Internal Audit Report

Transcription

1 Internal Audit Report Non-Capitalized (Controlled and Non-Controlled) Consumables Management TxDOT Internal Audit Division

2 Objective To determine whether districts and divisions have an adequate process for management and monitoring purchases under $5,000. Opinion Based on the audit scope areas reviewed, control mechanisms are effective and substantially address risk factors and exposures considered significant relative to impacting reporting reliability, operational execution, and compliance. The organization's system of internal controls provides reasonable assurance that most key goals and objectives will be achieved despite significant control gap corrections and improvement opportunities identified. Control gap corrections and improvement opportunities identified are likely to impact the achievement of the organization's business/control objectives, but management has agreed to corrective action plans to address the relevant risks within 6 months. Overall Engagement Assessment Satisfactory Finding 1 Title Incorrect Usage of Comptroller Object Code Classifications Finding Operating Control Design Effectiveness Rating X X Needs Improvement Management concurs with the above finding and prepared management action plans to address deficiencies. Control Environment The Texas Comptroller of Public Accounts (the CPA) defines controlled items and corresponding comptroller object codes ( comp object codes ). Manual and automated input of these comp object codes into the TxDOT enterprise resource planning system determines a purchased item s accounting treatment and whether an item will require an Asset Identification number ( Asset ID ). Each purchase made through the enterprise resource planning system goes through three levels of approval prior to the completion of the purchase: supervisor, purchaser, and lastly finance prior to payment of the purchase. When a comp object code is used during a purchase, an Asset ID must be entered in order for the purchase to be received and the purchase to be completed within the system if the item has a unit cost greater than $500 and is on the CPA controlled item listing or identified as an item needing capitalization. Through an external interface, assigned Asset IDs are filtered automatically to the State Property Accounting system. Annually, each district/division (DD) is responsible for performing an inventory count of their respective controlled inventory to ensure accurate external reporting. Support Services Division (SSD) is the division responsible for the process of tracking capitalized and controlled items, and the disposal of surplus and salvage items. However, SSD, doesn t monitor the classifications of each purchase centrally and is dependent on each DD to appropriately classify each requisition, manage its inventory of controlled/capitalized items, and provide notification to SSD when items require disposal. August

3 Summary Results Audit testing completed requiring management action. Finding Scope Area Evidence A judgmental sample was made within the total population of fiscal years (FY) 2015 and 2016 purchases for specific categories to review for proper comp object code classifications. 1 Asset Verifications and Monitoring Comp Object Code Classifications: 346 of 952 (36%) individual televisions (TVs) and cameras, totaling $644,907, purchased with unit prices $500 and greater were incorrectly classified as non-controlled items which is contrary to CPA policy. 289 of 4,792 (6%) individual purchases totaling $6,948,827, with a unit price greater than $5,000, were assigned an expense comp object code. Further analysis, as noted in the Management Action Plan (MAP), will be performed to determine further capitalization needs. Audit testing completed not requiring management action. Scope Area Evidence Benford s Analysis, performed on all purchases made during FY 2015 and 2016, to detect anomalies within purchasing patterns. No exceptions were identified. Asset Verifications and Monitoring 42 of 42 (100%) sampled purchases within items under $500 were classified to the correct comp object codes. No exceptions were identified. Audit testing was performed on the management of Information Management Division (IMD) surplus inventory to assess proper controls exist. The following was noted: Mobile Devices Monitoring Observed: Restricted access to the surplus warehouse Pallets of surplus designated for disposal were clearly labelled for pick up and physically separated from new inventory pallets Reviewed: Daily inventory counts performed by third party contractor demonstrated current spare inventory in stock, reorder points, and the August

4 number of units until reorder is necessary No inventory difference was noted between the third party count and auditor observation No exceptions identified Audit Scope The audit scope focused on TxDOT s processes and procedures to acquire, monitor, and report non-capitalized (controlled and non-controlled) consumables. Scope 1: Asset Verifications and Monitoring reviewed the requisition process for all purchases in FY 2015 and 2016 including the purchases classifications and performed a spending analysis. We then assessed the process to track and report controlled items, which are purchases greater than $500 and on the CPA controlled items listing. Scope 2: Mobile Devices Monitoring observed and assessed the surplus inventory management process for mobile devices. The audit was performed by Alberto Calderon, Franciou Niclas, Margarita Vasquez, Monica Washington, and Lindsay Bibeau (Engagement Lead). The audit was conducted during the period from March 3, 2017 to May 17, Methodology The methodology used to complete the objectives of this audit included: Reviewed TxDOT internal process documents for purchasing, property management, and surplus management. Reviewed sections of Federal Code, Texas Code, and the CPA Guide for Annual Financial Reporting for applicable thresholds and asset management requirements. Conducted interviews with key personnel in Support Services (SSD), Financial Management (FIN), Procurement (PRO), Aviation (AVN), Fleet Operations (FOD), Toll Operations (TOD), and Information Management (IMD) Divisions. We also included division directors, third-party contractors, and district personnel such as, section managers, asset coordinators, business services coordinators, and requisitioners to gain a better understanding and walk through the individual DD processes for purchase requisitions, disposal of surplus items, safeguarding items, inventory counts, and tracking controlled items. Performed spend analysis on comp object codes 7300, 7330, and 7334 by district and division on FY 2015 and 2016 for any trending Based on trending and exceptions noted in sample testing, analytical procedures were performed judgmentally on categories below (284,243 individual purchases) and included a review for proper comp object code classification of: o TVs and cameras greater than $500; 952 individual purchases o Services, equipment, and furnishings; 277,099 individual purchases o Mobile phones and tables; 1,400 individual purchases o Expense comp object codes greater than $5,000; 4,792 individual purchases Randomly selected 78 individual purchases between $500 and $4,999, which are included on the CPA controlled items listing, to review for proper classification and reporting. August

5 Randomly selected 42 individual purchases under $500, which are not included on the CPA controlled items listing, to review for proper classification and reporting. Background This report is prepared for the Texas Transportation Commission and for the Administration and Management of TxDOT. The report presents the results of the Non-Capitalized (Controlled and Non-Controlled) Consumables audit, which was conducted as part of the FY 2017 Audit Plan. The CPA provides Annual Financial Reporting guidance and classification standards to state agencies. Per CPA guidance, capitalized items reflected on TxDOT s financial statements (i.e., balance sheet), are generally purchases over $5,000. Some exceptions apply to this classification if the purchase greater than $5,000 will be attached to a building or highway (i.e., security cameras, air conditioning units and traffic lights). Building and highway purchases have higher thresholds for capitalization. Non-capitalized or expensed purchases (i.e., income statement) are purchases of items with a unit price under $5,000. The CPA Manual of Accounts also provides a list of items that are to be controlled (i.e., tagged) by agencies making purchases between $500 and $4,999. Normally purchases made below $5,000 are not required to be controlled, but further controls were placed on specific items including: TVs, cameras, laptops, tablets, and mobile phones. TxDOT, along with other state agencies, is required to report its inventory of controlled items to the CPA. In order to identify and report items that are required to be controlled, the CPA has created comp object codes to classify these purchases. Based on the comp object codes, the enterprise resource planning system will capitalize or expense the purchase, and will determine if the purchase requires an Asset ID. Accuracy of these codes determines proper accounting, reporting, and tracking of these items. We conducted this performance audit in accordance with Generally Accepted Government Auditing Standards and in conformance with the International Standards for the Professional Practice of Internal Auditing. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. Recommendations to mitigate risks identified were provided to management during the engagement to assist in the formulation of the management action plans included in this report. The Internal Audit Division uses the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control Integrated Framework version A defined set of control objectives was utilized to focus on reporting, operational, and compliance goals for the identified scope areas. Our audit opinion is an assessment of the health of the overall control environment based on (1) the effectiveness of the enterprise risk management activities throughout the audit period and (2) the degree to which the defined control objectives were being met. Our audit opinion is not a guarantee against reporting misstatement and reliability, operational sub-optimization, or non-compliance, particularly in areas not included in the scope of this audit. August

6 Detailed Finding and Management Action Plans (MAP) Finding No. 1: Incorrect Usage of Comptroller Object Code Classifications Condition A review of purchases with expense comptroller object codes ( comp object codes ) in fiscal year (FY) 2015 and 2016 revealed that the codes were incorrectly assigned for the following types of purchases: Televisions (TVs) and cameras greater than $500 Services, equipment, and furnishings Mobile phones and tablets Expense comp object codes greater than $5,000 A purchased item s accounting treatment and whether an item will be controlled or not is determined through the comp object code. Effect/Potential Impact TxDOT inaccurately reported items to the Texas Comptroller of Public Accounts (the CPA) by including items that were identified as non-controlled within the enterprise resource planning system, as well as not reporting items that were identified as controlled. In addition, TxDOT understated the value of the assets within its financial statements by an amount no greater than $7 million, which is to be further assessed by the Financial Management Division. In order for Financial Management Division to correctly classify each purchase in the financial statements, the accuracy of the comp object codes is necessary when determining if the purchases should be 1) capitalized on the balance sheet, 2) attached to the cost of an already capitalized item, or 3) directly expensed. Criteria The CPA Manual of Accounts requires items purchases with a unit price greater than $5,000 to be capitalized, unless noted as an item such as services, or building/highway improvement. Additionally, purchases with a unit price greater than $500, which are also on the CPA controlled items listing, are required to be tracked with an Asset Identification number (Asset ID) and reported to the CPA. Controlled items include televisions, cameras, sound systems, computers, laptops, data projectors, smartphones and tablets. This guidance also provides detailed descriptions for each comp object code such as purchase types, and provides example transactions for each account. Cause The enterprise resource planning system used for requisitioning and purchasing does not have an edit check or warning pop-up to ensure the requester assigns and verifies the correct comp object code to a purchase prior to submitting a requisition. When a requester enters a specific item description or National Institute of Government Purchasing (NIGP) code during the requisition process, the enterprise resource planning system may autopopulate a default comp object code that is not intended to be used. August

7 Evidence For FY 2015 and 2016, 11,377 individual purchases of items with unit costs between $500 and $4,999, totaling $14,203,356 were reviewed for appropriate Asset IDs and comp object code classification. A judgmental sample of 78 demonstrated: 60 of 78 (77%) purchases, totaling $65,044, were incorrectly classified as noncontrolled items. o 8 purchases were identified as misclassified through the review process and assigned an Asset ID Based on trending and exceptions noted in the judgmental sample of 78 individual purchases above, additional audit work on specific categories, as noted below (284,243 individual purchases), within the FY2015 and 2016 purchases, the following were noted to be classified to an incorrect comp object code: TVs and cameras greater than $ of 952 (36%) individual TVs (244 units at a value of $426,428) and cameras (102 units at a value of $218,479) purchased with individual unit prices greater than $500 were classified as non-controlled items which is contrary to CPA policy. Services, equipment, and furnishings below $5,000 27,970 of 277,099 (10%) individual services and equipment rentals (value of $3,548,375) were incorrectly coded to consumables, equipment, and furnishings comp object codes. Mobile phones and tablets 134 of 1,400 (10%) individual tablets and mobile phones (combined value of $65,689) had one or more of the following classification issues: o 21 tablets or mobile phones with unit prices greater than $500 were not classified as controlled items. o 113 tablets with unit prices less than $500 were incorrectly classified as controlled items. Expense comp object codes greater than $5,000 o 289 of 4,792 (6%) individual purchases totaling $6,948,827, with a unit price greater than $5,000, were assigned an expense comp object code. Further analysis, as noted in the Management Action Plan (MAP), will be performed to determine further capitalization needs. Management Action Plan (MAP): MAP Owner: Kenneth Black, Asset Management Branch Manager, Support Services Division MAP 1.1: Evaluate items noted with incorrect comptroller object codes to assess purchases requiring an Asset ID and add the Asset IDs to the items and to the system. Completion Date: September 15, 2017 August

8 MAP Owner: Dee Dee Evans, Business Analyst, Procurement Division Amanda Landry, Accounting Section Director, Finance Management Division Kenneth Black, Asset Management Branch Manager, Support Services Division MAP 1.2: Evaluate current default functionality relating to the comptroller auto population within the enterprise resource planning system and determine the best solution to remediate erroneous object coding for future purchases (either enhancing, correcting or removing the default functionality). Completion Date: February 15, 2018 MAP 1.3: Training will be updated or created to include information such as: What a comptroller object code is and why it is important Where more information on comptroller object codes can be found. Completion Date: February 15, 2018 August

9 Summary Results Based on Enterprise Risk Management Framework Closing Comments The results of this audit were discussed with/provided to the Support Services, Aviation, Fleet Operations, Information Management, Toll Operations Divisions, and the Districts on July 18, The Internal Audit Division appreciates the cooperation and assistance received from the Support Services, Aviation, Fleet Operations, Information Management, Toll Operations Divisions, and the Districts during this audit. August