Internal Control and Compliance Assessment Arkansas Legislative Audit Department of Arkansas Heritage For the Fiscal Year Ended June 30, 2014 INTRODUCTION This report is issued to inform the Legislative Joint Auditing Committee of compliance with state fiscal laws and regulations as well as deficiencies in internal controls for the Department of Arkansas Heritage. As discussed in the Results of Assessment section below, our procedures disclosed that the Agency had insufficient segregation of duties over cash transactions of the Loughborough Trust Fund due to a limited number of personnel. SCOPE AND METHODOLOGY We performed an internal control and compliance assessment of the Department of Arkansas Heritage, a department of Arkansas state government, as of and for the year ended June 30, 2014, and have issued our report dated May 26, 2015. Management of the Agency is responsible for establishing and maintaining internal controls and complying with applicable laws and regulations. The assessment included cash on deposit, cash receipts, expenditures, capital assets, and data entry to the Arkansas Administrative Statewide Information System (AASIS). The assessment consisted principally of inquiries, observations, analytical procedures, and selected tests of internal control policies and procedures, accounting records, and other relevant documents. We relied on financial data in AASIS recorded by the Agency and audit work conducted in the fiscal year 2014 State Comprehensive Annual Financial Reports (CAFR) and Single Audit Reports. The methodology used in conducting this assessment was developed uniquely for this engagement and, therefore, was more limited in scope than an audit or attestation engagement performed in accordance with Government Auditing Standards issued by the Comptroller General of the United States. RESULTS OF ASSESSMENT Assessment procedures disclosed the following internal control or compliance matter that was discussed with Agency officials during the assessment and at the exit conference: Finding: The Agency had inadequate control over cash transactions of the Loughborough Trust Fund because of insufficient segregation of duties due to a limited number of personnel. ARKANSAS LEGISLATIVE AUDIT 500 Woodlane Street, Suite 172, Little Rock, AR 72201 Phone: 501-683-8600 Fax: 501-683-8605 www.arklegaudit.gov Report ID: SR2386514 Report Date: May 26, 2015 Department of Arkansas Heritage ENABLING LEGISLATION AND ORGANIZATIONAL STRUCTURE The Department of Arkansas Heritage (DAH) was created in 1975 to combine state programs and agencies dealing most directly with the discovery, preservation, and presentation of the State’s cultural, historic, and natural resources. DAH seeks federal and private funding to augment its state funding. As illustrated in Exhibit I on page 2, the Agency is divided into two divisions: Heritage Museum Division preserves, presents, and interprets historic structures, objects, and natural assets. The Division’s museums serve as partners in education with public and private schools throughout Arkansas. Heritage Resources Division identifies, preserves, and promotes Arkansas’s rare, unique, or endangered natural resources and serves as a conduit for federal and state grant funds that conserve or develop those resources. Exhibit I Department of Arkansas Heritage Organizational Chart Department of Director Arkansas Heritage Heritage Museum Division Heritage Resources Division Stacy Hurst, Director (1/1/2015 – present) Old State House Museum Martha Miller, Director Arkansas Arts Council (1/1/2013 – 12-31-2014) Historic Arkansas Museum 1500 Tower Building 323 Center Street Arkansas Historic Preservation Program Little Rock, AR 72201 Delta Cultural Center Telephone: 501-324-9150 Mosaic Templars Arkansas Natural www.arkansasheritage.com Cultural Center Heritage Commission Source: Department of Arkansas Heritage FISCAL ANALYSIS Revenues, Expenditures, and Transfers Agency revenues, expenditures, and transfers for fiscal year 2014 are provided in Exhibit II on page 3. The Agency reported approximately $22.5 million in total revenue for the fiscal year ended June 30, 2014. The primary source of these funds was the real estate transfer tax authorized by Ark. Code Ann. § 15-12-103. Revenues fluctuate depending on the amount of real estate sold each year. 2 Arkansas Legislative Audit Agency expenditures totaled nearly $25.7 million for the fiscal year ended June 30, 2014. Salaries, capital outlay, and assistance, grants, and aid comprised 36.3%, 25.4%, and 15.1%, respectively, of Agency expenditures for fiscal year 2014. The Agency had net transfers in totaling $7.1 million for the fiscal year ended June 30, 2014. Transfers consisted mainly of interagency transfers of state and federal funds. The majority of the $3 million variance in net transfers between 2014 and 2013 was a due to decreased funding requests from grantees during the year, which are made on an as-needed basis. Assets and Liabilities Agency assets and liabilities at June 30, 2014, totaled $140.1 million and $1.1 million, respectively. Increases in assets have generally been due to the acquisition of land and museum artifacts. Asset and liability balances at year-end for fiscal years 2010 through 2014 are presented in Exhibit III on page 4. Fund balances were reconciled to the State Treasury without exception. Exhibit II Department of Arkansas Heritage Revenues, Expenditures, and Transfers For the Years Ended June 30, 2010 through 2014 Fiscal Year 2014 2013 2012 2011 2010 Revenues Real estate transfer taxes $ 19,629,192 $ 18,114,351 $ 15,449,165 $ 13,908,027 $ 15,765,203 Federal grants and reimbursements 1,651,918 1,502,166 1,429,150 2,067,370 1,895,356 Mineral lease royalties 964,481 476,848 316,412 431,090 1,621,801 Other income 248,678 260,013 463,094 404,365 325,450 Total Revenues $ 22,494,269 $ 20,353,378 $ 17,657,821 $ 16,810,852 $ 19,607,810 Expenditures Salaries $ 9,327,939 $ 9,033,812 $ 8,873,473 $ 8,390,101 $ 8,235,953 Capital outlay 6,518,409 3,898,971 7,898,397 4,514,368 5,560,688 Assistance, grants, and aid 3,864,891 3,572,100 2,940,843 3,789,596 3,838,491 Other expenses 5,952,768 6,045,737 5,687,936 5,616,366 5,502,404 Total Expenditures $ 25,664,007 $ 22,550,620 $ 25,400,649 $ 22,310,431 $ 23,137,536 Net Transfers In (Out) $ 7,108,820 $ 2,949,388 $ 4,899,070 $ 2,640,761 $ 2,476,435 Source: Arkansas Administrative Statewide Information System Trial Balance (unaudited by Arkansas Legislative Audit) 3 Department of Arkansas Heritage Exhibit III Department of Arkansas Heritage Assets and Liabilities For the Years Ended June 30, 2010 through 2014 Fiscal Year 2014 2013 2012 2011 2010 Assets Cash in State Treasury $ 33,979,196 $ 29,990,634 $ 29,150,696 $ 32,437,211 $ 35,356,804 Cash in bank 450,093 445,167 409,732 341,159 316,988 Fixed assets 105,350,603 98,662,120 94,706,703 86,628,555 77,931,207 Other assets 323,895 369,990 387,328 363,179 334,184 Total Assets $ 140,103,787 $ 129,467,911 $ 124,654,459 $ 119,770,104 $ 113,939,183 Liabilities Accounts payable $ 34,948 $ 18,876 $ 21,675 $ 64,524 $ 214,045 Accrued leave 789,296 762,410 741,821 708,210 663,899 Payroll liability 191,594 154,706 154,758 416,709 375,073 Other liabilities 124,451 207,340 135,472 230,483 232,393 Total Liabilities $ 1,140,289 $ 1,143,332 $ 1,053,726 $ 1,419,926 $ 1,485,410 Source: Arkansas Administrative Statewide Information System Trial Balance (unaudited by Arkansas Legislative Audit) GRANT PROGRAMS Grants totaling $11.2 million were distributed to recipients during fiscal year 2013, as illustrated in Schedule 1 on pages 5 and 6. The top 15 grant recipients from each DAH agency are listed separately. All other recipients are shown in aggregate. Central Administration receives an appropriation from the Conservation Tax – Amendment 75 each year, and each DAH agency is allocated a portion of the budget. The grants/aid line item is allocated to Central Administration for Heritage Month grants as well as two pass-through grants to the Arkansas Humanities Council. Any remaining balance of the grants/aid line item is allocated to the Arkansas Arts Council and may be used to fund related grant programs. The Arkansas Arts Council administers both federal and state funds, financial aid, and state art grants for programs and services benefiting Arkansas arts organizations, schools, and artists. Federal funds are appropriated by Congress to the National Endowment for the Arts which, in turn, grants funds to the Arkansas Arts Council. State funds for art grants and the Arkansas Arts Council are awarded annually. The Arkansas Historic Preservation Program administers or assists grant programs that seek to preserve the State’s historic resources. Financed through state general revenues, proceeds of the State's real estate transfer tax, and/or federal funds received from the National Park Service or Department of the Interior, these programs provide assistance to governments, organizations, and individuals seeking to preserve historic Arkansas. The Arkansas Natural and Cultural Resources Council (ANCRC) manages and supervises grants and trust funds for the acquisition, management, and stewardship of state-owned properties acquired or used for ANCRC-approved purposes. The grants are funded through the State's real estate transfer tax. Grants from this fund are for projects that protect and maintain state-owned natural areas, historic sites, and outdoor recreation. 4 Arkansas Legislative Audit Schedule I Department of Arkansas Heritage Grants Awarded to Recipients For the Year Ended June 30, 2014 Funded by Central Administration (0865) Vendor Name Amount Arkansas Humanities Council, Inc. $ 200,000 Main Street Russellville 75,000 The Museum of Discovery 59,481 Theatre Squared, Inc. 34,001 Texarkana Regional Arts and Humanities Council 33,298 Central Arkansas Library System 32,394 Tricycle Theater for Youth 31,064 Crittenden Arts Council, Inc.