REPORT OF INTERNAL AUDIT

Transcription

1 REPORT OF INTERNAL AUDIT PRESENTED TO REVIEW TASK: #07-03, Valley Regional Transit Review REVIEW CLIENT: Mayor s Office and Finance & Administration INTRODUCTION REVIEW DATE: February 23, 2007 REPORT DATE: April 13, 2007 AUDITOR: Jim McMahon CPA, CIA APPROVAL: Steven C. Purvis CPA In accordance with Boise Municipal Code Title 1, Chapter 9; and at the general direction of the City Council, the Office of Internal Audit undertook a review of the most recently completed Valley Regional Transit audits and reviews conducted during 2005 and The administration and monitoring of the Valley Regional Transit contract is largely coordinated through the Mayor s Office with Finance & Administration primarily assuming budget liaison responsibilities. The review conducted by Internal Audit did not reach beyond the defined scope of those recently completed audits and reviews. SCOPE AND METHODOLOGIES The overall purpose of the review was to summarize the financial information and operational issues disclosed within the most recent series of Valley Regional Transit (VRT) financial audits and operational reviews. Internal Audit has been requested to provide a summarized analysis of the audits and reviews; with this summary being utilized for decision making during the fiscal year budget development process. The Review objectives were as follows: Provide a summary of all the detailed audits and reviews conducted during 2005 and Determine whether there is information contained in the most recent GAAP financial audits, A133 compliance audits, and management letters that could impact and assist in future budget development or City Council decisions.

2 Review the results of the most recently completed Financial Management Oversight and Triennial Reviews to determine whether an adequate financial and operational control environment exists within Valley Regional Transit. Review the recently performed Maintenance Review to determine whether Valley Regional Transit is adequately supporting and maintaining new and Citytransferred capital assets. Review the VRT Indirect Cost Allocation Plan for reasonableness. Determine whether the Plan is based on sound business principles and practices. Review the most recently completed Workers Compensation and Mandatory Drug Testing Program audits. Internal Audit utilized a combination of examination, analysis, and comparison to perform the document review. The methods employed, and the evidentiary materials developed were deemed adequate to support the conclusions contained herein. Our review was conducted in conformity with The International Standards for the Professional Practice of Internal Auditing, as established by The Institute of Internal Auditors. OVERALL EVALUATION AND COMMENTS Valley Regional Transit operates in a highly regulated environment necessitated by compliance with federal grant requirements and public safety concerns relating to the transit industry. During the period from 2002 to 2004, Valley Regional Transit expended considerable resources trying to establish an adequate control environment over the operational, financial, and program components of its business model as it moved from being a start-up entity to a regional transit authority. In overall context, VRT navigated in a commendable fashion; given that the battery of reviews and audits during 2005 and 2006 were the first round of reviews conducted since emerging as a regional operating entity. Internal Audit examined a total of ten documents in six major categories of audits and reviews. These categories are as follows: 1) Financial - which includes GAAP audits, A- 133 Audits, and Management Letters 2) Financial Management Oversight and Triennial Reviews 3) The Indirect Cost Allocation Plan 4) Workers Compensation 5) Drug & Alcohol 6) Maintenance Review. The evaluation scale utilized by Internal Audit to report on each completed audit or review is as follows: High Satisfactory, Satisfactory, Marginal, Needs Improvement, and Unsatisfactory. Entities and functional processes are assigned a grade based upon the criteria listed below. High Satisfactory - Characterized by no significant weaknesses or deficiencies being present during an audit or review. Any issues noted were clearly determined to be insignificant or inconsequential. Satisfactory - Reportable issues may exist within an audited or reviewed entity or function. They are deemed not to be representative of a pattern or practice. Any issues noted were clearly determined to be insignificant or inconsequential. 2

3 Marginal - Reportable issues exist within the audited or reviewed entity or function. They are encountered frequently enough to lose the appearance of isolated. Internal control systems appear to be marginally adequate at best. Needs Improvement - Weaknesses or deficiencies are encountered on a relatively frequent basis within the audited or reviewed entity or function. Issues noted, and their frequency, are suggestive of a pattern or practice of inadequate oversight. Internal control mechanisms may not be universally in place, implemented, or actively observed. Management oversight is weak, or is not always effective. Unsatisfactory - Material or significant deficiencies are noted within the operations of the entity or function under audit or review. Issues may pose risks that are either mission-critical or mission-fatal. Management has failed to implement appropriate internal controls. Management oversight is ineffective, absent, or willfully avoided. VRT Evaluation Internal Audit graded each category separately and then assigned an overall evaluation. The Financial, Indirect Cost Allocation Plan, and Workers Compensation categories were evaluated to be Satisfactory. The Financial Management Oversight and Triennial Reviews were evaluated to be Marginal. The Drug & Alcohol category was evaluated as Needs Improvement. Finally, the Maintenance Review category was evaluated as Unsatisfactory. Internal Audit believes that if all the audits and reviews were taken in total; the findings evident across the spectrum of reports could not be merely characterized as isolated or infrequent. Consequently, during the period from 2005 to 2006, the control environment surrounding the operational and financial policies and procedures of Valley Regional Transit can best be characterized as Marginal in relation to the audits and reviews examined. This grade lies at the median (middle) point within the grading scale listed above. Internal Audit believes that some form of follow-up review will need to be conducted at a future date. It should be noted that certain audits and reviews disclosed findings and areas of noncompliance which were subsequently corrected in a timely manner by Valley Regional Transit and its Nampa ValleyRide service contractor, First Transit. FINANCIAL STATEMENT AUDIT REVIEW Fiscal Years 2005/2006 FY05 GAAP Financial, A-133 Audit, and Management Letter Review Background An independent audit provides reasonable assurance that the financial statements of Valley Regional Transit are free of material misstatement for the year ending 9/30/05. An A-133 Audit is required of all entities expending federal awards. The management letter is directed from the auditors to management; informing them of areas of concern. The management letter principally consists of internal control weaknesses and recommendations. When an auditor detects a "serious" internal control weakness, a management letter is issued disclosing this fact. 3

4 Results of Analysis REPORT OF REVIEW Review of the fiscal year 2005 GAAP Financials/A-133 Audit and Management Letter for Valley Regional Transit revealed a slightly deteriorated financial condition as compared to fiscal year Net assets decreased 12% from the prior year, with one of the components (unrestricted net assets available for spending) decreasing from $253,121 to ($345,686). Effectively, spendable assets decreased $598,807 during the year. Other contributing factors included the use of a prior year City over-contribution and the purchase of the Nampa UZA/Intercounty Fleet. Revenue and expense increased 4.9% and 2.4% respectively, as compared to the prior year. During 2005, VRT incurred a net loss of $1,075,957, including depreciation taken of $1,375,267. For fiscal year 2005, Valley Regional Transit was issued an unqualified or clean audit opinion by their auditors, Eide Bailly for the financial (GAAP) audit. For the Single Audit, no matters were noted to be material weaknesses of internal control in the operation over financial reporting. Furthermore, results of testing revealed no matters of noncompliance with laws, regulations, contracts, or grant provisions. It should be noted that the auditors considered Valley Regional Transit s internal control over financial reporting to determine audit procedures. The auditors did not necessarily express an opinion on the internal control over financial reporting itself. The second part of the Single Audit entails compliance in accordance with the U.S. Office of Management and Budget Circular A-133. This part of the Single Audit does involve the expression of an opinion. The testing threshold was to obtain "reasonable assurance" about whether noncompliance with laws, regulations, contracts, and grant requirements could have a direct and material effect on a major federal program. For the year ended September 30, 2005, Valley Regional Transit complied in all material respects with the requirements referred to above that are applicable to each of its major federal programs. No matters of material weakness were found. However, during the audit there was one audit finding. Valley Regional Transit failed to obtain a DBE certification for the financing of the Nampa equipment purchased under a capital lease. Conclusion Valley Regional Transit finished the year ending September 30, 2005 in a fairly stated but slightly deteriorated financial condition, as compared to the prior fiscal year. For fiscal 2005, VRT was issued an unqualified or clean audit opinion. VRT Management Comments Valley Regional Transit concurs with Internal Audit s conclusions and findings with the one following comment. The identified audit finding was resolved through an update to the VRT Procurement Manual and additional staff training. 4

5 FY06 GAAP Financial, A-133 Audit, and Management Letter Review Background An independent audit provides reasonable assurance that the financial statements of Valley Regional Transit are free of material misstatement for the year ending 9/30/06. An A-133 Audit is required of all entities expending federal awards. The management letter is directed from the auditors to management, informing them of areas of concern. The management letter principally consists of internal control weaknesses and recommendations. When an auditor detects a serious internal control weakness, they are required to issue a management letter disclosing this fact. Results of Analysis Review of the fiscal year 2006 GAAP Financials/A-133 Audit, and Management Letter for Valley Regional Transit revealed an improved financial condition as compared to fiscal year Net assets increased 3% from the prior year, with one of the components (unrestricted net assets available for spending) increasing from ($345,686) to $993,928. Effectively, spendable assets increased $1,339,614 during the year. Total investment in capital assets (net of related debt) fell by $1,112,754, principally due to depreciation and smaller amounts of capital purchases. Typically, VRT will have years in which capital will be purchased, and years in which depreciation will exceed capital purchases. At the end of 2005, VRT had a liability due to the City in the amount of $910,122. This liability was extinguished by September 30, Revenues increased 13% and expenses decreased 2.5% as compared to the prior year. VRT had a net operating loss of only $10,209, including depreciation expense of $1,305,549. For the Statement of Cash Flows, VRT had positive cash flow provided by operating activities of $1,106,642; whereas 2005 listed cash used by operations of $367,413. For fiscal year 2006, Valley Regional Transit was issued an unqualified or clean audit opinion by their auditors, Eide Bailly for the financial (GAAP) audit. Within the Single Audit, no matters were noted to be a material weakness of internal control in the operation over financial reporting. Furthermore, results of testing did not reveal matters of noncompliance with laws, regulations, contracts, or grant provisions. The second part of the Single Audit entails compliance in accordance with U. S. Office of Management and Budget Circular A-133. This part of the Single Audit does involve the expression of an opinion. For the year ended September 30, 2006, Valley Regional Transit complied in all material respects with the requirements referred to above that are applicable to each of its major federal programs. No material weaknesses were found. Conclusion Valley Regional Transit finished the year ending September 30, 2006 in a markedly better financial condition as compared to the prior year. For fiscal 2006, VRT was issued an unqualified or clean audit opinion. VRT Management Comments Valley Regional Transit concurs with Internal Audit s conclusions and findings. 5

6 Financial Management Oversight Review and Follow-up Review Background The Federal Transit Administration (FTA) is responsible for administering billions of dollars worth of federal financial assistance to the transit industry each year. Through its Financial Management Oversight (FMO) program, the FTA seeks to help grantees improve their financial management of FTA grants. During a FMO Review, the grantee's financial management system is analyzed to determine whether it meets the requirements of the Common Rule. The Common Rule is a set of criteria established by the FTA in: 48 CFR Part 18 "Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments. An objective, external, independent professional opinion is expressed to the FTA in accordance with established public accounting standards on the effectiveness of the grantee s internal control environment. The seven standards used to evaluate grantee financial management systems are: Financial Reporting, Accounting Records, Internal Control, Budget Control, Allowable Costs, Source Documentation, and Cash Management. Results of Analysis The original full-scope Financial Management Oversight Review Report dated April 29, 2005 was an adverse opinion. The opinion stated that VRT had not maintained effective internal control over their financial management system to meet the FTA established criteria. Three material weaknesses and four reportable conditions were found. The three material weaknesses were: 1) Unauthorized drawdown of excessive Planning labor costs and indirect costs not supported by an FTA-approved Cost Allocation Plan. As of the date of Internal Audit s Review, VRT has complied with all the requirements related to this finding. VRT has not yet received approval of their submitted Cost Allocation Plan or confirmation from FTA that this finding has been closed. 2) Grant-related labor costs are not charged to specific grants and account reconciliations were not conducted. This finding has been corrected by VRT and closed. 3) Classification of administrative labor as Planning, not supported by time keeping records. As of the date of Internal Audit s Review, VRT has complied with all the requirements related to this finding. VRT has not received confirmation from FTA that this finding has been closed. The four reportable conditions discovered during the original review were: 1) VRT did not have written information technology desk procedures. 2) VRT did not have a management information system (MIS) disaster recovery plan. 3) VRT had not performed a fixed asset inventory for its federally funded assets and equipment. 4) Lack of adequate documentation to support subsidiary general ledger account reconciliations. Items 1, 3, and 4 have been corrected by VRT and closed. Item 2 is still open as of 3/19/07. FMO Follow-up Review A Follow-up engagement was conducted by FTA to see whether VRT had addressed the three material weaknesses and four reportable conditions found in the original review. As of the date of Internal Audit s Review, VRT has complied with all the requirements 6

7 related to the material weaknesses and reportable conditions noted in the original audit. VRT has developed a MIS disaster recovery plan but has yet to submit that plan to the FTA for approval. VRT has not received confirmation from FTA that the two material weaknesses and one reportable condition found in the original review have been closed. During the Follow-up Review, the FTA auditors discovered one additional reportable condition: VRT had not instituted adequate screening procedures for the detection of Unallowable Costs. The VRT corrective actions are as follows: 1) VRT has established a multi-level review process (including written procedures) to ensure the appropriate screening for Unallowable Costs. 2) Additional training will be provided to VRT personnel in how to categorize expense items. Conclusion Valley Regional Transit has made substantial progress in addressing the serious internal control weaknesses evident in the design and operation of their financial management system, as it relates to Planning labor cost identification and support for federal grant programs. VRT is still awaiting the final report to be issued by the FTA regarding the Follow-up Review. VRT Management Comments Normally, the Financial Management Oversight Review (FMO) process is reserved for agencies receiving large Federal grant awards to test the strength of the agency s financial management systems and controls. Late in 2004, VRT management contacted the FTA to discuss newly created systems, controls, policies, and procedures, etc. and subsequently requested from the FTA an FMO review to assist in the development of internal systems and controls. The FTA agreed with VRT s request. There have been two FMO reviews conducted. The final report on the first review was dated April 29, However, the final report on the follow-up review has not yet been released. The following comments refer to the material weaknesses and reportable conditions identified. 1) Unauthorized drawdown of planning labor costs and indirect costs: a) The FTA has instructed VRT to resubmit the Indirect Cost Allocation Plan after the release of the final FMO review. As of April 3, 2007, VRT has not yet received the final FMO review document. b) Due to the fact that the City of Boise extensively funds beyond the minimum required to capture all Federal funds, the FTA has indicated that reimbursement for unwarranted administrative labor charges would not be required. 2) Grant related labor costs not charged to specific grants: The FTA had issue with the fact that the actual fully-loaded labor charges which were charged to specific grants could not be traced back to an employee s timesheet. All systems and procedures have been updated and implemented. This item has been closed. 3) Account reconciliations were not conducted: 7

8 VRT has always fully completed all account reconciliations. VRT maintains an electronic archiving system which stores all documents related to account reconciliations. At the time of the initial FMO Review, the review team did not fully understand that all documentation related to account reconciliations were stored in this manner. As a result, they listed this as a finding. Upon the second FMO Review, this point was communicated which prompted a clearing of the item. This item has been closed. 4) Classification of administrative labor as planning: The FMO Review team found timesheets where employees had charged direct time to a program; providing only summary information on the tasks performed. The recommendation was that all time charged directly to a planning program provide specific detailed task information. Since this seems somewhat excessive, VRT is waiting to see the final FTA determination on this required documentation prior to implementation. 5) Lack of a management information system disaster recovery plan: VRT has completed the plan. 6) Lack of information technology desk procedures: This item has been corrected 7) Missing fixed asset inventory: This item has been corrected 8) Lack of documentation to support subsidiary general ledger account reconciliations: VRT has always provided full documentation to support subsidiary general ledger account reconciliations. VRT maintains an electronic archiving system which stores all documents related to account reconciliations. At the time of the initial FMO Review, the review team did not fully understand that all documentation related to the account reconciliations were stored in this manner. Consequently, they listed this as an audit finding. During the second FMO Review this point was communicated which prompted the clearing of the item. This item has been closed 9) Screening procedures for the detection of unallowable costs: In the determination of unallowable cost, the Federal government primarily utilizes OMB Circular A-87 to provide guidance. However, the FTA also follows FTA Circular 9030 in the determination of unallowable costs. When there is a conflict between the two, the FTA will always follows the FTA Circular The items identified by the FMO Review team were based strictly on OMB Circular A-87 and not on FTA Circular Of the five items identified by the FMO Review team as unallowable expenses, three are reclassified by FTA Circular 9030 as allowable expenses. This left two items that still had been misclassified. VRT will enhance internal control procedures to reduce the potential for a reoccurrence in this area. 8

9 VRT Maintenance Review REPORT OF REVIEW Background During January 2006, Valley Regional Transit undertook a self-imposed review of the Maintenance function. This review was conducted by Mr. Charlie Mitchell of Professional Transit Management. The Maintenance Review report covered the following sections: 1) Introduction and System Overview 2) Organization and Staffing 3) Preventative Maintenance, General Repairs, and Tires 4) Maintenance Software and Parts Inventory 5) Service Lane and Environmental/Safety. The Maintenance Department is responsible for the quality and efficiency of the vehicle maintenance program; assuring that vehicles are maintained in top condition for frontline service. All vehicle repairs (except body/paint) are conducted in-house. Most mechanics have years of experience and appear qualified to keep the fleet in a safe and reliable condition. There are a total of 54 vehicles within the VRT system: 35 transit busses, 9 paratransit vans, and 10 support vehicles. There are fourteen employees associated with the Maintenance function: The Director and Asst. Dir. of Maintenance, 5 journeymen mechanics, 2 non-journeyman mechanics, 4 fuelers, and 1 utility person. Results of Analysis General Observations The Maintenance Review noted 7 general observations. 1) Excessive spare busses were held (45% spare capacity) over the industry standard (20%). 2) VRT had not been keeping track of miles between road calls. The number of miles between road calls is a standard industry measurement of dependability. 3) VRT had not established a formal training program to certify mechanics on the inspection and maintenance of brake and air conditioning systems. 4) Mechanics are scheduled to work when most of the busses are out providing service (synchronization issue). 5) Instances of excessive amounts of time being charged to work orders for standard (plain vanilla) types of work. 6) Instances of exceedingly low-12%/high-100% amounts of a mechanic s direct labor being charged to work orders. The standard industry benchmark is that an 80% minimum amount of direct labor should be charged to work orders. 7) A competitive bid process for tire purchases had not been established; causing VRT to be out of compliance with FTA regulations. Preventative Maintenance: During the Review, an inspection of 15 vehicle maintenance files revealed that: 1) Most preventative maintenance inspections were not completed on time. 2) Lifetime vehicle mileage was incorrectly input into the repair & maintenance (Fleet-Net) system, causing preventative maintenance schedules to be incorrect. 3) Quality assurance checks of vehicle inspection reports were not being conducted. General Repairs: The following observations were made during the Review: 1) Out-of- Status reports indicated that some vehicles were out-of- service for excessive amounts of time. 2) There appeared to be very little supervision over the mechanic's work progress. 3) The Report mentions a lack of organization, planning, and prioritization of the workflow process. 9

10 Because of the critical nature of the Maintenance Review findings, Internal Audit conducted follow-up with VRT management as to whether each of the findings had been addressed. The current status of each finding is listed below. Maintenance Department Supervision, Workflow Management, and Productivity: During the last year, VRT replaced their Director of Maintenance. The Assistant Director of Maintenance has been actively involved in the direct supervision of mechanics. Mechanics have been assigned more project work on vehicles that are down for excessive periods to permit a more focused attention to productivity. The present General Manager has been receiving daily vehicle status reports to ensure adequate coverage and monitor mechanical progress. Furthermore, regular in-person work site visits to the Maintenance Department floor are conducted. These visits are to inspect progress, discuss issues with mechanics, and to plan activities. Of the many recommendations contained in the Maintenance Review, most are basic to an effective maintenance management function. Some of these recommendations have been absent for a number of years. Within the VRT Maintenance function, work flow processes have improved dramatically. There has been a reprioritization towards preventive maintenance and returning long-term out-of-service vehicles to revenue service. VRT has been striving to maintain high levels of responsiveness to any new mechanical failures. The time incurred to complete standard types of work has converged towards established expectations. VRT has not been able to address the synchronization issue as of this time. Presently, attention has been directed towards developing personnel plans in an effort to realign shifts for proper synchronization. This will increase the number of later shift assignments. Later shifts will allow for greater availability of equipment for repair, preventive maintenance, and fleet campaigns. The 4:5 ratio (80%) of direct work order hours to payroll hours has not been achieved in the Maintenance Department to date. Road Calls: Road calls are now being tracked and reported. Supervisors have become more educated on what properly qualifies as a road call. Mechanic Certification: All mechanics have been certified in brake component maintenance, and in heat, ventilation, and air conditioning systems. System Mileage Data: The lifetime mileage for each vehicle has been researched, identified, and corrected. Inspection Sheets: Preventative maintenance inspection sheets now contain vehicle information on needed repairs, oil pressure, voltage, tire condition, and brake lining status. Quality assurance checks on preventive maintenance have been in place for six months. These checks are reviewed continuously by the Director of Maintenance. Out-of-Service Vehicles: Vehicles out-of-service for excessively long periods of time continues to be a problem. However, the breadth and depth of this problem has been drastically reduced. Significant progress has been made on these vehicles during the last 60 days. Only four of approximately eleven long-term out-of-service buses remain down for mechanical repair. 10

11 Competitive Tire Purchasing: VRT has yet to implement a bid process for tire purchases. Conclusion As compared to the other areas reviewed by Internal Audit, the Maintenance function appears to have contained the weakest control environment. Much needed progress has occurred within the VRT Maintenance function in a relatively short period of time. Proactive management of the function now appears to be the rule, rather than the exception. Internal Audit will need to conduct follow-up monitoring in order to determine whether the recently installed best practices have been imbedded in the present VRT business model. VRT Management Comments Emphasis on the Maintenance department has been, and will continue to be a priority. The limited number of personnel in comparison to actual needs remains far below the standards of a properly functioning maintenance department. What is of significance is the number of items identified in the audit that were completed within the twelve months between receipt of the audit and the response to the City s questions. Reduction of vehicles, increases in training and certification, documentation of road calls, miles and vehicle failures had long been ignored but are now the foundation of the improving performance of the Maintenance department. The greatest challenge remaining is to have a sufficient number of maintenance personnel to perform the necessary work in critical areas. Mechanical personnel to perform work such as preventive maintenance, routine operational repair, advanced safety inspections and maintaining vehicle appearance are insufficient because mechanics cannot be synchronized to match the hours when buses are not in service. Limited personnel prevents after hours maintenance. Simultaneously, there is an insufficient level of supervision to properly oversee day-to-day work and provide the level of analysis expected and required by ValleyRide s own standards, which exceed that of the Federal Transit Administration. The findings of the audit, in addition to lessons learned while resolving problems continue to shape the organizational approach. Federal Transit Administration Triennial Review Background The Federal Transit Administration (FTA) performs a 23 part review of Urbanized Area Formula Grantees at least once every three years. These reviews cover statutory and administrative requirements. The Review also includes an analysis over the extent to which proposed and actual program/planning activities diverge. Results of Analysis Internal Audit reviewed the documentation supporting the most recently conducted FTA Triennial Review dated August 12, No deficiencies were found in 14 of the 23 areas reviewed. Deficiencies were found in the following 9 areas: Financial, Technical, Satisfactory Continuing Control, Maintenance, Procurement, Title VI, Half Fare, ADA, and Drug & Alcohol Program. The audit findings and current status of each are listed below. 11

12 Financial: VRT had not submitted a multi-year financial plan. On July 18, 2006, VRT submitted the Plan. Current Status: This finding has been closed. Technical: 1) No procedures for post-award grant administration. 2) The Milestone Progress Reports lacked adequate descriptions for the scope of progress, program element delays, and unforeseen elements that impact the schedule and cost. 3) Project execution delays for the fuel island and commuter pass program. 4) No FTA approval or cost analysis was submitted to FTA for the lease purchase of busses. 5) No monitoring/ oversight program has been established for the Nampa 3rd party vendor. Current Status: All findings have been closed except for #1 & #5. Satisfactory Continuing Control: 1) VRT has not conducted an inventory of its federally funded assets. 2) The spare bus ratio was 40.5%, exceeding the FTA allowed percentage (20%). As of 3/20/07, the tagging and inventorying of federally funded assets has taken place. Current Status: All findings have been corrected and closed. Maintenance: 1) No maintenance plan for the leased and owned vehicles within the Nampa service area. 2) No established oversight processes/procedures for the 3rd party maintenance contractor. Current Status: All findings have been corrected and closed. Procurement: Federally-funded procurement procedures were deficient in three areas: 1) Contract administration (3rd Party Vendor-Nampa). 2) Fair and open competition was not addressed in procurement procedures. 3) VRT had not conducted cost or price analysis on procurements. Current Status: All findings have been corrected and closed. Title VI: (nondiscrimination) VRT allowed their Title VI Plan to expire on 3/15/05 without a Plan update. At the time of audit, VRT did not have standards and policies to address vehicle standards, route/garage assignments, vehicle headways by route, transit amenities, and access. Current Status: All findings have been corrected and closed. Half Fare: The Half fare structure did not extend to those with a valid Medicare card. Current Status: This finding has been corrected and closed. ADA: VRT had not established effective monitoring procedures to ensure compliance with ADA provisions. Current Status: This finding has been corrected and closed. Drug and Alcohol: 1) VRT's 3rd Party contractor does not have an updated drug and alcohol testing program. 2) VRT had not provided adequate oversight of the 3rd Party Contractor programs. Current Status: All findings have been corrected and closed. Conclusion Valley Regional Transit has addressed, corrected, and closed all but two of the findings listed in the FTA Triennial Review. Valley Regional Transit has not met the required corrective actions schedule and must still submit procedures for post-award grant administration and third-party contractor oversight. VRT Management Comments Valley Regional Transit concurs with Internal Audit s conclusions and findings. 12

13 Valley Regional Transit Indirect Cost Allocation Plan Review Background An Indirect Cost Allocation Plan (ICAP) is required to support the distribution of indirect costs related to a federal grant program. Indirect costs are those overhead expenses that exist for either a common or joint purpose. Often indirect costs are not readily identifiable with a specific program, or the cost of direct identification would be prohibitive. The ICAP is to be prepared in accordance with OMB Circular A-87, and must be approved by the FTA. VRT has established and maintains a comprehensive ICAP. VRT submitted the initial ICAP to the FTA in May The FTA has instructed VRT to operate under the initial ICAP until the final FMO Report has been released. At that time, the FTA will be requesting an updated ICAP that incorporates all FMO findings. As of 4/13/07, the FTA has not yet released the final FMO Report. Results of Analysis Internal Audit examined the submitted ICAP and supporting documents. Technically, there are two types of indirect overhead costs to be allocated within VRT. The first type is a regional indirect overhead cost that needs to be allocated between the Boise and Nampa (BTMA/NUZA) urbanized areas. The initial allocation for this type of indirect cost is based on population estimates generated by COMPASS each year for the urbanized areas. The second type of indirect overhead cost is specific to each particular division and department. This type of indirect cost is allocated within the division and department to each specific program based on the ratio of that program s direct labor cost in relation to the total labor costs across the organization. This methodology is consistent with Attachment E to OMB Circular A-87. Program allocation percentages are established each year during the budgetary process. During this process, each position is examined; with a determination made for the amount of time spent in each program. The ICAP is then approved by the VRT Board before it is forwarded to FTA for final approval. The indirect overhead costs that benefit all programs and projects are as follows: professional services, materials and supplies, utilities, casualty and liability insurance, taxes, miscellaneous and interest expenses, and leases & rentals. Technically, VRT handles indirect overhead costs differently than what is suggested in Attachment E to Circular No. A-87. VRT books actual indirect overhead costs each month. Per OMB Circular No. A-87, VRT should utilize a predetermined indirect cost rate; adjusting the subsequent year s rate by the differential between the prior year actuals and overhead applied. VRT states that using actual indirect costs results in greater accuracy. VRT maintains that this method reduces the potential exposure at year end due to variances between budgeted and actual rates. At the conclusion of fiscal year 2006, VRT experienced only a very small variance. This variance was less than 0.5%. 13

14 Conclusion REPORT OF REVIEW The current ICAP for fiscal year 2008 has evolved from the ICAP submitted to the FTA and examined by Internal Audit. Program allocation percentages have changed for each job class as position requirements within the various programs change. Budgeting systems have been enhanced; allowing allocation percentages to be carried to two decimal places instead of whole percentages. VRT has developed an indirect cost pool. Certain job classes benefiting the entire system are assigned into this pool. These pooled costs are then spread to each program and division based on an appropriate allocation basis. Based on evidence gathered, Internal Audit believes the submitted and current Indirect Cost Allocation Plans are based on sound allocation criteria and business principles. VRT Management Comments Valley Regional Transit concurs with Internal Audit s conclusions and findings. Workers Compensation Audit Review Background VRT maintains workers compensation insurance through the State Insurance Fund. The State Insurance Fund conducts the VRT premium/compliance audits over a three year cycle. Results of Analysis The most recent premium audit was conducted for the policy period of 4/1/04 to 4/1/05. During this period, VRT over-reported payroll wages by $11, due to a system reporting error that added-back voided checks. The system error has now been corrected. As an added control, the Payroll Specialist now compares gross wages for Workers Compensation and Federal/State tax filings each reporting period. During March of 2007, VRT received a letter from the State Insurance Fund stating that a completed interim audit revealed that a couple of employees were being reported under an incorrect workers compensation job classification code. The State Insurance Fund auditor determined that the class code for these employees should be based on where the employee physically resided while performing work related duties, rather than the actual work function itself. Conclusion VRT presently has no outstanding audit issues and is in compliance with the rules and regulations of the State Insurance Fund. VRT Management Comments Valley Regional Transit concurs with Internal Audit s conclusions and findings. 14

15 FTA Mandatory Drug Testing Program Background During 1995, the FTA established an on-site audit program to monitor compliance with the drug and alcohol testing regulations enacted by the U.S. Department of Transportation. On 7/25/06, the FTA conducted an audit of the mandated drug and alcohol testing programs of Valley Regional Transit and its contractor First Transit. This audit encompassed the areas of: Policy Manual Review, Program Manager Interviews and Records Management, Collection Technician and Medical Review Officer Interviews, Pre-Employment Test Results, and Random Testing throughout the year, month, and during service hours. Results of Analysis Internal Audit examined the Final Audit Report of the FTA Drug and Alcohol Compliance Program for Valley Regional Transit and their contractor First Transit. Internal Audit also examined a paper copy of the Finding Response Disk. This Disk was submitted to FTA and contained a listing of each finding and how the auditees implemented corrections. The resultant findings and status within each area is listed below. Valley Regional Transit Policy Manual Review: Produced four audit findings with Policy revisions to include: 1) Refusal/failure to sign. 2) DOT/Non-DOT testing forms. 3) Dilute negative specimens and 4) When random and reasonable suspicion of alcohol/drug testing is allowed. All audit findings were corrected by 10/23/06. Program Manager Interview: The interview with the Program Manager produced seven audit findings in the areas of: 1) Employees not being made aware of the testing authority. 2) Management training. 3) Random testing hours. 4-5) Program Manager s program knowledge and audit preparedness. 6) Communicating verbal test information and 7) Covered contractor monitoring and lists. One of the seven findings in this area was a major finding. That finding stated the transit system was not cooperative and/or did not produce all of the required records requested of them. Internal Audit discovered during the entrance meeting conducted with VRT management and staff, that the Program Manager did in-fact provide the audit team with the required documents in format before audit commencement. All findings in this area were corrected by 10/23/06. Records Management: Produced five audit findings in the areas of: 1) Correct form utilization. 2-3) Testing was not conducted randomly during the year, month and during times when safety sensitive functions occur. 4) Dilute negative test result procedures and 5) Flawed tests results. All findings in this area have been corrected. Collection Technician and Medical Review Officer Interviews: Produced six audit findings in the areas of: 1) Explanation of testing/instructions. 2) Specimen tampering. 3) Employee identification procedures. 4) Sequential completion of employee/collector steps. 5) Knowledge in the areas of: personal employee items that could tamper with the 15

16 specimen, adulterated samples, and inadequate specimen volumes. 6) Medical Review Officer audit preparation. All findings in this area were corrected by 10/23/06. First Transit Program Manager Interview: Interviews with the Program Manager produced one audit finding - random testing occurring only at the beginning/ending of each shift. Records Management: Produced four audit findings in the areas of 1-2) Random testing only occurring at the beginning/ending (between 9-2) of each shift and typically at the end of the month. 3) Testing excusal records are not always being maintained. 4) Auditor observed flawed tests which were not identified, canceled, or corrected. All findings in this area were corrected by 10/18/06. Collection Technician and Medical Review Officer Interviews: Produced five audit findings in the areas of: 1) Order of testing-alcohol before drug. 2-3) Explanations to the employee of testing/collection procedures, instructions, and confirmation. 4) Specimen tampering. 5) Procedures over when an employee is unable to provide the correct specimen size. All findings in this area were corrected by 10/18/06. Conclusion The drug and alcohol program occupies a critical position within the VRT business model. The critical nature results in-part from the perceived risk to VRT patrons, and a level of zerotolerance regarding the public s perception for transit employee impairment. The frequency of findings noted during the drug and alcohol program audit increases the risk that fundamental program objectives may not be met. It should be noted that VRT has corrected all audit findings; coupled with additional training of the Program Manager and managerial staff on the rules, regulations, and requirements of the FTA-mandated Drug and Alcohol Program. VRT Management Comments The Drug and Alcohol program is a highly regulated, detailed, and technical function that requires several levels of participants in the process. The drug and alcohol audit team looks at the most minute details within eight broad audit categories. Within the broader categories, there are even more detailed areas that are reviewed. This same review was done for both VRT and First Transit. The majority of the findings on the third party contractors were focused on one contractor. This contractor conducts after hours and weekend drug testing services. All contractors have indicated they are in compliance with the regulations. The corrections made by VRT have been focused on better contract management. MANAGEMENT PARTICIPANTS Kelli Fairless, Executive Director-Valley Regional Transit Randy Kyrias, Deputy Director-Valley Regional Transit Heather Mink, Senior Budget Analyst-City of Boise 16