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HomeNewsArchivesAUDIT REPORT ON LUMP SUM PAYMENTS

AUDIT REPORT ON LUMP SUM PAYMENTS

Government of The Virgin Islands
VIRGIN ISLANDS BUREAU OF AUDIT AND CONTROL
Executive Summary
The following summarizes the major findings resulting from the Audit of the December 30, 1998 Lump Sum Payments (AC-02-30-99).
Finding 1 – Payments (pages 4 to 10)
– Provisions of the Virgin Islands Code, and accepted procedures established by the Department of Finance were violated, when lump sum payments totaling $368,900 were made to 36 employees.
– Six employees received $39,400 in lump sum payments although they were still employed at least one month after the checks were processed.
– Eight employees were overpaid about $23,800, and twenty-three employees were underpaid about $35,200.
– A stipend totaling $25,000 was paid to an official of the Governor's Home Protection Roof Program without the approval of the Federal Emergency Management Agency, or the Virgin Islands Office of Management and Budget.
– A contractor received a duplicate payment of $2,700 for services that were already paid for.
Finding 2- Taxes (pages 11 to 12)
– Withholding tax provisions of the Internal Revenue Code were violated, resulting in about $93,000 in income tax withholdings and about $30,000 in social security taxes not being paid to the Virgin Islands Bureau of Internal Revenue and the Internal Revenue Service.
Finding 3 – Internal Controls (page 13)
– The payment of lump sum amounts by miscellaneous disbursement vouchers were contrary to sound financial management, and compromised the internal controls of the Department of Finance.
TABLE OF CONTENTS
PAGE
INTRODUCTION
Background 1
Objectives and Scope 2
Prior Audit Coverage 3
AUDIT RESULTS
Conclusions 4
Finding 1- Payments 5
Criteria 5
Lump Sums Paid By MDVs 5
Still Employed 8
Retired/Resigned 8
Stipend 9
Contractors 9
Miscellaneous Expense Reimbursements 9
Recommendations 10
Finding 2 – Taxes 11
Income Taxes 11
Social Security Taxes (FICA) 11
Penalties 12
Recommendations 12
Finding 3 – Internal Controls 13
Recommendation 13
EXHIBITS
I – List of Individuals Interviewed 14
II – Analysis of Payments Reviewed 15
APPENDICES
I – Additional Information Needed to Clear Recommendations From
Follow-up System 17
II – Official Report Distribution 19
INTRODUCTION
BACKGROUND
There are several sections of the Virgin Islands Code (Code) dealing with the payment of lump sum annual leave amounts to employees who leave government service. In addition, several sections of the Internal Revenue Code (IRS Code) deal with the withholding of taxes from lump sum payments. Also, although no documentation was provided, the Department of Finance (Finance) has specific procedures when dealing with lump sum payments.
The various code sections will be identified in this section of the report; however, they will be discussed in greater detail in the Audit Results section. We will also detail the undocumented procedures used by Finance for processing lump sum payments. Later in the report, we will try to detail the events surrounding the December 30, 1998 processing of selected lump sum payments, made contrary to Finance's procedures.
Title 3 Section 587(a) of the Code authorizes the payment, in a lump sum, of accumulated annual leave to an employee upon the separation from government service. Section 587(b) further states that, for purposes of taxation, the lump sum payment is considered a salary or compensation.
For situations when individuals reenter government service, Section 588 states that if an individual, who received a lump sum payment, under Section 587 noted above, reenters government service during the period covered by the lump sum, a refund to the government should be made for the period between the date of re-employment and the expiration of the leave. An exception to this section of the Code was noted in an Opinion by the Virgin Islands Attorney General. In opinion 1961-27, the Attorney General stated that if an employee transfers from one branch of the government to another branch not covered by the same leave system, reimbursement of lump sum leave would not be necessary. For example, an employee, who transfers from the legislative branch to the executive branch, would be entitled to the payment of accumulated leave.
Regarding the withholding of income and social security (FICA) taxes, several sections of the IRS Code deal with these taxes. Section 3402 deals with withholding of income taxes. Regarding FICA taxes, Sections 3101 and 3102 address the employee's contribution, and Section 3111 deals with the employer's contribution. Finally, Section 3404 identifies the responsible individual if the employer is a government entity, and Sections 6672 and 7207 deals with penalties, both civil and criminal, for the willful failure to withhold taxes as required by the IRS Code.
As previously stated, Finance has been unable to provide documented procedures for the payment of lump sum amounts; however, the following summarizes procedures that Finance officials indicated were implemented.
When a person leaves government service, the respective department prepares a Notice of Personnel Action (NOPA) stating the effective date of the action. The NOPA is sent to the Division of Personnel for verification and certification of the employee's personnel information. It is then sent to the Payroll Division (Payroll) at Finance for verification of annual and sick leave balances. Since the leave information shown on the biweekly pay stub is usually inaccurate, the manual leave card is audited and correct leave balances are calculated. These balances are recorded on the NOPA, as well as a Lump Sum Register maintained by Payroll. The NOPA is returned to the Division of Personnel, who keeps the original and distributes copies to the originating department and employee, Retirement, Finance, Government Health Insurance, and the union, if applicable.
Once the NOPA is received by the originating department, a Miscellaneous Payroll Record should be prepared, computing the amount of lump sum due to the employee based on the leave information provided by Payroll. The Miscellaneous Payroll Record is sent to Payroll, where the leave amount is compared to the information contained in the Lump Sum Register, and the calculations of the lump sum payment is verified. Payroll then inputs the information into the payroll module of the Financial Management System for inclusion in the next payroll run. This results in the appropriate income tax withholding and FICA deduction being made. In addition, the appropriate information is maintained for the issuance of a correct wage earnings statement (W-2) at the end of the year.
OBJECTIVES AND SCOPE
The objectives of the audit were to determine if: (i) the method used to make the December 30, 1998 lump sum payments violated laws, rules and regulations, or procedures; and, (ii) the lump sum amounts were correct.
Our review was performed at Finance, and we interviewed several current and former officials of Finance, as well as, some recipients of lump sum payments. Exhibit I of this report lists the individuals contacted and the positions that they held in the government.
Our scope was limited to 43 payments, valued at $442,165, identified by Finance officials, that were included in a special run of 127 checks on December 30, 1998.
As part of our review, we evaluated the internal controls over the processing of these payments to the extent necessary to accomplish the audit objectives. Weaknesses identified during the review are discussed in the Audit Results section.
Except for limitations to our independence as detailed in the succeeding two paragraphs, the audit was performed in accordance with "Government Auditing Standards" issued by the Comptroller General of the United States. We included tests and procedures that were considered necessary under the circumstances.
The second General Standard of the "Government Auditing Standards" states, "In all matters relating to
the audit work, the audit organization and the individual auditors, whether government or public, should be free from personal and external impairments to independence, should be organizationally independent and should maintain an independent attitude and appearance."
Under the current organizational structure, the Virgin Islands Bureau of Audit and Control (Audit Bureau) is not organizationally independent. Budget and personnel limitations have adversely affected the Audit Bureau's ability to fully carry out our responsibility.
PRIOR AUDIT COVERAGE
We are unaware of any other audits of the December 30, 1998 lump sum payments. AUDIT RESULTS
CONCLUSIONS
We conclude that the lump sum payments of accumulated annual leave to 36 employees by Miscellaneous Disbursement Vouchers (MDVs) violated provisions of the Code, the IRS Code, and procedures used by Finance. In addition, a stipend payment was processed in violation of Federal grant regulations and procedures established by Finance and the Virgin Islands Office of Management and Budget (OMB). Finally, a contractor received a duplicate payment for which the government had already paid.
As a result: (i) 6 employees received about $39,400 in payments although they were still employed at least one month after the lump sum checks were processed; (ii) 28 employees were paid about $329,500 before their resignations went into effect; (iii) 8 employees were overpaid by about $23,800; (iv) 23 employees were underpaid by at least $35,200; (v) a stipend of $25,000 was paid without a request or the approval of the Federal Emergency Management Agency (FEMA); (vi) a contractor received a duplicate payment of about $2,700; (vii) about $93,000 in income taxes were not withheld; (viii) FICA taxes of about $15,000 were not withheld, and about $30,000 was not paid to the Internal Revenue Service; and, (ix) internal controls to account for employee wages were compromised.
These results and conclusions are discussed in greater detail in the findings sections of this report. FINDING 1 – PAYMENTS
Specific provisions of the Code, IRS Code and accepted procedures at Finance were violated when lump sum payments, totaling $368,900, were made to 36 employees using MDVs. In addition, a stipend amount of $25,000 was paid without a request or approval of FEMA officials as required by Federal regulations. Finally, a contractor received a duplicate payment of $2,700.
Criteria
Title 3 Section 587(a) of the Code authorizes the payment of lump sum amounts and it states; "Whenever any civilian officer or employee of the government of the Virgin Islands entitled to leave under sections 581-584 of this title is separated from the Service with or without prejudice he shall be paid compensation in a lump sum for all accumulated and current accrued annual or vacations leave to which he is entitled under existing law. Such lump sum payment shall equal the compensation that such officer or employee would have received had he remained in the Service until the expiration of the period of such annual or vacation leave."
As detailed in the Background section of this report, Finance has established procedures, although not documented, to deal with the payment of lump sum amounts. These procedures provide a system of controls, as well as, incorporate the control features of the Financial Management System. In addition, they ensure that taxes are withheld from the payments, and that all employee wages are accurately recorded and reported.
Regarding the stipend issue, the Federal OMB Circular A-102, paragraph 30 requires written approval from the grantor agency (in this case FEMA) for any changes in an approved budget. Specifically, it states; "When a grant or subgrant provides funding for both construction and non-construction activities, the grantee or subgrantee must obtain prior approval from the awarding agency before making any fund or budget transfers from non- construction to construction or vice versa." In addition, procedures established by Finance and OMB require agencies to request authorization to drawdown Federal funds to cover expenses incurred in the operation of a Federal program. The drawdown request is processed through OMB.
Lump Sums Paid By MDVs
On December 30, 1998, Finance officials included lump sum payments for accumulated annual leave, totaling $368,900, for 36 employees, in a special check processing run, contrary to the Code and procedures used by Finance. These payments were part of 127 checks totaling $2.1 million, processed by the special run.
The following summarizes, based on interviews, the events resulting in the processing of the lump sum payments. As will be shown, some of the statements made by the individuals interviewed are in direct conflict with each other, especially the approval and level of involvement of the former Commissioner of Finance (former Commissioner).
Shortly after the November 3, 1998 elections, individuals from the former administration began requesting information on the payment of lump sum amounts for accumulated annual leave. The former Commissioner and the former Assistant Commissioner of Finance (former Assistant Commissioner) requested employees of Payroll to compute the leave balances, for selected employees, as of December 31, 1998, and to begin the process of paying the lump sum amounts. The Payroll employees indicated that in accordance with procedures, lump sum payments could not be processed until a NOPA was received, leave balances audited, and departmental payroll personnel verified employment of the departing employees through December 31, 1998. Accordingly, the Payroll employees refused to violate the procedures that they were accustomed to. The employees indicated to us that they were contacted constantly requesting that the lump sums be processed. Eventually, the two Payroll employees capable of auditing the leave records took sick leave for a few days leading up to and including the December 30, 1998 payments.
The former Assistant Commissioner indicated to us that during frequent meetings with the former Governor, on the status of the government's cash flow, discussions would almost always end with some dialogue on the status of the lump sum payments. The former Assistant Commissioner further stated that he suggested the payment of the lump sum amounts with MDVs, after it was indicated that the Payroll employees refused to process the payments and were on sick leave.
Based on available documents, on December 29, 1998, the former Commissioner contacted the former Attorney General by telephone, requesting advice on the legality of paying employees who leave government service as of December 31, 1998, lump sums for their unused annual leave using MDVs. The former Attorney General, in his December 30, 1998 Letter of Advice concluded; ". . . that the use of MDVs for this purpose is not, per se, illegal. However, I advise you that the customary practices of the Department of Finance in regard to disbursements should be observed and if this is done, the use of the MDV procedure seems to be inappropriate." He further stated; "Under the rubric of the rule of law which governs our official acts as Executive Officers, we are duty bound to achieve both efficiency and fundamental fairness when dealing with employees. It seems self-evident to me that this contemplated disbursement would run counter to both of these objectives. Consequently, I conclude that while the use of the MDV procedure for processing lump sum payments to retiring employees would not be contrary to any statutory provisions, I advise against its use for the policy reasons outlined above. I trust this Letter of Advice fully responds to your inquiry."
Upon receipt of the Letter of Advice, the former Commissioner wrote to the former Attorney General attempting ". . . to clarify the procedure used to process lump sum payments." He again asked if the payment by the MDV process was appropriate. When contacted by us, the former Commissioner stated that since he did not receive a response from the f
ormer Attorney General, he did not pursue the issue. He further stated that he returned to St. Croix without authorizing the further processing of the payments. As will be seen later, statements by others involved will directly contradict this claim.
The former Assistant Commissioner, in his interview, stated that although he had not seen the Letter of Advice, while in a meeting with the former Governor, the former Attorney General was contacted. The MDV process was further explained, as well as the situation with the Payroll employees being out on sick leave, after which the former Attorney General gave his concurrence to use the MDV process. We were not able to contact the former Attorney General to verify the validity of the claim.
From interviews with recipients of lump sum payments involved in the preparation of the MDVs, the former Assistant Commissioner, and employees in the Accounting Section of Finance, each agency involved was responsible for the preparation of their respective MDVs. They were instructed to use the leave balances shown on the most recent pay stubs in the computation of the lump sum amounts. The completed MDVs were to be delivered to the former Assistant Commissioner's office at Finance on St. Thomas. In the case of the Department of Public Works, whose former Commissioner was on St. Croix, the MDVs were faxed to the former Assistant Commissioner for processing.
The former Assistant Commissioner signed all of the MDVs, certifying that they had been verified, and requested the assistance of a Finance Voucher Examiner, who was working late on another special project, to enter the payment information into the Financial Management System. Again, contrary to the former Commissioner's claim, the former Assistant Commissioner stated that the former Commissioner was in his office and was aware of the events. The Voucher Examiner told us that the former Commissioner asked her to initial each of the MDVs that were processed, which she did.
The former Assistant Commissioner also indicated to us that the former Commissioner told him that he had to leave to return to St. Croix and provided his signature stamp to be used to endorse the checks once they were printed. This again contradicts the former Commissioner's claim to us that he did not authorize the use of the MDV process nor the use of his signature stamp.
Once all of the MDV information was entered, the former Assistant Commissioner proceeded to the Control Section of the Accounting Division, where verification printouts of the special run were reviewed for the accuracy of the information. The Chief of Control was asked to request a "priority" check run of the checks. The Chief of Control indicated that all items already in the system identified as "priority" items would also be included in the special run, resulting in 127 checks valued at $2.1 million being printed.
After the checks were printed in the Management Information Systems Section of Finance, the former Assistant Commissioner selected 43 checks out of the 127 checks printed. These 43 checks consisted of the 36 lump sum payment checks, 2 stipend payment checks, 3 checks for selected contractor, and 2 miscellaneous expense reimbursement checks. The checks were endorsed by the former Assistant Commissioner, with the former Commissioner's signature stamp. They were then matched with the corresponding MDVs and placed in envelopes. The former Assistant Commissioner indicated that he would handle the disbursement of the selected checks, and returned the other 84 unsigned checks to the Chief of Control for normal processing and disbursement.
The Chief of Control indicated to us that it was not normal to circumvent the Disbursement Section of Finance. That Section usually takes custody of unsigned checks, processes them through the signature machine, and matches them to the corresponding pay documents. With the current cash flow situation, they also control the actual mailing of checks to vendors.
Exhibit II of this report is an analysis of the 43 payments reviewed by us. The following sections summarize the payments.
Still Employed. Of the 36 individuals who received lump sum payments, 6 individuals were still employed through at least January 29, 1999. These individuals received $39,342 to which they were not entitled. The lump sum payments to these employees were in direct violation of Title 3 Section 587(a) of the Code.
We contacted 4 of the 6 individuals. One of the 6 employees was dismissed from the government on January 29, 1999; however, the other 5 are still employed. Of the 5 employees, one refused to accept the lump sum check, and it was canceled by Finance on January 22, 1999. Two others returned their lump sums on January 5, 1999 and February 12, 1999. The remaining 2 employees still have possession of the funds, and have been informed that the payments must be returned to the government.
Although the former Assistant Commissioner indicated that all of the employees receiving lump sum payments were required to provide evidence that they were in fact resigning, there were no NOPAs provided for the 6 individuals, and 1 individual indicated to us that he never submitted a letter of resignation, nor did he indicate to anyone that he was resigning.
Retired/Resigned. There were 30 employees who either retired or resigned from government service. They received $329,536. Twenty-eight of the employees ended their service with the government after December 30, 1998, the date that their lump sum checks were processed, with 3 as late as January 4, 1999. Eight employees were overpaid a total of $23,819, with 1 individual receiving $6,425 more than he was entitled to. Twenty-three employees were underpaid $35,239.
Stipend. The former acting Commissioner of Property and Procurement, who also served as the Executive Director of the Governor's Home Protection Roof Program, a FEMA- funded program, certified 2 stipend payments to himself totaling $25,000. These payments were based on a stipend agreement approved for legal sufficiency by the Department of Justice on December 29, 1998, and signed by the former Governor on December 30, 1998. It was made retroactive to February 16, 1998.
Regarding the authorization for payment, the stipend agreement stated that; "This stipend is subject to budgeted funds as provided for in the Governor's Home Protection Roof Program (Managerial Expenses), in accordance with FEMA's memorandum dated October 8, 1997. . . ." We obtained a copy of the October 8, 1997, correspondence from FEMA, and it stated; "When submitting these costs for approval for reimbursement to FEMA, they have to be well documented." Officials from OMB indicated to us that no request to drawdown funds, as required by Finance and OMB procedures, was received. It was also indicated that there was no request for approval of the stipend to FEMA. In addition, there was no documentation provided to OMB certifying the hours worked by the individual. Records provided to us by OMB showed that the former acting Commissioner of Property and Procurement should have been aware of the requirements of OMB, because he was involved in providing documentation and processing a $15,000 stipend payment from the same program for the former Commissioner of Property and Procurement.
Contractors. Three contractors were also given preferential treatment, receiving payments totaling $23,459. One contractor received a duplicate payment of $2,692. Two payments were made for services provided from September 28, 1998 through October 24, 1998, resulting in the duplicate payment.
Although we did not review the contracts in detail, all three contained issues discussed in our Audit Report AC-01-32-99, "Audit of the Management and Controls Over Professional Service Contracts", issued on March 1, 1999. The three contractors were contracted to perform services that should have been done by employees hired through the Personnel Merit System. In addition, at least one contractor was a retiree receiving a pension from the Government Em
ployees Retirement System, as well as, receiving compensation through a contract, a practice that violates Title 3 Section 706(c) of the Code.
Miscellaneous Expense Reimbursements. There were two payments totaling $4,828 to the former Governor and the former First Lady for travel and other claimed expenses. Included in the expenses were numerous supermarket and apparent living expenses that will be reviewed in greater detail in a planned audit of operating expenses at the Office of the Governor. Although we are identifying them here, we do not, at this time, have an opinion as to whether they are chargeable to the government.
Recommendations
We recommend that the Commissioner of Finance, with the assistance of the Attorney General:
1. Takes steps to ensure that the remaining 2 individuals still employed return the outstanding lump sum payments to which they are not entitled.
2. Takes steps to ensure that the 8 employees who were overpaid reimburse the government the excess funds.
3. Takes steps to ensure that the 23 former employees receive the additional lump sums due through the normal payroll process.
4. Takes steps to ensure that the former Executive Director of the Governor's Home Protection Roof Program reimburses the government the stipend amount, unless FEMA gives approval, and the appropriate drawdown and documentation procedures are met.
5. Takes steps to ensure that the contractor who received the duplicate payment reimburses the government the excess funds.
We recommend that the Attorney General:
1. Reviews the actions of the government officials responsible for authorizing the lump sum payments, and takes whatever steps determined to be appropriate. FINDING 2 – TAXES
As a result of processing the lump sum payments through the MDV process, provisions of the IRS Code were violated, and $93,003 in income tax withholdings, and $29,981 in FICA taxes were not paid to the Virgin Islands Bureau of Internal Revenue and the United States Internal Revenue Service. In addition, the employee wage reports (W-2) were understated by the lump sum amounts.
Income Taxes
Section 3402 of the IRS Code requires every employer making payments of wages to deduct and withhold from wages a tax to be determined in accordance with a table or computational procedures prescribed by the Secretary of the United States Treasury. Internal Revenue Rules and Regulations Section 31.3402(g)-1 states that if an employee receives a separate or supplemental payment, for example a lump sum, the employer must withhold 28% of the payment as an estimated tax.
Section 3403 of the IRS Code holds the employer liable for the withholding, whether or not it was collected from the employee.
As a result of the failure to withhold the $93,003 in income taxes, as required by the IRS Code, the government did not have the use of these badly needed funds.
The former Assistant Commissioner stated that all of the recipients of the lump sum payments were told of their responsibility to report the lump sum payments and to pay their own taxes. This however, as stated by the previously mentioned sections of the IRS Code, does not absolve the employer of the responsibility of paying the tax. Also, as will be shown in the section on Penalties, the employer is subject to the possibility of the imposition of sanctions and penalties.
Social Security Taxes (FICA)
Section 3101 of the IRS Code requires employees to pay FICA taxes on wages in an amount established by law. Section 3102 requires the employer to withhold the tax from the employee's wages. It also holds the employer responsible for the payment of the tax, even if it is not deducted from the employee's wages. Section 3111 of the IRS Code requires the employer to pay an equal share into the employee's FICA account.
FICA taxes of $14,990 were not withheld from the lump sum payments as required by the IRS Code. In addition, since the payments were not processed through the payroll system, the government's share of the FICA taxes was not paid, until Finance officials discovered what had been done. Finance officials indicated to us that the government has since made the payment in full, and are in the process of billing each employee their share of the FICA taxes that should have been withheld. In addition, revised W-2 forms are being prepared to reflect the increased wages due to the lump sum payments.
Penalties
Section 3404 of the IRS Code states that if a government agency is the employer, the responsibility of withholding taxes, both income and FICA, is placed on the official having control of the payment of the wages.
Section 6672 of the IRS Code imposes a penalty of 100% of the tax that should have been withheld for the willful failure to withhold. In addition, Section 7202 of the IRS Code imposes a fine of not more than $10,000 and not more than 5 years in prison or both for any person who has been convicted of willfully failing to collect, account for and pay over any tax required by the IRS Code.
Recommendations
We recommend that the Commissioner of Finance with the assistance of the Attorney General:
1. Monitors the collection of the employees' share of the FICA taxes. If any amounts are not collected, consider the legality of collecting the funds from the former government officials responsible for the processing of the lump sum payments.
We recommend that the Attorney General:
1. Considers the legality of possibly pursuing the imposition of penalties against the former government official responsible for processing the lump sum payments, resulting in the failure to withhold income and FICA taxes. FINDING 3 – INTERNAL CONTROLS
The payment of lump sum amounts by MDVs, severely compromised internal controls at Finance. As a result, individuals who were not eligible to receive lump sum payments were paid; some individuals were overpaid, while others were underpaid; income and FICA taxes were not withheld nor paid; and, employee wage reports were not accurate.
If Finance officials had not discovered these payments, the appropriate action to collect and pay FICA taxes, collect the over payments and revise the W-2s would not have been initiated. In addition, when the NOPAs were eventually sent to Payroll, as should have been done, accumulated leave would have most likely been computed and lump sum payments made again.
The events of December 30, 1998, included actions that were against sound financial management. Not only were accepted Finance procedures violated, the use of faxed copies of MDVs to process checks, the selection of 43 checks for special treatment out of 127 checks printed, the approval by the former Commissioner and the use by the former Assistant Commissioner of the signature stamp, and the bypassing of the Disbursement Section, in our opinion compromised the integrity of the officials involved.
Recommendation
We recommend that the Commissioner of Finance:
1. Ensures that there are written procedures detailing the steps to be used in making supplemental payroll payments, and specifically forbidding the use of MDVs to make such payments.
LIST OF INDIVIDUALS INTERVIEWED
NAME POSITION AND DEPARTMENT
A Former Commissioner of Finance
B Former Assistant Commissioner of Finance
C Former Assistant Legal Counsel to the Governor
D Acting Director of Payroll, Department of Finance
E Payroll Audit Technician III, Department of Finance
F Acting Director of Accounting, Department of Finance
G Acting Director of Management Information Systems, Department of Finance
H Chief of Control, Department of Finance
I Voucher Examiner, Department of Finance
J Director of Human Resources/Comptroller, Department of Public Works
K Deputy Commissioner of Administration, Department of Public Works
L Deputy Commissioner of Operations-St. Croix, Department of Public Works
M Deputy Commissioner, Department of Property and Procurement
APPENDIX II
NOTE: The names of the individuals interviewed were omitted by the Inspector General.
ANALYSIS OF PAYMENTS REVIEWED
ADDITIONAL
INFORMATION NEEDED TO CLEAR RECOMMENDATIONS FROM FOLLOW-UP SYSTEM
Recommendation
Number and Status Information Needed
Finding 1:
For the Commissioner of Finance:
1. Unresolved Provide evidence to show that the remaining individuals still employed returned the lump sum payments to which they were not entitled.
2 Unresolved Provide evidence to show that the employees who were overpaid returned the excess funds.
3. Unresolved Provide evidence to show that the employees who were underpaid were sent the additional amounts due.
4. Unresolved Provide evidence to show that the former Executive Director of the Governor's Home Roof Program either reimbursed the stipend payment received, or obtained approval from FEMA for the payments.
5. Unresolved Provide evidence to show that the contractor who was overpaid reimbursed the government for the overpayment.
For the Attorney General:
1. Unresolved Provide a copy of any determinations made regarding actions to be taken or not taken.
ADDITIONAL INFORMATION NEEDED TO CLEAR RECOMMENDATIONS FROM FOLLOW-UP SYSTEM
Recommendation
Number and Status Information Needed
Finding 2:
For the Commissioner of Finance:
1. Unresolved Provide evidence to show that the employees' share of the FICA taxes were collected.
For the Attorney General:
1. Unresolved Provide a copy of any determinations made regarding actions to be taken or not taken.
Finding 3:
1. Unresolved Provide a copy of procedures detailing the steps to be used in making supplemental payroll payments.
OFFICIAL REPORT DISTRIBUTION
Virgin Islands Government
Office of the Governor 4
Office of the Lieutenant Governor 1
Department of Finance 1
Department of Justice 1
Office of Management and Budget 1
23rd Legislature 15
Legislative Post Auditor 1
Virgin Islands Delegate to Congress 1
Federal Government
Office of Inspector General, Department of the Interior 1
Office of Inspector General, Federal Emergency Management Agency 1
Department of Justice 1

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Government of The Virgin Islands
VIRGIN ISLANDS BUREAU OF AUDIT AND CONTROL
Executive Summary
The following summarizes the major findings resulting from the Audit of the December 30, 1998 Lump Sum Payments (AC-02-30-99).
Finding 1 - Payments (pages 4 to 10)
- Provisions of the Virgin Islands Code, and accepted procedures established by the Department of Finance were violated, when lump sum payments totaling $368,900 were made to 36 employees.
- Six employees received $39,400 in lump sum payments although they were still employed at least one month after the checks were processed.
- Eight employees were overpaid about $23,800, and twenty-three employees were underpaid about $35,200.
- A stipend totaling $25,000 was paid to an official of the Governor's Home Protection Roof Program without the approval of the Federal Emergency Management Agency, or the Virgin Islands Office of Management and Budget.
- A contractor received a duplicate payment of $2,700 for services that were already paid for.
Finding 2- Taxes (pages 11 to 12)
- Withholding tax provisions of the Internal Revenue Code were violated, resulting in about $93,000 in income tax withholdings and about $30,000 in social security taxes not being paid to the Virgin Islands Bureau of Internal Revenue and the Internal Revenue Service.
Finding 3 - Internal Controls (page 13)
- The payment of lump sum amounts by miscellaneous disbursement vouchers were contrary to sound financial management, and compromised the internal controls of the Department of Finance.
TABLE OF CONTENTS
PAGE
INTRODUCTION
Background 1
Objectives and Scope 2
Prior Audit Coverage 3
AUDIT RESULTS
Conclusions 4
Finding 1- Payments 5
Criteria 5
Lump Sums Paid By MDVs 5
Still Employed 8
Retired/Resigned 8
Stipend 9
Contractors 9
Miscellaneous Expense Reimbursements 9
Recommendations 10
Finding 2 - Taxes 11
Income Taxes 11
Social Security Taxes (FICA) 11
Penalties 12
Recommendations 12
Finding 3 - Internal Controls 13
Recommendation 13
EXHIBITS
I - List of Individuals Interviewed 14
II - Analysis of Payments Reviewed 15
APPENDICES
I - Additional Information Needed to Clear Recommendations From
Follow-up System 17
II - Official Report Distribution 19
INTRODUCTION
BACKGROUND
There are several sections of the Virgin Islands Code (Code) dealing with the payment of lump sum annual leave amounts to employees who leave government service. In addition, several sections of the Internal Revenue Code (IRS Code) deal with the withholding of taxes from lump sum payments. Also, although no documentation was provided, the Department of Finance (Finance) has specific procedures when dealing with lump sum payments.
The various code sections will be identified in this section of the report; however, they will be discussed in greater detail in the Audit Results section. We will also detail the undocumented procedures used by Finance for processing lump sum payments. Later in the report, we will try to detail the events surrounding the December 30, 1998 processing of selected lump sum payments, made contrary to Finance's procedures.
Title 3 Section 587(a) of the Code authorizes the payment, in a lump sum, of accumulated annual leave to an employee upon the separation from government service. Section 587(b) further states that, for purposes of taxation, the lump sum payment is considered a salary or compensation.
For situations when individuals reenter government service, Section 588 states that if an individual, who received a lump sum payment, under Section 587 noted above, reenters government service during the period covered by the lump sum, a refund to the government should be made for the period between the date of re-employment and the expiration of the leave. An exception to this section of the Code was noted in an Opinion by the Virgin Islands Attorney General. In opinion 1961-27, the Attorney General stated that if an employee transfers from one branch of the government to another branch not covered by the same leave system, reimbursement of lump sum leave would not be necessary. For example, an employee, who transfers from the legislative branch to the executive branch, would be entitled to the payment of accumulated leave.
Regarding the withholding of income and social security (FICA) taxes, several sections of the IRS Code deal with these taxes. Section 3402 deals with withholding of income taxes. Regarding FICA taxes, Sections 3101 and 3102 address the employee's contribution, and Section 3111 deals with the employer's contribution. Finally, Section 3404 identifies the responsible individual if the employer is a government entity, and Sections 6672 and 7207 deals with penalties, both civil and criminal, for the willful failure to withhold taxes as required by the IRS Code.
As previously stated, Finance has been unable to provide documented procedures for the payment of lump sum amounts; however, the following summarizes procedures that Finance officials indicated were implemented.
When a person leaves government service, the respective department prepares a Notice of Personnel Action (NOPA) stating the effective date of the action. The NOPA is sent to the Division of Personnel for verification and certification of the employee's personnel information. It is then sent to the Payroll Division (Payroll) at Finance for verification of annual and sick leave balances. Since the leave information shown on the biweekly pay stub is usually inaccurate, the manual leave card is audited and correct leave balances are calculated. These balances are recorded on the NOPA, as well as a Lump Sum Register maintained by Payroll. The NOPA is returned to the Division of Personnel, who keeps the original and distributes copies to the originating department and employee, Retirement, Finance, Government Health Insurance, and the union, if applicable.
Once the NOPA is received by the originating department, a Miscellaneous Payroll Record should be prepared, computing the amount of lump sum due to the employee based on the leave information provided by Payroll. The Miscellaneous Payroll Record is sent to Payroll, where the leave amount is compared to the information contained in the Lump Sum Register, and the calculations of the lump sum payment is verified. Payroll then inputs the information into the payroll module of the Financial Management System for inclusion in the next payroll run. This results in the appropriate income tax withholding and FICA deduction being made. In addition, the appropriate information is maintained for the issuance of a correct wage earnings statement (W-2) at the end of the year.
OBJECTIVES AND SCOPE
The objectives of the audit were to determine if: (i) the method used to make the December 30, 1998 lump sum payments violated laws, rules and regulations, or procedures; and, (ii) the lump sum amounts were correct.
Our review was performed at Finance, and we interviewed several current and former officials of Finance, as well as, some recipients of lump sum payments. Exhibit I of this report lists the individuals contacted and the positions that they held in the government.
Our scope was limited to 43 payments, valued at $442,165, identified by Finance officials, that were included in a special run of 127 checks on December 30, 1998.
As part of our review, we evaluated the internal controls over the processing of these payments to the extent necessary to accomplish the audit objectives. Weaknesses identified during the review are discussed in the Audit Results section.
Except for limitations to our independence as detailed in the succeeding two paragraphs, the audit was performed in accordance with "Government Auditing Standards" issued by the Comptroller General of the United States. We included tests and procedures that were considered necessary under the circumstances.
The second General Standard of the "Government Auditing Standards" states, "In all matters relating to the audit work, the audit organization and the individual auditors, whether government or public, should be free from personal and external impairments to independence, should be organizationally independent and should maintain an independent attitude and appearance."
Under the current organizational structure, the Virgin Islands Bureau of Audit and Control (Audit Bureau) is not organizationally independent. Budget and personnel limitations have adversely affected the Audit Bureau's ability to fully carry out our responsibility.
PRIOR AUDIT COVERAGE
We are unaware of any other audits of the December 30, 1998 lump sum payments. AUDIT RESULTS
CONCLUSIONS
We conclude that the lump sum payments of accumulated annual leave to 36 employees by Miscellaneous Disbursement Vouchers (MDVs) violated provisions of the Code, the IRS Code, and procedures used by Finance. In addition, a stipend payment was processed in violation of Federal grant regulations and procedures established by Finance and the Virgin Islands Office of Management and Budget (OMB). Finally, a contractor received a duplicate payment for which the government had already paid.
As a result: (i) 6 employees received about $39,400 in payments although they were still employed at least one month after the lump sum checks were processed; (ii) 28 employees were paid about $329,500 before their resignations went into effect; (iii) 8 employees were overpaid by about $23,800; (iv) 23 employees were underpaid by at least $35,200; (v) a stipend of $25,000 was paid without a request or the approval of the Federal Emergency Management Agency (FEMA); (vi) a contractor received a duplicate payment of about $2,700; (vii) about $93,000 in income taxes were not withheld; (viii) FICA taxes of about $15,000 were not withheld, and about $30,000 was not paid to the Internal Revenue Service; and, (ix) internal controls to account for employee wages were compromised.
These results and conclusions are discussed in greater detail in the findings sections of this report. FINDING 1 - PAYMENTS
Specific provisions of the Code, IRS Code and accepted procedures at Finance were violated when lump sum payments, totaling $368,900, were made to 36 employees using MDVs. In addition, a stipend amount of $25,000 was paid without a request or approval of FEMA officials as required by Federal regulations. Finally, a contractor received a duplicate payment of $2,700.
Criteria
Title 3 Section 587(a) of the Code authorizes the payment of lump sum amounts and it states; "Whenever any civilian officer or employee of the government of the Virgin Islands entitled to leave under sections 581-584 of this title is separated from the Service with or without prejudice he shall be paid compensation in a lump sum for all accumulated and current accrued annual or vacations leave to which he is entitled under existing law. Such lump sum payment shall equal the compensation that such officer or employee would have received had he remained in the Service until the expiration of the period of such annual or vacation leave."
As detailed in the Background section of this report, Finance has established procedures, although not documented, to deal with the payment of lump sum amounts. These procedures provide a system of controls, as well as, incorporate the control features of the Financial Management System. In addition, they ensure that taxes are withheld from the payments, and that all employee wages are accurately recorded and reported.
Regarding the stipend issue, the Federal OMB Circular A-102, paragraph 30 requires written approval from the grantor agency (in this case FEMA) for any changes in an approved budget. Specifically, it states; "When a grant or subgrant provides funding for both construction and non-construction activities, the grantee or subgrantee must obtain prior approval from the awarding agency before making any fund or budget transfers from non- construction to construction or vice versa." In addition, procedures established by Finance and OMB require agencies to request authorization to drawdown Federal funds to cover expenses incurred in the operation of a Federal program. The drawdown request is processed through OMB.
Lump Sums Paid By MDVs
On December 30, 1998, Finance officials included lump sum payments for accumulated annual leave, totaling $368,900, for 36 employees, in a special check processing run, contrary to the Code and procedures used by Finance. These payments were part of 127 checks totaling $2.1 million, processed by the special run.
The following summarizes, based on interviews, the events resulting in the processing of the lump sum payments. As will be shown, some of the statements made by the individuals interviewed are in direct conflict with each other, especially the approval and level of involvement of the former Commissioner of Finance (former Commissioner).
Shortly after the November 3, 1998 elections, individuals from the former administration began requesting information on the payment of lump sum amounts for accumulated annual leave. The former Commissioner and the former Assistant Commissioner of Finance (former Assistant Commissioner) requested employees of Payroll to compute the leave balances, for selected employees, as of December 31, 1998, and to begin the process of paying the lump sum amounts. The Payroll employees indicated that in accordance with procedures, lump sum payments could not be processed until a NOPA was received, leave balances audited, and departmental payroll personnel verified employment of the departing employees through December 31, 1998. Accordingly, the Payroll employees refused to violate the procedures that they were accustomed to. The employees indicated to us that they were contacted constantly requesting that the lump sums be processed. Eventually, the two Payroll employees capable of auditing the leave records took sick leave for a few days leading up to and including the December 30, 1998 payments.
The former Assistant Commissioner indicated to us that during frequent meetings with the former Governor, on the status of the government's cash flow, discussions would almost always end with some dialogue on the status of the lump sum payments. The former Assistant Commissioner further stated that he suggested the payment of the lump sum amounts with MDVs, after it was indicated that the Payroll employees refused to process the payments and were on sick leave.
Based on available documents, on December 29, 1998, the former Commissioner contacted the former Attorney General by telephone, requesting advice on the legality of paying employees who leave government service as of December 31, 1998, lump sums for their unused annual leave using MDVs. The former Attorney General, in his December 30, 1998 Letter of Advice concluded; ". . . that the use of MDVs for this purpose is not, per se, illegal. However, I advise you that the customary practices of the Department of Finance in regard to disbursements should be observed and if this is done, the use of the MDV procedure seems to be inappropriate." He further stated; "Under the rubric of the rule of law which governs our official acts as Executive Officers, we are duty bound to achieve both efficiency and fundamental fairness when dealing with employees. It seems self-evident to me that this contemplated disbursement would run counter to both of these objectives. Consequently, I conclude that while the use of the MDV procedure for processing lump sum payments to retiring employees would not be contrary to any statutory provisions, I advise against its use for the policy reasons outlined above. I trust this Letter of Advice fully responds to your inquiry."
Upon receipt of the Letter of Advice, the former Commissioner wrote to the former Attorney General attempting ". . . to clarify the procedure used to process lump sum payments." He again asked if the payment by the MDV process was appropriate. When contacted by us, the former Commissioner stated that since he did not receive a response from the f ormer Attorney General, he did not pursue the issue. He further stated that he returned to St. Croix without authorizing the further processing of the payments. As will be seen later, statements by others involved will directly contradict this claim.
The former Assistant Commissioner, in his interview, stated that although he had not seen the Letter of Advice, while in a meeting with the former Governor, the former Attorney General was contacted. The MDV process was further explained, as well as the situation with the Payroll employees being out on sick leave, after which the former Attorney General gave his concurrence to use the MDV process. We were not able to contact the former Attorney General to verify the validity of the claim.
From interviews with recipients of lump sum payments involved in the preparation of the MDVs, the former Assistant Commissioner, and employees in the Accounting Section of Finance, each agency involved was responsible for the preparation of their respective MDVs. They were instructed to use the leave balances shown on the most recent pay stubs in the computation of the lump sum amounts. The completed MDVs were to be delivered to the former Assistant Commissioner's office at Finance on St. Thomas. In the case of the Department of Public Works, whose former Commissioner was on St. Croix, the MDVs were faxed to the former Assistant Commissioner for processing.
The former Assistant Commissioner signed all of the MDVs, certifying that they had been verified, and requested the assistance of a Finance Voucher Examiner, who was working late on another special project, to enter the payment information into the Financial Management System. Again, contrary to the former Commissioner's claim, the former Assistant Commissioner stated that the former Commissioner was in his office and was aware of the events. The Voucher Examiner told us that the former Commissioner asked her to initial each of the MDVs that were processed, which she did.
The former Assistant Commissioner also indicated to us that the former Commissioner told him that he had to leave to return to St. Croix and provided his signature stamp to be used to endorse the checks once they were printed. This again contradicts the former Commissioner's claim to us that he did not authorize the use of the MDV process nor the use of his signature stamp.
Once all of the MDV information was entered, the former Assistant Commissioner proceeded to the Control Section of the Accounting Division, where verification printouts of the special run were reviewed for the accuracy of the information. The Chief of Control was asked to request a "priority" check run of the checks. The Chief of Control indicated that all items already in the system identified as "priority" items would also be included in the special run, resulting in 127 checks valued at $2.1 million being printed.
After the checks were printed in the Management Information Systems Section of Finance, the former Assistant Commissioner selected 43 checks out of the 127 checks printed. These 43 checks consisted of the 36 lump sum payment checks, 2 stipend payment checks, 3 checks for selected contractor, and 2 miscellaneous expense reimbursement checks. The checks were endorsed by the former Assistant Commissioner, with the former Commissioner's signature stamp. They were then matched with the corresponding MDVs and placed in envelopes. The former Assistant Commissioner indicated that he would handle the disbursement of the selected checks, and returned the other 84 unsigned checks to the Chief of Control for normal processing and disbursement.
The Chief of Control indicated to us that it was not normal to circumvent the Disbursement Section of Finance. That Section usually takes custody of unsigned checks, processes them through the signature machine, and matches them to the corresponding pay documents. With the current cash flow situation, they also control the actual mailing of checks to vendors.
Exhibit II of this report is an analysis of the 43 payments reviewed by us. The following sections summarize the payments.
Still Employed. Of the 36 individuals who received lump sum payments, 6 individuals were still employed through at least January 29, 1999. These individuals received $39,342 to which they were not entitled. The lump sum payments to these employees were in direct violation of Title 3 Section 587(a) of the Code.
We contacted 4 of the 6 individuals. One of the 6 employees was dismissed from the government on January 29, 1999; however, the other 5 are still employed. Of the 5 employees, one refused to accept the lump sum check, and it was canceled by Finance on January 22, 1999. Two others returned their lump sums on January 5, 1999 and February 12, 1999. The remaining 2 employees still have possession of the funds, and have been informed that the payments must be returned to the government.
Although the former Assistant Commissioner indicated that all of the employees receiving lump sum payments were required to provide evidence that they were in fact resigning, there were no NOPAs provided for the 6 individuals, and 1 individual indicated to us that he never submitted a letter of resignation, nor did he indicate to anyone that he was resigning.
Retired/Resigned. There were 30 employees who either retired or resigned from government service. They received $329,536. Twenty-eight of the employees ended their service with the government after December 30, 1998, the date that their lump sum checks were processed, with 3 as late as January 4, 1999. Eight employees were overpaid a total of $23,819, with 1 individual receiving $6,425 more than he was entitled to. Twenty-three employees were underpaid $35,239.
Stipend. The former acting Commissioner of Property and Procurement, who also served as the Executive Director of the Governor's Home Protection Roof Program, a FEMA- funded program, certified 2 stipend payments to himself totaling $25,000. These payments were based on a stipend agreement approved for legal sufficiency by the Department of Justice on December 29, 1998, and signed by the former Governor on December 30, 1998. It was made retroactive to February 16, 1998.
Regarding the authorization for payment, the stipend agreement stated that; "This stipend is subject to budgeted funds as provided for in the Governor's Home Protection Roof Program (Managerial Expenses), in accordance with FEMA's memorandum dated October 8, 1997. . . ." We obtained a copy of the October 8, 1997, correspondence from FEMA, and it stated; "When submitting these costs for approval for reimbursement to FEMA, they have to be well documented." Officials from OMB indicated to us that no request to drawdown funds, as required by Finance and OMB procedures, was received. It was also indicated that there was no request for approval of the stipend to FEMA. In addition, there was no documentation provided to OMB certifying the hours worked by the individual. Records provided to us by OMB showed that the former acting Commissioner of Property and Procurement should have been aware of the requirements of OMB, because he was involved in providing documentation and processing a $15,000 stipend payment from the same program for the former Commissioner of Property and Procurement.
Contractors. Three contractors were also given preferential treatment, receiving payments totaling $23,459. One contractor received a duplicate payment of $2,692. Two payments were made for services provided from September 28, 1998 through October 24, 1998, resulting in the duplicate payment.
Although we did not review the contracts in detail, all three contained issues discussed in our Audit Report AC-01-32-99, "Audit of the Management and Controls Over Professional Service Contracts", issued on March 1, 1999. The three contractors were contracted to perform services that should have been done by employees hired through the Personnel Merit System. In addition, at least one contractor was a retiree receiving a pension from the Government Em ployees Retirement System, as well as, receiving compensation through a contract, a practice that violates Title 3 Section 706(c) of the Code.
Miscellaneous Expense Reimbursements. There were two payments totaling $4,828 to the former Governor and the former First Lady for travel and other claimed expenses. Included in the expenses were numerous supermarket and apparent living expenses that will be reviewed in greater detail in a planned audit of operating expenses at the Office of the Governor. Although we are identifying them here, we do not, at this time, have an opinion as to whether they are chargeable to the government.
Recommendations
We recommend that the Commissioner of Finance, with the assistance of the Attorney General:
1. Takes steps to ensure that the remaining 2 individuals still employed return the outstanding lump sum payments to which they are not entitled.
2. Takes steps to ensure that the 8 employees who were overpaid reimburse the government the excess funds.
3. Takes steps to ensure that the 23 former employees receive the additional lump sums due through the normal payroll process.
4. Takes steps to ensure that the former Executive Director of the Governor's Home Protection Roof Program reimburses the government the stipend amount, unless FEMA gives approval, and the appropriate drawdown and documentation procedures are met.
5. Takes steps to ensure that the contractor who received the duplicate payment reimburses the government the excess funds.
We recommend that the Attorney General:
1. Reviews the actions of the government officials responsible for authorizing the lump sum payments, and takes whatever steps determined to be appropriate. FINDING 2 - TAXES
As a result of processing the lump sum payments through the MDV process, provisions of the IRS Code were violated, and $93,003 in income tax withholdings, and $29,981 in FICA taxes were not paid to the Virgin Islands Bureau of Internal Revenue and the United States Internal Revenue Service. In addition, the employee wage reports (W-2) were understated by the lump sum amounts.
Income Taxes
Section 3402 of the IRS Code requires every employer making payments of wages to deduct and withhold from wages a tax to be determined in accordance with a table or computational procedures prescribed by the Secretary of the United States Treasury. Internal Revenue Rules and Regulations Section 31.3402(g)-1 states that if an employee receives a separate or supplemental payment, for example a lump sum, the employer must withhold 28% of the payment as an estimated tax.
Section 3403 of the IRS Code holds the employer liable for the withholding, whether or not it was collected from the employee.
As a result of the failure to withhold the $93,003 in income taxes, as required by the IRS Code, the government did not have the use of these badly needed funds.
The former Assistant Commissioner stated that all of the recipients of the lump sum payments were told of their responsibility to report the lump sum payments and to pay their own taxes. This however, as stated by the previously mentioned sections of the IRS Code, does not absolve the employer of the responsibility of paying the tax. Also, as will be shown in the section on Penalties, the employer is subject to the possibility of the imposition of sanctions and penalties.
Social Security Taxes (FICA)
Section 3101 of the IRS Code requires employees to pay FICA taxes on wages in an amount established by law. Section 3102 requires the employer to withhold the tax from the employee's wages. It also holds the employer responsible for the payment of the tax, even if it is not deducted from the employee's wages. Section 3111 of the IRS Code requires the employer to pay an equal share into the employee's FICA account.
FICA taxes of $14,990 were not withheld from the lump sum payments as required by the IRS Code. In addition, since the payments were not processed through the payroll system, the government's share of the FICA taxes was not paid, until Finance officials discovered what had been done. Finance officials indicated to us that the government has since made the payment in full, and are in the process of billing each employee their share of the FICA taxes that should have been withheld. In addition, revised W-2 forms are being prepared to reflect the increased wages due to the lump sum payments.
Penalties
Section 3404 of the IRS Code states that if a government agency is the employer, the responsibility of withholding taxes, both income and FICA, is placed on the official having control of the payment of the wages.
Section 6672 of the IRS Code imposes a penalty of 100% of the tax that should have been withheld for the willful failure to withhold. In addition, Section 7202 of the IRS Code imposes a fine of not more than $10,000 and not more than 5 years in prison or both for any person who has been convicted of willfully failing to collect, account for and pay over any tax required by the IRS Code.
Recommendations
We recommend that the Commissioner of Finance with the assistance of the Attorney General:
1. Monitors the collection of the employees' share of the FICA taxes. If any amounts are not collected, consider the legality of collecting the funds from the former government officials responsible for the processing of the lump sum payments.
We recommend that the Attorney General:
1. Considers the legality of possibly pursuing the imposition of penalties against the former government official responsible for processing the lump sum payments, resulting in the failure to withhold income and FICA taxes. FINDING 3 - INTERNAL CONTROLS
The payment of lump sum amounts by MDVs, severely compromised internal controls at Finance. As a result, individuals who were not eligible to receive lump sum payments were paid; some individuals were overpaid, while others were underpaid; income and FICA taxes were not withheld nor paid; and, employee wage reports were not accurate.
If Finance officials had not discovered these payments, the appropriate action to collect and pay FICA taxes, collect the over payments and revise the W-2s would not have been initiated. In addition, when the NOPAs were eventually sent to Payroll, as should have been done, accumulated leave would have most likely been computed and lump sum payments made again.
The events of December 30, 1998, included actions that were against sound financial management. Not only were accepted Finance procedures violated, the use of faxed copies of MDVs to process checks, the selection of 43 checks for special treatment out of 127 checks printed, the approval by the former Commissioner and the use by the former Assistant Commissioner of the signature stamp, and the bypassing of the Disbursement Section, in our opinion compromised the integrity of the officials involved.
Recommendation
We recommend that the Commissioner of Finance:
1. Ensures that there are written procedures detailing the steps to be used in making supplemental payroll payments, and specifically forbidding the use of MDVs to make such payments.
LIST OF INDIVIDUALS INTERVIEWED
NAME POSITION AND DEPARTMENT
A Former Commissioner of Finance
B Former Assistant Commissioner of Finance
C Former Assistant Legal Counsel to the Governor
D Acting Director of Payroll, Department of Finance
E Payroll Audit Technician III, Department of Finance
F Acting Director of Accounting, Department of Finance
G Acting Director of Management Information Systems, Department of Finance
H Chief of Control, Department of Finance
I Voucher Examiner, Department of Finance
J Director of Human Resources/Comptroller, Department of Public Works
K Deputy Commissioner of Administration, Department of Public Works
L Deputy Commissioner of Operations-St. Croix, Department of Public Works
M Deputy Commissioner, Department of Property and Procurement
APPENDIX II
NOTE: The names of the individuals interviewed were omitted by the Inspector General.
ANALYSIS OF PAYMENTS REVIEWED
ADDITIONAL INFORMATION NEEDED TO CLEAR RECOMMENDATIONS FROM FOLLOW-UP SYSTEM
Recommendation
Number and Status Information Needed
Finding 1:
For the Commissioner of Finance:
1. Unresolved Provide evidence to show that the remaining individuals still employed returned the lump sum payments to which they were not entitled.
2 Unresolved Provide evidence to show that the employees who were overpaid returned the excess funds.
3. Unresolved Provide evidence to show that the employees who were underpaid were sent the additional amounts due.
4. Unresolved Provide evidence to show that the former Executive Director of the Governor's Home Roof Program either reimbursed the stipend payment received, or obtained approval from FEMA for the payments.
5. Unresolved Provide evidence to show that the contractor who was overpaid reimbursed the government for the overpayment.
For the Attorney General:
1. Unresolved Provide a copy of any determinations made regarding actions to be taken or not taken.
ADDITIONAL INFORMATION NEEDED TO CLEAR RECOMMENDATIONS FROM FOLLOW-UP SYSTEM
Recommendation
Number and Status Information Needed
Finding 2:
For the Commissioner of Finance:
1. Unresolved Provide evidence to show that the employees' share of the FICA taxes were collected.
For the Attorney General:
1. Unresolved Provide a copy of any determinations made regarding actions to be taken or not taken.
Finding 3:
1. Unresolved Provide a copy of procedures detailing the steps to be used in making supplemental payroll payments.
OFFICIAL REPORT DISTRIBUTION
Virgin Islands Government
Office of the Governor 4
Office of the Lieutenant Governor 1
Department of Finance 1
Department of Justice 1
Office of Management and Budget 1
23rd Legislature 15
Legislative Post Auditor 1
Virgin Islands Delegate to Congress 1
Federal Government
Office of Inspector General, Department of the Interior 1
Office of Inspector General, Federal Emergency Management Agency 1
Department of Justice 1