DEPARTMENT OF INSPECTOR GENERAL OKALOOSA COUNTY, FLORIDA

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1 DEPARTMENT OF INSPECTOR GENERAL OKALOOSA COUNTY, FLORIDA JD PEACOCK II, CLERK OF CIRCUIT COURT AND COMPTROLLER John Hofstad, Okaloosa County Administrator 1250 N Eglin Pkwy, Suite 102 Shalimar, FL Dear Mr. Hofstad, Please find attached the report on our review of Internal Controls in the Growth Management Permitting Office. Our work served as a review of internal controls over Growth Management s process for issuing and receipting funds for building permits in Okaloosa County and came out of discussions with members of your senior management team regarding the need for such a review. I want to take this opportunity to thank you and your staff for the cooperation afforded us. Mr. Kampert and his staff were most accommodating to us during our work. I applaud the proactive approach to addressing internal controls in the Permitting office. Should you have any questions please do not hesitate to call. Respectfully, Samuel S Scallan, Inspector General CC: JD Peacock, Clerk of Courts Elliot Kampert, Director Growth Management encl 601 B N PEARL STREET CRESTVIEW, FLORIDA (850) Extension 3421

2 OKALOOSA COUNTY CLERK OF THE CIRCUIT COURT AND COMPTROLLER INSPECTOR GENERAL Department REPORT ON REVIEW OF INTERNAL CONTROLS IN GROWTH MANAGEMENT PERMITTING OFFICE REPORT NO. BCC REPORT ISSUED JANUARY 16, 2018 REPORT ISSUED BY: SAMUEL SCALLAN, INSPECTOR GENERAL

3 Contents Executive Summary... 2 Purpose... 3 Background... 3 Fax Permits... 3 On Account-Escrow Balances... 4 Our Review... 4 We only Examined Controls over Building Permits... 4 Where a Control Weakness Can Occur... 5 Establishing permitting fee amounts including cashiering, receipting and issuing permits... 5 Findings and Recommendations... 6 Permitting Techs... 6 Incompatible Duties... 6 Monitoring and Oversight is the Key... 6 Fees can be Changed and Deleted-Flagged... 6 Monitoring and Oversight is the Key... 7 On Account-Refunds... 7 Financial Coordinator... 8 There are numerous control issues with the current arrangement Planning Office -Ferdon Blvd Fee Waivers/Adjustments Not Included in Ordinance or Resolution Approved by the Board... 9 Written Policies... 9 Accounts Receivable... 9 Consistency in Documentation provided to Clerk of Courts The Importance of the Building Inspectors as a Fee Control and Monitor Efficient and Effective Operations Daily Cash Summary Report and End of Day Balancing South-end Permitting Office North-end Permitting Office Duplicate Deposit Slips and Timely Reporting Exhibit A Management s Response

4 REPORT ON REVIEW OF INTERNAL CONTROLS IN GROWTH MANAGEMENT PERMITTING OFFICE Executive Summary We have conducted a review of internal controls over the assessing, billing and colleting of building permit fees in the Okaloosa County Permitting Office. The assignment comes out of discussions with members of the County s senior management team regarding the need for such a review. Building permits are issued using an automated application; Eden. The system will assess the amount of fees owed for the work to be performed. It will bill and track amounts owed and the system receipts fees collected. Generally, controls built into the software application are sufficient however, we did find several control weaknesses regarding user rights and roles for several employees. We have discussed these weaknesses with management and they have addressed them in their written response contained at the end of this report. Standards for our work require that we perform follow-up activities to access the effectiveness of managements corrective actions. 2 P age

5 We have conducted a review of internal controls over the accessing, billing and collection of Building Permitting fees by the Okaloosa County Growth Management s Permitting office. The assignment comes out of discussions with members of Okaloosa County s senior management team regarding the need for such a review following the revelations of the misappropriations of tap-on fees in the Water & Sewer Department. While this assignment is more of a consulting engagement rather than an audit, our work was conducted in accordance with Standards for the Professional Practice of Internal Auditing promulgated by the Institute of Internal Auditors and generally accepted principles and quality standards approved by the Association of Inspectors General. Purpose The purpose of our audit was to identify and evaluate the effectiveness of controls over the assessing, billing and collecting of permitting fees by the Permitting Office. Background Problems identified in the Okaloosa County Water and Sewer tap-on fees process centered around a lack of adequate segregation of duties over billing and collecting tap-on fees known as capacity expansion charges (CEC) and cost of construction charges. Secondarily, there was a lack of automation or direct linking of receipting and accounting for such fees to issuing an authorization letter and installing a water meter (tap-on.) Because of this, the Inspector General s office reached out to the County Administrator to suggest that a review of similar receipting controls may be warranted in the County s Growth Management Permitting and Inspections offices (Permitting). The County Administrator concurred. Throughout this assignment, we met and worked with numerous employees in the Growth Management Department and found them all to be honest, competent and dedicated employees. However, as we have seen in the past, trust is not an internal control and therefore controls must be designed to guard against occasions where someone with less than honorable intentions assume one of the positions within the Permitting office. Fax Permits Okaloosa County issues building permits to a contractor prior to paying permitting and inspection fees though a Faxed Permit process. This is a business decision made by Okaloosa County management. Faxed permits allow contractors to begin work much sooner than the traditional permit walk-in application method. Information and an application for a permit is faxed to the Permitting office. 3 P age

6 Permitting techs create the permit, adding and assessing required fees, and then print and issue the permit to the builder. Fees do not have to be paid at this time. The County uses Eden to track amounts owed (Accounts Receivable-generally from Faxed permits), however, the County did not purchase the Accounts Receivable Module from Tyler Technologies. Because of this, much of the functionality (and controls) that would normally be built into such a module do not exist. Instead, the County tracks and maintains records of amounts owed by each contractor using a series of Crystal Reports designed by the County s Information Technology Department. This lack of built-in functionality creates an additional step creating an opportunity for human error or worse and adds to the complexity and control concerns (segregation of duties) over receivables regarding who accesses, monitors, reconciles and controls the amounts owed by each contractor. On Account-Escrow Balances In some organizations clients are permitted to place funds on deposit to be accessed as needed by the agency. One such example is attorneys who place funds on deposit with the Clerk of Courts to be drawn down as needed by the Clerk when an attorney files court papers electronically requiring the payment of fees. While Okaloosa County does not allow escrow deposits for customers who regularly pull building permits, they will temporarily hold excess funds on account. This occurs when a customer overpays for a permit or when a permit is voided or adjusted and the customer does not request a refund. On account balances are essentially an escrow balance in that these funds are accessed by permitting techs when collecting for the cost of a permit. Our Review Referring to control weaknesses identified in the Water and Sewer Department we examined related controls in place within the Okaloosa County Growth Management Permitting and Inspections operation. We interviewed county staff, examined user rights and roles with the assistance of the County s Information Technology Department, studied the functionality of the Eden permitting system through review of the operating manual and observed the permitting and receipting process at both the north and south end office. We performed limited testing and our assessment of controls was limited to those over billing, receipting and issuing for building permits. We only Examined Controls over Building Permits 4 P age

7 Our review and assessment of controls was limited to controls over creating and issuing Building Permits. We did not examine processes and related controls over contractor Licensing or Code Enforcement. These are two areas that also fall under Growth Management and are administered by the Permitting Office. We want to point out that the functionality of the Eden system used for issuing building permits is the same for Licensing and Code Enforcement. Control weaknesses identified for Permitting more than likely exist for assessing and collecting fees for Licensing and Code Enforcement. We encourage management to perform a self-assessment of controls in those areas. Where a Control Weakness Can Occur There is professional guidance addressing segregation of duties in business over a variety of accounting functions including cashiering and accounts receivable. The two areas while related are separate functions within an accounting system. Within the permitting process there are two potential areas where control weaknesses could exist: Establishing permitting fee amounts including cashiering, receipting and issuing permits and Billing and Accounts Receivable (A/R). Establishing permitting fee amounts including cashiering, receipting and issuing permits The process for Permitting involves several steps including: establishing the fee amount to be charged collecting cash and issuing a receipt making the deposit reconciling the deposit amount to receipt totals and posting the entries into the accounting system. The idea is to distribute these functions amongst different employees so that no one employee controls any two of them. 5 P age

8 Findings and Recommendations Permitting Techs Incompatible Duties Permitting techs create a permit, determine fees to be assessed, issue the permit and collect and receipt funds (cashier). In an ideal setting the duties of permitting, including determining the amount to pay, would be assigned to someone other than the person responsible for collecting and receipting those fees. Stated another way, cashiering/receipting for a permit should be assigned to someone independent of the permitting process. Monitoring and Oversight is the Key Recognizing that there is limited staff in the three locations that bill and receipt for permits, creating a cashiering function at each location is not cost effective. As an alternative, we recommend that daily transactions be reviewed by the Permitting Supervisor for irregularities and reasonableness of amounts though an end of day report that summarizes permitting and receipting activity. The form and content of the report should be developed by the Permitting Supervisor who is best able to define the format and contents needed to perform such a review. Fees can be Changed and Deleted-Flagged The Eden system has been programmed to generate various types of building permits. Each permit has been programmed to assess a variety of fees depending on the type of permit and is based on fee tables containing fees adopted by the Board of County Commissioners. Based on a business decision made by Okaloosa County, permitting clerks can change or delete fees generated for the various permit types in Eden. Every permit starts with a base permit fee of $70.00 and the amount for that permit increases depending on the various types of work performed under that permit. However, under certain circumstances associated with individual permit applications, the County Building Official and Permitting Supervisor have instructed employees to waive the base fee in some instances. For example, if an applicant is applying to construct a new home with a detached garage, a permit is required for each structure; however, because the structures are being built concurrently as part of the same project, the base fee is waived for the detached garage. All other fees for the garage (electrical, mechanical, plumbing, etc.) are still applied. In another example, and in accordance with the interlocal agreements executed between Okaloosa County and several municipalities, certain fees are also waived when issuing permits for construction within the city limits 6 P age

9 of Mary Esther, Laurel Hill, Town of Shalimar and the Town of Cinco Bayou. They do not charge the $30 development permit fee because those municipalities are performing that portion of the permit process. These variances in fees cannot be programmed into the Eden fee structure so permit clerks have rights to modify (delete) fees. While the system does generate a flag * when fees have been altered and employees have been instructed to enter a reason for the change, no one monitors this activity. In effect, permitting clerks can waive, adjust or delete fees assessed for permits. Such provides a mechanism to show favoritism to contractors (problem in Water & Sewer). While prohibiting the ability of permitting techs to modify, adjust or waive fees is preferred (a preventive control), a compensating control could be developed. Monitoring and Oversight is the Key We recommend that a report be developed that tracks and displays any instance when the default fee amount is altered (detective control). The report should be prepared daily and pushed out via to the Permitting Supervisor. The form and content of the report should be developed with input of the Permitting Supervisor who is best able to define the circumstances under which fees can be waived or adjusted. The Permitting Supervisor should review the report including the explanations given for irregularities and reasonableness of amounts. The report should be signed and dated acknowledging its review. The report should be filed for audit. Finally, there are no written rules, policies or procedures that define when fees can be adjusted. Permitting techs waive or adjust fees, discussed previously, based on instructions passed by word-ofmouth from one tech to another. We recommend that Growth Management develop written policies and procedures defining what circumstances predefined fees may be waived or adjusted. On Account-Refunds As mentioned previously, a balance on account is created when permit billings and related receipts are adjusted or voided. In addition, an on account balance is created when a customer pays more than the amount due. These balances for the respective customer are tracked in Eden and are available to be applied to the cost of future permits. These balances can also be refunded to the customer should they make a request for a refund. Refunds are processed by the Financial Coordinator and a letter requesting the refund is prepared and forwarded to the Clerk s Finance Department who issues a check. While appropriate information is contained on supporting documentation sent to the Clerk s Finance Department, no one independent of the Financial Coordinator is verifying this information as the Clerk s Finance Department personnel do not have access to the Eden System. In effect, no one is monitoring requests for refunds submitted by the Financial Coordinator. We recommend that requests for refunds be prepared by the Financial Coordinator and forwarded along with supporting documentation to the Permitting Supervisor. The Permitting Supervisor will verify the amount owed through the Eden system and then forward the refund request to the Clerk s Finance 7 P age

10 Department for processing and payment. The Clerk's Finance Department should be instructed in writing of the change in procedures and instructed to only process refund requests received from the Permitting Supervisor Financial Coordinator In reviewing the current process, we determined that the Financial Coordinator (FC) has incompatible duties. The FC processes billings for Fax Permits, opens the mail, removes checks received for Fax Permit billings and distributes them to the permit clerks for receipting. She also takes end of day cash collections from the two permitting clerks in the north-end office and the techs located in the Planning office on Ferdon Boulevard and prepares the deposit. She also has rights to adjust permit billing amounts and can adjust or void receipt amounts. The FC is also responsible for the overall balancing of all funds collected, receipted and deposited for Growth Management through the Eden Permitting system from all three sites (North, South and Planning Office. She sends a one page summary of her reconciliations of balancing to the Clerk s Finance Department for recording revenues in the accounting system. The FC sends reports of monthly customer balance summaries of outstanding accounts/receivable to Clerk Finance for recording. She also sends them a monthly summary report of On Account, discussed previously. No one that we interviewed monitors the on-account balances or verifies when they are applied to a customer s permitting costs. There are numerous control issues with the current arrangement. While the FC does not have user rights to issue receipts, they are authorized to void or edit a receipt and change the amounts billed for permits. These rights are necessary as the FC serves as a back up to the Permitting Supervisor in his/her absence. To compensate for this control weakness, we recommend that a report be designed that tracks and displays those instances when the FC performs such operations. The report should be reviewed daily by the permitting Supervisor. Planning Office -Ferdon Blvd. Funds are collected and receipted in Eden by two planning techs in the Planning Department located on Ferdon Blvd. Typically, these fees are planning fees. Employees in this office do not issue building permits. When funds are received, the planning tech sends an to the FC informing them that funds have been received. The Financial Coordinator (FC) physically drives over to that office and picks up 8 P age

11 their collections each day, reconciles those funds to daily receipts written in Eden and then prepares the deposit. While the FC does not have billing or receipting rights she does have the ability to void or adjust receipts and billing amounts. These duties, when combined with access to funds collected in the Planning office, are incompatible duties that must be assigned to different employees. In addition, employees should not be transporting funds. We recommend that only one of the two employees in the Planning Department be given receipting rights in Eden. At the end of the day that employee should perform an end of day close out as described previously. Such should be done in the presence of the other employee. Both should be present when the deposit slip is prepared and funds are placed in a deposit bag. Arrangements should be made with the County's armored car service for a pickup from the Planning Office. The daily balance report and related paperwork can then be scanned and ed or sent via courier to the Financial Coordinator. Fee Waivers/Adjustments Not Included in Ordinance or Resolution Approved by the Board As mentioned previously fees are waived under certain circumstances. The example given is the practice of waiving the base fee amount for permits issued in tandem with a construction permit. In the other example provided, the planning fee is waived for permits issued inside of the city limits. We recommend that Growth Management seek Board approval to waive or adjust the Board-approved fee schedule. Written Policies Policies and procedures that would define the use of Eden, its processes, controls and abilities as well as authority granted to the various employees through user rights and rules do not exist. Permits are routinely processed in Eden based only on the knowledge of long-time employees who have learned its functionality over the years. When they retire, or move on, the knowledge goes with them. We recommend that the Permitting office work to establish written procedures on Permitting and the use of the Eden system. Accounts Receivable As mentioned previously, the Eden software product is used for permitting tasks in Okaloosa County. While it has various modules available, the County opted to purchase and use only two modules; Planning and Permitting. There is no Accounts Receivable module and yet as we know, processing a FAX Permit creates an amount due from the contractor thereby creating an Accounts Receivable. 9 P age

12 Because the County did not purchase the Accounts Receivable module, Growth Management tracks the amounts owed by numerous contractors using a Crystal Report. This report, designed by the County s I/T Department is referred to as a Fax Billing Summary, extracts data from various data fields in Eden to build an accounts receivable report. In theory, the report should extract all balances owed by contractors who have received a permit but who has not yet paid for it. The majority of amounts owed are from FAX Billings. Unrelated to a FAX Permit, GM will occasionally adjust the amount billed on a permit as needed. This can occur when a contractor notices that a permit was issued for the wrong amount or when a contractor decides to cancel a construction job and requests that the permit be cancelled. When this occurs, key employees adjust or cancel the receipt amount on which the permit was paid. This, in effect creates an amount due from the contractor. In theory, the outstanding balance created by this adjustment should be reflected on the Crystal report designed for reporting amounts owed. This is important because errors in billing and receipting can and do occur. We tested the accuracy of the contents of the report by adjusting a receipt for a permit and discovered that the report does not pick up this balance, rather, the report only picks up the amount of funds owed from a Fax Permit. According to those we interviewed, the primary purpose of the Faxed Permit report is to monitor and track amounts owed for building permits. As designed, the report does not accomplish this goal. We recommend that the County s Information Technology Department modify the Fax Permit Summary Report to capture and report any amounts owed on a permit not just Fax Permits. Consistency in Documentation provided to Clerk of Courts There is inconsistency in documentation provided to the Clerk of Courts to support daily accounting entries. Growth Management should meet with members of the Clerk s Finance Department to discuss and agree on exactly what documentation the Clerk requires as support for billings (accounts receivable) and receipts (revenues). In addition, requirements to retain secondary, supporting documentation at Growth Management should be discussed and agreed to. The Importance of the Building Inspectors as a Fee Control and Monitor As mentioned previously, permitting techs, by design, have latitude in the amount charged for a building permit. Such is necessary due to the number of exceptions/waivers to certain fees that cannot be programmed into the Eden system. This constitutes a control weakness over fees assessed for building permits. Because of this latitude, permitting techs can adjust fees or simply not assess them thereby allowing an unscrupulous tech to collude with contractors to adjust or waive required fees in exchange for personal gain (kickback). Because of this acknowledged weakness, the work performed 10 P age

13 by building inspectors becomes even more important given their responsibility to monitor and approve work performed by a contractor. Such work is itemized on the building permit. In the normal course of their duties they review work authorized on a building permit and compare it to the work actually performed. Should they encounter work being performed that is not authorized under the permit, they should alert the permitting supervisor who can perform a further review. We recommend that the County's building inspectors be alerted to this important aspect of their work and establish a line of communication with the permitting supervisor. As mentioned previously one employee opens the mail, removes checks received for fax billings and distributes them to the permit clerks for receipting. The same employee generates billing reports, mails out bills for FAX permits and also has rights to modify or void billing and receipt amounts. Efficient and Effective Operations While the purpose of this review was to evaluate the effectiveness of internal controls over the permitting process we wish to share observations regarding the efficiency and effectiveness of operations. Daily Cash Summary Report and End of Day Balancing South-end Permitting Office The south-end Permitting and Inspections office conducts end of day cashier (permit tech) closeout by running a Daily Cash Summary Report (Exhibit A). The report, designed for this purpose, summarizes daily receipts issued. It sorts these receipts first by tender type (cash, check, credit/debit and on account (discussed earlier). Within each tender type the report lists each receipt issued and sorts those by what permit(s) the funds are paying for. This enables the cashier to balance the contents of his/her cash drawer to cash, checks and credit card charges. This report is an excellent tool to aid the cashier in the end of day balancing routine. In addition, each permit tech prints a duplicate copy of every receipt issued that day. Printing these receipts is duplicative as the Daily Cash Summary Report essentially pulls the same data from Eden as that appearing on the Daily Cash Summary Report. According to those we spoke with, duplicate receipts are printed based on instructions received from the Clerk of Courts Finance Department. We spoke with the Clerk s Finance Department who informed us that there is no need to print duplicate receipts if essentially the same information is contained on the Daily Cash Summary Report. We recommend that the Permitting Office discontinue the practice of printing and storing duplicate receipts. 11 P age

14 North-end Permitting Office The north-end Permitting and Inspections office conducts end of day cashier (permit tech) closeout using duplicate receipts only. They do not run the Daily Cash Summary Report. At the end of each day the permitting tech provides the Financial Coordinator with a copy of each receipt issued by them for that day along with the related funds. The FC uses these receipts to balance out the permitting techs cash drawer. This practice is not efficient and wastes paper. Instead, we recommend that the North-end Permitting and Inspections office use the same report that the South-end uses and discontinue the practice of printing and storing duplicate receipts. Duplicate Deposit Slips and Timely Reporting In discussions with the Permitting Office s Financial Coordinator we learned that the daily summary of receipt activity is not sent to the Clerk of Court s Finance Department until they have received the bank validated deposit slip. In discussions with staff in the Clerk s Finance Department we learned that it is not necessary to delay the transmittal. Bank notices of errors in a deposit, should one occur, will be forwarded by the Clerk s Finance Department to Growth Management s Financial Coordinator for investigation and correction. We recommend that the FC discuss the need to delay remitting daily closeout reports until bank verified deposit slips have been received with the Clerk of Court s Finance Department. Please see management s response to these findings following. End of Report 12 P age

15 Exhibit A Management s Response 13 P age

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