 is appropriately recorded in the Authority's books, because of the Attorney General's opinion stating that dividends from the investment accrue to the Pohnpei State General Fund.
- The Authority's deficit has increased to more than $3.80M in fiscal year 2001. In fiscal year 2002, it increased to about $4.14M. The increase is attributed to losses incurred from cold storage operation and the cost of administration.
- Our tests of the Authority's compliance with laws and regulations disclosed three (3) instances of noncompliance, which are presented in the Schedule of Findings and Questioned Costs of our report, pages 15 - 32 as finding numbers 02-7, 02-12 and 02-14. We consider finding number 02-7 and 02-12 as material instances of noncompliance.
- Of the eleven (11) reportable conditions identified in our report (pages 15 to 23, 25 through 29 and page 31), nine (9) are considered material weaknesses. The material findings are presented as finding numbers 02-2 through 02-5, 02-8 to 02-11 and 02-13.
- The MGOC did not record all property and equipment purchased for the Games. The assets were mostly untagged and not turned over to Pohnpei State after the Games. The items were found held by Game Officials and at various departments and locations.
- Receiving reports for off island purchases were not filed at the State Supply or filed two months after the Games. In addition, the reports were not supported with complete documents that authenticate actual receipt of items.
- The MGOC did not comply with the Financial Management Regulations on competitive bidding and thus incurred $7,367 more in its purchase of mattresses and pillows.
- The MGOC neither followed the Financial Regulations in its procurement of goods and services paid form donated funds nor were contracts made to support payment of professional services.
- Donated funds worth, $4,738 were used for travel unrelated to Micro Games. Travels were made without the required documentation and travel advances were not cleared after the trips.
- A budget overrun of $84,432 was incurred for overtime. Moreover, undetermined amounts of overtime are still being claimed.
- Unpaid accounts of various delegations for their athletes' food and accommodation amounting to $83,820 remain uncollected.
- The MGOC did not define the extent of business participation allowed to Game officials.
- Cash received were not receipted and some collections were not deposited in the legitimate account promptly.
- The fundraising lottery resulted to a loss of $2,613 and unaccounted tickets worth $7,219. Among the winners are members of the Micronesian Games Organizing Committee who did not return tickets or remit sales.
- Documents to support repayments of equipment and supplies amounting to $28,413 disclosed that the items were not all received. In addition, a penalty of $2,929 was paid for more than a month delay in the removal of mattresses and pillows from the dock.
- Disbursements were not properly supported with original invoices, receipts, purchase orders, billings, vouchers, payment forms, and other applicable documents.
- Duplicate payment of $1,100 was made to an off-island vendor.
- Extensions for employment of the Games Administrator were not made in writing. Also, the payments for extensions resulted to an overpayment of $440.
- The Micronesian Games Organizing Committee Checking Account, which was opened, as depository of all donations was not closed after the Games. The account is still active with a balance of $13,982.
- Six checks issued from the Micronesian Games Organizing Committee account were made payable to cash.
We recommend that administrators of future Games ensure that goods and services are acquired at the lowest reasonable costs.
- We recommend the Director of Treasury and Administration to ensure that the assets bought for Micro Games are recovered, tagged, recorded in the Pohnpei State's fixed asset master file, and transferred to Pohnpei Sports Administrator's custody for safekeeping.
- We recommend the Director of Treasury and Administration to centralize the receipt of goods to State Supply and ensure the following:
b. Receiving reports with attached shipping documents are issued immediately.
a. Monitor all repayments and follow up all outstanding repayments from the requesting departments and offices.
c. Property and equipment are tagged before releasing to departments and offices.
We recommend that administrators of future Games ensure that proper documents be processed in the procurement of goods and services. Also, we recommend that for professional services, contracts that define the compensation, scope of works, and responsibilities of contractors should be made to support payment of professional services.
We recommend the Director of Treasury and Administration to ensure that the travelers submit valid documents supporting their travels, follow up the travel advances and demand reimbursement of travel expenses not related to Micro Games.
We recommend that administrators of future Games ensure that overtime payments are properly budgeted and supporting documents be reviewed prior to payment.
We recommend the Director of Treasury and Administration to enforce the collection of outstanding accounts.
We recommend that administrators of future Games refrain from participating from endeavors that conflict with their official functions and personal interests.
We recommend that administrators of future Games ensure that all cash received for the Games are receipted and promptly deposited in the bank account of the Games.
We recommend that administrators of future Games ensure that fundraising lotteries are properly accounted for and conducted in accordance with well-defined rules and regulations.
We recommend the Director of Treasury and Administration to ensure that prepayments to vendors are closely monitored and collect from the vendors the cost of undelivered supplies and equipment.
We recommend that administrators of future Games ensure that disbursement procedures are established and followed to ensure effective controls.
We recommend the Director of Treasury and Administration to collect $1,100 from the vendor.
We recommend that future contract extensions be made in writing. We also recommend the Director of Treasury and Administration to collect $440 from the Games Administrator.
We recommend the Chairman of MGOC to close the account and remit the balance of the account to the Director of Treasury and Administration.
We recommend that administrators of future Games refrain from issuing checks payable to cash.
7. Division of Revenue and Taxation for the year ended September 30, 2002. This is a performance audit report.
- The Division's taxpayer roll is not complete. Not all business or individuals that are involved in taxable activities and required to pay sales taxes are included in the tax roll.
- The Division did not impose all penalties according to legislation.
- The Division is not aggressive in the collection of its delinquent accounts. In some case, the Division's actions were lenient toward delinquent taxpayers.
- Two taxpayers may have deliberately evaded tax payment by importing goods into Pohnpei State and subsequently exploring or transferring them to the other FSM States where sales tax did not apply.
- In conducting tax audits, the Division did not make its own calculation of taxable sales. In most of the field audits conducted, the Division used the taxpayer's sales. In some cases, the Division used assumed sales, which was computed by adding 50% mark-up to the total purchase amount during the audit period.
- The Division's audit schedules were not signed, dated, and approved by responsible personnel. We also noted that some audit schedules contain erasures and corrections that were not initialed.
- Audits that were settled for amounts different from assessed amounts were not always documented.
- Notices were not always sent to businesses that fail to file sales tax returns as expected.
- The Division did not properly maintain the taxpayer roll. Also, the "Accounts Receivable" balance per the Division's records showed a discrepancy with the State Finance's records.
- We recommend that the Division should establish a monitoring policy and procedure to ensure that it identifies all individuals or businesses that are required to file monthly tax returns and pay sales taxes.
- We recommend that the Division should strictly impose penalty as appropriate.
- To improve the Division's collection practices, we recommend that the Division should regularly review its accounts and take corrective actions as appropriate, e.g. file notice of lien and file tax warrants and order of levy as called for the Division policies.
- The Division should investigate if the taxpayers are purposely doing the transfer or export in order to evade tax payment. It should also seek legal clarification on the exemption of this type of transaction from sales tax payment.
- The Division should develop and maintain a sales tax audit manual, which should contain the specific procedures that tax auditors would follow in conducting their audits, e.g. calculation of taxable sales, documentation of the audit by the use of duly approved audit working papers and forms.
- We recommend that the Chief of the Division should ensure that all audit schedules are properly signed, titled, dated, and reviewed by responsible personnel.
- We recommend that the audit working papers should show how and why audits were settled for amounts different from assessed amounts.
- We recommend that the Division should ensure that the proper level of taxpayer notification be enforced.
- We recommend that the Division ensure the accurate recording of sales tax transactions. The Division should also perform periodic reconciliation of its account balances with State Finance's records, and investigate any discrepancy noted.
8. Small Business Guarantee and Finance Corporation for the year ended September 30, 2003. This is a financial audit.
Highlights of the Report:
- The financial statements present fairly, in all material respects, the financial position of the Corporation as of September 30, 2003, and the result of its operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
- The Corporation had total assets of $1,707,023, total liabilities of $5,197, and total net assets of $1,701,826 as of September 30, 2003. Net assets decreased by $51,338 when compared with last year's balance.
- The audit cited eight (8) instances of noncompliance with laws and regulations, two (2) of these were considered material, viz:
a. In fiscal year 2003, the Corporation used $36,052 of the interest income earned on the $1.5M capitalization and business development project funding for its operational and administrative expenses.
b. The Corporation's Board of Directors and Executive Director incurred total travel expenses of $31,990 to attend three (3) kinds of training during the year. Although the trainings were budgeted, the Corporation only received a $70,530 funding from Pohnpei State for its fiscal year 2003 operations.
- Of the six (6) reportable conditions described in detail on pages 21 through 42 of the audit report, three (3) findings were identified to be material weaknesses. These are findings numbers 9 through 11, viz:
a. The Corporation guaranteed three (3) loans totaling $60,650 that were already approved by the lending bank prior to the Corporation's guarantee. These were evidenced by the promissory notes and loan agreements that were signed between the borrowers and the bank before the dates of the guarantee requests and/or guarantee approval.
b. We noted the lack of controls on a loan guarantee approved by the former executive Director in fiscal year 2000. The guarantee agreement was only signed in fiscal year 2003 after the Board of Directors approved the guarantee application. Three months later, the lender called on the guarantee, which led to a civil case filed by the lending bank against the Corporation and eventually ended up with the Corporation paying $50,000 in court settlement.
c. The Corporation prepared and approved its current year budget of $167,428 for expenses and fixed assets. The Corporation only received a $70,530 State funding and the annual budget did not specify the funding source where the budget deficit would come from.
By State Law, OPSA is required to send follow-up letters regarding status of compliance to audit recommendations to State Government Agencies and Local Governments. The follow up letters would also encourage the auditees to correct deficiencies found in the audit reports and request correction for recurring deficiencies found in the previous years without adequate corrective action. We also raised concerns over the poor control over cash and equipments and the overall poor accountability over Compact funds and request immediate corrective actions:
- Department of Treasury and Administration
a. Questioned Costs
5th Micronesian Games
b. Overdue account receivable and account payable
c. Account receivable from FSM National Government (Unaudited Balance)
d. Account payable to Municipal Government (Unaudited Balance)
- Federal Grants $ 3,007,938 as of September 30, 2004
- CFSM $ 1,691,899 as of September 30, 2004
$ 1,058,767 as of September 30, 2004
e. Medium term note payable
a. Unauthorized taking of government properties
Division of Revenue and Taxation
a. Possible tax evasion by private business
Small Business Guarantee and Finance Corporation
a. Unauthorized use of interest income
Economic Development Authority
b. Unwarranted extension of credit with guarantee loan funds
a. Withholding of Social Security
Nukuoro Municipal Government
Kapingamarangi Municipal Government
Pohnpei State Housing Authority
a. Unwarranted extension of credits
Pohnpei Transportation Authority
b. Unauthorized advances
a. No monthly records of fuel purchase and fuel distribution
Pohnpei Fisheries Corporation
b. Budget overrun of $37,167 in FY 2001 for fuel
c. Account payable with State Government $597,178
a. Account payable to medium term note to state