August 23, 2012 Palikir, Pohnpei-Internal auditors say that FSM's payroll is the largest cost center of the National government. They said that the weaknesses in the system that handles those expenditures have caused wasteful spending, abuse, and potentially fraudulent payroll transactions.
The FSM's Office of the National Public Auditor (ONPA) reported that during the 2010 and 2011 fiscal years the FSM's Department of Finance and Administration (DF&A) issued 50,863 payroll checks for a total of $30,234,355. The audit additionally covered Fiscal Year 2012 through the month of May, just four months short of the end of this fiscal year, but it didn't include the numbers for the eight months of FY 2012.
"Ultimately, the significance of the findings and the nature of the findings should be adequately alarming to motivate the implementation of strong controls. The gravity of the findings if not corrected, will eventually erode the integrity of the payroll system, if such has not already occurred," the audit said. ONPA referred some of its findings to its Compliance Investigation Division (CID) for further review. Depending on the outcome of their investigation, CID could forward their results to the FSM Department of Justice for possible prosecution of any potential payroll lawbreakers.
In its first listed finding, auditors said that significant overpayments to active employees were made automatically without detection or correction. During the sample pay period which was determined before the audit was announced and before any auditing was conducted, auditors found that 15 employees were overpaid by a total of 459.25 hours resulting in overpayments of $2,352.35.
During the sample pay period, paychecks for two employees, each for 80 hours, were issued despite the fact that zero hours were submitted to payroll and no paychecks were requested or expected for either of those two employees.
Two employees were overpaid 17 hours of overtime hours for time which was not requested and not authorized.
The payroll process is computerized and auditors found that the Payroll Module of the "Fundware" financial management software package was set up to automatically pay all "active employees" 80 hours unless manual intervention occurs. The default pay setting in the software led to problems of overpayment.
The audit said that attendance records in the operating departments, agencies and offices were minimal and many times were non-existent even though FSM law requires attendance records even for "exempt employees".
According to the FSM Personnel office, exempt employees are salaried employees but since their leave is accrued according to the number of hours they work they must submit time cards just as hourly employees are supposed to be required to do.
"The result of paying employees for more hours than they actually worked, or employees who minimally attended work are waste, abuse, and potential fraud," the audit said.
Auditors pointed out that the issue of unequally applied requirements for recording of work hours is also an employee morale issue for employees who report their exact working hours either because of their own personal integrity or because they are required to do so by their supervisors. Those employees have to dig in to their annual leave or sick time for work hours if they miss work hours during a pay period for any reason.
Employees who are not required or who don't have the personal integrity to report their actual work hours and who miss work during a pay period often have full leave and sick days at the end of a year regardless of how many hours they actually worked during the rest of the year.
It's a disincentive for honest reporting of actual hours worked.
During the two and a half year audit period, at least one dead person received payroll checks for five months. The allottee (a department, agency, or division head; eg. "the boss") approved hours for the employee.
ONPA reckons that "$1,920.33 (of $2,730.24 paid out) likely is not recoverable due to direct deposit for personal use." The money was paid out into a personal bank account and to one or more vendors for the personal debts of the deceased employee.
Another national government employee was paid for four months after their termination date. ONPA figured that a third of the money that employee collected is also unrecoverable.
Again, the employee's former boss signed off on the payroll documents authorizing payment.
"The Office of Personnel has a list of 'active' employees but it is not maintained," the audit said.
Some paychecks were issued to employees who had not yet started work.
Because of the "Fundware" default Payroll module settings, as soon as the Office of Personnel entered a newly hired employee into the system, the system was set to automatically pay the employee for 80 hours of work even if the new employee had not yet started work.
Several erroneously issued checks had to be voided and returned to DF&A because of this problem.
Not only were payroll check stocks unnumbered and unsecured, but three DF&A employees had full administrator privileges to the Fundware software that administers payroll processes. Further, there is an administrator account bearing no name that is still active on the system that has top level privileges. In 2011 that user account made 21 edits to employee master files.
A high level user of the Fundware software could make any number of changes throughout the system after which the user could wipe out any traces of those changes until they hit FSM bank accounts.
During fiscal year 2011 the Payroll manager performed over 400 edits to employee master files. A significant number of those edits were for payroll increases. The edits were made without authorization of any kind.
"Lack of monitoring of changes to employee payroll master records may have resulted in illegitimate pay increases and premiums," the audit found. Personnel Action Forms could not be found to justify many changes in employee master files. There is no documentary proof for those transactions that authorizations for changes were ever in place.
As its final finding, ONPA said that there is no plan in place in the event of a catastrophic shut down of the DF&A financial system.
Rose Akinaga, Acting Director of FSM DF&A wrote in her response that by design all of the FSM States chose a uniform system so that it would be "easier if and when there is a technical issue or in case of emergencies that the states can utilize the closest State's financial system to ensure that operations are not halted or affected." She said that various discussions had taken place between Information Technology staff and State Finance Directors for "such set up."
She promised that DF&A would work on documenting in writing, the recovery program that is in place.