COMPLIANCE AND CONTROL AUDIT REPORT

State Fair

A Report to the Legislative Post Audit Committee By the Legislative Division of Post Audit

l State of Kansas '=~~~~~~~~~~~~~~~~ February 2003

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Legis/ative Post Audit Committee Legis/ative Division of Post Audit

The Legislative Post Audit Committee and its audit agency, the Legislative Division of Post Audit, are the audit arm of Kansas government. The programs and activities of State government now cost about $9 billion a year. As legislators and administrators try increasingly to allocate tax dollars effectively and make government work more efficiently, they need information to evaluate the work of government agencies. The audit work performed by Legislative Post Audit helps provide that information.

We conduct our audit work in accordance with applicable government auditing standards set forth by the U. S. General Accounting Office. These standards pertain to the auditor's professional qualifications, the quality of the audit work, and the characteristics of professional and meaningful reports. These audit standards have been endorsed bytheAmerican Institute of Certified Public Accountants and adopted by the Legislative Post Audit Committee.

The Legislative Post Audit Committee is a bipartisan committee comprising five senators and five representa­tives. Of the Senate members, three are appointed by the President of the Senate and two areappointed by the Senate Minority Leader. Of the representatives, three are appointed by the Speaker of the House and two are appointed by the House Minority Leader.

As part of its audit responsibilities, the Division is charged with meeting the requirements of the Legislative Post Audit Act which address audits of financial matters. Those requirements call for two major types of audit work.

First, the Act requires an annual audit of the State's financial statements. Those statements, prepared by the Department of Administration's Division of Accounts and Reports, are audited by a certified public accounting firm under contract with the Legislative Division of Post Audit. The firm is selected by the Contract Audit Committee, which comprises three members of the Legislative Post Audit Committee (including the Chairman and Vice-

Chairman), the Secretary of Administration, and the Legislative Post Auditor. This audit work also meets the State's audit responsibilities under the federal Single Audit Act.

Second, the Act provides for a regular audit presence in every State agency by requiring that audit work be conducted at each agency at least once every three years. Audit work done in addition to the annual financial statement audit focuses on compliance with legal and procedural requirements and on the adequacy of the audited agency's internal control procedures. These compliance and control audits are conducted by the Division's staff under the direction of the Legislative Post Audit Committee.

LEGISLATIVE POST AUDIT COMMITTEE

Representative John Edmonds, Chair Representative Tom Burroughs Representative Bill McCreary Representative Frank Miller Representative Dan Thimesch

Senator Derek Schmidt, Vice-Chair Senator Bill Bunten Senator Anthony Hensley Senator Dave Kerr Senator Chris Steineger

LEGISLATIVE DIVISION OF POST AUDIT

800 SW Jackson Suite 1200 Topeka, Kansas 66612-2212 Telephone (785) 296-3792 FAX (785) 296-4482 E-mail : LPA@lpa.state .ks .us Website: http://kslegislature.org/postaudit Barbara J. Hinton, Legislative Post Auditor

The Legislative Division of Post Audit supports full access to the services of State government for all citizens. Upon request, Legislative Post Audit can provide its audit reports in large print, audio, or other appropriate alternative format to accommodate persons with visual impairments. Persons with hearing or speech disabilities may reach us through the Kansas Relay Center at 1-800-766-3777. Our office hours are 8:00 a.m. to 5:00 p.m., Monday through Friday.

LEGISLA TURE OF KANSAS

LEGISLATIVE DIVISION OF POST AUDIT

February 21, 2003

800 SOUTHViEST JACKSON S TREET, SUITE 1200 TOPEKA, KANSAS 66612-2212

T ELEPHONE (785) 296-3792 FAX (785) 296-4482

E -MAIL: Ipa@lpa.state.ks.us

To: Members, Legislative Post Audit Committee

Representative John Edmonds, Chair Representative Tom Burroughs Representative Bill McCreary Representative Frank Miller Representative Dan Thimesch

Senator Derek Schmidt, Vice-Chair Senator Bill Bunten Senator Anthony Hensley Senator Dave Kerr Senator Chris Steineger

This report contains the findings and recommendation from our completed compliance and control audit ofthe State Fair.

The report includes one recommendation for the State Fair. We would be happy to discuss the reconllilendation or any other items in the report with any legislative committee, individual legislators, or other State officials.

Barbara J. Hinton Legislative Post Auditor

EXECUTIVE SUMMARY LEGISLATIVE DIVISION OF POST AUDIT

Question 1: Does the State Fair Have Adequate Procedures To Ensure That Revenues Are Handled Appropriately?

The State Fair has established adequate financial­management practices to ensure that it collects and deposits the appropriate amounts of fees from the operation of the Fair. Most of the Fair revenues come from gate admissions, grandstand shows, and food and other concessions. For the September 2002 Fair, these revenues totaled $2. 1 million. We found that the Fair had reasonable practices in place to collect and deposit the amounts for these types of revenues. We also tested a sample of each of these revenues and found that proper amounts were, in fact, collected and appropriately deposited.

...... .. ..... ... page 3

Question 2: Does the State Fair Have Adequate Procedures To Ensure That Local Moneys Are Spent Appropriately?

The State Fair has established adequate financial- ... .. ..... .. .. .. page 5 management practices to ensure that its local spending is appropriate. The Fair administers certain moneys locally, instead of through the Division of Accounts and Reports. These include moneys needed for operation of the annual Fair. We reviewed the Fair's practices for handling temporary payroll and local purchasing to see if those practices provided adequate controls and adhered to applicable legal requirements. We also tested samples of transactions and found that they were properly handled.

Additional Concerns Raised During the Audit Led To Identifying One Problem Area

State Fair moneys deposited with the Hutchinson Community .. ... ........... page 6 Foundation aren't always disbursed as required by State law. A concern was raised that Fair moneys were deposited with and disbursed by the Foundation to avoid State oversight. State law allows deposit of certain Fair moneys with the Foundation, but requires those moneys to be disbursed to the Fair for deposit in the State Treasury, then to be spent from the Treasury. Although approved by the Fair Board, payments totaling about $20,000 were made directly by the Foundation to the vendor during 2001.

EXECUTIVE SUMMARY Legislative Division of Post Audit February 2003

Recommendation ........ ... .. ... page 7

Concerns also were raised that equipment purchases were being recorded as equipment rentals, official hospitality expenditures were primarily benefitting Board members, and moneys dedicated to major renovations were being spent for regular operating expenses. Our reviews of these areas found no problems.

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Appendix A: Agency Response ................ page 9

This audit was conducted by Randy Tongier. If you need any additional information about the audit's findings, please contact Mr. Tongier at the Division 's offices. Our address is: Legislative Division of Post Audit, 800 SW Jackson Street, Suite 1200, Topeka, Kansas 66612. You also may call us at (785) 296-3792, or contact us via the Internet at LPA@lpa.state.ks.us.

EXECUl1VE SUMMARY Legislative Division a/Post Audit

February 2003

State Fair The Legislative Division of Post Audit has conducted compliance and control audit work at the State Fair. Compliance and control audits can identify noncompliance with applicable requirements and poor financial-management practices. The resulting audit findings often identify needed improvements that can help minimize the risk of potential future loss or misuse of State resources.

At the direction ofthe Legislative Post Audit Committee, this audit focused on the Fair's collection and deposit of revenues related to the annual Fair operated during September 2002, and on the Fair's spending from its local bank account. The audit addresses the following speci fic questions:

1. Does the State Fair have adequate procedures to ensure that revenues are handled appropriately?

2. Does the State Fair have adequate procedures to ensure that local moneys are spent appropriately?

To answer these questions, we reviewed applicable statutes, guidance from the Division of Accounts and Reports, and standard financial-management practices. We also interviewed appropriate staff members ofthe Fair, and reviewed the Fair's files and records. This audit work mainly covers the State Fair that took place in September 2002, and local spending from July 2002 through October 2002.

During the audit, several specific additional financial-management concerns were raised by an anonymous letter to our office. We reviewed those concerns, decided that they merited our attention, and did additional audit work to address them.

In conducting this audit, we followed all applicable government auditing standards.

COMPLIANCE AND CONTROLA UDIT REPORT Legislative Division of Post Audit

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Februmy 2003

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Authority:

Staffing:

Budget:

Created by K.SA 2-201.

State Fair

AT A GLANCE

The Fair has 22 full-time-equivalent positions, not including temporary employees during the annual Fair.

The Authority's major funding comes from fees and other revenues of the Fair and revenues from non-Fair activities, such as livestock shows, flea markets , etc. For fiscal year 2002, the Fair spent about $27 million as shown below. Most (about $24 million) of these moneys were payments related to major renovations of the Fair's grounds and buildings.

FY 2002 Expenditures Sources for Funding for Expenditures

lY..!2.g Amount % of Total

Non-Expense Items $22,933,264 84%

Contractual Services 1,743,661 6%

Salaries & Wages 1,344,358 5%

Capital Outlay & Improvements 1,167,865 4%

Commodities 202,083 1%

Non-expense Items 300 0%

Total Expenses: $27,391,531 100%

Source: The Governor's Budget Report, Vol. 2, FY 2004.

Other Funds, $27,258,991,

995%

Total Funding:

State General Fund .

$132.540, 0.5%

$27,391,531

COMPLIANCE AND CONTROL A UDIT REPORT Legislative Division of Post Audit

February 2003

Question 1: Does the State Fair Have Adequate Procedures To Ensure That Revenues Are Handled Appropriately?

The State Fair Has Established Adequate Financial-Management Practices To Ensure That It Collects and Deposits The Appropriate Amounts Of Fees From the Operation of the Fair

The State Fair's procedures for handling revenues are well­designed and were operating effectively during the period we reviewed. That situation minimizes the risk for loss or misuse of moneys. The basis for our conclusion is presented below.

As the At-A-Glance box indicates, the State Fair's budget for fiscal year 2002 was about $27 million. However, $24 million of that total related to major renovation and construction projects (which are one-time items), and only about $3 million related to ongoing operations. Ofthe ongoing financial activity of the agency, the major portion is connected to the operation of the Fair itself. The table below shows the amounts for the 2002 Fair.

Revenues from Major Sources 2002 State Fair

Gate Admissions Grandstand Admissions Food Concessions Other Concessions Other Revenues

TOTAL

$ 840,911 364,754 295,815 494,251

83,450

$2,079,181

We focused our audit work on the four major revenue types listed above. For those types of revenues, the Fair is responsible for developing and implementing procedures to ensure that it collects and deposits the appropriate amounts. Basic procedures that would help accomplish this goal include having a good way to do the following:

• Speci fy the fees due for the various activities connected to the Fair

• Make sure that appropriate fees are collected

• Make sure that all fees collected at admission gates and other outlying locations are taken to the Business Office

• Promptly deposit amounts collected in the local bank account and make appropriate transfers to the State Treasury

• Keep complete and accurate records of amounts due, collected, and deposited

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To identify and evaluate the procedures used by the Fair, we interviewed appropriate officials, reviewed applicable accounting records and files, and tested samples of receipts from each of the major revenue types. The Fair had appropriate practices in place, and appropriate amounts were collected and deposited. Some examples of processes put in place to help ensure that appropriate Fair revenues are collected and deposited are as follows :

• Space rental and concession fees are covered by signed contracts

• Space rental fees are paid in advance, an advance deposit is required for concession fees, and concessionaires pay their percentages on a daily basis

• Business Office staff double-check calculations of amounts due from concessionaires

• Gate admission tickets are pre-numbered, checked out to gate staff by number, and reconciled to a cash count at the end of each shift

• Cash collected is deposited in the local bank account daily, with Highway Patrol staff on hand to provide security

To provide change funds for the operation of the Fair, State law authorizes the creation of a special cash fund of $200,000. To ensure the proper handling of this cash fund, we reviewed documentation for the creation of the fund in the State Treasury, its transfer to the Fair, its use, and its retum to the State Treasury. The cash fund was appropriately handled during the 2002 Fair.

The Fair has addressed the previous audit recommendation regarding space rental fees. The previous compliance and control audit of the State Fair recommended increased segregation of duties in handling space rental fees to reduce the risk of loss or misuse. During this audit, we noted that one individual opens the mail and records those receipts, and another individual tracks and records the revenues. With the limited number of Business Office staff, this degree of segregation seems adequate.

COMPLIANCEAND CONTROL A UDfT REPORT Legislative Division of Post Audit

February 2003

The State Fair Has Established Adeq uate Financial-Management Practices To Ensure That Its Local Spending Is Appropriate

Question 2: Does the State Fair Have Adequate Procedures To Ensure that Local Moneys Are Spent Appropriately?

The State Fair has adequate procedures to ensure that local moneys are spent appropriately. In addition, during the period we reviewed, the Fair made appropriate expenditures for temporary payroll and local purchases~two major types oflocal spending.

As allowed by State law, the State Fair spends a portion of its moneys using a local bank account instead of processing payments from the State Treasury. This exception to normal requirements for State agencies makes the Fair's procedures for controlling local spending very important. Two areas of local spending where the risk of inappropriate payments may be somewhat higher are temporary payroll (covering about 600 temporary employees during the Fair) and local purchases. We focused our audit work on those areas.

The State Fair is responsible for ensuring that local spending is appropriate. To do this, the Fair should have in place certain financial-management practices, including the following:

• requiring prior authorization for purchases

• requiring a "sign-in" for goods and services received

• requiring documentation to support payments, such as an mVOlce

• requiring temporary employees to fill out time sheets

• requiring supervisors to approve temporary employee timesheets

• having Business Office staff double-check calculations oftime and pay

To identify and evaluate the procedures used by the Fair, we interviewed appropriate officials, reviewed applicable accounting records and files, and tested samples of temporary payroll payments and payments for local purchases. The Fair had appropriate practices in place, and payments were proper.

COMPLIANCE AND CONTROLA UDIT REPORT Legislative Division of Post Audit

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February 2003

Additional Concerns Raised During the Audit Led to Identifying One Problem Area

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During the audit, we received an anonymous letter that raised several specific additional financial-management concerns about the State Fair. Specifically, those concerns were that:

• State Fair moneys were being deposited with and disbursed by the Hutchinson Community Foundation to avoid State oversight of those moneys

• Some payments recorded as equipment rentals actually were for the purchase of equipment

• Use of State Fair official hospitality moneys primarily benefitted Fair Board members

• Some expenditures designated for renovations of the Fair's grounds and buildings were being used for regular operating expenditures

We determined that these concerns merited our attention. Accordingly we did additional audit work to address them. That work and our findings related to each of these concerns is discussed in the following sections.

State Fair moneys deposited with the Hutchinson Community Foundation aren't always disbursed as required by State law. State law (K.S.A. 2-225, originally enacted by the 1994 Legislature) allowed the State Fair to enter into an agreement with the Hutchinson Community Foundation so that the Foundation could accept contributions and grants for the general benefit of the State Fair or specific capital projects. The Foundation is to be paid a fee for expenses it incurs in connection with this agreement. According to Fair officials, this arrangement allows the contributors to claim the contributions as a charitable deduction for income tax purposes. The only allowable disbursements of moneys deposited with the Foundation are for fees paid to the Foundation and for deposits to the State Treasury at the direction of the State Fair Board.

To address the concern that moneys were being deposited with and spent through the Foundation to avoid State oversight, we interviewed State Fair officials and reviewed State statutes, agency correspondence, and Foundation reports to the Fair. We also reviewed State Fair moneys deposited with the Foundation and

COMPLIANCE AND CONTROL A UDIT REPORT Legislative Division of Post Audit

February 2003

disbursed by the Foundation. Finally, we tested the calculation of the Foundation's administrative fee.

During the first 3 quarters of calendar year 2002, the State Fair deposited about $103,000 with the Foundation. Of this total, $100,000 was a tourist attraction development grant from the Kansas Department of Commerce and Housing for installing air conditioning in one of the State Fair's buildings. (State law does allow grants for specific Fair capital projects to be deposited with the Foundation.) We found no disbursements during that period other than about $800 paid to the Foundation for administrative fees. However, in looking at the 2001 disbursements, we noted payments totaling about $20,000 made directly to Cargill Associates, a professional fund-raising firm, reportedly in connection with fund-raising activities for the Fair. Although those payments were approved by the Fair Board, they were made directly to Cargill Associates instead of being deposited in the State Treasury first. This action was contrary to the requirements of State law.

Recommendation To comply with the requirements of State law, the State Fair should work with the Hutchinson Community Foundation to ensure that all disbursements of State Fair moneys on deposit with the Foundation are made to the Board. The Board should then deposit all such moneys in the State Treasury.

State Fair payments recorded as equipment rentals were, in fact, for equipment rentals. The concern raised was that some payments recorded as equipment rentals were actually for the purchase of equipment. To address this concern, we reviewed supporting documentation for all expenditures coded as equipment rentals of more than $1,000 during the first 5 months of fiscal year 2003. The payments we reviewed accounted for 93% of the equipment rental expenditures during that period. All of the payments we tested were, in fact, for equipment rentals.

State Fair payments for official hospitality did not seem to be mainly for the benefit of Board members. The concern raised was that expenditures for official hospitality benefitted mainly the members of the State Fair Board. To address that concern, we reviewed the supporting documentation for payments for official hospitality during the first 5 months of fiscal year 2003. The documentation doesn't always allow a detennination of who benefitted from the official hospitality provided. However, we

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identified only one payment of$5.50 that clearly seemed to benefit only Board members.

State Fair payments from Master Plan moneys were for Master Plan projects. The concern raised was that some expenditures of Master Plan moneys-moneys dedicated to specific renovations of the Fair's grounds and buildings- were being made for regular operating expenses. To address that concern, we interviewed agency officials to identify the projects covered by the Master Plan, and we reviewed expenditures of Master Plan moneys during the period still in the "current" files ofthe State's central accounting system (accounting for about $1.2 million), and reviewed the Master Plan project files. We identified no expenditures of Master Plan moneys for regular operating expenditures.

COMPLIANCE AND CONTROL A UDIT REPORT Legislative Division of Post Audit

Februwy 2003

APPENDIX A

Agency Response

On February 12, 2003, we provided copies of the draft audit repOli to the State Fair. The Fair's response is included as this Appendix.

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The Kansas State Fair

2000 North Poplar

Hutch inson, Kansas 67502-5598

620 669-3600

Fax: 620669-3 640

E-Mail : in fo @kansassta tefair.com

ww w. kansass tatefair.com

DENNY STOECKLEIN, INTERIM GENERAL MANAGER

LARRY ANKERHOLZ, PHYSICAL PLAN T MANAGER

Barbara 1. Hinton Legislative Division of Post Audit 800 Southwest Jackson Street, Suite 1200 Topeka, KS 66612-2212

Barbara:

February 14,2003

We received the compliance and control audit for the Kansas State Fair today in the mail. We have reviewed the report and found two items in need of correction, We found under the heading "At a glance" the number offull-time-equivalent positions listed as 23, We have 22 full-time-equivalent employees, The payments listed at the bottom of page six from the Hutchinson Community Foundation were disbursed to Cargill Associates, a professional fundraising company and not to Cargill, Inc.

In regards to the account with the Hutchinson Community Foundation, we would like to note that we had internally discovered through a review of the statutes prior to the audit that the few payments made from the Foundation in 2001 were made direct to the vendor instead of routing through the State Treasurer's Office. Because we wanted to clarify the correct procedure, we had written to Camille Nohe, Assistant Attorney General, for an official decision regarding the proper procedures to be followed. It is our intent to comply with state law,

We thank your office for your hard work. We concur with the recommendations addressed to our agency and we will continue to strive to meet those expectations.

/ajc

Sincerely,

Denny Stoec ein Interim Manager

COMPLIANCE AND CONTROL A UDfT REPORT Leg islati ve Division of Post Audit

February 2003