City of West Palm Beach Internal Auditor s Office

Transcription

1 AUDIT OF PROCUREMENT CARD PROGRAM Report No. AUD July 10, 2015 City of West Palm Beach Internal Auditor s Office Roger Strout, City Internal Auditor, CIA, CRMA, CFE, CICA Connie Tory, Sr. Internal Auditor, CFE, CGAP, CRMA Elena Georgiev, Sr. Internal Auditor, CPA, CGMA Beverly Mahaso, Sr. Internal Auditor, JD, CFE Thomas A Sanchez, CPA, MBA

2 Internal Auditor s Office P.O. Box 3366 West Palm Beach, Florida Tel: Fax: The Capital City of the Palm Beaches July 10, 2015 Audit Committee City of West Palm Beach 401 Clematis Street West Palm Beach, Florida RE: Audit of Procurement Card Program REPORT NO. AUD Dear Audit Committee Members: Attached is the City of West Palm Beach Internal Audit Department's report on the City s Procurement Card Program. We thank the management and staff of the Finance Department and all user departments, for their cooperation and assistance during this audit. Respectfully Submitted, /s/ Roger Strout City Internal Auditor cc: Jeri Muoio, Mayor Jeff Green, City Administrator Dorritt Miller, Deputy City Administrator Scott Kelly, Assistant City Administrator Mark Parks, Director of Finance Richard Greene, Director of the Development Services Department Leah Rockwell, Director of the Parks and Recreation Department Carlos Cabrera, Fire Chief Kimberly Rothenburg, City Attorney

3 Table of Contents Background 4 Statement of Objectives 5 Statement of Scope 5 Statement of Methodology 5 Statement of Auditing Standards 6 Audit Conclusions and Summary of Findings 6 Opportunities for Improvement and Management Responses 1. Purchasing Policies and Procedures Manual 7 2. Assigning Cards and Establishing Credit Limits 8 3. Review and Approval of Purchases Credit Card Statement Reconciliations Sales and Motor Fuel Taxes Credit Card Rebate Programs 14

4 Background The State of Florida established a VISA Procurement Card Agreement with the Bank of America (BOA) in February, The City of West Palm Beach (City) is a participating entity, as are a number of other local governments in Florida. Further, the City s Finance Department (Department) oversees the Procurement Card Program (P-card). The Department s Policy and Procedures Manual details how the program should work. The purpose of the program is to enhance the purchasing process for small dollar purchases 1 by reducing manual paperwork, employee s time, and minimizing time needed to acquire necessary merchandise. This allows items to be purchased without the normal purchasing process. In some cases, this allows work to proceed with a minimum of delay when parts or supplies are needed to complete a job. Additionally, the City receives an annual rebate from the card issuer (BOA). Net charges for the 21 month audit period totaled over $13 Million. The number of P-card transactions totaled 43,627 2, with the average purchase slightly over $300. The agreement between the BOA and the State of Florida provides that the City receive a percentage rebate from BOA based on the total amount of annual purchases. When annual purchases total less than $10 million per calendar year, the City receives a 1.4 percent rebate; when annual purchases are in excess of $10 million, the City receives a rebate of 1.6 percent. For calendar year 2013, the City met the $10 million threshold to receive the 1.6 percent rebate. P-cards are issued to employees based upon requests from department heads. Limits on individual transactions and monthly aggregate limits are established by the P-card Administrator and based on need. The standard limit is $1,000 per transaction and $5,000 per month for each card. Some cardholders have been authorized higher limits based upon justified need. Another advantage of the P-card is the tax exemption provided, especially for travelers. Under Florida Law, sales tax can be exempted only if payment is made directly by the local government. Local government employees on official travel would have to pay sales tax on hotels and other bills if they paid with a personal credit card even though they would be reimbursed by their employer. Paying with a City P-card is considered a direct payment from the City and is tax exempt. Payment by City check would allow for the tax exemption but is usually not practical. Merchant category codes are established by BOA. Thereafter, the City determines which categories are prohibited for City employees (i.e. pawn shops, jewelers, bars, etc.) and the transactions will be blocked by BOA. The prohibitions vary depending upon the needs of the department. For example, it may be appropriate for some departments to purchase food items or specialty services not generally needed citywide. 1 Policy and Procedure Section I introduction & Section I A (purpose) 2 These totals include purchases, credits, payments, but not e-payments, which were not included in the scope of this audit. Page 4 of 16

5 Monthly statements are sent to each cardholder by BOA. They are reviewed by the cardholder, the Department Approver/Representative (Approver), and Management. They are then submitted to the Department s Accounting Division for payment to BOA. Statement of Objectives The objectives of this audit were to determine if: 1. P-card Policies and Procedures included in the Procurement Division s Policy and Procedure Manual were complete, accurate, and available to users and management. 2. Assignment of P-cards and credit limits were appropriate and documented. 3. Sales and fuel excise taxes were properly exempted or refunded. 4. Receipt documentation maintained was adequate to support credit card purchases. 5. All charges appeared reasonable and were for official City purposes. 6. Credit card purchases were approved by authorized individuals and made in compliance with the current procurement card policy. 7. All statements were reconciled and forwarded to accounting in a timely manner. 8. The Credit Card Rebate Program was reconciled by the City. 9. Alternate rebate programs have been explored which may be more advantageous to the City. Statement of Scope This audit included all P-card purchases made from October 1, 2012 through June 30, Some data has been drawn from different time frames based upon availability and are identified as such. This audit did not include E-Payments, which are part of the P-card billing system, but do not involve actual P-cards issued to employees. Statement of Methodology A statistical sample was selected from a population of approximately 43,000 charges made during the audit period. In addition, we examined a small judgmental sample of transactions that we determined worthy of additional review. Evidence was gathered by: Discussions with Management and P-card Representatives of various departments to determine processes actually in use; Examining the internal control systems and identifying any material weaknesses; Use of analytical review procedures to plan substantive testing and confirm the reasonableness of audit conclusions and findings; Page 5 of 16

6 Support Services (Fleet) comprised 43 of the 160 items in the random sample. Since they usually did not follow standard procedure, few of these items were compliant with P-card policy. In order to avoid skewing the results because of one division, Fleet results were calculated separately from all other items. Statement of Auditing Standards We conducted this audit in accordance with Generally Accepted Government Auditing Standards (GAGAS). 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. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Audit Conclusions and Summary of Findings 1. The Purchasing Card section of the Procurement Policy and Procedure Manual was in need of updates that were approved by management. 2. The process of assigning cards and establishing credit limits should be formally documented. 3. A refund of Florida motor fuel excise taxes was not requested for gasoline purchased from retail vendors utilizing P-cards Documentation in the form of a register receipt or invoice was almost always (with few exceptions) attached to the cardholder s statement. 5. Policy and Procedures only require the Department Approver to sign the monthly verification form. Policy and Procedures do not require Department Management or the Department Approver to sign individual statements. 6. The monthly credit card statements are not being signed in Support Services (Fleet), and a few were absent in other departments. 7. In general, charges appeared reasonable and consistent with City purposes. 8. Reconciled statements were generally forwarded to accounting appropriately. However, the Fire Department had several lapses in which statements were not submitted for months. 9. The P-card rebate has not been reconciled with the BOA annual remittance. 10. Alternate P-card rebate programs have not been explored. 3 This applies primarily to unmarked Police vehicles. Taxes on fuel purchased in bulk and dispensed at City facilities are being properly refunded. Page 6 of 16

7 Opportunities for Improvement and Management Responses 1) PURCHASING POLICIES & PROCEDURES MANUAL The Department does not have updated policies and procedures to guide the Purchasing Division staff. Criteria Good business practices indicate that guiding Policies and Procedures should be documented, current, and made available to employees. Condition We found several versions of the Purchasing Card Policies and Procedures, however, we found no evidence that the version currently being used was formally adopted or approved. Additionally, we reviewed the Policy and Procedures and found that it did not contain: Procedures for processing expenditures paid directly or indirectly by outside sources such as grants, scholarships, and participant fees. Guidance on determining whether purchases fulfill a public or non-public purpose. Specific notification procedures for reporting unusual or unauthorized charges to the Palm Beach County Inspector General. Finally, we found that the Purchasing Policy and Procedures manual located on the City s Employee Resource page was outdated. Causes The Department did not dedicate sufficient resources to ensure that policies and procedures are updated and address all pertinent matters. Effect Lack of updated procedures may result in confusion among staff, inconsistent processing, and violations of procedures designed to minimize purchasing risks. Recommendation The Department should ensure that the Purchasing Card Policies and Procedures provide sufficient guidance by: Page 7 of 16

8 Dedicating resources to update, approve, and post them timely. Ensuring that all relevant matters are fully addressed. Providing guidance with examples of purchases that are appropriate for public purposes versus non-public purposes. Providing refresher training courses on the updates made. Management Response We agree and are ensuring that the Purchasing Card Policies and Procedures provide sufficient guidance by dedicating resources to update, approve, and provide the updates to the Purchasing Department ensuring that all relevant matters are fully addressed. The policies will provide guidance with examples of purchases that are appropriate for public purposes versus non-public purposes. The Finance Department in concert with the Procurement Department has committed to providing refresher training courses on the updates made. Implementation Date: December 31, ) ASSIGNING CARDS AND ESTABLISHING CREDIT LIMITS The process of assigning procurement cards should be reviewed periodically to verify that current employees need the cards and to determine whether credit limits need to be decreased or increased. Condition We reviewed the City s procurement cards and found that in some instances, cards with minimal use were maintained, while other cards were subject to overuse, particularly when credit limits were increased. We reviewed a report provided by the Procurement department showing cards used during a twelve month period ending on October 16, 2014, and found that 305 cards were considered active at the time of this audit. We further noted that 370 cards were used during the period, accounting for approximately 23,000 transactions. The number of active cards at any given time is typically fewer than the number of cards used during a year, as cards are cancelled and new ones issued throughout the year. We noted the following: 14 of the cards were used only once, 13 were used twice, 9 were used 3 times, and 3 were used 4 times. The remaining 331 cards were used between 5 and 3,783 each during the period. The largest number was for Fleet, which is addressed separately below. Page 8 of 16

9 Fleet The manner in which the P-card is used for Fleet purchases is not in alignment with the stated purpose of the P-card program. Fleet is by far the largest user of the P-card, accounting for about 27% of all transactions. Further, four Fleet P-cards accounted for 5,375 transactions during a twelve month period ending on October 16, 2014, which includes the card used 3,783 times. The total monthly spending limit of the four cards used by Fleet is $215,000 including one card with a credit limit of $100,000. We question the validity and reasonableness of cards with high volume transactions or high credit limits. Criteria Section I of the Policy and Procedures states that the purpose of the P-card program is to improve efficiency in processing low dollar purchases from any vendor that accepts the Visa credit card. 4 Further, Section II-A indicates that procurement cards will be issued to individual employees who frequently purchase goods and services. Finally, Section II-B states that maximum limits shall be $1,000 for a single purchase and $5,000 for the month, however, exceptions can be made to these limits. Cause We found several areas that contributed to the conditions identified above: Credit limits are not always set at appropriate levels. With respect to the number of cards issued, there is insufficient periodic review of P- cards to determine usage levels and whether unnecessary cards should be cancelled. Within the Fleet Department, it appears that overuse of the P-card may exist. The P-card program rebate available on purchases, appears to have been the primary criteria for obtaining P-cards, when bidding and contracting for parts and outside services should have been explored. Competitively bid pricing will likely more than offset any savings from the rebate. Effect An excessive number of cards increases the potential for abuse by increasing the number of personnel with access to P-cards. With respect to Fleet, the large credit limits create an exposure for abuse, especially since purchases are not reviewed until after the end of the month. We wish to emphasize that we did not detect any actual abuse in our sample, but the potential exists. Recommendation The Department should ensure that only necessary cards are issued by continuing to review cards for low activity and cancelling unnecessary cards. It is understood that this will probably not 4 Emphasis added by Internal Audit. Page 9 of 16

10 reduce the number of transactions that must be reviewed, but it will reduce administrative time and risk. Further, Fleet should review its use of P-cards to determine whether the manner in which P-cards are used is reasonable and appropriate. Further, Fleet should review high volume and high dollar value purchases and determine whether they could benefit from being competitively bid. Management Response We agree and will work with City departments to ensure that only necessary cards are issued. We will continue to review cards for low activity, slow reporting and cancel unnecessary cards or cards that do not meet stated reporting requirements. The Finance Department will work with Fleet and Purchasing in reviewing its use of P-cards to identify purchases that could benefit from being competitively bid. Implementation Date: December 31, ) REVIEW AND APPROVAL OF PURCHASES The required Departmental reviews and approvals of purchases needs to be strengthened. Criteria The Department s Policy and Procedures articulate several procedures related to the review and approval of purchases: Section I-C requires the cardholders to collect their receipts and give them to the Approver within 48 hours of the purchase. Further, invoices must detail the purchase. Section II-C-6-b requires each cardholder to sign each statement for their card attesting that the charges are for official City use. Section II-C-6-e requires that the monthly verification form be signed by the P-card representative attesting to accuracy and appropriateness. Condition We conducted an analysis of the review and approval processes for purchases. We found that receipts for items purchased with a P-card are typically retained by the cardholder until the monthly statement is received from the BOA. Further, the statement is usually signed by the Department Approver, at which point, the receipts, statements, and verification forms are compiled for department management. Management indicates approval by signing the verification form which is the cover sheet. Page 10 of 16

11 We noted the following concerns in the approval process: Receipts are held for up to one month before any reviews occur. Individual receipts or invoices are not typically signed individually, but are under the umbrella of the signed statement of verification form which also serves as a batch transmittal document, but does not itemize the purchases for the Department Approver. Each credit card statement should be signed by the cardholder. However, a smiley-face rubber stamp is often used for this purpose. The monthly statement is not always signed by management, even though the bank predesignates a line for this purpose. Further, we reviewed Fleet purchases and noted similar concerns: Most Fleet purchase card statements are not signed by either the cardholder or management, but are placed under a verification form, which is signed. The first page of each credit card statement includes a preprinted line for the cardholder to sign and another line for the approving manager to sign, but these are often not used. It appears that on occasion, purchases from a single vendor on the same day exceed the single purchase limit. Finally, we reviewed a sample of 160 purchases from all departments and found that over half (57%) of the case files contained complete documentation. However, when viewing Fleet separately, we found that the majority (84%) of the case files were incomplete as indicated in the charts below. Testing Results (All Items) Complete - No Discrepancies Items Incomplete - Missing Signatures Unable to Locate Statement/File Miscellaneous 2% 9% Fleet Complete - No Discrepancies Items Incomplete - Missing Signatures Unable to Locate Statement/File Miscellaneous 2% 9% 5% 32% 57% 84% Cause There are various reasons that have resulted in the concerns identified: Management is not required to sign the statements that itemize the purchases. Policy and Procedures do not require the Department Approver to review submitted receipts within a specified period of time. Page 11 of 16

12 Approvals are often completed by signing a cover sheet verification form rather than on itemized, individual statements. This includes both the sign offs from the Department Approver and the Manager or Department Director. Most of the Department Approvers are in clerical positions and it is unclear if they are always knowledgeable about the types or items purchased. Effect Without sufficient reviews and approvals, many items that may look appropriate for City business could conceivably be overlooked and misappropriated for personal use. Further, waiting a month or more to review purchases makes it more difficult to determine if the purchases were appropriate. Recommendation The Department should ensure that adequate review and approval procedures are in place by establishing procedures requiring reviews of receipts and statements promptly. Receipts should be reviewed and initialed by the cardholders supervisor as the purchases are made, or shortly thereafter. Further, each statement should be reviewed and signed by the Department Approver and the Department Manager. Finally, the Policy and Procedures should be updated to reflect the changes. Management Response We agree and will work to affirm that adequate review and approval procedures are in place by establishing procedures requiring reviews of receipts and statements promptly. Receipts shall be reviewed and initialed by the cardholder s supervisor as the purchases are made or shortly thereafter. Further, each statement shall be reviewed and signed by the Department Approver and the Department Manager. The Purchasing Card Policies and Procedures shall be updated to reflect the changes. Implementation Date: December 31, ) CREDIT CARD STATEMENT RECONCILIATIONS Reconciliation and validation of Fire Department purchases is not performed in a timely manner. Criteria Section II-K of the Department s Policy and Procedures provides deadlines for all departments to submit monthly verification documents that are used to reconcile purchases. Late or incomplete documents result in the deactivation of procurement cards. Page 12 of 16

13 Condition We selected a random sample of 160 purchases, which included 5 from the Fire Department. However, none of the five purchases were available for our review. It was explained that the Fire Department submitted six months worth of purchases at one time early in 2014, and was preparing the purchases for July through September 2014, during the audit. As such, documentation for the purchases was not readily available. We question the effectiveness of reconciliations and validations that occur several months after purchases are made as it is increasingly difficult to identify questionable purchases. Cause Policies are not sufficiently enforced to ensure that departments submit their reconciliation documents in a timely manner. Effect Lack of timely reconciliations and validations may result in unnecessary or inappropriate expenditures. Recommendation The Department should ensure that all departments remit monthly statements and receipts in a timely manner by enforcing procedures that: State when reconciliation documents are due, and Require deactivation of procurement cards when policies are not followed. Management Response We agree and affirm that all departments shall remit monthly statements and receipts in a timely manner by enforcing procedures that state when reconciliation documents are due. Late reporting will result in deactivation of procurement cards when policies are not followed. Implementation Date: December 31, ) SALES AND MOTOR FUEL TAXES Florida municipalities are entitled to a refund of a portion of state gasoline excise taxes paid, however, tax refunds for fuel purchased from retail vendors have not been requested. Page 13 of 16

14 Criteria Federal law provides a fuel excise tax exemption for the sale of any liquid used as a fuel in a motor vehicle, motorboat, or aircraft for the exclusive use of any State, or any political subdivision of a governmental entity. Further, City Code Section 2-197(b)(12) indicates that it is the Finance Director s duty to receive all monies due to the City from any source, whether federal, state, or city. Condition Most fuel purchased by the City is acquired in bulk and dispensed from City fueling facilities. Fuel purchased in bulk is tax exempt at the time of purchase, or is reimbursed by the Florida Department of Revenue (FDOR). However, fuel purchased at retail vendors, for unmarked police cars seeking to remain undercover, incurs taxes even though the purchases are made with a City P-card. We found that FDOR permits requests for refunds in these cases, however, a review of these transactions indicated that refunds for fuel purchased in this manner has not been requested or received. Refunds can be requested up to three years from the date of purchase and should be filed quarterly. As such, 12 requests for refunds should be processed. We further found that filing these returns is likely to be a labor intensive process, as the reimbursement request requires that the number of gallons of fuel purchased be provided. Our review indicated that the gallons of fuel are only captured in the individual sales receipts, not on the statements. In order to compile such data, each cardholder s statement and the attached receipts for each month may have to be located. We also found that fuel purchased for in-state rental cars may also be eligible for reimbursement, however, the amount is not likely to be material. Cause The excise taxes on these purchases have been overlooked and reimbursement from FDOR has not been requested. Effect Insufficient controls for ensuring that reimbursable taxes are recovered may result in unnecessary costs to the City. Recommendation The Finance Department should ensure that tax reimbursements are received by establishing a procedure to monitor, track, and request fuel tax reimbursements on a monthly basis. Page 14 of 16

15 Further, for the reimbursements that are currently available, the Department should file the requests for reimbursement with the FDOR for the past three years and track usage in the future to facilitate quarterly filings. The Department should work with the FDOR and attempt to reach an agreement with the FDOR on a procedure to estimate usage and avoid manually calculating gallons of fuel from individual receipts. Because of the three-year limitation, this should be done immediately, starting with the transactions approaching the three-year limit. Management Response We agree and will work with the Fleet Department to assure that tax reimbursements are received by establishing a procedure to monitor, track, and request fuel tax reimbursements on a monthly basis. Further, for the reimbursements that are currently available, the Finance Department will evaluate filing the requests for reimbursement with the FDOR for the past three years. Finance will work with Fleet to track usage in the future to facilitate quarterly filings. With assistance from Finance, the Fleet Department should work with the FDOR and attempt to reach an agreement with the FDOR on a procedure to estimate usage and avoid manually calculating gallons of fuel from individual receipts. The process to request reimbursement and work with Fleet and FDOR will begin immediately, starting with the transactions approaching the three-year limit. Implementation Date: December 31, ) CREDIT CARD REBATE PROGRAMS Periodic reconciliations and reviews of the credit card rebate program should be conducted to ensure that the City receives a full credit and the best rebate available. Criteria City Code Section 2-197(b)(12) indicates that it is the Finance Director s duty to receive all monies due to the City from any source, whether federal, state, or City. Further, best practices indicate that rebate program reconciliations should be performed periodically. Condition The City receives an annual rebate from the BOA for a percentage of the net purchases made during the year. Currently 1.6 percent of the net purchases is refunded to the City provided that the net purchases exceed the threshold of $10 million. However, our review indicated that the amount of the rebate is not being reconciled or otherwise confirmed by the City, even though the data being captured by both the City and BOA systems, could provide the required information needed to perform reconciliations. Page 15 of 16

16 Further, we found that at least one other rebate program may be more beneficial to the City under certain circumstances. Hillsborough County has a consortium in which a number of other local entities participate. The rebate is 1.6 percent, the same as the City is currently receiving, but does not have any individual City dollar amount thresholds. Since the City only recently met the $10 million threshold, it is probable that reductions in P-card purchases may place the City below the threshold which could decrease the rebate amount. Cause Policies and Procedures do not address reconciliation of any rebates. Further, staffing has not been available to routinely explore other rebate programs. Effect The City may not always receive the correct rebate amount due from the BOA. Further, the City may not receive the maximum rebate available under other rebate programs. Recommendation The Department should update its Policies and Procedures and implement a process for reconciling rebates, including those from the Bank of America. Further, the Department should review other programs to determine if a more favorable rebate program is available. Finally, the Department should consult with the City s Legal Counsel regarding any contractual obligations with the Bank of America or the State of Florida that may impact changes to the current rebate program. Management Response We agree and will update the Purchasing Card Policies and Procedures and implement a process for reconciling rebates, including those from the Bank of America. Further, the Finance Department will periodically review other programs to determine if a more favorable rebate program is available. Implementation Date: December 31, 2015 Page 16 of 16