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HomeMy WebLinkAboutAudit Reports - Public - Miscellaneous Billing and Collections Audit - 10/22/2018 Date: October 22, 2018 To: Kevin R. Phelps, City Manager From: Candace MacLeod, City Auditor Subject: Miscellaneous Billing and Collections Audit In accordance with the FY18 approved audit plan, the City Auditor’s Office conducted an internal audit of the City of Glendale’s (City) miscellaneous receivables (MR) billing and collections process in May 2018. In FY18, the City billed approximately $18M. in MR. As a significant revenue source, it is important to ensure controls and governance processes are effective. The audit includes 15 recommendations to strengthen controls. Management concurred with 14 of the recommendations and expects to address them by June 30, 2019. Observations included: • Over $233,247 in MR accounts that are over 120 days delinquent have not been sent to Revenue Recovery (RR), the City’ internal collections division. • Past due MR accounts had not been sent by RR to the City’s previous third-party collections agency for over five years. • Testing identified inadequate separation of cash handling duties and lack of secondary approval of MR invoices in several City divisions. • A delinquent account write-off policy has not been developed and past due MR accounts dating back over 15 years have not been written off. • Sampling identified $194,692 in credit memos that were issued without a secondary level of review or were approved by an individual lacking appropriate signature authority. Attachment cc: Chris Anaradian, Assistant City Manager Michael D. Bailey, City Attorney Lisette Camacho, Assistant Director Budget and Finance Tom Duensing, Assistant City Manager Craig Johnson, Director of Water Services Vicki Rios, Director of Budget and Finance 5850 West Glendale Avenue | Glendale, AZ 85301 MR Billing and Collections May 2018 ______________________________________________________________________________ _____________________________________________________________________________________ City Auditor’s Office 1 MR Billing and Collections Introduction As part of the FY2018 approved audit plan, the City Auditor’s Office conducted an internal audit of the City of Glendale’s (City) miscellaneous accounts receivables (MR) billing and collections process in May 2018. MR invoices are generated by departments outside of the City’s enterprise systems. In FY2018, the City billed an estimated $18M. in MR, representing 2,143 invoices. As a significant revenue source for the City, it is critical to ensure that MR controls and governance processes are appropriate. The Accounting division in Budget and Finance is responsible for the MR billing process and works in conjunction with departments. City departments are responsible for preparing invoice requests in SharePoint and forwarding them to Accounting, where invoices are generated in QuickBooks and sent to customers. Since QuickBooks is a standalone system, most MR revenue is not recorded in PeopleSoft financials until an invoice is paid through the cash receipts system. Acc ounting is also responsible for monitoring past due accounts and forwarding them to Budget and Finance’s Revenue Recovery (RR) division, after departmental approval, where a final attempt to collect is made prior to sending the account to collections. The City utilizes a third-party collections agency to collect MR accounts over 120 days past due. Pursuant to Glendale City Code, Chapter 2, Article 1, Section 2.4, any person with a delinquent account will be responsible for all costs incurred by the City in collecting those delinquent funds, including the cost of a third-party collections agency. Table 1 summarizes the amounts billed and collected by MR over the past two years, as well as credit memos issued by departments. These amounts exclude several divisions, including Libraries and Community Housing, which independently manage their past due accounts, or utilize the services of an external contractor, separate from the one utilized by RR. Table 1 – Summary of MR Billings, Collections, and Credit Memos Category FY2017 FY2018 MR billings $18,617,603 $18,139,360 MR collections $18,629,238 $18,626,478 Credit memos issued ($322,858) ($126,047) The auditors performed an analysis of past due accounts. As of February 28, 2018, Accounting reported that 43% ($2.3M) of MR accounts were current, 23% ($0.8M) were between 30 and 90 days past due, and 34% ($1.8M) were over 120 days delinquent. A summary of past due MR accounts, by category, is provided in Table 2. ______________________________________________________________________________ _____________________________________________________________________________________ City Auditor’s Office 2 MR Billing and Collections Table 2 – Summary of Past Due MR Accounts (as of 2/28/2018) Category No. Accounts Dollar Amount % Current Accounts 205 $2,295,075 43% 30 Days Past Due 72 $572,192 11% 60 Days Past Due 30 $28,789 8% Over 90 Days Past Due 24 $219,246 4% Over 120 Days Past Due 2,523 $1,811,222* 34% Total 2,854 $4,926,524 100% *Approximately $891,379 of this amount relates to deed restrictions, accounts in litigation or bankruptcies. Purpose and Objectives The purpose of the audit was to assess the adequacy and effectiveness of internal controls and reporting related to the City’s MR processes. Scope and Methodology The scope of the audit was July 1, 2017 to February 28, 2018 and excluded the Library, which utilizes the services of an external collections agency unique to libraries, as well as Community Housing, which manages their own accounts. To gain an understanding of the applicable processes, policies, and procedures, we interviewed staff from Budget and Finance and various City departments. We also sampled invoices and reviewed various documents including: • Budgets and financial reports • Collection contracts and reports • Department invoices and supporting documentation • Laws, regulations, policies, and procedures Observations, Recommendations, and Management Responses Our testing identified the following observations: 1. Accounting records report $233,247 in MR accounts over 120 days delinquent that were not sent to Revenue Recovery. Customer aging reports should be monitored, and actions should be taken in a timely manner to collect past due accounts. A review of City accounts over 120 days past due that were not sent to RR is summarized in Table 3. ______________________________________________________________________________ _____________________________________________________________________________________ City Auditor’s Office 3 MR Billing and Collections Table 3 – Summary of MR Accounts Over 120 Days Past Due Not Sent to RR Department/Division No. Accounts Amount Airport 34 $7,404 Code Compliance 2 $312 Convention and Visitor’s Bureau (CVB) 53 $14,675 Development Services 14 $4,082 Engineering 7 $29,670 Fire 186 $31,900 Parks & Recreation 7 $13,551 Police 2 $2,170 Recycling 5 $73,089 Water Services 303 $56,394 Total 613 $233,247 Table 3 identifies 613 MR accounts over 120 days past due totaling $233,247 that were not sent to RR to start the collections process. Additionally, MR’s aging report included another 1,345 accounts over 120 days past due totaling $575,423 that were sent to collections from 2003 to 2012. However, RR did not have any records of these accounts. Furthermore, RR reported that they could attempt to collect 490 Code Compliance liens totaling $71,331 included in the over 120 days category reported in Table 2. RR’s internal practices and MR’s outstanding invoices and collections procedures (2016) discuss the steps that will be taken for invoices 90 days or more past due and are summarized in Table 4. Additionally, Accounting emails departments a list of their past due invoices with aging dates of 30, 60, 90, and 120 & over days for their review. If an invoice is greater than 120 days past due, Accounting will ask the department if they want to send it to RR for collection. If the department approves sending an account to collections, Accounting will forward it to RR. Table 4 – MR Collection Procedures Account Status MR Procedures RR Practices 90 days past due MR requests department’s approval to send past due invoices to RR. If the department approves sending the invoice, RR will send a final demand letter for account balances of $25 or more, and if not paid in 10 days, the account will be sent to the third-party collections agency. 120 days past due MR asks departments to resolve by approving the request to send the past due invoices to RR. If the department does not approve the request, Accounting will continue to track them and notify the department monthly that the invoices are still past due. RR will send a final notice requesting full payment within 10 working days to avoid further notice. ______________________________________________________________________________ _____________________________________________________________________________________ City Auditor’s Office 4 MR Billing and Collections A review of current MR and RR procedures indicated the following control issues: • Although MR procedures state that departments must resolve invoices that are 120 days or more past due, there is no control to ensure that the delinquent account is turned over to RR in a timely manner. Accounting indicated that some departments did not respond to their requests to let them know whether the accounts should be forwarded to collections and the accounts were never forwarded to RR. • During the audit, RR reported that Accounting was not providing RR with past due account information. The RR supervisor indicated that they did not have access to the MR aging reports in SharePoint and did not receive account aging reports. As a result, RR did not send out any final notice letters for past due accounts in FY2017 or FY2018. • Although RR will send out a final notice, the steps involved with this process are not formalized or referenced in the MR procedures. • MR procedures state that if a customer does not pay an invoice within 30 days after receipt of a demand letter, the account will be sent to a third-party collections agency. However, RRs demand letter states that the account will be sent to collections if the past due amount is not paid within 10 days. Furthermore, MR procedures state RR will send demand notices for account balances of $50 or more. RR reported that notices are sent out for account balances of $25 or more. • All employees interviewed during the audit outside of Budget and Finance indicated they were unaware of any City policies on MR or collections. They also indicated that they had not developed internal procedures for internal billings and collections processes within their department or division. • Management reports are not sent out to department heads to allow for their review and monitoring of past due accounts. Potential Risk: High – The City is not recovering funds that it is owed for services already provided. Procedures that are inconsistent or unwritten may lead to confusion or error. Recommendation: 1.1 Budget and Finance enhance controls to ensure past due accounts are sent to RR in a timely manner. Consideration should be given to sending past due accounts to RR earlier than 90 days. 1.2 Budget and Finance review, update, and communicate citywide MR and RR collections policies and procedures and train staff. 1.3 Budget and Finance enhance communication and reporting between MR, RR, and City departments as it relates to past due accounts. Management Response: 1.1 Concur. Budget and Finance will develop policies and procedures to enhance controls over MR collections by December 31, 2018. 1.2 Concur. Budget and Finance will develop additional citywide training for MR and RR by April 30, 2019 ______________________________________________________________________________ _____________________________________________________________________________________ City Auditor’s Office 5 MR Billing and Collections 1.3 Concur. Budget and Finance will develop policies and procedures to enhance communication between Accounting, RR and Departments regarding MR collections by December 31, 2018. 2) Records indicate that past due MR accounts had not been sent by Revenue Recovery to the City’s previous third-party collections agency for over five years. In 2012, the City entered into a three-year collections services agreement with Progressive Financial Services for sales tax, utility, and MR accounts. The agreement was renewed twice, each for a one-year period, expiring in September 2017. RR staff reported that 127 past due MR accounts totaling $82,907 were sent to Progressive around the time the agreement was executed so that the collections process could begin. In 2017, when the City terminated their contract with Progressive, the agency provided the City with a listing of MR accounts that had not been collected. The listing included the same 127 MR accounts that were sent to them by the City, indicating that none of the delinquent MR amounts had been collected. RR staff also reported that they have no other records indicating that any other past due MR accounts were transferred over to Progressive during the term of the contract. Although Progressive submitted monthly collections status reports to the City showing collections activity on other types of accounts, no one was effectively monitoring the reports and alerting management as to the status of past due MR accounts sent over to collections and the performance of the collections agency on MR accounts. In October 2017, the City entered into a debt collections services agreement with Transworld Systems (TSI) for an initial two-year period for sales tax, utility, and MR accounts. Under the agreement, TSI would be paid 11.5% from collected funds for each assigned account that has been placed for collection on behalf of the City. Since October, there were two amendments to the agreement to clarify TSIs compensation and add Community Housing accounts. In May 2018, 63 past due MR accounts totaling approximately $95,000 were transferred to TSI for collection. As at the time of the audit, TSI had not collected any of these delinquent accounts. Potential Risk: High – The City’s risk of not recovering past due accounts increases with time. Lack of adequately monitoring the performance of the collections agency has resulted in zero recovery of amounts owed to the City. Recommendation: 2.1 Budget and Finance ensure past due MR accounts are sent over to the City’s collections agency by RR in accordance with policy. 2.2 Budget and Finance assign responsibility for monitoring and reporting on the performance of the City’s third-party collections agency to ensure MR recovery efforts align with management’s expectations. Management Response: ______________________________________________________________________________ _____________________________________________________________________________________ City Auditor’s Office 6 MR Billing and Collections 2.1 Concur. Budget and Finance will develop policies and procedures to enhance collections of MR by December 31, 2018. 2.2 Concur. Budget and Finance will assign responsibility for monitoring and reporting on the performance of the City’s third-party collections agency to ensure MR recovery efforts align with management’s expectations by December 31, 2018. 3) Testing identified departments with inadequate separation of cash handling duties and lack of secondary approval of MR invoices. City Cash Handling policies state that: • Employees handling cash and checks should be properly trained • Cash should be physically protected using safes or vaults and not be stored in file cabinets • Cash should be collected and transported in dual custody prior to deposit • The person that receives cash should not be the sole person that balances the cash and prepares the deposit • Deposits should be made the next business day • Departments are responsible for ensuring all employees handling cash are properly trained Currently, City departments generate invoice requests in SharePoint. As part of the process, the department can determine whether the invoice requires a secondary level of review or not. If the department indicates that no secondary review is required, the employee generating the invoice can forward it directly to Accounting to generate an invoice. A review of a sample of departments that generated MR invoices identified the following control issues: • The same employee both received and deposited cash and checks at the Airport and CVB • Deposits were handled in single custody and cash and checks were stored in a locked drawer at the Airport • Secondary levels of review of invoices were not performed at the Airport, CVB, and Field Operations • None of the departments interviewed by the auditors reconciled MR payments to the general ledger Potential Risk: High – Lack of adequate review increases the risk that errors go undetected. Inadequate separation of cash handling duties increases the risk of theft, loss, or fraud. Recommendation: ______________________________________________________________________________ _____________________________________________________________________________________ City Auditor’s Office 7 MR Billing and Collections 3.1 Budget and Finance ensure MR invoices receive secondary levels of approval at the department level, prior to being forwarded to Accounting. 3.2 Budget and Finance educate departments on the need to reconcile MR payments to the City’s financial records. Management Response: 3.1 Concur. Budget and Finance has developed policies and procedures to ensure MR invoices receive secondary levels of approval as part of the SimpliCity project implementation. 3.2 Concur. Budget and Finance will develop additional citywide training for MR and RR by April 30, 2019. 4) The City does not have a formal write off policy and none of the City’s past due accounts dating back over 15 years have been written off. Past due accounts deemed uncollectible should be reviewed to determine if they should be written off. Policies should be developed to ensure past due accounts are written off in a timely manner. Chapter 2, Section 2-5 of the City Code discusses the collection of delinquent accounts, the determination of collectability, and identifies the levels of approval required for resolving delinquent accounts. Currently, the City records and tracks past due accounts in QuickBooks. A review of the aging of the City’s current past due accounts was performed. The review indicated that the City had approximately 1,345 past due accounts totaling $575,423 dating as far back as 2003. However, a citywide write off policy and procedures have not been developed. According to Budget and Finance, these accounts will be transferred over to SimpliCity when the system goes live on July 1, 2018. Additionally, a review of a sample of past due accounts identified some accounts that were written off by department staff without appropriate signature authority or management approval. Potential Risk: Moderate/High –Past due accounts may be written off without proper approval, increasing the risk of loss or misappropriation. Lack of clear policy direction may result in errors and inconsistent business practices. Recommendation: 4.1 Budget and Finance develop a past due account write off policy in conjunction with City Management, and write off past due accounts in accordance with that policy. City staff should be trained on the policy. Management Response: ______________________________________________________________________________ _____________________________________________________________________________________ City Auditor’s Office 8 MR Billing and Collections 4.1 Concur. Budget and Finance will develop a formal write-off policy by April 30, 2019. 5) Testing identified $194,692 in credit memos that were issued without a secondary level of review or approved by an individual without appropriate signature authority. Policies and procedures should be developed for generating and authorizing credit memos. According to MR procedures, a credit memo is only issued to reduce an invoice and is not recorded in the financial records until payment is received. If a department determines that an invoice was made in error, Finance will process a credit memo upon their request. All other credit memo requests must be approved by an authorized approver up to their level of expenditure authority as defined in FAP 1. Furthermore, although not written in policy, Budget and Finance reported that all credit memos require supervisory approval. In FY2017 and FY2018, the City processed $322,858 and $126,047, respectively, in credit memos. A review of a sample of 10 credit memos issued in FY2017 and FY2018 totaling $198,298 identified the following control issues: • One $3,800 credit memo was issued to cancel an invoice and a new invoice was issued through the Public Facilities, Recreation and Special Events (PFRSE) RecTrac system because the customer agreed to make partial payments. The credit memo was not approved by an authorized signer and the details of the customer’s repayment plan were not documented. • Nine credit memos totaling $194,692 were either approved by an employee without appropriate expenditure authority or did not receive a secondary level of review in CVB, Engineering, Fire, and PFRSE. • All employees interviewed by the auditors, outside of Budget and Finance, were unaware that the City had credit memo procedures. • One invoice was incorrectly numbered as it did not follow numbering procedures. Potential Risk: Moderate/High – Adjustments to invoices may not be properly reviewed or approved, increasing the risk of error or misappropriation. Recommendation: 5.1 Budget and Finance develop a credit memo policy, including controls to ensure credit memos receive a secondary level of review, and train staff. Management Response: ______________________________________________________________________________ _____________________________________________________________________________________ City Auditor’s Office 9 MR Billing and Collections 5.1 Concur. Budget and Finance has developed policies and procedures to ensure credit memos receive appropriate approval as part of the SimpliCity project implementation. 6) Testing identified some invoices that were not sent out or paid in a timely manner. Invoices should be generated and sent out as soon as possible to ensure accounts receivable are recorded and the City collects funds owed to it in a timely manner. City invoices currently state that payment is due upon receipt. However, none of the City policies and procedures reviewed by the auditors state the City’s payment terms or discuss whether penalties are assessed on late payments. Additionally, City staff outside of Budget and Finance that were interviewed during the audit were either uncertain of the City’s payment terms, or thought the standard terms were either 20 or 30 days. The auditors reviewed a sample of 30 invoices to determine the timeliness of invoice billings and collections. Testing indicated that bills were not always generated by some departments in a timely manner, delaying the generation of billings to up to 90 days after the invoice’s due date. Additionally, based on testing, the average time to pay a City invoice was over 42 business days. One $26,384 invoice was sent too late by the City and the department reported the customer was not required to pay it by law. The auditors also noted 53 CVB annual membership dues totaling $24,549 that were sent out two to four months late and were still outstanding at the time of the audit. Furthermore, the auditors identified invoices that were not entered in SharePoint at the time of the audit. Our review also indicated that goals and performance measures have not been developed for MR, including timeframes for which MR accounts should be invoiced, reviewed, or paid. Potential Risk: Moderate - When billing guidelines are not formalized, invoices may not be sent out in a timely manner, delaying the City’s collection of revenue. Additionally, management’s expectations regarding billing and revenue collection may not be met. Recommendation: 6.1 Budget and Finance formalize in policy and communicate the City’s invoice entry requirements and payment terms. 6.2 Budget and Finance develop MR billing and collection timeliness goals and measures and train staff. 6.3 Budget and Finance consider, in conjunction with City Management, whether penalties or interest should be assessed on late payments. Management Response: ______________________________________________________________________________ _____________________________________________________________________________________ City Auditor’s Office 10 MR Billing and Collections 6.1 Concur. Budget and Finance has formalized the City’s invoice entry requirements and payment terms as part of the SimpliCity project implementation. 6.2 Concur. Budget and Finance will develop MR billing and collection performance measures by December 31, 2018 and train staff. 6.3 Concur. Budget and Finance will consider, in conjunction with the City Manager’s office, whether penalties and interest should be assessed on late payments by December 31, 2018. 7) RR staff is funded entirely out of the Water Services Fund; however, their time is also spent on departments in other funds. In accordance with governmental cost allocation models, costs related to rendering internal central support services should be allocated to operating departments or programs that utilize and benefit from them in a fair and equitable manner. Chapter 2, Section 2-4 of the City Code states that any person who has a delinquent account with the City will be responsible for all costs incurred by the City to collect those delinquent funds. This includes any direct costs incurred, including the cost of a third-party collection agency. RR is comprised of three FTEs that include one supervisor, one collections representative, and one customer service representative. The salaries of these positions total $226,500 and are funded entirely out of the Water and Sewer fund, along with any operating costs. However, staff reported that they only spend 60% of their time on Water Services accounts, with the remaining 37% on sales tax and 3% on MR accounts. Furthermore, there are two FTEs in Customer Service which are fully funded out of the Water Services Fund that also spend time researching and applying MR payments. Additionally, RR does not charge fees to recover any direct costs associated with collecting delinquent accounts. Potential Risk: Moderate – Expenditures may not be allocated accurately if operating costs are not charged to the fund(s) to which the operations relate. The City may not be recovering all costs associated with the collections process. Recommendation: 7.1 Budget and Finance review costs associated with MR and RR to evaluate whether they are allocated in a fair and equitable manner to the funds in which they relate. 7.2 Budget and Finance assess, in conjunction with City management, whether direct costs associated with collecting delinquent accounts by RR should be recovered by the City. Management Response: ______________________________________________________________________________ _____________________________________________________________________________________ City Auditor’s Office 11 MR Billing and Collections 7.1 Do not concur. Budget and Finance considers the allocation of costs associated with every service annually as part of the budget process. Revising the current cost allocation has a budget impact that is considered every year. 7.2 Concur. Budget and Finance will consider whether to recover direct costs associated with collecting delinquent accounts by June 30, 2019. 8) Measures can be taken to enhance the efficiency and effectiveness of the MR billing and collections process. City processes should be as efficient and effective as possible to ensure prudent use of taxpayer dollars. Through review of the current RR process and discussion with City departments, several potential process improvements were identified including: • Collecting City fees prior to delivering services to customers to avoid following up with customers for payment on past due accounts. The auditors noted 303 delinquent accounts for Water Services pre-treatment inspections totaling $56,394 that were billed after the services were performed by the City. • Creating citywide searchable reports for RR and other City departments to check the status of their invoices and customer accounts versus sending customized delinquent account reports to individual departments. • Eliminating the use of departmental shadow systems and Excel spreadsheets to track MR invoices and payments. • Eliminating the need for City departments to assume collections duties, including calling customers and following up on past due accounts. • Emailing versus mailing MR invoices to customers to save postage and time. Staff estimated that 60% of invoices are currently emailed to customers. • Increasing the use of electronic payments by customers. Staff estimates that 10% of customers currently pay electronically by EFT/ACH. • Ensuring staff are trained to back up the one employee in Accounting that currently manages MR invoicing. Potential Risk: Moderate – City time and resources may not be expended in the most efficient and effective manner. Recommendation: 8.1 Budget and Finance consider implementing identified efficiencies associated with the MR process, in conjunction with other City departments. Management Response: 8.1 Concur. Budget and Finance will consider implementing efficiencies where the benefit of implementation is deemed to be greater than the cost or risk of loss associated with the change.