Maryland Public Broadcasting Commission

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Audit Report

Maryland Public Broadcasting Commission

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• This report and any related follow-up correspondence are available to the public. Alternate formats may also be requested by contacting the Office of Legislative Audits as indicated at the bottom of the next page or through the Maryland Relay Service at 1-800-735-2258. • Please address specific inquiries regarding this report to the Audit Manager listed on the

inside back cover by telephone at (410) 946-5900.

• Electronic copies of our audit reports can be viewed or downloaded from the Internet via http://www.ola.state.md.us.

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November 24, 2003

Delegate Van T. Mitchell, Co-Chair, Joint Audit Committee Senator Nathaniel J. McFadden, Co-Chair, Joint Audit Committee Members of Joint Audit Committee

Annapolis, Maryland

Ladies and Gentlemen:

We have audited the Maryland Public Broadcasting Commission (MPBC) for the period beginning July 1, 2000 and ending April 16, 2003.

Our audit disclosed numerous deficiencies regarding the procurement of contractual services. Specifically, website design services were improperly subcontracted to an individual who had a personal relationship with an MPBC employee involved in awarding the contract, and website design services totaling $2.2 million were awarded without competitive bidding. Additionally, certain procurement transactions were executed without the required approval of the Board of Public Works, and payments to contractors were not always properly supported. We also noted certain

deficiencies related to contracts for travel services that were procured to offer tours to donors to Maryland Public Television. For example, the contracts were awarded without competitive bidding to a company whose president was a member of MPBC’s affiliated foundation.

Furthermore, bonuses paid to MPBC employees were not adequately supported by employee achievements, nor had they been reviewed by the Department of Budget and Management, as required. In addition, MPBC’s agreement with its affiliated foundation did not specify the costs to be reimbursed for support services provided by MPBC to the foundation. Finally, MPBC did not ensure that sufficient procedures and controls existed over bank accounts, purchases and disbursements, cash receipts, and equipment.

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Table of Contents

Executive Summary

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Background Information

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Agency Responsibilities 7

Financial Statement Audits 7

Status of Converting to a Digital Broadcasting Signal 7 Current Status of Findings From Preceding Audit Report 8

Findings and Recommendations

9

Website Design Contracts

Finding 1 – Website Design Services Were Improperly Subcontracted, 9 Resulting in a Possible Conflict of Interest for a MPBC Employee

Finding 2 – Website Design Contracts Totaling $2.2 Million Were Procured 10 Without Obtaining Competitive Bids

Contract Procurement and Approval

Finding 3 – Procurement Transactions Totaling Approximately $824,000 Were 11 Executed Without Required Approval From BPW

Contractor Payments

* Finding 4 – Documentation Supporting Contractor Billings Was Not Always 12 Obtained and Overpayments Were Potentially Made to Two Contractors

Bonus Awards and Management Benefits

Finding 5 – Bonus Award Plans Were Not Reviewed by DBM and Related 13 Bonus Payments Were Not Adequately Supported

Finding 6 – Management Employees Were Reimbursed for a Portion of Their 14 Home Internet and Cable Television Bills

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Travel Club

Finding 7 – Travel Service Contracts Were Awarded Without Competitive 15 Bidding and the Contract Terms Were Not Clearly Defined

Finding 8 – A Cost Benefit Analysis Was Not Performed and Travel Club 16 Activity Was Not Disclosed in MPBC’s Annual Budgets

Bank Accounts

Finding 9 – Four Bank Accounts Were Opened Without Proper Authorization 17 and Account Activity Was Not Properly Reconciled

Purchases and Disbursements

* Finding 10 – Proper Internal Controls Were Not Established Over Purchasing 18 and Disbursement Transactions

Cash Receipts

Finding 11 – Cash Receipts Were Not Adequately Controlled 19 Finding 12 – Transfers from the Lockbox Account to the State’s Main Depository 20

Account Were Not Timely

Affiliated Foundation

Finding 13 – Costs to be Reimbursed to MPBC for Services Provided to the 21 Foundation Were Not Specified, and MPBC Costs Significantly Exceeded the Amount Reimbursed

Equipment

Finding 14 – Missing Equipment Items Were Not Adequately Investigated 22

Audit Scope, Objectives, and Methodology

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Agency Response

Appendix A

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Executive Summary

Legislative Audit Report on the Maryland Public Broadcasting Commission (MPBC) November 2003

• Website design services totaling approximately $54,000 were improperly

subcontracted to an individual who had a personal relationship with the MPBC employee who selected the vendor and monitored the contract. Furthermore, contract terms prohibited the contractor from subcontracting any of the agreed-upon services.

MPBC should properly monitor contract provisions that prohibit the subcontracting of work to be performed. MPBC should also establish procedures to avoid conflicts of interest.

• MPBC procured six website design service contracts totaling approximately $2.2 million without obtaining competitive bids or, for certain contracts, approval from the Board of Public Works (BPW), because it contended that a

procurement exemption applied to this circumstance. Both the procurement advisor for the BPW, and legal counsel to the General Assembly, have stated that the exemption only applies to artist services for television programs. MPBC should obtain competitive bids and Board of Public Works approval for website design contracts or obtain an Opinion of the Attorney General as to why such bids are not required.

• MPBC circumvented State procurement regulations and required approvals from the BPW and the Department of General Services (DGS) for certain procurement transactions. For example, MPBC artificially divided approximately $540,000 of construction related services into numerous

individual contracts, each valued at $25,000 or less, all of which were awarded to the same vendor.

MPBC should comply with State procurement regulations, and obtain Board of Public Works and DGS approval as required. Additionally, MPBC should report the

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• Supporting documentation was not always obtained to verify contractor billings. Overpayments may have been made to two contractors.

MPBC should obtain and review documentation supporting contractor billings, including subcontractor costs billed by the contractor, and recover any overpayments identified.

• Bonus payments totaling approximately $760,000 were made during the audit period even though the payments were not submitted to DBM for their review, as required. Furthermore, certain bonus payments were not supported by the achievement of established goals.

MPBC should submit bonuses to DBM for review as required and maintain documentation to support the bonus payments.

• Travel agency service contracts, procured to offer tours to donors to Maryland Public Television, were awarded without competitive bidding. The contracts were awarded to an agency whose president was a member of MPBC’s affiliated Foundation. In addition, MPBC had not performed a comprehensive cost benefit analysis of its travel club activity or disclosed such activity in its annual budget. MPBC should competitively bid travel agency service contracts, should periodically perform a comprehensive cost benefit analysis of the financial activity of the travel club, and should disclose this activity in its annual budget submissions.

• Four bank accounts were improperly opened by a MPBC employee without authorization from the State Comptroller and Treasurer.

MPBC should establish procedures to ensure that bank accounts are not opened without proper authorization.

• The agreement between MPBC and its affiliated Foundation did not specify the costs to be reimbursed to MPBC for services provided.

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Background Information

Agency Responsibilities

The Maryland Public Broadcasting Commission (MPBC) is responsible for operating and maintaining a system of regional and local facilities to provide educational and cultural television and radio programs throughout the State. MPBC is responsible for the

preparation, content, and presentation of programs for the general public. MPBC operates six television stations located in Annapolis, Baltimore, Frederick, Hagerstown, Oakland, and Salisbury. MPBC consists of eleven members who are appointed by the Governor.

During fiscal year 2003, MPBC operating expenditures totaled approximately $30.8 million, and consisted of $10.5 million (34%) in general funds, $17.5 million (57%) in special funds, and $2.8 million (9%) in federal funds. In addition, during the audit period MPBC’s capital expenditures totaled approximately $7.8 million, and primarily related to digital conversion projects.

Financial Statement Audits

In compliance with the audit requirements established by the Corporation for Public Broadcasting (a Federally-funded, non-profit organization that provides funds to MPBC as well as other public broadcasting stations), MPBC engaged an independent certified public accounting firm to perform audits of the combined financial statements of MPBC and the Maryland Public Broadcasting Foundation, Inc., an affiliated non-profit foundation, for the fiscal years ended June 30, 2000, 2001 and 2002. In the related audit reports, the firm stated that the combined financial statements presented fairly, in all material respects, the financial position of MPBC and the Foundation as of June 30, 2002, 2001, and 2000 and the respective changes in net assets and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Status of Converting to a Digital Broadcasting Signal

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MPBC filed a second request with the FCC to further extend the timeframe of facilities construction for two television stations until May 9, 2004. As of November 4, 2003, MPBC had not received a response to its second request. Failure to convert to a digital broadcasting signal could result in the FCC terminating a television station’s broadcasting license.

Current Status of Findings From Preceding Audit Report

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Findings and Recommendations

Website Design Contracts

Finding 1

Website design services were improperly subcontracted to an individual who had a personal relationship with the MPBC employee responsible for selecting the primary contractor and monitoring the contract.

Analysis

Website design services were improperly subcontracted to an individual who had a personal relationship with the MPBC employee, who, according to MPBC management personnel, had selected the vendor, awarded the contract and was responsible for monitoring the related contract. We were advised by the owner of the website design firm awarded the contract, valued at $176,500, that this individual worked as a subcontractor on the MPBC website design project, at a cost of $54,000. However, based on our review of the contract and our discussions with legal counsel to the Maryland General Assembly, the website design firm was specifically prohibited from subcontracting any of the services to be performed under the agreement. In addition, while the employees of the firm awarded the contract, and the specific MPBC employees who would work on the project were

specifically identified in the grant proposal submitted to the Corporation for Public

Broadcasting (the grantor agency for this project), the subcontractor was not named in the proposal.

The aforementioned MPBC employee and the subcontractor resided at the same home address at the time the contract was awarded, and the subcontractor was named in the employee’s personnel file as an emergency contact. Consequently, the awarding of this website design contract at a minimum, raises concerns of a possible conflict of interest. This situation may have occurred, in-part, because the website design services were

procured without obtaining competitive bids (see Finding 2). At the time of our review, the aforementioned MPBC employee was no longer employed by MPBC. Based on the results of our review, this matter has been referred to appropriate law enforcement officials.

Recommendation 1

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Finding 2

Website design services totaling approximately $2.2 million were procured without obtaining competitive bids and Board of Public Works approval, when applicable. Analysis

MPBC procured six website design contracts during the audit period totaling approximately $2.2 million without obtaining competitive bids. In addition, for four of these contracts, approval from the Board of Public Works (BPW) was not obtained as required when the contract value exceeds $200,000. We were advised by MPBC management personnel that bids were not obtained because an exemption from State procurement regulations was applied that permits MPBC to obtain artist services for educational and cultural television productions without competitive bidding.

In March 2002, MPBC’s legal counsel provided an advice of counsel regarding the use of this procurement exemption for website design contracts, concluding that such services fall within the exemption due to the heavily artistic nature of website design. The advice further concluded that if a vendor is named in a grant proposal, rather than awarding the contract competitively, the contract is to be awarded to the vendor specified in the proposal. However, both the Procurement Advisor for the BPW and Counsel to the General Assembly have stated that the exemption applies only to television productions, as specifically stated in the regulations, and not to website design services which are not mentioned in the exemption. Furthermore, we were advised by the applicable federal and private grantor agencies that naming a vendor in a grant proposal does not absolve MPBC from complying with State procurement regulations prior to naming the vendor in the proposal.

Recommendation 2

We recommend that, in the future, MPBC obtain competitive bids and approval from the BPW, as applicable, for website design contracts unless an Opinion of the

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Contract Procurement and Approval

Finding 3

MPBC circumvented State procurement regulations and did not obtain required approvals of the Board of Public Works and the Department of General Services for certain procurement transactions.

Analysis

MPBC did not always follow State procurement regulations, and did not obtain approvals from the Board of Public Works (BPW) and the Department of General Services (DGS) for certain procurement transactions:

• MPBC circumvented State procurement regulations by artificially dividing

approximately $540,000 of construction services related to digital conversion into numerous individual contracts, each valued at $25,000 or less, all of which were awarded to a single vendor. By procuring construction services in this manner, MPBC followed small procurement regulations, which do not require approval from applicable control entities. Had this procurement not been artificially divided, approval of BPW and DGS would have been required.

• MPBC did not obtain the required approval of BPW for modifications to two contracts: a service contract for warehousing and distribution of membership promotional items, and a broadcast antenna installation contract. The contract modifications were valued at $225,000 and $58,600, respectively.

State procurement regulations provide that a procurement may not be divided to use the small procurement method (that is, for purchases less than $25,000). These regulations also specify that construction service contracts exceeding $200,000 must be approved by both DGS and BPW, and that contract modifications exceeding $50,000 must be approved by BPW.

Recommendation 3

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Contractor Payments

Finding 4

Supporting documentation was not always obtained to verify certain contractor billings, and overpayments were potentially made to two contractors.

Analysis

MPBC did not always obtain documentation supporting contractor billings, and overpayments were potentially made to two contractors. Specifically, our test of 32 contractual services payments made during the audit period, totaling approximately $2 million, disclosed 23 payments that were not adequately supported:

• MPBC did not verify the propriety of six payments totaling approximately $489,000 made under a media advertising contract. The majority of the costs billed under this contract represented amounts paid to subcontractors for the purchase of media advertising (such as newspaper and radio). However, the contractor did not submit subcontractor itemized invoices to MPBC to support the amounts billed, as required by the contract. A similar situation was commented upon in our two preceding audit reports. Additionally, the payments included a contractor markup of up to 16 percent of media advertising costs even though the contract only allowed for a markup of 12 percent. For example, one payment of $305,343 included a 14 percent markup,

resulting in an overpayment of $5,674. During our audit period, payments to the media advertising contractor totaled approximately $1.8 million.

• Nine payments for website design and construction services totaling approximately $106,000, billed on a time and materials basis, were made without obtaining

documentation (such as timesheets) to support the amount billed. Additionally, seven payments totaling $814,000 for website design services were contingent upon the satisfactory completion of contract deliverables (such as content development and testing); however, there was no documentation of verification that the related contract deliverables were received prior to the payments being made to the contractor.

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Recommendation 4

We again recommend that MPBC obtain and review documentation supporting contractor billings, including subcontractor costs billed by the contractor and receipt of contract deliverables. Additionally, we recommend that MPBC obtain

documentation supporting amounts previously paid to the media advertising and membership warehousing distribution and shipping contractors, verify the propriety of payments made, and recover any overpayments identified, including the

aforementioned $5,674 and $5,700.

Bonus Awards and Management Benefits

Finding 5

Bonus payments totaling approximately $760,000 made during the audit period were not submitted to the Department of Budget and Management for review as required by State law, and were not always adequately supported.

Analysis

Bonus payments totaling approximately $760,000 were made during the audit period even though the payments were not appropriately reviewed or fully supported. Specifically, our audit disclosed the following conditions:

• MPBC did not submit management and staff bonus plans to the Department of Budget and Management (DBM) for review during the audit period as required by State law. Specifically, State law requires MPBC to submit certain changes to its salary plan, such as bonus payments, to DBM for review and determination as to whether such changes would have an adverse effect on comparable State jobs. In addition, the bonuses were not specifically disclosed in MPBC’s annual budget submissions.

• Bonus payments were contingent on MPBC’s achievement of certain financial and mission goals as approved by MPBC’s Board. However, our review of the fiscal year 2001 bonus plan disclosed that goals were not adequately established to support the related bonus payments, which totaled approximately $384,000. Specifically, the plan goals were not developed until December 2000, and were often vague and

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• The calculation of bonus payments for certain management employees for fiscal year 2001 was not adequately supported. The fiscal year 2001 management bonus plan stipulated that 60 percent of each management employee’s bonus payment was to be based on several individual performance criteria. However, individual performance criteria had not been established for five of six management employees tested. Bonus payments made to these five employees, which were included in the $384,000 noted above, totaled $80,790.

Recommendation 5

We recommend that MPBC submit bonuses to DBM for review as required by State law, and that such payments be specifically disclosed in MPBC’s annual budget submissions. We also recommend that MPBC establish goals specific to its mission, financial goals, and individual goals prior to the beginning of the applicable fiscal year. Finally, we recommend that bonus payments be made in accordance with the bonus plans approved by the MPBC Board.

Finding 6

MPBC reimbursed 25 management employees a total of approximately $7,600 for a portion of the cost of their home internet and cable television bills. These payments were not specifically identified in MPBC’s budget requests.

Analysis

MPBC reimbursed 25 management employees for a portion of the cost of their home internet and cable television (excluding pay-per-view costs) bills. Such reimbursements, which totaled approximately $7,600 during the period from March 2001 to October 2002, were not specifically identified in MPBC’s budget requests. Although the reimbursement program was discontinued in October 2002 due to budget constraints, we were advised by MPBC management personnel that the reimbursement program would be renewed when MPBC’s fiscal situation improves.

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Recommendation 6

We recommend that MPBC obtain specific budgetary authorization from the General Assembly if the reimbursement program is reinstated.

Travel Club

MPBC operates a travel club which offers tours to individuals who have donated $75 or more to Maryland Public Television. During the audit period, tours were taken to Ireland, Italy, Great Britain and China. MPBC contracts with a travel agency to arrange the tours and the travel agency pays a portion of its earned commissions to MPBC. Payments made by the travel agency to MPBC totaled approximately $24,400 for the four completed tours.

Finding 7

Four travel agency service contracts were awarded without competitive bidding to an agency whose president was a member of the Maryland Public Broadcasting

Foundation. In addition, contract terms were not always clearly defined, resulting in questionable deductions from the amounts paid to MPBC, totaling approximately $10,100.

Analysis

MPBC did not obtain competitive bids prior to awarding four travel agency service contracts. Rather, the contracts were awarded to a travel agency whose president was a member of the Maryland Public Broadcasting Foundation, thus creating a potential conflict of interest. We were advised by MPBC management personnel that the travel agency was selected because the Foundation member could help ensure that MPBC received the best possible terms and accommodations for the tours. However, without obtaining competitive bids for travel services, there is no assurance that MPBC received the maximum financial benefit.

MPBC’s conflict of interest policy for its Foundation members requires conflicts of interest to be brought to the attention of the Foundation, and encourages, but does not require Foundation members to complete a questionnaire annually disclosing any known conflicts of interests to MPBC. Although the Foundation reviewed and approved the business

relationship between MPBC and the travel agency, the aforementioned Foundation member did not complete the conflict of interest questionnaire. Consequently, this Foundation member’s potential conflict of interest was not formally disclosed to MPBC.

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and the travel agency was not prepared for one tour. We identified questionable deductions from the amount remitted to MPBC by the travel agency totaling approximately $10,100. For example, the travel agency reduced the amount paid to MPBC for one tour by

approximately $3,400 because the departure airport was changed. However, the

contractual agreement between MPBC and the travel agency was not modified to address this, and MPBC had no documentation that the travel agency incurred any additional costs as a result of this change.

Recommendation 7

We recommend that, in the future, MPBC obtain competitive bids for travel agency contracts and clearly define the terms of the contractual agreements with travel agencies. We also recommend that MPBC revise the conflict of interest policy to require Foundation members to report potential conflicts of interest to MPBC. Finally, we recommend that MPBC review payments previously remitted by the travel agency and recover any amounts improperly retained by the agency.

Finding 8

A comprehensive cost benefit analysis of travel club activity had not been performed by MPBC, nor could MPBC substantiate that the travel club met its intended

purpose. Such activity was not disclosed in MPBC’s annual budgets. Analysis

MPBC had not performed a comprehensive cost benefit analysis of travel club activity, nor could MPBC substantiate that the travel club met its intended purpose of securing large donations. In addition, such activity was not disclosed in MPBC’s annual budgets.

An analysis of the income and expenses for each tour prepared by MPBC concluded that the monetary benefits exceeded the costs for each trip; however, the analyses were not comprehensive because they did not consider certain significant costs associated with travel club activities. For example, we were advised that two employees dedicated approximately 30 percent of their time to travel club activities with related payroll costs totaling

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We were advised by MPBC management personnel that the main purpose of the travel club is to establish close relationships with MPBC supporters and secure large future donations; however, as of April 2003, MPBC could not substantiate that large donations had been received as a direct result of the travel club tours.

Recommendation 8

We recommend that MPBC perform a comprehensive cost benefit analysis of travel club activity and determine whether it is meeting its intended purpose. Should MPBC opt to continue the travel club, we recommend that travel club financial activity be reflected in MPBC’s annual budgets.

Bank Accounts

Finding 9

Four bank accounts were opened and controlled by a MPBC employee without authorization from the Comptroller of the Treasury and the State Treasurer, and periodic reconciliations of the activity related to these accounts were not properly performed.

Analysis

Four bank accounts were opened by a MPBC employee during fiscal years 2002 and 2003 without authorization from the Comptroller of the Treasury and the State Treasurer. The accounts were established and controlled by the employee, and used to process credit card transactions via MPBC’s website for viewer donations, merchandise sales, and subscriptions to MPBC’s on-line educational services. However, MPBC management personnel advised us that they did not become aware of these accounts until after the employee resigned in March 2003. As of March 31, 2003, funds available in these four accounts, which totaled approximately $79,500, had not been transferred to the State’s main depository account. Furthermore, bank and credit card fees totaled approximately $3,300 through April 2003. MPBC personnel advised us that they have requested a refund of all such fees from the bank.

In addition, MPBC did not periodically reconcile website credit card sales activity per its internal records with the corresponding activity reflected on the credit card merchant

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The Comptroller of the Treasury’s Accounting Procedures Manual specifies that bank accounts must be approved in advance by the Comptroller and the State Treasurer, and requires that all funds received by state agencies be deposited into the State Treasury unless specifically exempted.

Recommendation 9

We recommend that MPBC establish procedures to ensure that bank accounts are not opened without authorization from the Comptroller of the Treasury and the State Treasurer. We also recommend that MPBC transfer any remaining funds in the bank accounts to the State’s main depository account and close the accounts, unless appropriate authorization is obtained to keep them open. In addition, we recommend that all future website credit card collections be deposited directly to the State’s main depository account. Furthermore, MPBC should continue its efforts to obtain a refund of the aforementioned bank and credit card fees. Finally, we recommend that MPBC periodically reconcile website credit card sales per its records with website sales reflected on the merchant account statements, and that all differences, including the aforementioned $6,600, be investigated and resolved.

Purchases and Disbursements

Finding 10

Proper internal controls were not established over the processing of purchasing and disbursement transactions.

Analysis

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Recommendation 10

We again recommend that MPBC fully use the available FMIS security features by establishing independent on-line approval requirements for all critical purchasing and disbursement transactions, and on-line electronic comparison of critical documents for the purchase of goods. We also recommend that the capability to modify online approval rules be assigned to an employee who cannot process such transactions. We advised MPBC on accomplishing the needed separation of duties using existing personnel.

Cash Receipts

Finding 11

MPBC had not established adequate control over cash receipts. Analysis

Internal control over cash receipts was inadequate. Our audit disclosed the following deficiencies:

• Collections received in the mail and initially recorded on a mail log were not always verified to validated deposit slips. Due to a change in procedures, adequate deposit verifications have not been performed since January 2003. Consequently there was no assurance that recorded collections were deposited. Furthermore, the employee

responsible for preparing the bank deposits had the ability to adjust recorded deposits in FMIS. During the period from January 2003 to April 2003, recorded collections totaled approximately $4 million. Adjustments processed to reduce deposits recorded in FMIS totaled approximately $75,000 during fiscal year 2002.

• The date collections were initially received was not reflected on the mail log. Rather, the mail log reflected the date that MPBC anticipated depositing the collections. Consequently, the timeliness of MPBC’s bank deposits could not be determined.

• Credit card refunds were not subject to supervisory review and approval. Additionally, four employees had the ability to initiate refunds, record the refunds on MPBC’s membership database, and process the refunds using a credit card machine. Credit card refunds totaled approximately $45,800 during fiscal year 2002.

Recommendation 11

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employees with the ability to adjust bank deposits recorded in FMIS not have access to the related cash receipts. Finally, we recommend that credit card refunds be reviewed and approved by supervisory personnel, and that the employees who initiate and record refunds on the membership database be denied the ability to process refunds. We advised MPBC on accomplishing the needed separation of duties using existing personnel.

Finding 12

MPBC did not make timely transfers from the lockbox account to the State’s

depository account, resulting in a loss of investment income of approximately $9,600 during the audit period.

Analysis

Transfers from the MPBC lockbox account to the State’s main depository account were not timely. Specifically, MPBC transferred funds sporadically only after the daily deposits had been verified to MPBC’s membership records to ensure they were properly posted to member accounts. Our test of ten lockbox deposits totaling approximately $176,000 received during fiscal year 2002 and 2003 disclosed that nine deposits totaling

approximately $168,000 were not transferred to the State’s main depository account for periods ranging from 5 to 15 business days after receipt. If MPBC had transferred funds received during our audit period on the next business day after receipt, we estimate that the State could have earned investment income totaling approximately $9,600.

The State Treasurer’s Office contracted with a bank to provided lockbox services to State agencies, including MPBC. Although the State’s master banking agreement requires the bank to transfer the available lockbox account balance to the State’s main depository account each day, such transfers were not being processed by the bank unless directed by MPBC. During fiscal year 2003, collections received via the lockbox account totaled approximately $2.6 million.

Recommendation 12

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Affiliated Foundation

Finding 13

MPBC’s agreement with its affiliated Foundation did not specify the costs to be reimbursed for services provided by MPBC to the Foundation, and such costs significantly exceeded the amount reimbursed by the Foundation.

Analysis

The agreement between MPBC and its affiliated Foundation did not specify the costs to be reimbursed to MPBC for services provided to the Foundation. Rather, the Foundation reimbursed MPBC $30,000 annually, which we were advised by MPBC management personnel related to rental of office space and secretarial services provided to the

Foundation by two MPBC employees. However, we identified 13 MPBC employees who provide support services to the Foundation, including one employee who advised that a significant amount of time (approximately 70 percent) was spent on Foundation-related responsibilities. If that is so, the payroll cost of services provided to the Foundation by this one employee alone totaled approximately $85,700 for fiscal years 2002 and 2003

combined, which significantly exceeds the amount reimbursed by the Foundation.

MPBC’s affiliated Foundation exists to support the objectives of MPBC through

fundraising programs and contributions from private and public sources. We were advised by MPBC management personnel that although MPBC makes periodic draws from the Foundation for general support of MPBC’s mission, the draws are not intended to

reimburse the cost of support services provided by MPBC to the Foundation. During fiscal year 2002 and 2003, MPBC’s draws from the Foundation totaled $5.3 million and

$150,000, respectively.

Recommendation 13

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Equipment

Finding 14

MPBC did not investigate missing items identified during its June 2002 physical inventory of equipment.

Analysis

MPBC could not provide documentation that it had investigated missing items identified during its June 2002 physical inventory of equipment. Specifically, 49 items (for example, cameras, recording equipment) with a book value of approximately $264,000 were

identified as missing during the physical inventory. However, as of May 2003, there was no evidence that MPBC had investigated these missing items. The Department of General Services’ Inventory Control Manual requires that physical inventory variances be

investigated and resolved. According to MPBC’s records, as of June 30, 2002, the book value of MPBC’s equipment totaled approximately $33.8 million.

Recommendation 14

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Audit Scope, Objectives and Methodology

We audited the Maryland Public Broadcasting Commission (MPBC) for the period beginning July 1, 2000 and ending April 16, 2003. The audit was conducted in accordance with generally accepted government auditing standards.

As prescribed by the State Government Article, Section 2-1221 of the Annotated Code of Maryland, the objectives of this audit were to examine MPBC’s financial transactions, records and internal control, and to evaluate its compliance with applicable State laws, rules and regulations. We also determined the status of the findings contained in our preceding audit report.

In planning and conducting our audit, we focused on the major financial related areas of operations based on assessments of materiality and risk. Our audit procedures included inquiries of appropriate personnel, inspection of documents and records, and observation of MPBC’s operations. We also tested transactions and performed other auditing procedures that we considered necessary to achieve our objectives. Data provided in this report for background or informational purposes were deemed reasonable, but were not independently verified.

MPBC’s management is responsible for establishing and maintaining effective internal control. Internal control is a process designed to provide reasonable assurance that objectives pertaining to the reliability of financial records, effectiveness and efficiency of operations including safeguarding of assets, and compliance with applicable laws, rules and regulations are achieved.

Because of inherent limitations in internal control, errors or fraud may nevertheless occur and not be detected. Also, projections of any evaluation of internal control to future periods are subject to the risk that conditions may change or compliance with policies and procedures may deteriorate.

Our reports are designed to assist the Maryland General Assembly in exercising its legislative oversight function and to provide constructive recommendations for improving State operations. As a result, our reports generally do not address activities we reviewed that are functioning properly.

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and/or comply with applicable laws, rules and regulations. Our report also includes conditions regarding significant instances of noncompliance with applicable laws, rules or regulations.

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Findings and Recommendations

Web Site Design Contracts

Finding 1

Web site design services totaling $54,000 were improperly subcontracted to an individual who had a personal relationship with the MPBC employee responsible for selecting the primary contractor and monitoring the contract.

Recommendation 1

We recommend that MPBC monitor vendor compliance with the terms of contractual agreements, including provisions that prohibit the subcontracting of work to be performed. We also recommend that MPBC establish procedures to avoid conflicts of interest.

Response:

MPBC is currently monitoring vendor compliance with the terms of agreements. Our reading of the contract indicated that assignment was prohibited but not subcontracting. However, all new contracts will be written with clearly-stated provisions regarding

assignment and subcontracting rights.

MPBC will establish procedures to avoid conflicts of interest.

Finding 2

Web site design services totaling approximately $2.2 million were procured without obtaining competitive bids and Board of Public Works approval, when applicable. Recommendation 2

We recommend that, in the future, MPBC obtain competitive bids and approval from the BPW, as applicable, for Web site design contracts unless an Opinion of the Attorney General is obtained that provides for this exemption. We also recommend that MPBC obtain retroactive approval from the BPW for the aforementioned contracts, unless they are determined exempt.

Response:

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and cultural television productions” (hereinafter, the “artist exemption”), based in part on advice from its Assistant Attorneys General.

Going forward, however, unless MPBC first obtains an opinion from the Office of the Attorney General Central Office concluding that such contracts are within the artist exemption, MPBC will no longer apply the artist exemption to such contracts. Instead, MPBC will procure such contracts in accordance with State procurement law.

We do not believe that retroactive approval is warranted in this case. MPBC, relying on advice of counsel, felt that these contracts came within the exemption. We have agreed to change our interpretation of the artist exemption going forward as explained above. We understood from our meeting with the legislative auditors that that would be satisfactory and do not feel we should have to take these items retroactively to the BPW.

Contract Procurement and Approval

Finding 3

MPBC circumvented State procurement regulations and did not obtain required approvals of the Board of Public Works and the Department of General Services for certain

procurement transactions. Recommendation 3

We recommend that MPBC comply with State procurement regulations by not dividing contracts to avoid required approvals. We also recommend that in the future, MPBC obtain BPW and DGS approvals as required. Finally, we recommend that MPBC report the aforementioned procurement transactions to BPW and DGS.

Response:

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Contractor Payments

Finding 4

Supporting documentation was not always obtained to verify certain contractor billings, and overpayments were potentially made to two contractors.

Recommendation 4

We again recommend that MPBC obtain and review documentation supporting contractor billings, including subcontractor costs billed by the contractor and receipt of contract deliverables. Additionally, we recommend that MPBC obtain documentation supporting amounts previously paid to the media advertising and membership warehousing

distribution and shipping contractors, verify the propriety of payments made, and recover any overpayments identified, including the aforementioned $5,674 and $5,700.

Response:

MPBC will obtain and review documentation supporting contractor billings including subcontractor costs. MPBC is in the process of recovering any overpayment and will maintain documentation supporting acceptance of contract deliverables. MPBC has obtained documentation supporting amounts previously paid to the warehousing

distribution contractor and has determined there was no overpayment of $5,700 to recover. In fact, a new, senior–level supervisor is now personally overseeing all media advertising to ensure future compliance with documentation requirements.

MPBC was receiving tear sheets from the advertising agency for its work and was advised by previous auditors that this was acceptable.

Bonus Awards and Management Benefits

Finding 5

Bonus payments totaling approximately $760,000 made during the audit period were not submitted to the Department of Budget and Management for review as required by State law, and were not always adequately supported.

Recommendation 5

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recommend that bonus payments be made in accordance with the bonus plans approved by the MPBC Board.

Response:

It should be noted that prior to adapting an incentive plan MPBC, did indeed send the plan to DBM and received no adverse comments. Any payouts that year were made in accordance with the Plan. Therefore, no further notification was required.

Estimates for pay-for-performance and incentive pay were included in each annual budget under sub-object 0110 Misc. Adjustments per instructions of John Pirro, DBM’s director of administration. In fact, Mr. Pirro had indicated to MPBC that other agencies with this authority also used this sub-object. We included 2% of salaries as part of our annual estimates for pay-for-performance and incentive pay. In fact, with each budget

submission, a summary page notation conspicuously indicated that MPBC used pay-for-performance and incentive pay and stressed that, on the other hand employees did not receive cost of living adjustments or increments. Both the DBM budget analyst and the Legislative Services budget analyst were aware of the salary authority granted to MPBC and were aware that sub-object 0110 was being utilized. All payments will continue to be made in accordance to bonus plans approved by MPBC. Clear goals will continue to be established and their attainment documented.

Finding 6

MPBC reimbursed 25 management employees a total of approximately $7,600 for a portion of the cost of their home internet and cable television bills. These payments were not specifically identified in MPBC’s budget requests.

Recommendation 6

We recommend that MPBC obtain specific budgetary authorization from the General Assembly if the reimbursement program is reinstated.

Response:

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visitors: how such advancements are being used in everyday settings; and what problems or opportunities the technology presents to the station.

Because MPBC key employees are on the receiving end of so many inquiries about the technology from average citizens, it remains vital that MPBC managers are conversant about such services and that they continually seek ways in which MPBC can capitalize on the emerging digital opportunities. We believe this was appropriate and beneficial to MPBC.

The reimbursements were discontinued in October 2002 due to budgetary restraints. We will disclose this in our budget submissions if the reimbursements are reinstated.

Travel Club

Finding 7

Four travel agency service contracts were awarded without competitive bidding to an agency whose president was a member of the Maryland Public Broadcasting Foundation. In addition, contract terms were not always clearly defined, resulting in questionable deductions from the amounts paid to MPBC, totaling approximately $10,100.

Recommendation 7

We recommend that, in the future, MPBC obtain competitive bids for travel agency contracts and clearly define the terms of the contractual agreements with travel agencies. We also recommend that MPBC revise the conflict of interest policy to require Foundation members to report potential conflicts of interest to MPBC. Finally, we recommend that MPBC review payments previously remitted by the travel agency and recover any amounts improperly retained by the agency.

Response:

MPBC and its Assistant Attorneys General concluded in good faith that the contracts with the travel agency were not subject to procurement. The travel agency contracts did not involve an expenditure of State funds and were expected to be revenue-producing contracts. Section 11-202(3) of the State Finance and Procurement Article enumerates certain categories of non-expenditure revenue-producing contracts that are subject to procurement, and the travel agency contracts are not within the enumerated categories. In addition, the contracts with the travel agency were considered a donation in that, in

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MPBC will competitively bid any future travel service contracts.

As to the conflict of interest issue arising from the involvement of a member of the Foundation board of directors with the travel agency, Section 24-207 of the Education Article provides for MPBC’s affiliated Foundation to operate subject to policies adopted by the MPBC and provides for those policies pertaining to conflict of interest to be approved by the State Ethics Commission. Pursuant to this statutory authority, MPBC adopted a conflict of interest policy for the Foundation which was approved by the State Ethics Commission. Pursuant to that policy, the business relationship with the Foundation board member’s travel agency was presented to the Executive Committee of the Foundation and approved. The business relationship was also discussed at a meeting of the entire board of the Foundation which includes two members of the Commission. So, the business

relationship was not only approved in accordance with the State Ethics Commission approved policy but also widely disclosed.

MPBF has revised its conflict of interest policy to have Foundation board members file an annual disclosure of any conflicts of interest.

MPBC will seek to recover any funds that may be due us. The sum of $3,016 was recovered prior to September, and $2,595 was recovered in November.

Finding 8

A comprehensive cost benefit analysis of travel club activity had not been performed by MPBC, nor could MPBC substantiate that the travel club met its intended purpose. Such activity was not disclosed in MPBC’s annual budgets.

Recommendation 8

We recommend that MPBC perform a comprehensive cost benefit analysis of travel club activity and determine whether it is meeting its intended purpose. Should MPBC opt to continue the travel club, we recommend that travel club financial activity be reflected in MPBC’s annual budgets.

Response:

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MPBC did receive one major donor grant last year in the amount of $355,000. Most universities cultivate major donors in a similar manner.

Travel Club financial activity is included in our Program P003 budget estimates.

Bank Accounts

Finding 9

Four bank accounts were opened and controlled by a MPBC employee without

authorization from the Comptroller of the Treasury and the State Treasurer, and periodic reconciliations of the activity related to these accounts were not properly performed. Recommendation 9

We recommend that MPBC establish procedures to ensure that bank accounts are not opened without authorization from the Comptroller of the Treasury and the State Treasurer. We also recommend that MPBC transfer any remaining funds in the bank accounts to the State’s main depository account and close the accounts, unless appropriate authorization is obtained to keep them open. In addition, we recommend that all future Web site credit card collections be deposited directly to the State’s main depository account. Furthermore, MPBC should continue its efforts to obtain a refund of the

aforementioned bank and credit card fees. Finally, we recommend that MPBC periodically reconcile Web site credit card sales per its records with Web site sales reflected on the merchant account statements, and that all differences, including the aforementioned $6,600, be investigated and resolved.

Response:

MPBC financial personnel discovered the existence of the bank accounts (titled in the name of MPBC), arranged for them to be closed permanently, and transferred affected dollars ($77,716 initially) to the State’s depository account on 4/22/03 and prior to the issuance of auditors’ discussion notes. A copy of that transfer document was provided to the auditors. Moreover, upon that discovery, MPBC management reported the infraction to the

members of the Budget & Compensation and Audit committees and then to the full

Maryland Public Broadcasting Commission. Further, the office of the State Treasurer was notified by MPBC management in April as were officers of the bank immediately upon discovery of the existence of the accounts.

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MPBC will widely disseminate its procedures to ensure that all employees understand that they may not open a bank account of any type without authorization. We rely on the State Treasurer’s office to enforce elements of its contract with banks to ensure that they do not open accounts in violation of agreements with their client agencies.

We will periodically reconcile Web site credit card sales per internal records to Web site sales reflected on the merchant account statements. Similarly, we will investigate any differences that are revealed as a result of these reconciliations.

Purchases and Disbursements

Finding 10

Proper internal controls were not established over the processing of purchasing and disbursement transactions.

Recommendation 10

We again recommend that MPBC fully use the available FMIS security features by establishing independent on-line approval requirements for all critical purchasing and disbursement transactions, and on-line electronic comparison of critical documents for the purchase of goods. We also recommend that the capability to modify online approval rules be assigned to an employee who cannot process such transactions. We advised MPBC on accomplishing the needed separation of duties using existing personnel.

Response:

There were no improper transactions and our independent auditors did not note this finding as an internal control weakness. This recommendation refers to the separation of duties in Finance & Accounting which comprises six employees; four of those are working on purchasing and disbursement transactions. It is extremely difficult (if not impossible) to have complete separation of duties with this size staff and still process $17,000,000 in

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Cash Receipts

Finding 11

MPBC had not established adequate control over cash receipts. Recommendation 11

We recommend that the mail log reflect the date collections were received by MPBC, and that an employee, independent of the cash receipts functions, verify collections recorded in the mail log to subsequent deposit. Additionally, we recommend that employees with the ability to adjust bank deposits recorded in FMIS not have access to the related cash receipts. Finally, we recommend that credit card refunds be reviewed and approved by supervisory personnel, and that the employees who initiate and record refunds on the membership database be denied the ability to process refunds. We advised MPBC on accomplishing the needed separation of duties using existing personnel.

Response:

During the time period covered by the audit (33 months), there was a brief interval of approximately four months when the mail log was not being verified to the deposit. However, prior to and after this interval, such reconciliation was and remains standard operating procedure.

Staff had used the next-day date on the mail log (the day the deposit was made) but is currently using the same-day date.

We concur that a staff member responsible for preparing a bank deposit must not be in a position to alter the deposit in any way, and our internal procedures are now amended to incorporate that safeguard.

We concur that credit card refunds should have supervisory review and approval and that the employees who initiate and record refunds on the membership database be denied the ability to process the refunds on the credit card machine. Our supervisors in the

membership department will be advised of these requirements.

Finding 12

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Recommendation 12

We recommend that MPBC, in conjunction with the State Treasurer’s Office, ensure that the bank transfers the available balance of the lockbox receipts to the State’s main

depository account on a daily basis, as required by the State’s master banking agreement.

Response:

We understand that the State’s Master Banking Agreement governing lockbox services requires the financial institution (in this case, SunTrust Bank) to perform an automated daily sweep of money to the appropriate State depository account. As a user of lockbox services (and a lockbox client of SunTrust for the past two-to-three years), we remain disappointed that the automatic sweep feature has thus far been denied to us.

Having to rely on a daily manual transfer (that is, a specific call from an MPT membership unit staffer to instruct the bank to transfer the money), MPBC is now taking steps to build in procedures and back-up responsibilities to ensure that the daily phone call is placed to SunTrust. We have contacted the State Treasury to advise officials there that the daily sweep is not available at this time. If it becomes available, MPBC plans to take advantage of this feature being performed by SunTrust so that deposits occur as fast as possible. The final responsibility for enforcement of the State banking contract remains with the State Treasurer’s Office.

Affiliated Foundation

Finding 13

MPBC’s agreement with its affiliated Foundation did not specify the costs to be reimbursed for services provided by MPBC to the Foundation and such costs significantly exceeded the amount reimbursed by the Foundation.

Recommendation 13

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Equipment

Finding 14

MPBC did not investigate missing items identified during its June 2002 physical inventory of equipment.

Recommendation 14

We recommend that MPBC adhere to the provisions of the Inventory Control Manual and ensure that the aforementioned missing items are investigated and resolved.

Response:

Appropriate paperwork for DGS had already been prepared prior to the arrival of the auditors but had not yet been released. The Report of Missing Property was submitted to DGS on May 27, 2003, indicating that our investigation concluded the equipment had already been sent to surplus for disposal.

We will continue to adhere to the provisions of the Inventory Control Manual.

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APPENDIX B

Auditor’s Comments on Agency Response

The Maryland Public Broadcasting Commission (MPBC) disagreed with certain of our comments in its response (Appendix A) to the audit report. We continue to believe that the comments made in the report are valid. In accordance with State law, all areas of disagreement will be addressed through separate correspondence between this Office and MPBC. In addition, while MPBC’s response to the audit report indicated that no theft or fraud occurred in the subcontracting of certain website design services, to the best of our knowledge, this matter is still under

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A

UDIT

T

EAM Mark A. Ermer, CPA

Audit Manager

Matthew L. Streett, CPA Senior Auditor

Julia Gorner, CPA Robert N. A. Hammond

Figure

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References

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