Washington State Auditors Office

Accountability Audit Report

Kitsap County
Report Date December 27, 2011

Report No. 1007248

Issue Date February 21, 2012

Washington State Auditor Brian Sonntag

February 21, 2012

Board of Commissioners Kitsap County Port Orchard, Washington

Report on Accountability
We appreciate the opportunity to work in cooperation with your County to promote accountability, integrity and openness in government. The State Auditors Office takes seriously our role to advocate for government accountability and transparency and to promote positive change. Please find attached our report on Kitsap Countys accountability and compliance with state laws and regulations and its own policies and procedures. Thank you for working with us to ensure the efficient and effective use of public resources. Sincerely,

BRIAN SONNTAG, CGFM STATE AUDITOR

Insurance Building, P.O. Box 40021 Olympia, Washington 98504-0021 (360) 902-0370 TDD Relay (800) 833-6388 FAX (360) 753-0646 http://www.sao.wa.gov

Table of Contents
Kitsap County December 27, 2011
Audit Summary .......................................................................................................................... 1 Related Reports ......................................................................................................................... 2 Description of the County ........................................................................................................... 3 Schedule of Audit Findings and Responses ............................................................................... 5

Audit Summary
Kitsap County December 27, 2011 ABOUT THE AUDIT
This report contains the results of our independent accountability audit of Kitsap County from January 1, 2010 through December 31, 2010. We evaluated internal controls and performed audit procedures on the activities of the County. We also determined whether the County complied with state laws and regulations and its own policies and procedures. In keeping with general auditing practices, we do not examine every transaction, activity or area. Instead, the areas examined were those representing the highest risk of noncompliance, misappropriation or misuse. The following areas were examined during this audit period: Personal property tax Building permit receipting Rental property management Auditors Office cash receipting Parks contracts/agreements/fair operations/cash receipting Insurance/risk management Real Estate Excise Tax disbursements Open public meetings/records laws Hotel/motel tax expenditures Disbursements Payroll Conflict of interest/ethics laws Police/Sheriff/Jail financial operations/custody of evidence Restricted funds Procurement (bidding/prevailing wage) Solid waste billing/cash receipting

RESULTS
In most areas, the County complied with state laws and regulations and its own policies and procedures. However, we identified conditions significant enough to report as findings: The County lacks sufficient controls to ensure it sets appropriate rental rates, collects late payments and properly selects tenants for its rental properties. The Department of Community Development lacks adequate internal controls to ensure proper calculation and collection of impact fees.

We also noted certain matters that we communicated to County management. We appreciate the Countys commitment to resolving those matters.

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Related Reports
Kitsap County December 27, 2011 FINANCIAL
Our opinion on the Countys financial statements and compliance with federal grant program requirements is provided in a separate report, which includes the Countys financial statements.

FEDERAL GRANT PROGRAMS

We evaluated internal controls and tested compliance with the federal program requirements, as applicable, for the Countys major federal programs, which are listed in the Federal Summary section of the financial statement and single audit report.

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Description of the County

Kitsap County December 27, 2011 ABOUT THE COUNTY
Kitsap County was formed in 1857 from parts of King and Jefferson counties and includes four incorporated cities: Bremerton, Bainbridge Island, Poulsbo and Port Orchard. The County is home to Puget Sound Naval Shipyard, Naval Base Kitsap and the Keyport Undersea Warfare Research Station. The County serves approximately 244,800 citizens. The County is governed by a three-member Board of Commissioners, elected by district voters to staggered, four-year terms. Additional elected officials help administer the County including: Assessor, Auditor, Clerk, Coroner, Prosecutor, Sheriff, Treasurer and judges for the District and Superior Courts. The County has approximately 1,300 employees that provide services including: road construction and maintenance, flood control, parks and recreation facilities, court services, law enforcement and criminal detention. In addition, the County provides tax assessments and collections, planning, zoning, rehabilitative services, public health care, election administration, treasury services and processing and disposing of solid and liquid wastes. The County operates on an annual budget of approximately $200 million.

ELECTED OFFICIALS
These officials served during the audit period: Board of Commissioners: Charlotte Garrido Josh Brown Robert Gelder Walter Washington Jim Avery Meredith Greene David Peterson Greg Sandstrom Russ Hauge Marilyn Paja James Riehl Daniel Phillips Jeanette Dalton Leila Mills Anna Laurie Theordore Spearman Jay Roof Russell Hartman M. Karlynn Haberly Sally Olsen
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County Auditor County Assessor County Treasurer County Clerk County Coroner Prosecuting Attorney District Court Judges:

Superior Court Judges:

APPOINTED OFFICIALS
Director, Community Development Director, Public Works Budget and Finance Officer Director, Park and Recreation Director, Information Services Director, Human Services Director, Juvenile Services Larry Keeton Randy Casteel Amber DAmato James Dunwiddie Bud Harris Burt Furuta Ned Delmore

COUNTY CONTACT INFORMATION

Address: Kitsap County 619 Division Street MS 31 Port Orchard, WA 98366 (360) 337-7132 www.kitsapgov.com

Phone: Website:

AUDIT HISTORY
We audit the County annually. We reported no audit findings from 2000 through 2003, 2006, 2007 and 2008. The 2004 report included one finding regarding internal control weaknesses over citations at the Sheriffs Office and the 2005 audit reported a lack of adequate internal controls over cash receipts at the Facilities, Parks and Recreation Department. The County has taken steps to correct conditions noted in these findings. We believe this reflects the Countys desire and commitment to maintain an effective financial system.

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Schedule of Audit Findings and Responses

Kitsap County December 27, 2011
1. County lacks sufficient controls to ensure it sets appropriate rental rates, collects late payments and properly selects tenants for its rental properties. Description of Condition
The County rents 15 properties to the public and county employees. The properties generate approximately $151,000 in rent annually. We audited this area to determine whether the County was properly managing rental contracts and had a fair tenant selection process. We identified issues regarding late payments, rental rates and tenant selection. Late Payments We performed work at three County departments that manage the properties. We found $18,350 was owed to the County for overdue rent, late fees and security deposits: Parks and Recreation Department We found outstanding payments totaling $15,750. Of that, $8,100 was due to one tenants missed payments. The County is seeking to evict this tenant. The remaining $7,650 is late payment penalties the Department has not collected. We also noted the Department had not collected $700 in deposits for three properties. Public Works Department We found outstanding payments totaling $1,900 on one contract and no formal rental agreement, no deposit collected and no late fee terms for this contract. Facilities Department The Facilities Department manages three rental contracts. We found rent is not being receipted when received by County. Without the receipt detail, we were unable to determine if rent was paid by the 10th of each month as required by the rental agreement. Rental Rates The County has no formal policy regarding rental rates. It could not provide documentation to show it had evaluated if its rates are consistent with market rates. Tenant Selection The County has no formal policy detailing how to select tenants for rental properties.

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Cause of Condition
The County has not assigned a specific individual or department to oversee rental properties. It does not have forms or policies the departments can use to manage the properties in a consistent manner.

Effect of Condition
By not enforcing rental agreements, the County has not receipted $18,350 in overdue rent, deposits and late fees. By not periodically evaluating rental rates, the County could be over- or under-charging tenants. Without a formal tenant selection process, the County may be selecting tenants that are unable to pay rent which could result in additional costs to the County. In addition, tenants may be unfairly or inconsistently selected.

Recommendation
We recommend the County: Assign a specific individual or department to oversee rental properties. Establish and follow County policies and procedures for collecting late payments, assessing rental rates and tenant selection. Ensure rental payments are receipted daily when remitted to the County.

Countys Response
In response to the audit finding, the County will take the following steps: The County will appoint an individual to serve as or acquire the services of a Property Manager to oversee rental properties. The Property Manager will lead the County in determining if it makes sense to keep each rental property. Rentals may be retained,sold or demolished. If rental properties remain, the County will establish and follow County-wide policies and procedures for collecting late payments, assessing rental rates and tenant collection. The County will ensure payments are receipted daily when remitted to the county.

Auditors Remarks
We thank the County for its cooperation and assistance during the audit and acknowledge its commitment to improvements. We will review the status of this issue during our next audit.

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Applicable Laws and Regulations

State law (RCW 43.09.200) Uniform System of Accounting, Budgeting Accounting Reporting Standards Manual (BARS), Volume 1, Part 3, Chapter 1, Internal Control, Page 12 state: Identification of requirements Controls should ensure that requirements are identified and that employees whose actions may affect compliance are aware of applicable requirements. When statutory, regulatory or contractual provisions are unclear, the government should seek clarification through legal counsel, research or communication with regulatory agencies or contracting parties. Compliance Controls should prevent non-compliance or detect noncompliance in a timely enough fashion for the government to rectify the situation. Such controls vary greatly, depending on the nature of the compliance requirement. Safeguarding of public resources Controls should prevent misappropriation or misuse of public resources or detect misappropriation or misuse in a timely fashion and assign responsibility to individuals charged with custody of assets. Such controls should cover all receipts and receivables, expenditures and commitments, provisions of goods or services and the safekeeping of all public assets at risk of misappropriate or misuse.

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Schedule of Audit Findings and Responses

Kitsap County December 27, 2011
2. The Department of Community Development lacks adequate internal controls to ensure proper calculation and collection of impact fees.
The Department of Community Development generated approximately $2.2 million in fee related revenue for fiscal year 2010. The Department provides services and information for clients seeking permits for building construction, land development, fire and other associated permits within unincorporated Kitsap County. We audited this area to determine whether the County had adequate internal controls over the receipting of permit payments and provided adequate oversight for transaction overrides. We found a significant amount of system overrides. We judgmentally selected 25 transactions and compared them to supporting documentation. We found seven errors. We noted management does not consistently and independently review overrides or voids. We also noted insufficient documentation to support the purpose or amounts of the overrides. After further review, we found the overrides occurred because Department employees are not using the system as intended. They manually calculate fees and enter those calculations into the system. Staff should be entering the original information into the system and allowing it to calculate the criteria. During the audit, we became aware of an issue identified by the Department. The Department had discovered that the annual adjustment for impact fees was incorrectly identified and applied to approximately 950 permits submitted March 1, 2009 September 30, 2011. The net amount of the error is approximately $15,000 in undercollected fees.

Recommendation
We recommend the County: Consult with legal counsel to determine how to handle the amounts over and under collected. Ensure a supervisor approves future overrides and retain documentation to support the override amount. Provide Department staff training on how to properly use the impact fee software system in order to minimize errors due to manual calculations.

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County Response
In response to the audit finding of our internal controls related to impact fees, the County agrees with the finding and have made the following improvements: The Department of Community Development took immediate action to correct the error upon discovery and has trained affected staff on accurate calculation of annual impact fee adjustments as specified in Kitsap County Code. The Department of Community Development conducted an assessment of prior year impact fee calculations to determine the magnitude of the issue. The Department of Community Development is preparing a briefing for the Board of County Commissioners and will be meeting with legal counsel for input on resolution.

The Department of Community Development will further investigate overrides as specified.

Auditors Response
We appreciate the Countys commitment to resolving this issue. We will review this area again during our next scheduled audit.

Applicable Laws and Regulations

RCW 43.09.200 - Uniform system of accounting, Budgeting Accounting Reporting Standards Manual (BARS), Volume 1, Part 3, Chapter 1, Internal Control, Page 12. The full text of the state law can be found at http://apps.leg.wa.gov/rcw/default.aspx.

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ABOUT THE STATE AUDITOR'S OFFICE

The State Auditor's Office is established in the state's Constitution and is part of the executive branch of state government. The State Auditor is elected by the citizens of Washington and serves four-year terms. Our mission is to work with our audit clients and citizens as an advocate for government accountability. As an elected agency, the State Auditor's Office has the independence necessary to objectively perform audits and investigations. Our audits are designed to comply with professional standards as well as to satisfy the requirements of federal, state, and local laws. The State Auditor's Office employees are located around the state to deliver services effectively and efficiently. Our audits look at financial information and compliance with state, federal and local laws on the part of all local governments, including schools, and all state agencies, including institutions of higher education. In addition, we conduct performance audits of state agencies and local governments and fraud, whistleblower and citizen hotline investigations. The results of our work are widely distributed through a variety of reports, which are available on our Web site and through our free, electronic subscription service. We take our role as partners in accountability seriously. We provide training and technical assistance to governments and have an extensive quality assurance program. State Auditor Chief of Staff Deputy Chief of Staff Chief Policy Advisor Director of Audit Director of Performance Audit Director of Special Investigations Director for Legal Affairs Director of Quality Assurance Local Government Liaison Communications Director Public Records Officer Main number Toll-free Citizen Hotline Website Subscription Service Brian Sonntag, CGFM Ted Rutt Doug Cochran Jerry Pugnetti Chuck Pfeil, CPA Larisa Benson Jim Brittain, CPA Jan Jutte, CPA, CGFM Ivan Dansereau Mike Murphy Mindy Chambers Mary Leider (360) 902-0370 (866) 902-3900 www.sao.wa.gov https://www.sao.wa.gov/EN/News/Subscriptions/

(SAO FACTS.DOC - Rev. 09/11)