A REPORT FROM THE OFFICE OF INTERNAL AUDIT

Transcription

1 A REPORT FROM THE OFFICE OF INTERNAL AUDIT PRESENTED TO THE CITY COUNCIL CITY OF BOISE, IDAHO AUDIT / TASK: AUDIT CLIENT: #14-02, Utility Billing Systems Public Works / Utility Billing Division REPORT DATE: July 18, 2014 AUDIT GRADE: Needs Improvement REPORT AUTHOR: Steven Rehn CIA, CFSA APPROVED FOR RELEASE: Steven Rehn CIA, CFSA AUTHORITY: Boise City Code, FY2014 Work Plan

2 Task #14-02, Utility Billing Systems Date of Audit: January 31, 2014 INTRODUCTION The City of Boise, through the Public Works Department, provides a range of utilities-related services to its citizens. Those include residential and commercial sewer services; residential and commercial solid waste and recycling services; and minor services related to geothermal, and to municipal irrigation. These activities entail a considerable commitment of resources, and a need for efficient and effective support functions. The subject of this audit task, the Utility Billing function, represents a key support function for utility-related services, inclusive of both sewer and solid waste. Each of these sewer and solid waste is segregated within its own unique fund for accounting purposes. The following budgets / statistics for Fiscal Year 2013 provide perspective relative to the size of these service initiatives: Sewer Fund Budgeted Revenues (fees and charges) = $33.8 Million Personnel and Operating Costs = $33.3 Million Serviced Customer Accounts 60,000 Solid Waste Fund Budgeted Revenues (fees and charges) = $24.5 Million Personnel and Operating Costs = $25 Million Serviced Customer Accounts 75,000 The Public Works Department recently converted the system used by its Utility Billing Division from an aged, proprietary data-processing system to a newer, commercially-available product. This action was taken in order to mitigate risks associated with an application based on obsolete program language, and with maintaining the older system going forward. The conversion did not result in widespread service interruptions to customers, but it has presented both Public Works and Utility Billing with on-going administrative challenges in the areas of account servicing and accounting. And while some of these issues have been resolved, their resolution required additional time and effort, and the deployment of additional staff resources. Some of these challenges appeared to be continuing in one form or another. In response, Public Works management team requested our assistance in reviewing Utility Billing s processes and procedures. Their request was received contemporaneous with the approval of our FY 14 Audit Work Plan, which had independently identified this function for review. 2

3 SCOPE, OBJECTIVES, AND METHODOLOGIES Internal Audit established a scope period to include all activity related to the Utility Billing Division / function that had occurred within the period since conversion. The new system rolled out in early CY2013. Scope Period: In order to focus on current operations under the newly-acquired system, we limited our scope period to the ten-month period beginning March 1, and generally ending on December 31, In order to assess trending, certain activities were reviewed up through the end of February, The primary objective for the engagement was to assess the current state of operational efficiency and effectiveness within the billing function. Secondarily, there was an interest in identifying areas where opportunities for improvement might exist going forward. Specific Objectives: Specific items that were identified for testing and review included: (1) Ensure that new accounts are opened accurately; (2) Ensure that the on-going servicing of accounts complies with established policy and procedure, and with City Code; (3) Review basic system and operational control processes; (4) Ensure that performance monitoring and reporting are occurring; and, (5) Ensure that accounting data is captured accurately and timely, and that it is properly reconciled. Internal Audit employed various methodologies during the review. Methodologies: We employed staff interviews, the review of associated documentation, and detail testing of utility billing activities. The methods employed and the evidentiary materials developed were deemed to be adequate to support the conclusions contained within this report. 3

4 EVALUATION AND COMMENTS Based on the work performed, it appears that the Utility Billing function, when taken in total, is best characterized by an assigned grade of Needs Improvement. While the Billing unit itself appears to have overcome a number of conversion-related challenges and is functioning at a reasonable level, we noted relatively significant deficiencies in both core, and related areas. At a high level, internal control mechanisms do not appear to be completely operational in some areas where they should be. We noted a number of areas where opportunities for enhancing controls and procedures were present. Those included: Policy and Procedural guidance was outdated Significant general ledger control accounts were not being reconciled Policy changes that had been approved in FY12 had not been implemented We also provided recommendations to management relative to a number of associated issues that either impact, or are impacted by Billing. Those generally were in the areas of data input, account collectability, and the utilization of system accounting data. Those issues were left to management with respect to follow-up and corrective actions that might be pursued. As indicated earlier in the Introduction section, the Utility Billing Division s system conversion presented the unit with challenges. Post-conversion, both billing and account-servicing issues were encountered. Ultimately, additional staff resources were required in order to clear backlogged work, and to provide acceptable levels of customer support. The information we reviewed suggests the level of customer support that was present pre-conversion, and which was subsequently impaired, was again being realized approximately ten to eleven months after the new system was rolled out. Given the changes in how staff members interact with the new system versus the old, some long-term increase in staffing levels may prove to be necessary. However, these needs could be mitigated if management pursues additional system enhancements and procedural improvements that appear to be available. Details behind the issues referenced above are presented in the following report sections. (Refer to Appendix A for additional details concerning Internal Audit s existing grading scale.) 4

5 FINDINGS AND RECOMMENDATIONS Audit s Findings are detailed below; including any recommendations that were made, and management s responses to those suggestions. FINDING #1: Policy and Procedure Guidance is Obsolete We reviewed the Utility Billing Division s existing Policy Manual. We noted areas where policy guidance does not align with current practice. Two significant examples include: Customer Utility Deposits: The Policy Manual currently requires a deposit equivalent to three months service charges if a customer s Beacon credit score is less than 550. In practice, deposits are currently required if that score is less than 600. Publication of Debtor s Names: The Policy Manual requires the publication of customers names and addresses in the newspaper if their account balances are past due nine or more months. Management discontinued this practice due to a cost / benefit ratio that is perceived to be negative at this point in time. Management recognizes the Policy Manual is outdated in some respects, and indicated their commitment to updating the document. RECOMMENDATION: We recommend management pursue update of this document since it represents one of the baseline control mechanisms associated with the Utility Billing Division s tasking. MANAGEMENT RESPONSE: Public Works is updating the UB policy manual to reflect current business practices. The above referenced practices reflect business process improvements based on changes seen in day-to-day operations. We recognize that it is important to keep policies in sync with practice and vice versa, and will work to get the policy manual updates as expeditiously as possible. The above referenced policies will be updated by 9/30/2014. The entire UB policy manual will be reviewed and updated by 12/31/14. 5

6 FINDING #2: Account Reconciliations Have Not Been Performed The Utility Billing Division s system is the subsidiary ledger system that supports material accounts receivable balances in both the Sewer, and the Solid Waste Funds. Month-end balances in these accounts typically exceed $4 Million owing (collectively). As of the end of March, 2014, these general ledger accounts had not been agreed to the subsidiary system since the end of FY13 six months previous. Best practices, and widely-accepted accounting procedures, typically call for monthly reconciliations between subsidiary systems and material control account balances. This deficiency is likely related to the recent conversion to the new billing system that was undertaken last fiscal year. Management s focus has been on providing acceptable levels of service to their customers; work on administrative aspects of the process appears to have been deferred. However, the failure to perform timely reconciliations results in a deterioration of this important accounting control. Significant process or system failures, errors, or irregularities could go undetected for some time if this control procedure is not routinely performed. RECOMMENDATION: Internal Audit recommends management place additional emphasis on system posting and to the associated reconciliations. Doing so will help ensure the accuracy of significant account balances. MANAGEMENT RESPONSE: As noted in the finding, staff has been focused on service provision to customers and day-today operations, but also acknowledges the importance of the account reconciliations. Cash and billing accounting entries have been made in the general ledger system on a daily and monthly basis since 09/30/13. Only posting of some adjustment transactions was outstanding as of 03/31/14. As of 05/05/14, the account receivable reconciliations for the Sewer and Solid Waste funds are complete. Moving forward, the reconciliations will be completed according to the new audit schedule. (Audit Note: The audit schedule referenced in management s response pertains to a quarterly reconciliation review process conducted by the City Controller s office, with assistance from the Office of Internal Audit.) 6

7 FINDING #3: Approved Policy Has Not Been Implemented Utility Billing processes provide customers with opportunities to donate funds to two separate initiatives. The first is a Parks & Recreation landscaping initiative, and the second is an Assistance Fund that was established to assist those experiencing difficulty in paying their utility bills. Two separate funding streams were established for the two initiatives. The Public Works Commission approved these initiatives, and the methods for funding them in November The programs are structured and funded as follows: Round-ups These donations are unpledged, voluntary contributions that customers add to their regular bi-monthly service billings. By Policy, these funds are allocated 50% to the landscaping initiative, and 50% to the Assistance Fund. Donations These amounts are pledged by customers, and are included in their bimonthly service billings. These funds are allocated entirely to the Assistance Fund, and are to be administered by an outside agency with respect to the award of assistance. At the point where we reviewed the programs, the following issues were noted: Allocations Management viewed the two funding streams in the same way. A 50% / 50% allocation for both programs was accepted protocol. As a result, the Parks landscaping initiative was likely the unintentional recipient of funds dedicated to the Assistance Fund. Administrator No external agency has been selected to administer the award of assistance; thus, these funds were not being made available as intended. Disposition of Funds Funds have not been disbursed to either initiative for a period of six months or more. The Public Works Commission s intentions have not been pursued or implemented. Also, funds that were entrusted to the City by utility customers for very specific uses have not been deployed as intended. Finally, needs in the two initiative areas included in the policy (Parks landscaping and Assistance) have likely gone unsatisfied as a result. RECOMMENDATION: Audit recommends that management implement program initiatives that are adequate to ensure the funds arising from these two revenue streams are allocated to the uses intended; as to purpose, to amount, and in a timely fashion. MANAGEMENT RESPONSE: With the implementation of the new utility billing system, customers may now donate in two ways; one being a roundup to the next full dollar on individual payments, and the second being a donation subscription to roundup bills to the next full dollar when the customer is enrolled in automatic payments (EasyPay). To align policy with the new functionality available in the software, the PWC approved conceptual changes to the program including the addition of an assistance program to help 7

8 customers facing financial hardship pay their sewer or trash bills. The changes were to be implemented when the new utility billing software was brought online. Following implementation staff was focused on service provision and working out procedural issues. PW staff is now working to get the program rolled out to the public. Prior accounting entries will be reviewed to ensure proceeds were distributed correctly between Parks RoundUp and the Assistance Fund (completion by 9/30/2014). Public outreach materials will be created to explain the new Assistance program and a third party agency will be engaged to administer screening of customer assistance applications (completion by 09/30/2014). 8

9 OTHER AREAS OF CONCERN Internal Audit utilizes Other Areas of Concern to comment on issues noted during a project that may or may not be directly related to the audit, but that deserve management attention based on existing practice. We generated four such comments involving systems, processes, and procedures during our review of Utility Billing. We strongly recommended that management pursue initiatives in each of these areas. Management reviewed these concerns, and is currently creating a work plan to address each of the recommendations, which they will review with City Council s Audit Committee. Our communications to management involved the following areas / issues of concern: Improving Data Input Processes Internal Audit had an opportunity to observe customer service specialists as they performed baseline processing tasks on Utility Billing s CIS Infinity system. We noted that opening or transferring account information involved duplicative input, and a number of copy / paste steps. The opportunity for committing input errors that adversely impacted account servicing, and staff efficiency and effectiveness was prominent. In order to mitigate these operational risks, management should consider engaging the software vendor, and assess the feasibility of creating a template tool that would allow staff to input data once, and in one screen only. Based on transaction type, the data could then flow to, and populate the appropriate fields within the system s specialized tabs / pages. Enhancing Collections Efforts and Effectiveness The Collections Division of Finance and Administration is responsible for collecting on delinquent utility accounts. At December 31, 2013, we noted that delinquent accounts (8,275 accounts) totaled nearly $2.4 Million out of a total balance owing of roughly $4.3 Million. Significant growth in delinquent account balances had occurred recently we noted a 40% increase over a period of seven months. We also reviewed a sample of accounts, and noted that roughly 18% of the accounts in our sample had not been actively worked for collection. The Collections Division has undergone significant staff turnover in recent months. Additional issues have been encountered while attempting to re-implement commonly used collections tools such as collection letters and auto-dialer technologies. Management was making a concerted effort to put those systems in place as of the date of this review. We concur, and recommend these two baseline collection tools currently lacking (letters and auto-dialer functionality) be implemented as soon as possible. The ultimate goal of reducing delinquencies and enhancing revenues will be positively impacted. 9

10 Managing Delinquent Trash / Recycle Accounts During our work in the UB area, we had an opportunity to review code and policy, to interview both current and former staff members, and to examine overall delinquency numbers. There appear to be opportunities to gain efficiencies and effectiveness relative to the collection of residential solid waste account balances. Those include the following: Suspension of Service There long has been a perception that service cannot / should not be terminated or suspended for non-payment. However, the solid waste ordinance makes it clear that a suspension of service is anticipated for non-payment of fees. Implementing a more aggressive policy in this area could help reduce delinquencies. Fee Waivers / Adjustments Account aging reports suggest there may be customers who face enduring financial hardships that preclude payment of their bills. Providing these residents with realistic payment options that more closely match their financial capacity may help alleviate the situation where the City books unrealizable revenues and late fees, but subsequently charges those amounts off to bad debts since they are uncollectible. We recommend management consider pursuing these measures. Doing so could yield positive results in terms of more realistic accounts receivable balances, and the easing of administrative burdens associated with current utility billing and collections processes. Accounting Entries Produced by the Utility Billing System The CIS system has been mapped to produce GL Element Summary reports. The Element reports present summarizations of transactional data in the form of suggested general ledger postings. We reviewed system processing, and independently re-classified one representative day s processing in its entirety; we then projected the resulting general ledger entries. The posting entries we arrived at were, in large part, congruent with the information produced by the system. However, there were two points of divergence: Deposits Deposits (associated with customer creditworthiness issues) did not appear to be recognized properly by the system. They were doubled-counted, which resulted in over-statements of both Cash and Deposits Payable in system projections. Donations / Round-ups In some instances, these transactions resulted in recognition of revenues rather than payables. Accounts Receivable balances were also erroneously impacted where un-billed Round-up donations were involved. We recommend management review how these two transaction types are mapped in the system, and alter process so that the system produces more accurate general ledger entry projections. Currently, system activity being posted is limited to payment-related transactions, and to service billings. When system-generated entries are reliable, all entries can be posted to the general ledger, and the associated general ledger accounts will be maintained in a more current and more accurate condition. 10

11 CONCLUSION As noted in the Introduction section to this report, the Utility Billing Division has successfully addressed a number of conversion-related obstacles. Several issues both directly related to, as well as tangential to Billing continue to present challenges to effective and efficient operations. We believe that opportunities for improvement are available, and urge management to pursue the recommendations contained within this report in order to capitalize on those opportunities. Internal Audit appreciates the assistance provided by staff and management of the Public Works Department and its Utility Billing Division, and the Collections Division of Finance & Administration during the course of this review. MANAGEMENT PARTICIPANTS Heather Buchanan, Administrative Manager / Public Works Department Jonathan Williams, Revenue Officer / Public Works Department Rosa Steffes, Supervisor / Utility Billing Division Public Works Department John Rogers, Supervisor / Collections Division Department of Finance & Administration 11

12 APPENDIX A Evaluation and Grading of Audits Each audit will be evaluated or graded, and will receive one of the five following ratings. Grades will be assigned based on the perceived best fit. Thus, not all attributes associated with an assigned grade may be present within a given Department or Division at they point they were reviewed. High Satisfactory No significant weaknesses or deficiencies were noted during the audit. If any issues were noted, they were clearly insignificant or inconsequential. The audited area displays a high degree of control and management oversight is effective. Satisfactory Reportable issues may exist within the audited area, but they are not deemed to be representative of pattern or practice within the area. Issues are typically of an isolated nature. Overall, systems of internal control are effective, and management oversight is adequate and supportive of the accomplishment of goals and objectives. Low Satisfactory Reportable issues exist within the audited area, and are encountered frequently enough to lose the appearance of isolated. Systems of internal control appear to be marginally adequate at best. Management oversight is not always effective to ensure the quality of operations. Needs Improvement Weaknesses or deficiencies are encountered on a relatively frequent basis within the audited entity or function. Issues noted, and their frequency, are suggestive of a pattern or practice of inadequate oversight. Internal control mechanisms may not be universally in place, implemented, or actively observed. Management oversight is weak, or is not always effective. Unsatisfactory Material or significant deficiencies are noted within the operations under review. Issues may pose risks that are either mission-critical or mission-fatal. Management has failed to implement appropriate internal controls. Management oversight is ineffective, absent, or willfully avoided. 12