oversight

Puerto Rico Department of Education's Salaries for the Period July 1, 1999 to June 30, 2003.

Published by the Department of Education, Office of Inspector General on 2004-06-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                               U.S. DEPARTMENT OF EDUCATION 

                               OFFICE OF INSPECTOR GENERAL 

                                      75 Park Place, 12th Floor 

                                     New York, New York 10007



                                                    June 2, 2004

                                                                             Control Number
                                                                             ED-OIG/A02-D0023

Honorable César Rey-Hernández
Secretary of Education
Puerto Rico Department of Education
Calle Teniente González, Esq. Calle Calaf – 12th Floor
Urb. Tres Monjitas
Hato Rey, Puerto Rico 00919

Dear Secretary Rey-Hernández:

This is our Final Audit Report entitled Puerto Rico Department of Education’s (PRDE)
Salaries for the Period July 1, 1999 to June 30, 2003. The objective of our audit was to
determine the cause and extent of improper salary charges to U.S. Department of Education
(ED) programs. Our review disclosed that the primary cause of improper salary charges was
PRDE’s failure to monitor payroll transactions processed by a contractor, Rock Solid
Technologies (RST). We also determined PRDE’s salary reconciliations of the Title I
account for fiscal years 2002 and 2003 were erroneous. In addition, PRDE and the Puerto
Rico Treasury Department (Hacienda), the government agency that processes PRDE’s
payroll charges and paychecks, failed to provide adequate records necessary to initiate the
analysis of the Title I and other ED accounts. As a result of this audit scope limitation, we
were unable to determine the extent of the improper salary charges and the level of
unsupported costs.

We provided a draft of this audit report to PRDE. In its response, dated April 22, 2004,
PRDE stated it was working in cooperation with ED to institute new procedures that would
ensure that all salary charges to Federal programs are accurate and fully comply with Federal
laws and regulations. PRDE also stated it had established a Payroll Team that was working
with ED to update PRDE’s payroll system. PRDE suggested that the issue of past
reconciliations and independent evaluation be discussed in the context of the Cooperative
Audit Resolution and Oversight Initiative (CAROI), a collaborative method to provide
alternative and creative approaches to resolve audit findings, as well as their underlying
causes. Lastly, PRDE reported that requested transaction files were available for the OIG to
review and that Hacienda provided its payroll transactions to the OIG. However, neither
PRDE nor Hacienda provided the records necessary to initiate the analysis of the Title I and
other ED accounts. A Hacienda official reported that he did not recall, but may have
submitted the data to PRDE to provide to the OIG. PRDE’s response did not cause us to
change our finding and recommendations. We have summarized PRDE’s comments after the
finding and have included PRDE’s entire response as an Attachment.


   Our mission is to promote the efficiency, effectiveness, and integrity of the Department’s programs and operations.
Audit of PRDE’s Salaries                                                          Final Report
for the Period July 1, 1999 to June 30, 2003                                ED-OIG/A02-D0023

                                       BACKGROUND 


PRDE annually employs approximately 70,000 people. PRDE contracted with RST to
implement a human resources operating system to manage the PRDE employee payroll
accounts. RST is a software solutions company with offices in Austin, Texas and San Juan,
Puerto Rico.

PRDE’s December 31, 2001 financial records showed a deficit of $18,108,105 in the Title I
account for fiscal year 2001. Because of this purported deficit, PRDE conducted a
reconciliation of the Title I payroll account for fiscal year 2002 and provided the results to
the auditors conducting the 2002 Single Audit in December 2002. The results were
incorporated into the report as Finding 02-51. The Finding stated that, during PRDE’s fiscal
year 2002 that ended June 30, 2002, PRDE charged to the Title I program salaries totaling
$91,584,387 from employees who provided personal services for state activities, other
governmental agencies of Puerto Rico, and other Federal programs managed by PRDE. Of
that amount, $84,141,309 pertained to state activities. A Senior Partner of the audit firm told
the ED-OIG auditors that the Single Audit report did not include the cause of the finding
because the condition was identified just days before the report was to be issued.

A similar condition was reported in Finding 02-14. This Finding stated that employees who
should have been paid with state funds during the year ended June 30, 2002, were paid
$384,187 with ED funds from the Title I Grants to Local Education Agencies, Child
Nutrition Cluster, Goals 2000, Comprehensive School Reform Demonstration, and Class
Size Reduction programs.

In August 2002, ED placed Special Conditions on PRDE’s grants because of problems with
PRDE’s fiscal and program accountability. Additionally, in August 2003, PRDE’s Internal
Audit Office reported a payroll fraud case that involved the illegal appropriation of $104,161
in state funds. According to the Internal Audit report, this occurred due to a lack of
supervision and controls over processing payroll payment transactions. In September 2003,
ED again placed Special Conditions on PRDE’s grants due, in part, to the unallowable
payment of employees’ salaries using Title I and other Federal program accounts, and
formalized its collaborative efforts with PRDE through the CAROI process.

                                      AUDIT RESULTS

Finding: 	     PRDE’s lack of controls over payroll processing led to an undeterminable
               amount of improper salary charges

PRDE did not properly monitor payroll transactions processed by RST. In addition, PRDE
did not perform reconciliations of salary charges to ED programs until it identified a
purported deficit in its Title I account. This occurred because PRDE lacked internal control
procedures over its payroll processing. We were unable to determine the extent of the
improper salary charges to ED programs and the level of unsupported costs, because PRDE
conducted erroneous reconciliations of the Title I payroll account for fiscal years 2002 and
2003. Further, PRDE and Hacienda failed to provide us adequate records necessary to
initiate the analysis of the Title I and other ED accounts. As a result of this limitation to the

                                                2

Audit of PRDE’s Salaries                                                                         Final Report
for the Period July 1, 1999 to June 30, 2003                                               ED-OIG/A02-D0023

scope of our audit, we were unable to determine the amount of ED funds that were
improperly charged.

Pursuant to 34 C.F.R. § 80.40(a),1 “Grantees are responsible for managing the day-to-day
operations of grant and subgrant supported activities. Grantees must monitor grant and
subgrant supported activities to assure compliance with applicable Federal requirements and
that performance goals are being achieved. Grantee monitoring must cover each program,
function or activity.”

PRDE maintained its payroll accounts on its human resources operating system, which was
developed and operated by RST. PRDE processed its payroll through Hacienda by providing
payroll change data to Hacienda through RST. Hacienda uploaded the change data into its
payroll system and processed PRDE’s payroll twice per month.

The primary cause of improper salary charges to the Title I account was PRDE’s failure to
monitor payroll transactions processed by RST. Specifically, PRDE did not identify a
significant payroll processing error that occurred in September 2001. In September 2001,
PRDE requested RST to create change transactions to update payroll accounts for fiscal year
2002. RST wrote a computer program to create the transactions and sent the data to
Hacienda for processing. According to an RST senior official, the selection criterion was
written incorrectly and did not select the correct employees. This resulted in an
undetermined number of state employee account codes being improperly changed to ED
grant account codes. Staff at both RST and PRDE stated they were unaware that the update
included numerous erroneous employees. In addition, PRDE neither monitored the
transactions processed by the contractor, nor reconciled the data sent to Hacienda for
processing to the source documents that supported each payroll change.

To identify the cause of the deficit in the Title I account, PRDE established a task force
composed of personnel from the Office of Federal Affairs, the Finance Department, and the
Computer Center. In August 2002, the Computer Center developed a program to reconcile
the data in Hacienda’s system to PRDE’s system. PRDE’s Accounting Division then
reconciled the Title I payroll account for fiscal year 2002. The reconciliation identified
$84,141,309 improperly charged to the Title I payroll account from state activities; this was
the basis for the Single Audit Finding 02-51. PRDE obtained an advance of $81 million
from the Puerto Rico Office of Management and Budget and, in January 2003, reimbursed
the Title I account with the $81 million. PRDE offset the remaining $3,141,309 against state
accounts because the reconciliation also had identified payroll from the Title I account that
had been improperly charged to state accounts during fiscal year 2002. In addition, the
reconciliation identified payroll totaling $695,430 from employees of other governmental
agencies of Puerto Rico charged to the Title I payroll account. PRDE identified these
employees and sent collection letters to the agencies.

PRDE also reconciled the Title I payroll account for fiscal year 2003. The reconciliation
identified $57,764,458 improperly charged to the account. As of December 11, 2003, PRDE
had reimbursed the Title I account $49,789,989.


1
    Unless otherwise specified, all regulatory citations are to the July 1, 2002 volume.
                                                           3
Audit of PRDE’s Salaries                                                         Final Report
for the Period July 1, 1999 to June 30, 2003                               ED-OIG/A02-D0023

Our evaluation of the reconciliation process and testing of 10 personnel files determined that
PRDE did not accurately identify improper charges to the Title I payroll account. We found
that the PRDE reconciliations of its data to Hacienda's data did not, in all cases, identify the
actual variances in salary charges that occurred between the systems. Our evaluation noted
one of the reasons for the inaccurate reconciliations was that PRDE compared Hacienda's
salary data to the data in PRDE's system on the date the reconciliation program was run,
rather than the actual date of the payroll. As a result, in cases where PRDE's data had been
changed since the actual payroll processing, the reconciliation process identified inaccurate
discrepancies. Because of this condition, we were unable to determine the extent of the
improper salary charges to ED programs and the level of unsupported costs.

On July 29, 2003, we requested from PRDE all payroll transactions resulting in a transfer of
data to Hacienda for processing, as well as all salary charges to ED grants for the period July
1, 1999 through July 29, 2003. On that same date, we requested similar information from
Hacienda. The records were necessary to initiate our analysis of all ED accounts. As of
January 21, 2004, the date of our exit conference, neither PRDE nor Hacienda had provided
us the requested data.

PRDE’s lack of internal control procedures over its payroll processing weakened PRDE’s
ability to ensure payroll was processed properly. Specifically, PRDE

   ƒ   did not reconcile payroll transactions,

   ƒ   did not monitor the results of records submitted to Hacienda for processing,

   ƒ   allowed manual intervention to its payroll files, and

   ƒ   had an excessive number of employees with direct access to the Hacienda system.

As of November 2003, PRDE had 117 employees with access to the Hacienda system. Of
the 117 employees, 23 had “Read Only” access and 94 had “Change” authority. These 94
employees had sufficient access to manually enter transactions directly to the Hacienda
system without posting a transaction in PRDE’s system. While these transactions were
recorded in the audit-trail module of Hacienda’s system, the Hacienda staff did not monitor
the transactions routinely. According to a Hacienda senior official, all of PRDE’s payroll
changes should go through RST; if RST did its job correctly, PRDE employees would not
need to access Hacienda’s system. PRDE also lacked an automated data transfer system for
sending payroll files to Hacienda. Generally, PRDE sent the payroll data to Hacienda by
e-mail. However, occasionally the data was saved to a disk and a PRDE employee hand
delivered the disk to Hacienda.

Recommendations:

We recommend that the Chief Financial Officer for the Office of the Chief Financial Officer,
in conjunction with the Assistant Secretary for the Office of Elementary and Secondary
Education, require PRDE to


                                                 4
Audit of PRDE’s Salaries                                                         Final Report
for the Period July 1, 1999 to June 30, 2003                               ED-OIG/A02-D0023

   1.1    	reconcile payroll transactions quarterly, re-evaluate and correct all reconciliations
          completed to date, perform additional reconciliations necessary to cover the period
          September 2001 to the present for all ED grants, and make appropriate adjustments
          to ED. PRDE also must obtain an independent evaluation of all reconciliations
          performed to ensure ED that all improper charges have been returned to the
          respective ED programs,

   1.2 	 develop written internal control procedures over its payroll processing,

   1.3 	 establish monitoring control procedures of all payroll transactions submitted to
         Hacienda for processing to ensure accuracy of the work performed,

   1.4 	 eliminate or limit the amount of manual intervention allowed and performed in the
         payroll files generated by PRDE,

   1.5 	 eliminate the direct access by PRDE employees to Hacienda’s system. All PRDE
         payroll changes must go through its payroll contractor, RST, to maintain an
         appropriate level of internal control, and

   1.6 	 automate the data transfer of files from PRDE to Hacienda to eliminate possible
         manual intervention.

PRDE’s response

PRDE stated it was working in cooperation with ED to institute new procedures that would
ensure that all salary charges to Federal programs are accurate and fully comply with Federal
laws and regulations. PRDE also stated that the current administration inherited an
antiquated and burdensome payroll system and had been working diligently to design and
implement the far-reaching changes necessary to upgrade and modernize the payroll system
in an orderly and timely fashion. Further, PRDE recognized this task was critical to ensuring
the accuracy of the payroll system and its compliance with Federal and State regulations.

PRDE also stated it had established a Payroll Team that was working with ED to update
PRDE’s payroll system and that the team drew on expertise and experience from the
accounting, auditing, budgeting, legal, human resources, and software fields. The Payroll
Team, supported with technical assistance from ED, developed the following broad goals:

   •     ensuring people are paid from the proper accounts each time,
   •     ensuring the proper allocation of Federal funds using time distribution,
   •     identifying and resolving errors in a proper and timely manner,
   •     reengineering the current payroll transaction flow,

   •     streamlining and documenting the payroll processes, and
   •     adding internal controls to STAFF and the payroll process.

In response to recommendation 1.1, PRDE stated it was going to reconcile transactions on a
quarterly basis for payroll transactions that commenced in January 2004. PRDE suggested

                                                5
Audit of PRDE’s Salaries                                                         Final Report
for the Period July 1, 1999 to June 30, 2003                               ED-OIG/A02-D0023

that the issue of past reconciliations and independent evaluation be discussed in the context
of CAROI.

In response to recommendation 1.2, PRDE stated it was in the process of developing written
internal control procedures, and had discussed this specific issue and was developing a plan
in the context of the CAROI Payroll Team.

In response to recommendation 1.3, PRDE stated that the Human Resources Team had
developed an integrated approach to reengineer the Human Resources/Payroll/Hacienda
transaction flow.

In response to recommendation 1.4, PRDE stated that the approach developed in response to
recommendation 1.3 would significantly reduce manual intervention in transaction
processing, both at PRDE and Hacienda. The number of steps performed to run a payroll
was reduced from more than forty steps to two fully automated steps.

In response to recommendation 1.5, PRDE stated that once the improvements to the payroll
system were fully implemented, the need to directly access Hacienda’s system by PRDE
would be significantly reduced. PRDE’s expectation was to reduce the number of employees
directly accessing RHUM (Hacienda’s system) with “change” authority from 94 to less than
20 employees, when the new interface is fully implemented by the end of 2004.

In response to recommendation 1.6, PRDE stated that only one transaction file was going to
be sent to Hacienda. Because it would only be one file, and because the file would contain
payroll identification data and payroll totals, this data could be easily sent electronically to
Hacienda with minor risks. PRDE maintained that although the probability of data
intervention was low, in the event data intervention did occur, it would be immediately
detected through the Discrepancy Module in the Payroll Reconciliation component.

OIG’s reply

We considered PRDE’s general response and its response to each recommendation, but did
not change our finding and recommendations. PRDE’s request to resolve the issue of past
reconciliations, independent evaluation, and the development of written internal control
procedures through the CAROI process may be considered by ED’s Chief Financial Officer
and Assistant Secretary for the Office of Elementary and Secondary Education, as part of the
audit resolution process. However, in order to accurately determine the improper salaries,
PRDE must conduct reconciliations for each pay period and should have an independent
evaluation of its written controls. PRDE’s development of an integrated approach to
reengineer the Human Resources/Payroll/Hacienda transaction flow should also emphasize
the timely review of rejected files and other errors, and the ceasing of manual intervention by
the Hacienda and PRDE staff. No PRDE employee should have direct access to Hacienda’s
system. All changes must go through PRDE’s contractor, in order to maintain a minimal
level of control. Contrary to PRDE’s opinion, continued manual intervention provides
opportunities for data manipulation. Reducing the number of transaction files will reduce
some risk, but the risk remains. PRDE did not provide a description of the “Discrepancy
Module,” as a result, we cannot be assured any manual intervention would immediately be
identified.
                                                6
Audit of PRDE’s Salaries                                                        Final Report
for the Period July 1, 1999 to June 30, 2003                              ED-OIG/A02-D0023

                     OBJECTIVE, SCOPE, AND METHODOLOGY 


The objective of our audit was to determine the cause and extent of improper salary charges
to ED programs. To achieve the audit objective, we reviewed PRDE’s fiscal year 2002
Single Audit report and documents supporting the reported Finding 02-51 and interviewed
officials from the audit firm that conducted the Single Audit, PRDE, RST, and Hacienda.
We also reviewed electronic payroll files extracted by PRDE, RST, and Hacienda. In
addition, we reviewed the methodology followed and the results of the reconciliations of the
Title I payroll account performed by PRDE for fiscal years 2002 and 2003. From PRDE’s
May 2003 reconciliation, we obtained a list of the employees that were allocated to state
accounts in PRDE’s files, but were paid from the Title I account in Hacienda’s system. We
judgmentally tested the first 10 employees from the PRDE data to determine which account
they were allocated to in PRDE’s files during May 2003.

Through our interviews of PRDE, RST, and Hacienda officials, review of PRDE’s Title I
payroll account reconciliations for fiscal years 2002 and 2003, and testing of the 10 sampled
employee files, we determined that data provided by PRDE to meet the audit objectives was
sufficiently reliable for supporting our conclusion that PRDE did not adequately identify the
impact of the deficiencies noted. However, PRDE’s and Hacienda’s failure to provide
necessary electronic data impaired our ability to properly evaluate the impact of improper
charges to Title I and other ED programs. This audit scope limitation did not allow us to
determine the extent of improper salary charges to ED programs and quantify the impact of
the inaccurate reconciliations performed by PRDE.

We performed our fieldwork at PRDE’s offices in Hato Rey, Puerto Rico, from July 22, 2003
through January 21, 2004, the date of our exit conference.

Our audit was performed in accordance with generally accepted government auditing
standards appropriate to the scope of the review described above.

                    STATEMENT ON MANAGEMENT CONTROLS

As part of this audit, we assessed the system of management controls applicable to PRDE’s
payroll processing. Our assessment was performed to gain an understanding of PRDE’s
payroll system. Based on previous knowledge gained through our prior audits (ED­
OIG/A01-90006, ED-OIG/A01-90007, ED-OIG/A01-A0004, ED-OIG/A02-B0012, ED­
OIG/A02-B0025, and ED-OIG/A02-C0017) and ED’s designation of PRDE as a “high-risk”
grantee under 34 C.F.R. § 80.12, we determined the level of control risk, that is the risk that
material errors, irregularities, or illegal actions may occur, to be high. We found that PRDE
did not properly monitor payroll transactions submitted to Hacienda for processing, did not
reconcile payroll transactions, allowed a significant amount of manual intervention in the
payroll files it generated, lacked an automated data transfer system of payroll files, and had
an excessive number of employees with direct access to Hacienda’s system. These
weaknesses and their effects are fully disclosed in the AUDIT RESULTS section of the
report.



                                               7
Audit of PRDE’s Salaries                                                       Final Report
for the Period July 1, 1999 to June 30, 2003                             ED-OIG/A02-D0023

                             ADMINISTRATIVE MATTERS 


If you have any additional comments or information that you believe may have a bearing on
the resolution of this audit, you should send them directly to the following Education
Department officials, who will consider them before taking final Departmental action on this
audit:

               Jack Martin

               Chief Financial Officer 

               Office of the Chief Financial Officer 

               Federal Office Building 6 

               400 Maryland Avenue, SW, Room 4E313 

               Washington, DC 20202 


               Raymond J. Simon 

               Assistant Secretary       

               Office of Elementary and Secondary Education 

               Federal Office Building 6      

               400 Maryland Avenue, SW, Room 3W315 

               Washington, DC 20202 


It is the policy of the U.S. Department of Education to expedite the resolution of audits by
initiating timely action on the findings and recommendations contained therein. Therefore,
receipt of your comments within 30 days would be greatly appreciated.

Statements that managerial practices need improvements, as well as other conclusions and
recommendations in this report represent the opinions of the Office of Inspector General.
Determinations of corrective action to be taken will be made by the appropriate Department
of Education officials.

In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by the
Office of Inspector General are available to members of the press and general public to the
extent the information contained therein is not subject to exemptions in the Act.


                                               Sincerely,

                                                      /s/

                                               Daniel P. Schultz
                                               Regional Inspector General
                                                 for Audit


Attachment



                                                8
Audit of PRDE’s Salaries                                                                                                          Final Report
for the Period July 1, 1999 to June 30, 2003                                     Attachment                                 ED-OIG/A02-D0023




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                                           Commonwealth
                                              ..
                                           ~-----...----~--
                                                               of Puerto
                                                     . -_._._--_._,.- --- Rico                 -

                                                DEPARTMENT OF EDUCATION

          OFFICE OF FEDERAL AFFAIRS




                         7 2 ,'D" 2004


                   Daniel P. Schultz
                   Regional Inspector General for Audit
                   U.S. Depaliment of Education
                   Office oflnspector General
                   75 Park Place, Room 1207
                   ;-.!ewYork. NY 10007

                    Dear Mr. Schultz

                    The Puerto Rico Department of Education (PRDE) appreciates the opportunity to submit
                    comments regarding Draft Audit Report Control Number ED-OIG/A02-D0023.
                    Enclosed please find our comments regarding the finding.

                    If you have any questions, please feel free to contact me.




                    Director




           P.O.   BOX   190759,   SA:\   JUAN    Pl'ERTO      RICO   UUYl cJ-(1/;l9   •   PHONE.   (787)   759·B910   •   FAX   (787)   751-6192

           The Department of Education does not discrimin2te in it::: activlties_ educational ~en,-jces or employment opportunities on
           the bASis of race. COlOl", sex, age. birth. n8tional origin. social COndJtlUr~) political ideas, religious beliefs or any handicap.
Audit of PRDE’s Salaries                                                          Final Report
for the Period July 1, 1999 to June 30, 2003      Attachment                ED-OIG/A02-D0023




          PUERTO RICO DEPARTMENT OF EDUCATION RESPONSE TO

                        OIG DRAFT AUDIT REPORT 

         PRDE SALARIES FOR THE PERIOD JULY 1, 1999 TO JUNE 30, 2003 

                  AUDIT CONTROL NO. ED-OIG/A02-D0023 


The Puerto Rico Department of Education (PRDE) appreciates the opportunity to respond to the
Office of Inspector General’s (OIG) March 11, 2004 draft audit report due today, April 22, 2004.

PRDE has the following response to the finding contained in the draft audit report.

Finding – PRDE’s lack of controls over pay processing led to an undeterminable
amount of improper salary charges

PRDE is working in cooperation with the U.S. Department of Education (ED) to institute new
procedures that will ensure that all salary charges to Federal programs are accurate and fully
comply with Federal laws and regulations. This work has included extensive site visits and
technical assistance by ED since September 2003, when PRDE and ED formalized their
collaborative efforts through the CAROI process.

PRDE’s current administration inherited an antiquated and burdensome payroll system and has
been working diligently to design and implement the far reaching changes necessary to upgrade
and modernize the payroll system in an orderly and timely fashion. While improving and
modernizing this system, the payroll system must continue to assure salary payments for PRDE’s
78,000 employees. Although this task is formidable, PRDE recognizes that it is critical to
ensuring the accuracy of the payroll system and its compliance with Federal and state
regulations.

PRDE has established a Payroll Team that is working with ED to update PRDE’s payroll system.
This team draws on expertise and experience from the accounting, auditing, budgeting, legal,
human resources, and software fields. PRDE’s Payroll Team, supported with technical
assistance from ED, developed the following broad goals:

   •   ensuring people are paid from the proper accounts each time,
   •   ensuring the proper allocation of Federal funds using time distribution,
   •   identifying and resolving errors in a proper and timely manner,
   •   reengineering the current payroll transaction flow,
   •   streamlining and documenting the payroll processes, and
   •   adding internal controls to STAFF and the payroll process.



Puerto Rico Department of Education                                                    1
April 22, 2003
Audit of PRDE’s Salaries                                                          Final Report
for the Period July 1, 1999 to June 30, 2003      Attachment                ED-OIG/A02-D0023

PRDE collaborated with ED to develop the above goals and a corresponding action plan to
accomplish the goals during the March 2004 CAROI meeting in San Juan, Puerto Rico. PRDE is
finalizing its plan and has commenced work on a number of the goals. PRDE anticipates further
productive technical assistance and fine tuning during the upcoming June 2004 CAROI meeting
in Puerto Rico between PRDE and ED.

OIG concluded that the primary cause of improper salary charges was PRDE’s failure to monitor
payroll transactions. While PRDE recognizes that there has been room for improvement in this
area in the past, the report fails to acknowledge the significant monitoring improvements
undertaken by PRDE. As discussed in greater detail below in PRDE’s “Response to OIG
Recommendations,” PRDE is implementing an automated process to perform account changes
without the need for programming. In addition, beginning in January 2003, PRDE implemented
a procedure requiring a payroll department supervisor to validate account codes. As explained
below, as part of its improvements to the payroll transaction process, PRDE is implementing
additional internal controls that will automatically validate that each account number used for a
payroll transaction is allowable under the employee position code.

In addition, the report states that PRDE did not provide payroll transaction files to OIG. These
transaction files were available for review and PRDE is uncertain why OIG did not review these
files. Hacienda previously produced its payroll transactions files to OIG during the course of the
audit; if necessary, Hacienda is willing to reproduce this information again for OIG if it would
like to review the material.


PRDE Response to OIG Recommendations

In addition to the actions listed above, PRDE has also either already commenced work on, or has
developed a plan for each recommendation listed in the OIG report. PRDE offers the following
responses to the recommendations.

OIG Recommendation 1.1

Reconcile payroll transactions quarterly, re-evaluate and correct all reconciliations completed to
date, perform additional reconciliations necessary to cover the period September 2001 to the
present for all ED grants, and make appropriate adjustments to ED. PRDE must also obtain an
independent evaluation of all reconciliations performed to ensure ED that all improper charges
have been returned to the respective ED programs.

PRDE Response

PRDE will reconcile transactions on a quarterly basis for payroll transactions commencing in
January 2004. PRDE suggests that the issue of past reconciliations and independent evaluation
be discussed in the context of CAROI, where an appropriate sampling methodology can be
developed for past payroll transactions and that this effort be synchronized with the Payroll
Action Plan developed last month with ED’s assistance.


Puerto Rico Department of Education                                                      2
April 22, 2003
Audit of PRDE’s Salaries                                                            Final Report
for the Period July 1, 1999 to June 30, 2003      Attachment                  ED-OIG/A02-D0023

OIG Recommendation 1.2

Develop written internal control procedures over its payroll process.

PRDE Response

PRDE is in the process of developing written internal control procedures and has discussed this
specific issue and is developing a plan in the context of the CAROI Payroll Team.

OIG Recommendation 1.3

Establish monitoring control procedures of all payroll transactions submitted to Hacienda for
processing to ensure accuracy of the work performed.

PRDE Response

The Human Resources Team has developed an integrated approach to reengineer the Human
Resources/Payroll/Hacienda transaction flow that covers Transaction Origination to Payroll
Reconciliation. This approach consists of the following five categories or components:

       1.      Transaction
                	          origination

       2.      Internal
                 	      controls

       3. 	    Interface with Hacienda

       4.      Transaction
                	          rejections

       5.      Payroll
                	      reconciliation

Each category represents a major component of the Human Resources/Payroll transaction cycle.
For each category, PRDE has identified specific processes that must be implemented or
developed in order to improve the effectiveness and efficiency of the particular category. For
example:

       1. 	    Reconciliation of items (transactions) between STAFF and RHUM to ensure all
               transactions are accounted for either as “processed” or “rejected.”

       2. 	    Production of readable error messages to ensure that all transactions needing
               correction are properly identified.

       3. 	    Correction of errors to ensure that rejected transactions are corrected and re­
               submitted.

       4. 	    Consolidation of error files into one file to reduce the probability of missing error
               files.

Puerto Rico Department of Education                                                       3
April 22, 2003
Audit of PRDE’s Salaries                                                            Final Report
for the Period July 1, 1999 to June 30, 2003       Attachment                 ED-OIG/A02-D0023


       5. 	    Consolidation of RHUM transactions into one single file to avoid missing
               transaction files. (Currently, up to ten different transaction files may be produced
               for a given payroll.)

       6. 	    Production of RHUM/STAFF discrepancy reports to identify and report on data
               discrepancies in order to facilitate their correction.

OIG Recommendation 1.4

Eliminate or limit the amount of manual intervention allowed and performed in the payroll files
generated by PRDE.

PRDE Response

Among the categories detailed above, two specific areas will significantly reduce manual
intervention in payroll transaction files. These areas are the “Transaction origination” and
“Interface with Hacienda.”

       1. 	    STAFF will automatically generate most transactions through what PRDE refers
               to as the “pipeline”. Once a user enters a Human Resources transaction that has
               an impact in Payroll, this transaction will be automatically sent through a pipeline
               to a file containing all payroll transactions to be sent to Hacienda.

       2. 	    When the payroll closing date arrives, the Payroll Office will review these
               transactions, and export them to Hacienda (RHUM) in a single file. (Currently,
               up to ten different transaction files are used for this purpose.)

       3. 	    When the file arrives at Hacienda, a new approach will be used to process the
               transactions. This approach will first validate all transactions to identify errors.
               Because the payroll date will be included in all transactions, the validation
               program will verify the date in order to ensure that the correct transaction file is
               being processed. Totals for all transactions in the file and for all transaction types
               will be calculated and compared to totals already included in the transaction file.
               All errors identified will be reported back to PRDE in the same transaction file to
               ensure that all transactions are properly accounted for and to provide data for item
               reconciliation at PRDE.

       4. 	    Transactions that successfully pass the validation process will be applied (loaded)
               to RHUM files. Errors originated at this stage will be appended to the
               transaction/error file going back to PRDE. This way only one file goes back to
               PRDE. It will be the same file originally sent by PRDE to RHUM, with the
               addition of both editing and loading error messages. This design was proposed to
               Hacienda by PRDE and it is currently being implemented. After full
               implementation at PRDE, Hacienda will make it available to other agencies.


Puerto Rico Department of Education                                                        4
April 22, 2003
Audit of PRDE’s Salaries                                                         Final Report
for the Period July 1, 1999 to June 30, 2003     Attachment                ED-OIG/A02-D0023

The above processes will significantly reduce the manual intervention in transaction processing,
both at PRDE and Hacienda. The number of steps currently performed to run a payroll is
reduced from more than forty steps to two fully automated steps (validation and loading).

OIG Recommendation 1.5

Eliminate the direct access by PRDE employees to Hacienda’s system. All PRDE payroll
changes must go through its payroll contractor, RST, to maintain an appropriate level of internal
control.

PRDE Response

Once the improvements to the payroll system are fully implemented, the need to directly access
Hacienda’s system by PRDE will be significantly reduced. PRDE’s Human Resources System
(STAFF) will automatically generate most transactions. PRDE’s expectation is to reduce the
number of employees directly accessing RHUM with “change” authority from ninety four (94) to
less than twenty (20), when the new interface is fully implemented by the end of 2004.

While direct access has been significantly reduced, it will continue to exist in the short term.
Examples of transactions that will continue to be entered directly into RHUM with appropriate
internal controls are:

   1. Garnishments, and

   2. Off-cycle payroll transactions.

OIG Recommendation 1.6

Automate the data transfer of files from PRDE to Hacienda to eliminate possible manual
intervention.




Puerto Rico Department of Education                                                     5
April 22, 2003
Audit of PRDE’s Salaries                                                            Final Report
for the Period July 1, 1999 to June 30, 2003       Attachment                 ED-OIG/A02-D0023

PRDE Response

As explained in the response to 1.4, only one transaction file will be sent to Hacienda. This file
will contain a header record with the payroll date as well as the total number of transactions sent
in the file. Subtotals by transaction types will also be included. Because it will be contained in
only one file, and because the file will contain payroll identification data and payroll totals, this
data can be easily sent electronically to Hacienda with minor risks.

Although the probability of data intervention is low, in the event data intervention does occur, it
would be immediately detected through the Discrepancy Module in the Payroll Reconciliation
component.


Conclusion

PRDE recognizes the important task before it in upgrading and modernizing its payroll system.
As mentioned previously, PRDE’s current administration inherited an outdated payroll system
and has made the task of upgrading the system one of its top priorities. PRDE will continue to
upgrade its payroll system with the assistance of the U.S. Department of Education and looks
forward to continuing its productive and collaborative relationship with this Federal agency.




Puerto Rico Department of Education                                                        6
April 22, 2003