An Audit Report on

Financial Processes at
the Department of Criminal Justice
June 2018
Report No. 18-035

State Auditor’s Office reports are available on the Internet at http://www.sao.texas.gov/.

An Audit Report on

Financial Processes at the Department of
Criminal Justice
SAO Report No. 18-035
June 2018

Overall Conclusion
The Department of Criminal Justice
(Department) established processes and related
controls to help ensure that it managed Texas
Correctional Industries (TCI) sales and
purchases, assets, and Hurricane Harvey
expenditures in accordance with applicable
statutes, rules, and Department policies and
procedures. However, the Department should
strengthen its processes for documenting the
price of TCI products.
TCI. The Department oversees TCI, which
manufactures goods and provides services for
sale to certain city, county, state, and federal
entities. It also uses TCI goods internally. The
Department had processes and controls in place
to ensure that TCI sales, purchases, and cost
sheets complied with state laws and regulations
and Department policies and procedures.
However, the Department should strengthen its
processes for recording sales transactions and
documenting cost sheets.

Background
The Department of Criminal Justice
(Department) manages offenders in
state prisons and jails and private
correctional facilities that contract with
the Department. The Department also
provides funding and certain oversight
of community supervision (previously
known as adult probation) and is
responsible for supervising offenders
released from prison on parole or
mandatory supervision. The nine
member Texas Board of Criminal Justice
oversees the Department.
For fiscal year 2018, the Department
received $3,323,032,859 in
appropriations. The Department was
authorized to have 39,453.8 full-time
equivalent employees.
Sources: The Department’s Web site and
the General Appropriations Act (85th
Legislature).

Asset Management. The Department established processes and controls to help
ensure that assets were (1) appropriately accounted for, (2) safeguarded, and
(3) reported accurately in its accounting system, LONESTARS, and the State
Property Accounting (SPA) system.
Hurricane Harvey. The Department established processes and controls to ensure
that disaster recovery funds, such as those used for Hurricane Harvey, were
managed in accordance with applicable statutes, rules, and Department policies
and procedures.
Information Technology. The Department generally had appropriate information
technology processes and controls related to the financial processes audited.
Auditors communicated other, less significant issues to the Department separately
in writing.

This audit was conducted in accordance with Texas Government Code, Sections 321.0131 and 321.0132.
For more information regarding this report, please contact Audrey O’Neill, Audit Manager, or Lisa Collier, First Assistant State
Auditor, at (512) 936-9500.

An Audit Report on
Financial Processes at the Department of Criminal Justice
SAO Report No. 18-035

Table 1 presents a summary of the findings in this report and the related issue
ratings. (See Appendix 2 for more information about the issue rating classifications
and descriptions.)
Table 1

Summary of Chapters/Subchapters and Related Issue Ratings
Chapter/
Subchapter

Issue Rating a

Title

1

The Department Established Processes and Controls to Ensure That Texas
Correctional Industries’ Purchases and Sales Complied with Requirements;
However, It Did Not Always Follow Those Processes

Medium

2

The Department Established Processes and Controls to Help Manage Its Assets

Low

3

The Department Established Processes and Related Controls for Hurricane Harvey
Expenditures

Low

4

The Department Had Appropriate Information Technology Controls Over Its
Financial Data

Low

a A subchapter is rated Priority if the issues identified present risks or effects that if not addressed could critically affect the audited
entity’s ability to effectively administer the program(s)/function(s) audited. Immediate action is required to address the noted concern
and reduce risks to the audited entity.
A subchapter is rated High if the issues identified present risks or effects that if not addressed could substantially affect the audited
entity’s ability to effectively administer the program(s)/function(s) audited. Prompt action is essential to address the noted concern and
reduce risks to the audited entity.
A subchapter is rated Medium if the issues identified present risks or effects that if not addressed could moderately affect the audited
entity’s ability to effectively administer program(s)/function(s) audited. Action is needed to address the noted concern and reduce risks
to a more desirable level.
A subchapter is rated Low if the audit identified strengths that support the audited entity’s ability to administer the
program(s)/functions(s) audited or the issues identified do not present significant risks or effects that would negatively affect the
audited entity’s ability to effectively administer the program(s)/function(s) audited.

Summary of Management’s Response
At the end of certain chapters in this report, auditors made recommendations to
address the issues identified during this audit. The Department agreed with the
recommendations in this report.

Audit Objective and Scope
The objective of this audit was to determine whether the Department has
processes and related controls to help ensure that it administers financial
transactions in accordance with applicable statutes, rules, and agency policies and
procedures.
The scope of this audit covered the Department’s activities related to asset
management; Hurricane Harvey expenditures; TCI sales, purchases, and cost
determinations; and information systems from September 1, 2016, through January
ii

An Audit Report on
Financial Processes at the Department of Criminal Justice
SAO Report No. 18-035

31, 2018. In addition, auditors reviewed the Department’s Hurricane Harveyrelated project worksheets submitted to the Federal Emergency Management
Agency through April 5, 2018.

iii

Contents

Detailed Results
Chapter 1

The Department Established Processes and Controls to
Ensure That Texas Correctional Industries’ Purchases
and Sales Complied with Requirements; However, It Did
Not Always Follow Those Processes ................................. 1
Chapter 2

The Department Established Processes and Controls to
Help Manage Its Assets................................................ 4
Chapter 3

The Department Established Processes and Related
Controls for Hurricane Harvey Expenditures ...................... 6
Chapter 4

The Department Had Appropriate Information
Technology Controls Over Its Financial Data ...................... 7

Appendices
Appendix 1

Objective, Scope, and Methodology ................................ 8
Appendix 2

Issue Rating Classifications and Descriptions .................... 12

Detailed Results
Chapter 1

The Department Established Processes and Controls to Ensure That
Texas Correctional Industries’ Purchases and Sales Complied with
Requirements; However, It Did Not Always Follow Those Processes
Chapter 1
Rating:
Medium1

The Department of Criminal Justice
(Department) had processes and controls in
place to ensure that Texas Correctional
Industries (TCI) sales, purchases, and cost
sheets complied with state laws and
regulations and Department policies and
procedures. However, the Department should
strengthen its processes for recording sales
transactions and documenting cost sheets.
For its sales of TCI products, the Department
uses cost sheets. It calculates those cost sheets
based on overhead, raw material, and other
types of costs. The Department then uses
those cost sheets to determine the sales prices
for TCI’s finished products (see Figure 1).

Texas Correctional Industries (TCI)
TCI’s objective (described in Texas
Government Code, Section 497.002) is to
provide work program participants with
marketable job skills to help reduce
recidivism, while also reducing costs by
providing products to the Department of
Criminal Justice (Department) and other
eligible entities on a for-profit basis. The
Department asserted that it offered more
than 2,200 standard products.
TCI had external sales of approximately $82
million from September 1, 2016, through
January 31, 2018. In addition, the
Department reported that it produced
approximately $35 million in products for
internal consumption during that same time
period.
TCI had expenditures of approximately $75
million for raw materials and consumables
from September 1, 2016, through January 31,
2018.
Source: The Department.

Figure 1

Department Process for TCI Product Sales

Raw Materials
Purchased

Cost Sheet
Developed
Based on Raw
Material and
Other Costs

Product Price
Set Based on
Cost Sheet

Product Sold

Source: Auditors created Figure 1 based on information from the Department.

1

Chapter 1 is rated as Medium because the issues identified present risks or effects that if not addressed could moderately
affect the audited entity’s ability to effectively administer program(s)/function(s) audited. Action is needed to address the
noted concern and reduce risks to a more desirable level.

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The Department had processes and related controls to help ensure that it
accurately processed purchases of raw materials in accordance with applicable
statutes, rules, and Department policies and procedures.

Specifically, the Department:


Purchased allowable materials.



Accurately recorded transactions in the Uniform Statewide Accounting
System (USAS).



Used appropriate procurement methods.



Ensured that internal purchasing and division staff approved the
purchases.



Made timely payments to vendors.

The Department had processes for developing cost
sheets; however, it did not always follow those
processes.

The Department used cost sheets to document
the standard cost for items it produced (see text
box for more information about the cost sheets).

Cost Sheets
For TCI products, the Department
documents the standard cost of all
standard items on a TCI-73 Cost
Sheet. Those cost sheets capture
items such as:







Overhead costs.
Raw material costs.

Standard costs.
Most of the raw material and overhead costs used
Margins.
to calculate the cost sheets were supported;
Sales prices.
however, auditors identified some instances in
The cost sheets must be updated at
which the Department should improve its
least annually and managers at the
facility and division level must
documentation. Specifically, auditors tested cost
approve them.
sheets for five products the Department
Source: The Department.
manufactured. Those products were comprised of
37 separate cost components. For 30 of those
cost components, the Department had appropriate documentation to
support the raw material and overhead costs. For the remaining seven cost
components, the Department either (1) recorded inaccurate costs when
compared to supporting documentation or (2) did not have supporting
documentation. For example, auditors identified inaccurate cost components
that resulted in product pricing differences ranging from one cent to six
dollars per product. Not ensuring that cost sheets accurately reflect the raw
material and overhead costs increases the risk that the Department could
make decisions about price based on inaccurate information.

Additionally, the Department did not consistently document the review and
approval of cost sheets in accordance with its policies and procedures.
Specifically, one of the five cost sheets that auditors reviewed was not signed
by any of the required Department staff or management. A lack of cost sheet
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review and approval could lead to the inclusion of inaccurate component
costs in the final cost sheets.
The Department established processes and controls to help ensure that TCI
sales complied with requirements; however, its sales were not always
supported by the product cost sheets.

The Department had processes and related controls to help ensure that all
TCI sales were supported, reviewed, approved, and processed in accordance
with applicable statutes, rules, and Department policies and procedures.
However, the Department did not always ensure that the amount at which it
sold TCI products was consistent with the product cost sheets. Specifically,
auditors determined that 8 of 61 sales either (1) did not match the
corresponding cost sheet or (2) did not have a current cost sheet available.
Not ensuring that sales are supported by the cost sheets increases the risk
that the Department, based on its process, may charge an incorrect price for
a product.
Recommendations

The Department should:


Develop processes to ensure that all costs on its TCI cost sheets are
accurate and supported.



Strengthen processes to ensure that managers review and approve
product cost sheets whenever they are updated.



Develop and implement a process to ensure that its TCI sales are
consistently supported by the product cost sheets.

Management’s Response

The Texas Department of Criminal Justice agrees with the recommendations.
The Director of the Manufacturing, Agribusiness, and Logistics (MAL) Division
reviewed and updated the TCI Product Pricing Forms (TCI-73) for all Texas
Correctional lndustries (TCI) standard products to reflect current raw material
costs, accurate overhead rates, and new calculated sales pricing. Policy
2.02.07 Pricing of TCI Products and Services was reviewed by MAL
management and responsible staff received additional instruction on its
processes and enforcement.
Target Date: Complete

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Chapter 2

The Department Established Processes and Controls to Help Manage
Its Assets
Chapter 2
Rating:
Low

2

The Department established processes and controls to help ensure that
assets were (1) appropriately accounted for, (2) safeguarded, and
(3) reported accurately in its accounting system, LONESTARS, and the State
Property Accounting (SPA) system. However, the Department should ensure
that it accurately accounts for interagency purchases of vehicles.

Assets
The Department manages approximately
$3.74 billion in assets, which include the
following categories:
Capitalized assets: The Department manages
$3.57 billion in capitalized assets. A
capitalized asset has a value equal to or
greater than the capitalization threshold for
the asset type. Those assets are reported in
an agency’s annual financial report.
Controlled assets: The Department manages
$170 million in controlled assets. A
controlled asset is a capital asset that has a
value that is lower than the capitalization
threshold established for that asset type;
however, due to its high-risk nature, it is
tracked and reported in the SPA system.
Controlled assets include guns, computers,
mobile devices, and other equipment.

Specifically, for a sample of 70 assets tested, the Department
generally ensured that the assets’ locations matched the
information recorded in SPA/LONESTARS and that it accurately
documented key identifying information in LONESTARS. In
addition, the Department had appropriate processes and
controls to ensure that it properly accounted for the assets it
added to its inventory and the disposals that it made from its
inventory in LONESTARS and SPA, and it had controls to
internally monitor compliance with its asset management
policies.

While the vehicles tested were located and
appropriately safeguarded, for some interagency vehicle
purchases, the Department had tagged vehicles with two
Sources: The Department and SPA Process
different asset numbers. Specifically, auditors identified a total of
User’s Guide.
458 vehicles that the Department purchased from other state
entities that were assigned two different asset numbers. As a result, the
vehicles were recorded twice in both LONESTARS and SPA: once for the
interagency purchase amount and once for the historical acquisition cost.
The Department asserted that this occurred to account for the interagency
purchase costs for the vehicles, which were previously recorded at their
historical acquisition cost by the originating agency. The SPA Process User’s
Guide requires an asset to be recorded in SPA at its historical acquisition cost.
As a result, the asset value of those 458 vehicles was overstated by
approximately $2.2 million (or 0.06 percent of the Department’s $3.7 billion
in assets).

2

Interagency Purchases.

Chapter 2 is rated as Low because the audit identified strengths that support the audited entity’s ability to administer the
program(s)/functions(s) audited or the issues identified do not present significant risks or effects that would negatively affect
the audited entity’s ability to effectively administer the program(s)/function(s) audited.

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Recommendation

The Department should accurately account for all interagency purchases in
SPA and LONESTARS as required.
Management’s Response

The Texas Department of Criminal Justice agrees with the recommendation.
On December 18, 2017, the Comptroller's Office created a Comptroller Object
of Expense Code and guidelines related to interagency capital purchases. By
March 31, 2018, the Accounting & Business Services Director ensured that all
interagency-purchased vehicles had a single asset number and the
appropriate adjusting entries had been made in LONESTARS and SPA. The
TDCJ will continue to accurately account for all new interagency purchases in
SPA and LONESTARS.
Target Date: Complete

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Chapter 3

The Department Established Processes and Related Controls for
Hurricane Harvey Expenditures
Chapter 3
Rating:
Low 3

The Department established processes and controls to ensure that disaster
recovery funds used for Hurricane Harvey were managed in accordance with
applicable statutes, rules, and Department policies and procedures.

Hurricane Harvey
Hurricane Harvey, a federally declared
Major Disaster, made landfall in Texas in
August 2017. As a result of the Major
Disaster Declaration, resources that
Texas allocated to response and
recovery could become federally
reimbursable.
Twenty-nine Department units (including
prisons, jails, and treatment facilities)
were physically affected by the
hurricane. The Office of Incident
Management is the central oversight
authority for the Department’s
emergency management preparedness
and response.
At the time of this audit, the
Department was still in the process of
determining its total hurricane-related
expenditures. However, the Department
estimated that its hurricane-related
costs would total approximately $3.4
million, and it anticipated that
approximately $2.9 million of those
costs may be reimbursable.

At the time of the audit, the Department had submitted 2
hurricane-related project worksheets4 to the Federal Emergency
Management Agency (FEMA) requesting approximately $950,000
in federal reimbursements, and it anticipated that it would
submit a total of 8 project worksheets to FEMA related to
Hurricane Harvey. The Department ensured that the two project
worksheets tested were reviewed and approved prior to
submitting the worksheets to FEMA for reimbursement.5
The Department also established policies and reporting templates
for tracking costs (such as payroll, materials, or vehicle usage)
related to storm activities. In addition, for a sample of direct
expenditures tested, the Department had support to
demonstrate that each of those expenditures was related to
Hurricane Harvey.

Sources: The Department and FEMA.

3

The risk related to the issues discussed in Chapter 3 is rated as Low because the audit identified strengths that support the
audited entity’s ability to administer the program(s)/functions(s) audited or the issues identified do not present significant
risks or effects that would negatively affect the audited entity’s ability to effectively administer the program(s)/function(s)
audited.

4

Public Assistance awards from FEMA are based on project worksheets the requesting entity prepares. The project worksheets
document the determination of the eligible scope of work and the cost estimate, which includes the total amount that is
federally reimbursable. The project worksheets also include all relevant support for those costs.

5

The audit work performed on the project worksheets for this report was not designed to address compliance with the audit
requirements for federal awards in the Office of Management and Budget’s Uniform Guidance.

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Chapter 4

The Department Had Appropriate Information Technology Controls
Over Its Financial Data
Chapter 4
Rating:
Low 6

The Department generally had appropriate automated processes and
controls over the financial data related to this audit. For example, the
Department established key application controls in its procurement system,
ADPICS, that were operating effectively. In addition, the Department
established adequate change management controls for its key information
systems. The Department appropriately documented, tested, and approved
all changes tested before it implemented those changes in ADPICS or its
accounting system, LONESTARS.
However, while overall its controls were adequate, the Department should
ensure that it (1) consistently restricts access to LONESTARS to current
employees and (2) limits excessive access permissions to LONESTARS.
Appropriately managing access to key information systems would help
decrease the risk of inappropriate transactions being processed without
proper review.
Recommendation

The Department should ensure that it appropriately restricts access to its key
information systems.
Management’s Response

The Texas Department of Criminal Justice agrees with the recommendation.
By the end of May 2018, all access and permissions were reviewed and
limited to appropriate personnel by the Accounting and Business Services
Director and Information Technology Division Enterprise Applications
Director. Access and permissions will continue to be monitored by these
individuals to ensure appropriate system controls are in place.
Target Date: Complete

6

The risk related to the issues discussed in Chapter 4 is rated as Low because the audit identified strengths that support the
audited entity’s ability to administer the program(s)/functions(s) audited or the issues identified do not present significant
risks or effects that would negatively affect the audited entity’s ability to effectively administer the program(s)/function(s)
audited.

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Appendices
Appendix 1

Objective, Scope, and Methodology
Objective
The objective of this audit was to determine whether the Department of
Criminal Justice (Department) has processes and related controls to help
ensure that it administers financial transactions in accordance with
applicable statutes, rules, and agency policies and procedures.
Scope
The scope of this audit covered the Department’s activities related to asset
management; Hurricane Harvey expenditures; Texas Correctional Industries’
(TCI) sales, purchases, and cost determinations; and information systems
from September 1, 2016, through January 31, 2018. In addition, auditors
reviewed the Department’s Hurricane Harvey-related project worksheets
submitted to the Federal Emergency Management Agency through April 5,
2018.
Methodology
The audit methodology included collecting information and documentation;
interviewing Department staff regarding financial and operational processes;
physically inspecting assets; testing documentation related to TCI sales and
purchases; reviewing cost sheets and supporting documentation; reviewing
access to key financial systems; and analyzing and evaluating the results of
audit tests.
Data Reliability and Completeness

Auditors used expenditure data from the Department’s financial system
(LONESTARS) to test Hurricane Harvey expenditures; asset records; and TCI
sales and purchases. Auditors compared data in LONESTARS to (1) the
Uniform Statewide Accounting System (USAS) for expenditure and revenue
data and (2) the State Property Accounting (SPA) system for asset data.
Auditors also tested logical access and change management for LONESTARS
and the Advanced Purchasing and Inventory Control System (ADPICS). In

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addition, auditors tested certain key application controls in the LONESTARS
and ADPICS applications.
Auditors determined that expenditure, revenue, and asset data from
LONESTARS was reliable for the purposes of this audit.
Sampling Methodology

Auditors selected nonstatistical samples of (1) transactions related to TCI
sales and purchases, (2) Hurricane Harvey expenditures, and (3) current
assets, asset additions, and asset dispositions. Those samples were selected
primarily through random selection; in some cases, auditors also selected
additional risk-based items for testing. The sample items were not
necessarily representative of the populations; therefore, it would not be
appropriate to project the test results to the populations.
Information collected and reviewed included the following:


Department policies, procedures, and guidelines.



Department expenditure and revenue data from USAS and LONESTARS
and asset data from the SPA system.



Invoices, purchase orders, cost sheets, and other supporting
documentation for TCI sales.



Invoices, purchase orders, purchase requisitions, receiving reports, and
other supporting documentation for expenditures.



The Department’s Hurricane Harvey-related project worksheets and
supporting documentation.



Asset addition and deletion forms, asset tags, and other supporting
documentation for capital assets.



User access data and supporting documentation related to both general
and application controls over the Department’s financial process-related
systems.

Procedures and tests conducted included the following:


Interviewed Department staff to identify the Department’s financial and
operational processes, including financial and administrative internal
controls, and the information systems that support those processes.



Tested samples of the Department’s TCI sales and purchases, Hurricane
Harvey expenditures, and assets to determine compliance with the
Department’s policies and procedures and state laws and regulations.
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

Physically observed assets.



Reviewed project worksheets, supporting documentation, and evidence
of reviews of the project worksheets.



Reviewed supporting documentation related to both general and
application controls over the Department’s financial process-related
systems.



Reviewed user access information for the Department’s financial processrelated systems.

Criteria used included the following:


Department policies and procedures.



Department Property Manual.



Texas Government Code, Chapters 403, 404, and 2251.



Title 1, Texas Administrative Code, Chapter 202.



State of Texas Procurement Manual.



Office of the Comptroller of Public Accounts’ eXpendit purchasing
procedure.



SPA Process User’s Guide.



Department of Information Resources’ Security Control Standards
Catalog.

Project Information
Audit fieldwork was conducted from December 2017 through May 2018. We
conducted this performance audit in accordance with generally accepted
government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.
The following members of the State Auditor’s staff performed the audit:


Thomas Andrew Mahoney, CGAP (Project Manager)



Adam K. Ryan (Assistant Project Manager)

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

Cody Bogan



Jennifer Grant, MPA



Kelley Ngaide, CIA, CFE



Doug Stearns, CISA



George D. Eure, CPA (Quality Control Reviewer)



Audrey O’Neill, CIA, CFE, CGAP (Audit Manager)

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Appendix 2

Issue Rating Classifications and Descriptions
Auditors used professional judgement and rated the audit findings identified
in this report. Those issue ratings are summarized in the report chapters/subchapters. The issue ratings were determined based on the degree of risk or
effect of the findings in relation to the audit objective(s).
In determining the ratings of audit findings, auditors considered factors such
as financial impact; potential failure to meet program/function objectives;
noncompliance with state statute(s), rules, regulations, and other
requirements or criteria; and the inadequacy of the design and/or operating
effectiveness of internal controls. In addition, evidence of potential fraud,
waste, or abuse; significant control environment issues; and little to no
corrective action for issues previously identified could increase the ratings for
audit findings. Auditors also identified and considered other factors when
appropriate.
Table 2 provides a description of the issue ratings presented in this report.
Table 2

Summary of Issue Ratings
Issue Rating

Description of Rating

Low

The audit identified strengths that support the audited entity’s ability to
administer the program(s)/functions(s) audited or the issues identified do
not present significant risks or effects that would negatively affect the
audited entity’s ability to effectively administer the
program(s)/function(s) audited.

Medium

Issues identified present risks or effects that if not addressed could
moderately affect the audited entity’s ability to effectively administer
program(s)/function(s) audited. Action is needed to address the noted
concern(s) and reduce risks to a more desirable level.

High

Issues identified present risks or effects that if not addressed could
substantially affect the audited entity’s ability to effectively administer
the program(s)/function(s) audited. Prompt action is essential to address
the noted concern(s) and reduce risks to the audited entity.

Priority

Issues identified present risks or effects that if not addressed could
critically affect the audited entity’s ability to effectively administer the
program(s)/function(s) audited. Immediate action is required to address
the noted concern(s) and reduce risks to the audited entity.

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Copies of this report have been distributed to the following:

Legislative Audit Committee
The Honorable Dan Patrick, Lieutenant Governor, Joint Chair
The Honorable Joe Straus III, Speaker of the House, Joint Chair
The Honorable Jane Nelson, Senate Finance Committee
The Honorable Robert Nichols, Member, Texas Senate
The Honorable John Zerwas, House Appropriations Committee
The Honorable Dennis Bonnen, House Ways and Means Committee

Office of the Governor
The Honorable Greg Abbott, Governor

Department of Criminal Justice
Members of the Board of Criminal Justice
Mr. Dale Wainwright, Chairman
Mr. R. Terrell McCombs, Vice-Chairman
Mr. E.F. “Mano” DeAyala
Mr. Thomas G. Fordyce
Mr. Eric Gambrell
Mr. Larry Don Miles
Mr. Patrick O’Daniel
Ms. Derrelynn Perryman
Mr. Thomas P. Wingate
Mr. Bryan Collier, Executive Director

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