Audit Division
Audit Summary

Department of Conservation and
Natural Resources
Division of Water Resources
Report LA96-24

Results in Brief

The Division of Water Resources has not established an adequate process for determining assessments and charges to water users. The Division's system for developing water system budgets and determining water user assessments does not ensure charges are levied in a fair and equitable manner. As a result, over the past several years many water systems have accumulated significant account balances, because assessments have exceeded expenses. On the other hand, in some cases the Division did not assess enough to properly fund the expenses of several water systems.

Although the Division charged fees in compliance with statutes, its fee collection process resulted in violations of state depository laws, a lack of accountability for fees collected, and inefficient use of resources. In addition, the Division's process for recording and summarizing fee collections results in a duplication of effort and delays the deposit process. Timely deposits are critical to ensure money is safeguarded from loss or misuse.

Principal Findings

1. The Division's process for developing budgeted costs and assessments contains significant weaknesses. These weaknesses include: (1) inadequate written procedures for the budget and assessment process; (2) a lack of documentation supporting amounts budgeted, or how they were arrived at; (3) failure to use accumulated balances on hand to reduce current year's assessments; and (4) no established criteria for determining how much accumulated balances on hand should be. (page 10)

2. We noted significant variances between amounts budgeted and actual expenditures for a number of the water system accounts. In one account, for instance, the Division budgeted and assessed nearly $8,000, but actual costs amounted to only $12. In another instance, the Division budgeted and assessed over $4,500, but spent nothing. Although budgeting for anticipated expenditures of water systems can be difficult at times because of fluctuating levels of activity, we saw instances when the amount budgeted did not change at all over a period of 5 years. (page 12)

3. Because of inadequate budgetary and assessment practices, the Las Vegas Basin will likely be assessed about $730,000 more than the amount expended during fiscal years 1995 and 1996. In addition, based on historical spending trends, the account balance at the end of fiscal year 1996 will approach $1 million. (page 14)
4. Because the Division often assesses more money than it spends, excess assessments accumulate, and after several years the accounts have significantly more money than needed to pay future expenses. For instance, as of June 30, 1995, the Warm Springs Stream Account had an accumulated balance large enough to finance average annual expenses for 73 years. This account balance has grown from $18,500 at the start of fiscal year 1991, to nearly $52,000 at the end of fiscal year 1995, despite average annual expenses of only $711. (page 16)

5. The Ground Water Recharge Projects Account has many of the same weaknesses as the Division's water system accounts. As a result, the Division has collected significantly more than it has spent in recent years. The accumulated balance in the Ground Water Recharge Projects Account has grown from $24,000 at the start of fiscal year 1991 to $114,000 at the end of fiscal year 1995. As of June 30, 1995, the account balance was sufficient to pay average annual expenses for 35 years. (page 18)

6. Contrary to law, the Division deposits all General Fund water rights fees it collects in an outside bank account. As a result, the Division made unauthorized deposits totaling $1.9 million in fiscal year 1995. Although this money was transferred to the General Fund, the final transfer for each month was delayed until the monthly bank reconciliation was completed. These month-end transfers averaged $9,400 and were delayed from 6 to 27 days. (page 21)

7. In fiscal year 1995, deposits for publication and blueprint copier fees totaled $52,700 and disbursements totaled $53,200. However, this financial activity is recorded only in the Division's check log and not in the state's accounting system as required by NRS 353.321. (page 23)
Department of Conservation and
Natural Resources
Division of Water Resources

Auditor's Comments on Agency Response


The Division of Water Resources, in its response, does not agree with certain of our findings, conclusions, and recommendations. The following identifies those section of the report where the Division has taken exception to our position. We have provided our comments on the issues raised in the Division's response to assure the reader that we believe our findings, conclusions, and recommendations as stated in the report, are appropriate.

1. The Division states that the report does not: (1) indicate whether the agency's financial statements comply with generally accepted accounting procedure [sic]; (2) reflect on the honesty and integrity of the fiscal affairs; or (3) reflect on the accuracy and reliability of the information and reports. Furthermore, the Division states that with one exception, there is no information as to whether it complied with applicable laws and regulations, and there is no information on the control of management, nor on the efficiency of the accounting records. The Division concludes that one must assume that the State Engineer's accounting principles, compliance with laws, rules and regulations, records, and internal controls are impeccable, or the auditor would have discussed them in this report. (See page 29)

Legislative Auditor's Comments

The scope and objectives of this audit did not include rendering an opinion on the Division's financial statements. As stated on page 7, the specific scope of this audit addressed the Division's budget and assessment process for water system accounts, and its fee collection process. The specific objectives were to determine if the process for assessing water users ensures charges are levied in a fair and equitable manner, and if fees were charged, accounted for, and safeguarded in accordance with laws and regulations. On August 28, 1995, we wrote a letter to the State Engineer informing him of the areas that our audit would address.

Contrary to the Division's assertions, this report does discuss the Division's compliance with laws and regulations, management controls, and the efficiency and effectiveness of the Division's accounting systems. For instance, on page 10 we stated that the Division's process for developing budgeted costs and assessments contains significant weaknesses, including: (1) inadequate written procedures for the budget and assessment process; (2) a lack of documentation supporting amounts budgeted, or how they were arrived at; (3) failure to use accumulated balances on hand to reduce the current year's assessments; and (4) no established criteria for determining how much accumulated balances on hand should be. Furthermore, as discussed on page 20, the Division's fee collection process resulted in violations of state depository laws, a lack of accountability for fees collected, and inefficient use of resources. In addition, the Division's process for recording and summarizing fee collections results in a duplication of effort and delays the deposit of state funds.

2. The Division disagreed with our conclusion that it failed to use accumulated account balances when determining annual assessment levels, and rejected our recommendation to adopt a policy defining minimum and maximum accumulated account balances. (See page 38) The Division argues that many of the large account balances are to pay for studies that may be needed in the future. Furthermore, the Division indicates that good planning dictates that funding be available when the need arises, and that the alternative would be to request General Fund money to cover those expenses. (See page 31)

Legislative Auditor's Comments

Based on our analysis of annual assessments, expenditures, and account balances, we concluded that accumulated balances were not always factored into the Division's assessment calculations. (See page 16) Furthermore, because the Division does not prepare written support for how or why it arrived at the annual assessments, we found no documentation that accumulated balances had been taken into account when budgets were prepared.

As discussed on page 18, reserving account balances to pay for future expenses has some merit, however, we could find no justification for maintaining balances at levels to pay for 70 years of average annual expenses. Until the Division adopts a formal policy defining appropriate levels for account balances, questions will remain about the reasonableness of the balances. Finally, we do not believe that requesting General Fund money is a necessary or appropriate alternative to maintaining large account balances. With proper planning and budgeting, the authority granted to the State Engineer under NRS Chapters 533 and 534 is sufficient to ensure expenses for the ensuing fiscal year will be financed by charges and assessments to water users.

3. The Division disagreed with our statement that as of June 30, 1995, the Warm Springs Stream Account had an accumulated account balance large enough to finance average annual expenses for 73 years. (See page 33)

Legislative Auditor's Comments

Our finding is based on information recorded by the Division in the state's accounting system. Expenditures for the Warm Springs Stream Account for fiscal years 1991 to 1995 totaled $3,553--an average of $711 per year. (See Table 1 on page 13) As stated on page 16, the balance in the Warm Springs Stream Account has grown from $18,500 at the start of fiscal year 1991, to nearly $52,000 at the end of fiscal year 1995, despite average annual expenses of only $711. When the account balance of $52,000 is divided by the average annual expenses of $711, the result is 73 years.

4. The Division disagrees with our conclusion that inefficient accounting practices are delaying the deposit of fees and the delays identified in the audit are not due to inefficient use of resources but a lack of accounting personnel. (See page 36)

Legislative Auditor's Comments

We do not agree that deposit delays are the result of a lack of staff. On page 23 we have documented the inefficient practice of depositing over $1.9 million into the outside bank account to account for $65,000 of Division money. Consequently, the Division must prepare two deposits at a time instead of one. In addition, two employees prepare basically the same log to account for the receipts by revenue type. The deposit can not be prepared until the second log is completed. Eliminating inefficient practices will allow accounting employees time to perform other duties.

5. The Division states that its accounting staff will work with the Controller's Office to set up an "impress" [sic] account from which to reimburse the State Engineer's outside account. However, the State Engineer will keep the outside bank account to pay for the publication fees and excess remittances because there appears to be no benefit in money or time to the citizens and taxpayers of Nevada to do otherwise. (See page 37) Consequently, the Agency rejected our recommendations to deposit publication and blueprint fees into the State Treasury for credit to the Division's operating budget in the General Fund and to use the outside bank account only to issue refunds. (See page 38)

Legislative Auditor's Comments

Opening another account to act as an imprest account will only result in additional inefficient practices. As discussed on page 24, depositing publication and blueprint fees directly to the Division's operating budget account would result in a more efficient and effective system and ensure the proper accountability of these transactions. The Division would reduce both the inherent risk and costs associated with safeguarding money in an outside bank account. Furthermore, the minimal balance in the outside bank account would result in additional interest income for the General Fund. Therefore, we believe our recommendations to improve the accountability of publication and blueprint fees are appropriate.