Town of Lenox. Internal Controls Over Selected Operations. Report of Examination. Period Covered: January 1, 2008 June 30, M-246

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1 O FFICE OF THE NEW YORK STATE COMPTROLLER DIVISION OF LOCAL GOVERNMENT & SCHOOL ACCOUNTABILITY Town of Lenox Internal Controls Over Selected Operations Report of Examination Period Covered: January 1, 2008 June 30, M-246 Thomas P. DiNapoli

2 Table of Contents AUTHORITY LETTER 2 Page EXECUTIVE SUMMARY 3 INTRODUCTION 5 Background 5 Objective 5 Scope and Methodology 6 Comments of Local Officials and Corrective Action 6 HIGHWAY DEPARTMENT PAYROLL 7 Board Authorization 7 Leave Records 8 Time Records 9 Payroll Cost Allocation 11 Recommendations 12 PAYMENTS AND SERVICES TO OUTSIDE ORGANIZATIONS 13 Recommendations 15 PROCUREMENT 16 Competitive Bidding 16 Competitive Quotes 17 Professional Services 18 Recommendations 19 FUEL INVENTORY CONTROLS 20 Recommendation 20 APPENDIX A Response From Local Officials 21 APPENDIX B Audit Methodology and Standards 23 APPENDIX C How to Obtain Additional Copies of the Report 25 APPENDIX D Local Regional Office Listing 26 DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 11

3 State of New York Office of the State Comptroller Division of Local Government and School Accountability April 2010 Dear Local Officials: A top priority of the Office of the State Comptroller is to help local government officials manage government resources efficiently and effectively and, by so doing, provide accountability for tax dollars spent to support government operations. The Comptroller oversees the fiscal affairs of local governments statewide, as well as compliance with relevant statutes and observance of good business practices. This fiscal oversight is accomplished, in part, through our audits, which identify opportunities for improving operations and Town governance. Audits also can identify strategies to reduce costs and to strengthen controls intended to safeguard local government assets. Following is a report of our audit of the Town of Lenox, entitled Internal Controls Over Selected Operations. This audit was conducted pursuant to Article V, Section 1 of the State Constitution and the State Comptroller s authority as set forth in Article 3 of the General Municipal Law. This audit s results and recommendations are resources for local government officials to use in effectively managing operations and in meeting the expectations of their constituents. If you have questions about this report, please feel free to contact the local regional office for your county, as listed at the end of this report. Respectfully submitted, Offi ce of the State Comptroller Division of Local Government and School Accountability 2 OFFICE OF THE NEW YORK STATE COMPTROLLER

4 State of New York Office of the State Comptroller EXECUTIVE SUMMARY The Town of Lenox is located in Madison County and covers approximately 36 square miles with a population of about 8,700. The Town provides various services to its residents, including street maintenance and improvements, snow removal, parks, youth programs, water, sewer, and general governmental support. The Town s 2009 budgeted expenditures in all major funds were approximately $1.67 million, funded primarily by real property taxes and State aid. The Town is governed by the Town Board (Board), which comprises five elected members including the Town Supervisor (Supervisor). The Board is responsible for the general management and oversight of the Town s financial and operational affairs. The Supervisor is the Town s chief fiscal officer and chief executive officer. Although the Board is primarily responsible for the effectiveness and proper functioning of the Town s internal controls, department heads, including the Highway Superintendent (Superintendent), also share the responsibility for ensuring that internal controls are adequate and working properly. Scope and Objective The objective of our audit was to examine the Town s internal controls over selected operations for the period January 1, 2008 to June 30, We extended the audit period for our review of compensatory time back to November 1, 2007 and, for payments and services provided to outside organizations, to September 2, Town officials were unable to locate one employee s log of compensatory time earned and used and, therefore, we did not include this employee in our testing of compensatory time records. Our audit addressed the following related questions: Are internal controls over the Highway Department payroll appropriately designed and operating effectively to adequately safeguard Town assets? Were payments and services provided by the Town to outside organizations proper? Has the Town established policies and procedures to ensure that goods and services are purchased in the most prudent and economical way? Are internal controls over fuel inventory appropriately designed and operating effectively to adequately safeguard Town assets? Audit Results The Board did not establish and enforce adequate internal controls over the Town s fiscal operations or ensure that the Highway Superintendent maintained accurate records and enforced proper leave time procedures. These control weaknesses allowed unauthorized payments, the potential abuse of leave time benefits, inaccurate highway payroll cost allocations between funds, and deficiencies in the Town s procurement and fuel operations. DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 33

5 Our review of the wages paid to five Highway Department employees found that one employee received a $5.88 increase in his hourly wage in November 2008, resulting in $1,400 more in payments than authorized by the Board for Although the Board later approved this employee s 2009 wage rate, the 2008 increase should have been properly authorized in advance. Town officials also failed to ensure the independent review of leave time records maintained by the Superintendent. One employee improperly received a separation payment of $2,900 and two employees were paid for leave days taken but not recorded as used. When Town officials do not ensure that employee compensation and leave time accruals comply with Town policy, the Town may be paying its employees more than they are entitled to receive. Highway Department timesheets do not accurately reflect the actual hours worked and services performed, and officials could not locate eight weeks of highway employee timesheets. Employees maintain their own records of compensatory time and there is no documentation that anyone reviews the records for accuracy. Further, the Superintendent does not document prior approval or justification for such time. As a result, Town officials have no way to verify the accuracy of compensatory time accruals and usage. Further, because the timesheets do not accurately indicate the time actually worked and for which services, the Town cannot properly allocate payroll costs among appropriation accounts in the town-wide and part-town 1 highway funds, which could lead to an inequity among taxpayers. Our review of $63,630 in payments to outside organizations also found that the Town made payments totaling $11,000 to four private organizations which were prohibited. In addition, the Town improperly provided up to $7,200 in services to two other organizations without ensuring that these services were for a valid Town purpose. The Town s contributions to various organizations without entering into proper contracts, ensuring a valid Town purpose, and receiving commensurate value for such expenditures is an inappropriate use of public funds. The Town did not comply with General Municipal Law for the purchase of $65,548 in fuel, and could have saved $6,400 through State contract. The Board did not enforce Town policy requiring quotes for purchases under bidding thresholds, and Town officials did not document any quotes for 12 purchases totaling $44,886. Further, the Town did not solicit competition for any of the $49,653 in professional services we tested, and did not have written agreements with two professionals paid $20,500 for accounting and consulting services. Without a competitive procurement process, documented quotes, or proper agreements, the Board has no assurance that goods and services are procured in the most prudent manner. Finally, the Superintendent did not ensure that fuel supplies were adequately safeguarded and accounted for. Although employees maintained fuel logs showing quantities delivered and dispensed, perpetual inventory records were not maintained. Therefore, there is a risk that gasoline or diesel fuel could be stolen and the shortage not detected. Comments of Local Officials The results of our audit and recommendations have been discussed with Town officials and their comments, which appear in Appendix A, have been considered in preparing this report. Town officials generally agreed with our recommendations and indicated they will take corrective action. 1 In towns containing one or more villages, taxes for highway repairs and improvements are raised from the area of the Town outside the villages (referred to as outside-village or part-town ). 4 OFFICE OF THE NEW YORK STATE COMPTROLLER

6 Introduction Background The Town of Lenox is located in Madison County and covers approximately 36 square miles with a population of about 8,700. The Town provides various services to its residents, including street maintenance and improvements, snow removal, parks, youth programs, water, sewer, and general governmental support. The Town s 2009 budgeted expenditures in all major funds were approximately $1.67 million, funded primarily by real property taxes and State aid. The Town is governed by the Town Board (Board), comprising five elected members including the Town Supervisor (Supervisor) and the four members of the Town Council. The Board is responsible for the general management and oversight of the Town s financial and operational affairs. The Supervisor is the Town s chief fiscal officer and chief executive officer. As chief fiscal officer, the Supervisor is responsible for most of the Town s financial duties, including receiving and disbursing Town moneys, preparing financial reports, and reviewing payrolls to ensure that employees receive all and only the compensation to which they are entitled. The secretary to the Supervisor assists the Supervisor with maintaining the books and records for the Town. Although the Board is primarily responsible for the effectiveness and proper functioning of the Town s internal controls, department heads, including the Highway Superintendent (Superintendent), also share the responsibility for ensuring that internal controls are adequate and working properly. The Superintendent is an elected official who, along with four full-time and one part-time Highway Department (Department) employees, 2 is responsible for maintaining Town roads, bridges, and culverts, and providing snow removal services. The Superintendent is also responsible for maintaining inventories of consumable products, such as gasoline and diesel fuel, that are purchased for use by the Town. Objective The objective of our audit was to examine the Town s internal controls over selected operations. Our audit addressed the following related questions: Are internal controls over the Highway Department payroll appropriately designed and operating effectively to adequately safeguard Town assets? 2 In In 2008, the Town had six employees on the highway payroll. DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 55

7 Were payments and services provided by the Town to outside organizations proper? Has the Town established policies and procedures to ensure that goods and services are purchased in the most prudent and economical way? Are internal controls over fuel inventory appropriately designed and operating effectively to adequately safeguard Town assets? Scope and Methodology We examined the Town s internal controls over the Highway Department payroll, payments and services to outside organizations, procurement, and fuel inventories for the period January 1, 2008 to June 30, We extended the audit period for our review of compensatory time back to November 1, 2007 and, for payments and services provided to outside organizations, to September 2, Town officials were unable to locate one employee s log of compensatory time earned and used and, therefore, we did not include this employee in our testing of compensatory time records. We conducted our audit in accordance with generally accepted government auditing standards (GAGAS). More information on such standards and the methodology used in performing this audit are included in Appendix B of this report. Comments of Local Officials and Corrective Action The results of our audit and recommendations have been discussed with Town officials and their comments, which appear in Appendix A, have been considered in preparing this report. Town officials generally agreed with our recommendations and indicated they will take corrective action. The Board has the responsibility to initiate corrective action. A written corrective action plan (CAP) that addresses the findings and recommendations in this report should be prepared and forwarded to our office within 90 days, pursuant to Section 35 of the General Municipal Law. For more information on preparing and filing your CAP, please refer to our brochure, Responding to an OSC Audit Report, which you received with the draft audit report. We encourage the Board to make this plan available for public review in the Town Clerk s office. 6 OFFICE OF THE NEW YORK STATE COMPTROLLER

8 Highway Department Payroll Board Authorization Wages and employee benefits comprise the most significant portion of the Town s highway budget. In 2008, these expenditures amounted to about $293,000, or 54 percent of the Town s highway expenditures. 3 Town officials must ensure that appropriate payroll controls are established to prevent and detect errors and irregularities in a timely manner. As chief fiscal officer, the Town Supervisor is responsible for reviewing payrolls to ensure that employees receive all and only the compensation to which they are entitled. Internal controls over the Town s highway payroll were inadequate. There was no prior Board approval for a raise given to one highway employee, resulting in a $1,400 unauthorized increase in his 2008 wages. Town officials also did not ensure the independent review of leave time records maintained by the Superintendent, and we identified various inaccuracies in leave time records. One employee improperly received a separation payment of $2,900, and three employees accrued sick time up to 14 days in excess of the Board-authorized limit. When Town officials do not ensure that the compensation and leave time accruals of highway employees comply with Town policy and/or Board authorization, the Town is at an increased risk of paying its employees more than they are entitled to receive. The Highway Department timesheets do not accurately reflect the actual hours worked and services performed by employees. Highway employees maintain their own record of compensatory time worked and taken in lieu of overtime, and there is no documentation that the Superintendent or other supervisory personnel review these records for accuracy. The Superintendent also did not document any pre-approval or justification of employees compensatory time. As a result, Town officials have no assurance that compensatory time earned and used by employees was necessary and appropriate. In addition, because the employee timesheets do not properly indicate the time actually worked and for which services, the Town cannot properly allocate payroll costs among appropriation accounts in the town-wide and part-town 4 highway funds, which could lead to an inequity among taxpayers. While the Highway Superintendent, within the limits of appropriations, may fill highway laborer positions, the Board is responsible for authorizing compensation for these employees. The Board s 3 Comprising compensation and benefits paid to six Highway Department employees 4 In towns containing one or more villages, taxes for highway repairs and improvements are raised from the area of the Town outside the villages (referred to as outside-village or part-town ). DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 77

9 authorization of pay rates should be documented in the minutes, a Board-approved policy, or a negotiated employment contract. The Board set the 2008 hourly wage rates for highway employees at its annual reorganization meeting on January 14, 2008, and the 2009 rates at its January 6, 2009 meeting. These hourly rates were established for each individual employee, not by the positions they held. We tested the wages paid to five highway employees in 2008 and four employees in 2009 to determine if they were compensated at Board-authorized rates and found that one highway employee received a $5.88 (54 percent) increase in his hourly wage in November 2008, resulting in payments totaling $1,400 more than was authorized by the Board during The Superintendent stated that the employee received a raise because he was given additional duties. Although the Supervisor approved the wage increase, we found no documentation that the Board formally did so. While the Board did approve the 2009 wage rate for this employee at its January 2009 reorganization meeting, when Town officials do not ensure that Board authorization is obtained prior to changing employee compensation, there is an increased risk that employees could be paid more than they are entitled to receive. Leave Records Leave time, such as vacation, sick, and personal business days, is a benefit provided to Town highway employees pursuant to documented resolutions passed at the Board s organizational meetings and the Town s written employment policy. Because the Town provides cash payments to employees for their unused vacation days when they separate from Town employment, it is important for Town officials to establish internal controls to ensure that the accrual and use of leave time is accurately recorded in a timely manner and that the use of such time is appropriately monitored. The Board-authorized maximum for accrued sick leave is 30 days, which may be carried over from year to year. However, the Town s employment policy does not provide for the compensation of any accrued sick leave upon the employee s separation from service. The policy also stipulates that, when an employee leaves Town service, vacation time is to be prorated for purposes of compensation. 8 OFFICE OF THE NEW YORK STATE COMPTROLLER The Superintendent maintains a leave book for highway employees that shows leave credited at the beginning of each year, leave usage, and available balances. Although the Superintendent said he reviews leave balances with his employees at least once a year and will tell them their available balances on request, there is no other system in place for anyone to compare timesheets to the leave records. We tested five highway employees leave time accruals and traced leave usage from available timesheets to the Superintendent s leave book for the audit period to determine if leave time was accurately

10 accrued and recorded. Our test identified nine instances where these five employees either received payment or accrued leave to which they were not entitled, or had leave records that were not consistent with their timesheets. These exceptions had a total value of $9,456 as follows: The Town made a separation payment to one employee of approximately $2,900, to which he was not entitled. The proration formula specified in the Town s employment policy was not applied to the employee s accrued vacation time, and his payment for unused sick time was not authorized. The Superintendent permitted three employees to accrue sick time balances 11 to 14 days in excess of the Board-authorized maximum of 30 days, equating to approximately $5,250 at December 31, In two instances, employees took and were paid for a total of six leave days, valued at $918, that were not properly recorded as used. Two employees timesheets also indicated they worked three days valued at $388, while the Superintendent s leave book shows they charged leave on these days. 5 The Board s failure to enforce Board resolutions and the Town s employment policy regarding leave accrual and compensation, and to ensure independent review of the Superintendent s employee leave records, increases the risk of the Town paying its highway employees more than they are entitled to receive. Time Records Effective control over payroll operations begins with accurate and timely recordkeeping. Time records are used to document the hours and days worked and to certify that the recorded time is correct. Employees must submit their time records to their supervisors to further attest to the accuracy of those time records; these certified and approved time records serve as supporting documentation for payroll registers and can be reviewed if errors occur in payroll processing. Town Law generally requires that the Town officials who directly supervise employees certify that the services indicated on the payrolls were actually performed. Compensatory time off is paid leave that is earned and accrued by an employee in lieu of immediate cash payment for overtime work. 5 Because of this discrepancy, we were unable to determine whether these two employees leave accruals were improperly reduced (if they actually worked those hours) or whether their timesheets overstated the hours worked (if they did not actually work those hours). DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 99

11 10 OFFICE OF THE NEW YORK STATE COMPTROLLER As with overtime, good business practice requires that department supervisors formally approve all compensatory time hours before employees perform the work, document the reasons for such time, and maintain adequate records. The Town s policy allows the use of compensatory time, which is granted primarily for snow removal work. According to available records kept by the employees, 6 Highway Department employees earned about $10,300 in compensatory time in 2008 and $8,400 in compensatory time from January to June Highway employees maintain and sign weekly timesheets, approved by the Superintendent, that indicate the use of leave time and capture the daily start and finish times of the regular work days along with a brief description of the work performed (e.g., shop, blacktop, ditch, mowing, plow, sand, etc.). When highway employees work beyond their regular work hours, they generally earn and accrue compensatory time in lieu of paid overtime. We reviewed available timesheets during our audit period for five highway employees and found that the timesheets do not accurately reflect the actual hours worked or the services performed, but show only the employees regular work schedules. Variations from those schedules are routinely handled through compensatory time. Further, Town officials could not locate eight weeks of timesheets for highway personnel, and the Superintendent did not always submit Highway Department timesheets to the Supervisor before the related paychecks were issued. When timesheets do not accurately reflect actual hours worked, are not properly kept on file, and are not submitted on time, Town officials have no way of knowing how many hours employees actually work and, therefore, may be paying them more than they are entitled to receive. We also found that employee records of compensatory time were not properly reviewed and verified by the Superintendent. Each full-time highway employee maintained his own compensatory time notebook, recording the day, times worked or taken off, the compensatory time earned 7 and used, and a running balance of available compensatory time. However, there was no documentation that the Superintendent or other supervisory personnel reviewed these notebooks. Further, the Superintendent did not document his prior supervisory approval or justification for compensatory time, and allowed employees to use such time before they earned it (for example, one employee carried 6 One employee s compensatory time log was not available to us for audit, and therefore was not included in our examination of compensatory time records. This employee left Town service in October During our audit period, highway employees generally earned 1.5 hours of compensatory time for every extra hour they worked. They occasionally earned two hours of compensatory time for every extra hour worked on a holiday.

12 a negative balance of 69 compensatory hours in November 2007). The compensatory time log for another employee, who had left Town service, was not available; therefore, Town officials have no way of knowing if that employee may have taken compensatory time without actually accruing it and, therefore, the Town could have paid him for time he did not earn. The practice of routinely using compensatory time to account for time off, without adequate records or documented approvals, is a serious control deficiency that allows potential errors to occur without detection and invites the abuse of compensatory time benefits by highway employees at the taxpayers expense. Payroll Cost Allocation In towns containing one or more villages, taxes for highway repairs and improvements are raised from the area of the Town outside the villages (referred to as outside-village or part-town ). Taxes for bridges, machinery, snow removal, and miscellaneous expenditures are levied on the entire Town. However, the Board may elect to finance machinery, snow-related and miscellaneous expenditures with taxes from the area outside the villages, i.e., as part-town expenses. Because expenditures for these various highway repairs, equipment and services are charged to different tax bases some as town-wide and some as part-town it is important for the Town to maintain accurate records showing the various types of highway services being performed, and to use such records to allocate payroll costs each period. Not only does this help maintain equity among town-wide and part-town taxpayers, but it also helps the Town develop more realistic budgets and accurately report the true cost of the services. The Villages of Canastota and Wampsville are located within the Town. The Town charges expenditures for highway repairs and improvements to the part-town (outside-village) highway fund, and expenditures for bridges, machinery and snow and miscellaneous expenditures to the town-wide highway fund. However, the Town s method of allocating Highway Department payroll costs was not based on the services performed by employees. Instead, the secretary to the Supervisor (secretary) allocated each highway employee s payroll to a particular service every pay period, regardless of what they worked on. For example, two highway employees direct wages were allocated to snow removal all year and one employee s wages were allocated to road improvements all year. At year-end, the secretary changes the allocations as needed in order to stay within the budgeted appropriations. The secretary told us that, because the highway employees time sheets are not accurate due to the way employees record their compensatory time, 8 she does not use the time cards to 8 That is, in their own notebooks but not on their timesheets, which consistently showed 40 hours worked DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 111

13 allocate costs among the expenditure accounts. As a result, the Town cannot determine if it is charging the appropriate tax base for the services rendered, potentially creating an inequity among taxpayers. The Board s failure to ensure the proper authorization of highway payroll changes, adherence to leave policy, and the proper accrual, use, and recording of compensatory time increases the risk of the Town providing its highway employees with payments and/or time accruals to which they are not entitled. Recommendations 1. Town officials should ensure that highway employees are paid wage rates authorized by the Board, and that any changes are in accordance with Board resolutions. 2. The Superintendent should ensure that accurate and complete leave time records are maintained for highway employees. In addition, the Board should consider designating someone independent of the Highway Department to periodically review leave time records for accuracy. 3. Town officials should establish a review process to compare separation payment calculations to the Town s employment policy provisions prior to making payments to employees leaving Town employment. 4. The Board should ensure that employees maintain complete and accurate time records, and those records should be submitted to the Town Supervisor s office for payroll processing in a timely manner and retained on file. 5. The Board and Superintendent should develop and implement procedures to ensure that compensatory time is properly preapproved, documented, monitored, and controlled. 6. The Board should ensure that payroll expenditures are allocated among town-wide and part-town funds based on the actual services performed by highway employees. 12 OFFICE OF THE NEW YORK STATE COMPTROLLER

14 Payments and Services to Outside Organizations The New York State Constitution prohibits towns from making gifts of money or property to or in aid of private organizations, even if the organization is a not-for-profit entity. The Town generally may not use Town equipment and personnel to perform work on private property unless the work primarily furthers a proper Town purpose. The value of the benefits the Town receives under such a contract must be commensurate with the value of the work to the private party. The Town may enter into cooperation agreements with other municipalities or school districts only for the performance of those functions the Town is empowered to perform on its own. General Municipal Law (GML) authorizes the Town to undertake and promote activities devoted in whole or in part to providing leisure time activities for youth, to operate programs devoted to the welfare of the aging, and to contract with private agencies for the operation and maintenance of such programs. The Town is also authorized, by Town Law, to establish a publicity fund for the purpose of advertising the Town s advantages and promoting its general, commercial and industrial welfare. Our review of $63,630 in payments made to outside organizations found that $52,630 of these payments were for proper Town purposes. 9 However, the Town made payments totaling $11,000 to four private organizations which were prohibited. In addition, the Town improperly provided up to $7,200 in services to two other organizations without ensuring that these services were for a valid Town purpose. Children s Festival The Town made payments totaling $7,000 during our audit period to a local organization that runs an annual festival for children 10 and charged these expenditures (used for advertising space on placemats) to its publicity appropriation account. However, listing the Town on the placemat as a festival sponsor does not constitute publicity for the Town and, therefore, the Town lacked authority to spend $7,000 to be listed as a sponsor on the placemats. Alternatively, pursuant to GML, the Town could (on its own) spend money to sponsor a children s festival; jointly provide a festival with another municipality; or contract with a not-for-profit organization to operate such a program, provided that the Town retains ultimate 9 $36,830 for ambulance service, $15,000 for publicity, and $800 paid to patriotic organizations to defray the costs of holiday observances 10 The Town paid the organization $3,000 in 2008 and $4,000 in DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 1313

15 14 OFFICE OF THE NEW YORK STATE COMPTROLLER control and receives adequate consideration under the contract. Such arrangements would ensure that the Town s expenditure of public moneys is in return for benefits provided to the Town, or for functions that the Town is empowered to perform on its own. Other Donations The Town made additional donations totaling $4,000 to various entities and charged the expenditures to the appropriation account for publicity. However, the Town did not enter into contracts with these entities, and the vouchers approved by the Board did not indicate what services or benefits the Town was to receive for the payments. Although the Town recorded these payments as expenditures for publicity, none of them relate to publicizing the advantages of the Town. These donations comprised: $2,000 to a not-for-profit agency that provides services to the elderly $1,000 ($500 each year) to an organization that sponsors an annual fishing derby for children $1,000 to a not-for-profit entity whose stated purpose includes environmental education. Town officials told us that $600 of this payment was to help pay real property taxes on land the organization had recently purchased and $400 was to help pay for moving a historic school house onto land belonging to the organization. Greenhouse In addition to providing direct cash payments to outside organizations, the Town s Highway Department performed certain work for other outside organizations. The Town entered into an agreement with the local school district to help build a greenhouse at the school. According to the agreement, both the Town and school district benefit from the arrangement because the greenhouse will help meet the educational needs of the children within the district. As of September 2, 2009, the Town incurred up to $5,400 in direct labor charges for the construction of the greenhouse. Towns and school districts may participate in a cooperation agreement only for the performance of those functions that they are empowered to perform individually. As a rule, the function of providing education to children is a school district purpose, not a Town purpose. Parking Lot The Town Highway Department paved the parking lot of a local not-for-profit veterans organization. The

16 organization provided the materials for the project, and the Town incurred up to $1,800 in direct labor costs. Town officials told us that the Town uses the parking lot as a school bus turnaround and, therefore, receives a benefit from such use. The State Constitution permits the Town to use Town equipment or personnel to perform work on private property if the work primarily furthers a proper Town purpose and only incidentally benefits the private owner. Even if we assume that paving a school bus turnaround is a proper Town purpose, we do not believe that the paving project was undertaken primarily for that purpose. We also believe that the principal benefit of the project accrued to the patriotic organization. Moreover, the Town cannot undertake the work unless it has statutory authority to do so. Therefore, we conclude that the Town should not have used its taxpayer-funded resources to do work that primarily benefited this private entity. The Town s contributions to various organizations without entering into proper contracts, ensuring a valid Town purpose, and receiving commensurate value for such expenditures is an inappropriate use of public funds. Recommendations 7. The Board should not authorize contributions or donations of public moneys to private organizations without providing for the Town to receive a commensurate value in return. 8. The Town should enter into written agreements to support and justify payments or services provided to private organizations. 9. The Town should enter into inter-municipal agreements only for the performance of those functions that the Town is empowered to do on its own. 10. The Highway Department should perform only such services that further a Town purpose. DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 1515

17 Procurement An important part of the Board s responsibility is to establish, implement, and monitor procurement policies to help ensure that the Town obtains goods and services of the required quantity and quality at competitive prices and to protect against favoritism, extravagance, and fraud. A good system of internal controls over purchasing consists of policies and procedures that allow an organization to provide reasonable assurance that it is using its resources effectively. The Board established a procurement policy to provide guidance to Town officials responsible for procuring goods and services. We found that Town officials did not consistently comply with the policy regarding competitive bidding, and the Board did not enforce the Town s policy requiring verbal or written quotes for purchases under competitive bidding thresholds. Further, the policy does not require competitive proposals or quotes for the procurement of professional services. As a result, the Town did not get the benefit of a formal, open competitive process and may have paid more than needed for its purchases of some goods and services. Competitive Bidding GML and the Town s procurement policy require employees to follow competitive bidding requirements when purchasing goods and commodities that exceed $10,000 and public works contracts that exceed $20,000, annually. 11 Advertising for bids encourages competition among vendors and provides taxpayers with reasonable assurance that goods and services are procured in a prudent and economical manner. However, there are exceptions from competitive bidding requirements, such as purchases through the New York State Office of General Services (OGS), purchases through county contracts, and purchases of second-hand equipment from other governmental agencies. 16 OFFICE OF THE NEW YORK STATE COMPTROLLER The Town did not always adhere to GML or its own procurement policy, and made purchases in excess of the bidding thresholds without using a competitive bidding process. We tested five purchases totaling $302,990 for compliance with GML and the Town s procurement policy. Town officials appropriately solicited competitive bids, used OGS or county contracts, or purchased second-hand equipment from another governmental agency for four 12 of these purchases totaling 11 Effective November 12, 2009, the GML bidding threshold for public works contracts was increased from $20,000 to $35,000. The $10,000 bidding threshold for purchase contracts remains the same. 12 A loader, road material, road salt, and machinery used for roadside mowing

18 $237,442. However, the Town did not comply with either GML or the Town s policy for the purchase of gasoline and diesel fuel totaling $65,548. We further analyzed the purchase of the fuel and determined the Town could have saved approximately $6,400 if it had purchased the fuel on an OGS contract. The Superintendent said he thought the fuel vendor was matching the OGS (State) contract prices even though the vendor did not have the State contract. However, even if the vendor offers to match the State contract prices, the Town must still follow the competitive bidding requirements. Competitive Quotes The Town s procurement policy requires three oral quotes from vendors for purchase contracts between $250 and $2,999 and three written quotes for purchase contracts between $3,000 and $9,999. The policy also requires three verbal quotes for public works contracts between $250 and $4,999 and three written quotes for public works contracts between $5,000 and $19,999. The policy requires Town personnel to document each action taken in connection with each procurement, and requires documentation and an explanation of any contract award made to other than the lowest responsible offer. We tested 13 purchase contracts aggregating $46,188 that were not subject to competitive bidding requirements but were subject to the procurement policy related to verbal and written quotes. The Town properly purchased tires totaling $1,302 from an OGS contract, thereby precluding the need to obtain quotations. However, we found no documentation that Town officials complied with the procurement policy and obtained either written or verbal quotes for the remaining 12 purchases totaling $44,886, as follows: Granite slabs purchased in 2008 ($6,333) and 2009 ($6,629) Culvert piping purchased in 2008 ($5,964) and 2009 ($3,336) Granite curbing purchased in 2008 ($3,514) and 2009 ($2,436) Steel ($4,095) Tires ($3,873) Pipe arch ($3,100) Plow blade tips ($2,220) Oil ($2,130) Flags ($1,256). DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 1717

19 According to the Superintendent, verbal quotes were obtained for the highway purchases, but he did not realize that highway personnel were required to keep the documentation. Although the Superintendent may have obtained verbal quotes for purchases, many of the purchases tested required written quotes, which also should be documented. In addition, although the Supervisor told us he purchased the granite curbing from a sole-source provider, 13 there was no documentation of how he made this determination. Through the Internet, we located more than one granite curbing supplier in the Northeast. Therefore, the purchases of the granite curbing were not from a legitimate sole source and written quotes should have been obtained. When Town officials do not document the quotes they obtain, the Board has no assurance that the items were purchased at the lowest cost and that the Town s procurement policy is operating effectively. Professional Services Competitive bidding is not required for procuring professional services that involve specialized skill, training and expertise; use of professional judgment or discretion; and/or a high degree of creativity. While the Town is not legally required to obtain competitive bids when procuring professional services, the use of a competitive process, such as a request for proposal (RFP), is an effective way to ensure that the Town receives the desired services for the best price. An effective and comprehensive purchasing policy should require Town officials to solicit competition when procuring professional services, which provides taxpayers with the greatest assurance that such services are procured in the most prudent and economical manner. Written agreements between the Town and professional service providers give both parties a clear understanding of the services the professionals are expected to provide and how they will be compensated for these services. Therefore, it is important for the Board to enter into written agreements with professional service providers that indicate the contract period, the services to be provided, and the basis for compensation for those services. Written agreements are required to substantiate reimbursement of actual and necessary expenses. A Board resolution that clearly states the services to be provided and the basis for compensation may also serve this purpose. 18 OFFICE OF THE NEW YORK STATE COMPTROLLER 13 A sole-source provider of goods or services exists when there is clearly and legitimately only one supplier of a specific good or service.

20 The Town s procurement policy does not provide adequate guidance for making purchases of professional services. The policy states that it may not be in the best interest of the Town of Lenox to solicit quotations or document the basis for not accepting the lowest bid for the procurement of professional services. The policy does not provide guidance as to when it is in the best interests of the Town to solicit quotations or proposals. We reviewed payments totaling $49,653 that were made to three professional service providers during our audit period and found that Town officials did not solicit competition for any of these professional services, including those of the Town s outside accountant, an attorney for the Town, and a consultant for the assessor s office. The Town also did not have written agreements with two of the three service providers who provided $20,500 in accounting services and consulting services for the Town. Town officials told us they believed the outside accountant had performed annual audits of the books and records of various Town officials; 14 however, the outside accountant said he completed the Town s annual financial report but did not perform any audits. Without written agreements, there is no clear understanding of what compensation these professionals are entitled to and the extent of the services that they are obligated to provide. When the Town awards professional service contracts without the benefit of competition, Town officials cannot assure Town taxpayers that they are procuring services from the most economically beneficial and qualified service providers and that the procurements are free from favoritism. Additionally, the lack of written agreements with professional service providers can result in the Town paying for services it did not need or paying for services it did not receive. Recommendations 11. The Board should ensure that competitive bids are solicited for fuel purchases, or use State or county contracts to make the purchases. 12. The Board should ensure that all Town employees and officials involved in the procurement process follow the Town s procurement policy and document the quotes they obtain. 13. The Board should revise the Town s procurement policy to ensure that it provides guidance for soliciting competition when procuring professional services. 14. The Board should enter into written agreements or pass resolutions for all current and future professional services, detailing the services to be provided and the compensation for those services. 14 Town Law requires that, on or before the 20th of January, the Board must audit the records of each person who has received or disbursed moneys in the previous fiscal year (or hire an independent public accountant to perform such an audit). DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 1919

21 Fuel Inventory Controls The Superintendent is responsible for ensuring that fuel supplies are adequately safeguarded and accounted for, to protect against the risk of loss, waste, and misuse. To accomplish this, perpetual inventory records must be maintained to show the amount of fuel purchased and used and the balance remaining in inventory. In addition, the fuel balances in the perpetual records must be periodically reconciled to physical inventories, and material discrepancies investigated and resolved. It is also important for Town officials to review fuel usage reports to ensure that fuel is used only for Town purposes and that all fuel is accounted for. The Town maintained two above-ground fuel storage tanks at its highway facility: a 1,000-gallon tank for gasoline and a 1,000-gallon tank for diesel fuel. During the audit period, the Town purchased about 5,200 gallons of gasoline and about 16,100 gallons of diesel fuel costing approximately $65,500. Diesel fuel is used by the Highway Department and gasoline is used by the Highway Department, Supervisor, assessor, and codes enforcement officer. The Superintendent did not ensure that fuel supplies were adequately safeguarded and accounted for. Fuel logs were maintained showing quantities of fuel delivered and dispensed; however, perpetual inventory records were not maintained to show the amount of fuel in the tanks at any given time. The Town did not have a calibrated stick or electronic gauge that would enable the Superintendent to take an accurate physical inventory of the fuel on hand. Consequently, perpetual inventory records were not reconciled to physical inventories. Due to these internal control weaknesses, there is a risk that gasoline or diesel fuel could be stolen and the shortage not be detected. We compared fuel purchases with usage records from January 2008 through June 2008 in order to determine if fuel purchases were reasonable based on the recorded usage for the six-month period. Although we did not identify any significant discrepancies, this does not diminish the need for the Superintendent to strengthen controls over the Town s fuel inventories to reduce the risk of misuse or theft. Recommendation 15. The Superintendent should maintain perpetual inventory records that identify the quantities of fuel purchased/delivered, dispensed, and on hand. These records should be reconciled to periodic physical inventories and any differences identified should be promptly investigated and resolved. 20 OFFICE OF THE NEW YORK STATE COMPTROLLER

22 APPENDIX A RESPONSE FROM LOCAL OFFICIALS The local officials response to this audit can be found on the following page. DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 2121

23 22 OFFICE OF THE NEW YORK STATE COMPTROLLER

24 APPENDIX B AUDIT METHODOLOGY AND STANDARDS Our overall goal was to assess the adequacy of the internal controls put in place by officials to safeguard Town assets. To accomplish this, we performed an initial assessment of the internal controls so that we could design our audit to focus on those areas most at risk. Our initial assessment included evaluations of the following areas: Town Supervisor s records and reports, cash receipts and disbursements, purchasing, payroll and personal services, Town Clerk/Tax Collector, and Justice Court operations. During the initial assessment, we interviewed appropriate Town officials, performed limited tests of transactions, and reviewed pertinent documents such as Town policies, Board minutes, and financial records and reports. After reviewing the information gathered during our initial assessment, we determined where weaknesses existed, and evaluated those weaknesses for the risk of potential fraud, theft, and/or professional misconduct. We then decided upon the audit s objectives and scope by selecting for audit those areas most at risk. We selected highway payroll, payments and services to outside organizations, procurement, and fuel controls for further audit testing. Our examination included the following: We interviewed Town officials and documented and evaluated internal controls related to our audit objectives addressing highway payroll, procurement, and fuel inventories. We compared the five highway employees leave time accrual records to credited leave as authorized in the Board s reorganization meeting minutes and available timesheets for the audit period to ensure that leave time was accurately accrued and recorded. We analyzed the compensatory time records of highway employees. We reviewed highway payroll allocations. We reviewed highway wages to determine if the payments were Board-authorized. We reviewed highway employee timesheets to determine if services were provided to outside organizations. We also examined supporting documentation for the services provided. We reviewed abstracts (warrants listing claims approved for payment) and related supporting documentation for payments to outside organizations. We reviewed the Town s procurement policy and evaluated its adequacy. We examined a sample of five contracts totaling $302,990 and other supporting documentation to determine if the Town complied with competitive bidding laws. We also calculated the estimated cost savings the Town could have achieved had it purchased fuel on OGS contract. We examined a sample of 13 contracts totaling $46,188 and other supporting documentation to determine if the Town sought and documented quotes, as required by the procurement policy. DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 2323