OFFICE OF THE CONTROLLER CITY OF PHILADELPHIA PENNSYLVANIA. Jonathan A. Saidel City Controller

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1 OFFICE OF THE CONTROLLER CITY OF PHILADELPHIA PENNSYLVANIA OFFICE OF THE DIRECTOR OF FINANCE AND SINKING FUND COMMISSION AUDITOR S REPORT FISCAL 2001 and 2002 Jonathan A. Saidel City Controller

2 Janice D. Davis, Secretary of Financial Oversight and Director of Finance Office of the Director of Finance 13 th Floor, Municipal Services Building 1401 John F. Kennedy Boulevard Philadelphia, PA April 22, 2004 Benjamin Gilbert, Chairman Sinking Fund Commission 13 th Floor, Municipal Services Building 1401 John F. Kennedy Boulevard Philadelphia, PA We have examined the financial affairs and operations of the Office of the Director of Finance and the Sinking Fund Commission for fiscal 2001 and 2002 pursuant to the requirements of Section (c) and (d) of the Philadelphia Home Rule Charter. A synopsis of the results of our work is provided in the executive summary to the report. We discussed our findings and recommendations with your staff and included your Office s response to our comments as part of the report. Our recommendations have been numbered to facilitate tracking and follow-up in subsequent years. We believe that, if implemented by management, these recommendations will improve internal controls and the effectiveness and efficiency of the Office of the Director of Finance s and the Sinking Fund Commission's operations. We would like to express our thanks to you and your staff for the courtesy and cooperation displayed toward us during the conduct of our work. Very truly yours, JONATHAN A. SAIDEL City Controller cc: Honorable John F. Street, Mayor Honorable Anna C. Verna, President and Honorable Members of City Council Members of the Mayor s Cabinet

3 EXECUTIVE SUMMARY Purpose Background Results In Brief Annual Asset Certification We examined the financial affairs of the Office of the Director of Finance and the Sinking Fund Commission as part of our audit of the City of Philadelphia s basic financial statements, to determine whether management s internal controls over accountability of financial resources, safeguarding of assets, and compliance with certain laws and regulations were suitably designed and placed in operation. The Office of the Director of Finance (Finance) was established by the Philadelphia Home Rule Charter to provide the mayor and the city government a principal officer responsible for the financial, accounting and budgeting functions of the executive branch. The Sinking Fund Commission was established by the Philadelphia Home Rule Charter to invest moneys in the sinking fund and to redeem or purchase city bonds. Finance received operating and capital appropriations totaling $837 million for fiscal 2001 and $878 million for fiscal 2002 and administered assets with year-end balances amounting to $30 million for fiscal 2001 and $32 million for fiscal The Sinking Fund Commission received operating appropriations totaling $387 million for fiscal 2001 and $432 million for fiscal 2002 and administered assets with year-end balances amounting to $405 million for fiscal We noted the following internal control conditions that detract from the ability of the Office of the Director of Finance and the Sinking Fund Commission to adequately safeguard their assets and efficiently carry out their responsibilities: The Sinking Fund Commission did not submit an asset certification to the Controller's Office for fiscal Also, the asset certifications submitted by Finance for fiscal 2001 and 2002 did not include the Small Claims Imprest Fund and the Workers' Compensation Imprest Account balances. Failing to submit or submitting an inaccurate certification complicates the audit process. Uncertified asset balances may not be included in the scope of the departmental audit and inaccurate certified asset balances require additional audit hours to be resolved. i

4 EXECUTIVE SUMMARY Status of Prior Year Findings Recommendations Prior year findings are followed up and reported until corrective action or changes are made by management. We commend Finance for correcting weaknesses in the administration of the Small Claims Imprest Fund and the Burglar Alarm Program. However, our current review again revealed that Finance did not report the Burglar Alarm Program receivable activity to the Revenue Department for inclusion in the city's Agency Accounts Receivable balance. Also, certain civil service employees were not issued a warning letter upon their fifth uncertified sick leave day. Two of these employees who exceeded eight uncertified sick days in one calendar year were over compensated in the amount of $695. To ensure that all Finance and Sinking Fund Commission assets are included in the scope of the departmental audit, we recommend that Finance and the Sinking Fund Commission submit an accurate and complete asset certification to the Controller's Office each year. Future noncompliance will cause the Controller's Office to take the appropriate legal action. To ensure that Burglar Alarm Program receivable activity is included in the city's Agency Accounts Receivable balance, we continue to recommend that Finance forward a copy of the vendor's receivable report to the Revenue Department. To minimize the risk that employees abusing sick leave will be paid for time not worked, we continue to recommend that Finance enforce the managing director's sick leave abuse policy for its civil service employees. ii

5 CONTENTS INTRODUCTION Page Background...1 Organization Chart...3 REPORT ON COMPLIANCE AND ON INTERNAL CONTROL...4 FINDINGS AND RECOMMENDATIONS Annual Asset Certification...6 Status of Prior Year Findings...6 AGENCY RESPONSE E. Ray Zies, Deputy Secretary of Financial Oversight and Deputy Director of Finance...8

6 INTRODUCTION BACKGROUND Powers and Duties The Office of the Director of Finance was established by the Philadelphia Home Rule Charter to provide an agency and principal officer responsible for the financial, accounting and budgeting duties of the executive branch. Finance s powers and duties include: Maintaining separate accounts for each city appropriation. Devising, after consultation with the city controller, a uniform system of accounting for all agencies or individuals receiving city appropriations. Supervising the detailed accounting records maintained by the city. Supervising the accounting for all moneys received and receivable by the city. Issuing an annual report within 120 days after the close of each fiscal year. The Sinking Fund Commission was established by the Philadelphia Home Rule Charter to invest money and to redeem city bonds. Management The director of finance oversees and directs a staff of 164 full-time employees, 108 of whom were appointed through the civil service system. The Sinking Fund Commission consists of a chairman, two commissioners, and a secretary. For budgetary purposes, five divisions have been created under the Office of the Director of Finance to control appropriations and carry out the department s responsibilities. The Sinking Fund Commission s limited staff is organized in one division. The organization chart that follows (on page 3) shows the areas of responsibility established within the Office of the Director of Finance and the Sinking Fund Commission. Financial Resources Management has responsibility for establishing and maintaining controls to safeguard financial resources for which it is accountable. Safeguarding controls are designed to (1) prevent or timely detect unauthorized acquisition, use, or disposition of assets, (2) ensure the reliability of financial reporting and (3) to comply with applicable laws and regulations. During fiscal 2001 and 2002, management of the Office of the Director of Finance and the Sinking Fund Commission were accountable for the following appropriations, revenues and assets: 1

7 INTRODUCTION Appropriations: Finance General Fund Special Gasoline Tax Fund Grants Revenue Fund Community Development Fund Water Fund Aviation Fund Capital Projects Fund Sinking Fund Commission General Fund Water Fund Aviation Fund Car Rental Tax Fund 2001 $626,508,758 1,000, ,138,550 22,400,226 47,238,960 19,067,800 21,000,000 $157,535, ,262,841 72,688,747 4,525, $629,015,147 1,000, ,167,162 22,306,005 48,032,662 21,303,800 21,000,000 $192,558, ,882,516 75,401,417 6,188,000 Revenues: Finance Non-Tax Revenue From Other Governments From Other City Funds $ 4,850, ,297,000 84,770,000 $ 4,625, ,595, ,530,000 Assets (Year End Balances) 1 Finance Petty Cash Fund Witness Fee Account Escrow Fund Employee Health & Welfare Fund Personal Property Inventory $ 6,500 9,000 9,688,877 18,376,603 1,475,326 $ 6,500 9,000 8,871,005 21,745,022 1,356,423 Sinking Fund Commission 2 Sinking Fund Assets Water Sinking Fund Aviation Sinking Fund PGW Sinking Fund PGW Retirement Reserve $658, ,375 19, , ,045,492 1 Asset amounts represent balances reported by Finance and the Sinking Fund Commission in their year-end certification to the Controller's Office. Finance certifications did not include the $175,000 Small Claims Imprest Fund and the $3 million Workers' Compensation Imprest Account. The Sinking Fund Commission did not submit a year-end certification to the Controller's Office for fiscal Investment market values 2

8 INTRODUCTION OFFICE OF THE DIRECTOR OF FINANCE AND THE SINKING FUND COMMISSION ORGANIZATION CHART Source: Fiscal 2002 Mayor s Operating Budget 3

9 REPORT ON COMPLIANCE AND ON INTERNAL CONTROL We annually audit the basic financial statements of the City of Philadelphia, Pennsylvania as of and for its June 30 fiscal year end and issue a report thereon. Those statements include financial transactions of various city departments and agencies. We conduct our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Compliance As part of obtaining reasonable assurance about whether the basic financial statements are free of material misstatement, we perform centralized and departmental tests of the City of Philadelphia s compliance with certain laws, regulations, contracts, and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. Our consideration of the Office of the Director of Finance s and the Sinking Fund Commission s compliance with certain laws, regulations and contracts was limited to tests of certain assets, agency funds, revenues, and appropriation activity during fiscal 2001 and Our departmental tests disclosed no instances of noncompliance by the Office of the Director of Finance and the Sinking Fund Commission that are required to be reported under Government Auditing Standards. 4

10 C I T Y O F P H I L A D E L P H I A O F F I C E O F T H E C O N T R O L L ER Internal Control Over Financial Reporting In planning and performing our audit, we consider the internal control over financial reporting for the City of Philadelphia s centralized system, as well as for those systems in place at each department or agency, in order to determine our auditing procedures for the purpose of expressing our opinion on the basic financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the Office of the Director of Finance s and the Sinking Fund Commission s internal control over financial reporting was limited to determining if its control components for certain assets, fiduciary funds, revenues, and appropriation activity were suitably designed and placed in operation during fiscal 2001 and 2002, and would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the Office of the Director of Finance s and the Sinking Fund Commission s internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the basic financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the Office of the Director of Finance s and the Sinking Fund Commission s internal control over financial reporting and its operations that we consider to be material weaknesses. However, we noted other matters involving the Office of the Director of Finance s and the Sinking Fund Commission's internal control over financial reporting, which are described in the accompanying findings and recommendations section of the report. This report is intended solely for the information and use of the management of the City of Philadelphia, the Office of the Director of Finance, and Sinking Fund Commission, and City Council and is not intended to be and should not be used by anyone other than these specified parties. April 11, 2003 ALBERT F. SCAPEROTTO, CPA Deputy City Controller 5

11 FINDINGS AND RECOMMENDATIONS ANNUAL ASSET CERTIFICATION Annually, the Controller's Office requests each city department to certify its year-end asset balances for audit. By submitting an accurate and complete asset certification form, each department acknowledges and informs the Controller's Office of all assets entrusted to it for safekeeping. The annual certifications are used by the Controller's Office in conducting departmental audits mandated by the City Charter. Consequently, failing to submit or submitting an inaccurate certification complicates the audit process. Uncertified asset balances may not be included in the scope of the departmental audit and inaccurate certified asset balances require additional audit hours to be resolved. The Sinking Fund Commission did not submit an asset certification to the Controller's Office for fiscal Also, the asset certifications submitted by Finance for fiscal 2001 and 2002 were incomplete. They did not include the Small Claims Imprest Fund and the Workers' Compensation Imprest Account balances. We recommend that Finance and the Sinking Fund Commission submit an accurate and complete asset certification form to the Controller's Office each year. Future noncompliance will cause the Controller's Office to take the appropriate legal action. [ ] STATUS OF PRIOR YEAR FINDINGS Prior year findings are followed up and reported upon until corrective action or changes are made my management. Small Claims Imprest Fund Our prior year report addressed weaknesses in the administration of the Small Claims Imprest Fund. The fund was established to expedite the settlement of small claims in order to avoid costly litigation. Our prior year review disclosed that payments were made from the fund exceeding the small claim limit, and for which the city's liability was not clearly established and properly documented. Our current review revealed that payments were within the small claim limit and properly documented. This finding is considered resolved. [ ] Burglar Alarm Registration Fees We previously reported that improvements were required in the administration of the Burglar Alarm Program. Finance contracted with a vendor to bill annual registration fees and collect fines, however bills were being sent out late causing an opportunity loss of interest income. In addition to more timely billing, we also recommended that Finance report the program's receivable activity to the Revenue Department for inclusion in the city's Agency Accounts Receivable balance. Our current review revealed that bills for annual registration fees were sent out timely. This finding is considered resolved. [ ] However, Finance again did not report the program's receivable activity to the Revenue Department. We continue to recommend that Finance forward a copy of the vendor's receivable report to the Revenue Department. 6

12 FINDINGS AND RECOMMENDATIONS Sick Leave Abuse Policy We previously commented that Finance did not adequately enforce the managing director's sick leave abuse policy for civil service employees. Such non-compliance increases the risk that employees abusing sick leave will be paid for time not worked. We noted the same condition during our current review. Our testing revealed certain civil service employees who were not issued a warning letter upon their fifth uncertified sick leave day. Two of these employees who exceeded eight uncertified sick days in one calendar year were over compensated in the amount of $695. We continue to recommend that Finance enforce the managing director's sick leave abuse policy for civil service employees. [ ] 7

13 RESPONSE TO AUDITOR S REPORT 8

14 9 RESPONSE TO AUDITOR S REPORT