A REPORT FROM THE OFFICE OF INTERNAL AUDIT

Transcription

1 A REPORT FROM THE OFFICE OF INTERNAL AUDIT PRESENTED TO THE CITY COUNCIL CITY OF BOISE, IDAHO AUDIT / TASK: AUDIT CLIENT: #12-04, Franchise Fees City of Boise / Cross-Functional Intermountain Gas Company Cable One Television REPORT DATE: August 27, 2012 AUDIT GRADE: Satisfactory REPORT AUTHOR: APPROVED FOR RELEASE: Steven Rehn CIA, CFSA Steven Rehn CIA, CFSA AUTHORITY: Boise City Code, FY2012 Work Plan

2 Task #12-04, Franchise Fees Date of Audit: April 20, 2012 INTRODUCTION In general, the City has granted certain private entities franchises within the municipal boundaries so that they might provide various necessary services to the citizens. As a result, the City collects franchise fees on electric, water, gas, cable and trash services provided to qualifying residential and commercial customers. The fees are billed and collected by each franchisee on behalf of the City, and are remitted either quarterly or monthly to the City based on specific criteria contained in each Franchise Agreement. Internal Audit last reviewed Franchise Fees during a 2008 audit. That project included testing various aspects of the fees as collected and remitted by three franchisees; Idaho Power, United Water, and Capitol Water. This review included an in-depth look at processes and activities associated with two other franchisees Cable One, and Intermountain Gas. Franchise fees are assessed and collected on specific revenues generated by the Cable TV franchise at a rate of 5%; and at a rate of 3% on revenues resulting from the sales of natural gas by Intermountain Gas Company. Franchise fees have historically represented a material component of the City s revenue base. Data relative to revenues generated by just the two franchisees currently under review appear in the table below. Franchise Fee Revenues Natural Gas / Cable Television Franchise FY08 FY09 FY10 FY11 Natural Gas 2,365,177 2,356,723 1,916,973 1,919,163 Cable TV 1,406,600 1,369,686 1,327,935 1,213,513 Total 3,771,777 3,726,409 3,244,908 3,132,676 Franchise fees that are tied to the sales of natural gas are subject to change as the price for that commodity shifts, and / or as weather patterns impact demand. Changes reflected in the table are likely the result of significant declines in the price of natural gas recently. 2

3 Fees generated by the cable TV franchise have generally reflected a steady downward trend recently. This pattern could be due to the fact that alternative service providers have entered the market, and continue to capture a share of the available customer base. Similar to processes we noted at the previous audit, no single department or division within the City has assumed overall responsibility for the monitoring and oversight of all aspects of this revenue source. Rather, a number of City departments have been involved in the franchise fee process in the past; and ostensibly continue to share responsibility for various aspects of administration through an assignment of responsibilities that was undertaken as a result of our previous review. 3

4 SCOPE AND METHODOLOGIES The overall purpose of the audit was to gain a reasonable degree of assurance that the control environment surrounding the determination, remittance, receipt, and accounting treatment for these revenues is adequate. The environment should ensure that the responsible parties are fulfilling their obligations in an efficient and effective manner, that resources are properly safeguarded, that goals and objectives are being met, and that activities comply with applicable policy, law, regulation, and/or contractual agreement. Based on discussions with managers associated with the function, and consistent with a focus on contractual obligations, Internal Audit defined the following specific objectives for the review: To ensure that franchisees are notified of annexations on a timely basis. To ensure that franchise fee revenue projections are proper. To ensure that franchise fees are timely remitted to the City. To ensure that other compliance-related deliverables are achieved. Specific to the two franchise holders involved in the review, the following separate objectives were established: To ensure that franchise fees are assessed against all qualifying accounts within the City s jurisdictional limits. To ensure that qualifying service accounts within recent annexations have been identified in the franchisee systems. Internal Audit has established the scope of the review to include all Franchise Fee activity that occurred within the four-year period beginning October 1, 2007, and ending September 30, All work was planned and performed in a manner that was deemed to be adequate to support the observations and recommendations contained within this report. 4

5 EVALUATION AND COMMENTS Overall, based on the work performed it appears the level of administrative effort, and the oversight efforts associated with these two revenue streams are resulting in a Satisfactory level of performance. Internally, we continue to see opportunities for improvement in the administrative efforts directed towards franchise fees. As a result of the testing and reviews undertaken, we communicated one (1) Finding to management internally; additional attention appears to be required relative to contract compliance involving one franchisee. We also provided management with comments and recommendations relative to reinforcing procedures amongst the parties that are involved in handling and communicating annexation-related information to external entities. Follow-up on that specific issue was left to management s discretion. With respect to the external entities involved in the review the cable TV and natural gas franchisees it appears the levels of accuracy being achieved by both organizations in their account administration activities are very high. We detected only small numbers of accounts resident on each of their systems that were not properly coded for the collection of (or exclusion from the collection of) franchise fees; and thus in need of correction. In total, we verified over 24,000 qualifying service addresses during the review. The number of errors we detected represented fractions of a percent of the respective populations that were verified for the two entities. We also corresponded with one franchisee relative to areas where increased levels of contractual compliance were possible. Detailed findings and observations associated with these issues are presented in the report section that follows. (Refer to Appendix A for additional details concerning Internal Audit s grading scale.) 5

6 FINDINGS AND RECOMMENDATIONS Audit s Findings are detailed below; including any recommendations that were made, and management s responses to those suggestions. 1. FINDING: Compliance The City of Boise has granted franchises to various providers. Each of these franchises is supported by a formal long-term agreement, and in the case of cable TV, by associated sections of City Code. While reviewing the cable TV agreement and associated activities, we noted the following instances where additional attention to compliance appears to be warranted: Certificates of Insurance The cable TV franchisee was not providing the City with Certificates of Insurance evidencing liability coverage. The franchise agreement does not establish this requirement separately, though it is required by City Code. City Code requires the franchisee to provide on-going proof of general liability insurance. Remittance of Franchise Fees The franchise agreement requires that fees be remitted within 45 days after each quarter end. Over the four-year scope period, twelve (12) of sixteen (16) payments may have been received late. City code provides for a penalty in the event of late payment. If these payments were indeed late, Audit projects the amount of penalty that could have been assessed under this provision to be substantial, possibly as much as $15, RECOMMENDATION: Internal Audit recommends that City management establish processes and procedures sufficient to ensure the on-going receipt of Insurance Certificates from the franchisee. Additionally, Audit recommends that City management work with the franchisee to resolve the issue of potentially delinquent remittances, both historically and going forward, and to ensure compliance with the relevant provisions contained in City code. FRANCHISEE RESPONSE: Remittances: Relative to the issue of late remittances, Cable One does not agree with the Findings. Compared to when the checks were issued, the City s records indicate some of them are recorded as received almost a month later. Even allowing a few days from when the checks were issued, received by the local office, then hand-delivered to the Mayor's office, the records indicate the checks were held for over a week, and that is not the case. 6

7 Moving forward Cable One will mail the payments directly to the City to ensure there is no delay on the arrival of the check. Certificates of Insurance: Cable One has made arrangements to establish an automated process that will result in the certificates being sent annually to the City. (Audit Note: Cable One provided the City with Certificates of Insurance immediately upon notification of the need.) CITY RESPONSE: DFA plans to utilize the Lawson "Contract Module" within the City s new ERP system to better assist in the management of the franchise agreements. Contract requirements will be maintained in the system and will automatically alert staff to relative compliance documentation. 7

8 2. FINDING: Account Identification Errors During Internal Audit s review of Cable One customer data relative to Franchise Fees, we selected two Zip Code areas for detailed testing. We reviewed data for ZIP codes and 83716, comparing the City s GIS database with data provided by Cable One. Internal Audit identified three (3) accounts whose Franchise Fee flags did not appear to align with City limits. Specifically, one (1) account was incorrectly flagged as being outside of City limits, and two (2) accounts were incorrectly flagged as being inside City limits. This represents a potential error rate calculated at 0.16%. Per Boise Municipal Code 9-25 Master Ordinance Governing Cable Systems Franchises, the City of Boise is entitled to a Franchise Fee at a rate equal to five percent (5%) of all gross revenues received within the corporate limits of the City. As a result of the condition noted, one account may not have been charged Franchise Fees, while two other accounts may have been incorrectly charged franchise fees. RECOMMENDATION: Internal Audit recommends Cable One amend their records accordingly to ensure the accurate collection of Franchise Fees going forward; and further, to pursue any actions deemed necessary to make whole all parties involved. FRANCHISEE RESPONSE: In regards to the findings, we have researched these accounts and agree. The two customer addresses indicated are outside of the city limits; those records have been corrected. While one other customer address has now been flagged to be within the city limits. Cable One s system will issue credits for both accounts that were incorrectly charged franchise fees as well as a phone call and letters of explanation. We have also contacted the account that was not being charged to inform them of the changes to their account. 8

9 3. FINDING: Account Identification Errors Section 6 of the governing franchise agreement between the City of Boise and Intermountain Gas stipulates the City is entitled to a franchise fee at a rate equal to three percent (3%) of all gross revenues received from the sale of gas within the corporate limits of the City. During Internal Audit s review of Intermountain Gas Company s customer data relative to franchise fees, we selected two Zip Code areas for detailed testing. We performed a comprehensive review of data for ZIP Codes and 83716, comparing the City s GIS database with data provided by Intermountain Gas. Our tests suggest that not all qualifying accounts within the corporate city limits have been charged franchise fees, while a limited number of other accounts not within the City may have been incorrectly charged franchise fees. Internal Audit identified sixteen (16) accounts whose franchise fee flags did not appear to align with City limits: Twelve (12) accounts were incorrectly flagged as being outside of City limits; and; Four (4) accounts were incorrectly flagged as being inside City limits. We calculate a preliminary rate of error within the two zip code areas tested at 0.069% of all service addresses. While this rate would likely not result in a material impairment of the franchise fees payable, Intermountain Gas should nevertheless consider corrective actions. RECOMMENDATION: Internal Audit recommends Intermountain Gas validate the findings, and amend their records accordingly to ensure the accurate collection of Franchise Fees going forward for the affected accounts. Further, Intermountain Gas should pursue any actions deemed necessary to make whole all parties involved. Finally, Intermountain Gas should consider a comprehensive review and comparison of their account records with the City s GIS database in order to discover and correct any other errors that may be resident in their customer database. FRANCHISEE RESPONSE: Intermountain Gas Company is pleased with the findings of this audit and believes.069% rate of error is exceptional. 9

10 In validating the findings of the City of Boise, Intermountain Gas Company agrees with the Errors of Omission and has made immediate corrections to the non-company accounts* to ensure the collection of Franchise Fee moving forward. In regards to the four (4) errors of inclusion, one (1) account address was found to be in the city limits of Meridian and has been corrected to ensure Franchise fee is paid to the correct municipality, one (1) account address has been corrected and the fee that has been collected over the two months of active service has been refunded. The remaining two (2) addresses are shown to be inside the city limits based on the State Tax Commissions GIS map of Boise City Limits. The indicator will remain as yes and Franchise Fee will continue to be collected and passed to the City of Boise for these two address locations. The Company agrees with the suggestions made by the City Auditor and welcomes the opportunity to receive GIS data on a regular basis to assist with the company s internal audit procedures already in place. To assist with correct coding of annexations, Intermountain Gas requests the forwarding of all City Ordinances of Annexations to the IGC GIS department immediately upon approval of the City Council. Upon receipt of the initial GIS database, IGC will perform an additional audit of the remaining zip code areas to mitigate any additional errors in the Municipal Franchise Fee coding. *555 S Cole Rd (4 addresses) are company accounts. The company does not bill itself for usage; the billing system requires the indicator set as n in order to generate a usage statement for bookkeeping purposes. (Audit Note: The Auditor facilitated contact between the City s GIS staff and Intermountain Gas in order to encourage the sharing of data. An exchange of that information will assist IGC in completing its planned audit of the remaining zip code areas within the city limits.) 10

11 OTHER AREA OF CONCERN Internal Audit utilizes Other Areas of Concern to comment on issues noted during a project that may, or may not involve the department being audited, but that appear to deserve management attention at some level. One such comment was generated during our review of franchise fee-related activities. Annexation-Related Procedures During our previous review of franchise fees (FY08), we noted a lack of structure in terms of how information was being shared with franchisees, and of who was functionally responsible for various aspects of this sharing. As a result, management defined a procedure that involved some level of effort on the part of four separate divisions / departments. In summary, those processes consisted of: (1) PDS notification of annexation actions at the option of the franchisees; (2) Public Works GIS addressing function providing detailed maps / files related to the actions; (3) City Clerk transmitting the necessary information to franchisees; and, (4) Financial Services retaining documentation in support of these processes. Current processes and understandings suggest there may be a need to re-visit the procedures. Reasons include: Staff Changes Changes in key staff positions within the City Clerk s office have occurred since the procedures were defined. Knowledge of certain of the procedures did not carry forward. Observance City Clerk s office is currently retaining all documentation related to annexation notifications. The procedures originally called for some of these materials to be retained by Financial Services. Knowledge Staff members associated with addressing functions were unclear as to which office was generating maps and address files for the annexations. In order to ensure that all parties involved in the creation and sharing of this vital data possess the same understanding, Internal Audit recommends the procedures be re-visited, a path forward determined, and the processes reinforced. Doing so will help ensure data that is vital to the collection of these City revenues is transmitted to franchise holders in a timely and accurate fashion. 11

12 CONCLUSION Internal Audit would like to express its appreciation to management and staff of Cable One and Intermountain Gas for their assistance during the course of the review. The Office would also like to recognize the assistance of various members of management and staff from the City Departments and Divisions that assisted in the review. Those included the Mayor s Office, the City Clerk s Office, IT GIS, Public Works / GIS, Treasury, and the Department of Finance and Administration. CITY MANAGEMENT PARTICIPANTS Tonya Wallace, Strategic Planning & Budget Manager / City of Boise Craig Croner, Acting City Clerk / City of Boise Jim Hetherington, IT GIS Manager / City of Boise Jamie Heinzerling, Assistant City Clerk / City of Boise EXTERNAL MANAGEMENT PARTICIPANTS Cheryl Imlach, Manager Revenue Accounting / Intermountain Gas Company Jamie Humphrey, Programming Costs & Franchise Fees / Cable One 12

13 APPENDIX A Evaluation and Grading of Audits Each audit will be evaluated or graded, and will receive one of the five following ratings. Grades will be assigned based on the perceived best fit. Thus, not all attributes associated with an assigned grade may be present within a given Department or Division. High Satisfactory No significant weaknesses or deficiencies were noted during the audit. If any issues were noted, they were clearly insignificant or inconsequential. The audited area displays a high degree of control and management oversight is effective. Satisfactory Reportable issues may exist within the audited area, but they are not deemed to be representative of pattern or practice within the area. Issues are typically of an isolated nature. Overall, systems of internal control are effective, and management oversight is adequate and supportive of the accomplishment of goals and objectives. Low Satisfactory Reportable issues exist within the audited area, and are encountered frequently enough to lose the appearance of isolated. Systems of internal control appear to be marginally adequate at best. Management oversight is not always effective to ensure the quality of operations. Needs Improvement Weaknesses or deficiencies are encountered on a relatively frequent basis within the audited 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 under review. Issues may pose risks that are either missioncritical or mission-fatal. Management has failed to implement appropriate internal controls. Management oversight is ineffective, absent, or willfully avoided. 13