Office of Administrative Hearings - Office of Legislative Audits

Audit Report
Office of Administrative Hearings
March 2006
OFFICE OF LEGISLATIVE AUDITS
DEPARTMENT OF LEGISLATIVE SERVICES
MARYLAND GENERAL ASSEMBLY

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970-5400.

March 24, 2006
Senator Nathaniel J. McFadden, Co-Chair, Joint Audit Committee
Delegate Charles E. Barkley, Co-Chair, Joint Audit Committee
Members of Joint Audit Committee
Annapolis, Maryland
Ladies and Gentlemen:
We have audited the Office of Administrative Hearings (OAH) for the period
beginning May 13, 2002 and ending November 3, 2005.
Our audit disclosed that OAH did not always collect the proper hearing fees
provided for in State law, resulting in a loss of income to the State’s General Fund
during fiscal year 2005 of approximately $215,000. In addition, proper internal
controls were not established over the processing of certain purchasing and
disbursement transactions and cash receipts. Finally, we noted that OAH did not
ensure the reliability of certain information recorded in its case management
system.
Respectfully submitted,
Bruce A. Myers, CPA
Legislative Auditor

Table of Contents
Background Information 4
Agency Responsibilities 4
Current Status of Findings From Preceding Audit Report 4
Findings and Recommendations 5
Cash Receipts
Finding 1 – The Office Did Not Always Collect the Proper Hearing Fees 5
Specified in State Law
Finding 2 – Adequate Internal Control Had Not Been Established Over 5
Certain Collections
Purchases and Disbursements
* Finding 3 – Proper Internal Controls Were Not Established Over 6
Purchasing and Disbursement Transactions
Caseload Management
* Finding 4 – The Office Did Not Ensure the Accuracy of Caseload Data 7
Recorded on Its Case Management System
Audit Scope, Objectives, and Methodology 8
Agency Response
Appendix
* Denotes item repeated in full or part from preceding audit report
3

Background Information
Agency Responsibilities
The Office of Administrative Hearings (OAH) was established to provide an
unbiased and objective forum for contested cases involving State agencies that
regulate certain actions of businesses and citizens. According to OAH’s records,
during fiscal year 2005, OAH disposed of 64,944 cases. The majority of cases
heard by OAH relate to the Motor Vehicle Administration, the Department of
Health and Mental Hygiene, and the Department of Human Resources. OAH’s
fiscal year 2006 appropriation provided for 122 employee positions, including 56
administrative law judges. According to the State’s records, during fiscal year
2005, OAH’s expenditures totaled approximately $11.3 million.
Current Status of Findings From Preceding Audit Report
Our audit included a review to determine the current status of the four findings
included in our preceding audit report dated September 26, 2002. We determined
that OAH satisfactorily addressed two of these findings. The remaining two
findings are repeated in this report.
4

Findings and Recommendations
Cash Receipts
Finding 1
OAH did not always collect the proper hearing fees specified in State law,
resulting in a loss of income to the State of approximately $215,000.
Analysis
OAH did not always collect the proper hearing fees provided for in State law.
Specifically, effective July 1, 2004, State law increased the hearing fees from $15
for all hearings to $125 for Motor Vehicle Administration hearings and $50 for all
other hearings. However, our review disclosed that, as of November 2005, OAH
had continued to collect the $15 hearing fee for certain hearings. For example,
our test of 20 hearing fees collected during fiscal year 2005 disclosed that 11 of
the fees were for the incorrect amounts. According to OAH records, OAH
collected the improper fee for 2,050 cases during fiscal year 2005, resulting in a
loss of income to the State’s General Fund of approximately $215,000.
We were advised by OAH management personnel that the improper fees were
collected because, after July 1, 2004, the State agencies related to cases heard by
OAH continued to distribute hearing request forms to the public specifying the
$15 fee. However, OAH could not document that it took any action subsequent to
July 1, 2004 to require State agencies to distribute the revised hearing request
forms specifying the correct fees.
Recommendation 1
We recommend that OAH ensure that the proper hearing fees are collected,
as required by State law.
Finding 2
Adequate internal controls were not established over certain collections.
Analysis
OAH lacked adequate segregation of duties over hearing and subpoena fee
collections. Specifically, two employees responsible for either processing or
depositing the collections also had the ability to process waivers for hearing and
subpoena fees on the case management system, and such waivers were not
reviewed or verified to supporting documentation by supervisory personnel.
Consequently, these employees could misappropriate hearing and subpoena fees
5

and the related hearing could still be scheduled without detection. During fiscal
year 2005, OAH’s hearing and subpoena fee collections totaled approximately $2
million.
Recommendation 2
We recommend that hearing and subpoena fee waivers processed on the
system be reviewed and approved by an employee independent of the
collection and deposit functions. We advised OAH on accomplishing the
necessary separation of duties using existing personnel.
Purchases and Disbursements
Finding 3
Proper internal controls were not established over the processing of certain
purchasing and disbursement transactions.
Analysis
OAH did not fully use the security features available on the State’s Financial
Management Information System (FMIS) to restrict user access and to prevent
unauthorized purchase and disbursement transactions. Specifically, three
employees could initiate and process certain purchasing or disbursement
transactions without independent approval.
As a result, these employees could process unauthorized transactions which may
not be readily detected. Similar conditions were commented upon in our three
preceding audit reports dating back to February 1997. According to the State’s
accounting records, OAH used FMIS to process disbursements totaling
approximately $2 million during fiscal year 2005.
Recommendation 3
We again recommend that OAH fully use the available FMIS security
features by establishing independent on-line approval requirements for all
critical purchasing and disbursement transactions.
6

Caseload Management
Finding 4
OAH did not ensure that caseload data maintained on its case management
system were accurate.
Analysis
OAH did not ensure that caseload data reflected in its automated case
management system were reliable. As a result, management was not able to
effectively monitor the status of cases. As of June 30, 2005, the case management
system reflected a total of 5,652 open cases.
Specifically, our test of 25 cases reported as open in OAH’s system as of
November 3, 2005 disclosed that 9 of these cases had been closed for periods
ranging from 1 month to 22 months.
The accuracy of caseload data was commented upon in our three preceding audit
reports. Since caseload data are reported in OAH’s annual budget submission to
the General Assembly and are used by OAH management to monitor caseload
activity, it is important that such data be accurately maintained.
Recommendation 4
We again recommend that OAH ensure that caseload data maintained on the
automated case management system are accurate.
7

Audit Scope, Objectives, and Methodology
We have audited the Office of Administrative Hearings (OAH) for the period
beginning May 13, 2002 and ending November 3, 2005. The audit was conducted
in accordance with generally accepted government auditing standards.
As prescribed by the State Government Article, Section 2-1221 of the Annotated
Code of Maryland, the objectives of this audit were to examine OAH’s financial
transactions, records and internal control, and to evaluate its compliance with
applicable State laws, rules, and regulations. We also determined the current
status of the findings included in our preceding audit report.
In planning and conducting our audit, we focused on the major financial-related
areas of operations based on assessments of materiality and risk. Our audit
procedures included inquiries of appropriate personnel, inspections of documents
and records, and observations of OAH’s operations. We also tested transactions
and performed other auditing procedures that we considered necessary to achieve
our objectives. Data provided in this report for background or informational
purposes were deemed reasonable, but were not independently verified.
Our audit scope was limited with respect to OAH’s cash transactions because the
Office of the State Treasurer was unable to reconcile the State’s main bank
accounts during the audit period. Due to this condition, we were unable to
determine, with reasonable assurance, that all OAH cash transactions were
accounted for and properly recorded on the related State accounting records as
well as the banks’ records.
OAH’s management is responsible for establishing and maintaining effective
internal control. Internal control is a process designed to provide reasonable
assurance that objectives pertaining to the reliability of financial records,
effectiveness and efficiency of operations including safeguarding of assets, and
compliance with applicable laws, rules, and regulations are achieved.
Because of inherent limitations in internal control, errors or fraud may
nevertheless occur and not be detected. Also, projections of any evaluation of
internal control to future periods are subject to the risk that conditions may change
or compliance with policies and procedures may deteriorate.
Our reports are designed to assist the Maryland General Assembly in exercising
its legislative oversight function and to provide constructive recommendations for
improving State operations. As a result, our reports generally do not address
activities we reviewed that are functioning properly.
8

This report includes conditions that we consider to be significant deficiencies in
the design or operation of internal control that could adversely affect OAH’s
ability to maintain reliable financial records, operate effectively and efficiently,
and/or comply with applicable laws, rules, and regulations. Our report also
includes a finding regarding a significant instance of noncompliance with
applicable laws, rules, or regulations.
OAH’s response to our findings and recommendations is included as an appendix
to this report. As prescribed in the State Government Article, Section 2-1224 of
the Annotated Code of Maryland, we will advise OAH regarding the results of
our review of its response.
9

The Honorable Nathaniel J. McFadden, Chairman
The Honorable Charles E. Barkley, Chairman
March 21, 2006
Page 2
When structural changes are made to the form through legislation, MVA is the agency
responsible for producing and distributing the new form. MVA advises all law enforcement
agencies, by way of an official letter, of the new form and directs that older copies discontinue
being used. MVA receives a copy of every completed form, so they are aware that outdated
forms are still being used.
On April 29, 2004, I along with members of my staff, met with Mr. David Hugel, MVA
Administrator, and members of his staff to discuss the fee increase that was to take effect on July
1, 2004. A follow up letter dated April 30, 2004 to Mr. Hugel reiterated that OAH would not
reject any hearing request which comes to OAH with an MVA form containing the old fee
amount of $15.00.
OAH is the repository for the fees, but is not the agency responsible to ensure that the
correct fees are submitted by an appellant. Since MVA is the responsible agency for producing
and distributing the form, it is they who must ensure that law enforcement agencies use the
appropriate form.
Finding 2:
Adequate internal controls were not established over certain collections.
Agency Response:
Supervisory reviews had been established within the Finance Section in an effort to have
a second individual approve all requests for hearing and subpoena fee waivers. The Auditors
reviewed the procedures and noted that the approvals should be by an employee independent of
the collection and depositing function. Future waivers will be reviewed by the Director of
Administration as recommended by the Auditors.
Finding 3:
Proper internal controls were not established over the processing of certain purchasing and
disbursement transactions.
Agency Response:
OAH periodically reviews the procedures regarding the processing of purchase and
disbursement transactions. Due to the staffing size of Administration and the different types of
financial transactions that occur, it is not possible to completely separate some duties. To
establish internal controls, all purchasing and disbursement transactions are reviewed and
approved by a supervisor.
As a result of this issue, OAH reviewed “approval verifications” in FMIS. OAH has

AUDIT TEAM
Mark A. Ermer, CPA
Audit Manager
Channel D. Sumpter
Senior Auditor
Julie R. Newton
Staff Auditor