North Carolina Office of the State Auditor

3 Message from the Auditor

4 Strategic Plan 8 Information Systems Division 10 Performance Audit Division 13 Financial Audit Division

15 Management Services & Nongovernmental Compliance Division

18 Investigative Division

24 General Administration

27 Appendix A

34 Appendix B

Contents

If a single word could sum-up my vision for how the Office of the State Auditor (OSA) will play its role in State government, that word would be “proactive.” Being proactive in a fight against wasteful spending is more than plain rhetoric or a campaign slogan. It means helping achieve

effectiveness and efficiency in State government which is a principled bipartisan goal. The underlying philosophy of being proactive is embracing the idea that the State is not a proprietor of resources, but a trustee of taxpayer money. When put to use for the public good, this money can grow communities and foster a safer, more stable society. However, waste, fraud and abuse of State resources are unconscionable acts and a severe violation of the public trust by those in authority. The State’s resources are the sum of all taxpayers’ earnings which could have been put to good use by the individual earner for the betterment of his or her family. Respect for the taxpayer is the core of this philosophy. Financial auditors have been through extensive training to improve audit productivity by shifting focus to risk-based auditing. Adopting these principles is a natural extension of a proactive philosophy. Part of what we accomplished in 2006, and my vision for 2007, is to decrease the occurrence of wasteful State spending through a risk-based realignment of OSA’s structure. Through increased training, the use of modern technology and a dedicated yet flexible staff, resources and personnel have become untethered from retroactive auditing techniques as we move toward the use of many risk-based tools. One such tool is the Strategic Audit Review which will build a bridge from an abstract proactive policy to the actual practice of being proactive. Reams of data flow through State government every day and Strategic Audit Reviews will eventually cover areas that have either escaped OSA scrutiny or show suspicious data trends. While strategic auditing is a standard bearer for our proactive practices, our focus has been to build a team-centered approach. An increase in nonprofit training and compliance, marketing the State Auditor Hotline and financial auditors who think outside of the box are all proactive tools that contribute to stamping-out inefficiencies, waste and abuse before they become problems. In 2006, the low hanging fruit is already being gathered. As we move into 2007, the success built on the framework of a proactive philosophy, policy and practice will create the momentum to reach higher and tap further into areas of fraud, waste and abuse in State government. As a result State money, the taxpayer’s money, will be able to lift people higher, meet more of our neighbor’s needs and go further in building stronger communities across North Carolina.

Annual Report 2006 | Message from the Auditor

3Decreasing risk through proactive measures

Message from the Auditor

4

The goals expressed in this strategic

plan are intended to be implemented

throughout 2007 based on the proactive

philosophy articulated in the State Auditor’s

message. The strides made in 2006 serve as the

launching pad for OSA’s work in 2007 and beyond.

Nothing embodies this rebuilding better than

2006’s AuditWatch training.

AuditWatch

Efficiency Gains

AuditWatch productivity program is considered

the premier training program in the audit

profession. In today’s environment, as legislators

and taxpayers scrutinize expenditures and search

for increased value for hard-earned tax dollars,

technical excellence and timely reports are not

enough. OSA must provide audits in the most

efficient manner, and must dramatically change

the way audits are conducted. The AuditWatch

program met these goals by teaching best practices

and innovative techniques from private audit firms,

keeping the OSA current on rapidly changing

technology to improve productivity, and applying

critical thinking analysis and unbiased feedback on

current OSA auditing techniques and practices.

Using principles learned through AuditWatch

training, OSA has found the necessary tools to

whittle away inefficiencies and streamline work

product to free-up resources to focus more on

fraud, waste and abuse in State government. The

bottom line efficiency goal is to reduce audit

hours by 25% in the first year. Once achieved,

this reduction will be equivalent to a remarkable

35,000 work hours, or adding 22 fulltime auditor

positions, which will fuel proactive techniques and

team-centered strategies in all of OSA’s divisions.

But the AuditWatch efficiency gains will not

stop in 2006. OSA’s strategy in 2007 is to educate

State agencies to prepare the more time consuming

supporting worksheets in anticipation of the audit,

and to train OSA auditors to determine which tasks

to undertake and which to leave for the agencies.

By engaging the agency in this type of auditing

jujitsu, OSA will produce greater efficiency gains

and reduce the agency’s audit anxiety by moving

auditors in and out of the agency as quickly as

possible.

Building on these efficiency gains, the following

lays out OSA’s strategic plan to raise accountability

in State government.

Information Systems Division

Team-Centered Approach

Information Systems Division (IS) auditors

occupy a unique position to be able to think

proactively about discovering suspicious data

trends flowing from an agency’s information

technology systems. OSA’s goal for 2006 was to

integrate IS auditors into financial audit teams

with the specific purpose of accumulating and

analyzing financial data looking for unusual trends.

In 2007, IS auditors will now analyze the numbers

to objectively confirm whether fraud, waste or

abuse is occurring in any given audit throughout

State government. To take full advantage of their

Strategic Plan

Annual Report 2006 | Strategic Plan

Decreasing risk through proactive measures

North Carolina Office of the State Auditor

position on the auditing team, IS auditors will rely

upon the innovative techniques of data mining.

Data Mining

OSA has become a leader of state audit shops in

proactive thinking. By consulting with a national

data mining expert from Brigham Young University,

OSA is developing formulas

to find trends in State

government data that lead

to exposing fraud, waste

and abuse. In 2006, the OSA

employed these techniques

to uncover Social Security

Number fraud in the State’s

government. In 2007, the

OSA will expand data

mining’s use to till the

ground in more areas of

State government.

Strategic Audit Reviews

OSA believes Strategic

Audit Reviews build a

bridge from abstract proactive techniques to the

actual practice of being proactive. The Strategic

Audit Review is the vehicle used to combine team-

centered integration, data mining techniques and

their subsequent findings into a single public

document. In 2007, OSA plans to invest a portion

of the AuditWatch efficiency gains in IS to conduct

more Strategic Audit Reviews.

Investigative Division

Team-Centered Approach

The Investigative Division is a key component

of OSA’s strategy to raise accountability in State

government in 2007. To proactively reduce waste

in State government, audit teams must possess

an investigative eye. This has proven to be true in

routine audits in 2006, where suspicious facts may

have been dismissed because financial-oriented

audit programs did not encourage out-of-the-box

thinking and creative procedures. In 2007, OSA

will be working to build

a team-centered auditing

approach where all auditors

are given the analytical tools

and training to proactively

look for fraud, waste and

abuse of taxpayers’ money.

State Auditor’s Hotline

The promotion of the State

Auditor’s Hotline has proven

to be the tip source for the

majority of investigations

leading to direct savings for

taxpayers. This one area is

unique in that money spent

to promote the Hotline

will likely reap a far greater amount in savings

when fraud, waste and abuse of taxpayer money is

uncovered. In early 2007, the OSA plans to unveil a

major plan to promote the State Auditor’s Hotline

using all available tools and resources.

Increase Resources

A portion of the AuditWatch efficiency gains will

be put to good use in the Investigative Division.

Promotion of the Hotline will likely result in

more tips and more investigators will be needed.

As a result, OSA plans to add more supervisor

positions to the Investigative Division to bring

5Decreasing risk through proactive measures

Once achieved, this

reduction will be

equivalent to a remarkable

35,000 work hours, or

adding 22 fulltime

auditor positions...

greater flexibility to investigations and allow the

Division to simultaneously handle multiple major

investigations in 2007.

Performance Audit Division

Greater Flexibility

Performance audits are usually large in scope,

extremely detailed and

require a significant amount

of OSA resources. As a result,

OSA issues a limited number

of performance audits each

year. In 2006, OSA retooled

the Performance Audit

Division with an eye toward

producing reports that

are narrower in scope and

target specific programs or

areas where the state is at

the greatest risk for fraud,

waste or abuse. In 2007,

OSA’s plan is to apply that

narrow focus to areas of

risk with greater flexibility

as problems emerge. One example of increased

flexibility would be for OSA to provide a timely

response to a legislator’s or taxpayer’s specific

request for a review in their district or area.

Increase Resources

Building on the influx of auditing experience

into the Performance Audit Division in 2006, OSA

plans to conduct more performance audits in 2007.

OSA will meet this goal by reinvesting a portion of

AuditWatch efficiency gains into the Performance

Audit Division and training Performance auditors

to work with greater efficiency. In fact, this training

will conclude by the end of 2006 and Performance

auditors will already be working to meet the

heightened goals in early 2007.

Agency Cooperation

In 2007, OSA is prepared to work along side

other State agencies to set a bench mark by which

State government performance can be measured.

By supporting the new

Government Performance

Audit Committee (GPAC)

initiative and the Office

of the State Controller’s

initiative to monitor

internal controls as an

extension of management,

OSA’s Performance Audit

Division is prepared to

help steer the focus and

raise accountability in State

government.

OSA takes seriously

the goal of seeing the

internal audit function

strengthened throughout

State government. By working with State agencies,

universities and community colleges, and the

legislative Fiscal Research Division, the OSA plans

to extend its proactive philosophy to the fullest

extent allowed.

Management Services and

Nongovernmental Compliance Division

(MS&NGCD)

Compliance

OSA has oversight responsibility over $650-

$750 million a year in State and federal grants

to thousands of nonprofits, not-for-profits and

other entities that receive State funds. Therefore,

6 Decreasing risk through proactive measures

Annual Report 2006 | Strategic Plan

In 2007, OSA will be

working to build a

team-centered auditing

approach where all auditors

are given the analytical tools

and training to proactively

look for fraud, waste

and abuse of

taxpayers’ money.

North Carolina Office of the State Auditor

7Decreasing risk through proactive measures

nonprofit reporting compliance is essential to

raise accountability in State government. OSA’s

long term goal for MS&NGCD is 100% reporting

compliance for all nonprofit organizations. At

fiscal year end (FYE) 2006, the Division identified

437 nonprofit organizations in noncompliance.

By FYE 2007, OSA’s strategy is to make steady

progress through increased accessibility, training,

and accountability to cut noncompliance by 30%

or 137 noncompliant grantees.

Increasing accessibility to nonprofit grantees is

an important goal for 2007. OSA is developing a

reporting function that gives grantees the ability

to file their annual reports online. This step will

reduce paperwork by promoting electronic filing,

eliminate redundancy by simultaneously filing

with the grantor agency and OSA, and allow for

real-time public access of online annual reports

and reviews.

Grantor and grantee reviews are a new tool that

OSA plans to use more in 2007. By October 2006,

the Division posted 8 grantee reviews. OSA’s goal

is to release 24 grantee reviews in 2007, however,

that number could be significantly increased by

the end of this fiscal year. In addition, OSA plans

to complete monitoring reviews of grantor agencies.

OSA’s goal is to complete 12 agency monitoring

reviews by the end of next fiscal year.

Training & Best Practices

Training is a proactive tool to keep nonprofits

in compliance and bring truant organizations

back into good standing. OSA’s strategy to boost

compliance in 2007 is to maintain the high

paced training schedule from 2006, plus increase

efficiency and raise effectiveness. An important

part of the training’s effectiveness is providing

accurate information on evolving issues to local

grantees and State grantor agencies. To accomplish

this effort, MS&NGCD will continue to issue its

Best Practices newsletters that will target issues

and information applicable to individual grantees

and grantor agencies.

Increase Resources

In 2007, OSA’s plan is to increase training,

compliance and accountability with nonprofit

organizations that receive state and federal grants.

OSA already has the infrastructure in place to

invest AuditWatch efficiency gains in MS&NGC.

Through training existing branch office staff to

work with nonprofits, OSA can meet its training,

compliance and accountability goals and review

nonprofits while working within their surrounding

geographic areas.

Financial Audit Division

Efficiency Gains

The Financial Audit Division is OSA’s largest

division and biggest user of available resources.

Because of these facts, the AuditWatch curriculum’s

focus on improving efficiency presented a major

opportunity to Financial Division auditors and

staff. By committing to AuditWatch’s efficiency

principles, Financial’s auditors and staff have cut

inefficiencies and have the goal of expanding

productivity by 25%. That means that up to 35,000

work hours can extend the reach of Financial,

Information Systems, Investigations, Performance,

and MS&NGC divisions. Without the steadfast

commitment to efficiency by the Financial Audit

Division, the OSA would be unable to meet the

goals outlined in this Plan and the State would be

unable to reap the benefits.

8 Decreasing risk through proactive measures

The Information Systems Audit Division’s

(IS Division) responsibilities include

analyzing State agency computer systems

to ensure that they are properly secured, produce

accurate financial reports and comply with State

regulations. Staff in this division conduct their

own audits of computer systems across the State. In

addition, they provide IS audit assistance to financial

audit teams to ensure that agency computerized

accounting systems can be relied upon to

produce accurate financial reports. Without those

assurances, financial audit teams would be unable

to issue unqualified opinions on the accuracy of

agency financial statements.

IS Division auditors are in a unique position to

think proactively about discovering suspicious

data trends flowing from an agency’s information

systems. OSA’s goal for 2006 was to integrate IS

auditors into Financial and Investigative audit teams

and to increase proactive auditing by providing

computer forensic assistance and data mining

analyses of agency financial data.

To accomplish this goal, OSA developed a new

tool called Strategic Audit Reviews that are issued

separately from IS audits. These reviews are used to

uncover fraud, waste or abuse of taxpayer resources

by following suspicious State agency data trends.

While initiated and coordinated by the IS Division,

these reviews involve auditors from all divisions of

the OSA.

Strategic Audit Reviews build a bridge from an

abstract proactive policy to the actual practice of

being proactive. By conducting Strategic Audit

Reviews through the use of data mining analysis,

OSA is in the forefront of auditing trends. To

improve innovation and effectiveness, OSA hosted

an on site visit of a leading expert in data mining

from Brigham Young University. Fueled by resources

from AuditWatch efficiency gains, OSA plans to

increase the number of Strategic Audit Reviews to

bring more accountability to State government.

The OSA’s emphasis for the future is to weave more

IS Division auditors into other auditing processes

to instill a team-centered approach. Together, the

team can more readily identify security risks or

suspicious data trends. The General Assembly has

approved OSA’s request to hire 6 additional auditors

over two years to facilitate the team-centered

approach to auditing.

The following is a summary of IS Division’s

reports and reviews conducted during 2005-2006:

IS Audit: North Carolina Central University

– General Controls Review

IS conducted an Information System audit of

North Carolina Central University. The primary

objective of this audit was to evaluate IS general

controls at NCCU. The scope included general

security, access controls, program maintenance,

systems software, systems development, physical

security, operations procedures, and disaster

recovery. We found weaknesses in systems software

and disaster recovery. In systems software, we

found that software standards and documentation

needed improvement. In disaster recovery, we

found that critical general ledger application system

Information Systems Audit Division

Annual Report 2006 | Information Systems Audit Division

North Carolina Office of the State Auditor

9Decreasing risk through proactive measures

backup tapes were not sufficiently rotated off-site.

The general controls review also revealed several

weaknesses in access controls. Those improvements

were recommended to

management in a private

letter because of the sensitive

nature of the findings.

IS Audit: the University

of North Carolina at

Wilmington – General

Controls Review

IS staff audited the

University of North Carolina

at Wilmington. The primary

objective of this audit was

to evaluate general controls. The scope of our audit

included general security, access controls, program

maintenance, systems software, systems development,

physical security, operations procedures, and disaster

recovery. We found several weaknesses in access

controls.

IS Audit: Elizabeth City State University

– General Controls Review

IS conducted a general controls audit at

Elizabeth City State University. The scope of the

audit included general security, access controls,

program maintenance, systems software, systems

development, physical security, operations

procedures, and disaster recovery. In the

general security area, we found that ECSU

had not performed a risk assessment. We also

found several weaknesses in access controls.

Strategic Audit Review: North Carolina

Central University

The purpose of this Strategic Audit Review was

to identify invalid social security numbers (SSNs)

in the payroll system at NCCU and to investigate

unusual payments noted on the university payroll.

This review found that

NCCU failed to cross check

employee information

against the State Controller’s

verification report allowing

fraudulent SSNs to be used

as valid identification.

In addition, this review

found an unusually high

number of bookkeeping

errors, incomplete employee

files and one instance of

an employee receiving a

duplicate payment for services.

Information Security Vulnerability

Assessments

Funded by lapsed salaries, OSA contracted with

private firms to conduct a total of 5 vulnerability

assessments. These assessments included the

following entities: the Office of the State Auditor,

General Assembly, Department of Revenue, Office

of the State Controller, and Information Technology

Services. The purpose of these assessments were

to gauge the entities’ security posture at a given

point in time, identify security risks that might

make an entity vulnerable to attack, and determine

appropriate procedures to mitigate the identified

risks. The detailed results of the assessments are kept

confidential as to not announce control weaknesses

to would-be intruders. General results containing

the numbers of high, medium and low weaknesses

are released to the public through OSA’s website

and electronic posting service.

IS Division auditors are

in a unique position to

think proactively about

discovering suspicious

data trends flowing from

an agency’s information

systems.

10 Decreasing risk through proactive measures

OSA’s Performance Audit Division

was designed to allow for flexible

deployment of resources while

upholding strict auditing standards. Unlike

prescheduled financial audits, the subjects of

performance audits are chosen at the discretion of

the State Auditor upon consideration of two factors:

greatest risk potential and greatest opportunity

for impact. Upon release, performance audits

provide the public, agency managers and program

managers with an objective analysis of whether

State agencies efficiently and effectively manage

their programs and activities. Furthermore, these

audits are of particular value to legislators who

must consider the effectiveness of State programs

in funding decisions and to the taxpayers who pay

for those programs.

OSA’s efforts in the Performance Audit Division

during 2006 revolved around retooling its work to

produce reports that are narrower in scope and

target specific programs or areas where the state

is at greatest risk. We reassigned one of our most

experienced financial audit managers to this section

and scheduled training for the Division’s auditors

and staff. Ten days of intensive training instructed

auditors how to develop a comprehensive plan for

conducting risk-based audits, how to correctly

identify risk and vulnerabilities and how to

develop measurement based audit objectives. This

reengineering of the Performance Audit Division

will result in value-added audits that focus on

proactive issues and strengthen the watchdog

function in State government.

In 2007, the Performance Audit Division

will take on increased activity. Building on the

Division’s additional auditing experience and

training, OSA will maximize its efforts by directing

some of the AuditWatch efficiency gains to do

more performance audits. A good example of the

type of proactive audits this Division will perform

is the audit on the internal audit function in North

Carolina agencies and institutions.

The following are summaries of the Performance

Audit Division’s audit reports:

Internal Auditing In North Carolina

Agencies and Institutions

This performance audit was statewide in

scope and had two objectives. First, we sought to

determine whether State agencies, universities,

and community colleges had sufficient internal

audit resources. Second, we assessed the level of

compliance that existing internal audit functions

achieved with generally recognized internal audit

principles and best practices.

The audit found that the State’s internal audit

function is inadequately staffed and is in need

of more direct guidance from the General

Assembly. For example, many state entities had no

internal audit function, others were inadequately

staffed and others lacked the expertise needed

to meet the challenges presented by their

organizations. Furthermore, no universal State

criteria or minimum standards exist regarding

the establishment of activity, authority or

responsibilities of an internal audit function.

Performance Audit Division

Annual Report 2006 | Performance Audit Division

North Carolina Office of the State Auditor

11Decreasing risk through proactive measures

Medicaid Prescription Drug Costs

The purpose of this performance audit was to

determine why Medicaid prescription drug costs

are increasing and whether the cost containment

measures initiated by the Division of Medical

Assistance were effective.

The audit revealed a number of factors that

affected the increased total gross costs of Medicaid

prescription drugs. One factor was the increased

price for drugs, accounting for approximately 5%

of the total annual increase. Other factors were:

increasing number of recipients, increasing number

of prescriptions per recipient, and increasing the

use of managing care methods designed to keep

recipients out of institutional settings.

The Division of Medical Assistance had been

proactive in identifying and implementing various

cost containment measures for the prescription

drug program, avoiding an estimated $250

million in costs for the State since fiscal year 2002.

Specific measures included expanding certain

cost containment measures, changing the criteria

used in other cost containment programs, and

closer examination of cost containment measures

utilized by other states.

Driver’s Licensing Process

The purpose of this audit was to determine

whether the Division of Motor Vehicles had

sufficient procedures in place to ensure that only

qualified applicants received a driver’s license, and

to determine whether regulations were consistently

enforced in driver license offices throughout the

State.

This audit found that the State’s procedures

were neither sufficient nor as restrictive as those

of surrounding states. For example, DMV allowed

unregulated interpreters to be used for non-English

speaking applicants, inherent security risks existed

in one-person offices, mobile licensing units

lacked the ability to handle current technology,

and communication to the public needed to be

improved. Specific findings also included the

following: information provided to examiners by

management was not timely, weak controls over

information input into the Division’s computer

system, and inconsistent treatment of field office

customers.

Child Caring Institutions

The objectives of this audit were to examine

the cost allocation processes of child caring

institutions, evaluate administration rates, review

the institutions’ utilization rates, examine the rate-

setting methodology, and make recommendations

on ways to improve the rate-setting process.

We found that the rate-setting methodology

did not provide child caring institutions with

any incentives to contain costs. Most of the

institutions participating in the Title IV-E program

were provided rates that enabled them to have

most of their allowable costs reimbursed. This

methodology rewarded institutions for spending

additional dollars and produced a wide range of

reimbursement rates among institutions providing

similar program services. DHHS’ rate-setting

methodology also resulted in an over allocation

of $400,000 in indirect administration costs to

the foster care program. Also, we found that the

per diem reimbursement rate for the foster care

program could decrease significantly if more of the

bed-day capacity of the institutions were utilized.

Oversight of the rate-setting process was

lacking and hampered by program complexity,

inadequately written procedures and processing

delays. There was very little evidence that

analytical reviews, cost analysis and comparisons,

inquires or any other form of rate management

was employed by the Department of Health and

Human Services.

Northeastern North Carolina Regional

Economic Development Commission

The counties of North Carolina are organized

into seven regional partnerships the purpose of

which is to promote economic development in

their respective regions. Northeastern North

Carolina Regional Economic Development

Commission/Partnership is the regional entity

designated to market the northeastern area of the

State.

The objective of this audit was to determine

whether resources provided by the State were used

in a prudent business manner for their intended

purpose of furthering economic development in

the region.

The audit found that the organization’s president

created a conflict of interest when he expended

resources for the benefit of his future employer. The

organization made significant unjustified bonus

payments to its employees, employees of the North

Carolina Department of Commerce, and to several

of the organization’s independent contractors. The

organization’s process of selecting contractors

did not provide assurance that the organization

contracted with the most qualified and at the

best possible price. Many of the organization’s

employment and consulting contracts contained

terms that could adversely affect the organization’s

operations and finances and they lacked adequate

protection of the organization’s interests. The

Board of Directors did not sufficiently exercise its

fiduciary responsibilities to monitor operations

and ensure funds were used prudently.

Annual Report 2006 | Performance Audit Division

12 Decreasing risk through proactive measures

Originally printed in News and Observer on 4/14/06 and reprinted with permission

North Carolina Office of the State Auditor

13Decreasing risk through proactive measures

Staff in the Financial Audit Section audit

state agencies, universities, community

colleges, clerks of superior court, and Smart

Start nonprofit organizations. The State Auditor

is required to perform these audits as part of the

statutory responsibilities or to comply with federal

requirements. Some audits are performed at the

State Auditor’s discretion to ensure that all agencies

are properly reporting their financial conditions.

The Office of the State Auditor spent the greatest

percentage of hours (38%) to perform annual

financial statement audits/reviews of the State’s

sixteen universities and fifty-eight community

colleges. One of its largest financial audits is the

state’s Comprehensive Annual Financial Report

(CAFR), which accounted for 14% of staff hours.

The CAFR contains the annual financial statements

for the state of North Carolina as a whole.

Another major financial audit project, accounting

for 20% of staff time, is the state’s Single Audit

Report. The Single Audit Report contains the

results of the audit of the state’s financial statements

and the audit of the state’s compliance with laws and

regulations pertaining to federal grant programs.

The office also periodically audits selected fiscal

controls of clerks of superior court and general

government agencies.

The audit staff also conducts financial and

compliance audits of the organizations participating

in the Smart Start program, including the

statewide coordinating agency (the North Carolina

Partnership for Children, Inc.) and the individual

local partnerships. Smart Start is an early childhood

development program designed to prepare children

to begin school healthy and ready to succeed.

Currently, 80 Smart Start partnerships operate

throughout the state.

Financial Audit Results Summary 2005-2006

For the twelfth consecutive year, the state

auditor issued an unqualified opinion on the

state’s financial statements. This opinion, for the

fiscal year ended June 30, 2005, was contained

in the CAFR prepared by the Office of the State

Controller.

The State of North Carolina also received the

Certificate of Achievement for Excellence in

Financial Reporting from the Government Finance

Officers Association for the twelfth consecutive

year. This award is given to government units

whose CAFR achieves the highest standards in

government accounting and financial reporting.

In conjunction with the audit of the state’s

financial statements, the state auditor issues a

report on internal control over financial reporting

and on compliance and other matters based on

an audit of financial statements in the Single

Audit Report. Eleven findings of non-compliance

and weaknesses in internal control related to the

financial statement audit were reported. These

findings disclosed internal control deficiencies

related to investments, cash disbursements and

year-end financial reporting.

With regard to compliance with federal program

requirements, the state auditor issued a qualified

opinion on certain federal programs due to material

noncompliance with certain requirements. In

total, auditors identified $919,500 in questioned

Financial Audit Division

14

Annual Report 2006 | Financial Audit Division

costs resulting from 75 identified audit findings.

In addition to reporting on the CAFR and Single

Audit at the statewide level, the office publishes in

separately issued reports the audit findings and

recommendations from

CAFR and Single Audit

work for each individual

government agency.

Reported findings from

university and community

college audits for fiscal

year 2005 primarily related

to four areas: access

rights, financial statement

preparation, management

oversight and internal

control weaknesses. These

internal control weaknesses

were in areas such as financial aid awards, cash

receipts and deposits, cash disbursements and

separation of duties.

In the fiscal 2005 Clerk of Superior Court audits,

OSA noted internal control weaknesses. These

internal control weaknesses were in areas such

as cash receipts and disbursements, segregation

of duties and timely deposits. To better direct

our limited staff resources, we have set a target of

auditing each Clerk of Superior Court every three

years, with cash counts at some offices every year

since clerks handle large amounts of cash.

In the 2005 fiscal control audits of general

government agencies, internal control weaknesses

were reported in such areas as cash receipts, cash

disbursements, payroll, personnel management,

inventory and grants to not-for-profit

organizations. We intend to redirect some of our

resources to agencies which have not received a

full audit in some years to increase accountability.

Smart Start findings issued during 2005-2006

focused on internal control weaknesses, contract

management and monitoring, competitive bidding

and financial reporting. Audit reports issued

during the year ended June 30, 2006 are listed in

appendix A. This included a

total of 22 audit reports for

the fiscal year ended June

30, 2004, issued subsequent

to June 30, 2005.

For the fiscal year

ended June 30, 2005, the

Office of the State Auditor

performed 45 audits of

Smart Start partnerships.

CPA firms performed 25 of

these audits, with OSA staff

performing the remaining

20 audits. All reports were

issued by June 30, 2006.

OSA’s goal is to complete and release all 41 Smart

Start audits for the 2005-06 fiscal year by March

31, 2007. In an effort to achieve that goal, the

audit plan for fiscal year 2006 provides for audits

to be performed by both OSA staff and contracted

Certified Public Accounting firms. CPA firms will

be selected through a bidding process and will

be contracted for a total of 25 audits (13 due by

November 30, 2006; 6 due by January 31, 2007; 6

due by March 15, 2007).

OSA staff will perform the remaining balance

of 16 audits, with 3 assigned Raleigh-based teams

and 13 to branch office teams. It is anticipated the

more timely release of the audit reports will allow

the North Carolina Partnership for Children and

the local partnerships to more quickly address

identified deficiencies and to make the necessary

improvements to ensure accountability of state

funds.

Decreasing risk through proactive measures

We intend to redirect

some of our resources

to agencies which

have not received a full

audit in some years

to increase

accountability.

North Carolina Office of the State Auditor

15Decreasing risk through proactive measures

The Management Services and

Nongovernmental Compliance Division

(MS&NGCD), formally known as the

Public Audit Interface Division, has the responsibility

of increasing oversight and accountability of State

and Federal pass-through grants typically given to

nonprofit organizations. With the changes to the

reporting requirements for grants that took effect

July 1, 2005, the Auditor determined the need to

have a specific division within the OSA to respond

to the growing need for compliance oversight and

training to adhere to new reporting requirements.

The mission for the creation of MS&NGCD

was twofold. First, OSA needed to refocus its

resources to increase training and “best practices”

for nonprofit organizations receiving State grants.

Second, OSA needed to increase compliance and

accountability of funds on the grantee and funding

agency levels. The division has set measurable goals

for 2007 based on the accomplishments of 2006.

OSA is proud to report that MS&NGCD has

satisfied all areas of its original mission. The

following is a summary of 2006 accomplishments,

broken down by internal category, which has laid

the foundations for our expectations in 2007:

Training

• OSA trained almost 4,000 participants in

71 training sessions between August 2005

and August 2006. This training had an

immediate impact by reducing the percentage

of noncompliant grantees and increasing the

overall compliance percentage.

• Multifaceted training: The types of training

included grants administration sessions

directed at State agency personnel, grants

reporting/accountability sessions directed at

grantees, special sessions conducted at the

request of various groups (e.g., DHHS and

local fire departments) and presentations at 15

conferences between August 2005 and 2006.

• Web-based training resources: The Division

provided templates, reference materials and

training tools to all participants online.

Compliance

• Creation of monthly and annual online

noncompliance lists: OSA’s efforts have reduced

the number of noncompliant grantees by 29.3%

and increased the overall compliance percentage

to 92%.

• Timely processing of required grantee reports:

The Division has shortened the time it takes to

process grantee reports from a 5-month backlog

to processing within approximately 3 days of

receipt.

• Web-based reporting program: The Division

is in the process of streamlining the grant

reporting process through a web-based program.

When complete, we expect the new process to

eliminate redundancy, increase data capture

efficiency, and improve reporting timeliness.

Management Services &Nongovernmental Compliance Division

16

Annual Report 2006 | Management Services & Nongovernmental Compliance Division

Best Practices and Research Assistance

• Quarterly Best Practices newsletter: This

newsletter updates grantees on state grant

requirements, potential financial accountability

problems and developing adequate internal

policies and accounting controls.

• Research and reporting assistance: The Division

provides assistance on unique, confusing and

complicated questions

related to grants reporting

via telephone or email.

• Current documents and

formats: The Division

provided grantees

and funding agencies

information on required

grant reporting documents

and formats through

developing, updating and

maintaining online forms.

Agency and Grantee

Reviews

• Agency and grantee

review function: The

Division created an agency and grantee review

function to promote public confidence in the

expenditure of State grants while examining

potential problems.

• Standards for conducting agency and

grantee reviews: The Division set standards

for identifying factors that trigger a review,

determined what issues to investigate, and

proposed formats for reporting the results.

• Review process as training tool: The Division

used the review process to educate agency

personnel on monitoring techniques and to

suggest improvement to those techniques.

In addition, this review process provides an

excellent opportunity to provide best practice

information on improving accountability to

grantees.

Special Projects

• Legislative/nonprofit conflict of interest form: The

Division developed and distributed a legislative/

nonprofit conflict of interest

form and is creating a

searchable database for this

information (19 legislators

have responded through

August 2006).

• Statewide customer

service function: The

Division is formulating,

coordinating, and overseeing

a process to develop and

implement a statewide

customer service function

that will encompass all State

agencies.

• Audit findings

database: The Division is

updating and maintaining an audit findings

database to identify problem trends at State

agencies. This database will assist in internal

audit planning and the identification of best

practices to share with State agency and grantee

personnel.

Going into 2007, OSA is in a good position to

increase training, compliance and accountability

for nonprofit organizations that receive grants.

Directing some of the AuditWatch efficiency

gains to MS&NGCD makes sense because of the

growing number of nonprofits and the need for

Decreasing risk through proactive measures

OSA trained almost 4,000

participants in 71 training

sessions between August

2005 and August 2006.

OSA’s efforts have reduced

the number of noncompliant

grantees by 29.3% and

increased the overall

compliance percentage to

92%.

North Carolina Office of the State Auditor

17Decreasing risk through proactive measures

oversight. OSA already has the infrastructure

in place through existing branch office staff

that could be retrained to review nonprofits in

their surrounding geographic areas. In addition

to reviewing and informing nonprofits of best

practices, OSA will focus on the grantor agency,

its true “client” in the transaction.

Compliance reporting and subsequent processing

is an important bench mark in how effective

MS&NGCD is at compliance and accountability.

While OSA cannot control the number of reports

it receives, it can control its efficiency in regard to

bringing noncompliant grantees into compliance.

The number of noncompliant grantees ebbs and

flows with reporting deadlines, but the Division’s

goal is to reduce the peak number of noncompliant

grantees by 30%. That goal represents a reduction

of 137 noncompliant grantees by the end of next

fiscal year.

Coordinating and cooperating with the grantor

agency is of paramount importance to successfully

monitor and review nonprofits and their grantor

agencies. OSA has already seen a spike in activity

evidenced by the Division posting 8 grantee

reviews; in October 2006. OSA’s goal is to release

24 grantee reviews, however, that number could

be as high as 40 by the end of this fiscal year.

In an effort to help train agency monitors to

be proactive thinkers, OSA plans to complete

monitoring reviews of grantor agencies. OSA’s

goal is to complete 12 agency monitoring reviews

by the end of next fiscal year.

Training is an important function of MS&NGCD

and OSA plans to continue its record breaking

efforts in 2007. We plan to maintain our high

paced training schedule but increase our efficiency

and effectiveness. An important part of training is

providing information to grantees and grantors

that is relevant to their particular circumstances.

To aid in this effort, OSA will continue to issue

its Best Practices quarterly newsletter and

identify other efforts to benefit both grantors and

grantees.

OFFICE OF THE STATE AUDITOR MAIN OFFICE AND BRANCH LOCATIONS

Morganton

Asheville

Charlotte

Fayetteville

Wilmington

Greenville

Elizabeth City

Raleigh

GreensboroWinston-Salem

18

Annual Report 2006 | Investigative Division

OSA’s Investigative Division is one of the

most effective tools for investigating

allegations of fraud, waste and abuse

of State resources. Relying on State constitutional

and statutory authority, this arm of OSA uncovers

government waste and decreases the risk of future

waste through proactive measures.

The majority of tips that lead to investigations

come from OSA’s 24-hour, toll-free hotline [1-

800-730-TIPS (8477)]. This Hotline is designed for

state employees and the general public to report

activities they believe may be illegal or improper.

Allegations of fraud, waste and abuse may also

be reported by traditional mail or via email at

hotline@ncauditor.net.

To protect the integrity of tips, allegations of

improper governmental activities are strictly

confidential. In addition, state law provides

protection from retaliation or discrimination for

whistleblowers who report improper or illegal

activities to the State Auditor.

We have made great strides in detecting and

preventing fraud, waste and abuse of State resources

in 2006. We built on our 2005 accomplishments

by reducing the number of open cases, completing

cases with greater efficiency which reduced

the average age of cases, while simultaneously

investigating newly reported allegations.

Comparing fiscal 2006 with fiscal 2005, we

reduced the number of open cases by 42% (45

from 78). This is a substantial accomplishment of

increased efficiency given the fact that we received

137 new cases during this fiscal year (5% increase

over 2005). Consistent with these numbers is

the decrease in the average case age. In 2005, the

average case age was almost a whole year. By 2006

FYE, we reduced the average case age to 226 days,

a reduction of over 26%.

The goals for 2007 are to effectively promote the

State Auditor’s Hotline, integrate investigators into

a team-centered approach with other divisions,

and instill more flexibility to enable the handling

of multiple investigations simultaneously.

The promotion of the State Auditor’s Hotline is

mandated by statute and has proven to be the tip

source for the majority of investigations leading to

direct savings for the taxpayers. This one area is

unique in that money spent to promote the Hotline

will likely reap a far greater amount in savings to

the taxpayers when fraud, waste and abuse of their

money is uncovered. In 2007, OSA plans to unveil

a plan promoting the State Auditor’s Hotline using

all available tools and resources.

Now that the Investigative Division is mostly

caught-up on the inherited backlog of cases, focus

can now be directed toward integrating Investigators

into audit teams staffed by Performance and

Financial Divisions. To proactively reduce waste

in State government, audit teams must possess an

investigative eye. In 2007, OSA will be working to

build a team-centered auditing approach where

the Investigative Division plays an important role

in proactively looking for fraud, waste and abuse

of taxpayers’ money.

A portion of the AuditWatch efficiency gains will

be put to good use in the Investigative Division.

Because promotion of the Hotline will result in

more tips, more investigators will be needed as part

Investigative Division

Decreasing risk through proactive measures

North Carolina Office of the State Auditor

Decreasing risk through proactive measures 19

of other auditing teams. OSA plans to add more

supervisor positions to the Investigative Division in

2007. OSA believes this will bring greater flexibility

to investigations and allow the Division to handle

multiple investigations simultaneously.

The following are summaries of the more notable

cases in fiscal year 2005 – 2006. A complete list of

reports is detailed in Appendix A.

NORTH CAROLINA DEPARTMENT OF

INSURANCE—RAD TRUST

The Office of the State Auditor received

allegations that Department of Insurance personnel

and Regulatory Actions Division (RAD) Trust

management mismanaged the assets of London

Pacific Life & Annuity Company, an insurance

company in receivership due to financial problems.

Allegations included the improper disposal of assets,

unnecessary purchases, wasteful expenditures,

and lack of required reporting to the Wake County

Superior Court.

Auditors substantiated many of the allegations and

investigated other issues that arose during the course

of the audit. The investigation resulted in 15 findings

involving failure to follow state rules and regulations,

failure to file required quarterly reports to the courts,

inadequate supporting documentation, co-mingling

of agency and estate assets, failure to obtain bids or

quotes, excessive purchases, inadequate policies and

procedures, and lack of accounting controls.

NORTH CAROLINA COMMUNITY

COLLEGE SYSTEM

As a result of the following reports, OSA

met with the Community College Task Force

to highlight the various oversight issues. The

Task Force established a proactive, system-wide

response to train college staff to avoid repeating

these mistakes.

Blue Ridge Community College

During our annual financial audit of Blue Ridge

Community College, auditors uncovered several

problem areas and referred these issues to the

Investigative Audit Division. These problem areas

included: internal control weaknesses; potential

misuse of work-study payments; and the issuance

of a check to a private business lacking adequate

supporting documentation.

The special review resulted in eight findings

that detailed the lack of internal controls, conflicts

of interest, apparent falsification of documents,

diversion of student loan funds to a private

business, and inadequate oversight.

Halifax Community College

The North Carolina Community College System

referred a number of allegations of misconduct

concerning the President of Halifax Community

College to the OSA. The allegations included

falsification of travel records, creation of a hostile

work environment, and using College resources for

personal and political gain.

Upon investigation, auditors reported the following

findings: the President’s contract was approved

without advance notice of significant contract

amendments, the President received questionable

payments for insurance-related fringe benefits and

travel expense reimbursements, the President’s

executive secretary deleted files from her computer

despite Halifax Community College receiving a

cease and desist letter from the State Auditor, the

automotive tech instructor performed automotive

services for the President’s personal vehicle outside of

20

Annual Report 2006 | Investigative Division

classroom instruction, and the President authorized

the lease of Halifax Community College property

without obtaining approval from the State Board of

Community Colleges.

Wake Technical Community College

(WTCC) Board of Trustees

Investigators received tips from the State

Auditor’s Hotline about conflicts of interest in

the lease of a building owned by a Trustee’s family

member to WTCC. In addition, investigators

discovered that in a separate transaction, a

different WTCC trustee personally benefited from

the sale of land to the College.

Auditors confirmed the conflict of interest with

evidence that WTCC entered into a three-year

lease agreement with a WTCC Trustee’s family

member and the Board of Trustees approved

the lease agreement with no indication that the

Trustee abstained from voting.

Auditors confirmed an additional conflict of

interest with evidence that the former Chairman

of the Board of Trustees was a principal owner of

a company hired to purchase land and construct

a training center for the College. The former

Chairman acknowledged receiving financial gain

from the sale of the property which was in direct

violation of State law.

NORTH CAROLINA MUSEUM OF ART

The Office of the State Auditor received

allegations through the State Auditor’s Hotline that

North Carolina Museum of Art employees received

bonuses in the form of salary supplements from the

North Carolina Museum of Art Foundation, Inc.

Auditors discovered that at least 58 Museum and

foundation employees received salary supplements

dating as far back as 1998. The total compensation

paid to the Director of the Museum of Art

exceeded the amount set forth in legislation and

the Director entered into a consulting agreement

with the Museum of Art Foundation without

obtaining written approval from the Secretary of

the Department of Cultural Resources.

Other findings included: the Department of

Cultural Resources allowed unauthorized Museum

of Art Foundation compensation supplements for

the Director and Assistant Director of Marketing to

be processed through the State Retirement System,

the Museum of Art Foundation may have violated

federal tax regulations by executing employment

contracts with State employees and reporting their

earnings as non-employee compensation, the

North Carolina Museum of Art and the Museum

of Art Foundation were integrated into a hybrid

organization

STONE COLD CHEMICALS, INC.

The Office of the State Auditor received

information concerning an out-of-state business

named Stone Cold Chemicals, Inc., that was under

investigation in a number of states. Stone Cold

Chemicals was shut down in Florida and Georgia

after investigators in those states determined the

company sold products at inflated prices and

provided gifts to state purchasing agents in return

for placing orders. Records seized from Stone

Cold Chemicals indicated that employees of North

Carolina government agencies may have also

received gifts for purchases from the company.

Our investigation revealed seven Department of

Transportation employees and an Appalachian State

University employee authorized purchases from

Stone Cold Chemicals at up to six times the market

Decreasing risk through proactive measures

North Carolina Office of the State Auditor

21Decreasing risk through proactive measures

price and received gifts in return. During the course

of these investigations, we discovered that Stone

Cold Chemicals also solicited a significant volume of

business from local governments in North Carolina.

Auditors concluded that the

acceptance of gifts in return

for placing orders was a

violation of State law and

referred these issues to local

and state law enforcement

authorities. Our investigators

also identified a number of

local law enforcement, other

agencies and organizations

who had made questionable

purchases from Stone Cold

Chemicals. We forwarded

information to the appropriate

agencies.

NORTH CAROLINA

EASTERN REGION

DEVELOPMENT COMMISSION

The Office of the State Auditor received a number

of allegations concerning the financial management

and oversight of North Carolina’s Eastern Region,

an economic development partnership. Auditors

substantiated allegations regarding lack of

oversight, inadequate documentation, duplicate

payments, under-reporting of interest income,

and the misclassification of an employee for tax

purposes.

Auditors determined the Eastern Region

Development Commission did not exercise

adequate oversight and monitoring of the Eastern

Region’s Marketing and Client Development

activities. The special review revealed the

Executive Director was reimbursed for expenses

that were inconsistent with locations of travel and

were without adequate supporting documentation.

Moreover, auditors discovered the Eastern Region

under reported interest earned on its initial state

appropriation and the

Business Development

Consultant was paid twice

for the same expenses.

NORTH CAROLINA

DEPARTMENT OF

PUBLIC INSTRUCTION

Investigators received

allegations that the

Department of Public

Instruction’s Reading First

Section Chief maintained

a special fund outside of

the Department of Public

Instruction with a vendor for

the Reading First program

and used this special fund to make unnecessary

disbursements including payments to the Section

Chief ’s children. The special review resulted in

seven findings regarding operation of the special

fund, noncompliance with procurement and travel

policies, and unnecessary expenditures.

Auditors recommended the transfer of funds

to the Department of Public Instruction general

fund bank account and management comply with

departmental policy and state law. Additionally,

auditors recommended the Section Chief

reimburse the Department of Public Instruction

for inappropriate travel reimbursements and

submit documentation to properly establish staff

duty stations.

The promotion of the

State Auditor’s Hotline is

mandated by statute and has

proven to be the tip source for

the majority of investigations

leading to direct savings for

the taxpayers

22

Annual Report 2006 | Investigative Division

EMPLOYMENT SECURITY COMMISSION

Auditors received allegations through the State

Auditor’s Hotline that an employee with a criminal

record for false pretenses and cheats was granted

access to confidential employee information at the

Employment Security Commission. The Office

of State Personnel confirmed the employee had

access to the Personnel Management Information

System which contains social security numbers,

dates of birth, and compensation data for every

current and former employee of the Employment

Security Commission. The employee was serving

an active prison sentence and participating in the

Department of Correction’s work-release program

through his position with the Employment

Security Commission’s personnel section.

Auditors concluded his access to this

information, based on his criminal background

and work-release status, created an unnecessary

risk for the Employment Security Commission

and its employees. Additionally, the employee

used his state-issued computer to excessively visit

internet dating sites. Auditors recommended

the Employment Security Commission take

disciplinary action against the employee and review

the process for granting access to confidential

personnel information.

NORTH CAROLINA DEPARTMENT OF STATE

TREASURER

Auditors received allegations through the

State Auditor’s Hotline that the former Chief

Deputy of the Department of State Treasurer used

state resources for political purposes. Auditors

discovered the former Chief Deputy used the

agency’s computer resources to maintain and

process documents related to political activities.

Analysis of the Department of State Treasurer

computer network revealed more than 450 files

related to campaign activities including mailings

for fundraisers, contribution mailing lists,

campaign event invitations, thank you letters

for contributions, contribution spreadsheets,

operations outlines, voting precinct data,

campaign event schedules, and letters to the media.

Auditors recommended the Department of State

Treasurer create and implement an internal policy

prohibiting the use of state resources for political

activities.

NORTH CAROLINA AGRICULTURAL AND

TECHNICAL STATE UNIVERSITY

Auditors received a complaint through the

State Auditor’s Hotline that the former Physical

Plant Manager at North Carolina Agricultural and

Technical State University violated procurement

policies and accepted meals from vendors.

Auditors concluded the acceptance of lunches was

in violation of General Statute §133-32 regarding

gifts and favors. Auditors also discovered that

the University’s policy on conflicts of interest did

not adequately specify that employees involved

in preparing, awarding, and supervising public

contracts cannot accept gratuities. Auditors

recommended management train all employees

involved in contract administration about the laws

involving gifts and the University revise its policy

on gratuities to comply with statutes.

NORTH CAROLINA DEPARTMENT OF

TRANSPORTATION

Investigators received allegations through

the State Auditor’s Hotline that employees of

the Department of Transportation’s Materials

and Test Unit violated a variety of state policies.

The investigation substantiated a Soil Engineer

Decreasing risk through proactive measures

North Carolina Office of the State Auditor

23Decreasing risk through proactive measures

in the Materials and Test Unit used his state-

issued wireless telephone for personal calls and

the Materials and Test Unit did not have proper

documentation for the use of wireless phones.

The Soil Engineer admitted he used his

wireless phone to talk to his wife and individuals

constructing his personal residence. Policies of

the Department of Transportation, the Office of

State Budget and Management, and the Office of

State Personnel prohibit making personal calls on

state-issued wireless phones. In addition, use of

the wireless phone for personal calls contributed

to the Soil Engineer exceeding the monthly plan

for allowable minutes.

Auditors recommended management take

appropriate action with employees who exceed the

allowable minutes for wireless phones including

modifying or terminating wireless contracts.

Further, auditors recommended management

reiterate its policies prohibiting personal use of

wireless phones and seek reimbursement from the

Soil Engineer for the incurred overage charges.

Additionally, auditors recommended management

review assignment of all wireless telephones for

compliance with departmental policies and clarify

types of communications devices subject to the

policies.

NORTH CAROLINA DEPARTMENT OF

HEALTH AND HUMAN SERVICES

An allegation was received through the State

Auditor’s Hotline that employees of the

Department of Health and Human Services

accepted gifts of material value from a computer

services vendor in violation of state and

departmental policies. Auditors confirmed this

allegation in regards to the Deputy Secretary, the

Director of the Division of Information Resource

Management, and the Computer/Telecom Services

Manager.

Auditors recommended the Department of

Health and Human Services ensure its employees

understand and follow applicable State laws, the

North Carolina Board of Ethics’ Executive Orders,

and departmental policies regarding appearances

of conflicts of interest and ethical conduct.

ADMINISTRATIVE OFFICE OF THE COURTS

Auditors received an allegation through the State

Auditor’s Hotline concerning foreign language

(Spanish) interpreters allegedly receiving payment

from non-English speaking defendants while also

being paid by the State. Although auditors did not

substantiate the specific allegation, we confirmed

clerks of court and chief district court judges

received the same concerns on a regular basis.

As a result, auditors recommended the

Administrative Office of the Courts revise the form

for appointing interpreters to include a certification

that the interpreter has not nor will accept any

other payment for the same services. In addition,

auditors recommended the Administrative Office

of the Courts consider requesting presiding judges

to inform non-English speaking defendants and

participants not to make any payment to the

court-appointed interpreter and develop internal

processes to monitor, audit, and investigate various

interpreter concerns.

24

General Administrative Division is the

nerve center for the OSA, performing

three core functions. First, it coordinates

OSA personnel administration from initial hiring

to training and placement. Second, it manages

the processing of all audits, reports and reviews.

This processing entails reviewing and editing of

draft copies, electronic and print shop formatting,

and responding to media questions and public

concerns. Third, General Administrative staff is

responsible for the coordination of all OSA payroll,

budget and purchasing.

PERSONNEL

To be a proactive State agency, OSA must be

a responsible manager of its personnel. After

selecting the best qualified applicants, OSA must

then provide quality training to employees and a

quality control review of employees work product.

Recruiting

OSA developed an active program to recruit on

university and college campuses around the state

this year. Making informal presentations to Beta

Alpha Psi meetings, accounting classes and other

events blends well with our established presence

at formal “meet the firms” nights and career fairs.

In addition, building relationships with campus

faculty and staff helps OSA better identify applicants

based on their career goals. By not positioning itself

as a direct competitor with public firms or private

industry, OSA has found immediate success with

applicants who are interested in pursuing a career

that provides a balance between their personal and

professional lives.

OSA’s goal is to build relationships to target

the right applicant, thus reducing turnover and

eliminating the waste of resources that frequent

turnover creates. OSA had a number of interns

this year because of the positive relationships.

Training

To better direct resources to areas with the

greatest risk, our auditors must be exceptionally

well trained and cross-trained in as many areas

as practical. This is challenging for our auditors

but at the same time a great and exciting career

opportunity. Our training department is tasked to

help recruit, train and retain the best professionals

possible.

In May 2006, OSA kicked-off a series of training

sessions for audit productivity improvement and

reengineering. OSA partnered with AuditWatch

to present in-depth training for all financial

audit staff with the goal of improving efficiency,

improving audit quality and increasing staff

morale. AuditWatch was not about implementing

new standards but was about looking at our audits

differently, increasing upfront planning and

shortening the time from field work to final audit

report. AuditWatch showed OSA more efficient

methods of auditing.

In the past, OSA’s ability to follow-up on hotline

tips and scrutinizing areas of State government has

been limited by the number of available work hours.

However, the AuditWatch program is expected to

help address this problem. The efficiency rewards

of implementing the AuditWatch approach are

General Administration

Annual Report 2006 | General Administration

Decreasing risk through proactive measures

North Carolina Office of the State Auditor

25Decreasing risk through proactive measures

expected to be an approximate 25% increase in

newly available time resources. Approximately

35,000 work hours can now be redirected to

deserving projects OSA has been unable to address

in the past. In terms of human capital, these

productivity principles

could increase OSA by the

equivalent of 22 fulltime

auditor positions. These

work hours from OSA’s

Financial Division will be

reinvested in expanding

OSA’s financial auditing

reach in the Performance,

Information Systems,

Financial, Investigative,

and Management Services

and Nongovernmental

Compliance Divisions.

The improvements

gained through this audit

productivity initiative

are not just temporary ideas, but will become

permanent practices. The State Auditor appointed a

Productivity Task Force to meet regularly to ensure

OSA realizes this productivity potential on an on-

going basis. The Task Force includes personnel

throughout the Agency on active subcommittees

over specific subject areas. The subcommittee

design is to find a cross section of employees to

make recommendations to, and coordinate with,

the Task Force as we move forward into the next

fiscal year.

Quality Controls

OSA’s work product is governed by strict

adherence to professional standards promulgated

by government agencies and professional

organizations including the Government Auditing

Standards Board, the Financial Accounting

Standards Board, the Federal Office of Management

and Budget, the American Institute of Certified

Public Accountants, and various state and federal

laws and regulations. These

standards require auditors

remain independent,

receive continuing

professional education,

and address the role of

the auditee in resolving

and tracking findings and

recommendations.

OSA has a control system

to ensure the quality of

audit work. The system

includes supervisory

review of all work product

and management review

of audit reports and

critical supporting work

papers. Staff who did not participate in an audit

periodically review the work. To uphold the

standards of the supervisory review, OSA’s goal

is that all newly hired Supervisor level employees

and above have a valid CPA license, or the merit-

based equivalent in work experience.

Another layer of OSA review exists. The Agency

receives a peer review every three years under

the direction of the National State Auditors

Association. During the peer review, members

of audit staffs from other states review the office’s

quality assurance system and work papers for

compliance with auditing standards. The most

recent peer review was performed during the 2005-

2006 fiscal year and resulted in a clean opinion.

A report exposing an

instance of fraud, waste

or abuse of taxpayers’

resources, if publicized by

the statewide news media,

becomes an effective tool

for the deterrence of future

fraud, waste or abuse of

taxpayers’ resources.

26

PROCESSING & PUBLICATION

With approximately 192 OSA employees,

the publishing of audits, reports and reviews

is a complicated and time consuming process.

Magnified by the sensitive nature of the audit

subject matter, OSA’s administrative staff must

be detail minded and highly organized. The goals

of accuracy and timeliness are the staff ’s top

priorities. However without effective publication,

the audit, report or review would go unnoticed.

Publication of the audits, reports and reviews

is an essential part of OSA’s proactive posture.

A report exposing an instance of fraud, waste or

abuse of taxpayers’ resources, if publicized by the

statewide news media, becomes an effective tool

for the deterrence of future fraud, waste or abuse

of taxpayers’ resources. OSA, through a positive

relationship with the news media, can proactively

deter others from committing similar acts of fraud,

waste and abuse of taxpayer money.

BUDGETING & PURCHASING

OSA is the taxpayer’s watchdog against wasteful

spending of State resources. To be an effective

messenger, OSA must ensure that its resources are

spent as wisely as possible.

OSA’s appropriated budget is approximately

$16 million and the agency bills approximately $3

million for federal audit work. In addition to the

central office in Raleigh, OSA has 9 branch offices

throughout the State which our budget office is

responsible for managing financially.

Budgeting and purchasing are governed by strict

rules and regulations. An independent CPA firm

annually conducts a financial audit of the office

and routinely issues a clean opinion of its financial

statements.

MANAGEMENT INFORMATION SYSTEMS

The MIS Division of the Office of the State

Auditor is charged with four primary objectives:

• Provide technology support for OSA auditors

• Oversight of Senate Bill 991 compliance

• Enterprise Technology planning and

implementation

• Automating OSA’s critical business function

to increase productivity

In addition to providing for the daily computing

needs of OSA, the MIS Division completed several

projects to enhance the efficiency and quality of

the Agency. MIS participated in the ePartners

program at NC State University by working with

a senior design team to provide upgrades and

updates of computers and field systems to save

valuable travel time and expense. MIS enhanced

the publishing of online audits and reports on the

OSA website and worked closely with the Office

of the State Controller to ensure the success of

the Beacon Project (statewide payroll application

slated for implementation in 2008).

OSA’s 2007 goals for MIS are to improve

the security of the Agency and prepare for

future efficiency improvements. Specifically,

MIS will streamline the Management Services

and Nongovernmental Compliance Division’s

procedures to provide timelier grant and grantee

information to the public. MIS will also implement

a portal-based OSA Intranet that will improve

communications and collaboration within the

Agency. Finally, MIS will update the computing

infrastructure, replace older networking switches,

increase the bandwidth to the main office, and

install a comprehensive wireless networking

security system.

Annual Report 2006 | Investigative Division

Decreasing risk through proactive measures

North Carolina Office of the State Auditor

27Decreasing risk through proactive measures

Report Number Title Release Date

ISA-2007-4160 North Carolina Office of the State Controller - Vulnerability Assessment 11/13/06GRA-2006-0007 Review of Sit In Movement, Inc. - State Grant 11/8/06GRA-2006-0008 Review of Bertie-Martin-Washington Community Development Corporation State Grant 11/8/06GRA-2006-0009 Review of Sandhills Mediation Center State Grant 11/8/06ISA-2007-4660 North Carolina Office of Information Technology Services - Vulnerability Assessment 11/7/06ISA-2007-1000 North Carolina General Assembly - Vulnerability Assessment 11/2/06FIN-2006-3000 Office of the Governor - Statewide Financial Audit Procedures 11/1/06ISA-2007-3300 North Carolina Office of the State Auditor - Vulnerability Assessment 11/1/06FIN-2006-8303 USS North Carolina Battleship Commission - Financial Statement Audit 10/31/06PER-2006-0215 North Carolina Highway Program Located Within the Department of Transportation 10/31/06GRA-2006-0005 Review of Hope Pregnancy Care Center-State Grant 10/26/06GRA-2006-0006 Review of Western Youth Network-State Grant 10/26/06FIN-2006-2139 Greene County Clerk of Superior Court - Fiscal Control Audit 10/24/06GRA-2006-0001 Review of Wilson County Residential Services, Inc.-State Grant 10/23/06GRA-2006-0002 Review of Marine Corp Museum of the Carolinas-State 10/23/06GRA-2006-0003 Review of Club Fifteen-State Grant 10/23/06GRA-2006-0004 Review of Caswell County Parish, Inc.-State Grant 10/23/06FIN-2006-2188 Tyrrell County Clerk of Superior Court - Fiscal Control Audit 10/16/06FIN-2007-2115 Carteret County Clerk of Superior Court - Fiscal Control Audit 10/16/06FIN-2006-2133 Columbus County Clerk of Superior Court - Fiscal Control Audit 10/11/06PER-2006-7216 Internal Auditing In North Carolina Agencies And Institutions 10/11/06FIN-2006-2150 Johnston County Clerk of Superior Court - Fiscal Control Audit 10/3/06FIN-2006-2185 Surry County Clerk of Superior Court - Fiscal Control Audit 10/3/06SAR-2006-0001 North Carolina Central University - Strategic Audit Review 10/2/06FIN-2006-2166 Onslow County Clerk of Superior Court - Fiscal Control Audit 9/28/06FIN-2005-6850 Martin Community College - Financial Statement Audit 9/27/06INV-2006-0309 North Carolina State University 9/20/06FIN-2006-2108 Bladen County Clerk of Superior Court - Fiscal Control Audit 9/14/06FIN-2006-2173 Pitt County Clerk of Superior Court - Fiscal Control Audit 9/14/06FIN-2006-4160 Office of the State Controller - Fiscal Control Audit 9/14/06FIN-2006-2112 Cabarrus County Clerk of Superior Court - Fiscal Control Audit 9/13/06

Appendix AThe following reports are listed in reverse chronological order and were issued from the begining of fiscal year 2005-2006 through the date of this annual report:

28

INV-2006-0308 North Carolina Department of Transportation 9/13/06FIN-2006-1000 North Carolina General Assembly - Fiscal Control Audit 9/12/06INV-2006-0307 North Carolina Department of Administration - Division of Purchase and Contract 9/5/06FIN-2006-2184 Stokes County Clerk of Superior Court - Fiscal Control Audit 8/30/06FIN-2006-2107 Bertie County Clerk of Superior Court - Fiscal Control Audit 8/29/06FIN-2006-2113 Caldwell County Clerk of Superior Court - Fiscal Control Audit 8/29/06FIN-2006-2177 Robeson County Clerk of Superior Court - Fiscal Control Audit 8/29/06INV-2006-0306 North Carolina State University 8/28/06FIN-2006-2152 Lee County Clerk of Superior Court - Fiscal Control Audit 8/7/06NGV-2005-9157 Chowan-Gates-Perquimans Partnership for Children - Financial Statement Audit 7/26/06FIN-2006-2102 Alleghany County Clerk of Superior Court - Fiscal Control Audit 7/25/06FIN-2006-2128 Davidson County Clerk of Superior Court - Fiscal Control Audit 7/25/06FIN-2006-3510 Department of Public Instruction - Fiscal Control Audit 7/25/06FIN-2006-2194 Watauga County Clerk of Superior Court - Fiscal Control Audit 7/24/06FIN-2006-4500 Department of Correction - Fiscal Control Audit 7/24/06FIN-2006-2105 Avery County Clerk of Superior Court - Fiscal Control Audit 7/21/06FIN-2006-2180 Rutherford County Clerk of Superior Court - Fiscal Control Audit 7/21/06ISA-2006-6086 Elizabeth City State University 7/21/06NGV-2005-9167 Partnership for Children of Lincoln & Gaston Counties Inc - Financial Statement Audit 7/21/06NGV-2005-9185 Yadkin County Partnership for Children - Financial Statement Audit 7/21/06INV-2006-0305 North Carolina Public Staff 7/19/06FIN-2006-2168 Pamlico County Clerk of Superior Court - Fiscal Control Audit 7/17/06NGV-2005-9155 Carteret County Partnership for Children - Financial Statement Audit 7/17/06NGV-2005-9104 Cleveland County Partnership for Children Inc - Financial Statement Audit 7/12/06NGV-2005-9130 Randolph County Partnership for Children - Financial Statement Audit 7/12/06NGV-2005-9138 Anson County Partnership for Children - Financial Statement Audit 7/12/06NGV-2005-9150 Alamance County Partnership for Children - Financial Statement Audit 7/12/06INV-2006-0303 North Carolina Agricultural & Technical State University 7/6/06INV-2006-0304 North Carolina Department of Health and Human Services 7/6/06FIN-2005-6802 Asheville-Buncombe Technical Community College - Financial Statement Audit 6/30/06FIN-2005-6807 Brunswick Community College - Financial Statement Audit 6/30/06FIN-2005-6816 Central Carolina Community College - Financial Statement Audit 6/30/06FIN-2005-6861 Piedmont Community College - Financial Statement Audit 6/30/06FIN-2005-6864 Randolph Community College - Financial Statement Audit 6/30/06FIN-2005-2130 Duplin County Clerk of Superior Court - Fiscal Control Audit 6/29/06FIN-2005-6830 Edgecombe Community College - Financial Statement Audit 6/29/06FIN-2005-6851 Mayland Community College - Financial Statement Audit 6/29/06FIN-2005-6883 Stanly Community College - Financial Statement Audit 6/29/06

Annual Report 2006 | Appendix A

Decreasing risk through proactive measures

North Carolina Office of the State Auditor

29Decreasing risk through proactive measures

FIN-2005-6898 Wilson Technical Community College - Financial Statement Audit 6/29/06FIN-2006-2198 Yadkin County Clerk of Superior Court - Fiscal Control Audit 6/29/06INV-2006-0302 Employment Security Commission 6/29/06NGV-2005-9137 Wilson County Partnership for Children - Financial Statement audit 6/29/06NGV-2005-9143 Guilford County Partnership for Children, Inc. - Financial Statement Audit 6/29/06NGV-2005-9163 Harnett County Partnership for Children - Financial Statement Audit 6/29/06NGV-2005-9102 Burke County Partnership for Children Inc - Financial Statement Audit 6/28/06FIN-2005-6086 Elizabeth City State University - Financial Statement Audit 6/27/06FIN-2006-2159 Mecklenburg County Clerk of Superior Court - Fiscal Control Audit 6/27/06FIN-2006-2165 Northampton County Clerk of Superior Court - Fiscal Control Audit 6/27/06NGV-2005-9101 North Carolina Partnership for Children Inc - Financial Statement Audit 6/27/06NGV-2005-9111 Orange County Partnership for Young Children - Financial Stement Audit 6/27/06NGV-2005-9139 Brunswick County Partnership for Children Inc - Financial Statement Audit 6/27/06NGV-2005-9144 Hoke County Partnership for Children and Families - Financial Statement Audit 6/27/06NGV-2005-9161 Franklin-Granville-Vance Partnership for Children Inc - Financial Statement Audit 6/27/06FIN-2005-6082 The University of North Carolina at Pembroke - Financial Statement Audit 6/26/06FIN-2005-6843 Blue Ridge Community College - Financial Statement Audit 6/26/06FIN-2005-4205 North Carolina Turnpike Authority - Financial Statement Audit 6/22/06FIN-2005-6820 Cleveland Community College - Financial Statement Audit 6/22/06FIN-2005-6832 Fayetteville Technical Community College - Financial Statement Audit 6/22/06FIN-2005-6840 Halifax Community College - Financial Statement Audit 6/22/06FIN-2005-6847 Johnston Community College - Financial Statement 6/22/06FIN-2006-2147 Hyde County Clerk of Superior Court - Fiscal Control Audit 6/22/06FIN-2006-2195 Wayne County Clerk of Superior Court - Fiscal Control Audit 6/22/06NGV-2005-9140 Bertie County Partnership for Children Inc - Financial Statement Audit 6/22/06NGV-2005-9168 Madison County Partnership for Children and Families Inc 6/22/06NGV-2005-9170 Mitchell-Yancey County Partnership for Children Inc - Financial Statement Audit 6/22/06FIN-2005-6842 Haywood Community College - Financial Statement Audit 6/21/06NGV-2005-9109 Jones County Partnership for Children - Financial Statement Audit 6/21/06NGV-2005-9160 Davie County Partnership for Children Inc - Financial Statement Audit 6/21/06NGV-2005-9166 Partnership for Children of Johnston County Inc - Financial Statement Audit 6/19/06FIN-2005-6075 Western Carolina University - Financial Statement Audit 6/16/06FIN-2005-6860 Pamlico Community College - Financial Statement Audit 6/15/06FIN-2005-6868 Roanoke-Chowan Community College - Financial Statement Audit 6/15/06FIN-2005-6838A GHG Construction Corporation - Financial Statement Audit 6/14/06FIN-2006-2170 Pender County Clerk of Superior Court - Financial Statement Audit 6/14/06NGV-2005-9122 Lenoir/Greene Partnership for Children Inc - Financial Statement Audit 6/14/06FIN-2005-6838 Guilford Technical Community College - Financial Statement Audit 6/13/06NGV-2005-9124 Person County Partnership for Children - Financial Statement Audit 6/13/06PER-2006-7218 Performance Audit - Child Caring Institutions 6/12/06

30

NGV-2005-9182 Union County Partnership for Children - Financial Statement Audit 6/8/06NGV-2005-9186 Richmond County Partnership for Children - Financial Statement Audit 6/7/06FIN-2005-6836 Gaston College - Financial Statement Audit 6/6/06FIN-2005-6852 McDowell Technical Community College - Financial Statement Audit 6/6/06FIN-2005-6896 Wilkes Community College - Financial Statement Audit 6/6/06ISA-2006-6060 The University of North Carolina at Wilmington 6/6/06INV-2006-0301 North Carolina’s Eastern Region 6/5/06NGV-2005-9153 Bladen County Partnership for Children Inc - Financial Statement Audit 6/5/06NGV-2005-9176 Montgomery County Partnership for Children - Financial Statement Audit 6/5/06FIN-2006-2120 Chowan County Clerk of Superior Court - Fiscal Control Audit 6/1/06FIN-2006-2169 Pasquotank County Clerk of Superior Court - Fiscal Control Audit 6/1/06NGV-2005-9119 Durham Partnership for Children - Financial Statement Audit 5/31/06NGV-2005-9115 Avery County Partnership for Children 5/30/06NGV-2005-9175 Polk County Partnership for Children Inc. - Financial Statement Audit 5/30/06NGV-2005-9180 Smart Start of Transylvania County - Financial Statement Audit 5/30/06FIN-2005-6812 Carteret Community College - Financial Statement Audit 5/24/06FIN-2005-6055 The University of North Carolina at Asheville - Financial Statement Audit 5/23/06FIN-2005-6890 Wake Technical Community College - Financial Statement Audit 5/23/06NGV-2005-9136 Washington County Child Advocacy Council Inc. - Financial Statement Audit 5/23/06NGV-2005-9146 Lee County Partnership for Children - Financial Statement Audit 5/23/06NGV-2005-9152 Beaufort/Hyde Partnership for Children - Financial Statement Audit 5/23/06NGV-2005-9171 Northampton Partnership for Children Inc. - Financial Stament Audit 5/23/06FIN-2006-2114 Camden County Clerk of Superior Court - Fiscal Control Audit 5/18/06FIN-2005-6846 James Sprunt Community College - Financial Statement Audit 5/16/06FIN-2005-6870 Robeson Community College - Financial Statement Audit 5/16/06NGV-2005-9103 Caldwell County Smart Start A Partnership for Young Children - Financial Statement Audit 5/16/06NGV-2005-9108 Hertford County Partnership for Children Inc. - Financial Statement Audit 5/16/06NGV-2005-9132 Rutherford County Partnership for Children Inc. - Financial Statement Audit 5/16/06FIN-2005-6866 Richmond Community College - Financial Statement Audit 5/9/06NGV-2005-9151 Alexander County Partnership for Children - Financial Statement Audit 5/9/06NGV-2005-9164 Henderson County Partnership for Children - Financial Statement Audit 5/9/06FIN-2005-6884 Surry Community College - Financial Statement Audit 5/8/06NGV-2005-9184 The Partnership for Children of Wayne County, Inc -Financial Statement Audit 5/8/06FIN-2005-6814 Catawba Valley Community College - Financial Statement Audit 5/4/06FIN-2005-6874 Rowan-Cabarrus Community College - Financial Statement Audit 5/4/06FIN-2006-2138 Granville County Clerk of Superior Court 5/4/06ISA-2006-6090 North Carolina Central University 5/3/06INV-2006-0300 North Carolina Department of Public Instruction 5/2/06NGV-2005-9129 Pamlico Partnership for Children, Inc. - Financial Statement Audit 4/27/06

Annual Report 2006 | Appendix A

Decreasing risk through proactive measures

North Carolina Office of the State Auditor

31Decreasing risk through proactive measures

INV-2006-0299 North Carolina Department of State Treasurer 4/26/06FIN-2005-6088 Fayetteville State University - Financial Statement Audit 4/20/06FIN-2005-6070 North Carolina Agricultural & Technical State University 4/12/06FIN-2005-8730 Single Audit Report for Year Ended June 30 2005 4/12/06PER-2006-7217 Northeastern North Carolina Regional Economic Development Commission 4/12/06FIN-2005-4900 Crime Control and Public Safety Department of 4/10/06FIN-2005-6810 Cape Fear Community College 4/7/06FIN-2005-3510 Public Instruction Department of 4/6/06FIN-2005-4410 Health and Human Services Department of 4/6/06FIN-2005-4650 Employment Security Commission 4/6/06FIN-2005-3800 Labor Department of 4/5/06FIN-2005-4200 Transportation Department of 4/5/06FIN-2005-4300 Department of Environment and Natural Resources Statewide Financial Audit Procedures 4/5/06FIN-2005-4600 Commerce Department of 4/5/06FIN-2005-6800 Community College Department of 4/5/06FIN-2005-6828 Durham Technical Community College 4/5/06NGV-2005-9114 Ashe County Partnership for Children 4/5/06NGV-2005-9117 Chatham County Partnership for Children 4/5/06FIN-2005-8410 NC Teacher and State Employees Comprehensive Major Medical Plan 3/29/06FIN-2005-6804 Beaufort County Community College 3/20/06FIN-2005-6060 UNC - Wilmington 3/13/06FIN-2005-4160 Controller Office of the State 3/9/06FIN-2005-6808 Caldwell Community College and Technical Institute 3/8/06FIN-2005-8025 Boards and Commissions 3/8/06INV-2006-0298 Stone Cold Chemicals, Inc. 3/2/06INV-2006-0297 Duplin County Board of Education 3/1/06FIN-2005-6050 UNC- Charlotte 2/28/06FIN-2005-6084 Winston Salem State University 2/28/06FIN-2005-6020 UNC- Chapel Hill 2/23/06FIN-2005-6824 Craven Community College 2/22/06INV-2006-0296 Appalachian State University 2/22/06FIN-2005-8560 Wireless Emergency Telephone System Fund 2/21/06INV-2006-0295 North Carolina Department of Transportation 2/20/06PER-2006-7901 Follow-up Report on Findings From 2005 Audit Reports and Reviews 2/17/06FIN-2005-3400 Treasurer Department of the State CAFR/Single Audit 2/13/06FIN-2005-6882 Southwestern Community College 2/13/06FIN-2005-8530 North Carolina Global Transpark Authority 2/6/06INV-2006-0294 Onslow County Schools 2/3/06FIN-2005-4660 Information Technology Services 1/27/06

32

FIN-2005-6095 UNC Hospitals NC Memorial Hospital 1/27/06FIN-2005-4407 Butner Town of 1/25/06FIN-2006-2153 Lenior County Clerk of Superior Court 1/24/06INV-2006-0293 North Carolina Museum of Art 1/24/06INV-2006-0292 Wake Technical Community College Board of Trustees 1/23/06INV-2006-0291 North Carolina State Education Assistance Authority 1/19/06FIN-2005-6030 North Carolina State University 1/18/06FIN-2005-6040 UNC-Greensboro 1/18/06FIN-2005-6065 East Carolina University 1/18/06FIN-2005-6080 Appalachian State University 1/18/06INV-2006-0290 Blue Ridge Community College 1/18/06INV-2006-0289 UNC Math and Science Education Network 1/12/06INV-2006-0288 UNC-Chapel Hill School of Education Foundation 1/10/06INV-2005-0287 North Carolina Agricultural & Technical State University 1/4/06FIN-2005-4620 NC Ports Authority 12/29/05INV-2005-0286 North Carolina Board of Electrolysis Examiners 12/16/05FIN-2005-6092 NC School of the Arts 11/29/05FIN-2005-4464 Health and Human Service Department of 11/18/05FIN-2005-4700 Revenue Department of 11/16/05FIN-2005-8303 Battleship Commission 11/1/05FIN-2006-2146 Hoke County Clerk of Superior Court 11/1/05INV-2005-0284 North Carolina Community Colleges 10/25/05INV-2005-0285 Halifax Community College 10/25/05FIN-2005-4500 Correction Department of 10/19/05FIN-2006-2162 Moore County Clerk of Superior Court 10/19/05FIN-2006-2142 Harnett County Clerk of Superior Court 10/3/05FIN-2005-2144 Henderson County Clerk of Superior Court 9/27/05ISA-2005-4660 The Office of the Governor 9/21/05INV-2005-0283 North Carolina Department of Insurance - RAD Trust 9/19/05NGV-2004-9120 Down East Partnership for Children 9/16/05INV-2005-0279 North Carolina General Assembly, with Attorney General Opinion 9/12/05FIN-2005-2000 Administrative Office of the Courts 9/6/05NGV-2004-9145 Iredell County Partnership for Young Children, Inc. 9/2/05NGV-2004-9149 Rowan County Partnership for Children, Inc. 9/2/05NGV-2004-9172 Onslow County Partnership for Children, Inc. 9/2/05NGV-2004-9110 Mecklenburg County Partnership for Children 8/31/05NGV-2004-9141 Columbus County Partnership for Children, Inc. 8/31/05NGV-2004-9183 Children’s Council of Watauga County, Inc. 8/31/05FIN-2004-6854 Montgomery Community College 8/30/05FIN-2005-4305 Clean Water Management Trust Fund 8/30/05

Annual Report 2006 | Appendix A

Decreasing risk through proactive measures

North Carolina Office of the State Auditor

33Decreasing risk through proactive measures

NGV-2004-9107 Halifax-Waren Smart Start Partnership for Children, Inc. 8/29/05NGV-2004-9142 Dare County, Children and Youth Partnership for 8/29/05NGV-2004-9128 New Hanover County Partnership 8/26/05NGV-2004-9127 Buncombe County Partnership 8/25/05FIN-2005-2154 Lincoln County Clerk of Superior Court 8/24/05FIN-2005-2155 Macon County Clerk of Superior Court 8/24/05FIN-2005-2189 Union County Clerk of Superior Court 8/24/05NGV-2004-9105 Partnership for Children of Cumberland County, Inc. 8/24/05NGV-2004-9121 Smart Start of Forsyth County 8/24/05NGV-2004-9154 Cabarrus County Partnership for Children 8/24/05FIN-2004-6868 Roanoke-Chowan Community College 8/23/05FIN-2005-2122 Cleveland County Clerk of Superior Court 8/23/05NGV-2004-9126 Alleghany County Partnership for Children, Inc. 8/23/05NGV-2004-9178 Sampson County Partnership for Children 8/23/05INV-2005-0282 Administrative Office of the Courts 8/17/05FIN-2004-6801 South Piedmont Community College 8/15/05FIN-2004-8550 NC Agricultural Finance Authority 8/15/05NGV-2004-9156 Caswell County Partnership for Children 8/15/05FIN-2005-2100 Alamance County Clerk of Superior Court 8/8/05FIN-2005-2116 Caswell County Clerk of Superior Court 8/8/05FIN-2005-2118 Chatham County Clerk of Superior Court 8/8/05FIN-2005-2156 Madison County Clerk of Superior Court 8/8/05NGV-2004-9135 Wake County SmartStart 8/8/05NGV-2004-9169 Martin-Pitt County Partnership for Children, Inc. 8/8/05FIN-2005-2145 Hertford County Clerk of Superior Court 7/29/05NGV-2004-9131 Robeson County Partnership for Children 7/26/05NGV-2004-9118 Duplin County Partnership for Children 7/21/05NGV-2004-9133 Stokes County Partnership for Children 7/21/05PER-2005-0214 Drivers Licensing Process 7/20/05FIN-2005-2192 Warren County Clerk of Superior Court 7/15/05FIN-2005-4463 Health and Human Services, Department of 7/15/05FIN-2005-2191 Wake County Clerk of Superior Court 7/8/05FIN-2004-6090 North Carolina Central University 7/7/05INV-2005-0280 North Carolina Department of Transportation 7/1/05INV-2005-0281 North Carolina Department of Health and Human Services 7/1/05ISA-2005-6800 Audit of the Information System General Controls of the North Carolina Community College System 7/1/05PER-2005-0213 Performance Review of Medicaid Prescription Drug Costs 7/1/05

34

The OSA independently evaluates the state’s fiscal accountability and public program performance for North Carolina’s citizens and others. The office strives to assure that state government is executing its management responsibilities in compliance with applicable laws, rules, regulations, and policies. The office also evaluates whether sufficient management controls and policies exist to enable state agencies to most efficiently and effectively use public resources.

STATUTORY AUTHORITY

North Carolina General Statutes §§147-64.1-64.14 set forth the duties and responsibilities of the State Auditor, and requires the State Auditor be independent of the organizations being audited. These statutes mandate that all state agencies and entities partially or entirely supported by public funds be subject to audit by the state auditor. These audits independently evaluate public program performance for the General Assembly, Governor, executive departments and agencies, governing bodies, and the general public. Specifically, the State Auditor independently examines and makes findings of fact on whether State agencies:■ established adequate operating and administrative

procedures, reporting systems, and elements of management control

■ provided financial and other reports that disclose fairly, consistently, fully, and promptly all information necessary to demonstrate program performance

■ collected, deposited, and properly accounted for all revenues and receipts arising from activities

■ conducted programs and expended funds in an efficient and economical manner as well as in compliance with applicable laws and regulations

■ determined that programs effectively served the legislative intent.

OSA is also statutorily mandated to conduct certain audits, including the largest audit, the State’s Comprehensive Annual Financial Report (CAFR). These audits are required to be conducted in accordance with appropriate professional standards.

The Investigative staff is statutorily mandated to investigate allegations of improper activities, which may occur as a result of misfeasance, malfeasance or nonfeasance by governmental employees or those receiving state money. Investigators are required to protect complainants who provide information to OSA related to these charges. This section operates under the supervision of the Chief Deputy State Auditor.

CONSTITUTIONAL AGENCY

The State Auditor is a constitutional officer listed in the North Carolina Constitution under Article III, § 7. The State Auditor is elected statewide every four years and is a member of the Council of State which also includes the Governor, Lieutenant Governor, Secretary of State, State Treasurer, Superintendent of Public Instruction, Attorney General, Commissioner of Agriculture, Commissioner of Labor, and Commissioner of Insurance.

Appendix BSTATUTORY AND CONSTITUTIONAL AUTHORITY

Annual Report 2006 | Appendix B

Decreasing risk through proactive measures

North Carolina Office of the State Auditor

35Decreasing risk through proactive measures

SENIOR MANAGEMENT TEAM

Leslie W. Merritt, Jr., CPA, CFPState AuditorLeslie_Merritt@ncauditor.net(919) 807-7500

Lorrie L. Dollar, J.D. Chief DeputyLorriel_Dollar@ncauditor.net(919) 807-7517

Jeff Henderson, CPA, CISA Director of Field AuditsJeff_Henderson@ncauditor.net(919) 807-7513

James L. Forte, Director of Internal Operations and Legislative AffairsJames_Forte@ncauditor.net(919) 807-7642

Lenny Superville, Ph.D.Chief Information OfficerLenny_Superville@ncauditor.net(919) 807-7625

Cindy Gilliam, ControllerCindy_Gilliam@ncauditor.net(919) 807-7553

Kris Bailey, J.D.General CounselKris_Bailey@ncauditor.net(919) 807-7564

Charles K. Duckett Personnel OfficerCharles_Duckett@ncauditor.net(919) 807-7617

Christopher F. Mears, J.D.Director of Public AffairsChris_Mears@ncauditor.net(919) 807-7566

AUDIT MANAGEMENT TEAM

Joyce Flowers, CPASpecialty: Single AuditJoyce_Flowers@ncauditor.net(919) 807-7550

Janet Hayes, CPMSpecialty: Services to nongovernmental groupsJanet_Hayes@ncauditor.net(919) 807-7558

Jeff Henderson, CPA, CISASpecialty: Field Audits, Wilmington BranchJeff_Henderson@ncauditor.net(919) 807-7513

Linda Hollar, CPASpecialty: UNC, UNC Hospitals, Asheville BranchLinda_Hollar@ncauditor.net(919) 807-7565

David King, CPA, CFESpecialty: InvestigationsDavid_King@ncauditor.net(919) 807-7604

Lee Linker, CPASpecialty: CAFRLee_Linker@ncauditor.net(919) 807-7583

David Nance, CPASpecialty: Health IssuesDavid_Nance@ncauditor.net(919) 807-7660

Carol Smith, CPASpecialty: Community CollegesCharlotte BranchGreensboro BranchMorganton BranchWinston-Salem BranchCarol_Smith@ncauditor.net(336) 585-2513

Faye Steele, CPASpecialty: Clerks of CourtNorth Carolina State UniversityFayetteville BranchGreenville BranchElizabeth City BranchFaye_Steele@ncauditor.net(919) 807-7589

Stan Wesner, CPASpecialty: Performance AuditsStan_Wesner@ncauditor.net(919) 807-7630

Charles Williford, CPA.CITP, CISA, CFE, CPMSpecialty: Information Systems Audits Charles_Williford@ncauditor.net(919) 807-7627

Copies of reports issued by the Office of the State Auditor may be requested through the email link on the web site at www.ncauditor.net or by calling the main phone number. Other inquiries, comments, and suggestions may be made by contacting the main office or one of the staff members listed below.

N.C. OFFICE OF THE STATE AUDITOR2 South Salisbury Street20601 Mail Service CenterRaleigh, NC 27699-0601Main Phone Number: (919) 807-7500Hotline Number: (800) 730-8477Fax Number: (919)807-7647

Contact Information