Report On Internal Control and On Compliance and Other Matters City of Philadelphia Fiscal Year 2019


July 16, 2020
Annual, Financial Rebecca Rhynhart FY19 Internal Controls

Executive Summary


Why The Controller’s Office Conducted the Audit

In accordance with the Philadelphia Home Rule Charter, the Office of the City Controller audited the City of Philadelphia’s (city) basic financial statements as of and for the fiscal year ended June 30, 2019, issued as part of the city’s Comprehensive Annual Financial Report (CAFR). To help plan and perform the audit, which occurs annually, the Controller’s Office reviews the city’s internal control over financial reporting and examines the city’s compliance with certain provisions of laws, regulations, contracts and grant agreements to identify any noncompliance that could have a direct and material effect on financial statement amounts.

The Controller’s Office reports on any identified significant deficiencies and material weaknesses in the city’s internal controls. Significant deficiencies are less severe than material weaknesses, yet important enough to merit attention by those charged with governance. Material weaknesses identified in financial reporting result in a reasonable possibility that a material misstatement of the city’s financial statements may not be prevented or detected and corrected on a timely basis. If a material misstatement on the city’s financial statements occurred, the statements would be an ineffective tool for assessing the city’s financial health.

FY19 Report Findings

While the Controller’s Office found that the city’s financial statements were presented fairly, in all material respects, our review identified three material weaknesses and seven significant deficiencies in the city’s internal controls over financial reporting. The fiscal year 2019 report on internal control and on compliance and other matters discusses the material weaknesses and significant deficiencies in depth. Key findings include:

  • Material Weakness: Inadequate staffing levels, lack of technological investment, and insufficient oversight have led to undetected material misstatements. Our audit disclosed a number of conditions, which collectively the Controller’s Office considers to be a material weakness, that impede the ability of the Finance Office accountants to prepare a timely, accurate, and completed CAFR without significant adjustments recommended by the City Controller’s audit staff. The Controller’s Office identified accounting errors totaling $213 million during the preparation of the city’s FY19 CAFR. The Controller’s Office proposed adjustments to correct the $213 million in errors, and the Finance Office booked most, but not all, of the adjustments.
  • Material Weakness: Untimely preparation of the Schedule of Expenditures of Federal Awards (SEFA) resulted in the late submission of the Single Audit reporting package to the Federal Audit Clearinghouse. The Finance Office’s Grants Accounting and Administrative Unit (GAAU), which is responsible for preparing the SEFA, did not prepare and provide for audit a preliminary SEFA for the fiscal year ending June 30, 2019 until March 28, 2020 – a mere three days before the single audit submission deadline of March 31, 2020. As a result, the city did not submit a Single Audit reporting package to the Federal Audit Clearinghouse by the federally required deadline. Non-compliance with the reporting requirements is a violation of federal grants terms and conditions. The city’s continued failure to meet this filing requirement could affect future federal funding. Additionally, the Controller’s Office was unable to follow up on a FY18 prior year finding regarding the accuracy of the SEFA due to its late submission.
  • Material Weakness: Breakdowns in the functionality and application IT controls of the OnePhilly system increase the risk for material payroll errors. The OnePhilly system replaced the Human Resources and Benefits legacy systems in December 2018 and the city’s Payroll and Time and Attendance legacy systems in March 2019. The Controller’s Office engaged an independent accounting firm to perform an assessment of the IT application and general controls related to the new OnePhilly system. The review found multiple breakdowns in the functionality and application controls of the OnePhilly system. As a result, there was a potential for the payroll expense and other related liability accounts to be materially misstated in the CAFR. Additionally, individual employee pay may be inaccurate and/or unauthorized. Many of the conditions identified appeared to have been in existence from the time OnePhilly launched, meaning the potential cause may have occurred prior to the system’s Go-Live date.

What The Controller’s Office Recommends

The Controller’s Office developed a number of recommendations to address the findings in this report. Some of the more significant recommendations to the above findings are noted below.

To improve controls over the preparation and review of the city’s CAFR, the Finance Office should follow through with its plan to use an accounting firm to assist with the preparation of a compilation package with detailed documentation supporting the CAFR and  the development of a CAFR review checklist for the full accrual financial statements.   While we support Finance’s use of the accounting firm as a short-term remedy, the appropriate long-term solution is for Finance Office management to either hire more accountants or invest in a new financial reporting system to reduce the current labor-intensive procedures needed to prepare the CAFR, which include using a combination of Excel, Word, and Lotus 1-2-3 files.

To improve the timeliness of the SEFA, the Finance Office’s GAAU should allocate adequate resources to ensure the timely preparation and submission of the SEFA for audit purposes. GAAU should also proactively enforce the existing policies and procedures requiring departments to complete expenditure reconciliations by the due date.

To improve the OnePhilly system’s functionality and application IT controls, Finance Office management and the OnePhilly team should evaluate the sufficiency of resources dedicated to identifying, prioritizing, testing, and implementing necessary modifications to the OnePhilly system.

Additional recommendations developed by the Controller’s Office can be found in the body of this report.

Corrective Action – Prior Year Findings

During FY19, auditors identified improvement for several prior year findings. Notably, the Revenue Department made progress addressing its adjustment review process for tax accounts, resolving this finding. Other improvements noted for prior year findings can be found in the corrective action section of the report.