MyFloridaMarketPlace

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1 Office of Inspector General Management of the Department s Delinquent Accounts Receivable REPORT NO. IA Rick Scott, Governor John P. Miles, Secretary February 2011 State Purchasing Real Estate Development and Management Public Safety Communications MyFloridaMarketPlace

2 EXECUTIVE SUMMARY Purpose Of Audit In accordance with Section , Florida Statutes and the Department of Management Services (department) established priorities, the Office of Inspector General examined the effectiveness of the department s management of delinquent accounts receivable. This report presents the results of our review and recommendations for actions to improve management of accounts receivable. Results In Brief No single entity has overall responsibility for ensuring that programs exercise due diligence in the collections of past due charges or that programs appropriately manage their delinquent accounts receivable. While the Bureau of Financial Management Services, division program staff and executive management share responsibility for managing the department s delinquent accounts receivable, no one entity has assumed the responsibility for managing the entire program. Moreover, the department s existing policies do not provide programs with sufficient guidance regarding due diligence in the collection of delinquent accounts receivable, the management of credits on account or unapplied receipts, requirements for referring delinquent accounts to a collections agency and using available legal remedies for collecting past due accounts. Consequently, delinquent accounts receivable remain on the department s financial records indefinitely and some customers continue to receive department services despite the fact that they have significantly past due charges. As of June 30, 2010, the Bureau of Financial Management Services reported the department had approximately $5.1 million in charges over 180 days past due. While not excessive with regard to total departmental billings, these funds are needed during austere budget periods. Major Recommendations The department has the opportunity to improve its procedures for managing delinquent accounts receivable by: ff ff Assigning one entity the overall responsibility for ensuring that programs exercise due diligence in collecting past due accounts and appropriately managing their delinquent accounts receivables. Revising its administrative policies to include: Justification for the continuation of services to customers with delinquent accounts receivable from a prior fiscal year (or years). Guidelines for managing customers credits on account. A comprehensive explanation of the procedures programs must follow to demonstrate they have exercised due diligence in collecting delinquent accounts receivable. A requirement that programs establish comprehensive written internal policies and procedures for managing their delinquent accounts receivables. Guidance for referring accounts to a collections agency and the use of available legal remedies for collecting past due accounts. 1

3 INTRODUCTION AND BACKGROUND Department Provides Most Services on a Fee Basis The Department of Management Services is charged with providing a range of infrastructure services for other state agencies and eligible users. The department provides many services on a fee basis. For example: The Division of Telecommunications SUNCOM Network is funded by fees the division charges its customers for network services. Similarly, the Division of Real Estate Development and Management charges rent to customers who lease space from the Florida Facilities Pool. The division then uses the rent receipts to make bond payments and to operate and maintain the facilities. The Division of State Purchasing s on-line procurement system (MyFloridaMarketPlace) is funded by the one percent transaction fee assessed on vendors sales to state agencies and other eligible users. Other department programs also charge fees for service, such as Executive Aircraft Management and Federal Property Assistance. Proper management of current and delinquent accounts receivable is thus essential to ensuring that sufficient funds are available to provide department services on an on-going basis. New Legislation Highlights Management of Agency Delinquent Accounts Receivable Legislation that took effect July 1, 2010 underscores the need for appropriate management of delinquent accounts receivable. Chapter , Laws of Florida, provides that each agency shall be responsible for exercising due diligence in securing full payment of all accounts receivable and other claims due the state. The law requires that no later than 120 days after the date on which an account was due and payable the agency shall report the delinquent accounts receivable to a collection agent for further action. The law also requires agencies to provide an annual report to the legislature and Chief Financial Officer on the status of each delinquent account and actions the agency has taken to collect on the account. Bureau of Financial Management Services Has Established Administrative Policies For Accounts Receivable The Division of Administration s Bureau of Financial Management Services (FMS) established Administrative Policy Number (revised May 18, 2010) to document the functions of the department units involved in accounts receivable processing. FMS also established Administrative Policy FMS 106 (Revised December 7, 2010) regarding past due invoices. Together, these two documents establish the department s policies for managing its current and delinquent receivables. 1 1 The policy defines delinquent as an account status given when payment is not received within the time specified or in the amount invoiced. 2

4 Per the administrative policies, FMS compiles and records all information on invoices issued by department programs; issues reports to programs on outstanding receivables; and prepares and distributes monthly statements of activity to department customers. FMS is responsible for sending accounts that are 120 days past due to a collection agent and transmits requests to write-off delinquent charges to the Chief Financial Officer. Program staff are responsible for generating and distributing invoices for services and for resolving any disputed charges. Program staff are also responsible for collecting delinquent accounts receivable, maintaining records of collections activity and for submitting requests to write-off uncollectible accounts to FMS. The policies also provide that executive management is notified when past due account collection efforts are not successful. 3

5 DISCUSSION No Single Entity Has Overall Responsibility and Authority for Management of the Department s Delinquent Accounts Receivables The Bureau of Financial Management Services (FMS) administrative policies provide a framework for managing the department s past due accounts. However, no single entity has overall responsibility for ensuring that programs exercise due diligence in collecting past due accounts or that programs appropriately manage their delinquent accounts receivable. Further, no single entity has authority to resolve delinquent accounts receivable should programs fail to do so. We recognize that in addition to the department s policy framework, each program needs formal, written internal operating procedures for collecting and managing delinquent accounts receivable. These operating procedures should conform to departmental policies but also reflect the program s business environment. For example, the Division of State Purchasing has determined it is more efficient to send dunning notices to MyFloridaMarketPlace (MFMP) vendors only after they have accumulated over $50 in past due transaction fees. In comparison, the Division of Telecommunications does not issue dunning notices to its customers. Instead, FMS sends out account balance statements monthly reflecting all outstanding invoices and payment transactions. While both departmental and program-specific policies are needed, the absence of centralized control over the department s delinquent accounts receivable has resulted in a myriad of issues, as discussed below. 1. Delinquent accounts receivable were not always resolved timely. As of May 21, 2010, the Division of Telecommunications had $289,685 in delinquent accounts receivable from Fiscal Years through As in many of the department s programs, the majority of telecommunications customers are state agencies and other governmental entities. However, the accounts receivable of governmental entities that are more than five years past due are likely uncollectible. 2 The department s September 30, 2010 debt collection reports showed that the department had approximately $5.1 million in charges over 180 days past due as of June 30, This total represented only those delinquent receivables the department had not referred to a collections agency and, in accordance with reporting requirements, did not include delinquent receivables from years prior to fiscal year Of the $5.1 million in past due charges, $650,414 (12.7%) were charges due from fiscal years and FMS administrative policies do not require programs to resolve delinquent receivables or writeoff uncollectible accounts within a certain timeframe. Further, the policies do not give FMS clear authority to submit requests to the Department of Financial Services to write-off past due charges should programs fail to initiate such action. 2 The Department of State s General Records Schedule GS1-SL for State and Local Government Agencies provides that agencies must keep invoices, disbursements and receipt and revenue records for five fiscal years. Governmental entities are therefore unlikely to have records relating to charges that are more than five years past due. 3 The total included the delinquent receivables of the divisions of Telecommunications, Specialized Services, Real Estate Development and Management, Retirement, State Purchasing and Administration. 4 FMS reported that since Fiscal Year the department has referred over $2.4 million in overdue charges to a collections agency and has collected approximately $254,000 of the charges referred for collection. 4

6 2. Customers with significantly delinquent charges continued to receive department services. One current telecommunications customer had $91,371 in delinquent charges as of May 21, Of this amount, the customer owed $67,797 (74%) from invoices issued prior to fiscal year Further, $16,657 (18%) of the customer s past due charges were from fiscal year In another example, one MFMP vendor owed $12,734 in transaction fees as of June 30, State Purchasing had submitted this vendor to a collection agency in 2008 to collect $5,606 in transaction fees owed since June The collection agency had not recovered any of the delinquent charges as of June 30, We queried the Department of Financial Services Sunshine Spending website and determined the vendor continues to conduct business with state agencies. Payments to this vendor in fiscal year totaled $5,173 as of November 11, The decision to terminate services to department customers is largely dependent on each program s internal operating policies. However, some program managers reported they are hesitant to terminate infrastructure services such as telecommunications or leased space. State Purchasing staff reported the division has never found a vendor in default for failure to pay delinquent transaction fees. Administrative Policy establishes procedures for terminating department services to customers with accounts that are 60 days past due. However, FMS does not place customers in Stop Account status as is provided for in the policy. FMS lacks the authority to direct programs to either resolve seriously delinquent accounts or terminate services to customers. Undoubtedly many programs are hesitant to take action when customers do not pay in a timely manner due to the required involvement of senior management. Often actions by programs are overridden by senior management or senior management allows customers to continue to receive services while in arrears. Conversely, while many programs are hesitant to act on delinquent accounts for many reasons, the Bureau of Federal Surplus Property is prohibited by federal regulations from donating property to customers with service charges that are more than 120 days in arrears. The department needs to resolve this issue and develop procedures for seriously delinquent accounts. It is likely that the department needs the buy-in of FMS, programs and senior management on a methodology for handling these sensitive issues involving terminating services. 3. Customers credits on account were not always timely applied to current and/or delinquent charges or refunded to the customer. As of May 21, 2010, Division of Telecommunications customers had nearly $626,000 in credits on account; $189,274 (30%) of these unapplied credits from six months to nine years old. Thirty-three customers had credit balances, that is, the customer s credits on account exceeded the customer s total delinquent charges. 5 An additional 73 customers had credit balances totaling $86,284 but no delinquent charges. 5 Excludes customers with offsetting credits from 1 to 30 days old. 5

7 As of June 30, 2010, the Division of Real Estate Development and Management had delinquent accounts receivable of nearly $184,554. However, these past due charges were offset by $94,170 in unapplied customer credits. Approximately $34,000 (36%) of these credits was from six months to nearly five years old. Three customers with past due charges had credit balances. An additional six customers had credit balances totaling $32,184 but no delinquent charges. FMS administrative policies do not include guidelines for managing customers credits on account. FMS does not have clear authority to apply customers credits to current and/or delinquent charges should programs fail to do so timely. Further, FMS does not have clear authority to ensure that the department refunds unused customer credits should programs fail to initiate such action. 4. Unapplied receipts were not timely applied to current and/or delinquent charges or refunded to the customer. Unapplied receipts, or on account moneys are payments from customers that FMS cannot determine to which invoice(s) the payments apply. Unapplied receipts can also be a duplicate payment or an overpayment. FMS administrative policies do not include guidelines or procedures for the disposition of unapplied receipts. FMS staff reported that as of May 25, 2010, the Division of Telecommunications Communications Working Capital Trust Fund included approximately $800,000 in unapplied receipts. As of August 24, 2010, Real Estate Development and Management Supervision Trust Fund included $116,880 in unapplied receipts or over $26,000 more than net delinquent rent charges (see chart below). Rental Fees Net Delinquent Accounts Receivable As of August 24, 2010 Delinquent Charges as of $184,554 Credits on Account as of ($94,170) Unapplied Receipts as of ($116,880) Net Delinquent Accounts Receivable ($26,496) FMS does not provide programs with regular reports of customers on account moneys. Therefore, program staff was not always aware these funds were available to apply to customers current and/or delinquent charges. During the course of our review, FMS instituted internal operating procedures for managing unapplied receipts. These procedures should help reduce the future accumulation of on account moneys. 6

8 5. FMS administrative policies should provide programs with additional guidance regarding due diligence in the collection of delinquent accounts receivable. Chapter , Laws of Florida, requires each agency to exercise due diligence in securing payment for all accounts receivable. Chief Financial Officer Memorandum No. 03 ( ) on Claims for Collections provides that When determining the level of due diligence to exercise, consideration should be given to the type, age and amount of delinquent accounts; and whether or not the actions taken by the agency are reasonable and cost effective. The memorandum further provides that: Agencies should document and maintain policies and procedures which fully explain the process of exercising due diligence. FMS policies provide that the originating division/program is responsible for collecting accounts receivable and for exercising due diligence when securing payment. The policies state that collection activities will include and conform to the procedures designated within Florida statutes and the Florida Administrative Code. However, FMS administrative policies do not fully explain the procedures programs must follow to demonstrate they have exercised due diligence. The Department of Financial Services will not write off delinquent accounts receivable unless the agency can demonstrate due diligence in its collection efforts. The administrative policies do not require programs to establish written internal policies and procedures specific to program operations. While some programs maintain comprehensive written procedures, others do not. For example, Division of Telecommunication staff reported they do not have organized collections procedures. The division does not track the age of accounts receivable or use a formal process to identify and stratify problem accounts. Division managers do not provide collections staff with any strategic direction or priorities for collecting delinquent receivables nor do they monitor the results of staff s collections activities on an ongoing basis. 7

9 6. FMS administrative policies should provide programs with additional guidance regarding the referral of customers with delinquent accounts receivable to a collections agency or the use of other available legal remedies. Recent changes in state law address the resolution of delinquent accounts receivable for nonprofit and private sector customers. Effective July 1, 2010, state law requires agencies to report delinquent accounts receivable to a collection agent no later than 120 days after the date on which the account was due and payable. 6 Accordingly, FMS administrative policies provide that FMS will recommend an account be submitted to an independent collection agency when it reaches 120 days past due. Programs must provide documentation to FMS supporting why the account should not be submitted to a collection agency. FMS administrative policies do not provide any additional detail on how it will coordinate with program staff to submit accounts to a collection agent. For example, before referring a customer to a collection agent, FMS would need to determine if an account is delinquent due to an unresolved charge dispute. And as discussed above, many customers with delinquent charges have credits on account or unapplied receipts. These credits and unapplied receipts should be applied to delinquent charges before the customer is referred to a collections agent to collect any remaining balance due. The new law does not differentiate between the past due accounts of public and private sector customers. However, FMS staff informed us, and Department of Financial Services staff confirmed that they had verbally directed agencies not to refer state agency or local government entity customers to an independent collections agency. 7 FMS administrative policies do not inform programs about this directive or provide direction for programs regarding the use of other remedies available in statute and rule. For example, Section , Florida Statutes, provides that the Chief Financial Officer shall transfer from any available agency or judicial branch funds, the amount due to the Communications Working Capital Trust Fund for communications services provided by the department. The law provides that the Chief Financial Officer shall transfer moneys for services that remain unpaid 45 days after the billing date. Further, the amount transferred shall be the amount billed by the department. Where the delinquent telecommunications charge is from a state officer or employee, an agency of local government, a county, or an agency of a county, Chapter 69I , Florida Administrative Code, provides that the Department of Financial Services shall offset such delinquent account receivable against such other sums due from the state. The Department of Financial Services may also intercept or issue stop payment orders for any outstanding warrants payable to such persons or entities or take further action authorized by Chapter 17, Florida Statutes. 6 Chapter , Laws of Florida 7 DFS staff also reported that it is not clear whether the statutory requirement regarding referral to a collections agency applies to quasi-governmental entities with delinquent accounts. DFS staff agreed with the auditors that department representatives should consult with DFS representatives concerning the appropriate action to take with regard to quasi-governmental entities. 8

10 Section , Florida Statutes, provides that should an agency fail to make timely payment for rent, the Chief Financial Officer shall withhold general revenues from the agency in an amount sufficient to pay the delinquent charges and forward the general revenue to the department. Chapter 60S-3.011, Florida Administrative Code, provides similar remedies for payment of retirement contributions by state agencies, counties, cities and special districts. Program staff from both the Division of Telecommunications and Real Estate Development and Management reported they do not typically use these available legal remedies. In addition, the FMS bureau chief does not support using these remedies as they could lead to unintended consequences. For example, the department could not apply general revenue funds to overdue charges accrued by a federally funded program. However, Chapter 69I , Florida Administrative Code, provides that after exhausting other lawful measures available to the agency, the agency must report delinquent accounts receivable to the Department of Financial Services for further action within six months after the date on which an account was due and payable. We therefore concluded that FMS should provide guidance to programs regarding the use of available legal remedies and establish requirements for timely reporting state agency and other governmental entities delinquent accounts receivable to the Department of Financial Services for write-off or other action, including the use of available legal remedies. In accordance with FMS administrative policies, programs can notify executive management if collection efforts prove unsuccessful. Executive management can then attempt to resolve the problem directly with higher-level management within the customer s organization. However, FMS policies do not establish a timeframe for notifying executive management of collections problems or a timeframe within which executive management must resolve the problem or refer the delinquent account to the Department of Financial Services for write-off or further action, including the use of available legal remedies. 9

11 RECOMMENDATIONS 1. We recommend that the department assign one entity the overall responsibility for ensuring that programs exercise due diligence in collecting past due accounts and appropriately manage their delinquent accounts receivables. 2. We recommend that the FMS revise its administrative policies to include the following: a. A requirement that programs maintain written justification for the continuation of services to customers with delinquent accounts receivable from a prior fiscal year (or years). b. Guidelines for managing customers credits on account and, to the extent possible, procedures for refunding unused customer credits. c. Policies for managing unapplied receipts to include the refund of any unused on account moneys prior to the end of each fiscal year. d. A requirement that programs establish comprehensive written internal policies and procedures for managing their delinquent accounts receivable. e. Procedures for coordinating with the Department of Financial Services concerning the appropriate action to take with regard to quasi-governmental entities with charges that are more than 120 days past due. f. Timeframes for: 1) programs to notify executive management of a collections problem; and 2) for executive management to resolve the problem or refer the delinquent account to the Department of Financial Services for write-off or other action, including the use of available legal remedies. 3. We recommend that the department ensure the Bureau of Financial Management Services has sufficient resources to implement the recommendations made in this report. Division of Administration Response The division concurred with all recommendations. The division s complete response is attached in Exhibit A. OIG Position We agree with the division s response. 10

12 OBJECTIVE, SCOPE AND METHODOLOGY Our primary audit objective was to review how effectively the department manages its delinquent accounts receivable. We specifically evaluated whether the department s policies provide sufficient guidance to programs regarding debt collection requirements and procedures for managing delinquent accounts receivable. We also evaluated the department s implementation of recent legislative provisions concerning due diligence in securing payment for accounts receivable and the assignment of claims for collection. To accomplish our audit, we: Reviewed the Division of Telecommunication s delinquent accounts receivable report as of May 21, 2010 and the Division of Real Estate Development and Management s report of past due charges as of June 30, Reviewed the department s September 30, 2010 Debt Collection Reports and supporting data as submitted by the Bureau of Financial Management Services to the legislature and Chief Financial Officer. Interviewed staff in the Divisions of Telecommunications, Real Estate Development and Management and State Purchasing concerning their procedures for collecting past due accounts and managing delinquent accounts receivable. We also interviewed Bureau of Financial Management Services staff concerning the bureau s policies and procedures related to delinquent accounts receivable and Department of Financial Services staff concerning the implementation of new statutory provisions for the assignment of claims for collection. Reviewed relevant statutes and rules, Chief Financial Officer Memoranda and Agency Addressed Memoranda, and Bureau of Financial Management Services administrative policies. We also reviewed operating procedures and other relevant documents and materials regarding debt collection and accounts receivable management of the Divisions of Telecommunications, Real Estate Development and Management as well as State Purchasing. 11

13 Exhibit A Division Response 12

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16 Exhibit B - Distribution List David W. Martin, Auditor General Kathy McGuire, Interim Director of OPPAGA Office of Program Policy Analysis and Government Accountability Kathy DuBose, Staff Director Joint Legislative Auditing Committee Melinda Miguel, Inspector General Executive Office of the Governor Department of Management Service s Staff: David Faulkenberry, Deputy Secretary Charles Ghini, Deputy Secretary, Communications and Information Technology Services Debra Forbess, Director of Administration Sharon Larson, Director of Human Resources Stephanie Leeds, Director of Legislative Affairs Kristopher Purcell, Director of Communications Michele Robleto, Director of State Group Insurance J.D. Solie, Director of Specialized Services Sarabeth Snuggs, Director of Retirement Tom Berger, Interim Director of Real Estate Management and Development Joe Wright, Chief Information Officer Mitchell Clark, Chief of Financial Management Services Mike Kyvik, Chief Operations Officer, Communications and Information Technology Services 15

17 To promote accountability, integrity, and efficiency, in government, the Office of the Inspector General makes audits of the Department of Management Services programs, activities, and functions. This audit was conducted in accordance with applicable standards contained in the International Standards for Professional Practice of Internal Auditing, issued by the Institute of Internal Auditors. Other audit reports prepared by the Office of Inspector General of the Department of Management Services can be obtained on our Web site ( administration/inspector_general); by telephone (850) ; or by mail (4040 Esplanade Way, Suite 135, Tallahassee, Florida 32399). 16

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