Attached you will find the audit report for the Utility Loans and Liens Audit Impact Fees, CIAC Fees, and old Assessments.

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1 City of Cape Coral City Auditor s Office TO: Mayor and Council Members THRU: Dona J. Newman, City Auditor FROM: Margaret Krym, Assistant City Auditor DATE: June 30, 2008 SUBJECT: Utility Loans and Liens Audit Impact Fees, CIAC Fees, and Old Assessments Attached you will find the audit report for the Utility Loans and Liens Audit Impact Fees, CIAC Fees, and old Assessments. We would like to thank Mark Mason, Financial Services Director, Bill Boyd, Customer Billing Services Manager, Holly Goyette, Assistant Customer Billing Services Manager, and Petra Cruz, Billing Supervisor for their assistance during this engagement. We would also like to commend the employees in the Customer Billing Services Division, who were consistently conscientious and supportive of our efforts. We will be happy to respond to any questions or concerns you may have about this report. xc: Terry Stewart, City Manager Carl Schwing, Assistant City Manager Dolores Menendez, City Attorney Bonnie Potter, City Clerk Mark Mason, Financial Services Director John MacLean, ITS Director Bill Boyd, Customer Billing Services Manager Holly Goyette, Assistant Customer Billing Services Manager Petra Cruz, Billing Supervisor P O Box Nicholas Pkwy. Cape Coral, FL Phone Fax

2 City of Cape Coral Office of the City Auditor Utility Loans and Liens Impact Fees, CIAC Fees and Old Assessments Date: June 30, 2008

3 Utility Loans and Liens Impact Fees, CIAC Fees and Old Assessments Background As the City of Cape Coral continues to expand utility services to its property owners, the systems for documenting, reporting and managing the underlying transactions associated with this expansion have grown to accommodate the need. The Customer Billing Services Division (CBSD) is tasked with this responsibility. The increasing volume of activity has placed new demands on staff and systems alike. With this in mind and at the request of Management, we determined to perform this audit of utility loans and liens. At the entrance conference for the Utility Loans and Liens Audit held on March 25, 2008, we agreed to divide this audit into two separate engagements. This first one will focus on Impact Fee, Contributions in Aid of Construction (CIAC) Fee and Old Assessment Loans and Liens. (The definition of these fee types may be found in Appendix A.) The second, to be done at some time in the future, will address New Assessments which are now being collected by the Tax Collector. For each of the fee types included in this audit, the City has allowed lot owners to finance the fees and assessments over a period of years. Voluntary or involuntary liens have been placed on these properties and loan accounts have been created. The resulting balances due to the City are therefore a receivable asset to be safeguarded. On January 31, 2008, the outstanding balances for these loans were reported to be: Impact Fees CIAC Fees Old Assessment Total Balances Active Accounts 2, ,146 13,454 Delinquent Accounts ,498 2,169 Currently due and past due $ 492,850 $ 69,869 $ 611,387 $ 1,174,106 Due in future installments $ 1,803,766 $ 336,388 $ 10,370,729 $12,510,883 Scope The scope of this audit included a review of the financial accounting activities associated with Impact Fees, CIAC Fees and Old Assessments for potable and irrigation water and sewer services. Our work focused primarily on the functions of notification; creation of accounts; management of billed and unbilled outstanding loans and liens; recording of liens; billing; and collection within the Customer Billing Services Division (CBSD). Page 1 of 12

4 Audit Objectives and Conclusions Objective: Ensure that there is a system of internal control in place. During our audit we found that there is a system of internal controls in place and that the majority of the controls were effective. However, we also discovered several areas that were not well controlled and we have documented these in the report below. Objective: Ensure that there is completeness and accuracy in the information used to initiate, book, collect and account for these Utility Loans and Liens. Our audit work revealed that there is a risk that all Utility Loans and Liens may not be captured and accounted for. We also discovered errors within the data maintained in the Geographic Information System (GIS) that CBSD relies upon to be accurate. Objective: Ensure that information can be accessed efficiently. During our audit we found that the department is unable to efficiently compile data into meaningful aggregate reports for managing outstanding billed charges for loan accounts. This deficiency is primarily caused by the HTE software s inability to generate these reports. We were able to access detail individual account information efficiently, however the department is unable to efficiently extract information and efficiently compile it into reports. Detailed Findings Our review included documenting the department processes, identifying points requiring a control, documenting the related control and observing that control in the workplace to verify its effectiveness. During this observation process we found that there is a system of internal controls in place and that the majority of the controls were effective. Listed below are those that were deficient. Control to ensure that ALL lots are assessed, fees paid and/or financed. When an area receives utility service from a Utility Expansion Project, the owners of improved lots within that area are notified of the assessment of Impact Fees and they are given 180 days to pay these fees or agree to finance them and to hook up to the new services. During our review we determined that CBSD is relying on a data file which they call the Master Listing as their primary control to ensure that all improved lots receiving new service, actually pay or finance their fees and hook up to the utilities. The Master Listing is used to capture, monitor and control the population of improved lots which have been assessed. This Master Listing is maintained on an Excel spreadsheet file. CBSD s ability to ensure that ALL lots are processed depends on the integrity of this spreadsheet file. Although Excel is an exceptionally useful tool, it is an application that lacks controls. There are no controls in place over the number of records within the listing. There are no controls over the rows being deleted. Update information is received from various sources but is not documented in a daily activity record. Changes to data can be made without an Page 2 of 12

5 audit trail or trace of evidence to document that a change was made. Rows (lots) can be added or deleted without detection. This lack of control over the data in the Master Listing puts that data s integrity into question. If the data is compromised, it is possible that impact fees for some lots will be overlooked and that the associated revenue will be lost to the City. Also, a lack of control provides an opportunity for fraud. While performing our detail testing we selected a four block area which overlapped two completed utility extension assessment areas. The area included 98 lots. During our testing we verified that impact fees were paid, financed or classified as delinquent on each of these lots if they were improved (had structures built upon them.) We found one lot that had been charged water impact fees but sewer impact fees had been overlooked. These fees were due in This error can be attributed to the weakness in data control inherent in the use of a spreadsheet for the Master Listing. Finding one error in a population of 98 lots suggests that there may be more when the entire extension project area is considered. Prior to the completion of our audit field work, the department had prepared and sent a letter to the lot owner notifying him that he had 15 days to exercise a voluntary lien or have an involuntary lien placed upon his property. We strongly recommend that changes be made and controls put in place that will guarantee that all impact fees are accounted for. CBSD should work in conjunction with Information Technology Services (ITS) to determine a software solution for this problem. Options to accomplish this may include: Obtaining a new software application which provides for controls to ensure that all lots are captured and applicable fees collected. These controls should, at a minimum, include: o Documentation of daily postings and/or changes to facilitate recovery if a back up is needed and to provide audit trails for audit, verifications and approvals. o A reconciliation process by project to ensure the population is complete. o Limited access by password protection o A report generator to deliver data that can be used to manage the process. Obtaining a data analysis software application such as ACL or IDEA. Entering all assessed impact fees into HTE immediately at the time lot owners are first notified. If in Management s opinion this can be accomplished within the limitations of HTE, it may be possible to obtain control in this way. This option may require the continued use of the Master Listing to track the unique data used in this process but it would no longer place reliance on the Master Listing to ensure that all impact fees are accounted for. Page 3 of 12

6 H.T.E. does not have the ability to create a receivable at the time of availability, which could later be converted into a loan. Once the receivable is established, H.T.E. is designed to begin accruing interest and penalty, which should not occur until either the customer enters into the financing agreement, or the City imposes a delinquent lien for non-payment of the Capital Facility Expansion Fee. CBSD has password protected the Master Listing, with very limited access, and backs up the Master Listing weekly onto disc. CBSD is exploring the possibility of creating a unique account in DFAST, our assessment software, which currently has the security features requested, and queries/ reports are easily extractable. CBSD will be testing this in the upcoming weeks. DFAST would allow us to enter the applicable Capital Expansion Fees for all parcels receiving service, and allow us to place time constraints on data, to ensure accurate reports. Reliability of Payoff Request Information Forms When a lot owner, or other interested party, requests the exact amount due to settle all accounts with the City on a particular lot, one CBSD employee is tasked with drawing from multiple sources to gather the information required to determine that amount. In addition to outstanding impact fees, CIAC fees and old assessments, the employee must include lot mowing fees, utility billings and other miscellaneous charges. Since loan billings are performed on an annual basis and the payoff date may fall between billings, the employee must also calculate interest up to the assumed payoff date. This is a manual process and more than 100 of these payoff requests are prepared each day. Once the employee completes these calculations and fills in the form it is transmitted to the lot owner or his representative. No one else checks the work or verifies the accurateness of the calculations. The lot owner will rely on this information and assume his payment has been made In Full when he pays this balance. These payoff information requests are being used by title companies for purposes of closing sales transactions, banks for purposes of foreclosure and by lot owners for settling their accounts. We understand that frequently the date provided by the lot owner as the payoff date may differ from the date that a payoff actually takes place and this may cause a variance between the amount due and the amount quoted in the Payoff Request Information Form. However, if the dates are the same, the City may be in the position of having to honor a payoff amount given out in error. This could cause a loss to the City and also create an issue of credibility in the eyes of the public. We discussed this with management and prior to our completion of field work they provided a revised Payoff Request Information Form which included a disclaimer alerting outside parties that the payoff amount quoted may be subject to change and that it should be updated on the date of closing. We concur with CBSD that it is not an efficient use of staff to have a second person Page 4 of 12

7 recheck every form, however it is essential that all reasonable efforts be made to ensure that the form is correct prior to its release to the public. We also are aware that CBSD did try to automate this process in the past and found that it was not possible to produce the payoff balance without some manual participation. We recommend at this time that CBSD automate the process as much as possible. This would include the creation of a data input form to document only the necessary facts (date of payoff, billing date, interest rate, balance outstanding, etc) and the construction of automated templates that will utilize these facts for interest calculations and automatically populate the Payoff Request Information Form with balances. By removing the manual calculations from the process possible errors will be minimized, the process will take less time, and by printing an automated report its appearance will be more professional. CBS has requested that the new Financial Services Software have web access capability to allow customers to request payoff information electronically. Auditor Comment On We concur with Management s response and acknowledge that their suggestion would provide a permanent long term solution. However, for the short term, we continue to recommend that automated templates be used to improve their process. Cash deposits and segregation of duties The staff member who prepares the Payoff Information Request Form also informs the Cashiers where and how to apply payments received regarding these payoffs. Occasionally this employee actually receives the checks (payments) as well. When the same person prepares the charges, has access to the payment and determines where the payment should be applied there is an opportunity present to cover over errors and/or perpetrate fraud. We recommend that these duties be segregated. When the Payoff Information Request Forms are complete they should be maintained by a separate individual and the posting allocations for each payoff prepared by a second person. All payments will be immediately directed to the cash office. CBSD is currently in the process of installing a fax machine, whereby the cashier can fax a copy of the check in question out to the appropriate personnel for research. The Payoff Desk no longer receives any payments, nor issues any payment slips for postings. Also, it was reported that checks are occasionally given to CBSD staff members so that they may advise the cashier on the correct accounts for posting. We received a copy of a written policy provided by the Cashier Supervisor which specifically states that No Page 5 of 12

8 checks will leave the Cashier s office. We also received the Supervisor s assurance that they will enforce this policy. In addition, City practices require checks to be deposited in a timely manner. We recommend that Management enforce the current policy prohibiting checks from leaving the Cashier s possession. Checks should always be included in the current day s deposit. CBSD is currently in the process of installing a fax machine, whereby the cashier can fax a copy of the check in question out to the appropriate personnel for research. The cashier has also been instructed to management if a check is not resolved by the appropriate personnel in a timely manner. Billing adjustments We observed a strong control environment in CBSD over the processes of preparing loan documents, creating loan accounts in HTE, and preparing bills for these loan accounts. There are numerous logs and verification controls which are in place and documented. One exception to this however exists in the area of making adjustments to bills and accounts. One person is tasked with reviewing the billed account balances and payment postings prior to bill preparation. When errors are discovered this employee makes adjusting entrees to the balances. These are reported on the Adjustment Update Report. These adjustments to account balances are to be reviewed by the supervisor. We did observe that the employee forwarded this report to the supervisor but the review was not documented and therefore cannot be verified. We found no evidence of inappropriate entries. The concern here is that the control is not documented and therefore cannot be verified. If one employee has access to the balances in accounts receivable and can modify them without observation, the opportunity exists to make inappropriate changes that go undetected. We recommend that all adjustments to balances in accounts receivable be approved, that this approval be documented and that the documentation be retained. Ideally, all adjusting journal entries should be prepared and posted by the Accounting staff rather than CBSD. CBS makes the necessary adjustment to the accounts in the A/R module and Accounting completes all journal entries if necessary. On a daily basis the A/R module is updated and the reports generated are ed to the supervisor for approval. The supervisor verifies all adjustments and forwards the with the reports and approvals onto accounting. Page 6 of 12

9 Verification of Loan set up in HTE For one unimproved lot within our Detail Test Sample, Lot A, we found a water loan account and a sewer loan account that were set up in HTE in December of 2007 in error. When verifying the set up of these two loans, the CBSD staff found their error and recreated the loan accounts on the correct improved lot, Lot B. This error was discovered timely. Unfortunately, when that occurred they did not remove the incorrect loans from Lot A. The verifier had signed off on the posting when the error was found rather than after the error had been completely corrected. The employee then half fixed the error by posting the loans to the correct account but did not remove the erroneous postings. The lot owner for Lot A was unaware of the error. No billings for those erroneous loans had yet been sent. Nothing was paid. After we made them aware of this error, CBSD corrected the posting by adjusting the erroneous loans off of HTE. On discussion with the CBSD Supervisor responsible for this area, the supervisor immediately recognized the concern and volunteered that it would improve the control process if they did not allow the verifier to sign off on the verification until after ALL concerns with a particular posting had been corrected. We commend the Supervisor for taking prompt action to strengthen this control. Lot owners who are delinquent in responding to assessment notifications. Lot owners have 180 days from the time of notification of the assessment of an impact fee or CIAC fee to respond by either paying for or financing the fee. At the end of the 180 day period, any lots in the Master Listing that have not been marked to indicate that they are paid or have a loan created are considered delinquent. This delinquent status triggers two responses from the City. One, a Code Enforcement case is begun to require the lot owner to hook up to these services. Two, a delinquent lien process is begun. This process includes a resolution on the part of the City Council followed with the recording of an involuntary lien against the property. At the time of our visit we learned that there were over 60 lots currently in this status of delinquent. The majority of these had become delinquent on February 18, 2008 and some were remaining from In May of 2008, these were waiting for follow up action. Before we concluded our field work, CBSD had forwarded the listing to the City Attorney and the resolution process has begun. Page 7 of 12

10 We recommend that CBSD define a regular schedule for preparation of Council resolution packages for these non responding (delinquent) lot owners. We suggest that this be done as each project group reaches the end of its 180 day period, or at a minimum that it be done every quarter. CBSD will prepare a preliminary roll of delinquent Capital Expansion Fees and a roll of delinquent CIAC fees, along with the resolution and send to the City Attorney s office quarterly. There will still occasionally be carryover from a previous roll due to ownership changes, which initiates the entire process from the beginning. We also recommend that CBSD work with the City Attorney s office to create an efficient cross-departmental process for the completion of involuntary liens. Completion would be evidenced by a recorded lien for each delinquent lot. Further, that this process be tracked to see that agreed upon performance standards are achieved. CBSD is also exploring the possibility of tracking and recording this information in DFAST, the assessment software. CBSD will schedule a meeting with the City Attorney s office, and create a policy and procedure for the delinquent lien process, so all parties are in agreement. Lot owners who are delinquent in making payments on their billed loan balances For the 98 lots we selected to Detail Test, we reviewed the status of outstanding loan balances (both billed and unbilled portions) to verify the accuracy of the balances. Within this limited population we found that: There were fourteen lots with water loan accounts in HTE. Six of these fourteen accounts had been paid in full. Out of the remaining eight accounts, five were delinquent in their payments on the billed portion of their loan balances. There were nine lots with sewer loan accounts in HTE. Three of these nine accounts had been paid in full. Out of the remaining six, four were delinquent in their payments on the billed portion of their loan balances. These results show a very high delinquent rate in our sample and may indicate a high delinquent rate in all loan accounts. When we asked to see aging reports for outstanding billed loan receivable balances the reports that were made available to us were confusing and difficult to understand. Upon reviewing this with the department supervisor we learned that the HTE software does not accommodate aging reports that are user friendly or that the department is willing to rely on. As a result they have been forced to extract information through report queries by project type, research each line individually to determine age and if appropriate include the account in a listing of lots to be pursued for foreclosure. The process is manual and labor intensive. Despite this hardship, the department has pursued Page 8 of 12

11 collections and reduced the balance in outstanding billed charges in recent years. Reports that provide management with the aggregate balances in receivable accounts broken down by age are a management tool which may be used to proactively control receivable balances. They are intended to alert management to the potential risk of receivable balances growing older and becoming more difficult to collect. For the accounts that we examined, the percentage that were delinquent in their payments appeared to be significant. The department reported in the January 2008 End of the Month Report that the outstanding billed balances for Impact Fees, CIAC Fees and Old Assessments totaled $1,174,106. Currently the department has no easy way of reporting the age breakdown of that $1,174,106 or measuring if it is growing in age. We recommend that Management develop a plan to address these delinquent accounts. This plan should include: Ensuring that any new software selected for CBSD, to be used for the billing module, include the capacity to generate aging reports. Requesting ITS to create aging reports that can be produced monthly and that CBSD can rely on. These reports should document the age of aggregated outstanding billed charges for Impact and CIAC fees and Old Assessments. Using these reports to isolate and extract a listing of accounts that fall within defined parameters for purposes of collection activity. That management continue their review process that triggers specific actions when the volume of past due balances reach certain defined limits. (Dollar amount; number of accounts exceeding a certain number of days past due; etc.) A strategy to resolve old account balances that are lingering. The current criteria for an account to be considered delinquent is that the account(s) have been delinquent for three (3) years or owe over a $1, for Assessments, Seawalls, Capital Expansion and CIACS. The delinquency amount for Lot mowing has to be equal to or greater than $ CBSD could also recommend the threshold be lowered for the delinquent assessments, however, due to economic situation in the City, lowering the threshold for assessments, which includes many developed parcels that are inhabited by residents, may not be best change at the current time. CBSD could potentially benefit from taking a more aggressive approach with calling customers of delinquent accounts. The old assessments have a remaining life span of five (5) more years. Auditor Comment On We concur with Management s response, however, their comments do not address the underlying finding, specifically the lack of a commonly used tool, aging reports, to aid in the management of receivable balances. We continue to recommend they work with ITS to create a reliable aggregate aging report that can be produced monthly. Page 9 of 12

12 Accuracy of data coming from the GIS. The information that CBSD obtains from the Geographic Information System (GIS) includes a Y for property that is improved and an N for unimproved property. CBSD uses this information to determine whether or not a lot owner is obligated to pay impact or CIAC fees when new utility services are provided in that area. If a lot is marked N, it is set aside and no fees are charged. If a lot is marked Y the process notifies and charges a fee for that lot. For our selected sample of 98 lots, we went to the actual lot and visually inspected it to verify the correctness of the Y and/or N. The purpose of the testing was to verify that all the lots (improved and unimproved) from the GIS were accurately described. One lot that was marked as a Y in the GIS was observed to be in fact an empty unimproved lot. It was determined that the lot owner applied for a single-resident house permit in The GIS is updated by the Department of Community Development (DCD) to reflect a Y when a permit is obtained. The lot owner s permit was subsequently voided but DCD did not update the data in the GIS to revise the lot back to an N. The GIS is outside the scope of this audit work and we have not examined the processes involved with that system. Therefore we cannot make a specific recommendation. However, we do recommend that CBSD be alert to this concern and that they communicate the concern to those involved with maintaining the data in the GIS. Specifically, Management in DCD should review the processes involved in updating the system when a permit is voided and make effective changes to prevent this kind of error in the future. The information from GIS is extracted from the H.T.E. system. Our current system looks at a new construction permit date to populate the improved field. CBSD has not come across a parcel which is improved showing as unimproved. However, we do from time to time, come across parcels where a permit has been applied for, (New construction for building/home, seawall) which populates the Improved status. These parcels would normally be mailed a letter, and upon further research, we would determine the Letter of Availability was mailed in error, and would remove the property from the Master Listing. CBSD will meet with both DCD and ITS to see if any measures can be taken to ensure when a permit is voided, or the permit is for items such as a seawall, the improved field should display as unimproved. Control Environment Survey Within the definition of Control Environment provided by the The International Standards for the Professional Practice of Internal Auditing it is stated that Management (and of Page 10 of 12

13 course the Council) determine this environment. It is sometimes referred to as Tone at the Top. The Control Environment has a significant impact on the effectiveness of internal controls and the attitudes of employees regarding these controls. Without a strong Control Environment, internal controls in processes are not as effective. Therefore to evaluate the Control Environment, we conducted a survey of the Staff at the CBSD. Participant responses remained anonymous. The survey included 16 statements each of which were related to one of the elements of a strong control environment which are: Integrity and ethical values Management s philosophy and operating style Organizational structure Assignment of authority and responsibility Human resource policies and practices Competence of personnel Respondents indicated their degree of agreement with the survey statements provided on the survey. The results of the survey did not raise concerns for this audit. Our interaction with the CBSD staff supported these conclusions. We have made the results of this survey available to Management for their use and information. We found the CBSD staff to be consistently conscientious and committed to performing their work tasks completely and accurately. Also, they were open and supportive of our efforts and eager to learn of possible ways they could improve their processes. Page 11 of 12

14 Appendix A Impact Fees (also called Capital Expansion Fees) are charged to lot owners at the time they hook up to potable and/or irrigation water and/or sewer services. These fees are intended to support the City s ability to provide plant capacity. A lot owner may incur these fees either when they request new utility service for their new construction project in an area where these services have previously been available or when these utility services are being newly provided by the Utility Expansion Program. In the latter case the property owners have 180 days from the time the services become available to accomplish this hook up and either pay or finance the fees. CIAC Fees are charged to lot owners when a private developer extends potable and/or irrigation water and/or sewer services to an area which did not previously have such services and adjacent properties are benefited by that extension. These adjacent lots are then required to hook up to the services and pay CIAC fees in lieu of an assessment. CIAC fees are for the cost of the expansion of services. Old Assessments were applied to properties to reimburse the City for the cost of the Utility Expansion Programs that were done prior to the adoption of the Florida Statute allowing Non-Ad Valorum Assessments to be collected using the uniform method via the Tax Collector s Office. The balances remaining in the Old Assessment loan accounts are being collected by the City s Customer Billing Services Division. Page 12 of 12