OFFICE OF INSPECTOR GENERAL 

Catalyst for Improving the Environment 

Audit Report 

State of New Hampshire 

Drinking Water State Revolving Fund 

Program Financial Statements 

for the Year Ended June 30, 2005 

Report No. 2007-1-00044 

February 26, 2007 
Abbreviations 

CAFR Comprehensive Annual Financial Report 

CFR Code of Federal Regulations 

DWSRF Drinking Water State Revolving Fund 

EPA U.S. Environmental Protection Agency 

GASB Government Accounting Standards Board 

NHDES New Hampshire Department of Environmental Services 

OIG Office of Inspector General 

OMB Office of Management and Budget 

SDWA Federal Safe Drinking Water Act 
U.S. Environmental Protection Agency 2007-1-00044 

Office of Inspector General February 26, 2007 

At a Glance


Catalyst for Improving the Environment 

Why We Did This Audit 

We performed this audit to 

determine: 

• Whether the New 

Hampshire Drinking Water 

State Revolving Fund 

Program’s (the Program’s) 

financial statements were 

fairly presented in all 

material respects, 

• To what extent the 

Program’s internal controls 

over financial reporting 

could be relied upon, and 

• Whether the Program 

complied with applicable 

laws and regulations. 

Background 

The requirement for audited 

financial statements was 

enacted to help ensure that the 

Program had management 

practices, systems, and 

controls in place to provide 

reliable information for 

managing the Federally 

funded program. 

For further information, 

contact our Office of 

Congressional and Public 

Liaison at (202) 566-2391. 

To view the full report, 

click on the following link: 

www.epa.gov/oig/reports/2007/ 

20070226-2007-1-00044.pdf 

State of New Hampshire Drinking Water 

State Revolving Fund Program Financial 

Statements for the Year Ended June 30, 2005 

What We Found 

We rendered an unqualified opinion on the New Hampshire Drinking Water 

State Revolving Fund (DWSRF) Program financial statements for the year 

ended June 30, 2005. 

We noted various reportable conditions that we considered material 

weaknesses in internal controls. These deficiencies in the design and 

operations of internal controls for the DWSRF-specific financial accounting 

and reporting, in our judgment, could adversely affect the State’s ability to 

record, process, and report financial data consistent with the assertions of 

management in the DWSRF financial statements. The State did not make 

adjustments for the identified discrepancies to cash and investment balances 

in the DWSRF general ledger, and did not compare the general ledger to 

original source documentation, resulting in numerous unrecorded transactions 

and errors going undetected. The State made incorrect journal entries, 

miscalculated match funding, incorrectly executed amortization schedules, 

did not record loan payments, and materially misstated cash balances and 

short-term investments. 

We qualified our opinion on compliance with applicable laws and regulations 

because the required State match was underfunded by $228,436, set-aside 

costs were not separated and identifiable by the actual costs, and the State did 

not follow up on subrecipient Single Audits. 

What We Recommend 

To correct the internal controls weaknesses, we recommend that EPA require 

the New Hampshire Department of Environmental Services to: coordinate 

with the State Treasury to obtain up-to-date documentation on cash and 

investment transactions, properly reconcile subsidiary schedules, develop and 

implement procedures for reviewing and reporting accounting transactions, 

and develop training on the accounting system. For the compliance issues, 

we recommend that EPA require the State to: deposit $228,436 to correct the 

underfunded State matching funds, establish subcodes for each set-aside, and 

implement a policy for Single Audit report review. 
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

WASHINGTON, D.C. 20460 

OFFICE OF 

INSPECTOR GENERAL

February 26, 2007 

MEMORANDUM 

SUBJECT: Auditor’s Report for the State of New Hampshire 

Drinking Water State Revolving Fund Program

 Financial Statements for the Year Ended June 30, 2005 

 Report No. 2007-1-00044 

TO: Robert W. Varney 

 Regional Administrator, EPA Region 1 

Attached is a copy of the subject audit we sent to the State of New Hampshire. The audit 

contains reports on the financial statements, internal controls, and compliance requirements 

applicable to the Drinking Water State Revolving Fund program in New Hampshire for the year 

ended June 30, 2005. We issued an unqualified opinion on the financial statements and a 

qualified opinion on the compliance requirements, as discussed in our report on compliance. In 

our report on internal controls, we noted issues involving the internal control structure and its 

operations that we considered to be a material weaknesses. 

This report represents the opinion of the Office of Inspector General and does not represent the 

final position of the U.S. Environmental Protection Agency (EPA). Final determination on 

matters in this report will be made by EPA managers in accordance with established audit 

resolution procedures. 

The estimated cost of this report – calculated by multiplying the project’s staff days by the 

applicable daily full cost billing rates in effect at the time – is $134,635. 

Action Required 

In accordance with EPA Manual 2750, you are required to provide a written response to this 

report within 120 days. You should include a corrective actions plan for agreed upon actions, 

including milestone dates. Please email an electronic version of your response to 

kasper.janet@epa.gov. 

We have no further objections to the further release of this report to the public. The report 

contains no confidential business or proprietary information. This report will be available at 

http://www.epa.gov/oig. 
If you have any questions or concerns regarding this report, please contact Janet Kasper, the 

Director for Assistance Agreement Audits, at (312) 886-3059 or kasper.janet@epa.gov. 

Bill A. Roderick 

Acting Inspector General 

Attachment 
State of New Hampshire Drinking Water State Revolving Fund Program 

Financial Statements for the Year Ended June 30, 2005 

Table of Contents 

Independent Auditor’s Report ............................................................................................ 1 

Statement of Net Assets.......................................................................................... 2 

Statement of Revenues, Expenses, and Changes in Net Assets ........................... 3 

Statement of Cash Flows ........................................................................................ 4 

Notes to Financial Statements ................................................................................ 6 

Independent Auditor’s Report on Internal Control Over Financial Reporting 

and on Compliance and Other Matters Based on an Audit of Financial 

Statements Performed in Accordance with Government Auditing Standards .............. 13 

Internal Control Findings, Recommendations, and Responses .............................. 16 

Compliance Findings, Recommendations, and Responses.................................... 20 

Supplemental Information................................................................................................... 23 

Status of Recommendations and Potential Monetary Benefits....................................... 25

Distribution........................................................................................................................... 26 
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

WASHINGTON, D.C. 20460 

OFFICE OF 

INSPECTOR GENERAL 

Independent Auditor’s Report 

We have audited the accompanying financial statements of the State of New Hampshire 

Drinking Water State Revolving Fund Program (the Program) as of and for the year ended 

June 30, 2005. These financial statements are the responsibility of the Program’s management. 

Our responsibility is to express an opinion on these financial statements based on our audit. 

We conducted our audit in accordance with auditing standards generally accepted in the United 

States of America and the standards applicable to financial audits contained in Government 

Auditing Standards, issued by the Comptroller General of the United States. Those standards 

require that we plan and perform the audit to obtain reasonable assurance about whether the 

financial statements are free of material misstatement. An audit includes examining, on a test 

basis, evidence supporting the amounts and disclosures in the financial statements. An audit also 

includes assessing the accounting principles used and significant estimates made by 

management, as well as evaluating the overall financial statement presentation. We believe that 

our audit provides a reasonable basis for our opinion. 

As discussed in Note 1, the financial statements referred to above are intended to present the 

financial position, and the changes in financial position and cash flows, where applicable, of the 

Program. They do not purport to, and do not, present fairly the financial position of the State of 

New Hampshire as of June 30, 2005, and the changes in its financial position and its cash flows, 

where applicable, for the year then ended in conformity with accounting principles generally 

accepted in the United States of America. 

In our opinion, the financial statements for the Program referred to above present fairly, in all 

material respects, the financial position of the Program, as of June 30, 2005, and the changes in 

financial position and cash flows, where applicable, thereof for the year then ended in conformity 

with accounting principles generally accepted in the United States of America. 

Office of Inspector General 

May 24, 2006 

1
State of New Hampshire 

Drinking Water State Revolving Fund Program 

Statement of Net Assets 

as of June 30, 2005 

Total 

(Memorandum 

SRF Management Only) 

Assets 

Current Assets: 

 Cash and cash equivalents $ 7,893,014 $ 843,695 $ 8,736,709 

 Current receivables: 

 Loan interest 433,917 433,917 

 Current portion of loans receivable 2,051,979 2,051,979 

 Due from other funds 228,436 228,436 

 Total current receivables 2,714,332 - 2,714,332 

Total current assets 10,607,346 843,695 11,451,041 

Non-Current Assets: 

Loans receivable, net of current portion: 34,421,359 34,421,359 

 Allowance for principal forgiveness (2,651,485) (2,651,485)

 Total non-current assets 31,769,874 - 31,769,874 

Total Assets $ 42,377,220 $ 843,695 $ 43,220,915 

Liabilities and Net Assets 

Liabilities: 

 Due to Federal Government $ 19,623 $ 19,623 

 Accounts payable 208,812 208,812 

Total liabilities 228,435 - 228,435 

Net assets: 

Restricted 42,148,785 843,695 42,992,480 

Total Liabilities and Net Assets $ 42,377,220 $ 843,695 $ 43,220,915 

See accompanying notes to the financial statements. 

2 
State of New Hampshire 

Drinking Water State Revolving Fund Program 

Statement of Revenues, Expenses, and Changes in Net Assets 

for the Year Ended June 30, 2005 

Total 

(Memorandum 

SRF/Set-Asides Management Only) 

Operating Revenues: 

 Loan interest $ 956,388 $ 956,388 

Grant revenues 1,978,483 1,978,483 

Loan fees 301,847 301,847 

 Investment earnings 177,316 177,316 

 Total operating revenues 3,112,187 301,847 3,414,034 

Operating Expenses: 

 Program administration 324,178 - 324,178 

 Technical assistance 164,138 - 164,138 

 State program management 537,529 - 537,529 

Local Assistance 952,638 - 952,638 

Principal forgiveness expense 750,605 - 750,605 

Total operating expenses 2,729,088 - 2,729,088 

Operating Income 383,099 301,847 684,946 

Fund Equity: 

 Contributed capital: 

 Federal contribution 3,642,373 - 3,642,373 

 State contribution 767,547 - 767,547 

Total capital contributions 4,409,920 - 4,409,920 

Change in net assets 

Net assets, beginning of year 

4,793,019 

 37,355,766 

301,847 

541,848 

 5,094,866 

 37,897,614 

Net Assets, End of Year $ 42,148,785 $ 843,695 $ 42,992,480 

See accompanying notes to the financial statements. 

3 
State of New Hampshire 

Drinking Water State Revolving Fund Program 

Statement of Cash Flows 

for the Year Ended June 30, 2005 

Cash Flows from Operating Activities: 

 Loan interest receipts $ 760,913 

 Loan fee receipts 301,847 

 Receipts from operating grants 1,923,008 

 Receipts from investments 180,159 

 Loan principal repayments 2,657,456 

 Payments for program administration (327,268)

 Payments for technical assistance (172,149)

 Payments for state program management (480,480)

 Payments for source water protection/capacity development (943,111)

 Disbursements on loans (6,782,313)

 Net cash (used ) by operating activities (2,881,938) 

Cash Flows from Noncapital Financing Activities: 

 Grant from EPA for loans 3,642,373 

 Funds from State of New Hampshire 767,547 

 Net cash provided by noncapital financing activities 4,409,920 

Net increase (decrease) in cash 1,527,982 

Cash and cash equivalents, beginning of year 7,208,727 

Cash and cash equivalents, end of year $ 8,736,709 

Continued on Next Page 

See accompanying notes to the financial statements. 

4 
State of New Hampshire 

Drinking Water State Revolving Fund Program 

Statement of Cash Flows 

for the Year Ended June 30, 2005 

Continued From Previous Page 

Reconciliation of Operating (Loss) to Net Cash Used by Operating Activities: 

 Operating income $ 684,946 

 Reconcile to operating income to net cash used by operating activities: 

Loan principal forgiveness 750,605 

Change in assets and liabilities: 

(Increase) in interest receivable (192,095)

 Decrease in due from Federal Government 74,794 

 (Increase) in due from other funds (228,026)

 Increase in accounts payable 154,720 

(Decrease) in accrued payroll (1,488)

 (Decrease) in unearned interest (537)

 (Decrease) in construction cost payable (11,764)

 Loan repayments 2,657,456 

 Loan disbursements (6,770,549)

 Net cash (used) by operating activities $ (2,881,938) 

See accompanying notes to the financial statements. 

5 
NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES 

Drinking Water State Revolving Fund Program 

Notes to Financial Statements 

1. Organization of the Program 

The New Hampshire Drinking Water State Revolving Fund Program (the Program) was established 

pursuant to section 1452 (a) of the Safe Drinking Water Act amendments (SDWA) of 1996 and RSA486:14. The purpose of the SRF is to provide low interest loans to assist public water systems for 

financing the costs of infrastructure needed to ensure safe drinking water. The loan repayment period 

ranges from five to twenty years, and all repayments, including interest and principal, must be credited 

to the Program. 

The SRF program is administered by the State of New Hampshire’s Department of Environmental 

Services (NHDES), and consists of a loan fund to record loan and related activity and an administrative 

fund that collects fees and will in the future, pay the operating costs of the program, and are collectively 

referred to as the Program. The Department’s primary responsibilities for the SRF include obtaining 

capitalization grants from the Environmental Protection Agency (EPA), soliciting potential interested 

parties for loans, negotiating loan agreements with local water systems, reviewing and approving 

payment requests from loan recipients, monitoring the loan repayments, and conducting inspection and 

engineering reviews to ensure compliance with all applicable laws, regulations, and program 

requirements. In addition to the loan fund, states are allowed to take portions of this fund for noninfrastructure project activities, or “set-asides”, which further the intent of the SDWA. The Program 

activities (set-asides) include program administration, state program management, water system 

technical assistance, and local assistance. 

On a monthly basis the NHDES charges the Program for time spent on SRF activities by its employees. 

The charges include the salaries and benefits of employees, as well as indirect costs allocated to the 

Program. Employees charging time to the Program are covered by the benefits available to State of New 

Hampshire Employees. The fund is also charged indirect costs through a cost allocation plan agreement 

between NHDES and U.S. EPA, which is renewed annually. 

The Program’s financial statements, footnotes, and related schedules are presented for the U.S. 

Environmental Protection Agency. The Program is included in the State of New Hampshire’s 

comprehensive annual financial report (CAFR) as part of the governmental fund financial statements, 

which use the modified accrual basis of accounting. Due to differences in reporting methods, there may 

be differences between the amounts reported in these financial statements and the State’s CAFR. 

2. Summary of Significant Accounting Policies 

Basis of Accounting 

The financial statements for the Program are presented as an enterprise fund. As such, the Program 

is accounted for using the flow of economic resources measurement focus and is maintained on the 

accrual method of accounting. Under the accrual method of accounting, revenues are recognized 

when earned and expenses are recorded at the time the liabilities are incurred. All assets and 

liabilities associated with the operations of the Program are included on the balance sheet. The State 

6
NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES 

Drinking Water State Revolving Fund Program 

Notes to Financial Statements 

2. Summary of Significant Accounting Policies 

has elected to follow the accounting pronouncements of the Governmental Accounting Standards 

Board (GASB), as well as statements issued by the Financial Accounting Standards Board on or 

before November 30, 1989, unless the pronouncements conflict with or contradict GASB 

pronouncements. 

Cash and Cash Equivalents 

All monies of the Program are deposited into the State Treasury Department, which is responsible for 

maintaining these deposits in accordance with New Hampshire State law. The Program considers all such 

deposits to be cash. The Program, on a monthly basis, receives investment interest earnings on these 

deposits. According to State law, the Treasurer is responsible for maintaining the cash balances and 

investing excess cash of the Program, as further discussed in Note 3. Consequently, management of the 

Program does not have any control over the investment of the excess cash. The statement of cash flows 

considers all funds deposited with the Treasurer to be cash or cash equivalents. 

Loans Receivable 

The loans are funded by Federal capitalization grants and State matching funds. The SRF monies are 

disbursed to borrowers on a cost reimbursement basis. When the borrowers have incurred qualifying 

expenses, they request a loan disbursement from the Program, and at that time a disbursement is made. 

Interest begins accruing when funds are disbursed to the borrower. Repayment of the loan begins within 

six months to one year of construction completion. The Program must receive full repayment within 

twenty years of project completion. There is no provision for uncollectible accounts, as all repayments are 

current, and management believes all loans will be repaid according to the loan terms. 

Contributed Capital 

In accordance with generally accepted accounting principles, funds received from EPA and the State of 

New Hampshire for the capitalization of the Program are recorded under equity as contributed capital. 

3. Cash and Cash Equivalents 

GASB Statement No. 40 Deposits and Investment Risk Disclosures-an amendment of GASB Statement No. 

3 was implemented for the fiscal year ended June 30, 2005. As a result, the disclosures related to deposit 

and investment risks were changed. 

Deposits: The following statutory requirements and Treasury Department policies have been adopted to 

minimize risk associated with deposits: 

7
NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES 

Drinking Water State Revolving Fund Program 

Notes to Financial Statements 

3. Cash and Cash Equivalents 

RSA 6:7 establishes the policy the state Treasurer must adhere to when depositing public monies. 

Operating funds are invested per investment policies that further define appropriate investment choices 

and constraints as they apply to those investment types. 

Custodial Credit Risk: The custodial risk for deposits is the risk that in the event of a bank failure, the 

Program’s fund deposits may not be recovered. 

Custodial credit risk is managed in a variety of ways. Although State law does not require deposits to be 

collateralized, the Treasurer does utilize such arrangements where prudent and/or cost effective. All 

banks, where the State has deposits and/or active accounts, are monitored as to their financial health 

through the services of Veribanc, Inc., a bank rating firm. In addition, ongoing reviews with officials of 

depository institutions are used to allow for frequent monitoring of custodial credit risk. 

All depositories used by the State must be approved at least annually by the Governor and Executive 

Council. All commercial paper must be from issuers having an A1/P1 rating or better and an AA- or 

better long-term debt rating from one or more of the nationally recognized rating agencies. Certificates of 

deposits must be with state or federally chartered banking institutions with a branch in New Hampshire. 

The institution must have the highest rating as measured by Veribanc, Inc. 

Whereas all payments made to the State are to be in U.S. dollars, foreign currency risk is essentially 

nonexistent on State deposits. 

Interest Rate Risk: Interest rate risk is the risk that changes in interest rates will adversely affect the 

value of the State’s investments. The State measures the interest rate risk using the weighted average 

maturity method (WAM). The State’s WAM is dollar weighted in terms of years. 

All cash in the Program is deposited with the State Treasurer who is responsible for maintaining and 

investing the pooled cash balances in accordance with State laws. The Treasurer is required to maintain a 

mix of investments in order to allow funds to be withdrawn at any time to meet normal operating needs. 

The Program’s share of the investment income from the local government investment pool is based on the 

average daily balance for the period and is credited to the Program monthly. 

During the most of fiscal year 2005, all cash was primarily invested in the demand deposit account and the 

repurchase agreements. Cash is managed in the local government investment pool, and is stated at cost, 

which approximates fair market value. Investments in local government pools are not categorized because 

they are not evidenced by securities that exist in physical or book entry form. 

 Carrying Amount 

Not subject to categorization: 

Local government investment pool $8,736,709 

======== 

8
NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES 

Drinking Water State Revolving Fund Program 

Notes to Financial Statements 

4. Loans Receivable 

The Program makes loans to qualified entities at interest rates ranging from .1525 percent to 2.688 

percent. Interest rates are initially set in the original loan agreement, and then when the project is 

completed a supplemental loan agreement is made which fixes the final interest rate to be charged at the 

lower of the original loan agreement or prevailing market rate, per the following formula: 

Loan Term Interest Rate

 5 years 

10 years 

15 years 

20 years 

25% of market minus 1% 

50% of market minus 1% 

75% of market minus 1% 

80% of market minus 1% 

Details of loans receivable as of June 30, 2005 are as follows: 

Loan Status 

Loan Amount 

Authorized 

Remaining 

Commitment 

Loan Balance 

June 30, 2004 

Loan 

Disbursements 

Repayments & 

Principal 

Forgiveness 

Loan Balance 

June 30, 2005 

Funding Completed $ 36,833,440 $ - $ 29,743,805 $ 961,956 $ (2,255,640) $ 28,450,121 

Funding in Progress 30,049,905 22,026,687 2,721,513 5,301,705 8,023,218 

Loans Paid Off 5,617,600 - 199,354 506,887 (706,241) -

Total $ 72,500,945 $ 22,026,687 $ 32,664,672 $ 6,770,548 $ (2,961,881) $ 36,473,339 

9
NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES 

Drinking Water State Revolving Fund Program 

Notes to Financial Statements 

4. Loans Receivable 

The Program made loans to eight local communities that totaled $1 million or more, and in the 

aggregate, exceed $26 million. The outstanding balances of these loans represent approximately 73 

percent of the total loans outstanding as of June 30, 2005. 

Percentage 

Loan Loan of Total 

Community Authorized Outstanding Outstanding 

Berlin Water Works 9,506,246 8,165,283 22.39% 

City of Portsmouth 5,962,560 5,366,304 14.71% 

City of Manchester 5,008,820 4,112,839 11.28% 

Hanover Water Works 4,035,000 3,556,036 9.75% 

Town of Raymond 2,500,000 2,375,000 6.51% 

Town of Exeter 1,354,340 1,083,472 2.97% 

Tilton/Northfield Aqueduct 1,293,694 1,047,011 2.87% 

Town of Northumberland 2,031,018 1,001,960 2.75%

 Subtotal More than $1 Million 31,691,678 26,707,905 73.23%

 All Other Loans 32,983,913 9,765,434 26.77% 

Total Loans 64,675,591 36,473,339 100.00% 

Loans mature at various intervals through May 2025. The scheduled principal and interest amounts 

on completely disbursed loans maturing in the next five years and every five years thereafter are as 

follows: 

FY June 30 Principal Interest Total 

2006 $ 2,225,936 $ 685,734 $ 2,911,670 

2007 2,178,744 652,678 2,831,422 

2008 2,194,042 612,037 2,806,079 

2009 2,212,690 570,918 2,783,608 

2010 1,523,202 529,344 2,052,546 

2011 - 2015 7,693,534 2,032,919 9,726,453 

2016 - 2020 7,323,762 995,088 8,318,850 

2021 - 2025 3,098,211 158,075 3,256,286 

Total $ 28,450,121 $ 6,236,793 $ 3,686,914 

10
NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES 

Drinking Water State Revolving Fund Program 

Notes to Financial Statements 

5. Contributed Capital 

The Program is capitalized by annual grants through EPA. These grants have been awarded annually. 

The State of New Hampshire must also contribute an amount equal to 20 percent of the federal 

capitalization amount. New Hampshire’s matching contribution has been provided through 

appropriation of State general fund resource and general obligation bonds of the State. As of June 30, 

2005, EPA has awarded $68,225,700 to the State, of which $45,397,570 has been drawn for loans and 

set-aside expenses. The following summarizes the capitalization grant award, amounts drawn on each 

grant as of the balance sheet date, and balances available for future loans and set-aside costs: 

Total Draws Total Draws Grant Funds 

Grant Grant as of 2005 as of Available 

Year Amount June 30, 2004 Draws June 30, 2005 June 30, 2005 

1997 $ 13,754,800 $ 13,754,800 $ - $ 13,754,800 $ -

1998 7,121,300 7,121,300 7,121,300 -

1999 7,463,800 7,463,800 7,463,800 -

2000 7,757,000 6,643,421 943,111 7,586,532 170,468 

2001 7,789,100 3,187,595 3,433,140 6,620,735 1,168,365 

2002 8,052,500 1,450,468 409,943 1,860,411 6,192,089 

2003 8,004,100 210,805 341,129 551,934 7,452,166 

2004 8,283,100 438,058 438,058 7,845,042 

Total $ 68,225,700 $ 39,832,189 $ 5,565,381 $ 45,397,570 $ 22,828,130 

As of June 30, 2005, State matching contributions were as follows: 

Total Match As of 2005 Total Match As 

June 30, 2004 Contributions of June 30, 2005 

New Hampshire State Match $ 7,775,397 $ 767,547 $ 8,542,944 

11
NEW HAMPSHIRE DEPARTMENT OF ENVIRONMENTAL SERVICES 

Drinking Water State Revolving Fund Program 

Notes to Financial Statements 

6. Set-Asides 

Of the capitalization grants, the following summarizes the set-aside grants, amounts drawn on each 

set-aside as of the balance sheet date, and balances available for future set-aside costs: 

Technical State Program Local 

Grant Year Administration Assistance Management Assistance Total 

1997 $ 550,192 $ 275,096 $ 233,049 $ 2,063,220 $ 3,121,557 

1998 284,852 142,426 712,130 1,068,195 2,207,603 

1999 149,276 1,119,570 1,268,846 

2000 155,140 268,014 1,163,550 1,586,704 

2001 76,356 155,782 503,520 1,168,365 1,904,023 

2002 754,881 161,050 735,247 231,436 1,882,614 

2003 155,597 160,082 265,294 10,138 591,111 

2004 312,124 166,062 830,310 - 1,308,496 

Total Grant 2,134,002 1,364,914 3,547,564 6,824,474 13,870,954 

Draws thru June 30, 2004 (1,465,571) (1,110,325) (2,591,210) (4,300,956) (9,468,062) 

2005 Draws (327,268) (172,149) (480,480) (943,111) (1,923,008) 

Available, June 30, 2005 $ 341,163 $ 82,440 $ 475,874 $ 1,580,407 $ 2,479,884 

7. Contingencies, Related Parties, and Subsequent Events 

Contingencies 

The Program is exposed to various risks of loss related to torts, thefts of assets, errors or omissions, 

injuries to state employees while performing the Program business, or acts of God. The State 

maintains insurance for all risks of loss, which is included in the indirect costs allocated to the 

Program. 

According to NHDES management and legal counsel, there are no other loss contingencies which 

require disclosure or accrual under the Statement of Financial Accounting Standards No. 5. 

Related Parties 

There are no related party transactions with or related amounts receivable from management of the 

Programs. 

12
Independent Auditor’s Report on Internal Control Over Financial Reporting and 

on Compliance and Other Matters Based on an Audit of Financial Statements 

Performed in Accordance with Government Auditing Standards 

13
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

WASHINGTON, D.C. 20460 

OFFICE OF 

INSPECTOR GENERAL 

We have audited the financial statements of the State of New Hampshire Drinking Water State 

Revolving Fund Program (the Program) as of and for the year ended June 30, 2005, and have 

issued our report thereon dated May 24, 2006. We conducted our audit in accordance with 

auditing standards generally accepted in the United States of America and the standards 

applicable to financial audits contained in Government Auditing Standards, issued by the 

Comptroller General of the United States. 

Internal Control over Financial Reporting 

In planning and performing our audit, we considered the Program’s internal control over 

financial reporting in order to determine our auditing procedures for the purpose of expressing 

our opinion on the financial statements and not to provide an opinion on the internal control over 

financial reporting. However, we noted certain matters involving the internal control over 

financial reporting and its operation that we consider to be reportable conditions. Reportable 

conditions involve matters coming to our attention relating to significant deficiencies in the 

design or operation of the internal control over financial reporting that, in our judgment, could 

adversely affect the Program’s ability to initiate, record, process, and report financial data 

consistent with the assertions of management in the financial statements. Reportable conditions 

are described in the findings, recommendations, and responses. 

A material weakness is a reportable condition in which the design or operation of one or more of 

the internal control components does not reduce to a relatively low level the risk that 

misstatements caused by error or fraud in amounts that would be material in relation to the 

financial statements being audited may occur and not be detected within a timely period by 

employees in the normal course of performing their assigned functions. Our consideration of the 

internal control over financial reporting would not necessarily disclose all matters in the internal 

control that might be reportable conditions and, accordingly, would not necessarily disclose all 

reportable conditions that are also considered to be material weaknesses. However, we consider 

the reportable conditions described in the accompanying schedule of findings, recommendations, 

and responses to be material weaknesses. 

Compliance and Other Matters 

As part of obtaining reasonable assurance about whether the Program’s financial statements are 

free of material misstatement, we performed tests of its compliance with certain provisions of 

laws, regulations, contracts, and grant agreements, noncompliance with which could have a 

14
direct and material effect on the determination of financial statement amounts. This included 

tests of specific program requirements governing allowability for specific activities, allowable 

types of assistance, State matching, period of availability of funds and binding commitments, 

cash management, program income, and subrecipient monitoring that are applicable to the 

Program for the year ended June 30, 2005. 

The management of the Program is responsible for the Program’s compliance with those 

requirements. Our responsibility is to express an opinion on those requirements based on our 

audit. An audit includes examining, on a test basis, evidence about the Program’s compliance 

with those requirements. We believe that our audit provides a reasonable basis for our opinion. 

In our opinion, except for matters discussed in the findings and recommendations sections that 

follow, the Program complied, in all material respects, with the specific program requirements 

that are applicable to the Program for the year ended June 30, 2005. 

This report is intended solely for the information and use of management of the Program and the 

U.S. Environmental Protection Agency, and is not intended to be and should not be used by 

anyone other than these specified parties. 

Office of Inspector General 

May 24, 2006 

15
Internal Control Findings, Recommendations, and Responses 

Control Environment Needs Improvement 

The foundation of the accounting and reporting system is the control environment established by 

management. Management sets the tone of the organization, and determines the accounting 

systems and procedures to be used. Management also establishes the necessary controls and 

policies to assure that the assertions inherent in an accounting system are followed. 

The management assertions include: 

• Existence or occurrence: The assets and liabilities of the organization exist at a given 

date, and recorded transactions occurred during the proper period. 

• Completeness: All transactions and accounts that should be included are included in 

the accounting system. 

• Valuation or allocation: The accounts are recorded and presented at appropriate 

amounts. 

The DWSRF is accounted for and reported within the New Hampshire Department of 

Environmental Services’ (NHDES) General Fund. To facilitate program reporting required by 

the U.S. Environmental Protection Agency (EPA), NHDES maintains a separate DWSRF 

accounting system and provides EPA with program-specific financial statements. We noted 

deficiencies in the design and operations of NHDES’ internal controls for the DWSRF-specific 

financial accounting and reporting that, in our judgment, could adversely affect NHDES’ ability 

to record, process, and report financial data consistent with the assertions of management in the 

DWSRF financial statements. These conditions appear to have resulted, in part, from (1) the use 

of a separate spreadsheet-based accounting system that a limited number of employees and 

management are familiar with; (2) a lack of adequate training on the DWSRF-specific 

accounting system; (3) inadequate written procedures for key areas such as monthly 

reconciliations to the DWSRF general ledger and DWSRF financial reporting; (4) lack of 

management understanding, review, and approval of entries to the DWSRF general ledger and 

supporting schedules; and (5) significant turnover of key staff and management working in the 

DWSRF program over the last 2 years. Specifically, we noted problems with the effectiveness 

of management assertions as follows. 

Existence or Occurrence: Periodic reconciliations of the DWSRF accounting records to 

the actual cash and investment deposits maintained by the Treasurer is an important 

control aspect that can provide assurances that the accounting records properly record 

cash and investment transactions and balances. Management review of these 

reconciliations provides assurances that these controls are working as intended. 

We found that NHDES was reconciling the account used to deposit Federal draws and 

related State match (the “zero balance account”) and the account used for loan 

16
repayments and disbursements ("the repayment account"), but it was not adjusting for 

errors and other reconciling items in the DWSRF general ledger. Several other errors 

between the loan interest and management fees were identified, but not corrected. As a 

result, cash was overstated by $3,941,721 and short-term investments were understated 

by $4,000,000 as of June 30, 2005. 

Completeness: NHDES’ accounting system is not specifically designed for the State 

Revolving Funds program. Therefore, the DWSRF accountant maintains a separate 

spreadsheet-based DWSRF general ledger to generate the DWSRF financial statements. 

This general ledger was not properly reconciled to original source documentation. We 

encountered numerous unrecorded transactions and errors in the DWSRF general ledger 

that went undetected during the period because DWSRF Program management did not 

have procedures in place for approval of the transactions and periodic review of the 

general ledger. As a result, control and accountability over State Revolving Funds is 

diminished and there is no assurance that the funds are accounted for properly. 

Valuation or Allocation: The amounts recorded in the DWSRF general ledger for loans 

and related interest receivable should be supported by a subsidiary schedule(s) that 

provide details by specific loan. Loans included on the schedule should be supported by 

the proper loan documentation (e.g., loan agreement, requests for disbursements, loan 

amortizations schedules). The subsidiary schedules should be periodically reconciled to 

the DWSRF general ledger. 

We discovered numerous instances where the balances of the DWSRF general ledger 

accounts were incorrect. Journal entries were incorrectly made because of a lack of 

understanding of how the system was designed, a lack of documentation of proper yearend accounting procedures and closeouts, and the absence of training for new staff and 

management. For example, the year-end reclassifying journal entries for Federal funds 

and the fund balance were overstated by $9.5 million and understated by the same 

amount, respectively, in the DWSRF general ledger. Also, the required State match was 

underfunded by $228,436 due to the State using the wrong percentage to calculate the 

required matching funds. The State calculated its share at 17 percent of the capitalization 

grants instead of the required percentage, which was 20 percent. 

Amortization schedules for 5 of the 13 loans executed during the last 2 fiscal years were 

prepared incorrectly. Two of the five resulted in improper accounting for principal 

forgivenesses and the principal amounts. We also identified a number of loan 

repayments that were not recorded. The Program does not have procedures in place to 

detect these omissions. Proper reconciliations to the supporting documents, disbursement 

and amortizations schedules, and the DWSRF general ledger would have detected these 

errors. 

The short-term investment was understated by $4,000,000 in the DWSRF general ledger. 

A $2,000,000 purchase of short-term investments was not recorded. A $500,000 shortterm investment was under recorded at its maturity, and another $500,000 short-term 

investment in another instance was over recorded at its maturity. These errors appeared 

to be due to the lack of coordination with the State of New Hampshire Treasury, lack of 

17
subsidiary records to support the general ledger, and lack of proper reconciliations to the 

subsidiary records and the DWSRF general ledger. 

Recommendations 

We recommend that EPA Regional Administrator, Region 1, require the NHDES to: 

1. Coordinate with the State of New Hampshire Treasury and obtain up-to-date 

documentation on specific cash and investment transactions and balances. A schedule of 

cash, investments, and related earnings per the State Treasurer should be properly 

reconciled with supporting documents and the DWSRF general ledger on a recurring 

basis. DWSRF program management should gain an understanding of the reconciliation 

process and review and assess the reconciliations on a periodic basis. 

Prior to our audit, NHDES had recognized the need to improve its DWSRFspecific accounting and management system. NHDES is currently in the process 

of developing a new system expected to address this condition. 

2. Properly reconcile its subsidiary schedule(s) for loans and interest receivable with the 

DWSRF general ledger on a recurring basis. DWSRF program management should gain 

an understanding of the reconciliation process and review the reconciliations on a 

periodic basis. 

Prior to our audit, NHDES had recognized the need to improve its DWSRFspecific accounting and management system and is in the process of developing a 

system that is expected to correct this condition. 

3. Develop and implement procedures for appropriate review and approval of accounting 

entries and reporting from the DWSRF-specific accounting system, including year-end 

closing and reporting. 

4. Develop training on the DWSRF-specific accounting system for all appropriate staff and 

management, including the accountants, accounting manager, and program manager. 

State’s Response 

The State responded on February 14, 2007, with the following: 

With regards to the comments on the accounting system, DES is in the middle of a system 

conversion from our manual, Excel spreadsheet based, system to a general ledger system. 

When this system conversion is complete, the majority of the posting and reconciliation 

issues will be resolved as we will have one integrated accounting package. All 

appropriate staff will be trained on using this system including accountants, accounting 

manager and program managers. 

18
Procedures have been developed for preparing accounting entries and for their 

appropriate management review and approval and for the reconciliation of subsidiary 

schedules to the general ledger. 

Concerning the State Treasury, we are working with that department to improve the 

timely receipt of SRF documents from them in order for DES to perform our 

reconciliations and postings in a timely manner. 

OIG’s Response 

We find the State’s response to be acceptable. 

19
Compliance Findings, Recommendations, and Responses 

State Match Calculations Incorrect 

As of June 30, 2005, NHDES had received $228,436 in excess Federal funds and had a $228,436 

shortfall in State funds required to be in the revolving loan fund. Pursuant to Title 40, Code of 

Federal Regulations (CFR), Section 35.3550(g), the State is to deposit 20 percent of each 

capitalization grant into the revolving loan fund. However, the State provided matching funds 

based on 17 percent of the capitalization grant, which resulted in a shortfall of $228,436. Each 

Federal draw associated with the shortfall was regarded as an erroneous payment by EPA to the 

State pursuant to Office of Management and Budget (OMB) Circular No. A-11, Section 57.1. 

Set-Aside Costs Need to Be Separate and Identifiable for Each Set-Aside by Actual Costs 

NHDES has only one code 4718 for charging all set-aside activities, and charges budgeted time 

for each employee instead of actual time worked on each set-aside. There are four kinds of setasides in the Program, as defined in 40 CFR 35.3535(b)-(e): 

Description 

NHDES 

Accounting Code 

Allowed Percentage Use 

of Capitalization Grants 

Administration D 4% 

Small systems technical assistance E 2% 

State program management F 10% 

Local assistance and other State programs G 15% 

40 CFR 35.3540 (b) requires that a State must maintain separate and identifiable set-aside 

accounts for the portion of its capitalization grant to be used for set-aside activities. The State 

agency that is awarded the capitalization grant is accountable for the use of the funds provided in 

the capitalization grant agreement under the general grant regulations at 40 CFR Part 31. 

40 CFR 31.22 (b) states that allowable costs are to be determined in accordance with the cost 

principles in OMB Circular A-87. Attachment B, §8(h) of OMB Circular A-87 provides the 

requirements for support of salaries and wages charged to Federal programs. When employees 

work on multiple activities or cost objectives, a distribution of their salaries or wages are to be 

supported by personnel activity reports that meet the standards in §8(h)(5), which state that the 

activity report must reflect an after-the-fact distribution of the actual activity of each employee 

and that budget estimates do not qualify as support for charges. 

Employees in the NHDES Water Supply Engineering Bureau are assigned to specific set-asides 

by budget, and a list of these employees is provided to the DWSRF accountant. Employees 

working on set-aside activities charge Organization Code 4718 for all activities. The DWSRF 

accountant then enters letter codes to the corresponding set-aside employees’ payroll transactions 

according to the list in order to identify costs for each set-aside. As a result, budgeted time, not 

actual time, is charged to the set-aside accounts. Since the charges were not adequately 

supported, they would be considered erroneous payments as defined by OMB Circular A-11. 

20
For example, an employee was promoted to a supervisory position during the year; however, the 

accountant coded and charged the employee’s time to the 15-percent set-aside even though the 

employee’s responsibilities changed. The costs should have been allocated to three set-asides – 

4 percent, 10 percent, and 15 percent – based on the actual time spent on each activity. Based on 

budgeted time, $30,538 of this employee’s time was charged to the wrong set-aside account. 

The actual cost of this employee’s time that should have been charged to each set-aside activity 

is not known since employee did not maintain records of the activities they performed. 

Subrecipient Monitoring Not Performed 

OMB Circular A-133 and 40 CFR 31.26 require that a pass-through entity ensure that 

subrecipients expending $500,000 or more in Federal awards during the subrecipient’s fiscal 

year meet the Single Audit requirements for that fiscal year. The pass through entity is to issue a 

management decision on any audit findings within 6 months after receipt of the subrecipient’s 

audit report and ensure that the subrecipient takes appropriate and timely corrective action. 

NHDES did not have procedures in place to ensure that borrowers expending Federal awards met 

the Single Audit requirements to issue management decisions within 6 months of receipt of the 

audit reports, and to ensure that subrecipients took appropriate and timely corrective action. 

Program management was not aware that the monitoring of and response to Single Audit 

requirements was necessary. As a result, NHDES was unaware of the Single Audit status of its 

borrowers and, thus, whether the borrowers’ audits had uncovered any issues of noncompliance. 

Recommendations 

We recommend that EPA Regional Administrator, Region 1, require the NHDES to: 

5. Deposit $228,436 to correct the underfunded State matching funds, and calculate future 

matching contributions according to the appropriate formula. 

6. Establish subcodes for each set-aside so that employees, not the Program accountant, 

identify and charge set-aside activities on their timesheets. 

By the end of the audit field work, we noted that the State had already established 

subcodes for each set-aside, and employees identified set-aside activities on their 

timesheets instead of being coded by the Program accountant later. 

7. Implement a Single Audit report review and corrective action policy consistent with 

OMB Circular A-133 and EPA regulations. 

State’s Response 

The State responded on February 14, 2007, with the following: 

The DWSRF state match percentage has been corrected and DES made-up the under 

funding issue of $228,436 in State Fiscal Year 2006. 

21
OIG’s Response 

The State has adequately addressed recommendations 5 and 6. However, the State did not 

respond to the recommendation of implementing a Single Audit report review. EPA Region 1 

should work with the State to assure that it meets the requirements of OMB Circular A-133 and 

40 CFR 31.26 regarding pass-through entity responsibilities for followup on subrecipient audits. 

22
Supplemental Information 

23
State of New Hampshire 

Drinking Water State Revolving Fund Program 

Schedule of Set-Aside Expenses 

Year Ended June 30, 2005 

Technical State Program Local 

Description Administration Assistance Management Assistance Total 

Payroll $ 206,866 $ - $ 347,671 $ 773,684 $ 1,328,221

Contracts 12,289 164,138 - 20,023 196,450

Grants - - 41,736 138,465 180,201

Rent 44,430 - - - 44,430 

Indirect Cost 38,244 - - - 38,244 

Travel 1,024 - 18,890 12,177 32,091 

Other Operating Costs 21,326 - 129,232 8,289 158,847

 Total $ 324,178 $ 164,138 $ 537,529 $ 952,638 $ 1,978,483 

24
Status of Recommendations and 

Potential Monetary Benefits 

POTENTIAL MONETARY 

RECOMMENDATIONS BENEFITS (in $000s) 

Rec. 

No. 

Page 

No. Subject Status1 Action Official 

Planned 

Completion 

Date 

Claimed 

Amount 

Agreed To 

Amount 

1 18 Coordinate with the State of New Hampshire 

Treasury and obtain up-to-date documentation on 

specific cash and investment transactions and 

balances. A schedule of cash, investments, and 

related earnings per the State Treasurer should be 

properly reconciled with supporting documents and 

the DWSRF general ledger on a recurring basis. 

DWSRF program management should gain an 

understanding of the reconciliation process and 

review and assess the reconciliations on a periodic 

basis. 

O EPA Regional Administrator, 

Region 1 

2 18 Properly reconcile its subsidiary schedule(s) for 

loans and interest receivable with the DWSRF 

general ledger on a recurring basis. DWSRF 

program management should gain an 

understanding of the reconciliation process and 

review the reconciliations on a periodic basis. 

O EPA Regional Administrator, 

Region 1 

3 18 Develop and implement procedures for appropriate 

review and approval of accounting entries and 

reporting from the DWSRF-specific accounting 

system, including year-end closing and reporting. 

O EPA Regional Administrator, 

Region 1 

4 18 Develop training on the DWSRF-specific 

accounting system for all appropriate staff and 

management, including the accountants, 

accounting manager, and program manager. 

O EPA Regional Administrator, 

Region 1 

5 21 Deposit $228,436 to correct the underfunded State 

matching funds, and calculate future matching 

contributions according to the appropriate formula. 

C EPA Regional Administrator, 

Region 1 

State 

Fiscal Year 

2006 

$228 $228 

6 21 Establish subcodes for each set-aside so that 

employees, not the Program accountant, identify 

and charge set-aside activities on their timesheets. 

C EPA Regional Administrator, 

Region 1 

04/06/06 

7 21 Implement a Single Audit report review and 

corrective action policy consistent with OMB 

Circular A-133 and EPA regulations. 

U EPA Regional Administrator, 

Region 1 

1 O = recommendation is open with agreed-to corrective actions pending; 

C = recommendation is closed with all agreed-to actions completed; 

U = recommendation is undecided with resolution efforts in progress 

25
Distribution 

EPA Region 1 

Regional Administrator 

Director of Office of Ecosystem Protection 

Manager of Municipal Assistance Unit 

 Audit Liaison 

 DWSRF Coordinator 

EPA Headquarters 

Director, Grants Administration Division 

Agency Followup Coordinator 

Infrastructure Branch Chief 

 DWSRF Coordinator 

DWSRF Audit Manager 

New Hampshire Department of Environmental Services 

Commissioner 

Chief Operating Officer 

 DWSRF Administrator 

26