REPORT OF INTERNAL AUDIT

Transcription

1 REPORT OF INTERNAL AUDIT PRESENTED TO AUDIT/TASK: #05-05, Solid Waste Contract AUDIT CLIENT: City of Boise, Public Works Department AUDIT DATE: May 5, 2005 REPORT DATE: August 29, 2005 AUDITOR: Steven Rehn CIA, CBA, CFSA APPROVAL: Steven Purvis CPA INTRODUCTION In accordance with Boise Municipal Code Title 1, Chapter 9; and at the general direction of the City Council, the Office of Internal Audit undertook a review of the City s administration of the Solid Waste Agreement with Allied Waste / BFI. Since 1996, the City of Boise has contracted with BFI (a subsidiary of Allied Waste Systems) to provide for the disposal of solid waste. Under the governing Agreement, BFI provides scheduled residential and commercial trash service, on-call commercial trash service, and a range of recycling-related services. The City administers the billings for those services, and subsequently reimburses BFI for services provided. The City and BFI have developed effective channels of communication as they coordinate billing and service-related activities. This contract is likely the City s largest, providing for approximately $10 million dollars in reimbursements to the vendor annually.

2 SCOPE AND METHODOLOGIES The Solid Waste Agreement, and the accompanying schedule of reimbursement rates, is renewed periodically. The rate sheet currently in force was effective February 1, As such, Internal Audit restricted its scope to the current fiscal year when reviewing payments to the vendor. When reviewing internal administrative activities within the City, the scope period was expanded backward to include Fiscal Years 2001 and forward. All administrative processes within the City that relate to the Solid Waste Agreement were subject to review; none of BFI s internal activities were included. Audit anticipates that BFI activities will be the subject of a separate review to be conducted later in CY 05. The objectives established for the review included the following: Ensure that management has implemented controls and procedures sufficient to support the successful conduct of activities contemplated under the Solid Waste Agreement. Ensure that the billing system is set up and maintained appropriately, resulting in accurate billings to customers, and accurate reimbursements to the vendor. Ensure that processes and procedures are in place that provide for accurate payments to the vendor, at approved rates, and based on validated reports of vendor services. Internal Audit utilized methodologies consisting of observations, interviews, detail testing, and analysis. The methods employed, and the evidentiary materials developed during the review were deemed to be adequate to support the conclusions contained within this report. The audit was conducted in conformance with The International Standards for the Professional Practice of Internal Auditing, as established by The Institute of Internal Auditors. 2

3 EVALUATION AND COMMENTS During the course of the City s involvement with BFI, it appears that a reasonably sound control environment has evolved. Communications between the parties appear to be open, honest, and effective. Also, oversight and monitoring efforts appear to be actively pursued on the City s part. As of the audit date, the City s administration of the Solid Waste Agreement can best be characterized as Satisfactory. During the review, Internal Audit did identify several areas where improvements in the control environment could be realized. The majority of these involved issues that were perceived to carry reduced levels of risk. Corrective actions would likely consist of simple procedural enhancements that could be easily implemented. One issue appeared to hold greater significance in terms of its impact on controls. That issue related to access rights that had been granted to the computerized billing system utilized by the City. Corrective action was effected almost immediately upon discovery of the fact that some users held multiple rights that were not consistent with their job duties. However, this issue did pose significant risks to the City; and, had it been left uncorrected, could have had serious ramifications. Management was very responsive to Audit s recommendations. Corrective actions were implemented in a timely manner where it was possible to do so. Internal Audit is also obligated to call attention to any additional issues it may become aware of during the course of a review, even if they are not directly related to the area being audited. These types of concerns are identified as Other Areas of Management Concern. Two such issues were noted during this review. Audit believes these two areas should be of concern to management, and are worthy of additional review and consideration. Both deal with administrative aspects of billing for utility services; one with the timing of interest / late fee postings; and one with the management of past due accounts. Internal Audit recommended changes in these areas that, if adopted and implemented, would result in cleaner and more business-like processes with respect to utility account billings, and improved management of delinquent balances. Internal Audit would like to thank management and staff of the Public Works Department for their efforts and assistance during the performance of this review. A detailed presentation of Audit s Findings, Other Areas of Concern that were noted, and management s responses to those issues appear in the following sections of this Report. 3

4 FINDINGS AND RECOMMENDATIONS 1. FINDING: SYSTEM USER RIGHTS The Utility Billing system is the cornerstone in the solid waste billing / reimbursement process. The system drives all waste-related billings to customers, and the vast majority of reimbursements to the solid waste vendor, BFI. Given the critical nature of the system, security is of paramount importance. Internal Audit obtained and reviewed a listing of those individuals who possessed rights to the various system functions. The following issues were noted: A generic training logon was active on the system. The logon possessed rights to all but four major system functionalities. Four logons possessed access rights to functions that were not compatible with those individuals assigned responsibilities. Two programmer analysts possessed multiple rights to the production system / files. Two Utility Billing specialists possessed rights to functions more properly reserved to supervisory or managerial level staff. Failure to properly limit system access increases the risk that system data and / or files could be improperly manipulated or deleted. Given this system s importance, and given the visibility of this particular process to the citizenry, improper manipulation of the system could have wide-ranging negative impacts on the revenue streams, and on the City s reputation overall. RECOMMENDATION: Internal Audit recommends that system access rights be reviewed, and unnecessary access be deleted or altered to view-only. The Utility Billing Supervisor has already visited and corrected these weaknesses. However, additional review should take place and re-assessment of these rights considered in order to achieve the best security possible within the operational context of the Utility Billing process. 4

5 MANAGEMENT RESPONSE: The system access rights have been corrected so that users only have the necessary rights for their responsibilities. New procedures are planned to avoid granting of rights inconsistent with responsibilities in the future. We plan to have all rights authorized at the management level. Requests for rights for new users or a change in rights for existing users will be on a form submitted by the Utility Billing Office Coordinator. This form will be approved and signed by Public Works management. Access rights will also be reviewed quarterly for accuracy and security. With regard to programmer security, Public Works plans to institute the same policies and procedures as the city Information Technology department. It is our understanding these policies and procedures are currently under review and subject to change. For the immediate future, Public Works will develop a migration request form which will be approved by management before any changes are migrated from the Utility Billing development and test directories to the production area. These procedures will be enhanced and modified to comply with City policy as that is finalized. Because of the small shop environment of the Utility Billing system, future enhancements could potentially include personnel from the city Information Technology department to fulfill the roles of Upgrader and Security Officer. 5

6 2. FINDING: SYSTEM CODING During our review of the relationship between the Utility Billing system and the BFI Reimbursements, we tested the rates that are maintained on the system. The various amounts that are billable to residences and to businesses are maintained on the UB system, as are amounts subsequently reimbursable to BFI for those services. Each charge and each reimbursement amount is associated with a unique service code. As customer accounts are created or maintained in the system, they are assigned a series of service codes that represent the types of services rendered. The codes then determine both the City s billings, and BFI s reimbursements for the various services that are provided. A total of 322 individual service codes currently reside on the system. Audit noted a number of the rates that appeared to be in error: Ten service codes associated with sales tax on container rentals appeared to be incorrect on the system. They were not consistent with the State of Idaho s published Sales and Use Tax Schedule each of the ten rates was $.01 below the published rate. One service code associated with recycling services appeared to be incorrect on the system. The system rate was less than the most recent rate approved by the City Council. One service code associated with container relocations appeared to be incorrect on the system. The system rate was higher than the most recent rate approved by the City Council. These 12 codes represent approximately 3.7% of all the rates maintained on the system. The result of these errors, respectively, has been an under-collection of Sales Taxes; the potential for under-payment to BFI for certain recycling services; and, an actual over-payment to BFI for certain large container relocations. RECOMMENDATION: Though the amounts involved with these coding errors have been immaterial to date, Internal Audit recommends that the system rates be corrected as soon as possible. Doing so will insure accurate charges to service recipients, and accurate reimbursements to the vendor. Additionally, since there is a significant flow of funds that is driven by these rate structures, it is imperative that they are 6

7 maintained accurately. When the schedule of charges and reimbursements undergoes change, sales tax-based rates should be validated against Statepublished schedules. Additional scrutiny should also be directed at the balance of the rates that are maintained on the Utility Billing system in order to ensure that they are completely accurate. MANAGEMENT RESPONSE: The 12 service codes found to be in error have been corrected. The sales tax amount for ten of these codes was calculated and rounded to the nearest cent. The result is one cent less than the amounts specified in the State Sales and Use Tax Table eg: ($10.04 x 6% = $0.6024, rounded to $0.60. The Sales and Use Tax Table has an amount due of $0.61 for sales from $10.04 to $10.20) The sales tax in the service codes have been corrected so the system will calculate sales tax in accordance with the Sales and Use Tax Table. All future changes to the service codes will be checked by a second staff member. 7

8 3. FINDING: ACCOUNT RECONCILIATIONS On a quarterly basis, senior accounting staff members in the Public Works department reconcile receivable accounts in the general ledger back to the main subsidiary application, the Utility Billing system. This procedure allows the department to identify variances between the two, and to make the appropriate adjustments where they are deemed to be necessary. Audit reviewed the quarterly reconciliations back as far as FY 02, and noted what appeared to be a consistent observance of the procedure. Audit also noted it was fairly common to include an unidentified difference in the reconciling items those differences have ranged in recent quarters from relatively small amounts, to adjustments in excess of $7, The unidentified amounts are typically charged to revenues / receivables in order to bring the general ledger balance into agreement with system totals. There was no evidence of supervisory review and approval on the documentation reviewed by Audit. RECOMMENDATION: It is common practice in most business venues for supervisors or managers to review and approve all reconciliation activities. Doing so allows management to monitor significant financial activities, and to approve any adjustments that may be made to activities under their span of control. Internal Audit recommends that Public Works implement a review process with respect to these reconciliations, and to any other reconciliation activities where such a review would be appropriate. Management should review the reconciliations timely and in detail, and should signify their approval by initialing or signing off on the reconciliations. MANAGEMENT RESPONSE: This reconciliation process was implemented several years ago shortly after Public Works assumed responsibility for Utility Billing. Public Works management agrees with the finding that reconciling adjustments should be reviewed by management. A process is planned to have reconciliations forwarded to the Revenue Officer for review. The reconciliation and adjustments will be initialed by the reviewing manager. 8

9 4. FINDING: VENDOR PAYMENTS Internal Audit tested a series of payments to BFI for several attributes, one of which was timeliness of the remittances. Under Idaho Statute , the City is required to make payment to vendors on partial deliveries within 45 calendar days of receipt for Each complete item or service... Two recent payments tested did not appear to have been paid timely as required by the statute. Invoice # : The invoice was received December 8, 2004, and approved for final payment on February 2, 2005 in the amount of $1, A total of 56 calendar days elapsed between date of receipt and date of approval for payment. Invoice # : The invoice was received January 11, 2005, and approved for final payment on March 1, 2005 in the amount of $28, A total of 49 calendar days elapsed between date of receipt and date of final approval for payment. While documentation suggests there may have been improperly stated amounts on the invoices, no backup information was provided that demonstrates the vendor was contacted in writing, within 10 days of receipt of the invoices. Had this form of contact occurred as specified in the statute, then the timeframe allowed for payment may well have been extended in both cases. RECOMMENDATION: Management indicated that procedures have been strengthened since these two occurrences, which has resulted in faster turnaround times for vendor payments. Audit recommends that the processes in place be reviewed, and assurances gained that procedural enhancements are sufficient to ensure timely payment. Also, management should follow up with appropriate members of the staff and ensure that they are familiar with the statutory requirements of , and that they have included appropriate measures within their work processes that ensure compliance. 9

10 MANAGEMENT RESPONSE: Due to staff changes at BFI in the fall of 2004, a number of invoices contained errors. The on-going communications with BFI on the invoice issues were conducted by telephone and were not documented in writing. At the time of receipt of the two invoices, the city was completing BFI reimbursement rate negotiations and public notices and the resolution for city council review. The rate issues took considerable staff efforts and timing of the rate changes was critical to the management of the solid waste contract. Also, late fall/early winter are extremely busy times of the year, with the annual Recycle the Fall collection event in November and the Christmas tree recycling in late December. Staff time and efforts are frequently fully devoted to those programs. Staff members have been advised of the need to review and respond in a timely manner to BFI invoices. Copies of the Idaho Code have been provided to all staff members. Staff members will document BFI billing errors in writing. Timely payment of correct billing invoices will be made and the supervisor has begun tracking receipt of invoices and payment approval dates. 10

11 OTHER AREAS OF MANAGEMENT CONCERN 1. ISSUE: POSTING LATE FEES While reviewing activities associated with management of the Solid Waste Agreement, Internal Audit noted an issue that it believes requires additional consideration by the Public Works management team. The issue impacts all services currently billed through the Utility Billing system, thus transcending function or project lines; impacting all utility-related services. Audit obtained the Utility Billing system s scheduled billing dates, and the associated interest / late fee posting dates from IT personnel. A review of the information revealed the fact that the billing dates tend to vary by as much as 6 days on a month-to-month basis some billing cycles cut on the 4 th of the month, and others as late as the 9 th of the month. Additionally, interest / late fee posting dates were noted to occur after the corresponding billing dates for 6 of the 12 months in CY 05. This process suggests the following issues that should be considered: Based on an average of 4,600 past due accounts per month, the current process will result in the City of Boise sending out an estimated 27,600 statements annually that do not include all amounts rightly due and owing the City. While these billing statements would include an accurate presentation of charges for services rendered, they would not contain all late charges due on the accounts. These billings would not properly reflect the amounts owing. Inaccurate billing statements may result in additional administrative burdens being placed on Utility Billing and Collections staff as they work with customers to resolve billing questions and collect amounts owed. RECOMMENDATION: Internal Audit recommends that management review the current processes in place and determine if corrective actions are possible. Current procedures could be standardized to a greater degree by establishing a standard monthly billing cutoff date, such as the 10 th. That date could either be moved back to the last business day, or ahead to the next business day when the 10 th falls on a 11

12 weekend or holiday. Regardless of the cutoff date selected, interest on overdue balances should be posted prior to the production of billing statements. Doing so results in accurate billings to customers, accelerated collection of late fee revenues, and a reduction in the administrative burden currently placed on two of the departments that work most closely with, and rely most heavily on the Utility Billing system. MANAGEMENT RESPONSE: This issue has been discussed in the past on more than one occasion by Public Works Management. The current system bills in accordance with the Ordinance which allows 30 days from the invoice date for payment. Staff disagrees that the City sends out statements that do not include all amounts rightly due and owing the City. At the time that the invoice is printed the amount due is an accurate accounting of the total amount due. If the billing date occurs before the next interest accrual date, at the time of billing the interest is not due per the ordinance. Requiring payment by the 10 th of every month as suggested, would mean billing at some time after the 10 th, generally allowing customers less than 30 days to pay. In past discussions this has always been a concern particularly since we bill in advance. Public Works management will continue to remain cognizant of this issue and will revisit it when we move to bi-monthly billing. At that time we may wish to change the ordinance and have a due date before the next billing date. 12

13 2. ISSUE: DELINQUENT ACCOUNTS While reviewing quarterly reconciliations of the revenue receivable accounts for utilities billed, Internal Audit noted these account balances contain a significant component that is attributable to interest reconciliations for the second quarter of Fiscal Year 2005 listed interest balances amounting to $228, Audit obtained a detailed listing of all UB accounts with outstanding interest charges. The data was analyzed, and the following issues were noted: Accounts still on the system, and still accruing late charges, date back as far as the January 1995 billing cycle. Accounts with outstanding interest charges i.e. delinquencies that accrued prior to FY 03 number 877. Outstanding interest receivable attributable to the group of pre-fy 03 accounts referred to above amounted to $134, as of June 13, A statistical sample of these accounts indicated 67% have been inactive since before FY 03. They continue to accrue late charges. Annually, the Comptroller funds a reserve for bad debts that offsets all UB accounts more than 180 days delinquent. Public Works management should consider the following: Policies currently contain the provision for flagging delinquent utility accounts as latent. The accrual of late charges can also be discontinued. These measures are not utilized for seriously delinquent accounts. The City continues to accrue income monthly on these accounts; accounts that are, for all practical purposes, dormant. Annually, the Comptroller books additional compensating expense, and funds a reserve for bad debts, in order to offset the continuing accrual of this interest. The current reserve for these bad debts is approximately $465, From an accounting standpoint, receivables should only be recognized as long as their collection can reasonably be expected. Once accounts are deemed to be uncollectible, they should be charged off. Doing so does not preclude pursuing collection of those balances. On a net basis, there is no impact to the City s financial statements. 13

14 RECOMMENDATION: Internal Audit recommends that management review the current processes in place and determine if corrective actions are desirable. Realistic thresholds could be established, beyond which accounts would be deemed to be uncollectible. Once accounts crossed that threshold, they could be put in latent status, and the accrual of interest discontinued. Collections activity could continue unabated, with accounts either re-instating to an active status, or being charged off. In either case, the ability to pursue collection would not be impacted, quarterly accruals of income would be more realistic, and bad debt reserves could be reduced to more reasonable levels. MANAGEMENT RESPONSE: Public Works staff has met with the Treasurer, Comptroller, and Collections Officer to discuss the recommendations provided by the Auditor. Generally speaking, staff members do not agree with the recommendations and believe that current business practices provide the most efficient processes for handling overdue accounts. The exception is an agreement to have the Collections Officer begin making more frequent, but smaller dollar amount write-off recommendations to Public Works. This will ease the administrative burden and keep the overdue accounts at a more current level. The Collections Officer makes her recommendations based on the criteria listed in the Bad Debt Write-Off policy approved by the Public Works Commission. Staff members believe that the current practice of carrying overdue accounts for an extended period of time, and allowing them to accrue interest, is appropriate. It is also the easiest practice to administer. As a utility and a government agency, time is an ally. Long overdue accounts can often be collected as property transactions take place (e.g. property sales or estate probates), which sometimes occur well into the future. As long as these accounts continue to be shown in a collections reserve on the financial statements, there is no harm. It should be noted that this practice has been in place for many years including the last time the Sewer Fund issued bonds on the open market. Moody s gave the fund an excellent Aa2 rating. 14

15 MANAGEMENT PARTICIPANTS Chuck Mickelson, Director / Public Works Carl Ellsworth, Environmental Manager / Public Works Neal Oldemeyer, Support Systems Manager / Public Works Catherine Chertudi, Program Manager / Public Works Jonathan Williams, Revenue Officer / Public Works 15