Executive Summary
Why the Controller’s Office Conducted the Audit
In accordance with the Philadelphia Home Rule Charter, the Office of the City Controller (Controller’s Office) audited the City of Philadelphia’s (city) basic financial statements as of and for the fiscal year ended June 30, 2020, issued as part of the city’s Annual Comprehensive Financial Report (ACFR)[1]. 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.
Fiscal Year 2020 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 six significant deficiencies in the city’s internal controls over financial reporting. The fiscal year 2020 report on internal control and on compliance and other matters discusses the material weaknesses and significant deficiencies in depth. Key findings include:
Material Weakness: Breakdowns in the functionality and application IT controls of the OnePhilly system continue to increase the risk for material payroll errors. Several conditions, which combined are considered a material weakness, were identified as part of a prior year evaluation of the IT application and general controls related to the OnePhilly workforce management system, including issues with the assumed time program, changes to employee timecards without approval, inaccuracies in the Overpaid/Underpaid report, and more. Most of the breakdowns in the functionality and application IT controls of the OnePhilly system were not remediated during fiscal year 2020. Only four of 13 previously reported conditions were corrected. As a result, the potential for the payroll expenditures and other related liability accounts to be materially misstated in the ACFR remains. Individual employee pay may be inaccurate and/or unauthorized.
In addition to this material weakness, two significant deficiencies related to the OnePhilly system were also identified. All OnePhilly findings were first reported in fiscal year 2019.
Material Weakness: Inadequate staffing levels, lack of technological investment, and insufficient oversight have led to undetected material misstatements. The audit disclosed a number of conditions that impact Finance accountants’ ability to prepare a timely, accurate, and completed ACFR without Controller’s Office staff recommending significant adjustments. The Controller’s Office found $167 million in errors in the ACFR submitted for audit that Finance accountants did not detect during its preparation. While improved from the more than $900 million in errors identified in fiscal year 2017, undetected material misstatements could result in financial statements that cannot be used as a reliable source of information regarding the status of the city’s finances. Auditors notified Finance Office accountants of the errors who subsequently corrected most, but not all, of the errors. Errors in the ACFR preparation have been a finding in the internal control report since fiscal year 2007 without remediation.
Material Weakness: Untimely preparation of the Schedule of Expenditures of Federal Awards (SEFA) may result 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 fiscal year 2020 until March 13, 2021, only three months prior to the June 30 submission deadline,[2] which is insufficient time for completion. The untimely and inaccurate preparation of the SEFA caused delays in audit planning and subsequent testing of the SEFA and major programs. As a result, the city may not submit a Single Audit reporting package to the Federal Audit Clearinghouse by the federally required deadline.[3] 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. This finding has been reported on as a material weakness since fiscal year 2018.
What the Controller’s Office Recommends
The Controller’s Office developed recommendations to address the findings in this report. Some of the more significant recommendations to the above findings are noted below.
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. When applicable, Finance Office and OnePhilly team should focus on resolving the issue prospectively, as well as completing any necessary retrospective corrections.
To improve controls over the preparation and review of the city’s ACFR, 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 ACFR and the development of a ACFR review checklist for the full accrual financial statements. While we support Finance Office’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 ACFR. It should be noted that the investment in a new financial reporting system must be be strategic and thoughtful.
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.
Additional recommendations developed by the Controller’s Office can be found in the body of this report.
[1] The Annual Comprehensive Financial Report was previously referred to as the Comprehensive Annual Financial Report. Throughout the Report on Internal Control and Other Matters, the ACFR is called Comprehensive Annual Financial Report, but is referred to as the ACFR in management’s response.
[2] The federal submission deadline for the Single Audit Reporting Package is March 31st annually, however the fiscal year 2020 deadline was extended to June 30, 2021 due to COVID-19.
[3] The Single Audit Reporting Package for fiscal year 2020 was not submitted by the June 30, 2021 deadline.