OFFICE OF INSPECTOR GENERAL 

Catalyst for Improving the Environment 

Audit Report 

State of New Hampshire 

Clean Water State Revolving Fund 

Program Financial Statements 

for the Year Ended June 30, 2005 

Report No. 2007-1-00037 

February 7, 2007 
Abbreviations 

CAFR Comprehensive Annual Financial Report 

CWSRF Clean Water State Revolving Fund 

DES New Hampshire Department of Environmental Services 

EPA U.S. Environmental Protection Agency 

GASB Government Accounting Standards Board 

OIG Office of Inspector General 

OMB Office of Management and Budget 

SRF State Revolving Fund 
2007-1-00037 

Office of Inspector General February 7, 2007

At a Glance


U.S. Environmental Protection Agency 

Catalyst for Improving the Environment 

Why We Did This Audit 

We performed this audit to

determine: 

• Whether the New 

Hampshire Clean 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/ 

20070207-2007-1-00037.pdf 

State of New Hampshire Clean 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 Clean Water 

State Revolving Fund (CWSRF) 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 CWSRF-specific financial accounting 

and reporting could adversely affect the State’s ability to record, process, and 

report financial data consistent with the assertions of management in the 

CWSRF financial statements. The State did not reconcile cash and 

investment balances to the CWSRF general ledger, and did not reconcile the 

general ledger to original source documentation, resulting in numerous 

unrecorded transactions and errors going undetected. The State made 

incorrect journal entries, incorrectly calculated amortization schedules, did 

not record loan payments, and materially misstated cash balances and shortterm investments. 

We qualified our opinion on compliance with applicable laws and regulations 

because the State did not comply with the subrecipient monitoring 

requirements for followup 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, make the necessary reconciliations, develop and 

implement procedures for reviewing and reporting, and develop training on 

the accounting system. For the compliance issue, we recommend that EPA 

require the State to implement a policy for Single Audit report review. 
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

WASHINGTON, D.C. 20460 

OFFICE OF 

INSPECTOR GENERAL

February 7, 2007 

MEMORANDUM

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

Clean Water State Revolving Fund Program 

Financial Statements for the Year Ended June 30, 2005 

Report No. 2007-1-00037 

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 Clean 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 weakness. 

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 $106,798. 

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. 

 Sincerely, 

Bill A. Roderick 

 Acting Inspector General 

Attachment 
State of New Hampshire Clean 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 the Financial Statements .......................................................................... 5 

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 .............. 14 

Internal Control Findings, Recommendations, and Responses .............................. 17 

Compliance Finding, Recommendation, and Response ......................................... 20 

Status of Recommendations and Potential Monetary Benefits....................................... 22

Distribution ...................................................................................................................... 23 
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 Clean 

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 of the Program are intended to present the 

financial position, and the changes in financial position and cash flows 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 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 16, 2006 

1
State of New Hampshire 

Clean Water State Revolving Fund Program 

Statement of Net Assets 

as of June 30, 2005

Total 

(Memorandum 

Assets SRF Management Only) 

Current assets: 

Cash and cash equivalents $ 58,078,559 $ 2,119,655 $ 60,198,214

 Current receivables 

 Loan interest 3,406,611 3,406,611 

 Investment interest 109,595 109,595 

Due from other fund 90,722 90,722 

Current portion of loans receivable 

 Wastewater 11,262,567 11,262,567 

 Landfills 5,522,459 5,522,459 

Reloans 3,569,812 3,569,812 

Total current receivables 23,871,044 90,722 23,871,044 

Total current assets 81,949,603 2,210,377 84,159,980 

Noncurrent assets: 

Loans receivable, net of current portion

 Wastewater 93,533,584 93,533,584 

 Landfills 32,157,613 32,157,613 

Reloans 47,235,210 47,235,210 

Total noncurrent assets 172,926,407 - 172,926,407 

Total assets 254,876,010 2,210,377 257,086,387 

Liabilities and Net Assets 

Current liabilities 

Due to other funds 176,007 809 176,816 

Project costs payable 608,978 608,978 

Total liabilities 784,985 809 785,794 

Net assets: 

Restricted 254,091,025 2,209,568 256,300,593 

Total liabilities and net assets $ 254,876,010 $ 2,210,377 $ 257,086,387 

See accompanying notes to the financial statements. 

2 
State of New Hampshire 

Clean Water State Revolving Fund Program 

Statement of Revenues, Expenses, and Changes in Net Assets 

for the Year Ended June 30, 2005 

Total 

Operating revenues 

Loan interest 

 Investment earnings 

Management fees 

Total operating revenues 

SRF 

$ 4,356,317 

1,230,524 

5,586,841

 Management

 $ 1,646,071

 1,646,071 

 (Memorandum 

Only) 

$ 4,356,317

1,230,524 

1,646,071 

7,232,912 

Operating expenses 

Administrative costs 

Operating income 

737,562

4,849,279 

1,489,642

156,429 

2,227,204 

5,005,708 

Capital contributions

 Federal grants 

State contributions 

Total capital contributions 

12,756,503 

2,551,296

15,307,799 

12,756,503 

2,551,296 

15,307,799 

Change in net assets 20,157,078 156,429 20,313,507 

Net assets, beginning of year 233,933,947 2,053,139 235,987,086 

Net assets, end of year $ 254,091,025 $ 2,209,568 $ 256,300,593 

See accompanying notes to the financial statements. 

3 
New Hampshire Department of Environmental Resources 

Clean Water State Revolving Fund 

Statement of Cash Flows 

for the Year Ended June 30, 2005 

Cash flows from operating activities: 

 Principal repayments received from borrowers 

 Interest payments received from borrowers 

Loan advances to borrowers 

 Management fees 

 Interest on investments 

 Payments to suppliers and employees 

 Net payments to other funds 

$ 15,305,197 

4,692,417 

(25,008,637)

 1,646,071 

1,125,000 

(2,185,069) 

(4,932) 

Cash (used) by operating activities (4,429,953) 

Cash flows from capital and related financing activities: 

 Environmental Protection Agency 

 State of New Hampshire 

12,756,503

2,551,296 

Net cash from (used in) capital and related financing activities 15,307,799 

Net cash provided by operating activities 10,877,846 

Cash and cash equivalents, beginning of year 49,320,368 

Cash and cash equivalents, end of year 60,198,214 

Reconciliation of operating income to cash (used) by 

operating activities 

 Operating income

 Adjustments to reconcile operating income to 

 net cash flow (used) by operating activities: 

 (Increase) decrease in current receivables 

 Increase (decrease) in current liabilities 

 Disbursements on loans 

 Loan principal repayments 

$ 5,005,708 

150,891 

116,888 

(25,008,637)

15,305,197 

Net cash (used) by operating activities $ (4,429,953) 

4
New Hampshire Department of Environmental Resources 

Clean Water State Revolving Fund 

Notes to the Financial Statements 

1. Organization of the Fund 

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

established pursuant to Title VI of the Federal Water Quality Act of 1987 (the Act). The 

Act established the State Revolving Fund (SRF) program to replace the construction 

grants program. The purpose of the SRF is to provide low interest loans to local 

governments for the purpose of constructing wastewater treatment facilities, 

implementing nonpoint source management plans and estuary management plans. 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 (DES), and consists of a loan fund (SRF) to record loan and 

related activity and an administrative fund (Management) that collects fees and pays 

some of 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 communities, 

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. 

The program does not have any full time employees, instead, the DES charges the 

Program for time spent on SRF activities by its employees and the Program reimburses 

DES for such costs the following month. The charges include the salaries and benefits of 

employees, as well as indirect costs allocated to the program. Employees are covered by 

the benefits available to State of New Hampshire employees. 

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 States 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 

5
New Hampshire Department of Environmental Resources 

Clean Water State Revolving Fund 

Notes to the Financial Statements 

2. Summary of Significant Accounting Policies (continued) 

and is maintained on 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 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 (FASB) 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 with the New Hampshire State Treasurer 

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 

Loans are funded by capitalization grants from EPA, State matching funds, funds 

generated from repayments and fund earnings. Loan funds are advanced to local 

agencies on a cost reimbursement basis, and interest begins accruing when funds are 

disbursed. After construction is completed, the local agency can elect to add the 

construction period interest to the loan amount, or they can pay it in total with the first 

loan repayment. Loans are amortized over periods of five, ten, fifteen or twenty years, 

and repayment of the loans must begin within one year of construction 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 (GAAP), funds received 

from EPA and the State of New Hampshire for the capitalization of the Program are 

reported in the statement of revenues, expenses, and changes in fund net assets after 

nonoperating revenues and expenses. 

6
New Hampshire Department of Environmental Resources 

Clean Water State Revolving Fund 

Notes to the Financial Statements 

3. Cash, Cash Equivalents, and Investments 

GASB Statement 40, Deposit 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: 

New Hampshire statute RSA 6:7 established policies 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 state's 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. 

As of June 30, 2005, the CWSRF's bank balances were exposed to custodial credit 

risk as follows: 

7
New Hampshire Department of Environmental Resources 

Clean Water State Revolving Fund 

Notes to the Financial Statements 

3. Cash, Cash Equivalents, and Investments (continued) 

CWSRF Fund Deposit Credit Risk 

June 30, 2005 (amounts in thousands) 

 Collateralized 

& Held in 

Type Insured State’s Name Uncollateralized 

Demand Deposit $228,685 $0 

Money Market 35,335,332 0 

Overnight Repurchase Agreements 

Term Repurchase Agreements 12,420,625 10,093,917 

Totals $47,984,642 $10,093,917 $0 

Investments: 

The Treasury Department has adopted policies to ensure reasonable rates of return 

on investments while minimizing risk factors. Approved investments are defined 

in New Hampshire statutes. Additionally, investment guidelines exist for 

operating funds as well as trust and custodial funds. All investments are 

denominated in U.S. dollars. As of June 30, 2005, the CWSRF had the following 

types of investments: 

Investment Type Balance 

Term Repurchase Agreements $10,093,917 

Money Markets 35,335,332 

 Total Investments $45,429,249 

The table below reconciles the cash and investments in the financial statements to 

the footnote. 

Per Balance Sheet 

 Cash and Cash Equivalents $60,198,214 

Per Footnote

 Carrying amount of deposits 14,768,965 

Investments 45,429,249 

Total per footnote $60,198,214 

8
New Hampshire Department of Environmental Resources 

Clean Water State Revolving Fund 

Notes to the Financial Statements 

4. Loans Receivable 

The Program makes loans to qualified local agencies at interest rates ranging from .1575 

percent to 4.128 percent. Interest rates are initially set in the original loan agreement, and 

then when the project is completed a supplemental loan agreement fixes the final interest 

rate to be charged at the lower of the original loan agreement or prevailing market rate, 

according to the following formula: 

Loan Interest 

Term Rate 

5 years 25% of market minus 1% 

10 years 50% of market minus 1% 

15 years 75% of market minus 1% 

20 years 80% of market minus 1% 

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

Outstanding Outstanding 

Original Loan Balance Balance 

Commitments 6/30/04 Disbursements Repayments 6/30/05 

$388,259,707 $ 182,968,828 $ 25,617,614 $15,305,197 $193,281,245 

Loans mature at various intervals through January 1, 2026. The scheduled principal 

repayments for completely disbursed loans in subsequent years are as follows: 

Principal Interest Total 

2006 $ 18,049,563 $ 3,548,958 $ 21,598,521 

2007 12,404,642 3,353,985 15,758,627 

2008 11,345,737 3,045,437 14,391,174 

2009 9,733,179 2,775,432 12,508,611 

2010 9,339,384 2,531,323 11,870,707 

2011 - 2015 41,003,641 8,883,622 49,887,263 

2016 - 2020 26,697,461 3,648,844 30,346,305 

2021 - 2025 9,360,883 547,622 9,908,505 

2026 14,860 1,747 16,607 

Totals $ 137,949,350 $ 28,336,970 $ 166,286,320 

9
New Hampshire Department of Environmental Resources 

Clean Water State Revolving Fund 

Notes to the Financial Statements 

4. Loans Receivable (continued) 

DES has three categories of loans receivable, wastewater, landfills and repayments. The 

wastewater loans are for sewer and wastewater treatment projects. The landfill loans 

provide financial assistance for municipalities to close unlined landfills as well as the 

construction of transfer stations and recycling facilities directly related to the specific 

landfill closure projects. The repayment loans are loans made from revolving funds for 

either wastewater or landfill closure loans. The balances of these loan categories as of 

June 30, 2005 are as follows: 

Wastewater projects $ 104,796,151 

Landfill projects 37,680,071 

Repayment projects (revolving loans) 50,805,023

 $ 193,281,245

5. Contributed Capital 

The Program is capitalized by annual grants through the EPA. 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 the appropriation of State resources. As of June 30, 2005, EPA has awarded 

capitalization grants of $226,232,978 to the State, of which $185,356,820 has been drawn 

for loans and administrative expenses. The State has provided match funds of 

$45,254,595, of which $37,071,359 has been deposited into the SRF. 

The following table summarizes the capitalization grant award, amounts drawn on each 

grant as of the balance sheet date, and balances available for future loans and 

administrative expenses. 

10
New Hampshire Department of Environmental Resources 

Clean Water State Revolving Fund 

Notes to the Financial Statements 

5. Contributed Capital (continued) 

Draws 2005 Draws Available 

Grant Amt 6/30/04 Draws 6/30/05 6/30/05 

1991 $ 40,690,941 $ 40,690,941 $ 40,690,941 -

1992 19,417,068 19,417,068 19,417,068 -

1993 19,207,782 19,207,782 19,207,782 -

1994 11,918,313 11,918,313 11,918,313 -

1995 12,834,171 12,834,171 12,834,171 -

1996 20,162,543 20,162,543 20,162,543 -

1997 6,191,100 6,191,100 6,191,100 -

1998 15,456,773 15,456,773 15,456,773 -

1999 13,698,723 13,698,723 13,698,723 -

2000 13,412,223 13,022,903 $ 389,320 13,412,223 -

2001 13,293,027 12,367,183 12,367,183 $ 925,844 

2002 13,322,628 13,322,628 

2003 13,423,664 13,423,664 

2004 13,204,022 13,204,022 

$ 226,232,978 $ 172,600,317 $ 2,756,503 $ 185,356,820 $ 40,876,158 

As of June 30, 2004 and 2005, State matching contributions were as follows: 

 Total Match Total Match

 As of 2005 As of 

 June 30, 2004 Contribution June 30, 2005 

New Hampshire State 

Matching Contribution $ 34,520,063 $ 2,551,296 $ 37,071,359 

11
New Hampshire Department of Environmental Resources 

Clean Water State Revolving Fund 

Notes to the Financial Statements 

6. Administrative Costs and Management Fee Revenue 

The Clean Water Act provides for states to use up to four percent of the capitalization 

grants toward SRF program administrative costs. The program also charges local 

agencies a one percent annual management fee on the outstanding principal balance after 

August 1996. These fees are deposited in a fund (Management) outside the SRF and are 

to be used to pay for the administrative costs of the Clean Water Revolving Loan 

Program as well as related water quality control costs. 

Total management fees and expenses as of June 30, 2005 are shown in the table 

following: 

Fiscal Year Fees Earned Expenditures 

1997 $227,395 $138,619 

1998 523,836 277,972 

1999 570,120 324,457 

2000 658,775 430,811 

2001 838,128 396,318 

2002 1,225,115 815,187 

2003 1,323,794 932,450 

2004 1,312,001 1,311,604 

2005 1,646,071 1,489,642 

Totals $8,325,235 $6,117,060 

Total administrative costs charged to the Program are as follows: 

SRF Management Total 

Fiscal Administrative Administrative Administrative 

Year Costs Cost Costs 

1997 $ 423,393 $ 138,619 $ 562,012 

1998 430,684 277,972 708,656 

1999 448,855 324,457 773,312 

2000 530,344 430,811 961,155 

2001 566,000 396,318 962,318 

2002 608,674 815,187 1,423,861 

2003 682,187 932,450 1,614,637 

2004 704,101 1,311,604 2,015,705 

2005 737,562 1,489,642 2,227,204 

Totals $ 5,131,800 $ 6,117,060 $ 11,248,860 

12
New Hampshire Department of Environmental Resources 

Clean Water State Revolving Fund 

Notes to the Financial Statements 

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 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 DES 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 Program. 

13
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 

14 
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

WASHINGTON, D.C. 20460 

OFFICE OF 

INSPECTOR GENERAL 

We have audited the financial statements of the New Hampshire Clean 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 16, 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 out audit, we considered the Program’s and the Division of 

Environmental Protection’s internal control over financial reporting in order to determine our 

auditing procedures for the purpose of expressing our opinion on the Program’s financial 

statements and not to provide an opinion on the internal control over the Program’s 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 record, process, summarize, and report financial data consistent 

with the assertions of management in the Program’s financial statements. Reportable conditions 

are described in the accompanying schedule of findings 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 

15 
direct and material effect on the determination of financial statement amounts. This included 

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

costs, cash management, State matching, period of availability of funds and binding 

commitments, program income, reporting, 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 the matter noted in the finding and recommendation section that 

follows, 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 16, 2006 

16 
Internal Control Findings, Recommendations, and Responses 

Pursuant to American Institute of Certified Public Accountants standards incorporated by 

Generally Accepted Government Auditing Standards as described in the accompanying 

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, relating to New Hampshire’s Clean Water State Revolving 

Fund (CWSRF) program, the following reportable conditions are considered as material 

weaknesses. We have discussed these matters with appropriate State officials. 

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. 

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 CWSRF is accounted for and reported within the Department of Environmental Services’ 

(DES) General Fund. In order to facilitate program reporting required by the U.S. 

Environmental Protection Agency (EPA), DES maintains a separate CWSRF accounting system 

and provides EPA with program-specific financial statements. We noted deficiencies in the 

design and operations of DES’ internal controls for the CWSRF-specific financial accounting 

and reporting that, in our judgment, could adversely affect DES’ ability to record, process, and 

report financial data consistent with the assertions of management in the CWSRF 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 CWSRF-specific accounting system; 

(3) inadequate written procedures for key areas such as monthly reconciliations to the CWSRF 

general ledger and CWSRF financial reporting; (4) lack of management understanding, review 

and approval of entries to the CWSRF general ledger and supporting schedules; and 

(5) significant turnover of key staff and management working in the CWSRF program over the 

last 2 years. Specifically, we noted the following matters that impact management assertions: 

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Existence or Occurrence: Periodic reconciliations of the CWSRF general ledger to the actual 

cash and investment accounts 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 DES was reviewing the “zero balance” (the account used to deposit Federal draws 

and related State match, and subsequent disbursements for loans or administration) and 

“repayment” (the account for loan repayments and subsequent disbursement for loans) accounts 

and noting any discrepancies. However, DES was not actually posting adjustments for 

discrepancies to cash and investment balances in the CWSRF general ledger. 

As a result of inadequate procedures for reconciling cash and investment balances on the 

CWSRF general ledger to the cash and investments maintained by the Treasury, the cash balance 

was understated and the investment balance in the CWSRF general ledger was overstated at 

June 30, 2005 by approximately $5,700,000 and $5,000,000, respectively. The net difference 

was primarily due to investment earnings that had been deposited to the accounts but were not 

recognized as received on the CWSRF general ledger. 

Completeness: As a result of the inadequate reconciliation procedures noted above, a long-term 

repurchase agreement and its related $202,580 in investment earnings had not been recognized 

on the CWSRF general ledger. 

Valuation or Allocation: The amounts recorded in the CWSRF general ledger for loans and related 

interest receivable should be supported by subsidiary schedules that provide details by specific loans. 

Loans included on the schedule should be supported by proper loan documentation (such as loan 

agreements, requests for disbursements, and loan amortization schedules). The subsidiary schedules 

should be periodically reconciled to the CWSRF general ledger. 

The State did not reconcile loan receivable balances to the CWSRF general ledger properly. While 

the reconciliations identified specific loans that required adjustment, no adjustments were posted to 

the general ledger. As a result, loans receivable at June 30, 2004, were approximately $19,000 

greater than the supporting loan schedules, and interest receivable balances were misstated by 

approximately $132,000 and $103,000 at June 30, 2004 and 2005, respectively. Loan interest 

earnings for 2005 were misstated by approximately $29,000. To ensure that general ledger balances 

are supported by subsidiary records, management should review the supporting schedules on a 

regular basis to ensure the necessary adjustments have been made and the schedules support the 

CWSRF general ledger balances. 

Summary 

SRF management has the responsibility to establish and maintain an accounting system and 

control environment that both encourages and requires accurate financial information and 

reporting. Management needs to ensure that the controls, policies, and accounting system are 

designed and operating properly by reviewing monthly reports, reconciliations, and financial 

statements, and making inquiries of staff. Prior to our audit, DES had recognized the need to 

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improve its CWSRF-specific accounting and management system. DES is currently in the 

process of developing a new system expected to address this condition. 

Recommendations 

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

1. Coordinate with the 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 Treasurer should be reconciled with supporting documents and the 

CWSRF general ledger on a recurring basis. 

2. Reconcile its subsidiary schedule(s) for loans and interest receivable with the CWSRF 

general ledger on a recurring basis. 

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

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

closing and reporting. 

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

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

State Response 

The State responded on November 22, 2006, 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. 

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

timely receipt of bank statements from them in order for DES to perform our 

reconciliations and postings in a timely manner. 

Procedures have been developed for review and approval of accounting entries and for 

the reconciliation of subsidiary schedules to the general ledger. 

As to training, all users will be trained on the new system and user guides will be 

developed for each level of user. 

OIG Response 

We find the State’s response to be acceptable. 

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Compliance Finding, Recommendation, and Response 

Noncompliance on Subrecipient Monitoring 

Office of Management and Budget (OMB) Circular A-133 and EPA regulations at Title 40, Code 

of Federal Regulations, Section 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. (OMB Circular 

A-133, Subpart D §__.400(d)) 

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

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

audit reports, or to ensure that subrecipients take appropriate and timely corrective action. The 

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

requirements was necessary. 

DES was not aware of the Single Audit status of their borrowers and therefore were not aware if 

the borrower’s audit had uncovered any issues of noncompliance. 

Recommendation 

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

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

OMB Circular A-133 and EPA regulations. 

States Response 

The State responded on November 22, 2006, with the following: 

In compliance with the March 6, 2000 recommendation from Charles R. McCollum, 

Audit Manager at OIG, regarding sub-recipient monitoring, on April 17, 2000 DES 

submitted the policy to EPA, Region 1 for review and approval. By letter dated February 

2, 2001, EPA responded that, after review of the policy by the regional office and the 

OIG, “we consider these steps to be prudent and we find that your policy complies with 

the sub-recipient monitoring requirements.” 

Based on this approved policy, DES believes that the CWSRF Program is in compliance 

with sub-recipient monitoring requirements. However, it appears that the OIG 

recommendation to EPA Region 1 in the current draft audit report would further require 

DES to “implement a Single Audit report review and corrective action policy consistent 

with OMB Circular A-133 and EPA regulations.” DES agrees to work with EPA, 

Region 1 in amending the present policy to meet these requirements if requested to do so. 

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OIG Response 

EPA Region 1 should work with the State to assure that it meets the requirements of 

OMB Circular A-133 and Title 40, Code of Federal Regulations, Section 31.26, regarding 

pass-through entity responsibilities for followup on subrecipient audits. 

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Status of Recommendations and 

Potential Monetary Benefits 

POTENTIAL MONETARY 

RECOMMENDATIONS BENEFITS (in $000s) 

Planned 

Rec. Page Completion Claimed Agreed To 

No. No. Subject Status1 Action Official Date Amount Amount 

1 19 Require DES to coordinate with the Treasury and O 

obtain up-to-date documentation on specific cash 

and investment transactions and balances. A 

schedule of cash, investments, and related 

earnings per the Treasurer should be reconciled 

with supporting documents and the CWSRF 

general ledger on a recurring basis. 

2 19 Require DES to reconcile its subsidiary schedule(s) O

for loans and interest receivable with the CWSRF 

general ledger on a recurring basis. 

3 19 Require DES to develop and implement O 

procedures for appropriate review and approval of 

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

closing and reporting. 

4 19 Require DES to develop training on the CWSRF- O 

specific accounting system for all appropriate staff 

and management, including the accountants, the 

accounting manager, and program manager. 

5 20 Require DES to implement a Single Audit report O 

review and corrective action policy consistent with 

OMB Circular A-133 and EPA regulations. 

EPA Regional Administrator, 

Region 1 

EPA Regional Administrator, 

Region 1 

EPA Regional Administrator, 

Region 1 

EPA Regional Administrator, 

Region 1 

EPA Regional Administrator, 

Region 1 

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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 
Distribution 

EPA Region 1 

Regional Administrator 

Director of Office of Ecosystem Protection 

Manager of Municipal Assistance Unit 

Audit Liaison 

CWSRF Coordinator 

EPA Headquarters 

Director, Grants Administration Division 

Agency Followup Coordinator 

Infrastructure Branch Chief 

CWSRF Coordinator 

CWSRF Audit Manager 

New Hampshire Department of Environmental Services

 Commissioner 

Chief Operating Officer 

 CWSRF Supervisor 

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