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Audit of Accounts PayableApril 20, 2018Project Number 18-01-015

Audit of Accounts PayableApril 20, 2018MissionInternal Audit provides independent and objective assurance and consultingservices designed to protect and enhance Health and Human Services (HHS)programs and operations through a systematic, disciplined approach to evaluatingthe effectiveness of risk management, internal control, and governance processes.We strive to provide insightful, proactive, timely, and innovative advice andrecommendations to help HHS improve the health and safety of Texans.Team MembersTressie Landry, CIA, Project ManagerJohn R. Isle, CIA, CFE, CRMAChanda Riddick, CIAHHS Internal Audit DirectorKarin Hill, CIA, CGAP, CRMAHHS Internal Audit Division

Audit of Accounts PayableApril 20, 2018TABLE OF CONTENTSExecutive Summary . 1Background . 4Audit ResultsManagement review of the timeliness of payment processing will increasecompliance with prompt payment requirements. . 5A quality review process would improve accuracy of accounts payableinformation. . 8Performing a process review would increase efficiencies and centralizeaccounts payable functions. . 10Improved controls over user access to the agency’s financial system wouldensure payment duties are segregated. . 11Updating policies would better inform staff on voucher processing andincrease consistency. 13Appendix: Objectives, Scope, and Methodology . 14Report Distribution . 16HHS Internal Audit Division

Audit of Accounts PayableApril 20, 2018EXECUTIVE SUMMARYThis report presents the results of the Audit of Accounts Payable. The objectiveswere to: Determine whether the accounts payable process has necessary and effectivecontrols. Determine whether payables are being processed timely in compliance withTexas Government Code 2251.021.The scope included payments, excluding disaster relief, payroll, travel, and costallocation expenditures, made from September 1, 2017 through November 2, 2017.For the timeliness of payments, the scope included payments made fromSeptember 2016 through August 2017.There are opportunities to improve timeliness of voucher processing at theDepartment of State Health Services (DSHS). DSHS vouchers tested were accurateand duplicate payments were not identified. However, a high instance of untimelypayments exists.The Health and Human Services Commission (HHSC) paid vouchers timely based onthe dates entered. However, changes are needed to (a) improve the accuracy ofvoucher processing, (b) reduce the number of duplicate payments, and (c) improvecontrols over access to the accounts payable module of CAPPS Financials.HHSC Accounts Payable should update their policies and procedures to reflectorganizational changes as well as the upgrade of the financial system. A processreview is recommended to ensure efficient and centralized accounts payableprocesses.Audit testing led to the development of 5 observations.Management review of the timeliness of payment processing will increasecompliance with prompt payment requirements.DSHS processed 80,479 vouchers in fiscal year 2017, of which 11,299 (14%)vouchers required interest penalties totaling approximately 67,000 in interestwithin fiscal year 2017.HHSC processed 133,075 vouchers in fiscal year 2017, of which 222 (0.2%)vouchers required interest penalties totaling approximately 75,000 in interestwithin fiscal year 2017.Texas Government Code 2251.021 and 2251.026 requires payment of valid invoicesno later than 30 days after the latter of either the service date or the invoicereceived date to avoid owing interest.HHS Internal Audit DivisionPage 1 of 16

Audit of Accounts PayableApril 20, 2018DSHS and HHSC Accounts Payable management should establish performancemetrics to communicate acceptable tolerances of late payment error rates based onrisk to address processing times and interest penalties.A quality review process would improve accuracy of accounts payableinformation.DSHS processed vouchers accurately and without duplication based on the sampleselected for testing. HHSC vouchers had inaccurate dates entered into CAPPSFinancials. Of the 52 manually processed vouchers tested, three (5.8%) wereprocessed with inaccurate dates. Additionally, seven duplicate payments, includingone for 18 million, were detected for HHSC. Five of these duplicate payments wereidentified by either the vendor or this audit.HHSC Accounts Payable management should perform tests on available data toidentify, detect, and prevent duplicate payments, and create performanceexpectations or training related to data accuracy.Performing a process review would increase efficiencies and centralizeaccounts payable functions.State Hospital and State Supported Living Centers (SSLCs) Accounts Payable staffreport to the facility directors, not the HHSC Chief Financial Officer. This conditionallows each facility to design facility specific processes. Opportunities exist toimplement standardized processes related to preparing invoices for paymentincluding the level and extent of documentation necessary for accurate and timelypayment processing.HHSC Accounts Payable management, in coordination with State Operated Facilitiesmanagement, should review the organizational processes and key controls overaccounts payable to ensure the process is efficient and results in consistentapplication of policies.Improved controls over user access to the agency’s financial system wouldensure payment duties are segregated.Four HHSC staff have inappropriate access to CAPPS Financials which enables themto process vouchers without a review by another employee. One of these users wasidentified as having prepared and approved vouchers in CAPPS Financials.HHSC Accounts Payable management should remediate segregation of duties issuesand develop a matrix outlining roles, position requirements, and policy forappropriate access.Updating policies would better inform staff on voucher processing andincrease consistency.HHSC Accounts Payable departmental procedures are focused on tasks, such as aseries of steps to follow with minimal inclusion of policy statements to set the goals,HHS Internal Audit DivisionPage 2 of 16

Audit of Accounts PayableApril 20, 2018principles, and direction of the process. The documents have also not been updatedto include the State Hospitals and SSLCs transferred from DSHS and Department ofAging and Disability Services.HHSC Accounts Payable management should consolidate and update policies andprocedures and make available to staff.We express our appreciation to management and staff of DSHS Accounts Payable,HHSC Accounts Payable, State Hospitals, and SSLCs for their cooperation andassistance during this audit.HHS Internal Audit DivisionPage 3 of 16

Audit of Accounts PayableApril 20, 2018BACKGROUNDAccounts Payable is responsible for processing invoices for payment through theagency’s financial system, the Centralized Accounting and Payroll/Personnel System(CAPPS) which interfaces with the Comptroller’s system and the Uniform StatewideAccounting System (USAS) for actual payment. The agency upgraded theaccounting system on September 1, 2017 to include additional modules forprocurement, but the accounts payable module was not significantly changed. Thenewly upgraded system is now called CAPPS Financials.Invoices are approved by program areas and departments and are sent to AccountsPayable for processing only. The division is organized between payments for goodsand services, client services, travel, and vendor maintenance.In fiscal year 2017, HHSC processed 133,075 expenditure vouchers totaling 37billion and DSHS processed 80,479 expenditure vouchers totaling 997 million.Between September 1, 2017 and November 1, 2017, HHSC processed 46,405vouchers totaling 6 billion and DSHS processed 3,827 vouchers totaling 81million.HHS Internal Audit DivisionPage 4 of 16

Audit of Accounts PayableApril 20, 2018AUDIT RESULTSManagement review of the timeliness of payment processing willincrease compliance with prompt payment requirements.Texas Government Code 2251.021 and 2251.026 requires payment of valid invoicesno later than 30 days after the latter of either the service date or the invoicereceived date to avoid owing interest. DSHS processed 80,479 vouchers in fiscalyear 2017, of which 11,299 (14%) vouchers resulted in interest penalties totalingapproximately 67,000 in interest within fiscal year 2017.According to Accounting management, due to the directive to not use overtime tocompensate for the hiring freeze, DSHS did not offer overtime to staff. To meet thedemand, management shifted staff from other accounting units to assist withvoucher processing.HHSC processed 133,075 vouchers in fiscal year 2017, of which 222 (0.2%)vouchers required interest payments totaling approximately 75,000 in interestwithin fiscal year 2017. HHS agencies report interest payments in executive levelperformance reports and program managers at HHSC are informed of the amountof interest incurred for their programs.As a result of the submission procedures changes due to transformation and delaysin submitting invoices for payment, both agencies expect the amount of latepayments and interest to increase in fiscal year 2018.Recommendation 1DSHS Accounts Payable management should establish performance metrics tocommunicate acceptable tolerance of late payment error rates based on risk.Management ResponseAction PlanSome critical payments and invoices are tracked and kept on the S drive formanagement review but due to vacancies (partly driven by a statewide hiringfreeze), the process was not well documented. This process is being updated andwill be monitored by management.DSHS management is continually monitoring payment backlog to shift staff asnecessary to meet these priorities and reviews our production statistics weekly toanticipate the changing needs of the business environment. DSHS will establishperformance measures for late payment error rates based on risk.HHS Internal Audit DivisionPage 5 of 16

Audit of Accounts PayableApril 20, 2018Responsible ManagerAccounting DirectorTarget Implementation DateAugust 2018Recommendation 2DSHS Accounts Payable management should review the costs of reducingprocessing times with the benefit of reducing the number of vouchers resulting ininterest penalties.Management ResponseAction PlanAccounts Payable management will have monthly reviews of interest payments andprocesses and will make changes where appropriate to better utilize our availableFTEs, balancing the goal of minimizing interest while keeping our top prioritypayments on time. The Claims Unit manager will also hold monthly Branchmeetings to get feedback from our accountants to find what works and whatchanges need to be put in place that will help improve our processes.Responsible ManagerAccounting DirectorTarget Implementation DateAugust 2018Recommendation 3HHSC Accounts Payable management should establish performance metrics tocommunicate acceptable tolerance of late payment error rates based on risk.Management ResponseAction PlanHHSC Fiscal Management understands the need to process payments both timelyand accurately. Prior to transformation, late payment interest was reported monthlyand tracked in the Quarterly Business Report (QBR). Management currently reviewsthe interest charges monthly and tracks late payment interest as part of the QBR.Monthly reporting was suspended due to transformation priorities, but will beginHHS Internal Audit DivisionPage 6 of 16