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Audit of LCB finds sloppy accounting

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Saturday, May 11, 2013, 6:28 p.m.
 

The state Liquor Control Board overstated its store fixtures, equipment and other assets in financial documents by more than $1 million because the agency does not regularly take a physical inventory, according to an annual audit by the state auditor general.

Without implementing procedures for periodically counting items, errors in financial statements will occur and go undetected in audits, the report said.

The audit, quietly released in March while state lawmakers were buzzing about the idea of privatization, looked at the fiscal year that ended in June.

As the state Senate considers legislation that would privatize the sale of wines and spirits, the LCB's finances, value and management have come under intense scrutiny. LCB sales and tax revenue for the 2011-12 fiscal year reached nearly $2.1 billion, a 5.5 percent increase over the previous year.

Kevin Shivers, state director of the National Federation of Independent Businesses, said such accounting “missteps” in the private sector would have consequences, such as management being fired or the company being liquidated.

“In a private business, that's how you manage your growth — profits, assets and liabilities,” Shivers said. “You need to manage those things. You need to know what those numbers are. That's the problem with government running this business. There's just no consequences there.”

True value at issue

The audit found that in a random sample of 10 items from the LCB's list of assets, six items valued at $1.047 million were no longer being used or were described vaguely and could not be identified by LCB officials or a store manager.

The list of assets includes items such as store shelving and signs, cash registers and warehouse machinery. It does not include wine and spirits inventory.

Stacy Kriedeman, spokeswoman for the LCB, denies its assets were overstated. She said the audit's sample looked at fully depreciated items, or older items that were beyond their useful life.

Taking such items off the balance sheet “is an issue for many retail companies,” she said. “In all likelihood, they were replaced and disposed of but were not removed from the ledger.”

The LCB's buildings, equipment, store improvements and other, intangible assets were valued at about $117 million last year with a depreciated value of $52.8 million, the audit showed.

“It's not up to us to render an opinion on the LCB's operation, but to raise the issue about their ability to maintain their capital assets,” said Barry Ciccocioppo, spokesman for Auditor General Eugene DePasquale. “We're looking at it from a financial statement aspect. They need to be able to properly maintain inventory of capital assets so they can list those as part of financial statements.”

Robert Hoag, a CPA and managing partner of Carnegie-based R.D. Hoag and Associates, said a company's income, assets and inventory are equally important in determining the company's value.

“You want to make sure the assets generating the income physically exist,” Hoag said. “You absolutely take into consideration assets as well as income stream. You must look at both.”

“I think it's too soon to know whether or not the issues raised will have any impact on the debate about liquor sales reform,” said Erik Arneson, spokesman for Senate Majority Leader Dominic Pileggi, R-Delaware County.

Computer issues

The audit found that the agency's internal controls over its Information Business Management System, which tracks store and warehouse inventory, agency assets and other financial details, are deficient.

• An “excessive number of users,” including contractors, can add, change or delete user IDs and data. And a group of users can log in and make changes in the system under the same user ID, rather than individual IDs. The LCB does not have a policy or procedure in place to monitor the use of those functions.

• Credit card users who made purchases in state stores between Nov. 23 and Nov. 28, 2011, were charged twice because the computer monitoring did not detect a problem with the transactions. Cash-paying customers were not affected, and the LCB removed the duplicate credit card charges in March 2012.

Ciccocioppo said the credit card issue is a unique problem but that other issues raised in the audit are common for large organizations.

But Hoag said computer system access should be guarded closely and that offering too many people access without documenting who makes changes could make collusion to steal easier.

“There needs to be a trail of who has made any significant changes to have access to make changes to the computer,” Hoag said. “That's a very significant issue. Without a doubt, that would be very problematic.”

Kriedeman said the agency has changed its login procedures so that every person has a unique user name so activity can be traced back to an individual.

She said LCB officials felt it was important to give an adequate number of staffers access to the computer systems when new components were rolled out or upgraded so they could respond quickly if there were problems. Access was always limited to a person's job functions and has been pared down over time, she said.

Ciccocioppo said auditors believe the agency has made progress and that computer control concerns are less serious now than in past years.

A 2011 audit found the LCB's more than $66 million inventory management software had problems with predicting when more wines and spirits should be ordered that ultimately caused inventory shortages at distribution centers and led LCB officials to over-order products.

The agency ended up spending about $500,000 to store excess merchandise in tractor-trailers that were not temperature-controlled, the audit found.

Kari Andren is a staff writer for Trib Total Media. She can be reached at 724-850-2856 or kandren@tribweb.com.

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