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OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Audit Report
State of New Hampshire
Clean Water State Revolving Fund
Program Financial Statements
for the Year Ended June 30, 2005
Report No. 2007-1-00037
February 7, 2007
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Abbreviations
CAFR
Comprehensive Annual Financial Report
CWSRF
Clean Water State Revolving Fund
DES
New Hampshire Department of Environmental Services
EPA
U.S. Environmental Protection Agency
GASB
Government Accounting Standards Board
OIG
Office of Inspector General
OMB
Office of Management and Budget
SRF
State Revolving Fund
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OFFICE OF
INSPECTOR GENERAL
February 7, 2007
MEMORANDUM
SUBJECT: Auditor's Report for the State of New Hampshire
Clean Water State Revolving Fund Program
Financial Statements for the Year Ended June 30, 2005
Report No. 2007-1-00037
TO : Robert W. Varney
Regional Administrator, EPA Region 1
Attached is a copy of the subject audit we sent to the State of New Hampshire. The audit
contains reports on the financial statements, internal controls, and compliance requirements
applicable to the Clean Water State Revolving Fund program in New Hampshire for the year
ended June 30, 2005. We issued an unqualified opinion on the financial statements and a
qualified opinion on the compliance requirements, as discussed in our report on compliance.
In our report on internal controls, we noted issues involving the internal control structure and its
operations that we considered to be a material weakness.
This report represents the opinion of the Office of Inspector General and does not represent the
final position of the U.S. Environmental Protection Agency (EPA). Final determination on
matters in this report will be made by EPA managers in accordance with established audit
resolution procedures.
The estimated cost of this report - calculated by multiplying the project's staff days by the
applicable daily full cost billing rates in effect at the time - is $106,798.
Action Required
In accordance with EPA Manual 2750, you are required to provide a written response to this
report within 120 days. You should include a corrective actions plan for agreed upon actions,
including milestone dates. Please email an electronic version of your response to
kasper.ianet@epa.gov.
We have no further objections to the further release of this report to the public. The report
contains no confidential business or proprietary information. This report will be available at
http://www.epa.gov/oig.
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If you have any questions or concerns regarding this report, please contact Janet Kasper, the
Director for Assistance Agreement Audits, at (312) 886-3059 or kasper.ianet@epa.gov.
Sincerely,
Bill A. Roderick
Acting Inspector General
Attachment
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State of New Hampshire Clean Water State Revolving Fund Program
Financial Statements for the Year Ended June 30, 2005
Table of Contents
Independent Auditor's Report 1
Statement of Net Assets 2
Statement of Revenues, Expenses, and Changes in Net Assets 3
Statement of Cash Flows 4
Notes to the Financial Statements 5
Independent Auditor's Report on Internal Control Over Financial Reporting
and on Compliance and Other Matters Based on an Audit of Financial
Statements Performed in Accordance with Government Auditing Standards 14
Internal Control Findings, Recommendations, and Responses 17
Compliance Finding, Recommendation, and Response 20
Status of Recommendations and Potential Monetary Benefits 22
Distribution 23
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(3
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
Independent Auditor's Report
We have audited the accompanying financial statements of the State of New Hampshire Clean
Water State Revolving Fund Program (the Program) as of and for the year ended June 30, 2005.
These financial statements are the responsibility of the Program's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United
States of America and the standards applicable to financial audits contained in Government
Auditing Standards, issued by the Comptroller General of the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
As discussed in Note 1, the financial statements of the Program are intended to present the
financial position, and the changes in financial position and cash flows of the Program. They do
not purport to, and do not, present fairly the financial position of the State of New Hampshire, as
of June 30, 2005, and the changes in its financial position and its cash flows, where applicable, for
the year then ended in conformity with accounting principles generally accepted in the United
States of America.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the Program, as of June 30, 2005, and the changes in financial position and
cash flows, where applicable, thereof for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
Office of Inspector General
May 16, 2006
1
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State of New Hampshire
Clean Water State Revolving Fund Program
Statement of Net Assets
as of June 30, 2005
Assets
Current assets:
Cash and cash equivalents
Current receivables
Loan interest
Investment interest
Due from other fund
Current portion of loans receivable
Wastewater
Landfills
Reloans
Total current receivables
Total current assets
Noncurrent assets:
Loans receivable, net of current portion
Wastewater
Landfills
Reloans
Total noncurrent assets
SRF
$ 58,078,559
3,406,611
109,595
11,262,567
5,522,459
3.569.812
23.871.044
81,949,603
93,533,584
32,157,613
47.235.210
172,926,407
Management
$ 2,119,655
90,722
90.722
2,210,377
Total
(Memorandum
Only)
$ 60,198,214
3,406,611
109,595
90,722
11,262,567
5,522,459
3.569.812
23.871.044
84,159,980
93,533,584
32,157,613
47.235.210
172,926,407
Total assets
254.876.010
2.210.377
257.086.387
Liabilities and Net Assets
Current liabilities
Due to other funds
Project costs payable
Total liabilities
Net assets:
Restricted
176,007
608,978
784,985
254.091.025
809
809
2.209.568
176,816
608,978
785,794
256.300.593
Total liabilities and net assets
$ 254.876.010
$ 2.210.377
$257.086.387
See accompanying notes to the financial statements.
2
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State of New Hampshire
Clean Water State Revolving Fund Program
Statement of Revenues, Expenses, and Changes in Net Assets
for the Year Ended June 30, 2005
SRF
Operating revenues
Loan interest
Investment earnings
Management fees
Total operating revenues
Operating expenses
Administrative costs
Operating income
Capital contributions
Federal grants
State contributions
Total capital contributions
Change in net assets
Net assets, beginning of year
Net assets, end of year
$ 4,356,317
1,230,524
5,586,841
737.562
4,849,279
12,756,503
2.551.296
15,307,799
20,157,078
233.933.947
$254.091.025
Management
$ 1.646.071
1,646,071
1.489.642
156,429
156,429
2.053.139
$ 2.209.568
Total
(Memorandum
Only)
$ 4,356,317
1,230,524
1.646.071
7,232,912
2.227.204
5,005,708
12,756,503
2.551.296
15,307,799
20,313,507
235.987.086
$256.300.593
See accompanying notes to the financial statements.
3
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New Hampshire Department of Environmental Resources
Clean Water State Revolving Fund
Statement of Cash Flows
for the Year Ended June 30, 2005
Cash flows from operating activities:
Principal repayments received from borrowers $ 15,305,197
Interest payments received from borrowers 4,692,417
Loan advances to borrowers (25,008,637)
Management fees 1,646,071
Interest on investments 1,125,000
Payments to suppliers and employees (2,185,069)
Net payments to other funds (4,932)
Cash (used) by operating activities (4,429,953)
Cash flows from capital and related financing activities:
Environmental Protection Agency 12,756,503
State of New Hampshire 2,551,296
Net cash from (used in) capital and related financing activities 15,307,799
Net cash provided by operating activities 10,877,846
Cash and cash equivalents, beginning of year 49,320,368
Cash and cash equivalents, end of year 60,198,214
Reconciliation of operating income to cash (used) by
operating activities
Operating income $ 5,005,708
Adjustments to reconcile operating income to
net cash flow (used) by operating activities:
(Increase) decrease in current receivables 150,891
Increase (decrease) in current liabilities 116,888
Disbursements on loans (25,008,637)
Loan principal repayments 15,305,197
Net cash (used) by operating activities $ (4,429,953)
4
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New Hampshire Department of Environmental Resources
Clean Water State Revolving Fund
Notes to the Financial Statements
1. Organization of the Fund
The New Hampshire Clean Water State Revolving Fund Program (the Program) was
established pursuant to Title VI of the Federal Water Quality Act of 1987 (the Act). The
Act established the State Revolving Fund (SRF) program to replace the construction
grants program. The purpose of the SRF is to provide low interest loans to local
governments for the purpose of constructing wastewater treatment facilities,
implementing nonpoint source management plans and estuary management plans. The
loan repayment period ranges from five to twenty years, and all repayments, including
interest and principal, must be credited to the Program.
The SRF program is administered by the State of New Hampshire's Department of
Environmental Services (DES), and consists of a loan fund (SRF) to record loan and
related activity and an administrative fund (Management) that collects fees and pays
some of the operating costs of the program, and are collectively referred to as the
Program. The Department's primary responsibilities for the SRF include obtaining
capitalization grants from the Environmental Protection Agency (EPA), soliciting
potential interested parties for loans, negotiating loan agreements with local communities,
reviewing and approving payment requests from loan recipients, monitoring the loan
repayments, and conducting inspection and engineering reviews to ensure compliance
with all applicable laws, regulations, and program requirements.
The program does not have any full time employees, instead, the DES charges the
Program for time spent on SRF activities by its employees and the Program reimburses
DES for such costs the following month. The charges include the salaries and benefits of
employees, as well as indirect costs allocated to the program. Employees are covered by
the benefits available to State of New Hampshire employees.
The Program's financial statements, footnotes, and related schedules are presented for the
U.S. Environmental Protection Agency. The Program is included in the State of New
Hampshire's comprehensive annual financial report (CAFR) as part of the governmental
fund financial statements, which use the modified accrual basis of accounting. Due to
differences in reporting methods, there may be differences between the amounts reported
in these financial statements and the States CAFR.
2. Summary of Significant Accounting Policies
Basis of Accounting
The financial statements for the Program are presented as an enterprise fund. As such,
the Program is accounted for using the flow of economic resources measurement focus
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New Hampshire Department of Environmental Resources
Clean Water State Revolving Fund
Notes to the Financial Statements
2. Summary of Significant Accounting Policies (continued)
and is maintained on the accrual method of accounting, revenues are recognized when
earned and expenses are recorded at the time the liabilities are incurred. All assets and
liabilities associated with the operations of the Program are included on the balance sheet.
The State has elected to follow the accounting pronouncements of the Governmental
Accounting Standards Board (GASB), as well as statements issued by the Financial
Accounting Standards Board (FASB) on or before November 30, 1989, unless the
pronouncements conflict with or contradict GASB pronouncements.
Cash and Cash Equivalents
All monies of the Program are deposited with the New Hampshire State Treasurer
Department which is responsible for maintaining these deposits in accordance with New
Hampshire State law. The Program considers all such deposits to be cash. The Program,
on a monthly basis, receives investment interest earnings on these deposits. According to
State law, the Treasurer is responsible for maintaining the cash balances and investing
excess cash of the Program, as further discussed in Note 3. Consequently, management
of the Program does not have any control over the investment of the excess cash. The
statement of cash flows considers all funds deposited with the Treasurer to be cash or
cash equivalents.
Loans Receivable
Loans are funded by capitalization grants from EPA, State matching funds, funds
generated from repayments and fund earnings. Loan funds are advanced to local
agencies on a cost reimbursement basis, and interest begins accruing when funds are
disbursed. After construction is completed, the local agency can elect to add the
construction period interest to the loan amount, or they can pay it in total with the first
loan repayment. Loans are amortized over periods of five, ten, fifteen or twenty years,
and repayment of the loans must begin within one year of construction completion.
There is no provision for uncollectible accounts, as all repayments are current, and
management believes all loans will be repaid according to the loan terms.
Contributed Capital
In accordance with generally accepted accounting principles (GAAP), funds received
from EPA and the State of New Hampshire for the capitalization of the Program are
reported in the statement of revenues, expenses, and changes in fund net assets after
nonoperating revenues and expenses.
6
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New Hampshire Department of Environmental Resources
Clean Water State Revolving Fund
Notes to the Financial Statements
3. Cash, Cash Equivalents, and Investments
GASB Statement 40, Deposit and Investment Risk Disclosures-an amendment of
GASB Statement No. 3, was implemented for the fiscal year ended June 30, 2005.
As a result, the disclosures related to deposit and investment risks were changed.
Deposits:
The following statutory requirements and Treasury Department policies have
been adopted to minimize risk associated with deposits:
New Hampshire statute RSA 6:7 established policies the state Treasurer must
adhere to when depositing public monies. Operating funds are invested per
investment policies that further define appropriate investment choices and
constraints as they apply to those investment types.
Custodial Credit Risk: The custodial risk for deposits is the risk that in the event
of a bank failure, the state's deposits may not be recovered.
Custodial credit risk is managed in a variety of ways. Although State law does
not require deposits to be collateralized, the Treasurer does utilize such
arrangements where prudent and/or cost effective. All banks where the State has
deposits and/or active accounts are monitored as to their financial health through
the services of Veribanc, Inc., a bank rating firm. In addition, ongoing reviews
with officials of depository institutions are used to allow for frequent monitoring
of custodial credit risk.
All depositories used by the state must be approved at least annually by the
Governor and Executive Council. All commercial paper must be from issuers
having an Al/Pl rating or better and an AA- or better long-term debt rating from
one or more of the nationally recognized rating agencies. Certificates of deposits
must be with state or federally chartered banking institutions with a branch in
New Hampshire. The institution must have the highest rating as measured by
Veribanc, Inc.
Whereas all payments made to the State are to be in U.S dollars, foreign currency
risk is essentially nonexistent on State deposits.
As of June 30, 2005, the CWSRFs bank balances were exposed to custodial credit
risk as follows:
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New Hampshire Department of Environmental Resources
Clean Water State Revolving Fund
Notes to the Financial Statements
3. Cash, Cash Equivalents, and Investments (continued)
CWSRF Fund Deposit Credit Risk
June 30, 2005 (amounts in thousands)
Type
Insured
Demand Deposit
Money Market
Overnight Repurchase Agreements
Term Repurchase Agreements
Totals
$228,685
35,335,332
12,420,625
$47,984,642
Collateralized
& Held in
State's Name
10,093,917
$10,093,917
Uncollateralized
$0
0
$0
Investments:
The Treasury Department has adopted policies to ensure reasonable rates of return
on investments while minimizing risk factors. Approved investments are defined
in New Hampshire statutes. Additionally, investment guidelines exist for
operating funds as well as trust and custodial funds. All investments are
denominated in U.S. dollars. As of June 30, 2005, the CWSRF had the following
types of investments:
Investment Type
Balance
Term Repurchase Agreements
Money Markets
Total Investments
$10,093,917
35,335,332
$45,429,249
The table below reconciles the cash and investments in the financial statements to
the footnote.
Per Balance Sheet
Cash and Cash Equivalents
Per Footnote
Carrying amount of deposits
Investments
Total per footnote
$60,198,214
14,768,965
45,429,249
$60,198,214
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New Hampshire Department of Environmental Resources
Clean Water State Revolving Fund
Notes to the Financial Statements
Loans Receivable
The Program makes loans to qualified local agencies at interest rates ranging from .1575
percent to 4.128 percent. Interest rates are initially set in the original loan agreement, and
then when the project is completed a supplemental loan agreement fixes the final interest
rate to be charged at the lower of the original loan agreement or prevailing market rate,
according to the following formula:
Loan Interest
Term Rate
5 years 25% of market minus 1%
10 years 50% of market minus 1%
15 years 75% of market minus 1%
20 years 80% of market minus 1%
Details of loans receivable as of June 30, 2005 are as follows:
Original Loan
Commitments
Outstanding
Balance
6/30/04
$388,259,707 $ 182,968,828
Disbursements
$ 25,617,614
Repayments
$15,305,197
Outstanding
Balance
6/30/05
$193,281,245
Loans mature at various intervals through January 1, 2026. The scheduled principal
repayments for completely disbursed loans in subsequent years are as follows:
Principal Interest Total
2006
$
18,049,563
$ 3,548,958
$ 21,598,521
2007
12,404,642
3,353,985
15,758,627
2008
11,345,737
3,045,437
14,391,174
2009
9,733,179
2,775,432
12,508,611
2010
9,339,384
2,531,323
11,870,707
2011 -2015
41,003,641
8,883,622
49,887,263
2016-2020
26,697,461
3,648,844
30,346,305
2021 -2025
9,360,883
547,622
9,908,505
2026
14,860
1,747
16,607
Totals
$
137,949,350
$ 28,336,970
$ 166,286,320
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New Hampshire Department of Environmental Resources
Clean Water State Revolving Fund
Notes to the Financial Statements
4. Loans Receivable (continued)
DES has three categories of loans receivable, wastewater, landfills and repayments. The
wastewater loans are for sewer and wastewater treatment projects. The landfill loans
provide financial assistance for municipalities to close unlined landfills as well as the
construction of transfer stations and recycling facilities directly related to the specific
landfill closure projects. The repayment loans are loans made from revolving funds for
either wastewater or landfill closure loans. The balances of these loan categories as of
June 30, 2005 are as follows:
Wastewater projects $ 104,796,151
Landfill projects 37,680,071
Repayment projects (revolving loans) 50.805.023
$ 193.281.245
5. Contributed Capital
The Program is capitalized by annual grants through the EPA. The State of New
Hampshire must also contribute an amount equal to 20 percent of the federal
capitalization amount. New Hampshire's matching contribution has been provided
through the appropriation of State resources. As of June 30, 2005, EPA has awarded
capitalization grants of $226,232,978 to the State, of which $185,356,820 has been drawn
for loans and administrative expenses. The State has provided match funds of
$45,254,595, of which $37,071,359 has been deposited into the SRF.
The following table summarizes the capitalization grant award, amounts drawn on each
grant as of the balance sheet date, and balances available for future loans and
administrative expenses.
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New Hampshire Department of Environmental Resources
Clean Water State Revolving Fund
Notes to the Financial Statements
5. Contributed Capital (continued)
Grant Amt
Draws
6/30/04
2005
Draws
Draws
6/30/05
1991
$ 40,690,941
$ 40,690,941
$ 40,690,941
1992
19,417,068
19,417,068
19,417,068
1993
19,207,782
19,207,782
19,207,782
1994
11,918,313
11,918,313
11,918,313
1995
12,834,171
12,834,171
12,834,171
1996
20,162,543
20,162,543
20,162,543
1997
6,191,100
6,191,100
6,191,100
1998
15,456,773
15,456,773
15,456,773
1999
13,698,723
13,698,723
13,698,723
2000
13,412,223
13,022,903
$ 389,320
13,412,223
2001
13,293,027
12,367,183
12,367,183
2002
2003
2004
13,322,628
13,423,664
13,204,022
$ 226,232,978
$ 172,600,317
$ 2,756,503
$ 185,356,820
Available
6/30/05
$ 925,844
13,322,628
13,423,664
13,204,022
$40,876,158
As of June 30, 2004 and 2005, State matching contributions were as follows:
Total Match
As of
2005
Total Match
As of
New Hampshire State
Matching Contribution
June 30, 2004 Contribution June 30, 2005
$ 34,520,063 $2,551,296 $ 37,071,359
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New Hampshire Department of Environmental Resources
Clean Water State Revolving Fund
Notes to the Financial Statements
6. Administrative Costs and Management Fee Revenue
The Clean Water Act provides for states to use up to four percent of the capitalization
grants toward SRF program administrative costs. The program also charges local
agencies a one percent annual management fee on the outstanding principal balance after
August 1996. These fees are deposited in a fund (Management) outside the SRF and are
to be used to pay for the administrative costs of the Clean Water Revolving Loan
Program as well as related water quality control costs.
Total management fees and expenses as of June 30, 2005 are shown in the table
following:
Fiscal Year
Fees Earned
Expenditures
1997
$227,395
$138,619
1998
523,836
277,972
1999
570,120
324,457
2000
658,775
430,811
2001
838,128
396,318
2002
1,225,115
815,187
2003
1,323,794
932,450
2004
1,312,001
1,311,604
2005
1,646,071
1,489,642
Totals
$8,325,235
$6,117,060
Total administrative costs charged to the Program are as follows:
SRF
Management
Total
Fiscal
Administrative
Administrative
Administrative
Year
Costs
Cost
Costs
1997
$ 423,393
$ 138,619
$ 562,012
1998
430,684
277,972
708,656
1999
448,855
324,457
773,312
2000
530,344
430,811
961,155
2001
566,000
396,318
962,318
2002
608,674
815,187
1,423,861
2003
682,187
932,450
1,614,637
2004
704,101
1,311,604
2,015,705
2005
737,562
1,489,642
2,227,204
Totals
$ 5,131,800
$ 6,117,060
$ 11,248,860
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New Hampshire Department of Environmental Resources
Clean Water State Revolving Fund
Notes to the Financial Statements
7. Contingencies, Related Parties, and Subsequent Events
Contingencies
The Program is exposed to various risks of loss related to torts, thefts of assets, errors or
omissions, injuries to state employees while performing Program business, or acts of
God. The State maintains insurance for all risks of loss, which is included in the indirect
costs allocated to the Program.
According to DES management and legal counsel, there are no other loss contingencies,
which require disclosure or accrual under the Statement of Financial Accounting
Standards No. 5.
Related Parties
There are no related party transactions with or related amounts receivable from
management of the Program.
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Independent Auditor's Report on Internal Control Over Financial Reporting and
on Compliance and Other Matters Based on an Audit of Financial Statements
Performed in Accordance with Government Auditing Standards
14
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
We have audited the financial statements of the New Hampshire Clean Water State Revolving
Fund Program (the Program) as of and for the year ended June 30, 2005, and have issued our
report thereon dated May 16, 2006. We conducted our audit in accordance with auditing
standards generally accepted in the United States of America; and the standards applicable to
financial audits contained in Government Auditing Standards, issued by the Comptroller General
of the United States.
Internal Control over Financial Reporting
In planning and performing out audit, we considered the Program's and the Division of
Environmental Protection's internal control over financial reporting in order to determine our
auditing procedures for the purpose of expressing our opinion on the Program's financial
statements and not to provide an opinion on the internal control over the Program's financial
reporting. However, we noted certain matters involving the internal control over financial
reporting and its operation that we consider to be reportable conditions. Reportable conditions
involve matters coming to our attention relating to significant deficiencies in the design or
operation of the internal control over financial reporting that, in our judgment, could adversely
affect the Program's ability to record, process, summarize, and report financial data consistent
with the assertions of management in the Program's financial statements. Reportable conditions
are described in the accompanying schedule of findings and responses.
A material weakness is a reportable condition in which the design or operation of one or more of the
internal control components does not reduce to a relatively low level the risk that misstatements
caused by error or fraud in amounts that would be material in relation to the financial statements
being audited may occur and not be detected within a timely period by employees in the normal
course of performing their assigned functions. Our consideration of the internal control over
financial reporting would not necessarily disclose all matters in the internal control that might be
reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that
are also considered to be material weaknesses. However, we consider the reportable conditions
described in the accompanying schedule of findings, recommendations, and responses to be material
weaknesses.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the Program's financial statements are
free of material misstatement, we performed tests of its compliance with certain provisions of
laws, regulations, contracts, and grant agreements, noncompliance with which could have a
15
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direct and material effect on the determination of financial statement amounts. This included
tests of specific program requirements governing allowability for specific activities, allowable
costs, cash management, State matching, period of availability of funds and binding
commitments, program income, reporting, and subrecipient monitoring that are applicable to the
Program for the year ended June 30, 2005.
The management of the Program is responsible for the Program's compliance with those
requirements. Our responsibility is to express an opinion on those requirements based on our
audit. An audit includes examining, on a test basis, evidence about the Program's compliance
with those requirements. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, except for the matter noted in the finding and recommendation section that
follows, the Program complied, in all material respects, with the specific program requirements
that are applicable to the Program for the year ended June 30, 2005.
This report is intended solely for the information and use of management of the Program and the
U.S. Environmental Protection Agency, and is not intended to be and should not be used by
anyone other than these specified parties.
Office of Inspector General
May 16, 2006
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Internal Control Findings, Recommendations, and Responses
Pursuant to American Institute of Certified Public Accountants standards incorporated by
Generally Accepted Government Auditing Standards as described in the accompanying
Independent Auditor's Report on Internal Control Over Financial Reporting and on Compliance
and Other Matters Based on an Audit of Financial Statements Performed in Accordance with
Government Auditing Standards, relating to New Hampshire's Clean Water State Revolving
Fund (CWSRF) program, the following reportable conditions are considered as material
weaknesses. We have discussed these matters with appropriate State officials.
Control Environment Needs Improvement
The foundation of the accounting and reporting system is the control environment established by
management. Management sets the tone of the organization, and determines the accounting
systems and procedures to be used. Management also establishes the necessary controls and
policies to assure that the assertions inherent in an accounting system are followed.
Management assertions include:
• Existence or occurrence: The assets and liabilities of the organization exist at a
given date, and recorded transactions occurred during the proper period.
• Completeness: All transactions and accounts that should be included are included in
the accounting system.
• Valuation or allocation: The accounts are recorded and presented at appropriate
amounts.
The CWSRF is accounted for and reported within the Department of Environmental Services'
(DES) General Fund. In order to facilitate program reporting required by the U.S.
Environmental Protection Agency (EPA), DES maintains a separate CWSRF accounting system
and provides EPA with program-specific financial statements. We noted deficiencies in the
design and operations of DES' internal controls for the CWSRF-specific financial accounting
and reporting that, in our judgment, could adversely affect DES' ability to record, process, and
report financial data consistent with the assertions of management in the CWSRF financial
statements. These conditions appear to have resulted, in part, from (1) the use of a separate
spreadsheet-based accounting system that a limited number of employees and management are
familiar with; (2) a lack of adequate training on the CWSRF-specific accounting system;
(3) inadequate written procedures for key areas such as monthly reconciliations to the CWSRF
general ledger and CWSRF financial reporting; (4) lack of management understanding, review
and approval of entries to the CWSRF general ledger and supporting schedules; and
(5) significant turnover of key staff and management working in the CWSRF program over the
last 2 years. Specifically, we noted the following matters that impact management assertions:
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Existence or Occurrence: Periodic reconciliations of the CWSRF general ledger to the actual
cash and investment accounts maintained by the Treasurer is an important control aspect that can
provide assurances that the accounting records properly record cash and investment transactions
and balances. Management review of these reconciliations provides assurances that these
controls are working as intended.
We found that DES was reviewing the "zero balance" (the account used to deposit Federal draws
and related State match, and subsequent disbursements for loans or administration) and
"repayment" (the account for loan repayments and subsequent disbursement for loans) accounts
and noting any discrepancies. However, DES was not actually posting adjustments for
discrepancies to cash and investment balances in the CWSRF general ledger.
As a result of inadequate procedures for reconciling cash and investment balances on the
CWSRF general ledger to the cash and investments maintained by the Treasury, the cash balance
was understated and the investment balance in the CWSRF general ledger was overstated at
June 30, 2005 by approximately $5,700,000 and $5,000,000, respectively. The net difference
was primarily due to investment earnings that had been deposited to the accounts but were not
recognized as received on the CWSRF general ledger.
Completeness: As a result of the inadequate reconciliation procedures noted above, a long-term
repurchase agreement and its related $202,580 in investment earnings had not been recognized
on the CWSRF general ledger.
Valuation or Allocation: The amounts recorded in the CWSRF general ledger for loans and related
interest receivable should be supported by subsidiary schedules that provide details by specific loans.
Loans included on the schedule should be supported by proper loan documentation (such as loan
agreements, requests for disbursements, and loan amortization schedules). The subsidiary schedules
should be periodically reconciled to the CWSRF general ledger.
The State did not reconcile loan receivable balances to the CWSRF general ledger properly. While
the reconciliations identified specific loans that required adjustment, no adjustments were posted to
the general ledger. As a result, loans receivable at June 30, 2004, were approximately $19,000
greater than the supporting loan schedules, and interest receivable balances were misstated by
approximately $132,000 and $103,000 at June 30, 2004 and 2005, respectively. Loan interest
earnings for 2005 were misstated by approximately $29,000. To ensure that general ledger balances
are supported by subsidiary records, management should review the supporting schedules on a
regular basis to ensure the necessary adjustments have been made and the schedules support the
CWSRF general ledger balances.
Summary
SRF management has the responsibility to establish and maintain an accounting system and
control environment that both encourages and requires accurate financial information and
reporting. Management needs to ensure that the controls, policies, and accounting system are
designed and operating properly by reviewing monthly reports, reconciliations, and financial
statements, and making inquiries of staff. Prior to our audit, DES had recognized the need to
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improve its CWSRF-specific accounting and management system. DES is currently in the
process of developing a new system expected to address this condition.
Recommendations
We recommend that the EPA Regional Administrator, Region 1, require the DES to:
1. Coordinate with the Treasury and obtain up-to-date documentation on specific cash and
investment transactions and balances. A schedule of cash, investments, and related
earnings per the Treasurer should be reconciled with supporting documents and the
CWSRF general ledger on a recurring basis.
2. Reconcile its subsidiary schedule(s) for loans and interest receivable with the CWSRF
general ledger on a recurring basis.
3. Develop and implement procedures for appropriate review and approval of accounting
entries and reporting from the CWSRF-specific accounting system, including year-end
closing and reporting.
4. Develop training on the CWSRF-specific accounting system for all appropriate staff and
management, including the accountants, the accounting manager, and program manager.
State Response
The State responded on November 22, 2006, with the following:
With regards to the comments on the accounting system, DES is in the middle of a system
conversion from our manual, Excel spreadsheet based, system to a general ledger system.
When this system conversion is complete, the majority of the posting and reconciliation
issues will be resolved as we will have one integrated accounting package.
Concerning the issue with Treasury, we are working with that department to improve the
timely receipt of bank statements from them in order for DES to perform our
reconciliations and postings in a timely manner.
Procedures have been developedfor review and approval of accounting entries andfor
the reconciliation of subsidiary schedules to the general ledger.
As to training, all users will be trained on the new system and user guides will be
developedfor each level of user.
OIG Response
We find the State's response to be acceptable.
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Compliance Finding, Recommendation, and Response
Noncompliance on Subrecipient Monitoring
Office of Management and Budget (OMB) Circular A-133 and EPA regulations at Title 40, Code
of Federal Regulations, Section 31.26 require that a pass-through entity ensure that subrecipients
expending $500,000 or more in Federal awards during the subrecipient's fiscal year meet the
Single Audit requirements for that fiscal year. The pass-through entity is to issue a management
decision on any audit findings within 6 months after receipt of the subrecipient's audit report and
ensure that the subrecipient takes appropriate and timely corrective action. (OMB Circular
A-133, Subpart D §_.400(d))
DES did not have procedures in place to ensure that borrowers expending Federal awards met
the Single Audit requirements to issue management decisions with 6 months of receipt of the
audit reports, or to ensure that subrecipients take appropriate and timely corrective action. The
Program management was not aware that the monitoring of and response to Single Audit
requirements was necessary.
DES was not aware of the Single Audit status of their borrowers and therefore were not aware if
the borrower's audit had uncovered any issues of noncompliance.
Recommendation
We recommend that the EPA Regional Administrator, Region 1, require the DES to:
5. Implement a Single Audit report review and corrective action policy consistent with
OMB Circular A-133 and EPA regulations.
States Response
The State responded on November 22, 2006, with the following:
In compliance with the March 6, 2000 recommendation from Charles R. McCollum,
Audit Manager at OIG, regarding sub-recipient monitoring, on April 17, 2000 DES
submitted the policy to EPA, Region 1 for review and approval. By letter dated February
2, 2001, EPA responded that, after review of the policy by the regional office and the
OIG, "we consider these steps to be prudent and we find that your policy complies with
the sub-recipient monitoring requirements. "
Based on this approved policy, DES believes that the CWSRF Program is in compliance
with sub-recipient monitoring requirements. However, it appears that the OIG
recommendation to EPA Region 1 in the current draft audit report wouldfurther require
DES to "implement a Single Audit report review and corrective action policy consistent
with OMB Circular A-133 and EPA regulations. " DES agrees to work with EPA,
Region 1 in amending the present policy to meet these requirements if requested to do so.
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OIG Response
EPA Region 1 should work with the State to assure that it meets the requirements of
OMB Circular A-133 and Title 40, Code of Federal Regulations, Section 31.26, regarding
pass-through entity responsibilities for followup on subrecipient audits.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
Rec. Page
No. No.
Subject
Status1
Action Official
Planned
Completion
Date
POTENTIAL MONETARY
BENEFITS (in!
Claimed Agreed To
Amount Amount
19 Require DES to coordinate with the Treasury and
obtain up-to-date documentation on specific cash
and investment transactions and balances. A
schedule of cash, investments, and related
earnings per the Treasurer should be reconciled
with supporting documents and the CWSRF
general ledger on a recurring basis.
-|g Require DES to reconcile its subsidiary schedule(s)
for loans and interest receivable with the CWSRF
general ledger on a recurring basis.
19 Require DES to develop and implement
procedures for appropriate review and approval of
accounting entries and reporting from the CWSRF-
specific accounting system, including year-end
closing and reporting.
19 Require DES to develop training on the CWSRF-
specific accounting system for all appropriate staff
and management, including the accountants, the
accounting manager, and program manager.
20 Require DES to implement a Single Audit report
review and corrective action policy consistent with
OMB Circular A-133 and EPA regulations.
EPA Regional Administrator,
Region 1
EPA Regional Administrator,
Region 1
EPA Regional Administrator,
Region 1
EPA Regional Administrator,
Region 1
EPA Regional Administrator,
Region 1
1 0 = recommendation is open with agreed-to corrective actions pending
C = recommendation is closed with all agreed-to actions completed
U = recommendation is undecided with resolution efforts in progress
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Distribution
EPA Region 1
Regional Administrator
Director of Office of Ecosystem Protection
Manager of Municipal Assistance Unit
Audit Liaison
CWSRF Coordinator
EPA Headquarters
Director, Grants Administration Division
Agency Followup Coordinator
Infrastructure Branch Chief
CWSRF Coordinator
CWSRF Audit Manager
New Hampshire Department of Environmental Services
Commissioner
Chief Operating Officer
CWSRF Supervisor
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