Audit Report on the Financial and Operating Practices of the Detectives Endowment Association Health Benefits Fund–Active Employees

EXECUTIVE SUMMARY

The Detectives Endowment Association Health Benefits Fund (Active Fund) was established on March 1, 1979, under the provisions of a Fund Agreement between the City of New York and the Detectives Endowment Association (the Union), and of a Declaration of Trust, to provide health and welfare benefits to eligible New York City detectives and their dependents.

According to the Active Fund’s Fiscal Year 1999 financial statements, it had approximately $7.8 million in revenues and $7 million in expenses. As of December 31, 1999, the Active Fund reported net assets of $10,021,655.

Our audit objective was to determine whether the Active Fund complied with applicable procedures and reporting requirements as set forth in Comptroller’s Directive #12, as well as its own benefit processing and accounting procedures.

To achieve our audit objective, we reviewed the Active Fund’s fiscal and operating practices for the period January 1, 1999, to December 31, 1999. We interviewed the Active Fund’s Administrator and Certified Public Accountant, and reviewed the Active Fund’s Trust Agreements. We prepared a flowchart of the Fund’s contribution and benefit processing procedures to document our understanding of these procedures and of internal controls in place. In addition, we reconciled the Active Fund’s financial statements with its trial balance, its cash receipts and cash disbursement journals, and other related documentation to determine whether all revenues and expenses were properly recorded. Finally, we performed tests of the Active Fund’s benefit payments to determine whether only eligible members and their dependants received benefits from the Active Fund.

Overall, the Active Fund generally complied with the procedures and reporting requirements of Comptroller’s Directive #12, as well as its own accounting procedures. In addition, the Active Fund had adequate internal controls over the processing and reporting of contributions received and benefit and administrative expenses paid. Specifically:

• All City contributions were accounted for and deposited in the Active Fund’s bank account in a timely manner.
• Expenses were accurately recorded in the Active Fund’s trial balance and cash disbursements journal.
• The Active Fund had adequate supporting documentation for most of the expenses paid.
• Checks had the appropriate authorizations and signatures.

However, there were some weaknesses in the Active Fund’s financial and operating practices. Specifically:

• The Active Fund made improper benefit payments totaling $10,446. For example, the Active Fund paid $3,653 for rehabilitation and detox services and $3,619 for infant formula. However, such payments are not covered by the Fund’s benefits package.

• The Active Fund paid the Union $17,878 for its share of certain expenses, but those expenses were either undocumented, questionable, or not related to Active Fund business. Some of the Active Fund’s administrative expenses, such as telephone, postage, supplies, and equipment maintenance, are allocated between the Union, the Active Fund, the Retiree Fund, and the Annuity Fund. During Fiscal Year 1999, the Union allocated expenses totaling $228,287, of which the Active Fund paid 20 percent ($45,657). However, the Union did not document $45,393 of these expenses, it made questionable payments totaling $16,330, and it included in the allocated amount $27,670 in expenses not related to Active Fund business. Consequently, we question $89,393 of the $228,287 in allocated expenses, which resulted in an excess payment of $17,878 by the Active Fund.
• The Active Fund paid $3,951 in bonuses to Active Fund employees. Directive #12 states that funds should ensure that City contributions are spent appropriately by restricting their use to expenditures and programs that directly or indirectly benefit only fund members. We fail to see how this type of expense conforms to Directive #12.
• The Active Fund did not verify the eligibility of members’ dependents. The Active Fund does not require its members to submit records, such as marriage or birth certificates, documenting the eligibility of their dependents. Lack of such documentation prevents the Active Fund from ensuring that benefits are provided only to eligible individuals.
• The Active Fund does not maintain adequate control over its timekeeping function. The Active Fund does not require its employees to record daily attendance. Consequently, we could not confirm whether Active Fund employees were paid for hours actually worked.

The Active Fund’s trustees should:

• Ensure that benefits are paid in accordance with the Active Fund’s guidelines.
• Recoup the $17,878 it overpaid the Union for allocated expenses.
• Ensure that it pays for Union-allocated expenses related only to Active Fund business.
• Discontinue its practice of paying bonuses to its employees.
• Obtain and maintain copies of all documentation showing the eligibility of dependents.
• Maintain daily attendance records for all Active Fund employees.

The matters covered in this report were discussed with Active Fund officials during and at the conclusion of this audit. A preliminary draft report was sent to Active Fund officials and discussed at an exit conference on May 20, 2002. On May 29, 2002, we submitted a draft report to Active Fund officials with a request for comments. We received a written response from the Fund Manager on June 12, 2002.

The Fund Manager did not specifically address our recommendations to follow Fund benefit guidelines, to recoup overpayments from the Union, and to ensure that the Fund pays only for expenses related to Fund business. The Fund Manager stated that a Trustee approved the exceptions to the Fund’s benefits policies, and that although the Fund may have paid for certain expenses that were questioned by the audit, "the overall allocation methodology . . .results in a very inexpensive office." In addition, the Fund stated that it believes that paying bonuses to employees is appropriate and that daily attendance records are not necessary. The Fund stated, however, that it is obtaining information on members’ dependents and spouses, as recommended in the report.