1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 DECEMBER 16, 2015 10 11 12 13 14 ITEM P 15 OTHER ADMINISTRATIVE MATTERS 16 ITEM P1 17 EXECUTIVE DIRECTOR'S REPORT 18 1. UPDATE ON ACTIONS TO ADDRESS THE FINDINGS IN THE 19 SCO REVIEW REPORT OF THE BOARD OF EQUALIZATION'S 20 INTERNAL ACCOUNTING AND ADMINISTRATIVE CONTROLS 21 22 23 24 25 26 27 REPORTED BY: Carole W. Browne 28 CSR NO. 7351 1 1 P R E S E N T 2 3 For the Board of Jerome E. Horton Equalization: Chairman 4 Sen. George Runner (Ret.) 5 Vice Chair 6 Fiona Ma, CPA Member 7 Diane L. Harkey 8 Member 9 Yvette Stowers Appearing for Betty T. 10 Yee, State Controller (per Government Code 11 Section 7.9) 12 Joann Richmond Chief 13 Board Proceedings Division 14 15 For Board of 16 Equalization Staff: Cynthia Bridges Executive Director 17 Julia Findley 18 Business Taxes Administrator III 19 Property and Special Taxes 20 Edna Murphy 21 Deputy Director Administration 22 23 ---o0o--- 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 16, 2015 4 ---o0o--- 5 MR. HORTON: Ms. Richmond. 6 MS. RICHMOND: Our next matter is Item P, Other 7 Administration Matters. Item P1 is the Executive 8 Director's Report. P1.1 is the State Controller's 9 Office findings detailed in its Review Report, Internal 10 Accounting and Administrative Controls Review. 11 And I believe we have a Power Point? 12 MS. BRIDGES: Yes. Thank you. 13 MR. HORTON: Welcome to the Board. Please 14 introduce yourself for the record. 15 MS. BRIDGES: Good afternoon, Chairman Horton 16 and Members. 17 I want to express my appreciation to the Board 18 for your -- 19 MR. HORTON: Ms. Bridges, please -- 20 MS. BRIDGES: Oh. 21 MR. HORTON: -- introduce yourself. 22 MS. BRIDGES: Cynthia Bridges, Executive 23 Director. 24 MS. FINDLEY: Julia Findley, Acting Chief, 25 Financial Management Division. 26 MS. MURPHY: And Edna Murphy, Deputy Director 27 of Administration. 28 MS. BRIDGES: Again, good afternoon, Honorable 3 1 Members. I would like to express my appreciation to the 2 Board for your engagement and solutions to the findings 3 cited in the State Controller's review report relative 4 to BOE's internal accounting and administrative 5 controls. 6 For your edification today, the Financial 7 Management Team and I wish to provide you with an 8 overview on a history of the issues and initial 9 going-forward plans to -- in response to the referenced 10 SCO review report. 11 As you know, the Chief of SCO's Audit Division 12 recommended that BOE develop and submit the detailed 13 corrective action plan within six months to address each 14 concern identified, particularly internal controls over 15 the retail sales tax funds, revenue allocation process, 16 and the office revolving fund. 17 As referenced in my November 30th memorandum to 18 you in this matter, our preliminary corrective action 19 plan and other recommendations will be provided to you 20 in January 2016. 21 The most recent -- the most significant concern 22 in the SCO report is BOE's allocation of retail sales 23 taxes among several State and local funds. 24 Let me reiterate, and it was also confirmed by 25 the SCO staff, that it does not subject the State to 26 financial exposure as it relates to distributions to the 27 locals, counties, and special taxing jurisdictions. 28 The SCO findings were consistent with what the 4 1 BOE had already identified as a result of a previous 2 fund reallocation adjustment. 3 When I was first informed of the potential of a 4 revenue allocation issue, I immediately ordered an 5 internal review to determine the nature and extent of 6 the issue. Staff subsequently commenced actions to 7 prepare recommendations to reduce the recurrence of the 8 issue. 9 Additionally, given the extent of the 10 allocation issue, in my professional judgment, that 11 other reporting challenges existed regarding BOE's 12 Financial Management operations, I commissioned an 13 external study for recommendations to update and reform 14 the BOE's Financial Management operations. 15 The revenue cycle management analysis report, 16 which was forwarded to you in October, concluded that a 17 number of reforms were required to improve the accuracy, 18 efficiency, and integrity of the BOE's accounting and 19 reporting functions. 20 Both the internal review and RCMA report 21 reference the following systemic and institutional 22 deficiencies as requiring attention: A tax 23 administration system, the Integrated Revenue 24 Information System, commonly referred to as IRIS within 25 the Agency, lacks revenue accounting functionality, is 26 cumbersome to update for tax changes due to its 27 now-outdated platform and the voluminous modifications 28 that have occurred since its inception 25 years ago, an 5 1 outdated external accounting system and extensive manual 2 accounting processes facilitating a greater risk of 3 errors in accounting transactions and reports. 4 The BOE's final management structures as they 5 currently exist reflect silos rather than a best 6 practices fully integrated revenue accounting and 7 reporting operation. That this systemic siloing is 8 rooted in an institutional culture that worked well 9 before the rise of multiple local government taxing 10 jurisdictions as well as the increasing complexity of 11 State-imposed revenue programs but now stifles effective 12 communications internally and externally and impacts the 13 accuracy of revenue fund allocations. 14 We're happy to share that BOE is moving forward 15 in preparing an initial allocation adjustment based on 16 the current internal and SCO findings. 17 The BOE will be collaborating with the 18 Department of Finance and SCO regarding the proposed 19 adjustment and underlying methodology. We will apprise 20 Members on the outcome of the work with DOF and SCO 21 prior to any execution of an adjusting entry. 22 Internal audit staff is engaging with Financial 23 Management Division management in a consulting capacity 24 regarding accounting process changes, and, more 25 importantly, the internal control requirements as 26 provided in Government Code Sections 13400 through 27 13407, known as the State Leadership Accountability Act. 28 Additionally, to supplement the RCMA report, 6 1 which, due to time constraints, was not as (inaudible) 2 liked, the revenue management team is in the process of 3 developing a scope for the procurement of an external 4 consultant to assess the BOE's revenue recognition and 5 implementation activities as well as accounting and 6 reporting advisory services, which should include a 7 transfor- -- transformation solutions. The proposed 8 scope will be submitted to Members via the three-day 9 review process prior to initiation of an RFP. 10 I am encouraged by the Board's proactive 11 participation, working together with staff, to bring 12 about Financial Management reforms. 13 Again, pursuant to the Members' request for a 14 review relative to the history of the issues cited in 15 the SCO review report and a go-forward plan, Acting 16 Financial Management Division Chief Julia Findley will 17 address in more detail the retail sales tax fund 18 allocations, pending reallocation adjustments, and 19 internal corrections that have been accomplished and 20 soon to be undertaken. Deputy Director of 21 Administration Edna Murphy will follow her with an 22 overview of the office revolving fund improvements and 23 proposed next steps. 24 Ms. Findley. 25 MS. FINDLEY: Good afternoon. I'm Julia 26 Findley, Acting Chief, Financial Management Division. 27 Please refer to the slide that provides a brief 28 history of the BOE's endeavors to review the revenue 7 1 process. The local revenue 2011 component of sales and 2 use tax went into effect July 1st, 2011. In September 3 2011 -- sorry. In September 2011, the State's 4 Controller's Office established the local revenue 2011 5 fund. In response, the BOE initiated the $342.9 million 6 adjustment to transfer the local revenue 2011 taxes 7 collected in the General Fund into the newly created 8 fund. 9 In August 2014, the BOE initiated an adjustment 10 resulting from an internal review of sales and use tax 11 fund allocations in response to issues raised about 12 potential underfunding of the Public Safety Fund. 13 In December 2014 the BOE established a work 14 group dubbed the Revenue Allocation Team made up of 15 units involved in sales and use tax revenue allocation 16 and distribution to determine if the issues identified 17 by the internal review were corrected. The team 18 consists of Research and Statistics, Local Revenue 19 Allocation Unit, Technology Services Division, and 20 Accounting. 21 In January 2015, the BOE contracted with 22 CPS Consulting to evaluate the revenue accounting 23 process. 24 In March 2015, the Revenue Allocation Team 25 prepared an informal issue paper that discussed 26 allocation issues, including the need for a CROS unit 27 communications and training for accounting staff. 28 In June, the team proposed a simplified process 8 1 for reconciling the quarterly revenue allocation 2 reported by taxpayers to daily factor funded remittance 3 advices. The BOE delayed implementing fund allocation 4 adjustments to ensure all issues identified -- were 5 identified and to await any additional items that may be 6 noted through the revenue cycle management analysis. 7 In July 2015, the BOE provided a corrected 8 template to the DMV that properly allocated the funds 9 and began discussions with DMV on an electronic 10 solution. 11 As indicated by the previous slides, for the 12 past several months the Revenue Allocation Team 13 evaluated the sales and use tax fund allocation process, 14 which included a comprehensive review of reports used to 15 reconcile daily remittances to information system 16 reports. 17 The simplified process discussed previously 18 excludes suspense, DMV, and FTB from the reconciliation 19 of reported allocation to daily remittances and 20 correctly allocates the sales -- the additional sales 21 tax on diesel fuel to the General Fund. 22 Prior to the implementation of the revised 23 allocation template to DMV, the Financial Management 24 initiated an adjustment to correct DMV fund allocations 25 for the period of October 2014 through April 2015. 26 The Revenue Allocation Team submitted a request 27 to Technology Services to modify reports used in the 28 revenue allocation process and is continuing to evaluate 9 1 additional reports that may be useful for more frequent 2 reconciliations and monitoring. 3 During the review process, the team automated 4 IRIS reports used in quarterly reconciliation that were 5 previously provided in paper format to improve 6 efficiencies and reduce the risk of error. 7 Next slide. 8 Going forward, the BOE will complete its review 9 of fund allocations in December 2015 and collaborate 10 with the Department of Finance on proposed adjustments 11 in early 2016. 12 The adjustments identified by the Revenue 13 Allocation Team included corrections -- corrected 14 allocations for DMV, FTB, and diesel fuel consistent 15 with the SCO's findings. 16 The SG component referenced in the SCO report 17 is actually the claimed fuel tax credits which come from 18 the Schedule G and are allocated in IRIS reports. 19 However, any unclaimed fuel tax credits are allocated 20 based on factor funding until they are claimed. 21 The Revenue Team is working with Technology 22 Services to develop a report to capture those unclaimed 23 credits. The proposed adjustment is substantiated by 24 documentation and is subject to third-party 25 verification. 26 The Financial Management Division reached out 27 to Program to obtain training materials on legislative 28 mandates and to begin training accounting staff. The 10 1 Accounting Branch partnered with Data Analysis Section 2 and Technology Services to address Accounts Receivable's 3 reporting to incorporate SCO-approved write-offs. 4 In addition, the Accounting Branch is 5 evaluating and documenting processes to ensure 6 compliance with accounting and governmental standards 7 and to position itself for CROS and FisCal. The 8 evaluation includes updating policies and procedures, 9 performing risk assessments, and developing appropriate 10 controls to mitigate risk. 11 Last, we will engage Internal Audit to evaluate 12 the processes to ensure compliance with standards and to 13 validate the related controls and monitoring put in 14 place to mitigate risk. 15 That concludes my portion of the presentation. 16 MS. MURPHY: Good afternoon, Members. Edna 17 Murphy, Deputy Director of Administration. 18 In response to BOE's preliminary internal 19 audit, which was released in August of 2015, the 20 Financial Management Division implemented procedures 21 related to the revolving fund which noted many of the 22 same issues that were identified in the SCO audit. 23 In both audits one important area noted was the 24 need to identify tracking and monitoring tools to ensure 25 that process and procedures that are in place are being 26 adhered to. Both reports had a review period of July 27 2013 through February 2015 for our internal audit and 28 April 2015 for SCO. 11 1 In July of 2014, the Financial Management 2 Division updated the policy, reminding employees of 3 timelines to clear travel advances and consequence -- 4 and the consequences of funding being taken from their 5 payroll warrant when not done. This policy was also 6 reissued to all employees again on October 2015. 7 In November of 2014, the Financial Management 8 Division released its updated travel guide, which is 9 posted to our intranet. We also implemented procedures 10 that in (inaudible) secondary approval for travel 11 advances and we established processes to ensure that 12 documentation is maintained that is accurate and 13 properly filed. 14 In addition, we developed processes with the 15 Human Resources Division to ensure prompt collection of 16 employee account receivables, which includes the timely 17 submission of collection letters. 18 And then, finally, we developed procedures to 19 weekly process claims schedules to replenish our 20 revolving fund. 21 Some of our next steps. We continue to train 22 managers, supervisors, and BOE employees on salary and 23 travel advance policies and procedures. This may 24 include Take Five video, town hall meetings and 25 training, frequently asked questions, and the 26 distribution of monthly travel tips. 27 We're currently working on the development of 28 reports and tracking system for our travel and our 12 1 salary advances. 2 We're going to engage our Internal Audit staff 3 to evaluate the change -- the process changes and the 4 monitoring controls to ensure sufficient risk 5 management, and we plan to implement quality assurance 6 programs to ensure compliance with the State and BOE 7 policies. 8 This is the end of our informational update, 9 and we'd be happy to answer any questions that you may 10 have. 11 MR. HORTON: Thank you. 12 Discussion, Members? 13 Member Runner. 14 MR. RUNNER: The -- yeah. Just a couple quick 15 things. The -- I'm glad to hear that the -- the efforts 16 being moved forward in regards to the outside 17 third-party RFP -- 18 MS. BRIDGES: Yes. 19 MR. RUNNER: -- because I know that wasn't real 20 clear when we had met and contemplated some other 21 issues, so I'm glad to hear that that's been added to 22 it. Tell me about the timeline for that. 23 MS. BRIDGES: We will be forwarding in January, 24 if not before then, a recommended scope with regard to 25 the services that we're securing. 26 At a minimum, it should contain or include an 27 evaluation of data management, data validation and 28 reconciliation, analytics, automating annual processes 13 1 and reporting, governance and internal controls as part 2 of the accounting and reporting assessment to a certain 3 extent. So we will provide the scope for the Members' 4 review, and shortly thereafter, embark upon the 5 procurement -- I mean, the RFP process. 6 And I would ask Ms. Murphy to address the 7 timeline with respect to general contract procurement 8 processes. 9 MS. MURPHY: I think a portion of it will just 10 really depend on the scope. We do have some current 11 contracts already that we can tap into with CPS if it's 12 coming in to do some additional training, which was one 13 of the things that was identified in the revenue 14 collection management audit -- I'm trying to remember 15 the -- RMCA. So if it's -- for some of the training 16 we'll be able to tap into that. For the scope of coming 17 in to do the validation, kind of the review of the 18 process, et cetera, so on, we will probably have to go 19 out through the procurement process and -- and take that 20 to bid. 21 MS. BRIDGES: And I'm envisioning that for the 22 services that we're looking for it will more than likely 23 include us going out for bid for that. 24 MR. RUNNER: Because it's over . . . 25 MS. BRIDGES: I think that for the level of 26 assessment, the amount of assessment that we're asking 27 for and the time that it's going to take and the amount 28 of effort engaged in performing those services, it is 14 1 going to take quite a bit of time and effort. And, of 2 course, I'm also looking at the expertise that we're 3 looking for from the consultants that will be actually 4 conducting the assessment. 5 MR. RUNNER: So again, where -- and where do 6 you -- so some, like, timeline, dates -- 7 MS. BRIDGES: We can provide that along with 8 the information relative to the scope. 9 MR. RUNNER: And how -- okay. So as the scope 10 gets developed, then you'll know the length of time that 11 the -- 12 MS. BRIDGES: Right. And that will also be -- 13 MR. RUNNER: -- contract will run. 14 MS. BRIDGES: -- incorporated into the 15 preliminary action plan that we're also submit -- to 16 submit in January as well. 17 MR. RUNNER: Okay. Let me ask you then 18 specifically, too, in regards to the -- the -- the fund 19 reallocation adjustment, right now, at least as I am 20 understanding this, the target is to do that by 21 December 31st? 22 MS. BRIDGES: I think the target is to at least 23 complete the determination based on the information that 24 was already provided in the SCO report. They had 25 already made some determinations. Staff has actually 26 reviewed and validated those calculations as well. 27 But generally, the practice is, when we make 28 those kinds of adjustments, we work in concert with 15 1 the Department of Finance as well as SCO, because they 2 have an interest in actually reviewing it, understanding 3 the methodology, and basically approving it before we 4 actually execute those adjustments. 5 And I am going to again refer to Ms. Murphy 6 since she has had some experience with that in the last 7 reallocation adjustment that was done. 8 Do you have anything else to add? 9 MS. MURPHY: Well, like she said, we worked 10 very closely when we did the allocation last year, in 11 2014, with the Department of Finance. 12 One of the processes that we do on a regular 13 basis is we do quarterly true-ups all the time, so we do 14 these adjustments. They're very familiar with that. 15 But as we're doing something where we taking 16 consideration that some of this information goes back 17 over several years, we want to make sure that we're 18 working collaboratively with our stakeholders and that 19 everybody is in agreement to the changes that we're 20 going to be putting forward. 21 MS. BRIDGES: So even though we want to 22 basically complete our analysis and review of those 23 issues that were cited in the SCO report with -- 24 correcting those particular allocation issues, it 25 doesn't necessarily mean that we're going to be actually 26 making the adjustment until we have actually had the 27 reviews and discussions with the control agencies. And 28 then, of course, upon their recommendation, we will make 16 1 the adjustment. And it could be in January, it could be 2 in April. It's going to depend -- be dependent upon 3 whatever their workload is. Obviously, they're going to 4 be very busy with the budget -- 5 MR. RUNNER: Mm-hmm. 6 MS. BRIDGES: -- in January, so we're not sure 7 whether or not that would be an appropriate time frame 8 to execute the adjusting entry. 9 MR. RUNNER: Okay. Thank you. 10 MR. HORTON: Member Stowers. 11 MS. STOWERS: Just real quick. Thank you. 12 (Inaudible), you said you are going to be 13 contacting an external consultant and you're indicating 14 that the scope will be shared with the Members in 15 January. 16 MS. BRIDGES: Yes. 17 MS. STOWERS: Okay. I also encourage you to 18 contact the SCO audit team -- 19 MS. BRIDGES: Okay. 20 MS. STOWERS: -- management there, they're open 21 and willing to work out -- work with everyone here at 22 the BOE -- 23 MS. BRIDGES: Okay. 24 MS. STOWERS: -- to resolving some of the 25 problems. 26 Three-day review seems to be a bit short for 27 me, so I would ask for more time to look at it. So as 28 you're developing the scope, if you could send it to me 17 1 on a flow basis, and probably the other Members, would 2 be great, so that we have a good idea of what you're 3 developing day by day. 4 MS. BRIDGES: Okay. 5 MS. STOWERS: That's it right now. 6 MR. HORTON: Member Ma? 7 MS. MA: (Shaking head.) 8 MR. HORTON: Okay. Thank you. The Board will 9 receive and file. Thank you very much for your 10 presentation. 11 Hearing no further discussion by the Members, 12 Ms. Richmond, what's the next matter? 13 (Time Noted: 4:37 p.m.) 14 ---o0o--- 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, CAROLE W. BROWNE, Hearing Reporter for the 8 California State Board of Equalization, certify that on 9 December 16, 2015, I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 35 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: December 29, 2015 17 18 19 _________________________________ 20 CAROLE W. BROWNE, CSR #7351 21 Hearing Reporter 22 23 24 25 26 27 28 19