Report On Internal Control and On Compliance and Other Matters City of Philadelphia Fiscal Year 2021


Audit Date: June 30, 2022

Audit Categories

  • Annual,
  • Financial
Controller: Rebecca Rhynhart

Audit Tags

  • FY21,
  • Internal Control,
  • 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 (Controller’s Office) audited the City of Philadelphia’s (city) basic financial statements as of and for the fiscal year ended June 30, 2021, issued as part of the city’s Annual Comprehensive Financial Report (ACFR). 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.

FY21 Report Findings

While the Controller’s Office found that the city’s financial statements were presented fairly, in all material respects, our review identified two material weaknesses and six significant deficiencies, as well as four other conditions in the city’s internal controls over financial reporting. The fiscal year 2021 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 led to undetected material misstatements and the untimely preparation of the Schedule of Expenditures of Federal Awards (SEFA).  The audit detailed several conditions that impact Finance accountants’ ability to prepare a timely, accurate, and completed ACFR and SEFA without the Controller’s Office staff recommending significant adjustments. Specifically, the Controller’s Office found $229 million in errors in the ACFR submitted for audit that Finance accountants did not detect during its preparation. 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. Errors in the ACFR preparation have been a finding in the internal control report since FY07 without remediation.

Additionally, the untimely preparation of the SEFA by the Finance Office’s Grants Accounting and Administrative Unit (GAAU) may result in the late submission of the Single Audit reporting package to the Federal Audit Clearinghouse. 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 since fiscal year 2018. The GAAU provided the Controller’s Office with an incomplete preliminary SEFA on June 15, 2022, which is an inadequate amount of time for our office to complete its audit by the September 30, 2022 deadline.

Material Weakness: Breakdowns in the functionality and application IT controls of the OnePhilly system continue to increase the risk for material payroll errors. The OnePhilly system was launched to replace the city’s legacy Human Resources and Benefits systems (December 2018) and Payroll and Time and Attendance systems (March 2019). As part of the city’s fiscal year 2021 ACFR audit, the Controller’s Office reviewed the efforts of the OnePhilly team to remediate outstanding control deficiencies identified during a prior year evaluation of the information and technology application and general controls related to the OnePhilly system. While some conditions have been corrected, we noted that five of nine previously unresolved conditions including issues with the assumed time program, use of an automated process to change unapproved time cards to approved status, and more, remain. As a result, the potential for the payroll expense and other related liability accounts to be materially misstated in the ACFR persists. Individual employee pay may be inaccurate and/or unauthorized.

Significant Deficiency: Treasurer’s bank reconciliation procedures still require improvement.

The Treasurer’s Office reconciliations for the consolidated cash and other cash accounts contains numerous long-standing reconciling items since fiscal year 2018. The Treasurer’s Office also continues to have issues reconciling revenue activity for the Department of Public Health, resulting in a $15.9 million variance between DPH’s recorded collections and actual transfers as of June 20, 2021. Controller’s Office testing noted noncompliance with the Pennsylvania escheat act with more than $12 million not yet escheated to the state. The Treasurer’s Office informed our office that it has engaged an outside accounting firm to assist in addressing the legacy escheatment backlog.

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 controls over the preparation and review of the city’s ACFR, the Controller’s Office recommends that Finance Office Management either hire more accountants or invest in a new comprehensive financial reporting system that will reduce the labor-intensive procedures needed to prepare the ACFR. To ensure the timely preparation and submission of the SEFA for audit purposes, we recommend that GAAU allocate adequate resources and proactively enforce existing policies and procedures with departments for expenditure reconciliations.

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 as more resources may be needed to make necessary modifications to the system.

To improve its bank reconciliation procedures, the Treasurer’s Office should investigate and resolve all reconciling difference between the account book and bank balances within 90-days, and work to ensure all escheatable amounts are reported and paid to the Pennsylvania Treasury.

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