Department of Aviation and Administration Division. Finance

Transcription

1 Finance Department of Aviation and Administration Division Expenditure Control Gro up Performance Audit November 2009 Office of the Auditor Audit Services Division City and County of Denver Dennis J. Gallagher Auditor

2 The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the proper and efficient use of City resources and providing other audit services and information to City Council, the Mayor and the public to improve all aspects of Denver s government. He also chairs the City s Audit Committee and oversees the City s Comprehensive Annual Financial Report (CAFR). The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee assists the Auditor in his oversight responsibilities of the integrity of the City s finances and operations, including the integrity of the City s financial statements. The Audit Committee is structured in a manner that ensures the independent oversight of City operations, thereby enhancing citizen confidence and avoiding any appearance of a conflict of interest. Audit Committee Dennis Gallagher Robert Haddock Charles Husted Timothy O Brien Maurice Goodgaine Jeffrey Hart Bonney Lopez Audit Staff John Carlson, Deputy Director, CIA, CICA Marcus Richardson, Internal Audit Supervisor, CICA Anita Thompson, Lead Internal Auditor, CICA Manijeh Taherynia, Senior Internal Auditor, CPA, CFE, CICA, Wayne Leon Sanford, Senior Internal Auditor, CICA, You can obtain free copies of this report by contacting us at: Office of the Auditor 201 W. Colfax Avenue, Dept. 705 Denver CO, (720) Fax (720) Or view an electronic copy by visiting our website at:

3 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado FAX November 19, 2009 Ms. Kim Day, Manager Department of Aviation City and County of Denver Dear Ms. Day: Attached is the Auditor s Office Audit Services Division s report of their audit of the Department of Aviation s Finance and Administration Division s Expenditure Control Group for the period January 1, 2008 through May 31, The purpose of the audit was to determine whether internal controls in place were adequate as they related to the accounts payable process, and to identify any opportunities for performance enhancements. The audit did not reveal any reportable internal control weaknesses in the Department s accounts payable processes. In fact, audit work identified that the Department recently implemented process improvements that decreased prompt payment penalties. However, audit work also indicated that an alternative financial system integration design may provide opportunities for further accounts payable process efficiencies. If you have any questions, please call Kip Memmo tt, Director of Audit Services, at Sincerely, DJG/ ect Dennis J. Gallagher Auditor cc: Honorable John W. Hickenlooper, Mayor Honorable Members of City Council Members of Audit Committee Ms. Roxanne White, Chief of Staff Mr. Claude Pumilia, Chief Financial Officer Mr. David Roberts, Chief Services Officer Mr. David Fine, City Attorney Mr. Michael Henry, Staff Director, Board of Ethics Ms. Lauri Dannemiller, City Council Executive Staff Director Ms. Beth Machann, Controller To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

4 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX AUDITOR S REPORT We have completed an audit of the City and County of Denver s Department of Aviation s Finance and Administration Division s Expenditure Control Group for the period January 1, 2008 through May 31, The purpose of the audit was to determine whether internal controls in place were adequate as they related to the accounts payable process, and whether opportunities existed for performance enhancements. This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. The audit revealed no reportable internal control weaknesses in the Department s accounts payable processes. In fact, audit work identified that the Department recently implemented process improvements that decreased prompt payment penalties. However, audit work also indicated that an alternative design for financial system integration may provide opportunities for further accounts payable process efficiencies as disclosed within the accompanying report. We extend our appreciation to the Depa rtment of Aviation and personnel who assisted and cooperated with us during the audit. Audit Services Division Kip Memmott, MA, CGAP, CICA Director of Audit Services To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation.

5 TABLE OF CONTENTS EXECUTIVE SUMMARY 1 Finding 1: Process Improvements Have Decreased Prompt Payment Penalties 1 Finding 2: Alternative Financial System Integration Design May Improve Accounts Payable Process 2 INTRODUCTION & BACKGROUND 3 Department of Aviation - Finance and Administration Division 3 Expenditure Control Group Functions 3 SCOPE 4 OBJECTIVE 4 METHODOLOGY 4 FINDING 1 6 Process Improvements have Decreased Prompt Payment Penalties 6 RECOMMENDATION 8 FINDING 2 8 Alternative Financial System Design May Improve Accounts Payable Processes 8 RECOMMENDATION 11 APPENDIX 12 AGENCY RESPONSE 20

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7 EXECUTIVE SUMMARY Finding 1: Process Improvements Have Decreased Prompt Payment Penalties The City of Denver s Prompt Payment Ordinance specifies that the City must provide timely payments to contractors and vendors for amounts due under contracts, purchase orders, and leases entered into by the City. 1 When payments are delayed by the City beyond 35 days from the vendor or contractor s invoice date, per ordinance, the City accrues an interest penalty, payable to the contractor, at the rate of 1% per month (12% per annum) on the invoice amount. Audit work noted that during 2008 the Department of Aviation (Department) incurred $42,774 in prompt payment interest penalties paid to contractors and vendors. To address the prompt payment issues, the Department initiated improvement invoicing process in early 2009, which included: s to the Establishing Centralized Invoice Reception Points Both vendor and contract invoices now have respective centralized locations for invoice reception. This process improvement eliminated prior timeliness issues, when vendors and contractors would forward invoices to the end-user or the project manager for payment processing, rather than directly to the Department s Contract Administration or Accounts Payable groups. Implementing Simultaneous Review and Approval At the same time that a contractor s invoice is forwarded by the Contract Administration Group to the project manager for review and approval of payment, a copy of the invoice is now forwarded to the Auditor s Office Prevailing Wage unit for simultaneous review and approval. Increasing Supervisory Oversight Both the Expenditure Control Group (ECG) and the Contract Administration Group have increased supervisory oversight to better ensure that invoices are processed in a timely manner. For example, project managers are now allotted five days for review of contractor invoices. If the invoice is not returned to the Contract Administration Group within the allotted time the issue is referred to a group supervisor. Audit work included a prompt payment analysis for the comparative periods of January 1 through May 31 of 2008 and 2009 to determine whether improvements had any noticeable effects. That analysis found that the percentage of late payments decreased from 2.25% (in the five month period of 2008) to 1.34% (in the five month period of 2009) of all vouchers processed by the Department. Additionally, the amount of interest 1 Denver Revised Municipal Code (D.R.M.C.), through , entitled Prompt Payment to Contractors, Vendors, Suppliers of Goods and Services to City and Lessors of City. Page 1 Office of the Auditor

8 penalties paid by the Department had decreased from $20,257 (in the five month period of 2008) to $9,621 (in the five month period of 2009). Finding 2: Alternative Financial System Integration Design May Improve Accounts Payable Process The Department of Aviation s current financial system is designed with IBM Maximo (Maximo) as the central system for purchasing, receiving, and accounts payable processes. 2 The Finance and Administration Division s Expenditure Control Group enters and approves all vendors invoices in Maximo. Through interface technology, Maximo transfers transactional data to the Department s AMS Advantage 3 (AMS) and the City s PeopleSoft financial systems. When data is transferred from Maximo to AMS and PeopleSoft, interface rejections occasionally occur, resulting in inefficiencies. The Department s personnel do not gather and maintain information showing the number, frequency, and reasons for rejections. However, inquiries of the Department s personnel indicated that some of these rejections are caused by a lack or mismatch of elements of the data being transferred. According to the Division s personnel, these challenges are mostly system related and primarily due to the following reasons: The interaction with three systems for financial purposes increases the risk of interface errors and the need for data reconciliation. The current system integration design requires financial data transfers Maximo. Maximo was not designed to be a financial system. through These comments along with a study conducted by The Solution Design Group, Inc. prompted the audit team to obtain more information about the design of the system integration at other airports that use similar systems. 4 Orlando and McCarran (Las Vegas) International are airports using a similar system. These airports indicated they use a system integration design that differs from the Department s system. Specifically, these airports initiate and process their purchases and payables in their financial systems 5. In their systems, Maximo receives the necessary data from the financial system for maintenance and inventory purposes. We recommend the Department review an alternative system design for their purchasing and payable functions when they explore the options related to AMS upgrades and process improvements. 2 IBM Maximo is a work order and inventory management application used by the Department of Aviation. Maximo stores data related to purchase order and receiving. 3 AMS (American Management Systems) Advantage is the financial management system currently used by the Department of Aviation. 4 The Solution Design Group, Inc., (the Department s consultants) conducted a survey of four comparable airports in their report entitled Financial System Review and Assessment issued on April 24, Orlando and Las Vegas International Airports use Oracle Financials and SAP, respectively, as their financial systems. City and County of Denver Page 2

9 INTRODUCTION & BACKGROUND Department of Aviation - Finance and Administration Division Pursuant to the City Charter, the Department of Aviation (the Department) is responsible for managing the development, promotion, and accommodation, of air commerce, air travel and air transportation for Denver International Airport (DIA). The Finance and Administration Division (the Division) serves as one of the seven divisions within the Department. The Division is charged with a number of diverse responsibilities including but not limited to approving payment requests for the Department s vendors. Specifically, the Finance-Accounting Section of the Division includes the Expenditure Control Group (ECG). ECG is primarily responsible for the review and approval of vendor payment requests. Expenditure Control Group Functions The Expenditure Control Group (ECG) performs the following functions: Accounts Payable: Reviews and approves vendor payment performs PCard reconciliations. requests and Project Accounting: Reviews and approves payment requests to the Department s contractors and accounts for project expenditures. Fixed Assets: Conducts fixed assets inventories. They also maintain update the fixed asset schedules. This performance audit focused on the Accounts Payable and Project Accounting functions. ECG is required to comply with all of the City s applicable rules and regulations and the Department s written policies and procedures for accounts payable functions. ECG receives vendor invoices and other requests for payments. Those payments are entered and approved in Maximo. Payments for transactions that have been initiated through the purchase order (PO) process are matched with an existing PO and receiving information in Maximo before they are approved for payment. The Contract Administration Group reviews contract payments for compliance with contract terms and the budget before they are forwarded to ECG. ECG s Project Accounting team compares all requests for payments with amounts encumbered in AMS and the City s PeopleSoft financial system before payment data is entered into Maximo. A Maximo feature called Workflow moves all payments recorded, as well as supervisory reviews and approvals, which is also embedded in Maximo. After supervisory approvals are made, Maximo transfers invoice data to AMS for accounting purposes and subsequently, to the City s PeopleSoft financial system for payment by the Controller s Office. ECG processed 11,605 vouchers in the amount of $402,510,669 in and Page 3 Office of the Auditor

10 SCOPE The scope of the audit was to evaluate the adequacy of internal controls over the Department s accounts payable process and to identify any areas for improvement in the efficiency and effectiveness of this process. The audit covered the period January 1, 2008 through May 31, OBJECTIVE The audit objectives included: Obtaining knowledge of procedures involving review and approval of payments to vendors by the Department s personnel and the design of controls over these procedures. Evaluating whether internal controls over the accounts payable operat adequate. Assessing whether vendor payments are reviewed and approved in an and effective manner. ions are efficient Determining whether the Department s accounts payable process complies with applicable City Ordinances and other rules and regulations and adheres to the written policies and procedures adopted by the Department s Finance and Administration Division. METHODOLOGY We utilized multiple methodologies to achieve audit objectives. These ev gathering techniques included but were not limited to: Performing risk assessments to identify critical business risks. idence Reviewing pertinent rules and regulations of the Denver Revised Municipal Code (DRMC), the State of Colorado, and the Federal Aviation Administration. Reviewing the Department s Airport Rules and Regulations and the Policies and Procedures of the Finance and Administration Division. Reviewing information from prior audits conducted by the Auditor s Office, the City s external auditors, the Department of Aviation s Internal Audit group, the State of Colorado, and the Federal Aviation Administration. Reviewing reports issued by the Department s consultants. Conducting walk-throughs with accounts payable personnel to observe the review and approval process of vendor payments. Interviewing Department management and key personnel involved in the accounts payable process. Flowcharting the accounts payable process to identify control weaknesses. City and County of Denver Page 4

11 Performing an analysis to determine the impact of prompt pay enhancements. Benchmarking with other airports to obtain information about the design of their financial systems. Page 5 Office of the Auditor

12 FINDING 1 Process Improvements have Decreased Prompt Payment Penalties Background Chapter 20, Article VII of the Denver Revised Municipal Code (DRMC), requires the City to provide timely payments to contractors and vendors for amounts due under contracts, purchase orders, and leases entered into by the City. When payments are delayed by the City beyond 35 days from the vendor or contractor s invoice date, DRMC requires that the City accrue an interest penalty, payable to the contractor, at the rate of 1% per month (12% per annum) on the complete and responsive invoice amount. Further, the 35-day timeframe apportions 25 days for the agency to process and forward the invoice to the City s Controller s Office, and 10 days for the Controller s Office to issue pay ment. Figure 1 illustrates the City s Prompt Payment timeline. Figure 1: Denver s Prompt Payment Timeline City s Prompt Pay Timeline 35-Day Prompt Pay Timeline Agency s Processing Time Allowance 25 Days City s Finance Dept Processing Time Allowance 10 Days Vendor s Invoice for Payment City s Payment Prior Audit Work Identified Factors that Contributed to Prompt Payment Issues In 2008 the Auditor s Office conducted a review of the Department of Aviation s prompt payment issues as they related to contractor payments (see Appendix). This review found that the Department took an excessive amount of time to process contractors invoices due to the following reasons: The use of a manual and sequential process to route contractors invoices for requisite reviews and approvals for payment. The lack of a designated central point of responsibility for monitoring the invoice procession to ensure that invoices were paid in a timely manner. City and County of Denver Page 6

13 The failure to adequately track contractors invoices from the point of reception to ensure they were not lost or misplaced for any period of time. The inability to readily identify and rectify impediments to efficient processing, such as a lack of sufficient documentation submitted by the contractor, incomplete invoices, fund deficiencies, and incorrect budget allocations. The combination of such factors resulted in $42,774 of prompt payment penalty costs to the Department for Additionally, this situation created a potentially negative public relations impact with the contractor community. Prompt Payment Process Improvements were Implemented with a Noticeable Impact As a result of the foregoing review by the Auditor s Office, and in recognition by City leaders that the issues surrounding prompt payments to contractors were not unique to the Department of Aviation, a series of meetings were convened in early 2009 to formulate process improvements. The Department of Aviation subsequently implemented the following prompt payment improvements: Establishing Centralized Invoice Reception Points Both vendor and contractor invoices now have respective centralized locations for invoice reception. This process improvement eliminated prior timeliness issues when vendors and contractors would forward invoices to the end-user or the project manager for payment processing. Implementing Simultaneous Review and Approval At the same time that a contractor s invoice is forwarded by the Contract Administration Group to the respective project manager for review and payment approval, a copy of the invoice is now simultaneously forwarded to the Auditor s Office Prevailing Wage unit for review and approval. Increasing Supervisory Oversight Both the Expenditure Control Group (ECG) and the Contract Administration Group have increased supervisory oversight to better ensure that invoices are processed in a timely manner. For example, project managers are now allotted five days for review of contractor invoices. If the invoice is not returned to the Contract Administration Group within the allotted time the issue is referred to the group supervisor. Positive Results from Improvements Audit work performed determined that the procedural changes made by DIA had a tangible, positive impact towards decreasing the Department s prompt payment penalties. The quantitative results of our analysis are shown in Table 1. Page 7 Office of the Auditor

14 Table 1 Prompt Payment Analysis For the Period January 1 through May Difference +/(-) Total Vouchers Processed 4,624 4, % of Late Payments 2.25% 1.34% (0.91%) Prompt Payment Interest Paid $20, 257 $9,621 ($10,636) Source: City and County of Denver PeopleSoft financial system The analysis shows that the percentage of late payments and the corresponding prompt payment interest penalties paid by the Department were reduced significantly in Based on this analysis it appears that the prompt payment process improvements had a positive impact. RECOMMENDATION 1. The Department should perform formal analyses of prompt payment incide may identify additional areas for improvement. nts that 2. If the analyses indicate that the prompt payment timeline is unreasonable for certain payments, the Department should work collectively with their managers, vendors and the City Attorney s Office to identify prompt payment solutions. FINDING 2 Alte rnative Financial System Design May Improve Accounts Payable Processes Current Financial System Design and Processing The Department s current financial system design is setup for ECG to process all vendor payments in Maximo. 6 Maximo is primarily utilized to manage $6.6 million of inventory for the Department s maintenance function. However, under the current system design, all purchase orders and accounts payable transactions must be entered and approved in Maximo. Upon supervisory approval of a transaction in Maximo, the system (using interface technology) pushes the transaction data to the Department s AMS Advantage (AMS) 6 The Department s work order maintenance and asset management system. City and County of Denver Page 8

15 financial system for accounting purposes. After AMS accepts the data, Maximo transfers the data to the City s PeopleSoft financial system for payment. Figure 2 illustrates the flow of data under the current system design. Figure 2 DIA s Current Systems Integration Design (Simplified) Procurement Procurement Processes Function (ECG) Contract & Vendor Invoices (ECG) Travel & Official Function Payables DIA s Maximo Workflow & Materials Management System [$6.6 Million of Airport Inventory Maintained] City s PeopleSoft Financial System [Over $1 Billion of Payables Processed in 2008] (ECG) Refunds & Other Payables Receiving Function DIA s AMS Advantage Financial System [Over $400 Million of Payables Processed in 2008] Observation This systems integration design requires traversing through DIA s Maximo Workflow System to feed DIA s Advantage Financial System and the City s PeopleSoft Financial System. Interface Challenges with the Current Financial System Interface rejections may occur for various reasons when Maximo sends data to the AMS and PeopleSoft financial systems. ECG personnel research reasons for each rejection, correct the error, and resend the data for interface with the financial systems. Audit inquiries indicated that ECG does not maintain a log of the interface rejections nor do they compile data related to the number, type, and cause of these errors. However, the ECG personnel indicated that interface rejections are mostly due to the fact that financial data is routed to financial systems through Maximo, which was not designed to be a financial system. According to ECG personnel, dealing with three systems for financial purposes has increased the risk of data discrepancies, including interface rejections and the need for data reconciliations. Personnel also stated that sending transactional data related to capital projects, which is the majority of the Department s expenditures, 7 to AMS via Maximo is an unnecessary procedure for the reasons including but not limited to the following: 7 Based on the data obtained from the City s PeopleSoft, payments on the Department s contracts amounted to $290,433,039 in 2008, which is over 72% of the total payment requests processed by the Department for the same period. Page 9 Office of the Auditor

16 Transactions do not have PO and receiving information in Maximo or any other work order and inventory management implications to necessitate data entry and payment approval in Maximo. Maximo does not have project accounting capabilities. Data related to encumbrances are in AMS and must be checked before transactions are entered and approved in Maximo. ECG personnel stated that the Department has to use AMS as a financial system because the City s current PeopleSoft is not capable of handling the Department s complex accounting and billing procedures. Alternative Financial System Integration Design In December 2008, the Department hired The Solution Design Group, Inc. (SDG), an outside consultant, to review the current state of all systems used by the Department, including Maximo and AMS. SDG s primary task was to identify potential inefficiencies and redundancies among the wide variety of systems used by the Department. As a part of its review, SDG conducted a survey of four airports, comparable to the Department in size and similarity of business applications used. The four airports selected use financial and maintenance systems similar to AMS and Maximo. According to the SDG report, the airports selected enter their purchasing and accounts payable data directly into their financial systems, rather than into Maximo or similar maintenance systems. Based on the comments from Department personnel regarding the system design issues and a review of the SDG report, we contacted two of the airports cited in SDG s report -- Orland (MCO) and Las Vegas McCarran (LAS) International Airports. Both of these airports are of similar size and both use Maximo. Our inquiries confirmed that both airports process their entire procurement from purchasing through to the approval of vendor payments in their financial systems. In both cases, the financial system transfers necessary data to Maximo for maintenance and inventory management purposes. To illustrate the information obtained through interviews with both MCO and LAS, as it may be applicable to the Department, we prepared the following figure: City and County of Denver Page 10

17 Figure 3 Alternative Systems Integration Design (Simplified) [Modeled after Las Vegas & Orlando Airports] Procurement Function (ECG) Contract & Vendor Invoices DIA s AMS Advantage Financial System [Over $400 Million of Payables Processed in 2008] City s PeopleSoft Financial System [Over $1 Billion of Payables Processed in 2008] (ECG) Travel & Official Function Payables (ECG) Refunds & Other Payables Receiving Function DIA s Maximo Workflow & Materials Management System [$6.6 Million of Airport Inventory Maintained] Observation This systems integration design allows direct communication between DIA s Advantage Financial System and the City s PeopleSoft Financial System. RECOMMENDATION We offer the following recommendations for the Department: 1. With assistance from the Department s Information Technology Division, design and utilize reports of data related to the number, frequency, nature, and causes of interface rejections and other system related problems. This information will provide analytical evidence of the existing problems, their impact on the payment process, and will serve as a useful tool in finding the proper solutions. 2. In collaboration with the Department s Management and the other stakeholders and as the Department begins to implement their AMS upgrade, the Department should conduct a cost-benefit and feasibility analysis of changes to the current system integration design and consider the design used by other airports. Page 11 Office of the Auditor

18 APPENDIX Analysis of the DIA Construction Change Order and Prompt Payment Processes City and County of Denver Page 12

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26 AGENCY RESPONSE City and County of Denver Page 20

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