Audit Report on the Internal Controls Over Bail Refunds by the Client Services Unit of the New York City Department of Finance

EXECUTIVE SUMMARY

The Department of Finance (DOF) administers and enforces tax laws; collects taxes, judgments, and other charges; and provides collection enforcement services for court-ordered private sector creditors. One of the court-ordered services DOF provides is maintaining bail money on behalf of the courts. This service is performed through its Client Services Bail Unit (Unit).

In 1996, DOF contracted with Chase Manhattan Bank (Chase) to maintain a lockbox operation for the collection of bail funds. Courts and Department of Correction (Correction) facilities remit the bail funds, along with the bail receipts given to sureties, directly to a lockbox maintained by Chase. These funds are then directly deposited into a DOF bank account (Common Trust) also maintained at Chase. For each case in which bail is posted, Chase assigns a tracking number (TR#). Chase sends DOF the bail receipts daily, along with a computer tape listing all bail funds deposited in the bank. The information on the computer tape is uploaded onto the Bail Master File, the DOF bail-tracking computer system.

Under § 99M of the General Municipal Law, DOF is entitled to an administrative fee of three percent of the bail refund amount for cases that result in convictions. This fee is assessed by the courts at the conclusion of a case. DOF procedures call for the agency to issue a bail refund check within two weeks after receiving the court order authorizing the release of the bail funds. During Fiscal Year 2001, Chase processed $45.7 million in bail receipts representing 30,090 cases.

The objectives of this audit were to determine whether (1) DOF remits bail refunds in a timely manner, and (2) DOF appropriately deducts the administrative fee as ordered by the courts.

The audit scope covered Fiscal Years 2001 and 2002. To determine whether DOF remits bail refunds in a timely manner, we randomly selected 128 check numbers, representing 128 out of 2062 cases from the August 2001 disbursement report generated from the Bail Master File. We traced the check numbers to the corresponding case file to ascertain whether DOF issued the corresponding check within the two-week period after receiving the court order. To determine whether DOF deducted the three percent (3%) administrative fee as ordered by the court, we reconciled the disbursement information contained in the court orders to the corresponding bail refunds as shown on the disbursement report.

To verify whether the refund information on the Bail Master File was accurate, we randomly selected an additional 50 out of 1968 cases for which bail refund checks were issued in February 2001.

To determine whether DOF reconciled its bank balance to its book balance, we reviewed the bank reconciliations for January 2001 through June 2001.

This audit was conducted in accordance with generally accepted government auditing standards (GAGAS) and included tests of the records and other auditing procedures considered necessary. This audit was performed in accordance with the City Comptroller’s audit responsibilities as set forth in Chapter 5, § 93, of the New York City Charter.

DOF remitted bail refunds in a timely manner. For the 128 sampled cases from August 2001, DOF remitted refunds to sureties within four days, on average, after receiving the court orders. DOF also deducted the three percent (3%) administrative fee from the bail refunds for all sampled cases in which the courts ordered it. Additionally, for the cases in our sample, there were no instances in which the administrative fee was assessed or waived inappropriately by the court.

On the whole, the Unit’s internal control structure provided adequate accountability over bail refunds in that: transactions were properly authorized and recorded; transactions were recorded promptly; and key duties and responsibilities for authorizing, processing, recording, and reviewing transactions were adequately segregated among individuals. As a result, DOF procedures provided adequate assurance that bail refunds were issued to the correct sureties, in the correct amounts, within agency-mandated time frames.

Although DOF controls provided reasonable assurance that bail refund checks were sent on time and to the correct parties, we did find a weakness in DOF’s maintenance of the Common Trust account, specifically in performing monthly bank reconciliations. DOF did not perform proper bank reconciliations in accordance with the City Comptroller’s Directive #11, including adjustment of the accounting records for any unreconciled differences. For the first six months of calendar year 2001, DOF’s bank reconciliations for the Common Trust account revealed an average unreconciled difference of $878,387 between its books and the bank’s records.

We reviewed the supporting documentation for May 2001 in an attempt to perform a correct bank reconciliation based on the available records. In examining DOF’s reconciliation, we found that DOF made a number of errors in its reconciliation. For instance, the agency reported $489,653 in interest income earned on its investment account as a deposit to the Common Trust account, although these funds were not deposited in the account. Based on our analysis, the unreconciled difference between the book and bank balances for May 2001 should have been $390,582—$237,131 less than the difference DOF recorded in its reconciliation.

We discussed DOF’s difficulty in reconciling the Common Trust account with the Unit Director. The director said that he recently instituted a number of changes, including the hiring of an accountant in January 2002 to perform proper reconciliations of all its accounts, including the Common Trust account. At the exit conference, DOF officials provided us a copy of the December 2001 bank reconciliation for the Common Trust account, which was completed by the recently-hired accountant. According to the December 2001 reconciliation, the bank balance was $4,817.00 more than the book balance. (We did not verify the accuracy of the figures reported in the reconciliation.) This new format appropriately provides for the calculation of adjusted book and bank balances. Officials stated that this is the format that the Unit now uses for its reconciliations.

The audit resulted in three recommendations, specifically, that the Department of Finance should:

• Investigate and resolve the difference between its books and the bank’s records for the Common Trust account. The agency should adjust its books, subject to the review and approval of an appropriate official, to account for any differences that cannot be resolved within three months, in accordance with Comptroller’s Directive #11.
• Perform monthly bank reconciliations for all its accounts in accordance with Comptroller’s Directive #11. The reconciliations should include, at a minimum, calculations of the adjusted bank and book balances.
• Ensure that any differences identified in its bank reconciliations are properly investigated and resolved within three months. The agency should adjust its books, subject to the review and approval of an appropriate official, to account for any differences that cannot be resolved within three months.

The matters covered in this report were discussed with officials from DOF during and at the conclusion of this audit. A preliminary draft report was sent to DOF officials and was discussed at an exit conference on April 24, 2002. On May 1, 2002, we submitted a draft report to DOF officials with a request for comments. We received a written response from DOF officials on May 15, 2002. DOF officials agreed with the audit’s findings and recommendations and stated:

"Thank you for the opportunity to review and comment on the above referenced draft report, which confirms that the Department of Finance maintains adequate controls over the bail refund process, that refunds are being made timely and that administrative fees are being properly charged."