City Payment Processing1\, A ,~ A r~,;~ 11 Bi I.E·. A· v \I} •J I \ i' i .
BUDGET AND PERFORMANCE IMPROVEMENT
Internal Audit Division INTERNAL AUDIT REPORT
TO:
VIA:
Jorge M. Gonzalez, City Manager ,Q
Kathie G. Brooks, Budget and Performance Improvement Director 1//1.)
FROM: James J. Sutter, Internal Audito~,iJ,;Y /
DATE:
AUDIT:
PERIOD:
January 27, 2011 /
City Payment Processing Audit
October 1, 2007-July 31, 2009
This report is the result of a regularly scheduled audit to review the documentation maintained
and the internal controls implemented to help ensure that selected Citywide payments are
properly processed.
INTRODUCTION
The Finance Department's Accounts Payable Section reviewed and issued 33,945 checks and
wire transfers during the audit period to pay City invoices. City departments are responsible for
entering their invoices into the City's financial enterprise system's (EDEN) accounts payable
module. Approvals are made electronically based upon an approval queue established by City
administration. Departments are responsible for forwarding proper documentation to support
the expenses to the Finance Department. Payment methods vary based on the items/services
purchased with purchase orders, requests for direct payment and purchasing cards as
described by the City's Procurement policies and procedures. Required employee approvals
are based on the amount and method of the payment subject to budget authority. Once paid,
the supporting documentation is attached to a copy of the check and is filed sequentially by
check number in locked cabinets inside the Finance Department. Meanwhile, the approvals by
the receiver and other relevant information are maintained electronically in the Eden System's
Accounts Payable Module.
In order to pay City purchases of goods and services, the following purchasing methods are
used according to the City's Procurement policies and procedures.
• Purchase requisitions are initiated by City departments/divisions to obtain commodities
and services. Upon receipt of a completed and approved purchase requisition for
purchases exceeding $25,000 the Procurement Division will determine whether to
prepare an invitation to bid (ITB), a request for proposals (RFP), a request for
qualifications (RFQ) or utilize the "piggyback contract authority" in the City Code for
contracts issued by agencies approved by the City Commission. These agencies
currently include: Federal GSA, State of Florida, Miami-Dade County, Miami-Dade
County School Board and the U.S. Communities Purchasing Alliance. Once the
appropriate process has been been completed the Procurement Division will issue either
a blanket purchase order (for repetitive purchases) or a purchase order (for a one-time
purchase) for the purchase of the listed goods and/or services which can be used
throughout the fiscal year or until the designated monies are spent.
• Certain items which do not lend themselves to competitive procurement are exempt by
Florida Statutes, the Miami Beach City Code, or the City's Policy and Procedures.
These types of expenses include travel reimbursements, advertising in newspapers or
VVe ore committed to providing excellent public service one/solely to oil who live, work, ond ploy in our vibront, tropiccd, historic community.
Internal Audit Report
City Payment Processing Audit
January 27, 2011
websites, refunds to customers, travel, subscriptions, memberships, legal services, utility
payments, etc.
Finally, the City has the following three payment types available to pay for the desired
commodities and services received from the vendor:
• Upon receiving all of the required supporting documentation and pre-determined Eden
System electronic approvals based on the department and the purchase amount, the
Finance Department will issue a City check. Check runs are made twice a week and all
checks are to be mailed directly to the payee.
• Similarly, the Finance Department issues wire transfers as needed instead of checks
after the electronic approval process is complete and supporting documentation is
deemed complete. These wire transfers cost the City between $2 and $5 each and are
currently used primarily for payroll deduction and bond payments.
• The City's purchasing card (p-card) program is designed to improve efficiency and
deliver savings by authorizing designated employees to make payment thereby allowing
them to acquire within the City's procurement policies, approved commodities and
services directly from vendors without undue delay. The p-card is meant to simplify and
streamline the acquisition process for small dollar purchases. The p-card can also be
used for paying invoices from City purchase orders. The City receives a designated
percentage of all p-card purchases which for example equaled $143,331 during the 2009
calendar year.
OVERALL OPINION
The Finance Department's Accounts Payable Section process a large number of invoices and
checks each year so it is imperative that Procurement rules and policies and procedures are
strictly followed by departments. Additionally, internal controls need to be followed and
sufficient documentation maintained. Internal Audit's testing showed that operations and
systems appear to be essentially functioning as intended except for the following incidents
noted below which are in need of improvement:
• Three of the one hundred fifty-nine or 1.88% of the tested City issued checks and wire
transfers were missing supporting documentation to substantiate the payment.
• Sixteen Requests for Direct Payments were processed for temporary labor, recreational
coaches, meal allowances, etc. even though these purchased items/services did not fall
into any of the Allowed Categories. Procedures for paying these types of expenditures
have been subsequently corrected.
• Incomplete vendor information was noted in the Eden System as physical mailing
addresses, telephone numbers and/or federal identification numbers were occasionally
missing.
• Five vendor accounts were apparently opened for the same vendor with all containing
entries thereby creating confusion as to the correct account and decentralizing payment
information.
• Tested purchase card transactions found that the Finance Department is correctly
reviewing purchases and having individuals reimburse the City for any personal
expenditures. However, ten purchases were noted that do not comply with the policies
Page 2 of 8
Internal Audit Report
City Payment Processing Audit
January 27, 2011
and procedures but were accepted because they were approved by the Department
Directors and monies were available in the budget.
PURPOSE
The purpose of this audit is to determine whether items were paid in accordance with City Code
and operating policies and procedures; whether transactions are economically and efficiently
processed, accurately and promptly recorded, reported, and followed up; whether key forms,
records, files and systems are properly safeguarded and controlled, and access thereto is
restricted in accordance with management's criteria; whether the amounts paid to confirmed
vendors agrees to documented prices; and whether all transactions were correctly and timely
recorded in the City's Financial System.
SCOPE
1. Confirm that comprehensive policies and procedures exist, are known and are followed
by staff.
2. Confirm that maintained accounting records and supporting documentation is organized,
complete and sufficient.
3. Confirm that the internal control process is adequate and that a proper segregation of
duties exists.
4. Confirm that tested vendors' pertinent financial data is centralized under one vendor
number.
5. Confirm that tested vendors are actual businesses via phone calls, internet research,
address verification, etc.
6. Confirm that tested payments are timely and properly approved so that any vendor
offered discounts are utilized.
7. Confirm that tested payments are for City business purposes in accordance with City
policies, contracts, etc.
8. Confirm that voided checks are correctly labeled, recorded and maintained.
9. Confirm that items paid through a D.P. (Request for Direct Payment) were correctly paid
as such.
10. Confirm that tested p-card and purchase order purchases were made within authorized
spending limits and in accordance with City policies.
11. Confirm that tested transactions were accurately recorded in the City's Financial System.
FINDINGS, RECOMMENDATIONS AND MANAGEMENT RESPONSES
1. Finding -Documentation Shortcomings
One hundred fifty-nine out of 33,945 payments made by the City (123 checks and 36
wire transfers) were randomly selected for testing. In reviewing these City payments,
the following documentation shortcomings were noted:
a. Check number 257464 was issued payable to a skating coach at the Scott
Rakow Youth Center, totaling $618.75. There were no supporting documents
attached to the Request for Direct Payment that would warrant the issuance of
Page 3 of 8
Internal Audit Report
City Payment Processing Audit
January 27, 2011
this check (time sheets signed by both the coach and the City supervisor, a
listing of customers, etc.). Similarly, check number 268269 payable to another
skating coach for $307.50 also did not contain similar supporting documentation.
b. Check number 281117 was issued payable to a City employee for April 2009
cellular telephone reimbursement for $40.00 with an approved Request for Direct
Payment form without any supporting documentation attached.
Recommendation(s):
Supporting documentation should always be attached to the copy of the check to justify
the issuance of the check to an independent observer.
Management Response:
An approved Direct Payment form approved by the authorized supervisor is proper
documentation for direct payments. These forms are attached to a copy of the check.
The Director of Procurement has been added to the Eden Invoice Approval Queue to
ensure that requested direct payments are in accordance to the City Code.
2. Finding -Requests for Direct Payment (D.P.s)
The Procurement Division's operating policy and procedure state "The Request for
Direct Payment (D.P.) is to be used by Departments when one time payments are
required for the procurement of products or services that are exempt from the City's
Purchasing Procedures. A list of Allowed Categories for which the D.P. form may be
used is provided herein." A standardized D.P. form may be completed by the originating
department or the transaction can be processed electronically in the Eden System where
it is approved by the applicable parties based on the payment amount and submitted to
the Finance Department's Accounts Payable Section for final review and the issuance of
a City check.
We reviewed all forty-eight direct payments from the 123 checks selected from our initial
testing. We noted that sixteen of the forty-eight reviewed D.P. payments' stated purpose
or 33.33% did not appear to satisfy any of the Allowed Categories. These deviations
centered mainly on the purchase of temporary labor and professional services (swim
coaches, skating coaches, etc.).
This listing also includes four payments to eligible employees for meal allowances
earned when employees work three consecutive hours or more of pre-shift or post-shift
overtime in accordance with the union contracts. These payments are typically small
and can be voluminous and do not fit any of the Allowed Categories.
There should be consistency and uniformity in the preparation of payments through
either D.P.s or Standing/Purchase Orders. Otherwise, City departments will most likely
choose the more expedient D.P.s and the Finance Department's workload would be
increased.
Recommendation(s):
The Procurement Division, in cooperation with the Finance Department, should review
the Allowed Categories for Direct Payments and determine if any revisions need to be
made. Once this is done, City departments should be advised of the revisions as well as
Page 4 of 8
Internal Audit Report
City Payment Processing Audit
January 27, 2011
the need to adhere to the listed categories, to obtain the required signatures and provide
supporting documentation.
The Finance Department's Accounts Payable Section should be instructed to process
only those D.P.s that comply with all the stated requirements. Enforcement actions (i.e.
notification of applicable Assistant City Manager or City Manager) should be taken
against any repeat offenders to help improve compliance.
Finally, it is recommended that payment for future meal allowances through the payroll
system should be explored rather than continued payment through D.P.s thereby
reducing the need to issue so many small reimbursement checks.
Management Response:
The Direct Payments Allowed Categories List ("DP List") is periodically revised and
distributed to all departments with guidance and direction on proper procedures relative
to Direct Payments. The DP List will be posted on the Procurement website as part of
our policies and procedures. The Director of Procurement has now been added to the
Eden approval queue for direct payments to ensure that they are in accordance to the
City Code. The DP List will be discussed as part of any training conducted by the
Finance Department or Procurement Division, and will be updated on an "as needed"
basis. Further research will made as to the reasonableness of paying meal allowances
through other methods (petty cash). The City has developed an independent contractor
process to insure that the existing practice was changed to require professional services
agreements with all recreational coaches and instructors.
3. Finding -Vendor Information
Twenty vendors out of the 159 selected above were randomly tested to determine the
completeness of their contact information entered into the Eden System's Accounts
Payable Module. The creation of these vendor accounts is restricted to four designated
Finance Department employees and two Procurement Division employees. The
following informational items were noted in our analysis that could allow for the creation
of fictitious businesses if not corrected in the future:
• Eight of the twenty vendors sampled or 40% did not contain a physical mailing
address as only a P.O. Box or similar information was listed. Internal Audit's
concern is that a P.O. Box can be opened by anyone and does not contain the
vendor's physical location which can then be more easily verified by independent
sources.
• Two of the twenty vendors sampled or 10% entries did not include a phone
number at which the company could be reached. This list includes one of the
aforementioned vendors whose address consisted of only a P.O. Box.
• Four of the twenty vendors sampled or 20% did not include their federal tax
identification number.
Despite this missing information raising concerns as to the vendors' legitimacy, Internal
Audit confirmed their existence through internet research and phone calls with no
exceptions noted.
Page 5 of 8
Internal Audit Report
City Payment Processing Audit
January 27, 2011
Recommendation(s):
Designated Finance and Procurement employees should ensure that such information
as the vendor's physical address, phone number and federal tax identification number
are fully completed before creating the vendor in the Eden System. Furthermore, this
information should be updated when and if the vendor's information changes. Current
centralized contact information is beneficial in the event that City personnel need to
speak with vendor representatives and it helps facilitate independent confirmation as the
vendors' existence.
Management Response:
We currently require a completed W-9 form before entering a vendor in the system. Our
system does not have the capacity to enter both a physical address and a mailing
address. We will be asking Eden for this enhancement.
4. Finding -Duplicate Vendor Accounts
In a separate cursory review of some of the vendors in the City financial system utilizing
the inquiry function, we found five vendors which had at least two different vendor
numbers in the Eden System. These duplicated vendor accounts included Franmar
Corporation, Hazen and Sawyer P.C., Maroone Chevrolet, and Palmetto Ford Truck
Sales Inc. Many contained current payments but some had not had any entries in
several years.
Inquiries with Accounts Payable Section personnel found that companies must now
furnish a Form W-9 before a vendor account is created to help prevent duplicate vendor
accounts from occurring. This form is maintained by the City for verification purposes of
the information return for reportable payments made to others. Its other primary purpose
is to help the payee (the City) avoid backup withholding as the vendor would now be
responsible for these taxes.
Recommendation(s):
Finance Department employees should investigate the aforementioned five vendors to
determine which of these accounts are duplicates and can be merged into one so that all
pertinent information is centralized to help prevent future confusion. As time permits,
this practice should be done globally on the Eden System's vendor accounts to help
eliminate further duplication.
Management Response:
Based on current staffing levels as a duplicate vendor is discovered it will be merged
using the current system.
5. Finding -Purchasing Cards or P-Cards
A total of one hundred sixty-two City issued purchasing cards or p-cards were assigned
to employees during the audit period with sixteen used exclusively for Office Depot
purchases. All employees being issued p-cards receive the p-card policy and procedure
and must execute a cardholder agreement or vendor card agreement that the card shall
not under any circumstance be used for person al expenses and that disciplinary action
up to any including termination may result from improper use of the card.
Page 6 of 8
Internal Audit Report
City Payment Processing Audit
January 27, 2011
We selected a random sample of sixty-nine accounts for the current fiscal year 2008/09
and the following exceptions were found:
• Two instances were noted where the p-card was used for personal expenditures.
The Finance Department became cognizant of these purchases during their
review process and questioned the corresponding individuals. These employees
had their p-card privileges revoked and the monies were immediately returned to
the City and were deposited into the correct general ledger accounts.
• Beginning August 2008, the Department Directors are required to sign off on the
front page of the p-card statement instead of each individual invoice thereby
approving all purchases made. Internal Audit encountered a total of eight
purchases made that were not in accordance with the p-card policies and
procedures (three for not documenting the purpose and attendee(s) for meals,
one for not documenting the purpose of snacks, one for not having supporting
documentation, one for flowers, and two for gift cards) but they were all approved
by the Department Director and charged against line item accounts where
monies were available, whether or not for the stated purpose.
• In reviewing the credit limits issued to the different card holders it was noted that
nine individuals exceeded $25,000. These credit limits were established to pay a
for purchase orders or for larger single transactions with proper authorization.
The Chief Financial Officer already has taken action to lower all individual p-card
spending limits and issue specific vendor p-cards that are tied to a specific
purchase orders. It was also indicated that if a big ticket item needs to be paid
that exceeds the individual's payment limit, then their designated Finance
Department representative can have the authority to pay for goods or services if
the money is in the department's budget, approved by the Department Director
and if items or services have been acquired via the proper purchasing policies
and procedures.
The Finance Department is currently updating p-card policies and procedures.
Recommendation(s):
Internal Audit agrees that p-card policies and procedures should be updated and once
completed and approved, should be distributed to all p-card holders.
Management Response:
P-card policies and procedures are currently being updated. Upon completion, the
Finance department will distribute the information to all p-card holders. Any individuals
that misuse their City issued p-card will have their credit cards temporarily suspended
and/or completely removed depending on the severity. The Finance Department
annually review individuals' credit limits to determine their reasonableness and to ensure
that any increases were properly approved.
EXIT CONFERENCE
An exit conference was held to discuss the findings in this report. Participants included
Georgina Echert (Assistant Finance Director), Ramon Suarez (Finance Manager) Scott Wagner
Page 7 of 8
Internal Audit Report
City Payment Processing Audit
January 27, 2011
(Financial Analyst Ill), Gus Lopez (Procurement Division Director), James Sutter (Internal
Auditor), Laura Franco-Rubines (Assistant Internal Auditor) and Mark Coolidge (Senior Auditor).
All parties were in agreement as to the contents of this report. Management responses were
solicited and included in our report.
JJS:LFR:Ifr:MC:mc
Audit performed by Laura Franco-Rubines (Assistant Internal Auditor) and Mark Coolidge
(Senior Auditor)
F:lobpii$AUD\INTERNAL AUDIT FILESIDOCOS-09\REPORTS-FINAL\CITY PAYMENT PROCESSING.docx
cc: Patricia Walker, Chief Financial Officer
Georgina Echert, Assistant Finance Director
Gus Lopez, Procurement Division Director
Page 8 of 8