OFFICE OF THE NEW YORK STATE COMPTROLLER

D IVISION OF LOCAL GOVERNMENT

& SCHOOL ACCOUNTABILITY

Sea Breeze and

Vicinity Water District
Internal Controls Over
Billing and Collections
Report of Examination
Period Covered:
January 1, 2007 — January 20, 2010
2010M-66

Thomas P. DiNapoli
 Table of Contents

Page

AUTHORITY LETTER 2

INTRODUCTION 3
Background 3
Objective 3
Scope and Methodology 3
Comments of District Officials and Corrective Action 3

BILLING AND COLLECTIONS 5

Segregation of Duties 5
Cash Receipts 6
Account Adjustments 7
Recommendations 8

APPENDIX A Response From District Officials 9

APPENDIX B OSC Comment on the District Officials’ Response 12
APPENDIX C Audit Methodology and Standards 13
APPENDIX D How to Obtain Additional Copies of the Report 14
APPENDIX E Local Regional Office Listing 15

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 11

 State of New York
Office of the State Comptroller

Division of Local Government

and School Accountability

August 2010

Dear Water District Officials:

A top priority of the Office of the State Comptroller is to help local government officials manage
government resources efficiently and effectively and, by so doing, provide accountability for
tax dollars spent to support government operations. The Comptroller oversees the fiscal affairs of
local governments statewide, as well as compliance with relevant statutes and observance of good
business practices. This fiscal oversight is accomplished, in part, through our audits, which identify
opportunities for improving operations and Board governance. Audits also can identify strategies to
reduce costs and to strengthen controls intended to safeguard local government assets.

Following is a report of our audit of the Sea Breeze and Vicinity Water District, entitled Internal
Controls Over Billing and Collections. This audit was conducted pursuant to Article V, Section 1 of
the State Constitution and the State Comptroller’s authority as set forth in Article 3 of the General
Municipal Law.

This audit’s results and recommendations are resources for local government officials to use in
effectively managing operations and in meeting the expectations of their constituents. If you have
questions about this report, please feel free to contact the local regional office for your county, as listed
at the end of this report.

Respectfully submitted,

Office of the State Comptroller

Division of Local Government
and School Accountability

2 OFFICE OF THE NEW YORK STATE COMPTROLLER

 Introduction

Background The Sea Breeze and Vicinity Water District (District) was created
in 1914 to finance, construct, operate and maintain a water
supply system for the benefit of the residents of Sea Breeze and
the surrounding area. The District provides water services for
approximately 9,900 residents of the Sea Breeze neighborhood and
the surrounding area in the Town of Irondequoit (Town), Monroe
County. The District is governed by an elected three-member Board
of Commissioners (Board). The Town Supervisor acts as the District’s
Treasurer. The Water Superintendent is responsible, along with other
staff, for the District’s day-to-day management under the direction of
the Board.

The District maintains approximately 80 miles of water main and

270 fire hydrants. For the 2009 fiscal year, the District reported
revenues totaling $854,000, operating expenses totaling $927,000,
and unappropriated fund balance of $216,000. District revenues
are primarily generated from water usage charges, but also include
approximately $120,000 from cellular antennae rentals. Operating
expenses of the District include payroll, employee benefits, power,
purchased water, maintenance and operating costs.

Objective The objective of our audit was to review the District’s controls over
the billing and collection of water charges. Our audit addressed the
following related question:

• Are internal controls over billed receivables appropriately

designed and operating effectively to adequately safeguard
District assets?

Scope and We reviewed relevant records and reports, and observed processes
Methodology relative to the District’s billing and collection of water charges for the
period January 1, 2007 to January 20, 2010.

We conducted our audit in accordance with generally accepted

Comments of
District Officials and
Corrective Action
government auditing standards (GAGAS). More information on such
standards and the methodology used in performing this audit are
included in Appendix C of this report.
The results of our audit and recommendations have been discussed
with District officials and their comments, which appear in Appendix
A, have been considered in preparing this report. District officials
generally agreed with our recommendations and indicated they have
taken or plan to initiate corrective action. Appendix B includes our
comment on the issue raised in the District’s response letter.

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 33

 The Board has the responsibility to initiate corrective action. A
written corrective action plan (CAP) that addresses the findings and
recommendations in this report should be prepared and forwarded
to our office within 90 days, pursuant to Section 35 of the General
Municipal Law. For more information on preparing and filing your
CAP, please refer to our brochure, Responding to an OSC Audit
Report, which you received with the draft audit report. We encourage
the Board to make this plan available for public review in the Clerk’s
office.

4 OFFICE OF THE NEW YORK STATE COMPTROLLER

 Billing and Collections

District officials are responsible for establishing an internal control

system consisting of policies and procedures to provide reasonable
assurance that billings are properly initiated, approved, documented,
and recorded. It also provides mechanisms for ensuring that cash
receipts are deposited timely and intact, and that cash is safeguarded
to prevent loss or theft. Key duties (e.g., maintenance of accounting
records, cash custody, bank reconciliations) must be adequately
segregated so that the same individual is not controlling most or all
phases of a transaction, particularly when there is limited supervisory
oversight. Town Law also provides a key control for cash collections
by requiring that the Receiver of Taxes and Assessments (Receiver)
collect all water rents within the Town.1 With good internal controls,
District officials can enhance the safeguarding of cash assets,
mitigate the risk of misappropriation and mistakes, and help ensure
compliance with applicable laws.

We identified significant weaknesses in internal controls over water

billing and cash collections. District officials have not established and
adopted written policies and procedures governing billed receivables.
As a result, the billing clerk did not have adequate guidelines for
preparing or adjusting bills, and for recording and depositing cash
receipts. In addition, the billing clerk is directly responsible for
most aspects of the billing and collection process. Finally, we also
found that the billing clerk did not deposit moneys intact and made
adjustments to customer accounts without management approval.
Without adequate segregation of duties and management oversight,
there is an increased risk that errors and irregularities will not be
detected and corrected in a timely manner.

Segregation of Duties An important component of any internal control system is proper

segregation of duties, ensuring that no one person controls all
phases of a transaction. Concentrating key duties (i.e., authorization,
recordkeeping and custody) with one individual with little or no
oversight weakens internal controls and significantly increases the
risk that errors and/or irregularities might occur and go undetected
and uncorrected. Another important component is management
oversight.

The District bills users quarterly in January, April, July and October.
The billing clerk is directly responsible for the majority of the billing
and collection process. Her responsibilities include preparing and
collecting meter reading cards, entering meter readings into the
1
The Receiver does not have responsibilities for billing or recordkeeping.

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 55

 computer, preparing and printing bills, collecting payments, preparing
deposits, entering receipts into the computer system, maintaining
customer detail accounts and making account adjustments. She also
has the ability to change the water rate within the computerized
billing system. While the Town Accountant maintains all control
accounts, prepares monthly and year-end financial reports and
prepares bank reconciliations, the information the Town Accountant
uses is based solely on reports and other information that is provided
by the billing clerk.

Due to the inadequate segregation of duties, we reviewed 15 late

payments to ensure amounts due included penalties. We also
compared meter reading cards from eight customer accounts to the
October 2009 billing to ensure accuracy and we compared billed
amounts on master billings to amounts posted to customer accounts.
Additionally, we reviewed 14 receipts from the April 2009 billing to
ensure that they had been properly recorded and deposited. While we
found significant weaknesses with cash collections, the weaknesses
can be easily eliminated by relinquishing the cash collection
responsibilities to the Receiver, as required by Town Law.

Cash Receipts Good management practices require that cash receipts be recorded in
a cash receipts journal to provide a detail of the amount received, the
date received, the type of payment, and the payee. This information
becomes a summary of the amounts deposited in the bank. It is
important that collections be deposited in the bank and credited to
the customers’ accounts in a timely manner. When the billing clerk
receives a payment, she records only the amount and the customer
account number and does not record the date received or whether
the payment was by cash or check. Deposit slips are not properly
itemized to show the individual checks included. Normally, after
she receives 100 payments,2 the billing clerk prepares a deposit and
credits the customers’ accounts in the computer system accordingly.
While this generally results in daily deposits during the first month of
a collection cycle, deposits in the final two months were on average
only once per week. Therefore, she does not credit customer accounts
or secure collections in the bank on a timely basis.

Because of the lack of documentation, we requested deposit

compositions from the bank for several deposits. We determined
that deposits were not made intact. Because the District has not
established a “change fund,” there is no set cash amount in the
drawer after each deposit. Instead, the billing clerk withholds several
receipt stubs and the corresponding amount of cash from the day’s
collection (which were paid by check) totaling between $200 and

2
Near the end of a billing cycle, she will make a deposit after 25 payments are
received.

6 OFFICE OF THE NEW YORK STATE COMPTROLLER

 $250. She deposits those checks but does not credit those accounts in
the computerized billing system until she makes the next deposit. For
example, while preparing her April 23, 2009 deposit, the billing clerk
withheld cash totaling $220.85 (which she kept in the cash drawer
as a change fund), which was the total of four check payments she
had received. She deposited those four checks in the April 23, 2009
deposit, but did not credit the corresponding customer accounts until
the next deposit date (April 24, 2009.) Similarly, she credited six
customer accounts ($225.78) in the computer on the April 23, 2009
deposit date, for checks which had actually been included in the April
21, 2009 deposit.

When cash receipt records are not accurate and complete, and cash
receipts are not deposited intact, the risk is increased that funds
could be misappropriated without detection. In addition, because
of inadequate segregation of duties in preparing and adjusting bills,
collecting and depositing receipts, and maintaining customer records,
there is an increased risk of the loss or unauthorized use of District
funds, and of errors or irregularities occurring and going undetected
and uncorrected. These conditions emphasize why the duties of
collecting water revenues should be transferred to the Receiver, as
provided in Town Law.

Account Adjustments Effective controls over District revenue require management review
and approval of adjustments to customer accounts, including the
rationale for such changes. In addition, prudent management practices
include, at a minimum, a written agreed-upon policy with strong
internal controls, including a segregation of incompatible duties and
a specific authorization process.

Due in part to the District’s lack of enforcement of its meter reading

system, a large number of billing adjustments are made each
quarter. The District sends out meter reading cards each quarter,
approximately six weeks prior to the billing cycle. Each customer is
responsible for reading their meter and either returning the card by
mail or calling the District with the reading. When a customer fails to
read their meter, the billing system estimates their water consumption
based upon prior readings.3 With each successive estimate, the
computer increases the estimated consumption. Consequently,
billings based on estimated usage could be significantly higher or
lower than they should be based upon actual metered usage.

District officials generally do not authorize adjustments made to

customer accounts.4 The billing clerk makes all adjustments to
customer records. She handles customer phone calls and makes
3
The billing clerk has the ability to override the computer’s estimate.
4
The District requires authorization for a one-time 50 percent leak adjustment.

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 77

 adjustments at her own discretion, without prior authorization. These
changes appear in a system-generated adjustments report which
she prints periodically. However, District officials had not adopted
policies and procedures to provide the billing clerk with guidance,
such as authorization limits on adjustments she could preapprove,
and no one from the District reviews or approves the adjustments
reports she prepared.

For the period December 16, 2008 through January 6, 2010, the billing
clerk made 225 adjustments in the billing and collection system,
which lowered customer account balances by a total of $15,000. Of
the 225 adjustments, 129 (57 percent) were because of overestimates,
24 (11 percent) were due to computer billing errors and the remaining
72 were for various other reasons, including underestimates (9),
misreads (8), bad checks (8) and having the envelope postmarked
by the due date (5). Ten (4 percent) adjustments had no explanation
listed. Only one of the 225 adjustments had prior approval according
to the District’s “One Time 50 percent Leak Adjustment.”

We found that a majority of the account adjustments resulted from

customers calling in with an actual meter reading after receiving a
very high estimated bill. By refraining from making such adjustments
after the bills are mailed, the District could significantly reduce
the number of account adjustments needed and further encourage
customers to send accurate and timely readings. Instead, the District
could wait until the following billing cycle to make the proper
correction, based on an accurate and timely meter reading. At the
end of our fieldwork, the Board established a minimal fee to attempt
to encourage customers to submit timely meter readings. Effective
August 15, 2010, an estimated read fee of $10 will be charged if the
District does not receive an actual reading at least once annually by
August 15.

The combination of the lack of segregation of duties in billing and the

adjustment of accounts, lack of approval of adjustments, and the lack
of management oversight increases the risk that the District may not
generate the proper amount of water rent revenues because customers
are not properly billed.

Recommendations 1. Water rents should be collected by the Receiver.

2. The Board should adopt a written policy requiring that all customer
account adjustments be properly documented and approved by
the Board or an appropriate designee.

8 OFFICE OF THE NEW YORK STATE COMPTROLLER

 APPENDIX A

RESPONSE FROM DISTRICT OFFICIALS

The District officials’ response to this audit can be found on the following pages.

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 99

 See
Note 1
Page 12

10 OFFICE OF THE NEW YORK STATE COMPTROLLER

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 11
11
 APPENDIX B

OSC COMMENT ON THE DISTRICT OFFICALS’ RESPONSE

Note 1

We have revised our report to address the concern that District officials raised in their response.

12 OFFICE OF THE NEW YORK STATE COMPTROLLER

 APPENDIX C

AUDIT METHODOLOGY AND STANDARDS

Our overall goal was to assess the adequacy of the internal controls put in place by officials to
safeguard District assets. To accomplish this, we performed an initial assessment of the internal
controls so that we could design our audit to focus on those areas most at risk. Our initial assessment
included evaluations of the following areas: financial condition, cash receipts and disbursements, and
purchasing.

During the initial assessment, we interviewed appropriate District officials, performed limited tests
of transactions and reviewed pertinent documents such as District policies and procedures manuals,
Board minutes and financial records and reports. Further, we reviewed the District’s internal controls
and procedures over the computerized financial databases to help ensure that the information produced
by such systems was reliable.

After reviewing the information gathered during our initial assessment, we determined where
weaknesses existed, and evaluated those weaknesses for the risk of potential fraud, theft and/or
professional misconduct. We then decided upon the reported objective and scope by selecting for audit
the area most at risk. We selected billed receivables for further audit testing.

During the course of our audit, we examined the District’s records and reports for the period January
1, 2007 to January 20, 2010. To accomplish our audit objective and obtain relevant audit evidence, our
procedures included the following:

• We interviewed the Water Superintendent and the billing clerk to obtain an understanding of
the water operations and controls in place. We reviewed the Annual Drinking Water Quality
Report for 2008.

• We reviewed the minutes of the Board of Commissioners meetings to obtain information

related to the Board’s oversight.

• We reviewed bank statements and deposit slips.

• We compared meter reading cards from eight customer accounts to the October 2009 billing.

• We compared the billed amount on the October 2009 master to amounts posted on 22 customer
accounts.

• We reviewed 14 receipts from the April 2009 billing to ensure that they had been properly
recorded and deposited.

We conducted this performance audit in accordance with generally accepted government auditing
standards (GAGAS). Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objective.

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 13

13
 APPENDIX D

HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT

To obtain copies of this report, write or visit our web page:

Office of the State Comptroller

Public Information Office
110 State Street, 15th Floor
Albany, New York 12236
(518) 474-4015
http://www.osc.state.ny.us/localgov/

14 OFFICE OF THE NEW YORK STATE COMPTROLLER

 APPENDIX E
OFFICE OF THE STATE COMPTROLLER
DIVISION OF LOCAL GOVERNMENT
AND SCHOOL ACCOUNTABILITY
Steven J. Hancox, Deputy Comptroller
John C. Traylor, Assistant Comptroller
LOCAL REGIONAL OFFICE LISTING
ALBANY REGIONAL OFFICE
Kenneth Madej, Chief Examiner
Office of the State Comptroller
22 Computer Drive West
Albany, New York 12205-1695
(518) 438-0093 Fax (518) 438-0367
Email: Muni-Albany@osc.state.ny.us
Serving: Albany, Columbia, Dutchess, Greene,
Schenectady, Ulster counties
BINGHAMTON REGIONAL OFFICE
Patrick Carbone, Chief Examiner
Office of the State Comptroller
State Office Building, Room 1702
44 Hawley Street
Binghamton, New York 13901-4417
(607) 721-8306 Fax (607) 721-8313
Email: Muni-Binghamton@osc.state.ny.us
Serving: Broome, Chenango, Cortland, Delaware,
Otsego, Schoharie, Sullivan, Tioga, Tompkins counties
BUFFALO REGIONAL OFFICE
Robert Meller, Chief Examiner
Office of the State Comptroller
295 Main Street, Suite 1032
Buffalo, New York 14203-2510
(716) 847-3647 Fax (716) 847-3643
Email: Muni-Buffalo@osc.state.ny.us
Serving: Allegany, Cattaraugus, Chautauqua, Erie,
Genesee, Niagara, Orleans, Wyoming counties
GLENS FALLS REGIONAL OFFICE
Karl Smoczynski, Chief Examiner
Office of the State Comptroller
One Broad Street Plaza
Glens Falls, New York 12801-4396
(518) 793-0057 Fax (518) 793-5797
Email: Muni-GlensFalls@osc.state.ny.us
Serving: Clinton, Essex, Franklin, Fulton, Hamilton,
Montgomery, Rensselaer, Saratoga, Warren, Washington
counties
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY
HAUPPAUGE REGIONAL OFFICE
Ira McCracken, Chief Examiner
Office of the State Comptroller
NYS Office Building, Room 3A10
Veterans Memorial Highway
Hauppauge, New York 11788-5533
(631) 952-6534 Fax (631) 952-6530
Email: Muni-Hauppauge@osc.state.ny.us
Serving: Nassau, Suffolk counties
NEWBURGH REGIONAL OFFICE
Christopher Ellis, Chief Examiner
Office of the State Comptroller
33 Airport Center Drive, Suite 103
New Windsor, New York 12553-4725
(845) 567-0858 Fax (845) 567-0080
Email: Muni-Newburgh@osc.state.ny.us
Serving: Orange, Putnam, Rockland,
Westchester counties
ROCHESTER REGIONAL OFFICE
Edward V. Grant, Jr., Chief Examiner
Office of the State Comptroller
The Powers Building
16 West Main Street – Suite 522
Rochester, New York 14614-1608
(585) 454-2460 Fax (585) 454-3545
Email: Muni-Rochester@osc.state.ny.us
Serving: Cayuga, Chemung, Livingston, Monroe,
Ontario, Schuyler, Seneca, Steuben, Wayne, Yates counties
SYRACUSE REGIONAL OFFICE
Rebecca Wilcox, Chief Examiner
Office of the State Comptroller
State Office Building, Room 409
333 E. Washington Street
Syracuse, New York 13202-1428
(315) 428-4192 Fax (315) 426-2119
Email: Muni-Syracuse@osc.state.ny.us
Serving: Herkimer, Jefferson, Lewis, Madison,
Oneida, Onondaga, Oswego, St. Lawrence counties
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