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HomeMy WebLinkAboutAudit Reports - Public - City-Wide Asset Management Internal Audit Report - 3/4/2021 FINAL REPORT City of Glendale CITY-WIDE ASSET MANAGEMENT INTERNAL AUDIT REPORT March 4, 2021 Moss Adams LLP 999 Third Avenue, Suite 2800 Seattle, WA 98104 (206) 302-6500 City-wide Asset Management Internal Audit Report for the City of Glendale Table of Contents Executive Summary 1 A. Objectives 1 B. Conclusions 1 Detailed Report 3 A. Introduction 3 B. Background 3 C. Objectives 3 D. Scope and Methodology 3 Findings and Recommendations 5 Process Improvement Opportunities 10 Appendix: Definitions of Audit Findings Rankings 11 City-wide Asset Management Internal Audit Report for the City of Glendale | 1 EXECUTIVE SUMMARY Moss Adams LLP was contracted by the City of Glendale (the City) to evaluate and test internal controls related to the City’s asset management function, including reviewing the process of acquisitions, classification, tracking, maintenance, and retirements of assets, as well as assess the overall performance of the asset management function. This audit did not include coverage of the capital-improvement plan. We performed a variety of procedures to test internal controls and assess the asset management function, including testing samples of asset additions and retirements and repairs and maintenance expenses, examining the plans for maintenance schedules and forecast schedules for replacement of assets, and evaluating the inventory process. This engagement was performed in accordance with Standards for Consulting Services established by the American Institute of Certified Public Accountants. Accordingly, we provide no opinion, attestation, or other form of assurance with respect to our work or the information upon which our work is based. This engagement was also performed consistent with the guidance issued by the Institute of Internal Auditor’s (IIA’s) International Professional Practices Framework (IPPF). This report was developed based on information gained from our interviews and analysis of sample documentation. The procedures we performed do not constitute an examination in accordance with generally accepted auditing standards or attestation standards. Our objectives for this engagement were to:  Determine whether adequate internal controls were in place over the acquisition, classification, tracking, maintenance, and retirement of assets.  Evaluate the City’s maintenance tracking and replacement forecasting schedules and processes.  Evaluate the overall efficiency and effectiveness of the City’s asset management program. The procedures and testing performed identified three areas that require improvement. These are highlighted below: Finding 1. Capital Asset Physical Inventory Counts – High Risk Finding Capital asset physical inventory counts did not occur on a regular basis or at a preset frequency based on a defined methodology. Changes and errors identified during the counts that are occurring are not consistently recorded in the City’s Capital Asset Listing. Recommendation Establish and document a formal physical inventory count process, ensuring adequate coverage of the City’s significant investment in capital assets on a consistent basis. Changes and errors identified during the counts should be promptly recorded in the City’s Capital Asset Listing. City-wide Asset Management Internal Audit Report for the City of Glendale | 2 Finding 2. Asset Additions and Disposals – Medium Risk Finding Capital asset additions and disposals were not recorded in the City’s Capital Asset Listing in a timely manner resulting in large year-end adjustments and a time-consuming update process several months after year-end. Recommendation Improve the Asset Addition and Disposal Forms, provide training to promote compliance in reporting, and update the Capital Asset Listing on at least a quarterly basis. Finding 3. Capital Asset Policies and Procedures – Medium Risk Finding Comprehensive capital asset policies and procedures are not updated to reflect the current processes and systems that the City has in place. Recommendation Develop/update capital asset policies and procedures that specifically address all key elements of the capital asset management function, and implement processes to educate departments on their responsibilities in the process and to monitor compliance. Throughout the internal audit, we also identified three process improvement opportunities related to repairs and maintenance expense tracking, replacement forecasting, and maintenance tracking. These process improvement opportunities should be considered for implementation. Although the focus of this internal audit was to identify opportunities for improvement, it is important to note the areas that are operating well. The City should be commended for the following accomplishments:  Policies and Procedures: While policies and procedures related to the asset management function were not provided during the course of this internal audit, they were provided after the internal audit was completed. Even though they are outdated, they still provide a good baseline for implementing updated policies and procedures.  Readiness for Change: During our interviews, feedback from City employees indicated an eagerness to implement improvements to the asset management function. We would like to thank City staff and management for their time and efforts in assisting with this project. City-wide Asset Management Internal Audit Report for the City of Glendale | 3 DETAILED REPORT Moss Adams LLP was contracted by the City to perform an internal audit over the asset management function, which involves all departments within the City. In particular, the Budget and Finance Department is responsible for keeping a record of capital assets for City-wide financial statements through the use of the capital asset module in the Tyler MUNIS (MUNIS) system. This audit was focused on assets that meet the City’s capitalization threshold, which will be referred to throughout this report as “capital assets.” This internal audit was performed as part of the Fiscal Year (FY) 2020 Annual Audit Plan developed by the City’s Independent Internal Audit Program (IIAP). Our internal audit was performed between August and December 2020. The City’s Budget and Finance Department is responsible for monitoring general ledger (G/L) activity and working with City departments to obtain the appropriate supporting documentation, to ensure that asset additions, transfers, and disposals are properly recorded in the Capital Asset Listing in MUNIS. Currently, when a department has obtained a new asset or needs to dispose of an asset, they will fill out an Asset Addition Form or Asset Disposal Form to notify the Budget and Finance Department of the asset change. Currently, the workflow for the forms is to fill them out manually and then send them to the Budget and Finance Department for recording in MUNIS. In FY 2020, the City recorded over $4 million of asset additions, not including construction-in-progress or infrastructure, and $9 million of asset disposals. The City is also implementing a new maintenance software, Lucity, within select City departments. Lucity will help departments track past and upcoming maintenance of capital assets and aid in the budget process. Our objectives for this internal audit were related to the City’s asset management function. Specifically, the internal audit focused on the following objectives:  Determining whether adequate internal controls were in place over the acquisition, classification, tracking, maintenance, and retirement of assets.  Evaluating the City’s maintenance tracking and replacement forecasting schedules and processes.  Evaluating the overall efficiency and effectiveness of the City’s asset management program. In order to obtain an understanding of the specific processes and overall asset management function, we conducted interviews with City personnel specifically within the Budget and Finance Department and Water Services, who have designated responsibilities related to asset additions, disposal/transfer of assets, asset inventory counts, and maintenance of assets. We reviewed the City’s minimal policies and procedures provided during the internal audit related to capital assets. We performed the following detailed testing procedures: City-wide Asset Management Internal Audit Report for the City of Glendale | 4  Capital Asset Additions and Disposals: To evaluate and test the City’s procedures for identifying and recording capital asset additions and disposals, we performed the following: ○ Obtained a MUNIS system-generated General Ledger (G/L) Detail Report of all repairs and maintenance expense account activity from January through September 2020. For all expenses that were $5,000 or more (75 transactions in total), we reviewed supporting documentation for the expense to assess whether it was correctly expensed or if the expense should have been capitalized. ○ Obtained the City’s current Asset Addition Form, which is used to record new assets, and evaluated how it could be simplified or otherwise improved. ○ Obtained the City’s current Asset Disposal Form, which is used to record asset disposals or transfers, and evaluated how it could be simplified or otherwise improved. ○ Obtained the City’s Capital Asset Listing as of August 31, 2020 and evaluated for current year additions and disposals. For the one addition and one disposal that had been processed during FY 2020 (i.e., between July 1, 2019 and June 30, 2020), we obtained the supporting documentation to assess whether it had been properly recorded. In addition, we obtained the revised FY 2020 Capital Asset Listing, which reflected year-end adjustments to account for the activity during the year and assessed the overall volume of the adjustments posted for additions and disposals that were not processed throughout FY 2020.  Physical Inventory Counts: We requested all documentation related to physical inventory counts for capital assets performed in FY 2020 including support for the physical counts, documentation of who performed the count, and documentation of the final reconciliation and resulting adjustments. We assessed the documentation to determine whether: ○ Inventory counts were performed within the last fiscal year. ○ The inventory counts performed appeared to be complete and adequate. ○ Departments appeared to be actively involved in the counts and that someone other than the asset custodian was involved in, or approved, the count results. ○ The results were reconciled to the City’s Capital Asset Listing, asset changes were properly supported (e.g., disposals, additions, etc.) and adjustments were made timely. We evaluated any existing instructions that are used to conduct the physical inventory counts to assess whether they promoted an accountable and accurate inventory process. Additionally, we obtained documentation of the latest capital asset spot checks that had been conducted and assessed whether these spot checks were occurring regularly and appeared to be effective in identifying assets that did not belong on, or needed to be added to, the Capital Asset Listing.  Maintenance: Through interviews, we obtained an understanding of the current state of the processes around maintenance tracking for capital assets. For Water Services, which recently implemented the Lucity system to track maintenance performed and preventive maintenance schedules, we performed additional interviews and obtained the maintenance schedules available for January through September 2020. We assessed the schedules for adequacy and effectiveness. We researched best practices in this area to assess what other cities are doing to track asset maintenance and assessed the overall cost of repairs and maintenance related to City assets.  Replacement Forecast: We performed inquiries to determine whether the City is performing replacement forecasts. We reviewed City policies and municipal code requirements related to maintaining replacement schedules and researched best practices for the City’s replacement schedules and forecasting replacements of assets. City-wide Asset Management Internal Audit Report for the City of Glendale | 5 FINDINGS AND RECOMMENDATIONS 1. Finding Capital asset physical inventory counts did not occur on a regular basis or at a preset frequency based on a defined methodology. Changes and errors identified during the counts that are occurring are not consistently recorded in the City’s Capital Asset Listing. Recommendation Establish and document a formal physical inventory count process, ensuring adequate coverage of the City’s significant investment in capital assets on a consistent basis. Changes and errors identified during the counts should be promptly recorded in the City’s Capital Asset Listing. Condition: A process is not in place to conduct a full capital asset inventory on regular basis. In FY 2020, physical inventory counts were only conducted and recorded for three departments. These three departments accounted for $18 million of the City’s capital assets. Of the three physical counts that were performed, two were not complete counts of all department assets. Finally, two of the counts reported assets that had been disposed of and for which Asset Disposal Forms were provided; however, the disposals were not processed in the MUNIS system as of the time of this audit. Criteria: Best practices established by the Government Finance Officers Association (GFOA), as well as other reputable best practice resources, recommend instituting a formal process to count capital asset inventory on a regular basis, and capital asset records should be updated timely after the completion of the physical counts. The process should be documented and applied consistently to ensure that capital asset inventory records are accurate for operational decisions and financial reporting. The City’s goal was to complete a full physical inventory every year, with spot checks performed by the Budget and Finance Department on a regular basis. Cause: Based on interviews, the Budget and Finance Department had a vacancy for most of FY 2020 and did not have the capacity to coordinate and oversee the full physical inventory process for more than the three departments that were completed. The two disposals reported by the departments appeared to have been missed by the Budget and Finance Department when disposals were being entered into the MUNIS system. Finally, the planned spot checks could not be performed due to a lack of staffing and the COVID-19 pandemic. Effect: Without a formal, consistent process in place for performing capital asset inventory counts, the Capital Asset Listing may not be correct; accountability may be compromised or not enforced; asset additions, disposals, and transfers may not be identified timely; and the condition and existence of capital assets cannot be confirmed. The lack of inventory counts also contributes to inaccurate information on City assets for operational decisions and financial reporting purposes. Given that the physical counts are the primary way that both disposals that did not go through the auction process and asset transfers are identified, the lack of a full count in recent years likely has resulted in these types of changes not being recorded. Recommendation: The City should establish and document policies and procedures around the physical inventory of capital assets (see finding #3 below). These are essential to ensuring an City-wide Asset Management Internal Audit Report for the City of Glendale | 6 effective and reliable count is performed and demonstrates management’s commitment to control and accountability over City assets. In defining the inventory count process, the City should consider what volume of assets should be counted, in what frequency, the specific purpose of the counts performed, and a method for ensuring that inaccuracies or changes reported during counts are processed and recorded timely. While counting all assets on a yearly basis may not be realistic, the City should consider establishing a rotating cycle where different departments are counted at set intervals (i.e., quarterly) and consider a risk-based approach for identifying assets to count more regularly through spot checks. Once established, the physical inventory count process should be carried out on a consistent basis and accountability should be enforced to ensure the integrity of the City’s asset records and to promote the importance of controlling the City’s significant investment in capital assets. MANAGEMENT RESPONSE Management Agreement Concur Owner Levi Gibson, Assistant Director of Budget and Finance Target Completion Date 7/1/2021 Action Plan Budget and Finance will develop a capital asset physical inventory methodology that will be documented to reflect the following: timing of the inventory, volume of assets to be counted and spot checked, the rotating cycle of departments to inventory, and the updating of the capital asset records. This methodology will include evaluating the capital assets to be inventoried, utilizing a risk-based approach applied by asset type. 2. Finding Capital asset additions and disposals were not recorded in the City’s Capital Asset Listing in a timely manner resulting in large year-end adjustments and a time-consuming update process several months after year-end. Recommendation Improve the Asset Addition and Disposal Forms, provide training to promote compliance in reporting, and update the Capital Asset Listing on at least a quarterly basis. Condition: Throughout FY 2019/2020, capital asset additions and disposals were not recorded in a timely manner. All but one addition and one disposal occurring between July 2019 and June 2020 were not recorded in the City’s Capital Asset Listing until approximately four months after the fiscal year-end as part of the external financial statement audit preparation. In October 2020, over $4 million of asset additions, not including construction-in-progress or infrastructure, and over $9 million of disposals, were entered into the City’s FY 2020 Capital Asset Listing. Asset additions, excluding vehicles, were not issued a City tag to affix to the asset to properly identify the asset as City property until approximately four months post fiscal year-end. City-wide Asset Management Internal Audit Report for the City of Glendale | 7 Criteria: Best practices recommend updating Capital Asset Listings on at least a quarterly basis to help ensure internal financial records are properly stated and assets are tracked. Asset additions, transfers, and disposals should be reported and accounted for timely to ensure that the City’s large investment in capital assets is tracked accurately and accountability is assigned correctly. Cause: The City has been behind on reviewing the Capital Asset Listing, related G/L activity and Asset Addition and Asset Disposal Forms, as a result of the Budget and Finance Department being down one employee throughout most of the year. Additionally, the process for updating the Capital Asset Listing can be time-consuming given: 1. Departments code things incorrectly in the G/L and the errors are not identified on the front-end of the process. 2. Asset Addition Forms are filled out manually, and the content does not exactly align with the asset information that must be entered into the MUNIS system. For example, the form requires the department to be listed, but not the exact location of the asset which is required upon asset entry. At times, the forms are either not completed or submitted, or are not completed in full. 3. Asset Disposal Forms are filled out manually and are not consistently completed and submitted to the Budget and Finance Department. Departments do not always complete a form unless it is identified when an asset goes to auction, and the proceeds received trigger the completion of the form. 4. It is unclear whether an Asset Disposal Form is always completed for disposals that do not go through auction and who would be responsible for ensuring the disposal gets reported. Effect: The lack of a current Capital Asset Listing creates the risk of inaccurate internal financial reporting throughout the fiscal year. In addition, it increases the risk that the City’s large investment in capital assets will not be properly controlled, given the listing assigns accountability, through a designated custodian, and an asset tag is issued at the time of recording to identify the asset as City property. Assets that cannot be identified and tracked are more susceptible to theft or misuse. Recommendation: 1. The City should update the current Asset Addition Form and Asset Disposal Form to ensure all information required to update the MUNIS system is included. The forms may be easier to use if they are converted to PDF fillable forms. 2. Consider providing training to departments on their role in reporting newly acquired or disposed of assets at the time of the purchase/disposal. Alternatively, a training video on how to fill out the forms could be made available within the City’s intranet site, as well as guidance on responsibilities of departments for reporting capital asset activity. 3. For asset additions, consider requiring the submission of a complete Asset Addition Form when an invoice is submitted for payment to Accounts Payable (A/P). Although this practice is in place, it does not appear to be consistently enforced. Consider implementing a preliminary review of the forms by A/P to assess for proper completion (e.g., G/L coding, asset location, value, etc.) on the front-end to prevent time-consuming follow-up later. 4. Given that it was unclear, outside of the physical inventory count process (see finding #1 above), how asset disposals are identified and reported when an asset is not auctioned off, the process for this should be evaluated and responsibility for reporting should be assigned to ensure disposals are reported timely. 5. The Budget and Finance Department should aim to update the Capital Asset Listing on a more frequent basis (i.e. quarterly)or at an interval that is reasonable and achievable. City-wide Asset Management Internal Audit Report for the City of Glendale | 8 6. The City should assess the process for issuing asset tags to affix to the physical asset. Assets should be tagged timely after they are physically received. MANAGEMENT RESPONSE Management Agreement Concur Owner Levi Gibson, Assistant Director of Budget and Finance Target Completion Date 7/1/2021 Action Plan Budget and Finance will update the capital asset addition and disposal forms in order to capture the necessary information needed to update the capital asset records within MUNIS twice a year. Budget and Finance will communicate the changes in the capital asset addition and disposal forms City-Wide to ensure greater compliance through trainings, as well as targeted communications to asset custodians throughout the City. 3. Finding Comprehensive capital asset policies and procedures are not updated to reflect the current processes and systems that the City has in place. Recommendation Develop/update capital asset policies and procedures that specifically address all key elements of the capital asset management function, and implement processes to educate departments on their responsibilities in the process and to monitor compliance. Condition: Formal documented policies and procedures covering all significant components of capital asset management were not provided during this internal audit and, therefore, were not reviewed in detail or provided as a basis for audit testing; however, some were provided after the completion of the internal audit. City staff communicated that the policies and procedures have not been updated in recent years to reflect current practices or to incorporate the use of the MUNIS Fixed Asset Module. Documented procedures/workflows provided during the internal audit were limited to asset additions, disposals, and transfers; however, they were vague and contained significant process gaps. Criteria: GFOA best practices, as well as other reputable best practice resources, recommend that all governmental entities formally adopt financial policies, including those covering the City’s capital assets, and that these be updated when there are system changes or significant changes in current processes. Cause: Formal policies and procedures requested for this internal audit were not provided until after the completion of the project. City staff communicated that they have not been able to go back and update the policies and procedures to reflect current practices or the system change due to a lack of resources; however, they are in the process of taking on this initiative. Effect: Without current, comprehensive policies and procedures to guide this significant transaction cycle for the City, there are gaps in the internal controls of the capital asset function and a lack of City-wide Asset Management Internal Audit Report for the City of Glendale | 9 accountability for certain related components. Specifically, asset additions, disposals, and transfers were not consistently reported and recorded and physical inventories and spot checks were not performed (see findings #1 and #2 above). Recommendation: Comprehensive capital asset policies and procedures should be developed and/or updated and employees should be held accountable for compliance. In addition, for those policies that involve other departments (e.g., reporting additions, transfers, etc.), consider providing training or communication on the applicable policies, and ensure they are posted on the City’s intranet or other shared drive to allow for user departments to access. Policies and procedures should address all key areas of the capital asset management function. Roles and responsibilities should be well-defined and compliance should be monitored. The policies and procedures should include, but not be limited to, the following:  Depreciation, including methods used, determination of useful lives, entering during asset setup, depreciation expense entry preparation, review, approval, posting, etc.  Capital asset receiving, including physical receipt and documentation of receipt.  Reporting new capital assets to Accounting for entry in MUNIS and tag issuance.  New asset setup in the system, including the information required, supporting documentation submitted/maintained, etc.  Fixed asset tagging, including who issues tags, when tags are issued in the process, tracking of tags, placement on assets, and recording tag numbers in the system.  Reconciliation of the G/L to the Capital.  Asset Listing, including reviews to ensure all capital assets have been captured.  Capital asset custodian assignment and accountability.  Capital asset transfer and disposal procedures including reporting disposals/transfers to Accounting, updating in MUNIS, change in accountability, methods of disposal including documentation requirements and approvals, lost/stolen asset handling/reporting, etc.  Annual inventory process including frequency and steps involved in the count process, condition assessment, segregation of duties including having an independent person performing the count, identifying assets damaged or not tagged, adding assets, verification of asset details, reconciling information and making updates in MUNIS, etc.).  Spot checks or audits that will be performed to verify the accuracy of inventory information reported.  Record retention for capital assets. MANAGEMENT RESPONSE Management Agreement Concur Owner Levi Gibson, Assistant Director of Budget and Finance Target Completion Date 7/1/2021 Action Plan Budget and Finance will develop and update capital asset policies and procedures to ensure that the capital assets of the City are accounted for properly and safeguarded. Additionally, City departments will be trained on their responsibilities in the capital assets lifecycle from acquisition to disposition. City-wide Asset Management Internal Audit Report for the City of Glendale | 10 PROCESS IMPROVEMENT OPPORTUNITIES Moss Adams LLP identified opportunities for process improvements as a result of this internal audit. The table below summarizes these recommendations. CATEGORY PROCESS IMPROVEMENT RECOMMENDATIONS 1 Repair and maintenance expense analysis In our analysis of 75 expenses that were $5,000 or greater and charged to a repairs and maintenance expense account, we identified two instances in which items expensed should actually have been capitalized. These two transactions totaled approximately $22,000. Two of the 75 transactions coded to repair and maintenance expense tested were incorrectly coded as an expense when they were actually assets that needed to be capitalized. Consider evaluating the current process in place for analyzing repair and maintenance account activity for opportunities to improve the City’s ability to identify these types of errors. 2 Replacement forecast The current Capital Asset Listing contains a “replacement date” for each asset; however, the dates are preset based on a formula in the system and this tool in MUNIS is not being utilized. The City should consider developing a process for tracking estimated replacement dates for the City’s capital assets. Replacement forecasts can assist in the budgeting and strategic planning process, and can help the City mange a replacement fund for assets that need to be replaced after end-of-life. 3 Maintenance tracking The City does not have a process in place for tracking preventive maintenance schedules for City assets or for tracking repairs and maintenance performed on City assets in a consistent manner. Water Services recently implemented a system called Lucity to allow for this sort of tracking. However, the information entered into Lucity did not have any correlation to the Capital Asset Listing (e.g., tag number, serial number, etc.). If this system is rolled out to other City departments, a method should be used to ensure that the system can correlate to the City’s MUNIS system to allow for tracking and monitoring, as well as to aide in replacement forecasting. City-wide Asset Management Internal Audit Report for the City of Glendale | 11 APPENDIX: DEFINITIONS OF AUDIT FINDINGS RANKINGS We utilized the City IIAP’s risk rankings, presented below, and assigned rankings based on our professional judgment. A qualitative assessment of high, medium, or low helps to prioritize implementation of corrective action as shown in the following table. HIGH Critical control deficiencies that expose the City to a high degree of combined risks. Recommendations from High risk findings should be implemented immediately (preferably within 3 months), to address areas with the most significant impact or highest likelihood of loss, misappropriation or damage related to the City assets. MEDIUM Represents less than critical deficiencies that expose the City to a moderate degree of combined risks. Recommendations arising from moderate risk findings should be implemented in a timely manner (preferably within 6 months), to address moderate risks and strengthen or enhance efficiency in internal controls on areas with moderate impact and likelihood of exposure. LOW Represents low risk or control deficiencies and the exposure is not likely to expose the City and its assets to significant losses. However, they should be addressed in order to improve efficiency and effectiveness of operations. Recommendations arising from low risk findings should be implemented within 12 months.