Audit and Finance Committee (AFC) Meeting Notes November 9, 2018 8:30Am

Audit and Finance Committee (AFC) Meeting Notes November 9, 2018 8:30am

Supervisors in Attendance: Staff in Attendance:

Ms. Dorothy Jaeckle, Chairman Greg Akers Mr. Christopher M. Winslow Allan Carmody Dr. Joseph Casey, County Administrator Mary Martin-Selby Meghan Coates Matt Harris School Board Members in Attendance: Patsy Brown Mr. John Erbach, Chairman Steve Sanderson Dr. Javaid Siddiqui Jonathan Davis Dr. Merv Daugherty, Superintendent Donald Fairheart Christina Berta Rene Ewing

Call to Order: • Ms. Jaeckle, sitting in for Mr. Elswick, called the meeting to order at 8:30 am.

Opening Remarks: • Ms. Jaeckle thanked everyone for attending the meeting and for being invited by the School Board to attend the BRAVO awards the previous evening.

JOINT ITEMS: 1. Committee Restructuring: Committee Members • Mr. Erbach: Acknowledged the importance of collaboration between the two Boards and agree that they should meet at least 4 times a year to discuss various topics that pertain to the Chesterfield County citizens. He agrees that both Boards should have access to one another’s staff members when needed, however; schools will have their own independent Audit and Finance Committee. He thanked Dr. Casey and the Board of Supervisor members for their continued cooperation. • Mr. Winslow: Welcomed the new Superintendent, Dr. Merv Daugherty. He stated that citizens are best served when the Boards can work collaboratively and was happy they were finding ways to work together going forward.

2. FY2018 Financial Audit: Patsy Brown, Director of Accounting • Ms. Brown reviewed the annual process of presenting the external auditor and introduced Mr. Rob Churchman, Partner, Government Services Group for Cherry Bekaert. • Mr. Churchman reviewed his Presentation to the Audit and Finance Committee*. Mr. Churchman provided the required technical disclosures for their audit of the Comprehensive Annual Financial Report (CAFR), noting they also audit the County’s Economic Development Authority and the Watkins Centre and Chippenham Place Community Development Authorities. During discussion of audit results, Ms. Brown clarified that the one late VRS payment identified in the report for Schools was 3 days late. • Ms. Brown followed Mr. Churchman and provided CAFR highlights, noting the report illustrates compliance with the County’s financial policies. Ms. Brown also described impact for new GASB disclosure requirements for Other Post-Employment Benefits (OPEB) liability. In response to Mr. Winslow’s inquiry how our OPEB funding compares to industry standards, Ms. Brown and Mr. Churchman explained this is only the second year for reporting OPEB this way and benchmarks are still developing. However, the County is ahead of many other localities from steps taken in 2007 to reduce OPEB levels and setup a trust for funding. Mr. Carmody added that a more detailed presentation to AFC for OPEB funding is planned for early 2019.

3. Audit Committee and Finance Discussion: Greg Akers, Director of Internal Auditor • Mr. Akers referred to the Policy 8-1 and 8-2 handouts* describing minor revisions proposed for the recent restructuring of the AFC Committee membership and separate School AFC. He asked the Board members to review and provide him with any input before presenting them for final approval.

4. County/CCPS SRP Annual Reports: Scott Zaremba, DCA, Community Operations/ Christina Berta, CFO CCPS • Mr. Zaremba introduced the topic and began the review of the Report of Supplemental Retirement Plans (SRP) presentation*. He noted that this was the first report generated with all the April 2017 School SRP design changes. Ms. Berta reviewed the net pension liability reduction ($83.2m to $57.2m) and funded ratio (22.59% to 32.85%) improvements for School SRP. Ms. Berta also shared School SRP forecasts for future funded status and required contributions through FY2023. Mr. Zaremba noted County SRP continues to be well funded with ratio improving from 97.86 to 99.8%. • Dr. Siddiqi noted the positive impact 2017 School SRP plan changes had for reducing the liability. Ms. Jaeckle thanked them for the report and said it is very helpful, from a layman’s perspective, to have these numbers to get a sense of where we are and where we are going. • After the SRP presentation was complete, Mr. Carmody briefly shared results for recent debt issuances. • Ms. Jaeckle asked about funding to acquire parcels adjoining School properties that are needed for future school build-outs, like Enon. Mr. Siddiqi and Mr. Erbach acknowledged this is a consideration, but not part of existing projects and would need to be separately funded. • Mr. Winslow thanked the School Board members and Dr. Daugherty for attending the Joint portion of the meeting and called a two-minute recess before reconvening for the remaining County items on the agenda. Mr. Erbach, Dr. Siddiqui, and School staff departed the meeting.

Audit and Finance Committee Meeting Notes 2 November 9, 2018

COUNTY ITEMS: 5. Internal Audit: Greg Akers, Director of Internal Audit, Steve Sanderson Audit Manager, Internal Audit Mr. Akers noted recent improvements Internal Audit has made by posting audit reports on the Chesterfield.gov website immediately after distribution to the Boards and eliminating the need for the pre-meeting update memo. The hyperlinks to the reports discussed in the AFC meetings will be on the Agenda, as they were today with the following reports: • FY18 Fraud, Waste, and Abuse (FWA) Hotline Program Report, Mr. Akers reviewed highlights noting: o County and Schools have implemented the 5 key steps to decrease vulnerability to fraud. o Statistics for allegations received and how items are handled. o Summary results for investigations provided here were previously reported in AFC updates, and a new summary included for referral results. • FY18 Jail Canteen & Inmate Trust Fund, Mr. Sanderson reviewed highlights and thanked Sheriff Leonard and his staff for their cooperation and for attending the meeting today. Sheriff Leonard responded to Ms. Jaeckle’ s invitation to speak by clarifying that his office abided by the recommendation to hire a replacement for their financial record keeper, but the prison environment can make it difficult to obtain and retain employees. Ms. Jaeckle thanked him for his comments and cooperation. • FY2019 Audit Plan and Hotline Activity Update*: o Mr. Akers reviewed the handout and asked for any questions. o Mr. Akers updated committee on Commissioner of Revenue data breach discussed at October 16, 2018 AFC meeting. The Commissioner declined Internal Audit’s offer to assist them with an internal control assessment to help prevent future breaches. The Commissioner believes their own evaluation was sufficient. The County Attorney confirmed the Commissioner’s authority under State code to decline internal audit assistance. Ms. Jaeckle remarked she was disappointed the Commissioner did not accept Internal Audit’s offer of assistance to help ensure this isolated incident did not reoccur. Commissioner Hughes, in attendance, explained she had already provided a thorough report identifying 5 issues with solutions and controls to prevent reoccurrence. Ms. Jaeckle suggested an outside perspective may have been helpful. Ms. Hughes thanked her for her comments, but she takes full responsibility and feels confident that the situation is under control and her department did the right things to ensure this would not reoccur. Mr. Winslow assured Ms. Hughes that it was not personal, and the Internal Audit has a function for these types of situation that occur within local government. Ms. Hughes

Audit and Finance Committee Meeting Notes 3 November 9, 2018 responded that she provided a sufficiently detailed account, and that she had prior audit training and is familiar with audit’s function and practices. • In response to Ms. Jaeckle’ s comment on the Chesterfield election issues and long lines, Dr. Casey discussed he and Matt Harris meet with Constance Tyler, General Registrar after the election last Tuesday to offer their assistance to help improve on customer service with line management, parking, etc. The Registrar was receptive to County assistance and accepted invitation to speak at the Board of Supervisors November 14th meeting (as part of Dr. Casey’s comments section). Sheriff Leonard added he was also working with Registrar and offered to join the County efforts to consider future customer service solutions.

6. Real Estate Assessment Department Update: Jonathan Davis, Director of Real Estate Assessor’s Office / Ashley DeBiase, Assessment Automation Manager, Real Estate Assessor’s Office • Mr. Carmody introduced Mr. Davis and congratulated him and his department for the upgraded website success. He mentioned some citizens used to the prior website were adjusting to the new format, but overall it has been a smooth transition and received well by the citizens. • Mr. Davis agreed with Mr. Carmody regarding the improved website functionality and online form accessibility. He also discussed the restructuring of the process of presenting real estate assessment figures so they could be presented in December instead of the normal reporting period in January. Mr. Davis introduced Ms. DeBiase and thanked her for the work she had done on the website. • Ms. DeBiase walked through the website’s upgraded features, illustrating available information and search features for parcels. Mr. Winslow commended the department for the great new features.

7. Next meeting/topics: Allan Carmody, Finance Director Before covering future meeting plans, Mr. Carmody thanked Patsy Brown, Director of Accounting and her staff for their work effort completing the CAFR and external audit process. Meeting topics planned for December 7th, 10:30 am: • Major Maintenance for Facilities • Facility Planning Update • Financial Metrics Reporting

8. Proposed Recurring Joint Topics: Allan Carmody, Finance Director noted the future topics and dates targeted for joint AFC meetings with County and Schools: o Annual Budget and CIP (Feb/Sept/Dec) o External Audit Pre-Audit Overview (June) Audit and Finance Committee Meeting Notes 4 November 9, 2018 o Year-end Projections (June/Dec) o Health Insurance Rates (June) o Financial Audit (November) o Supplemental Retirement Plans (November) o Major Maintenance (September)

9 Closed Session: • Mr. Winslow reminded committee of best practice for AFC to separately meet with the External Auditor. Provides an opportunity for direct performance feedback and to share any possible concerns. At 10:10 am he asked for a motion to go into close session “pursuant to Section 2.2-3711.A.1, Code of Virginia. 1950, as amended, relating to the performance of departments where such evaluation will necessarily involve discussion of specific individuals”. Ms. Jaeckle seconded the motion, which was approved by both members. Meeting reconvened at 10:25 am. Mr. Winslow requested a motion to certify that the closed session content was limited to the planned item noted above. Ms. Jaeckle seconded the motion which was approved by both members. Meeting was adjourned at 10:26 am.

*All November 9, 2018 meeting handout materials noted above are available on the Chesterfield.Gov Audit and Finance Committee webpage.

Audit and Finance Committee Meeting Notes 5 November 9, 2018 AFC MEETING MATERIALS 11-09-18

Audit and Finance Date: November 9, 2018 Committee of the Board Time: 8:30 am Location: Room 502 Of Supervisors

Joint Items Item Person Responsible Materials 1. Committee Restructuring. Committee Members No handout

2. FY2018 Financial Audit Patsy Brown AFC Presentation / Cherry Bekaert 3. Audit Committee and Policy Discussion Greg Akers 8-01 & 02 Policy Updates

4. County/CCPS SRP Annual Reports Scott Zaremba/Christina County/CCPS SRP Annual Berta Reports County Items 5. Internal Audit: Greg Akers a. Fraud, Waste and Abuse Hotline Program FY18 Report IA Project and Hotline b. FY18 Jail Canteen & Inmate Trust Fund Activity Update c. Audit Plan and Hotline Activity Update 6. Real Estate Assessment Dept. Update November Department Staff No handout

7. Next Meeting, December 7th at 10:30 Allan Carmody Major Maintenace for Facilities No handout Facility Planning Update Financial Metrics Reporting 8. Proposed Recurring Joint Topics: Annual Budget and CIP (Feb/Sept/Dec) External Audit Pre-Audit Overview (June) Year-end Projections (June/Dec) Health Insurance Rates (June) Financial Audit (November) Supplemental Retirement Plans (November) Major Maintenance (September) 9. Closed Session pursuant to Section 2.2-3711.A.1., Dr. Casey Code of Virginia, 1950, as amended, relating to the performance of departments where such evaluation will necessarily involve discussion of specific individuals Presentation to the Audit and Finance Committee

County of Chesterfield, Virginia

November 9, 2018

AFC 11-09-18 Meeting Materials Table of Contents

Engagement Summary

Service Deliverables

Overall Audit Results

Required Communications with Those Charged with Governance

Future Accounting and Reporting Changes

2 AFC 11-09-18 Meeting Materials Engagement Summary

AFC 11-09-18 Meeting Materials Engagement Summary

You have engaged us to provide the following: . Audit of the financial statements as of and for the fiscal year ended June 30, 2018: • County, including the Schools and related Schools’ Activity Funds • Economic Development Authority of the County of Chesterfield • Watkins Centre Community Development Authority • Chippenham Place Community Development Authority . Audit of the County’s major federal programs as required by the Uniform Guidance (Single Audit) . Audit of the County’s compliance with the Auditor of Public Accounts’ (APA) Specifications for Audits of Counties, Cities and Towns (Specifications) Continuous Communication

4 AFC 11-09-18 Meeting Materials Engagement Summary (continued)

You have engaged us to provide the following: . Procedures required by the Commonwealth related to: • Comparative Report Transmittal Forms in accordance with the requirements of the Uniform Financial Reporting Manual • Sheriff Office’s internal control over compliance with the Virginia Sheriffs' Accounting Manual • Compliance with maintaining internal controls in accordance with the Financial Assurance Regulations of Solid Waste Disposal Facilities • Virginia Retirement System census data testing

Continuous Communication

5 AFC 11-09-18 Meeting Materials Service Deliverables

AFC 11-09-18 Meeting Materials Service Deliverables

Audit Deliverables:  As of and for the fiscal year ended June 30, 2018: . Opinion on the financial statements of the County and component units . Report on internal control over financial reporting and on compliance and other matters required by Government Auditing Standards . Report on compliance for each major federal program and internal control over compliance in accordance with the Uniform Guidance . Report on compliance with the APA’s Specifications . Report on procedures performed related to: • Comparative Report Transmittal Forms • Sheriff Office’s internal control • Financial Assurance Regulations of Solid Waste Disposal Facilities • Virginia Retirement System census data examination

7 AFC 11-09-18 Meeting Materials Overall Audit Results

AFC 11-09-18 Meeting Materials Overall Audit Results

 Opinion on the financial statements - unmodified  Report on internal control over financial reporting - unmodified  Report on internal control over compliance - unmodified  Virginia Retirement System census data:  The Schools’ contributions for one month tested were not remitted to VRS by the 10th of the subsequent month  No exceptions related to County testing

Continuous Communication

9 AFC 11-09-18 Meeting Materials Required Communications with Those Charged with Governance

AFC 11-09-18 Meeting Materials Required Communications

 Accounting Policies . Adoption of new accounting policies effective July 1, 2017 • GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions – Required governments to report a liability on the face of the financial statements for OPEB obligations • GASB Statement No. 88, Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements – Required additional disclosures related to debt including unused lines of credit, assets pledged as collateral for debt, and specific terms specified in debt agreements related to significant events of default with finance-related consequences, significant termination events, and significant subjective acceleration clauses • GASB Statement No. 89, Accounting for Interest Costs Incurred Before the End of a Construction Period – Establishes accounting requirements for interest costs incurred before the end of a construction period . No other changes in accounting policies 11 AFC 11-09-18 Meeting Materials Required Communications (continued)

Management Judgment and Accounting Estimates . Allowance for doubtful accounts and taxes receivable . Pension and other postemployment benefits (OPEB) liabilities . Risk management claims liabilities Adjustments . No corrected or proposed uncorrected adjustments Disagreements with Management . There were no disagreements with management regarding accounting or auditing issues Difficulties Encountered in Performing the Audit . We encountered no difficulties in preforming the audit

12 AFC 11-09-18 Meeting Materials Required Communications (continued)

Consultation with Other Accountants . We are not aware of any Material Client Communications . Management representation letter Independence . We are not aware of any relationship that we believe, based on current authoritative guidance, would impair our independence

13 AFC 11-09-18 Meeting Materials Future Accounting and Reporting Changes

AFC 11-09-18 Meeting Materials Future Accounting and Reporting Changes

GASB statements effective for FY 2019:

GASB Statement No. 83 – Certain Asset Retirement Obligations

• Establishes criteria for determining the timing and pattern of recognition of a liability and a corresponding deferred outflow of resources for asset retirement obligations

15 AFC 11-09-18 Meeting Materials Future Accounting and Reporting Changes

GASB statements effective for FY 2020:

GASB Statement No. 84 – Fiduciary Activities

• Establishes criteria for identifying fiduciary activities of all state and local governments. The focus of the criteria generally is on: • (1) whether a government is controlling the assets of the fiduciary activity, and • (2) the beneficiaries with whom a fiduciary relationship exists. • Separate criteria are included to identify fiduciary component units and postemployment benefit arrangements that are fiduciary activity

16 AFC 11-09-18 Meeting Materials Future Accounting and Reporting Changes

GASB statements effective for FY 2021:

GASB Statement No. 89 – Leases

• Establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset • Requires recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract

17 AFC 11-09-18 Meeting Materials Your Guide Forward

Matt Carey Senior Manager 804.673.5766 [email protected]

Rob Churchman Partner 804.673.5733 [email protected]

18 AFC 11-09-18 Meeting Materials

CHESTERFIELD COUNTY ADMINISTRATIVE POLICIES AND PROCEDURES

Department: Internal Audit Policy Number: 8-1 Subject: Introduction Supersedes: 9/28/18 Date Issued: ##/##/##

I. INTRODUCTION The County of Chesterfield, Office of Internal Audit (O.I.A) was established as an independent review and evaluation service function to conduct and evaluate financial, and performance audits of programs, functions, and activities as a service to County and School management. The Internal Audit Director (Auditor) reports to the County Administrator, School Superintendent, and the County and School’s Audit and Finance Committees (AFC’s). The Auditor also provides periodic internal audit reports and updates to the Board of Supervisors and School Board through their respective AFC’s. The four member AFC consists of two members of the Board of Supervisors and two members of the School Board appointed by their respective Chairs. Annual performance review feedback for the Auditor is provided from elected officials via their representatives on the Audit and Finance Committees, and through the County Administrator and School Superintendent. Independence – To be independent in fact and appearance, auditors must be free from conflicts of interest and free from interference in how the work is conducted and reported. The Auditor will comply with Government Auditing Standards to identify, safeguard against, or report threats to independence. The Audit Director has no direct authority over other persons in the organization whose work he/she reviews. Such authority is vested in the Department head. Further, his review and evaluations do not in any way relieve other persons in the organization of the responsibilities and accountability for duties assigned to them. Complete objectivity is essential to the audit function. The Auditor, therefore, should not develop and/or install procedures, prepare records, or engage in any activity, which he/she would normally expect to review. Management Support – The organizational status of the Auditor and the support of his function by County and School Management provides the benchmark for the success of the internal audit program. The Auditor must have access to management at all levels to ensure adequate consideration and satisfactory resolution to all comments, recommendations and findings. Unique Creation and Update Process for Internal Audit Administrative Policy and Procedure – County Administrative Policy (CAP) 09-01, County Administration – Administrative Policies and Procedures establish guidelines for creating, updating, and rescinding County Administrative Policies and Procedures. Based on Internal Audit’s organizational placement, Internal Audit administrative policy and procedure creation or updates use an alternate approval process to CAP 09-01. Internal Audit policies will be evaluated at least annually for potential update during the County AFC’s first calendar year meeting. Internal Audit will provide recommended administrative procedure creation or update to the County Administrator and School Superintendent, and present to the County AFC for approval. II. OBJECTIVES AND SCOPE The Auditor shall have responsibility to conduct audits of all County and School departments, agencies, and activities as stipulated by County Code Chapter 6.12 to independently and objectively determine whether:

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A. Activities and programs being implemented have been authorized by either the Board of Supervisors, School Board, County Administrator, School Superintendent, state or federal law or regulations and are being conducted and funds expended in compliance with applicable laws; B. The department, office, or agency is acquiring, managing, protecting, and using its resources, including public funds, personnel, property, equipment, and space, economically, efficiently, equitably, and effectively and in a manner consistent with the objectives intended by the authorizing entity or enabling legislation; C. The entity, programs, activities, functions, or policies are effective, including the identification of any causes of inefficiencies or uneconomical practices; D. The desired result or benefits are being achieved; E. Financial and other reports are being provided that disclose fairly, accurately, and fully all information required by law, to ascertain the nature and scope of programs and activities, and to establish a proper basis for evaluating the programs and activities including the collection of, accounting for, and depositing of any funds, revenues, and other resources; F. Management has established adequate operating and administrative procedures and practices, systems or accounting internal control systems and internal management controls; and, G. During the course of audit work, there are no indications of fraud, waste, abuse or illegal acts.

III. ANNUAL AUDIT PLAN A. At the beginning of each fiscal year, the Auditor shall submit a proposedrevised annual audit plan to the County Administrator, and School Superintendent, and the AFC’s for review and inputapproval. This proposed audit plan will be presented foris also approvaled by the AFC’s. The plan shall include the departments, offices, boards, activities and agencies scheduled for audit during the year. This plan may be amended during the year after review with the County Administrator/School Superintendent. Additionally, the Auditor may initiate and conduct any other audit deemed necessary to undertake. B. In the selection of audit areas, the determination of audit scope and the timing of audit work, the auditor may consult with the County’s external auditors, Deputy County Administrators, School Division Chiefs and Department Heads so that desirable audit coverage is provided, and audit effort may be properly coordinated. Proposed audit plan will allocate resources between County and School projects proportionate to the auditable unit population. C. Risk Assessment – Internal Audit in developing or revising its Annual Audit Plan shall conduct a County-wide risk assessment. This allows Internal Audit to systematically evaluate risks related to auditable units. It also provides for an audit frequency for each auditable unit based upon a calculated risk score and other relevant factors. Auditable units and the assessed risk levels are subject to change over time. D. Audit Follow-up – On an annual basis, the Auditor will furnish the County Administrator, School Superintendent and AFC with a summary of all material unresolved comments, recommendations and management responses.

IV. SPECIAL EXAMINATION The AFC’s, County Administrator, School Superintendent, Deputy County Administrator, School Division Chief or Department Head may request the Auditor to perform special examinations or unplanned audits that are not included in the annual audit plan. The Auditor will determine the performance of requested items based on audit plan priorities, professional standards, available staff, and resources. Page 2 of 5 AFC 11-09-18 Meeting Materials

V. AUDIT PROCESS A. The Office of Internal Audit will make every effort to inform the auditee about an upcoming audit and be flexible in scheduling. Factors such as auditee’s seasonal workload, or other issues, will be taken into consideration when scheduling audits and developing the timetable for completion. This notification will take the form of an Entrance Conference Memorandum that will outline the general scope, objectives of the audit, a proposed timetable for completion, request for general information, and the responsibility of the Auditor and Department Head. This memorandum will be sent to the Department Head at least two weeks in advance of the Entrance Conference. B. At the Entrance Conference, the auditee and the auditor will discuss approaches and expectations about the way the audit will be conducted. The Auditor will also determine whom management designates to receive Point Sheets. The Auditor will then conduct a Survey, which enables the Auditor to gain a working understanding of the mission, operations and functions of the entity or function being audited. C. The Fieldwork will commence after completion of the survey. The fieldwork stage involves testing of transactions, vouching of account balances, and evaluation of administrative and internal policies and procedures and other audit procedures deemed necessary. The fieldwork is conducted generally within the general framework of generally accepted government auditing standards. D. Upon completion of any function or activity during fieldwork, the In-charge Auditor will prepare Point Sheets. Point Sheets are written documents which list: Criteria, Condition, Cause, Effect and Recommendation(s) for each audit finding. These point sheets will be provided as drafts to management and discussed. The auditor will document point sheet discussion with management, noting if there was agreement and describing any disagreements. Based on supporting information from management, the In-Charge Auditor may revise the draft findings and/or perform additional testing. The evaluation of the Point Sheets by management and concurrence by the In-Charge Auditor only represents acknowledgement that the issues were discussed. It does not indicate approval or any final commitment. E. An Exit Conference will be scheduled by the Auditor. At the Exit Conference, the auditee and the Audit Director will discuss each comment and recommendation. This conference provides an opportunity for the auditee to produce evidence that may result in changes due to material inconsistencies, omissions, and/or errors in the point sheets. It also provides for a sound evaluation of the recommendations in terms of cost/benefit, timetables for implementation, or other resources that the audit process may not have identified. The Exit Conference takes place after the issuance of all point sheets and discussion with management. F. Based upon the results of the Exit Conference, the Auditor will provide the auditee with a DRAFT REPORT, which will include revised comments and recommendations. The department must return the Draft Report with responses within 21 days from the draft report date. The Audit Director and auditee will then discuss this Draft with the appropriate Deputy County Administrator or School Division Chief when necessary. If material disagreement remains after this meeting, the Audit Director must document points of disagreement and will be responsible for mutually scheduling a meeting with the Auditee, County Administrator or School Superintendent, and /or appropriate Deputy County Administrator or School Division Chief to resolve the issues. G. The last stage will result in the issuance of a Final Audit Report. The report will include: 1. An Executive Summary to summarize the audit for top management and an Auditor’s Opinion (if necessary),

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2. A precise statement of the objectives and scope encompassed by the audit, as well as, some background information, 3. A statement that the audit was performed in accordance with generally accepted government auditing standards, 4. A statement of material and immaterial audit findings, including a statement of the underlying cause and evaluative effects, 5. A statement that internal control systems were examined, and report of any material weaknesses found in the internal control systems, 6. Statements of response submitted by the audited department or agency relevant to the audit findings, 7. A concise statement of corrective actions taken or contemplated as a result of the audit findings and a time table for their accomplishments, 8. Recommendations for additional necessary or desirable action and follow-up procedures, 9. A statement disclosing we are a department within Chesterfield County/Schools.

VI. REPORT OF IRREGULARITIES/FRAUD If the auditor suspects violations of law or malfeasance, misfeasance, nonfeasance, or dereliction of duty by an officer or employee, the Auditor shall report such irregularities to the County Administrator or School Superintendent. If the irregularity is criminal in nature, the Auditor shall immediately notify the County Administrator or School Superintendent and the Commonwealth Attorney or Police in addition to those previously cited.

VII. CONTRACT AUDITORS, CONSULTANTS, AND EXPERTS An audit that is performed by contract must be conducted by persons who have no financial interests in the affairs of the governmental units or its officers. The Auditor will coordinate and monitor auditing performed by public accounting or other organizations employed under contract by the County to assist with audit related activities. Contracting for external audits will be awarded in accordance with established procurement procedures.

VIII. ACCESS TO RECORDS AND PROPERTY (COUNTY CODE CHAPTER 6.12) All officers and employees of the County and School system as designated by the County and School Attorney shall furnish (within legal constraints) the Auditor with requested information and records within their custody regarding powers, duties, activities, organization, property, financial transactions and methods of business required to conduct an audit or otherwise perform audit duties. In addition, they shall provide access for the Auditor to inspect all property, equipment, and facilities within their custody. If such officers or employees fail to produce the aforementioned information, then the Auditor, subject to County Administrator’s or School Superintendent’s approval, may request a search to be made and exhibits to be taken from any book, paper or record of any such official or employee, excepting personal information, and every office having the custody of such records shall make a search and forward such requested information to the Auditor. The Auditor shall retain in accordance with “the Commonwealth of Virginia Records Retention and Disposition Schedules” all audit reports, including examinations, investigations and reviews made. Audit work papers and other supportive material directly pertaining to the audit report will be retained for 8 years.

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IX. AUDIT REPORT DISTRIBUTION A. Point Sheets – Limited between In-Charge auditor and the auditee Management Designee. B. Draft Report – After Exit Conference, distribution will include Department Head, Assistant Department Head, and Audit Director. C. Final Audit Report – Distribution to the Board of Supervisors, School BoardAFC, Department Head, appropriate Deputy County Administrator, School Division Chief, and County Administrator or School Superintendent. Audit Director may send courtesy copies of appropriate sections to the Director of Accounting, Budget and Management, Human Resources, Information System Technology (IST) and other departments, if situations warrant Department Head will be notified before release.

X. PEER REVIEW The Internal Audit activities of the Auditor’s office shall be subject to peer review at least once every three years by a professional, nonpartisan objective group utilizing guidelines endorsed by the Association of Local Government Auditors. A copy of the written report of this independent review shall be furnished to the County Administrator, School Superintendent and the AFC’s. The peer review will use generally accepted government auditing standards to evaluate the quality of audit effort and reporting. Specific peer review areas shall include staff qualifications, preparation and evidence, and the adequacy of systems for reviewing internal controls, fraud, waste and abuse, program compliance, and automated systems. The peer review will also assess the form, distribution, timeliness, content, staff qualifications, independence, due professional care, quality control, fieldwork, (♦ planning ◆ evidence ♦ internal control ♦ supervision ♦ legal and regulatory requirements) reporting, and presentation of Internal Audit reports.

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CHESTERFIELD COUNTY ADMINISTRATIVE POLICIES AND PROCEDURES

Department: Internal Audit Policy Number: 8-2 Subject: Fraud, Waste and Abuse Prevention and Detection Supersedes: 11/15/17 Date Issued: ##/##/##

I. PURPOSE Chesterfield County’s Strategic Plan goal “Model for excellence in government” includes an objective to “Require the highest standards of professionalism, ethics, and integrity.” To help achieve this objective, this policy has been developed to prevent and detect fraud. The policy also defines what constitutes fraud and outlines expectations and procedures all employees must follow when fraud, waste or abuse is suspected. This policy also addresses requirements of the Code of Virginia, §15.2-2511.2, Duties of local government auditors for the fraud, waste, and abuse hotline.

II. SCOPE This procedure applies to all County employees. Chesterfield County School Board Policy 2170 includes similar employee responsibilities to report suspected fraud, waste or abuse.

III. DEFINITIONS A. Fraud – Intentional deception perpetrated by an individual or individuals, or an organization or organizations, either internal or external to local government, that could result in a tangible or intangible benefit to themselves, others, or the locality or could cause detriment to others or the locality. Fraud includes a false representation of a matter of fact, whether by words or by conduct, by false or misleading statements, or by concealment of that which should have been disclosed, which deceives and is intended to deceive. Specific examples of fraud include but are not limited to: 1. Theft of County Funds. 2. Serious abuse of County time such as unauthorized time away from work or excessive use of County time for personal business. 3. Unauthorized use or misuse of County property or records. 4. Falsification of records. 5. Theft or unauthorized removal of County records, County property or the property of other persons (to include the property of employees, supervisors, consumers, clients, customers, inmates or visitors). 6. Willful destruction or damage of County records, County property or the property of other persons (to include the property of employees, supervisors, consumers, clients, customers, inmates or visitors). 7. Neglecting or subverting job responsibilities in exchange for an actual or promised reward. 8. Improperly influencing or misleading auditors or investigators.

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AFC 11-09-18 Meeting Materials

B. Waste – Intentional or unintentional, thoughtless or careless expenditure, consumption, mismanagement, use, or squandering of resources owned or operated by the County or Schools to the detriment or potential detriment of the organization. Waste also includes incurring unnecessary costs because of inefficient or ineffective practices, systems, or controls. Specific examples of waste include but are not limited to: 1. Unnecessary spending to purchase items including: a. Unneeded items that have no business purpose. b. Purchases at inflated prices. c. Overstocking inventory. d. Replacing functional items without cause. 2. Unnecessary use of resources including: a. Wasteful use of government property or equipment. b. Performing unnecessary work. c. Wasting energy including electricity and fuel. 3. Mismanagement of resources. a. Failure to reuse or recycle major resources. b. Improper disposal of property or hazardous materials.

C. Abuse – Excessive or improper use of something, or the employment of something in a manner contrary to the natural or legal rules for its use; the intentional destruction, diversion, manipulation, misapplication, maltreatment, or misuse of resources owned or operated by the County or Schools; or extravagant or excessive use so as to abuse one's position or authority. Specific examples of abuse include but are not limited to: 1. Minor County time misuse, such as unauthorized work absence or conducting personal business, including: a. Taking long lunches or other excessive breaks b. Arriving to work late or leaving early, not working a complete work day. c. Failing to report leave for absences. d. Conducting secondary employment activity during work hours (such as selling products, preparing tax returns, selling real estate, scheduling or receiving deliveries). e. Conducting significant personal business during work hours. 2. Improper personal use of County resources, including: a. Using government vehicle for commercial purposes, personal gain, or advancing or inhibiting religious beliefs or political positions. b. Using government equipment, computer, email, services, materials or supplies for commercial purposes, personal gain, or advancing or inhibiting religious beliefs or political positions. c. Failure to report damage to government property or equipment. d. Unnecessary travel or conference attendance. e. Inflated travel or expense reimbursement.

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f. Receiving favors for awarding contracts to certain vendors. g. Using one’s position to gain an advantage over another resident when conducting personal business with the government. 3. Unfair hiring, promotion, and severance practices including: a. Pre-selection of candidates. b. Selection of unqualified candidates. 4. Intentionally circumventing or overriding policy, procedure or internal controls without appropriate justification or approval.

D. Internal Controls – Organization’s system to provide reasonable assurance of effective and efficient operations, reliable financial and performance reporting, compliance with applicable laws and regulations, and safeguarding assets. The fundamental difference between internal control weaknesses resulting in errors and those weaknesses resulting in fraud is intent.

E. County Funds – Currency, checks, or other negotiable instruments belonging to the County of Chesterfield or Chesterfield County Public Schools (CCPS), or for which the County or CCPS is the fiscal agent or has a fiduciary responsibility.

F. County Property – Any tangible item owned by the County of Chesterfield or CCPS.

G. Retaliation – When an individual is discriminated against or penalized for reporting fraud or for cooperating, giving testimony, or participating in any manner in an audit/investigation, proceeding, or hearing.

IV. BACKGROUND A. Studies have shown that “red flags” of fraud within an organization were ignored by the organization in many of the frauds reported. Downsizing and repositioning of an organization increases the risk of fraud. Internal controls are the best method of preventing fraud. Poorly written or poorly enforced internal controls allow most frauds to occur.

B. Fraud occurs for the following reasons (note: there are multiple reasons in some cases): 1. Poor internal controls 2. Management override of internal controls 3. Type of organization (industry with high risk of fraud) 4. Collusion between employees and third parties 5. Poor or non-existent company ethical standards 6. Lack of control over managers by their supervisors

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C. Some “red flags” of fraud are: 1. Changes in an employee’s lifestyle, spending habits or behavior 2. Poorly written or poorly enforced internal controls, procedures, policies or security 3. Irregular/unexplained variances in financial information 4. Inventory shortages 5. Failure to take action on results of internal/external audits or reviews 6. Unusually high expenses or purchases 7. Frequent complaints from customers 8. Missing files 9. Ignored employee comments concerning possible fraud

D. Perpetrators of fraud typically live beyond their reasonably available means. Other indicators of fraud include: the borrowing of small amounts of money from co-workers, collectors or creditors appearing at the place of business, excessive use of telephone to stall creditors, falsifying records, refusing to leave custody of records during the day, working excessive overtime, refusing vacations, and excessively rewriting records under the guise of neatness.

E. The following internal controls help prevent fraud: 1. Adherence to all organizational procedures, especially those concerning documentation and authorization of transactions 2. Physical and logical security over assets such as locking doors, firewalls, password protection and restricting access 3. Proper training of employees 4. Independent review and monitoring of tasks 5. Separation of duties so that no one employee is responsible for a transaction from start to finish 6. Clear lines of authority 7. Conflict of interest statements that are enforced 8. Rotation of duties in positions more susceptible to fraud 9. Ensuring that employees take regular vacations 10. Regular independent audits of areas susceptible to fraud

F. To provide opportunities for employees and citizens to report allegations of fraud, waste and abuse, Internal Audit shall administer a telephone hotline, website and other methods through which employees and residents of Chesterfield County may report anonymously any incident of fraud, waste and abuse. Internal Audit will coordinate investigations with other departments as necessary.

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V. EXPECTATIONS A. All County employees should practice the following as it applies to their job: 1. Know the fraud-related exposures in your area. 2. Know the symptoms or indicators of fraud. 3. Put in place methods to identify wrongdoing. 4. Make sure transactions you personally approve are not fraudulent. 5. Personally monitor for frauds which only you are in a position to detect. 6. Question and challenge the unusual. 7. Set an example of honest and ethical behavior by personal example and by not tolerating dishonest or unethical behavior in others. 8. Strive to prevent fraud by minimizing the exposures and reducing the opportunities and temptation. 9. Never inappropriately subordinate the needs of the organization to your own needs. 10. Recognize and respond to increased exposures. 11. Do not seek to achieve goals through dishonest or unethical means, and do not tolerate such behavior from others. 12. After a fraud, initiate corrective action to reduce the risk that fraudulent activity will recur. 13. Take appropriate disciplinary action. 14. Immediately refer suspected wrongdoing to Internal Audit or your supervisor for investigation. 15. Encourage other employees to be vigilant in reporting suspected wrongdoing. 16. Do the right thing.

VI. PROCEDURES lA. Al Employees – Any employee who has knowledge of an occurrence of fraud, waste or abuse, or has reason to suspect that a fraud, waste or abuse has occurred, shall immediately notify his/her supervisor or Internal Audit. If the employee has reason to believe that the employee’s supervisor may be involved, the employee shall immediately notify the Department Director/Chief of his/her department or Internal Audit. Every employee shall cooperate with administrative investigations pursuant to this administrative procedure in accordance with County Personnel Policies and Procedures. The employee shall not discuss the matter with anyone other than his/her supervisor, the Department Director/Chief, the Internal Audit department and the Police Department.

B. Supervisor – Upon notification from an employee of suspected fraud, waste or abuse, or if the supervisor has reason to suspect that a fraud, waste or abuse has occurred, the supervisor shall immediately notify the Department Director/Chief of his/her department or Internal Audit. The supervisor shall not attempt to investigate the suspected fraud or to discuss the matter with anyone other than the Department Director/Chief, the Internal Audit Department and the Police Department. However, if the supervisor has reason to believe that the Department Director/Chief

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may be involved in a fraud, the supervisor shall contact the Internal Audit Department or Police Department.

C. Department Director/Chief – Upon notification from an employee or supervisor of suspected fraud, waste or abuse, or if the Department Director/Chief has reason to suspect that a fraud, waste or abuse has occurred, the Department Director/Chief shall immediately contact the Internal Audit Department. The Department Director/Chief shall not attempt to investigate the suspected fraud or to discuss the matter with anyone other than the Internal Audit Department and the Police Department.

D. Internal Audit – Internal Audit logs all Fraud, Waste, and Abuse allegations received and evaluates if conditions warrant: a special project investigation by Internal Audit, referral or consultation of matter with the related County or School department, referral to another entity or jurisdiction (i.e. items not involving Chesterfield County or Schools personnel, resources, or operations), insufficient information to initiate an action, or no action required. Internal Audit determines if a separate report is necessary for each specific case. If applicable, such separate reports are provided to the County Administrator or School Superintendent, and the Audit and Finance Committees. Internal Audit documents disposition and if the allegation was substantiated for each case. All opportunities to improve internal controls or disagreements with management’s decisions are not necessarily Fraud, Waste or Abuse. Internal Audit provides a fiscal year report to the Audit and Finance Committees summarizing all allegations with dispositions. When Internal Audit suspects fraud, the Internal Audit Department will investigate the fraud and promptly notify the Chesterfield County Police Department.

E. Record Security – A successful audit/investigation can only be performed if the documentation relating to an alleged fraud is available for review in its original form. Therefore, once a suspected fraud is reported Department Directors/Chiefs and supervisors shall take immediate action to prevent the theft, alteration, or destruction of relevant records. Such actions include, but are not necessarily limited to, removing the records and placing them in a secure location, limiting access to the location where the records currently exist, and preventing the individual suspected of committing the fraud from having access to the records. The records must be adequately secured until Internal Audit obtains the records to begin the audit investigation.

F. Contacts/Protocols – After an initial review and a determination that the suspected fraud warrants additional investigation, Internal Audit will notify the County Administrator or School Superintendent, Appropriate Deputy County Administrator or School Division Chief, Human Resources, County or School Attorney, Police Department, and Commonwealth Attorney of the allegations. Internal Audit shall coordinate the investigation with the appropriate law enforcement officials and shall report its investigative findings as described below. At the conclusion of such fraud investigations, Internal Audit will document the results in a confidential memorandum report to the County Administrator or School Superintendent with a copy to the appropriate Deputy County Administrator or School Division Chief and Department Director/Chief. If the report concludes that the allegations are founded, the report will be copied to Human Resources, the County or School Attorney, and the Accounting Department. If the

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report documents that criminal offenses may have occurred, copies will also be sent to the Chief of Police and the Commonwealth’s Attorney. If the fraud has resulted in County or School property loss, Internal Audit shall report such loss to the Risk Management Department. Risk Management shall seek restitution for any property loss.

G. Confidentiality – All participants in a fraud investigation shall keep the details and results of the investigation confidential except as expressly provided in this administrative procedure. However, Internal Audit and the Police Department may discuss the investigation with any person if such discussion would further the investigation. Internal Audit obtains reports of suspected fraud, waste and abuse in confidence, specific details cannot be released in order to maintain confidentiality and anonymity (Code of Virginia, §2.2-3705.3. (7)). Information for completed investigations will not reveal the identity of the complainants or persons supplying information to investigators. If an investigation does not lead to corrective action, the identity of the person who is the subject of the complaint may be released only with the consent of the subject person.

H. Personnel Actions – If a suspicion of fraud is substantiated by the audit investigation, disciplinary action shall be taken in conformance with the County’s Personnel Policies and Procedures. A false and vindictive allegation of fraud is a violation of this administrative procedure. All violations of this administrative procedure, including violations of the confidentiality provisions, shall result in disciplinary actions up to and including termination and loss of retirement benefits and retiree health benefits.

I. Retaliation (Whistleblower protection) – It is a violation of this administrative procedure to discriminate against any individual for their reporting, cooperation, testimony, participation, or other activities related to a fraud, waste or abuse investigation. This includes threatening, attempting, taking, or directing others, on any reprisal or personnel action. Any such reprisals by employees will be subject to disciplinary procedures under personnel policies. Reckless accusations of fraud waste, or abuse that an employee or citizen knew, or should have known, were false or malicious are not protected. Whistleblower reprisal complaints should be filed with the Fraud, Waste and Abuse Hotline and describe the: 1. Related original fraud, waste or abuse allegation or investigation, 2. Retaliatory action taken or withheld, and 3. Responsible person(s) performing and/or directing the retaliation.

J. Media Issues – If the media becomes aware of an audit investigation, the appropriate supervisor or Department Director/Chief shall refer the media to the Office of Communications and Media. The alleged fraud and audit investigation shall not be discussed with the media other than through the Office of Communications and Media.

K. Upon completion of the audit investigation and all legal and personnel actions, records will be returned by Internal Audit to the appropriate department if acceptable.

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Report on Supplemental Retirement Plans PRESENTATION TO THE JOINT AUDIT AND FINANCE COMMITTEES NOVEMBER 9, 2018

AFC 11-09-18 Meeting Materials 1 Agenda Operating Overview Plan Financials as of June 2018 ◦ CCPS ◦ County Future Outlook

AFC 11-09-18 Meeting Materials 2 Operating Overview Oversight Structures Exist in Both Plans ◦ CCPS – Administrative Committee ◦ County – Board of Trustees Recent Activities ◦ New actuary and investment manager contracts executed – same vendor for both plans ◦ New asset custodian/ trustee contract executed (CCPS only) ◦ CCPS investment policy approved in conjunction with new investment manager April 2017 School Plan design now reflected in FY2018 financial reporting

AFC 11-09-18 Meeting Materials Operating Overview 3 CCPS Plan Position Improved in FY2018 Contributions exceeded requirements Net pension liability reduced Funded ratio improved Additional $2M deposit prior to Jan 2019 (will be reported in FY2019) Full extent of Plan revisions first reflected in FY2018

AFC 11-09-18 Meeting Materials Plan Financials as of June 2018 4 Key Metrics – CCPS SRP

AFC 11-09-18 Meeting Materials Plan Financials as of June 2018 5 Key Metrics – CCPS SRP

AFC 11-09-18 Meeting Materials Plan Financials as of June 2018 6 County Plan Position Improved in FY2018 Contributions exceeded requirements Net pension liability reduced Funded ratio improved

AFC 11-09-18 Meeting Materials Plan Financials as of June 2018 7 Key Metrics – County SRP

AFC 11-09-18 Meeting Materials Plan Financials as of June 2018 8 Key Metrics – County SRP

AFC 11-09-18 Meeting Materials Plan Financials as of June 2018 9 Key Metrics – County SRP

AFC 11-09-18 Meeting Materials Plan Financials as of June 2018 10 Future Outlook Forward focus on multiple fronts: ◦ Adherence to strong financial principles and oversight ◦ Track financial performance against expectations ◦ Update School Plan financial projections

AFC 11-09-18 Meeting Materials 11 Chesterfield County, Virginia Internal Audit FY19 Project Status Update

Completed: • External Audit support • Sheriff, Jail Canteen & Inmate Trust • FY18 Audit Follow-up Fund1 • Fraud, Waste, and Abuse Hotline • Schools, FY18 School Activity Funds Program, FY18 Report1 • Schools, Custodial Services • Internal Audit FY18 Report Card • Schools, Food Service/Vendors • Police, Animal Services

Note 1 – 11.9.18 AFC Meeting item.

In Progress: • Accounting, Enterprise System Security2 • Planning, Proffers and Conditions • Accounting, Revenue Collection Points Tracking2 • Accounting, Quarterly Expenditure • Real Estate Assessor, Assessment Analysis Processes & Systems and Expenditures2 • ARWA Special Project • Schools, School IT Risk Assessment2 • CDBG Program Compliance • Schools, Payroll, HR Classification and • County/School Special Projects Compensation • Financial Statement Review • Schools, Temporary Work Assignments • HR, Benefits Administration • Treasurer Tax Billing, Payment • MHSS, Medicaid Procedures and Balances2

Remaining: • County Wide Affiliated Entities/ERM • General Services, Security Program • Economic Development, Revitalization • Peer Review (other organization • Emergency Communications Center, participation) Training, Operations, and Expenditures2 • Parks & Recreation, Concessions Stands • Financial Statement Review: Leases and Leases (Softball, etc.) o APA FY18 Comparative Report • Police, Training Analysis • Risk Management, Claims o CDBG & HOME Program Administration and Workers Organizations Applicants Compensation o Volunteer Fire & Rescue • Social Services, General Relief Organizations • Utilities, Customer Information System2 • IST, Application Security Controls2

Note 2 – Denotes IT Focused Projects

Audit and Finance Committee Meeting – November 9, 2018 Internal Audit Handout Chesterfield County, Virginia Internal Audit Hotline Status Update

ALLEGATIONS RECEIVED FY19 There have been 6 allegations received through November 9, 2018, and 3 allegations carried over from Fiscal Year 2018.

Activity Since Prior Update September 28 November 9 New Completed Investigations 1 - 1 2 Referrals 2 - 2 4 Open/Pending Items 6 - (3) 3 Total 9 - - 9

INVESTIGATION(S) SUMMARY FY19 There has been 1 completed investigation previously reported to the Audit and Finance Committee in Fiscal Year 2019. Investigation(s) completed this period:

Allegation Department Allegation (Source) Substantiated Summary Result (Yes/No) Community Employee ethics violation No No unfair regulatory Development (management) enforcement or policy non- Division compliance found in employee communications.

Audit and Finance Committee Meeting – November 9, 2018 Internal Audit Handout