State of Hawaii Agribusiness Development Corporation
June 30, 2019 Financial Statements
from Hawaii State Auditor, March, 2022 (excerpts)
THE PRIMARY PURPOSE of the audit was to form an opinion on the fairness of the presentation of the financial statements for the Agribusiness Development Corporation, as of and for the fiscal year ended June 30, 2019. The audit was conducted by Accuity LLP….
The auditors from Accuity LLP identified one material weakness in internal controls over financial reporting that is required to be reported in accordance with Government Auditing Standards….
A material weakness is a deficiency, or a combination of deficiencies in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis….
Finding No. 2019‐001 – Internal Controls over Financial Reporting (Material Weakness)
Condition
The Corporation did not design control activities to provide reasonable assurance in the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Thus, we proposed multiple audit adjustments and reclassifications as a result of our audit procedures. During our audit, we identified the following observations within the financial reporting process:
1. Galbraith Water Receivables
During fiscal year 2019, there were no accruals for billed but uncollected water usage associated with the delivery of irrigation water to tenants in the Galbraith area. Management invoiced the Galbraith water users out of the QuickBooks subledger. However, the QuickBooks accounts receivable report was not used during the preparation of the year‐end accrual entries. Failure to record appropriate accrual entries resulted in an understatement of beginning accounts receivable as of July 1, 2018 of approximately $8,000. An adjustment to correct the understatement was recorded as part of our audit.
Also during our testing, we noted there were no water user agreements in place between the Corporation and the Galbraith tenants during fiscal year 2019. Upon identifying that no agreements were in place, the Corporation discontinued billing the Galbraith water users in March 2019. In May 2020, the Corporation’s board of directors approved a new water user agreement and billing recommenced in early fiscal year 2021. Galbraith water users were not retrospectively invoiced for any unbilled water usage in the intervening period.
2. Land Leasing Receivables
Management prepares the monthly rental invoices out of the QuickBooks subledger. However, there were no formal procedures in place to ensure all adjustments and cash receipts were recorded timely in the subledger. Additionally, there were no procedures in place to reconcile the subledger to the State’s Financial Accounting and Management Information System (“FAMIS”). As a result, various audit adjustments were identified, and the final closing of the Corporation’s financial statements were significantly delayed while management performed a retrospective review of select tenant balances from inception to ensure the completeness and accuracy of the current ledger balance. The exceptions resulted in a net overstatement of approximately $33,000 in program revenues for fiscal year 2019. Adjustments to correct the exceptions were recorded as part of our audit.
We also noted during our audit that accounting records frequently could not be located when needed. The result was that employees spent nonproductive time searching for needed documents and resulted in various delays to the preparation of the financial statements and the completion of the audit. This condition could also present problems when documents are needed in support of other reports subject to audit or oversight by regulatory entities.
3. Navy Service Contract Receivables
The Corporation has a service contract with the U.S. Navy that calls for an annual fixed price award and an Indefinite Delivery Indefinite Quantity (“IDIQ”) award for additional services as called for in the contract. Management invoices the Navy manually and does not maintain a schedule of contract billings or accounts receivables to monitor progress billings and subsequent collections. During the year‐end financial closing process, we identified invoices that were not accrued in the correct fiscal year, which resulted in the overstatement of fiscal year 2019 revenue by approximately $63,000. An adjustment for the overstatement was recorded by the Corporation as part of our audit. Additionally, we identified a delivery order for IDIQ work that was underbilled by approximately $39,000 due to an unidentified error in the invoicing process. No adjustment to accrue for the amount underbilled was recorded as the Corporation has completed the delivery order and no further amounts can be invoiced to the Navy.
4. Waiahole Water System (“WWS”) Water Sales
Management prepares the monthly WWS invoices from its WWS QuickBooks subledger. However, there were no formal procedures in place to ensure all adjustments and cash receipts were recorded timely in the subledger. Additionally, there were no procedures in place to reconcile the subledger to FAMIS. As a result, various audit adjustments were identified to properly account for the water sale balances in accordance with GAAP. The exceptions resulted in a net understatement of approximately $69,000 in program revenues for fiscal year 2019 and a net understatement of approximately $132,000 in gross accounts receivable as of June 30, 2019. An adjustment to correct the understatement was recorded as part of our audit.
The WWS Office Manager prepares the monthly invoices, collects payments, and posts the payments to the WWS QuickBooks subledger. Allowing these functions to be controlled by the same person increases the risk that errors or misappropriation could occur and go undetected. In addition, the WWS Office Manager is the sole user of the WWS QuickBooks subledger and no formal policies are in place to allow for the continuity of access to the subledger. As a result, management was unable to access the historical billing records upon the termination of a former WWS Office Manager.
5. WWS Water Rates
Evidence was not retained to support the calculation and approval of the fiscal year 2019 water rate applied to the water users under the Kunia Water Cooperative. Although management was able to demonstrate that the water rate applied during fiscal year 2019 was correct and stated that the water rate was approved timely, the Corporation should retain the annual calculation of the water rate and its approval by executive management due to its significance over the WWS water sales. Additionally, the lack of formal policies governing the annual water rate could result in a material loss over time if an error in the water rate calculation goes undetected.
6. Accounting for Rent Credits
In certain situations, the Corporation issues rent credits to tenants in exchange for services or improvement work for leased property. Under GAAP, these exchange transactions should be reported gross as revenues and expenses. During our audit, we identified rent credits that were either recorded as a reduction of revenue or were erroneously applied to a tenant in the QuickBooks subledger. The exceptions resulted in an understatement of approximately $84,000 in program revenue and expenses for fiscal year 2019. An adjustment to correct the understatement was recorded as part of our audit.
7. Accounts Payable Accruals
Management did not prepare an accurate listing of the Corporation’s outstanding invoices. The exceptions resulted in an understatement of accounts payable of approximately $49,000 and $144,000 as of June 30, 2019 and 2018, respectively. Adjustments to correct the errors were recorded as part of our audit.
8. Ceded Land Liability
There are no formal reviews over the ceded lands and sugarcane lands remittances due to the Office of Hawaiian Affairs and the Department of Hawaiian Home Lands. During our audit, we noted errors in the calculation of the ceded land accruals. The errors resulted in an overstatement of approximately $30,000 and an understatement of approximately $5,000 of the ceded land liability as of June 30, 2019 and 2018, respectively. Adjustments to correct the errors were recorded as part of our audit.
We also noted that management recorded the land remittances as a reduction of program revenues. However, under GAAP these remittances should be reported as operating costs. This exception resulted in an understatement of program revenue and operating costs of approximately $448,000 for fiscal year 2019. An adjustment to correct the misstatement was recorded as part of our audit.
* * * * *
Because the Corporation’s internal control over the financial reporting did not prevent, or detect and correct, such misstatements in the Corporation’s financial statements, including related disclosures, these deficiencies are considered a material weakness in internal control over financial reporting.
Criteria
Management is responsible for establishing and maintaining internal control over financial reporting for the fair presentation of the Corporation’s financial statements, including the notes to the financial statements, in conformity with GAAP.
Cause
While Corporation personnel understand its operations and record its day‐to‐day transactions in a consistent manner, they lack the expertise to properly record and account for all transactions in accordance with GAAP. As they lack the appropriate expertise, management was unable to design an appropriate internal control system.
Effect
The failure to adequately design, implement and operate internal controls increases the risk that misstatements occur without being prevented, or detected and corrected in a timely fashion. The deficiencies resulted in the misstatements reported above and the delay in the completion of the audit of the Corporation’s fiscal year 2019 financial statements until March 10, 2022.
Recommendation
We recommend that management assess the current capabilities of its employees and either (a) hire accounting personnel with the requisite knowledge and skill to prepare financial statements in accordance with GAAP or (b) procure the services of a qualified provider to assist with the preparation of financial statements in accordance with GAAP.
read … Full Report