Audit of the North Carolina Office of Information Technology Services Internal Service Fund

EXECUTIVE SUMMARY:

Our objective was to determine whether North Carolina refunded to the Federal Government the Federal share of all refunds and transfers from the State's Information Technology Services' (ITS) internal service fund.  We audited refunds and transfers from ITS in State fiscal years (FYs) 2002 and 2003.  At the request of the Division of Cost Allocation, we also reviewed all transfers that ITS made to the State's Year 2000 Special Fund (Y2K fund) in FYs 1997 and 1998.  With respect to refunds, DHHS appropriately credited its Federal programs to comply with OMB Circular A-87.  With respect to transfers, ITS transferred $34.2 million in excess revenues from its internal service fund to the State's Y2K fund and general fund.  Contrary to OMB Circular A-87 requirements, the State failed to return the Federal share of $8.2 million (consisting of $4.5 million transferred to the Y2K fund and $3.7 million transferred to the general fund.)  The State did not return the $8.2 million because ITS did not have procedures in place to ensure that the Federal Government received its share of all revenues in excess of costs.  We recommended that North Carolina:  (1) refund $4.5 million to the Federal Government for the estimated Federal share of ITS transfers to the State's Y2K fund and determine whether additional refunds are due the Federal Government for the actual Federal share of those transfers, (2) refund $3.7 million to the Federal Government for the Federal share of ITS transfers to the State's general fund, and (3) implement appropriate procedures to ensure that the Federal Government receives its share of any revenues in excess of costs in the future.  State officials generally disagreed with our computation of the Federal share of monies transferred to the State's Y2K and general funds.  Despite the State's assertions, we continue to believe that our calculation of the Federal share of Y2K and general fund transfers was accurate.