Washington State Auditors Office

Accountability Audit Report

Northwest Open Access Network

King County
Report Date July 12, 2013 Report No. 1010503

Issue Date September 30, 2013

Washington State Auditor Troy Kelley

September 30, 2013

Board of Directors Northwest Open Access Network Bremerton, Washington

Report on Accountability
We appreciate the opportunity to work in cooperation with your Network to promote accountability, integrity and openness in government. The State Auditors Office takes seriously our role to advocate for government accountability and transparency and to promote positive change. Please find attached our report on Northwest Open Access Networks accountability and compliance with state laws and regulations and its own policies and procedures. Thank you for working with us to ensure the efficient and effective use of public resources. Sincerely,

TROY KELLEY STATE AUDITOR

Insurance Building, P.O. Box 40021 Olympia, Washington 98504-0021 (360) 902-0370 TDD Relay (800) 833-6388

Table of Contents
Northwest Open Access Network King County July 12, 2013
Audit Summary .......................................................................................................................... 1 Related Reports ......................................................................................................................... 2 Description of the Network ......................................................................................................... 3 Schedule of Audit Findings and Responses ............................................................................... 5

Audit Summary
Northwest Open Access Network King County July 12, 2013 ABOUT THE AUDIT
This report contains the results of our independent accountability audit of Northwest Open Access Network from January 1, 2010 through December 31, 2011. We evaluated internal controls and performed audit procedures on the activities of the Network. We also determined whether the Network complied with state laws and regulations and its own policies and procedures. In keeping with general auditing practices, we do not examine every transaction, activity or area. Instead, the areas examined were those representing the highest risk of noncompliance, misappropriation or misuse. The following areas were examined during this audit period: Billing, receipting, adjustments and accounts receivable Review of projects procurement, contract and prevailing wage compliance Payroll and leave benefits Disbursements general, travel, employee reimbursements and credit cards

RESULTS
In most areas, the Network complied with state laws and regulations and its own policies and procedures. However, we identified a condition significant enough to report as a finding: The Network lacks adequate internal controls over expenses and assets increasing the risk of misuse, loss and misappropriation of public resources.

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Related Reports
Northwest Open Access Network King County July 12, 2013 FINANCIAL
A financial statement audit was performed by a firm of certified public accountants. That firms report is available from the Network. The firm reported a material weakness in internal controls over financial reporting regarding the Networks treatment of its pension liability and classification of net assets for 2011.

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Description of the Network

Northwest Open Access Network King County July 12, 2013 ABOUT THE NETWORK
The Northwest Open Access Network (NoaNet), a nonprofit mutual corporation of the state of Washington, was incorporated in February 2000. The Network provides a broadband communications backbone, primarily over public benefit fibers licensed from Bonneville Power Administration, throughout Washington State. The Network assists its members in providing high-speed telecommunications services to customers and in the efficient management of load, conservation and acquisition of electric energy, as well as other purposes. In addition, the Network conducts business on a wholesale basis with unrelated commercial and government entities. The Network began commercial operation in January 2001. A seven-member Board of Directors governs the Network. Board Members are appointed from the Networks members, consisting of Washington Public Utility Districts and Energy Northwest, a joint operating agency. The Board appoints management to oversee the Networks daily operations as well as its 46 employees. For 2010 and 2011, the Network operated on annual budgets of approximately $20 million and $22 million, respectively.

APPOINTED OFFICIALS
These officials served during the audit period: Board of Directors: Fred Mitchell Douglas Miller (through November 2011) Dave Siburg John Jordan Ernie Bolz (through November 2011) Rich Nall (through November 2010) Warren Miller (through November 2010 and new term effective December 2011) Gary Ivory (effective December 2010) Tim Nies (effective February 2011) Linda Gott (effective December 2011) Greg Marney Dave Spencer

Chief Executive Officer Chief Operating Officer

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NETWORK CONTACT INFORMATION

Address: Northwest Open Access Network 4312 Kitsap Way, Suite 101 Bremerton, WA 98312 (208) 841-4403 www.noanet.net

Phone: Website:

AUDIT HISTORY
We typically audit the Network every two years. The Network was free of findings in the prior 10 years.

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Schedule of Audit Findings and Responses

Northwest Open Access Network King County July 12, 2013
1. The Network lacks adequate internal controls over expenses and assets increasing the risk of misuse, loss and misappropriation of public resources. Description of Condition
The Network spent $16.2 million and $18.1 million in operating expenses for 2010 and 2011, respectively. During our prior audit, we communicated concerns to management regarding unsupported payments made during 2007 through 2009. The following concerns continued during the current audit: Credit cards Credit card purchases, totaling $494,724 and $646,245, were made during 2010 and 2011, respectively. We selected one month, June 2011, to review support for expenses, totaling $78,918, and found: Credit card purchases do not have adequate documentation to support the business purpose for charges totaling $19,372. In addition, we identified unallowable purchases, totaling $1,512, for flowers, valet services, room upgrades and other personal charges. Fuel charges in the amount of $1,143 were paid for the use of personal vehicles. Although the Network allows these expenditures, it did not monitor these types of fuel purchases to ensure they were for valid public purposes. The Network charged more than $20,000 for hotel charges and meals associated with two meetings held during the month. We identified the following concerns: One employee incurred $591 of hotel expenses for staying at hotels within 16 to 19 miles from their home residence. Meals for a two-day workshop totaled over $10,600. We calculated the per day meal costs and found the Network spent $122 per person for provided meals. By way of comparison, daily state per diem for this area, as set by the Office of Financial Management, is $71.

Employee reimbursements Employees routinely request reimbursement for various business related expenses, including lodging, meals, airfare, cell phone charges, internet fees, etc. During the audit,

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employees were reimbursed approximately $93,000 each year. For 2010 and 2011, we reviewed 16 employee reimbursements totaling $39,558 and 14 employee reimbursements totaling $16,723, respectively. Reimbursements made to employees lacked adequate documentation to support the validity of the payment. For 2010 and 2011, we questioned the business purpose for reimbursements totaling $27,619 and $4,629, respectively. A vehicle allowance is provided to select employees and, per policy, the allowance amount is $500 per month. We identified two employees receiving $600 without prior approval. In total, an additional $4,754 was paid to these employees.

Payroll The Network had $2.6 million in gross payroll costs in 2010 and $3.5 million in 2011. We noted the following: The Network pays employees double their regular rate for hours worked on holidays. The Network was unable to provide documentation, such as a policy, showing Board approval of this practice. In addition, we found two instances in which there were inconsistencies in the application of this practice. The Network policy allows employees to carry over unused leave as long as the minimum annual usage, prescribed in policy, is met. We tested support for 12 employees in 2010 and identified four employees that carried forward a total of 158 hours, or approximately $12,000, contrary to the policy. Employees are able to cash out excess leave; however, the formula used to calculate hourly rates was not consistently applied. Of the 10 employees tested in 2011, we identified two underpayments of $130 and $149, as well as an overpayment of $850.

Safeguarding of assets Some Network employees work out of their homes. Per policy, the Network purchases office and other miscellaneous equipment, such as printers, headphones and file cabinets, to furnish at-home work offices. However, the Network does not have policies and procedures for tracking and monitoring equipment purchased and as a result we were unable to trace $2,849 of equipment purchased to an equipment listing. In addition, the Network was unable to provide a list of all equipment and other items purchased and provided to Network employees.

Cause of Condition
Network management has not effectively implemented internal controls or policies and procedures to ensure it complies with state laws to support the public purpose of every transaction and prevent the loss of public funds.

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While the Network has included operating policies in its employee handbook, the policies are not sufficiently detailed to address the issues noted in this audit. The Network does not have sufficient monitoring in place to ensure adequate supporting documentation is received and maintained.

Effect of Condition
Without maintaining proper documentation, in accordance with state law, the Network was not able to demonstrate that all payments reviewed in the audit were for a valid public purpose. Inadequate internal controls such as these increase the risk that misuse, loss or misappropriation could occur and not be detected in a timely manner, if at all, by Network officials.

Recommendation
We recommend the Network improve internal controls over expenses and assets to ensure appropriate use of public funds. We specifically recommend the Network: Clarify existing policies and add policies to ensure staff have the information needed to accurately interpret and act on Board expectations. These policies should include a more detailed travel expense reimbursement policy, including payment for meals with meetings, and should consider the use of per diem rates. Require and retain supporting documentation for all payments to demonstrate the public purpose and compliance with state laws. Establish monitoring procedures over all payments made and items purchased with public funds to safeguard public assets.

Networks Response
The Network recognizes the importance of adequate internal controls, as reflected in the Recommendation section in this report. Since the 2010-2011 audit period covered in this report the Network has taken steps to increase its controls as follows: 1. Clarification of existing policies in the employee handbook including a more detailed travel expense reimbursement policy. Some of the items brought up by the State Auditor in this report were allowed under previous policies and practices and have since been corrected; 2. Improvement in the retention of supporting documentation for payments by centralizing storage and implementing a new financial information system where files are primarily stored in electronic format with sufficient backup procedures; 3. Increase in the number of employees in the accounting department to compensate for an increase in work load as a result of sustained Network growth. Management believes that there is currently sufficient staff in place to ensure that review and monitoring procedures are followed, proper safeguards of public assets are enforced and payroll policies are consistently implemented. The Network continues to pursue options to improve and strengthen its internal controls and is open to any further specific recommendations from the State Auditors Office.
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Auditors Remarks
We thank the Network for its response and appreciate the steps it is taking to resolve this issue. We will follow up with the Networks corrective action during the next audit.

Applicable Laws and Regulations

RCW 43.09.200 Local government accounting Uniform system of accounting, states in part: The system shall exhibit true accounts and detailed statements of funds collected, received, and expended for account of the public for any purpose whatever, and by all public officers, employees, or other persons. The accounts shall show the receipt, use, and disposition of all public property, and the income, if any, derived therefrom; all sources of public income, and the amounts due and received from each source; all receipts, vouchers, and other documents kept, or required to be kept, necessary to isolate and prove the validity of every transaction; all statements and reports made or required to be made, for the internal administration of the office to which they pertain; and all reports published or required to be published, for the information of the people regarding any and all details of the financial administration of public affairs. RCW 40.14.010 Definition and classification of public records, states in part: As used in this chapter, the term "public records" shall include any paper, correspondence, completed form, bound record book, photograph, film, sound recording, map drawing, machine-readable material, compact disc meeting current industry ISO specifications, or other document, regardless of physical form or characteristics, and including such copies thereof, that have been made by or received by any agency of the state of Washington in connection with the transaction of public business, and legislative records as described in RCW 40.14.100. For the purposes of this chapter, public records shall be classified as follows: (1) Official public records shall include all original vouchers, receipts, and other documents necessary to isolate and prove the validity of every transaction relating to the receipt, use, and disposition of all public property and public income from all sources whatsoever; all agreements and contracts to which the state of Washington or any agency thereof may be a party; all fidelity, surety, and performance bonds; all claims filed against the state of Washington or any agency thereof; all records or documents required by law to be filed with or kept by any agency of the state of Washington; all legislative records as defined in RCW 40.14.100; and all other documents or records determined by the records committee, created in RCW 40.14.050, to be official public records.

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RCW 40.14.070 Destruction, disposition, donation of local government records Preservation for historical interest Local records committee, duties Record retention schedules Sealed records, states in part: (1)(a) County, municipal, and other local government agencies may request authority to destroy noncurrent public records having no further administrative or legal value by submitting to the division of archives and records management lists of such records on forms prepared by the division . . . (2)(a) Except as otherwise provided by law, no public records shall be destroyed until approved for destruction by the local records committee. Official public records shall not be destroyed unless: (i) The records are six or more years old; (ii) The department of origin of the records has made a satisfactory showing to the state records committee that the retention of the records for a minimum of six years is both unnecessary and uneconomical, particularly where lesser federal retention periods for records generated by the state under federal programs have been established; or (iii) The originals of official public records less than six years old have been copied or reproduced by any photographic, photostatic, microfilm, miniature photographic, or other process approved by the state archivist which accurately reproduces or forms a durable medium for so reproducing the original. RCW 42.24.090 Municipal corporations and political subdivisions Reimbursement claims by officers and employees, states: No claim for reimbursement of any expenditures by officers or employees of any municipal corporation or political subdivision of the state for transportation, lodging, meals or any other purpose shall be allowed by any officer, employee or board charged with auditing accounts unless the same shall be presented in a detailed account: PROVIDED, That, unless otherwise authorized by law, the legislative body of any municipal corporation or political subdivision of the state may prescribe by ordinance or resolution the amounts to be paid officers or employees thereof as reimbursement for the use of their personal automobiles or other transportation equipment in connection with officially assigned duties and other travel for approved public purposes, or as reimbursement to such officers or employees in lieu of actual expenses incurred for lodging, meals or other purposes. The rates for such reimbursements may be computed on a mileage, hourly, per diem, monthly, or other basis as the respective legislative bodies shall determine to be proper in each instance: PROVIDED, That in lieu of such reimbursements, payments for the use of personal automobiles for official travel may be established if the legislative body determines that these

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payments would be less costly to the municipal corporation or political subdivision of the state than providing automobiles for official travel. All claims authorized under this section shall be duly certified by the officer or employee submitting such claims on forms and in the manner prescribed by the state auditor. Washington State Constitution, Article 8, Section 7, Credit Not to be Loaned, states: No county, city, town or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any association, company or corporation. Attorney General Memorandum May 14, 1987, Eating and Drinking at Public Expense RCW 42.24.115 Municipal corporations and political subdivisions Charge cards for officers' and employees' travel expenses, states in part: (1) Any municipal corporation or political subdivision may provide for the issuance of charge cards to officers and employees for the purpose of covering expenses incident to authorized travel. (2) If a charge card is issued for the purpose of covering expenses relating to authorized travel, upon billing or no later than thirty days of the billing date, the officer or employee using a charge card issued under this section shall submit a fully itemized travel expense voucher. Any charges against the charge card not properly identified on the travel expense voucher or not allowed following the audit required under RCW 42.24.080 shall be paid by the official or employee by check, United States currency, or salary deduction. RCW 43.09.2855 Local governments Use of credit cards, states in part: (1) Local governments, including counties, cities, towns, special purpose districts, municipal and quasi-municipal corporations, and political subdivisions, are authorized to use credit cards for official government purchases and acquisitions. Part II. Virtual Office Environment, Section K. Credit Card Usage of the Employee Handbook, states: Employees may be issued a NoaNet credit card to charge expenses properly reimbursable by NoaNet. Personal charges or charges for expenses not reimbursable by NoaNet shall not be made on NoaNet credit cards. Part III. Benefits, Section G. Combined Leave Benefits of the Employee Handbook, states in part:

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If any employee has not used at minimum the Minimum Annual Usage itemized below between January 1 and December 31 of each calendar year the difference between the Minimum Annual Usage and the actual usage will be removed from that employees Combined Leave Benefit prior to being carried over to the next year.
NoaNet Combined Leave Benefit Accrual Schedule Annual Combined Leave Employees years Maximum Benefit Accrual of service Accumulation (approx hours per month) Less than 2 years 10 hours (1.25 days per month) 200 hours Less than 5 years 12 hours (1.5 days per month) 400 hours At least 5 years 20 hours (2.5 days per month) 600 hours
Minimum Annual Usage 40 Hours 60 Hours 80 Hours

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ABOUT THE STATE AUDITOR'S OFFICE

The State Auditor's Office is established in the state's Constitution and is part of the executive branch of state government. The State Auditor is elected by the citizens of Washington and serves four-year terms. Our mission is to work with our audit clients and citizens as an advocate for government accountability. As an elected agency, the State Auditor's Office has the independence necessary to objectively perform audits and investigations. Our audits are designed to comply with professional standards as well as to satisfy the requirements of federal, state, and local laws. The State Auditor's Office employees are located around the state to deliver services effectively and efficiently. Our audits look at financial information and compliance with state, federal and local laws on the part of all local governments, including schools, and all state agencies, including institutions of higher education. In addition, we conduct performance audits of state agencies and local governments and fraud, whistleblower and citizen hotline investigations. The results of our work are widely distributed through a variety of reports, which are available on our Web site and through our free, electronic subscription service. We take our role as partners in accountability seriously. We provide training and technical assistance to governments and have an extensive quality assurance program. State Auditor Chief of Staff Director of State and Local Audit Deputy Director of State and Local Audit Deputy Director of State and Local Audit Deputy Director of State and Local Audit Deputy Director of Quality Assurance Deputy Director of Communications Local Government Liaison Public Records Officer Main number Toll-free Citizen Hotline Troy Kelley Doug Cochran Chuck Pfeil, CPA Kelly Collins, CPA Jan M. Jutte, CPA, CGFM Sadie Armijo Barb Hinton Thomas Shapley Mike Murphy Mary Leider (360) 902-0370 (866) 902-3900

Website Subscription Service

www.sao.wa.gov www.sao.wa.gov/EN/News/Subscriptions