LEGISLATIVE AUDIT AND FISCAL REVIEW COMMITTEE

The Legislative Audit and Fiscal Review Committee is a statutorily created committee of the Legislative Council. Pursuant to North Dakota Century Code (NDCC) Section 54-35-02.1, the committee is created as a division of the Budget Section and its members are appointed by the Legislative Council. The committee's purposes are to:

• Study and review the state's financial transactions to assure the collection of state revenues and the expenditure of state money are in compliance with law, legislative intent, and sound financial practices.
• Provide the Legislative Assembly with objective information on revenue collections and expenditures to improve the fiscal structure and transactions of the state.

Pursuant to NDCC Section 54-35-02.2, the committee is charged with the duty of studying and reviewing audit reports submitted by the State Auditor. The committee is authorized to make such audits, examinations, or studies of the fiscal transactions or governmental operations of state departments, agencies, or institutions as it may deem necessary.

Committee members were Senators Ken Solberg (Chairman), Randel Christmann, Dwight Cook, Duaine C. Espegard, Jerome Kelsh, Jerry Klein, and Kenneth Kroeplin and Representatives Ole Aarsvold, Rex R. Byerly, Jeff Delzer, RaeAnn G. Kelsch, Doug Lemieux, Andrew G. Maragos, Bob Skarphol, Mike Timm, Francis J. Wald, and Lonny Winrich.

The committee submitted this report to the Legislative Council at the biennial meeting of the Council in November 2002. The Council accepted the report for submission to the 58th Legislative Assembly.

During the 2001-02 interim the State Auditor's office and independent accounting firms presented four performance audit and evaluation reports and 73 financial or information technology application audit reports. An additional 65 audit reports were filed with the committee but were not formally presented. The committee's policy is to hear only audit reports relating to major agencies and audit reports containing major recommendations. However, other audit reports are presented at the request of any committee member.

The committee was assigned the following duties and responsibilities for the 2001-02 interim:

1. Receive the annual audit report for the State Fair Association (NDCC Section 4-02.1-18).
2. Receive the annual report from any corporation or limited liability company that produces agricultural ethyl alcohol or methanol in this state and which receives a production subsidy from the state (NDCC Sections 10-19.1-152 and 10-32-156).
3. Receive annual reports on the writeoffs of accounts receivable of the Department of Human Services and Developmental Center at Westwood Park, Grafton (NDCC Sections 50-06.3-08 and 25-04-17).
4. Receive the annual audited financial statements and a report from the North Dakota low-risk incentive fund. (NDCC Section 26.1-50-05 provides for the financial statements and the report to be submitted to the Legislative Council. The Legislative Council assigned this responsibility to the Legislative Audit and Fiscal Review Committee.)
5. Receive the North Dakota Stockmen's Association audit report. (NDCC Section 36-22-09 provides for the audit report to be submitted to the Legislative Council. The Legislative Council assigned this responsibility to the Legislative Audit and Fiscal Review Committee.)
6. Receive the biennial performance audit report on Job Service North Dakota (NDCC Section 52-02-18).
7. Determine necessary performance audits. (NDCC Section 54-10-01(4) provides that the State Auditor is to perform or provide for performance audits of state agencies as determined necessary by the State Auditor or the Legislative Audit and Fiscal Review Committee.)
8. Determine the frequency of audits or reviews of state agencies (NDCC Section 54-10-01(2)).
9. Determine when the State Auditor is to perform audits of political subdivisions (NDCC Section 54-10-13).
10. Direct the State Auditor to audit or review the financial records and accounts of any political subdivision (NDCC Section 54-10-15).
11. Study and review audit reports submitted by the State Auditor (NDCC Section 54-35-02.2).
12. Receive reports from the director of the Workers Compensation Bureau and the chairman of the Workers Compensation Board of Directors, including a report on the biennial performance evaluation of the Workers Compensation Bureau (NDCC Sections 65-02-03.3 and 65-02-30).
13. Receive from the Information Technology Department a report on the development of performance measures to assist the Legislative Assembly in determining the effectiveness and efficiency of the department's operations, pursuant to Section 9 of 2001 Senate Bill No. 2043; and the annual report on state information technology projects, pursuant to NDCC Section 54-59-19.

SUGGESTED GUIDELINES FOR PERFORMING AUDITS OF STATE AGENCIES

The committee received information on and reviewed the guidelines, which were developed by prior Legislative Audit and Fiscal Review Committees, relating to state agency and institution audits performed by the State Auditor's office and independent certified public accountants. The guidelines require that reports address the following with respect to a particular agency:

1. Whether expenditures are made in accordance with legislative appropriations and other state fiscal requirements and restrictions.
2. Whether revenues are accounted for properly.
3. Whether financial controls and procedures are adequate.
4. Whether the system of internal control is adequate and functioning effectively.
5. Whether financial records and reports reconcile with those of state fiscal offices.
6. Whether there is compliance with statutes, laws, and rules under which the agency was created and is functioning.
7. Whether there is evidence of fraud or dishonesty.
8. Whether there are indications of lack of efficiency in financial operations and management of the agency.
9. Whether actions have been taken by agency officials with respect to findings and recommendations set forth in audit reports for preceding periods.
10. Whether all activities of the agency are encompassed within appropriations of specific amounts.
11. Whether the agency has implemented the statewide accounting and management information system, including the cost allocation system.
12. Whether the agency develops a budget of anticipated expenditures and revenues and compares, on at least a quarterly basis, budgeted expenditures and revenues to actual expenditures and revenues accounted for using the accrual basis of accounting.

State agency and institution audit reports presented to the committee during the 2001-02 interim addressed the 12 audit guidelines developed by the committee. Audits of boards and commissions are not required to address the 12 audit guidelines. The committee received a Legislative Council staff review of the history of the audit guidelines. The purpose of the guidelines is to aid auditors in the development of audit programs and reports, so the audit reports will be of maximum value to the appropriate authority and the taxpayers of North Dakota. The guidelines were developed to assist the committee in meeting its statutory responsibilities and to encourage state entities to improve fiscal practices. Auditors generally review the answers to the 12 areas in the presentation of the audit report, and the areas are addressed in a positive manner, indicating agencies take the issues seriously and attempt to comply. Areas that are not addressed in a positive manner may alert the committee to areas needing additional review. Elimination of the 12 guidelines may send the message to agencies that these areas are no longer of importance to the committee. The committee plans to review the guidelines at future meetings to determine if they need to be updated.

AUDIT OF THE STATE AUDITOR'S OFFICE

North Dakota Century Code Section 54-10-04 requires the Legislative Assembly to provide for an audit of the State Auditor's office. The Legislative Council contracted with Eide Bailly LLP, Certified Public Accountants, for an audit of the State Auditor's office for the years ended June 30, 2001 and 2000. The firm presented its audit report at the committee's November 26, 2001, meeting. The audit report contained an unqualified opinion and did not include any findings or recommendations.

PERFORMANCE AUDITS AND EVALUATIONS
Service Payments for Elderly and Disabled

A representative of the State Auditor's office presented the performance audit report of the service payments for elderly and disabled (SPED) and expanded SPED programs for the period July 1, 1998, through December 31, 2000. The performance audit report contained 13 recommendations, including:

• The Department of Human Services should review controls in the Medicaid management information system (MMIS) and take appropriate actions to ensure that SPED and expanded SPED claims are processed correctly and efficiently.
• The Aging Services Division should provide additional guidance for case management.
• The Aging Services Division should make improvements to the screening requirements and processes used to enroll applicants as qualified service providers.
• The Aging Services Division should implement procedures and establish controls related to clients' self-declarations of income and assets.

The committee received testimony from representatives of the Department of Human Services regarding the performance audit report. The committee learned that prospective service providers must sign a statement indicating they have no criminal record, and the department's policy is to take action against any individual who has not truthfully completed the statement. The committee accepted the performance audit report on SPED and expanded SPED.

Workers Compensation Bureau

Pursuant to NDCC Section 65-02-30, a biennial performance evaluation was conducted of the Workers Compensation Bureau. The evaluation included an examination of contracts for services with "outside" vendors, the safety and loss prevention programs, the Special Investigation Unit, the Claims Department, the Policyholder Services Department, the governance of the Workers Compensation Board of Directors, performance measures used by the agency, and whether the agency followed all the laws in construction of the new Workers Compensation Bureau building. The evaluation was conducted by Eide Bailly LLP. The resulting report included 80 recommendations, including:

• The Workers Compensation Bureau should renegotiate the contracts with external disability management contractors from a flat fee to an hourly basis with a limit on total hours.
• The Workers Compensation Board of Directors should determine the overall goals of the organization in advance of the goal setting performed by the functional areas.
• The Workers Compensation Bureau should consider employer incentive and penalty systems to produce timely reporting of claims.
• The Workers Compensation Bureau should develop a continuing education plan for all loss prevention specialists.
• The Workers Compensation Bureau should reduce the current caseload of the Special Investigation Unit director to allow for more time to manage other investigators.

The committee received testimony from a representative of the Workers Compensation Bureau indicating the agency agrees with and has taken steps to implement nearly all the recommendations included in the report. The committee accepted the performance audit report on the Workers Compensation Bureau.

The committee learned the construction of the new Workers Compensation Bureau building was on schedule, and the cost of the project was under budget. A representative of the Workers Compensation Bureau estimated the completion date for the Workers Compensation Bureau portion of the building to be May 1, 2003, and the total cost of the building to be approximately $11.5 million. The performance audit report did not contain any recommendations relating to construction of the new building.

Job Service North Dakota

Pursuant to NDCC Section 52-02-18, a biennial performance audit was conducted of Job Service North Dakota. The evaluation included an examination of the unemployment insurance trust fund, the unemployment insurance suitable work and reemployment process policy, the performance and cost-effectiveness of the unemployment insurance tax and benefit payment processes, and an administrative and total cost analysis. The audit was conducted by Brady, Martz & Associates, P.C., Certified Public Accountants, Bismarck. The resulting report included 16 recommendations, including:

• Job Service North Dakota should seek funding for complete replacement of its unemployment insurance (UI) tax and benefits systems.
• The Legislative Assembly should consider a more restrictive definition of claimants exempt from work search activities.
• Job Service North Dakota should communicate to the "positive balance" employers the reasons for rate increases, the reasons for larger increases than in the past, and the positive benefits that will result when the trust fund balance reaches its solvency target.
• Job Service North Dakota should consider acquiring a system to assist in managing overpayment and delinquent tax collections.

North Dakota Century Code Section 52-04-05 requires a minimum balance in the unemployment compensation fund, to be achieved over a seven-year period beginning January 1, 2000, sufficient to pay one year of unemployment benefits. The committee received testimony from a representative of Job Service North Dakota regarding rate limiters, which were enacted by the Legislative Assembly to gradually increase unemployment insurance rates for the years 2000, 2001, and 2002. The committee learned the removal of the rate limiters in 2003 will result in the average rate increases being greater than the previous three years and will allow Job Service North Dakota to more rapidly increase the trust fund balance in order to meet the December 31, 2006, targeted balance. Negative balance employers previously received incentives to bring their accounts to a positive balance; thus the removal of the rate limiters will more significantly affect positive balance employers. The committee accepted the performance audit report on Job Service North Dakota.

Veterans Home

Pursuant to Section 2 of 2001 Senate Bill No. 2007, a performance audit was conducted of the Veterans Home. The evaluation included studies of the management and administrative structure of the Veterans Home, whether the Veterans Home is efficiently and effectively using financial resources, and sufficiency in staffing and level of care. The evaluation was conducted by the State Auditor's office and Pathway Health Services, White Bear Lake, Minnesota. The resulting report included 46 recommendations, including:

• The Administrative Committee on Veterans Affairs should exercise more control and direction over the Veterans Home.
• The Veterans Home should develop a strategic plan with significant input from its stakeholders for measuring the productivity and operations of the Veterans Home.
• The Veterans Home should comply with NDCC Section 37-15-14, which requires the home to spend federal and special funds prior to general fund money.
• The Veterans Home should comply with NDCC Section 37-15-21 and ensure that gifts, donations, and bequests are used for the specific purposes for which they were given or donated.
• The Veterans Home should withhold appropriate payroll taxes for payment to employees and immediately notify the applicable federal and state entities of the lack of withholding appropriate payroll taxes from previous bonus payments to employees.
• The Veterans Home should establish a formal policy and procedure for admission, discharge, and continuous stay criteria for the evaluation of appropriateness of residents moving into the basic care facility.

The committee received testimony from the State Auditor's office regarding the confidentiality of draft audit reports. The committee learned draft audit reports are exempt from open records laws; however, once the draft is released to an agency for comment, the exemption is lost. In order to exempt draft audit reports from the open records requirements, the Legislative Assembly would have to amend NDCC Section 54-10-26. The word "confidential" within Section 54-10-26 would prohibit discretionary issuance of the draft audit report by the agency or State Auditor's office.

The committee received testimony from a representative of the Administrative Committee on Veterans Affairs regarding the board's response to the Veterans Home performance audit. The committee learned each board member has been delegated responsibility for implementing specific audit recommendations within a specified period of time, ranging from less than 30 days, 31 to 90 days, 91 to 150 days, and 151 days and over. The committee also received testimony from representatives of the Veterans Home in support of the commandant and the Veterans Home.

The committee received information about the liability of the state and state employees for acts or omissions of the state employee, including the acts of a state employee which may be inappropriate. The committee received testimony from a representative of the State Department of Health regarding an incident in which the commandant became angry at State Department of Health employees and retrieved a toy gun from his desk, the department's response, and pursuing events.

Conclusion

The committee accepted the performance audit of the Veterans Home. The committee chairman asked the chairman of the Administrative Committee on Veterans Affairs to keep the Legislative Council staff and the committee informed regarding progress in implementing the performance audit recommendations.

The committee approved a motion to request the Attorney General's office to investigate, pursuant to NDCC Section 54-35-02.2, possible violations of state law as detailed in the June 2002 State Auditor's office performance audit report on the Veterans Home. The committee plans to meet during the 2003 Legislative Assembly to review the status of the implementation of the audit recommendation.

Recommendation

The Legislative Audit and Fiscal Review Committee recommends House Bill No. 1051 to provide that draft audit reports are confidential and exempt from open records requirements, and allow agencies to review the audit recommendations and suggest changes in language before finalization of the audit report.

Performance Audit Followup Reports

The committee accepted the followup reports presented to the committee on the status of recommendations included in the following performance audits:

• State procurement practices (state agencies) - The original performance audit report was presented to the committee in October 1998. The followup report indicated 11 of the original recommendations have been fully implemented, four of the original recommendations have been partially implemented, and one recommendation is no longer applicable.
• State procurement practices (North Dakota University System) - The original performance audit was presented to the committee in January 1998. The followup report indicated nine of the original audit recommendations have been fully implemented, six of the original recommendations have been partially implemented, two recommendations have not been implemented, and three recommendations are no longer applicable.
• State personnel systems - The original report was presented to the committee in October 1997. The followup report indicated 11 of the original recommendations have been fully implemented, 14 recommendations have been partially implemented, and five recommendations have not been implemented.

Procurement Practices - Additional Testimony

The committee received information on major NDCC provisions that require state agency purchases or expenditures to be subject to competitive bidding requirements; a summary of other statutory provisions, administrative rules, and agency policies relating to competitive bidding; and a summary of statutory provisions, rules, and policies relating to the inclusion of scholarships, endowments, and premiums in bid proposals, the appeal process for aggrieved vendors, and penalties.

A representative of the State Auditor's office presented information to the committee relating to the State Auditor's review of scholarships, endowments, and premiums that have been accepted by institutions of higher education as part of bid proposals. The committee learned, based on information provided by the institutions of higher education, of 12 instances of a vendor providing a scholarship, endowment, or premium to an institution of higher education as part of a bid proposal. The information indicated such instances occurred at six of the University System's 11 campuses.

Budget data prepared by the Office of Management and Budget is required, pursuant to NDCC Section 54-44.1-06, to include a list of every individual asset or service and every group of assets or services with a value of $50,000 or more acquired through a capital lease or a debt financing arrangement. The list must include assets and services acquired during the current biennium and anticipated assets and services to be acquired in the next biennium. The committee received a report from a representative of the Office of Management and Budget on general fund, federal funds, and special funds state agency expenditures for the 1999-2001 biennium for equipment lease payments.

Future Performance Audits

The committee learned the State Auditor's office will conduct a performance audit of the Department of Transportation's Motor Vehicle and Drivers License Divisions. Other possible performance audits include state agency-leased building space and the Department of Corrections and Rehabilitation Roughrider Industries.

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