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Miami Beach Police Athletic LeagueMIAMI BEACH BUDGET AND PERFORMANCE IMPROVEMENT Internal Audit Division TO : Jimmy L. Morales , City Manager VIA: John Woodruff, Budget and Perform FROM: James J. Sutter, Internal Auditor DATE: September 19, 2014 ~ERNAL AUDIT REPORT nee I provement Director ~ AUDIT : Miami Beach Police Athletic League Operational Audit PERIOD : June 1, 2009 to February 28, 2014 This report is the result of an operational audit of the Miami Beach Police Athletic League between June 1, 2009 and February 28, 2014 conducted at the request of the City Manager's Office. This lengthy 57 month audit period commences with the ending of the last internal audit performed. The primary focus of this audit was to follow-up on previously reported findings as well as to review the effectiveness of the organization's internal control structure, the completeness of revenues, the legitimacy of expenditures and to report on the primary child programming offered to City youth. INTRODUCTION The Miami Beach Police Athletic League (PAL) was founded in 1958 and is the oldest in the state of Florida . This non-profit 501(c)3 organization offers the community 's youth an array of recreational , athletic and educational activities. However, its primary focus is educational due to the shortage of nearby available outdoor field space. Resolution No. 73-13924 authorized a five year lease agreement between PAL and the City on February 21, 1973 for the use of a parcel of land on Flamingo Park for the benefit of the youth of the community and to also enable them to participate in healthful sports and recreational activities. This lease agreement 's terms were extended with the adoption of Resolution No. 77- 15471A and then again until June 30, 1996 with the passage of Resolution No. 93-20868. Next, the terms were extended for a five year period ending June 30, 2001 through the passage of Resolution No. 96-21987. However, PAL raised monies in 1997 through donations, grants, etc. with the City's assistance to construct a new facility in Flamingo Park on City owned land. Accordingly, Resolution No . 98-22741 was passed granting PAL a twenty-five year lease to operate on the premises through June 30 , 2023. Compliance with the stated lease terms is monitored by the City's Leasing Specialist in the Office of Real Estate . PAL is located at 999 11 1h Street in Flamingo Park where it is visited by hundreds of children and adults daily Monday through Sunday. The 13 ,000 square foot facility opened in January 2001 and contains a computer lab; offices; classrooms ; fitness center; and meeting rooms. Its programs are designed to create better relations between law enforcement officers and youth , as well as to help prevent juvenile delinquency. Examples of offered programs include Police Explorers, Youth Director's Council, Kindergarten Cops and the Summer Work Program. PAL operates under the leadership of an Executive Director, who is a full-time active Miami Beach police officer in accordance with City Resolution No. 11022. Per PAL 's by-laws, monthly Executive Board meetings are to be held while the larger General Board of Directors is to meet We ore committed to providing excellent public seNice ond safely to oll who live , work, ond ploy in our vibrant, trop ical, historic communily. Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 six times a year. The Executive Board and the General Board of Directors are composed primarily of volunteer citizens and law enforcement officers, who together help plan PAL's future. In addition the agency's by-laws specify the responsibilities of its officers and the Executive Director as to spending authority, oversight of operations, fund raising, public relations and check signing authorities. Although PAL and the City are separate entities, they are closely intertwined and benefit from each other's existence. For example, the City fully pays the Executive Director's salary, allows food and beverage concessions to operate on City property during the Miami International Boat Show, permits PAL to operate on City owned land, etc. In return, the City utilizes the PAL building for programs whereby local children are supervised in a structured learning environment, several Parks & Recreation Department employees' offices are located on the premises, etc. PAL created a wholly owned subsidiary in 2012 called the Miami Beach Police Athletic League Fitness Center, Inc. (the Fitness Center) which is a Florida for-profit corporation to separate its fitness operations from its non-profit operations. The Fitness Center operates the gymnasium located on the property which is shared with PAL, and in return PAL helps to manage the Fitness Center. The PAL and Fitness Center's consolidated financial data presented below has been audited by an independent external accounting firm: * 01/01/09 -01/01/10-10/01/10 -10/01/11 -10/01/12 - 12/31/09 09/30/10 * 09/30/11 09/30/12 09/30/13 Beginning Net Assets $775,243 $810,386 $847,046 $794,265 $700,425 PAL Generated Revenues $427,423 $327,359 $413,347 $451,444 $558,588 Law Enforcement Trust Fund $12,500 $12,500 $12,500 $0 $0 Executive Director's Salary ** $104,738 $69,545 $103,248 $106,092 $106,261 Off-Duty Surcharge $81,001 $54,625 $20,245 $0 $0 Total City Contributions $198,239 $136,670 $135,993 $106,092 $106,261 Total Revenues $625,662 $464,029 $549,340 $557,536 $664,849 Total Expenditures** ($590,519) ($427,369) ($602,121) ($651,376) ($626,139) Change in Net Assets $35, 143 $36,660 ($52,781) ($93,840) $38,710 Ending Net Assets $810,386 $847,046 $794,265 $700,425 $739,135 PAL changed its year end from December 31st to September 30th in 2010 in order to coincide with the City's fiscal year end so this column's reported figures represent only nine months of activity. ** In accordance with FASS ASC 958 Not-For-Profit Entities -Presentation of Financial Statements, the fair market values of the salary of the full-time police officer acting as Executive Director was recorded as a contribution by the City and a payroll expense of PAL (included in the total expenditures amount) which would not affect reported ending net assets. Exhibit A attached to this report provides a categorized summary graphical breakdown of the revenues generated and expenses incurred for each year during the audit period as copied directly from the provided annual financial statements audited by an independent external accounting firm. Finally, the 2012/13 fiscal year figures reported in both the table above and in Exhibit A were based on a draft copy of the audited financial statements completed by their Page 2 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 external auditor on June 3, 2014 as it was assumed that these numbers would not subsequently change. OVERALL OPINION Despite improvements made to correct many of the previous internal audit report's findings, the non-profit Miami Beach Police Athletic League, Inc. (PAL) and it's for profit subsidiary, Miami Beach Athletic League Fitness Center, Inc. (Fitness Center) has experienced several shortcomings in their operational internal controls which are detailed below. The creation of new documented internal controls and closer oversight by the Executive Board of Directors and management will better enhance operations necessary to meet the agency's objectives. In addition, the existing lease agreement terms should be revised to clarify the building's space usage and the responsibilities of each party. Finally, the City's involvement with PAL should be assessed and a decision reached on its level of commitment and interaction. The following shortcomings were noted during the audit period that are in need of corrective action: 1. Various building security and internal control deficiencies relating to Fitness Center software, maintained documentation and subsequent analyses, the verification of collections, the monitoring of fixed assets, etc. were noted that could potentially result in assets being damaged or misappropriated. 2. The terms in the signed Memorandum of Understanding dated November 5, 2007 were no longer applied after September 2010 thereby creating confusion as to the responsibilities of each party concerning utilities and police off-duty administrative surcharge payments. 3. The separation of the non-profit PAL from the for-profit Fitness Center was not always distinct in relation to purchases, shared expenses and management fees. 4. The City and PAL both claim ownership of the building located at 999 11th Street which has created uncertainty as to each's responsibilities. Meanwhile, property taxes may be due for the portion of the facility utilized by such non-exempt organizations as the Fitness Center and PAL's subtenants, the Fraternal Order of Police and the Miami Beach Policeman's Relief and Pension fund. 5. Tracing of forty sampled individuals' extended Fitness Center memberships to the supporting payment receipts found that two or 5% did not remit the correct amount of monies and that 12 identified City employees received free membership in contradiction to the City's gift policy. 6. Observed inadequacies in the maintained accounting records are listed which hinder the audit trail. 7. The Executive Director reports simultaneously to both the Chief of Police and PAL's Board of Directors which could potentially result in conflicts of interest. 8. PAL funds were used to pay an individual's funeral expenses; charitable donations; City incurred costs; and for adult programming that do not necessarily adhere to the organization's mission statement. 9. None of the building's tenants obtained business tax receipts during the audit period. 10. The building's roof leaks caused interior water damage, several electrical outlets are uncovered and an exterior door does not securely fasten which are all in need of repair before someone is inadvertently injured. Page 3 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 11. Needed workers' compensation insurance was not obtained by PAL and the Fitness Center during the audit period. 12. Standard operating procedures were not maintained. 13. Detailed participation records were not always retained for PAL's programs. PURPOSE The purpose of this audit was to determine whether the Miami Beach Police Athletic League complied with tested requirements in their signed lease agreement; whether maintained accounting records and supporting documentation are organized, complete and sufficient; whether internal controls were soundly developed and a proper segregation of duties existed; whether monies received from various sources were appropriately safeguarded and deposited intact; whether eligible sampled expenditures were properly approved, paid timely and were for legitimate business purposes; and whether sampled permits, business tax receipts and utility payments were current. SCOPE 1. Confirm that standard operating procedures exist, are current and are followed by staff. 2. Confirm that maintained accounting records and supporting documentation are 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 monies collected from various revenue sources were deposited intact and were correctly recorded. 5. Confirm that sampled expenditures were properly approved, paid timely and were for legitimate business purposes. 6. Confirm that City employees are not working concurrently for the Miami Beach Police Athletic League, Inc. 7. Confirm that the Miami Beach Police Athletic League, Inc. and Miami Beach Police Athletic League Fitness Center, Inc. maintained the appropriate insurance coverage. 8. Confirm that the Miami Beach Police Athletic League and Miami Beach Athletic League Fitness Center, Inc. are current with their business taxes, permits, utilities, etc. 9. Confirm the number of programs offered annually, the associated costs incurred and the number of active participants. Page 4 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 FINDINGS, RECOMMENDATIONS AND MANAGEMENT RESPONSES 1. Finding -Various PAL and Fitness Center Building Security and Internal Control Deficiencies are Noted A review of Miami Beach Police Athletic League, Inc. (PAL) and the Miami Beach Police Athletic League Fitness Center, lnc.'s (Fitness Center) building security and internal control system identified the following deficiencies: Building Security: a. PAL's Executive Director stated that the building's security alarm is not set daily because the northernmost building doors do not secure properly thereby making the facility more vulnerable to unauthorized access. Internal Controls: b. The Keyscan Access Control Software System (Keyscan) only has one password that is known and used by all Fitness Center employees thereby giving each user the same ability to make entries, changes, etc. besides making it difficult to identify the transaction's creator. Additionally, the password has not been changed for at least the past six years so it is known by all terminated and active individuals employed during that time period. KeyScan was not necessarily developed to operate a fitness center as it is an access control system whereby ingress to the facility is controlled by programmable key fobs so it does not have sufficient internal controls designed into the system. For example, it is not interfaced with the cash register so membership transactions have to be separately entered in each, it does not allow the Fitness Center Manager to generate supervisory reports to help reconcile system entries with the corresponding payments, etc. On a positive note, the Fitness Center Manager stated that he compares the daily completed receipts (see finding c below) with system entries but this practice will not help identify someone whose membership is extended without the submittal of a receipt providing evidence of payment. Finally, inquiries found that management is actively researching purchasing a new fitness center specific software. c. The Fitness Center uses a pre-numbered sequential three part receipt form containing their logo with the white copy given to the customer, the yellow copy is used to provide support for the bank deposit and the pink copy is retained in the receipt book. Testing of completed receipt books found that all the reviewed pink copies were present but that the books were not always issued and used in sequential order which can lead to confusion and reconciliation challenges. It was also found that the voided white and yellow copies of these manually prepared receipts were occasionally missing (some examples include receipt numbers 8131, 8206, 8207, 9021 and 9122). Furthermore, prepared receipt amounts were changed and processed without being initialed by the appropriate employee indicating the reason for the change and the documented approval of a supervisor. It is possible in both of these instances that dishonest employees could charge customers one amount and then either void or change the corresponding receipts to a lesser amount while misappropriating the difference if Page 5 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 their work was not closely scrutinized. d. In addition to memberships, the Fitness Center also receives monies through the sale of apparel, drinks, protein bars, supplements, gloves and weight belts. All membership payments are to be recorded both on the aforementioned receipts and in the cash register. Meanwhile, the other saleable items processing varied as some were recorded only through the preparation of a receipt while others were recorded through both the receipt and then were entered into the cash register. Although the simplistic cash register allows the employee to record purchases in any of four categories (1 = memberships, 2 = drinks and supplements, 3 = t-shirts and apparel, and 4 = gloves and straps), no supporting detail was maintained to help verify the amount of total revenues for each category. Lastly, there were no daily count sheets used to help identify the amount of inventory shrinkage and/or when it occurred. e. Each Fitness Center employee generates and reconciles a Z tape (cash register generated summaries totaling all amounts entered during the day) to the cash, checks, credit cards and receipts present. The credit card transactions are processed by their Heartland Credit Card System and are deposited intact directly into the Fitness Center's Regions Bank operating account with separate withdrawals made by the vendor for any associated fees. At the conclusion of each day, the designated Fitness Center employee reconciles the day's total revenues and prepared receipts to the supporting Z tapes before securing these items in a locked box for safekeeping until readied for deposit. The Fitness Center Manager reconciles all cash, checks and supporting documentation at the end of the week before giving the items to PAL's Executive Director for examination prior to being deposited into their Regions Bank operating account. Again, the lack of maintained daily detail transaction register tapes adversely affects the effectiveness arid reliability of the deposit reconciliation. Even though the Fitness Center Manager does not have the ability to access the bank account to verify that the deposits were made intact, he does manually prepare and maintain a document listing the amount of cash and checks given to the Executive Director for deposit. Testing was performed on ten of these randomly sampled documents to ensure that the corresponding monies were deposited intact into the Fitness Center's operating account. It was subsequently found that the Executive Director splits each Fitness Center deposit into two with one being solely for membership revenues and one for everything else (apparel, drinks, protein bars, gloves, etc.) thereby complicating the reconciliation process. Cash was occasionally removed from deposits to purchase needed items as neither PAL nor the Fitness Center had a petty cash fund. For example, the sampled Regions Bank $606 deposit made on November 15, 2013 was found to be reduced by $45. PAL's Executive Director subsequently provided a $44.97 Staples receipt dated October 24, 2013 as support for the reduced deposit, but Internal Audit has no means to confirm the validity of this statement. Another deposit reviewed on November 9, 2012 was Page 6 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 reduced by $11 but no receipts were presented to explain this difference. Lastly, no one is reconciling the daily credit card settlement reports with the amounts deposited into the Regions Bank operating account by their Heartland Credit Card System. Fortunately, testing of eight weeks' credit card transactions did not reveal any discrepancies but they need to be routinely checked for accuracy by designated staff members to quickly identify any differences. f. Neither PAL's Executive Director nor the Fitness Center Manager perform any analysis to ensure that all completed non-voided receipts were included in the received deposits. Failure to perform this testing under the current scenario could result in received cash being misappropriated by a dishonest employee who either does not submit the completed receipt or by falsely checking the box indicating that payment was received via credit card. Internal Audit unsuccessfully tried reconciling eight weeks' bank deposits with the corresponding yellow receipts but differences were repeatedly found indicating that either receipts were missing, they were miscoded as cash or credit card, the wrong dates were listed or present, the records were not adequately safeguarded to help prevent unauthorized access, etc. so no conclusions were reached other than the need to revise the current process. g. PAL does not attach tags to fixed assets (items such as televisions, computers, etc. whose cost is above a designated threshold) to facilitate identification. Recommendation(s) The implementation of the following recommendations should help better safeguard building assets and improve the established internal control structure: Building Security a. Although all questioned PAL and Fitness Center employees stated that the building has not knowingly been vandalized, all access points should be properly secured with any needed repairs promptly made. Once completed, the alarm should be set nightly with specific passwords given to each employee to help identify anyone who disables it. Internal Controls b. As PAL and Fitness Center management begin their search to replace their outdated KeyScan System, they should strongly consider any potential new systems inherent internal controls and supervisory reports into their purchase decisions. c. PAL's Executive Director should distribute the receipt books in sequential order for usage by Fitness Center staff. All three copies of voided receipts should be present in the receipt book. Also, any changes to the listed dollar amounts received or other material information should be initialed by the employee/supervisor accompanied by the reason for the change. d. The daily detailed cash register tapes should be maintained to help determine Page 7 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 the amount of revenues for each sales category. In addition, Fitness Center management should create a count sheet for staff to list the amount of inventory on display at the end of each day and to record any drinks consumed by employees. This form should be completed daily and included as part of staff's closing duties to support listed sales revenues' figures and to help alert management as to the periods that any inventory was missing. Finally, receipts should be prepared for each purchase in lieu of the potential purchase of the new software system which should be interfaced with the cash register. e. Whenever possible, bank deposits should be done more frequently to help reduce the organization's potential risk exposure to theft. Both PAL's Executive Director and the Fitness Center Manager should sign a daily revenue control sheet indicating the total amount of cash and checks received for the reconciled period. An independent person should routinely verify that each bank deposit properly reconciles to the aforementioned signed documents with any differences immediately investigated. Fitness Center bank deposits should also not be split between memberships and all other categories as it is recommended that only one deposit be made for each designated period. Furthermore, all monies should be deposited intact into the checking account. Finally, PAL's Executive Director or his designee should be tasked with reconciling the daily credit card settlement reports with the amounts deposited into the Regions Bank operating account by their Heartland Credit Card System. f. PAL's Executive Director should routinely perform analysis to ensure that all completed non-voided receipts were included in the received deposits. Also, all deposits' supporting yellow receipts should be properly safeguarded and stored together to facilitate reconciliation. g. Unique tags should be attached to all fixed assets over a certain dollar threshold designated by the Executive Committee and/or Board of Directors to facilitate identification. PAL's Management Response Building Security 1 (a)-The City should be responsible for reimbursing PAL for the cost of the security alarm repair. PAL's position is based on the fact that the damage is as a result of the City's usage. PAL agrees the building should be secure. Internal Controls 1 (b)-(g)-PAL Board of Directors will review, analyze and consider the City's suggested recommendations. 2. Finding -The Terms in the Signed Memorandum of Understanding Dated November 5, 2007 Stopped being Applied after September 201 O Thereby Creating Confusion as to the Responsibilities of Each Party Concerning Utilities and Off-Duty Administrative Surcharge Payments Resolution No. 96-21987 requires PAL to maintain the facility and pay all utilities throughout the term of the lease agreement. Meanwhile, section 2 of PAL's corresponding Page 8 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 lease agreement states "Lessor {City} agrees to pay for all utilities used within the premises including, but not limited to, electric, water, gas, telephone and garbage disposal. JI These two statements are contradictory resulting in uncertainty as to which organization is responsible for paying for the building's utilities. The City's Legal Department previously opined that a scrivener's error occurred and that PAL has always been responsible for the utilities of the building. In reality, the City paid the water and sewer charges totaling $18,924 between October 1, 2006 and May 31, 2009 while PAL paid the electric and telephone invoices. In an attempt to resolve this issue and others, the previous City Manager and PAL Board President signed a Memorandum of Understanding on November 15, 2007 which contained a paragraph stating "The Parties have also discussed the payment of utility bills associated with the operation of the Building. The City of Miami Beach has agreed on a one-time payment of $50, 000 to assist with previous utility bills associated with the property. This payment is with the understanding that in the future the Police Athletic League may utilize an Off-Duty Police Surcharge Fund created to assist the Police Athletic League for whatever portion of future utility bills the Police Athletic League determines is necessary. The fund has been created to assist in the eligible operational expenses of the Police Athletic League by adding one dollar per hour to the off duty police rate. This amount shall be forwarded to the Police Athletic League upon receipt of a quarterly request from the Police Athletic League. In the event the surcharge rate is altered in the future, the parties agree to meet and discuss alternate funding mechanisms as necessary. The City will have no future responsibility to pay utility bills beyond this one-time payment per terms indicated in the Lease Agreement. JI The City made the $50,000 payment with the issuance of check number 251711 dated July 27, 2007 but the City has continued paying for the building's water and sewer charges to date. As a result, PAL would owe the City for water and sewer charges incurred assuming that the building's direct consumption could be calculated. Furthermore, PAL pays all electrical charges incurred at the building. However, PAL management claims that the City's recent installation of new air conditioners has resulted in less control over building temperatures as unoccupied rooms may be very cold while other occupied areas can be very hot as the building thermostats do not function properly. They stated that they have to contact the City's Air Conditioning Supervisor to make the necessary cooling and heating adjustments while complaining that their Florida Power & Light bills have increased accordingly. Additionally, the City's Finance Department made quarterly wire transfers to PAL totaling $329, 175.93 between December 2007 and October 2010 for the off-duty administrative surcharge payments with $214,127.43 paid prior to June 2009 and $115,048.50 paid during the audit period. For unknown reasons, this Memorandum of Understanding was not brought before the City Commission for approval before being implemented. The Finance Department stopped remitting these off-duty administrative surcharge payments as of the quarter ending September 2010. All the received off-duty administrative surcharge payments received are entered into general ledger revenue account number 156-8000-342900 on the City's Financial System whereby any resulting surcharge payments to PAL were incorrectly treated as a reduction Page 9 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 in revenues. Upon request, the City's Finance Department calculated that the amount of off-duty administrative surcharge payments that would have been due to PAL for the period of October 1, 2010 through January 31, 2014 equaled $271,558.37 if the Memorandum of Understanding's terms were applied. Recommendation(s) The City's Public Works and Finance Departments should calculate the amount of water and sewer charges for the PAL building during the audit period so that reimbursement can be sought. An amicable resolution should also be negotiated concerning the building's new air conditioning system shortcomings resulting in higher Florida Power & Light monthly bills paid solely by PAL. Additionally, the City Administration should determine whether PAL is owed the police off-duty administrative surcharge monies collected since October 2010. Finally, the City and PAL should negotiate and sign an agreement detailing the terms upon which any disbursed off-duty administrative surcharge monies are to be spent. City Manager's Office Response It is our understanding that the surcharge was implemented in 2007 without Commission approval and then ended at the Commission's request in 2010. We would like to meet and discuss with the PAL a comprehensive restructuring of our relationship that would be mutually beneficial and address all of the findings and concerns. PAL's Management Response PAL reserves all its legal rights and remedies pursuant to the Memorandum of Understanding and any and all agreements entered into with the City of Miami Beach. The PAL looks forward to sitting down with the City Manager as soon as possible and discussing amicable resolutions to all the aforementioned issues. 3. Finding -The Separation of Non-Profit PAL from the For-Profit Fitness Center was not Always Consistent in reference to Purchases, Shared Expenses and Management Fees PAL is a 501 (c)3 organization while the Fitness Center spun off in 2012 is a Florida for- profit corporation. The Fitness Center operates the gymnasium which is shared with PAL, and in return the PAL helps to manage the Fitness Center but no management agreement exists specifying the terms for both parties. Their independent accountant stated that the Fitness Center was spun off for liability purposes and to avoid potentially jeopardizing PAL's non-profit status as the Fitness Center is their main revenue source. The following concerns related to this separation and related party transactions were noted during testing: • Fitness Center purchases need to be kept separate from PAL because they are required to pay 7% state sales taxes while PAL is considered exempt. However, instances were found whereby this did not always hold true as shown by check numbers 518 and 522 and a debit card purchase from Johnson Health Tech NA Inc. to name a few examples. • Shared expenses (utilities, cleaning, building repairs, etc.) were not allocated between the Fitness Center and PAL which could have federal income tax implications. • Monies are transferred from the Fitness Center as needed to fund PAL Page 10 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 operations at the discretion of the Executive Board. It was also found that PAL's Executive Board had approved larger monetary transfers from the Fitness Center to PAL at the end of the fiscal year. Recommendation(s) A management agreement should be drafted and signed outlining the terms of PAL and the Fitness Center's relationship. Purchases for each entity should be kept separate with any shared expenses properly allocated in a reasonable manner such as by square footage due to possible state or federal tax implications. Lastly, monies should be consistently transferred from the Fitness Center to PAL in an equitable manner designated in the approved management agreement. PAL's Management Response PAL Board of Directors will review, analyze and consider the City's suggested recommendations. 4. Finding -Both Parties Claim Ownership of the Building which once Resolved could Impact Future Operations plus Property Taxes are not being Billed or Paid on the Portion utilized by Non-Exempt Organizations Both PAL and the City claim ownership of the building located at 999 11th Street which could impact the lease agreement's terms once resolved. Assuming that PAL was deemed to own the building, they could require the City to pay rent and/or a greater proportion of the building costs. Conversely, the City could charge building subtenants (Fraternal Order of Police and the Miami Beach Policeman's Relief and Pension fund) higher rents, use more of the building for Parks & Recreation programming, etc. if they owned the building. For now, the City is recorded as the owner of the PAL building according to the Miami- Dade County Property Tax Appraiser's records. No property taxes have been billed or paid since the building's inception in January 2001; however, they may be due on the proportional share of the building used by the Fitness Center, the Fraternal Order of Police and Miami Beach Policeman's Relief and Pension fund (commonly known as the 1 % fund) as they are not exempt organizations. Recommendation(s) PAL and the City should resolve the building ownership issue and amend the lease agreement as needed with City Commission approval to help clarify each party's responsibilities. Furthermore, it should be promptly determined if property taxes should be paid by any of the building's current occupants. If so, the Miami-Dade Property Tax Appraiser's Office should be notified of the building's non-exempt occupants so that the applicable amount of property taxes can be billed and remitted. City Manager's Office Response The City Attorney's office has taken the position that the City owns the building. Furthermore, the City has continued to perform all capital repairs to the building. We would like to meet and discuss with the PAL a comprehensive restructuring of our relationship that would be mutually beneficial and address this issue. Page 11 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 PAL's Management Response PAL reserves all its legal rights and remedies as it relates to the ownership of the building. PAL looks forward to discussing amicable resolutions with the City of Miami Beach to the above referenced matters. 5. Finding -Tracing of Forty Sampled Individuals' Extended Fitness Center Memberships to the Supporting Receipts found that Two or 5% did not Remit the Correct Amount of Monies and 12 Identified City Employees Received Free Memberships in Contradiction to the City's Gift Policy Upon request, the Fitness Center provided a KeyScan system report listing all active members, their membership classification (1 = regular, 2 = PAL and Fitness Center management, etc.), the corresponding membership periods associated with their most recent fee payments, etc. A random sample of thirty active non-City employee memberships were reviewed and traced to the corresponding receipt books to confirm whether proper payments were received. Testing found that one individual's membership was extended through March 16, 2015 but no receipts were found indicating any monies were received. After additional inquiries were held with Fitness Center staff members, it was learned that the individual apparently worked for Mango's which has an arrangement whereby all their employees receive free memberships in return for a negotiated price paid entirely by the business owner. The Fitness Center employee that initiated this transaction stated that he extended the individual's membership at no charge for one year which contradicts the Fitness Center Manager's policy of extending Mango's employees memberships for up to three months at a time due to turnover. The individual supposedly stopped working for Mango's after a couple of weeks but his membership was not adjusted accordingly. Similar testing performed on ten City employees who pay to be active Fitness Center members found that a Code Compliance Officer l's membership was renewed for a year through March 7, 2014 despite the fact that no monies were received. A review of the KeyScan system found that her file contained a notation stating not to extend her membership unless payment is made because she no longer worked inside the building for the Parks & Recreation Department as the Fitness Center opts to give these City employees free memberships (membership classification 3 = Parks & Recreation staff). He continued to state that the PAL Executive Director instructed him to disregard the notation and to extend her membership but no documentation was maintained verifying this statement. Although it's a benevolent gesture that may or may not be used by the twelve identified City employees, the issuance of free gym memberships contradicts the City's gift policy as it is not universally offered to all City employees. Recommendation ( s) The implementation of stronger internal controls such as those listed in finding #1 's recommendations should help to curb instances where memberships are extended but proper payments are not received. In addition, Mango's Fitness Center memberships should be routinely reviewed for any changes in employment so that they can be revised as necessary. Written documentation should be maintained for any instances whereby standard procedures are not followed and stated instructions are overridden. Lastly, free Page 12 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 or reduced gym memberships given to City employees should immediately be discontinued unless offered universally to all staff members. PAL's Management Response PAL's Board of Directors will address the above mentioned internal controls. As to City employees, the issues have already been addressed and resolved. 6. Finding -Observed Documentation Shortcomings are Listed which Hinder the Audit Trail Annual audits performed by an independent accounting firm were completed with PAL and the Fitness Center receiving unqualified opinions indicating their compliance with FASS accounting pronouncements for not-for-profit companies reporting on a modified cash basis. In order to avoid duplication of work, Internal Audit focused on testing PAL's documentation and accounting records which have continued to improve from our past internal audits; however, the following shortcomings were noted that are still in need of improvement: a. PAL typically does not maintain information concerning sponsored trips and meals as to the names of the attendees, what was the business purpose, etc. Similarly, PAL did not always have their recipients sign documents attesting to the receipt of Thanksgiving baskets, bicycles, etc. b. The Miami Beach Policeman's Relief and Pension fund provided lease agreement requires the remittance of $300 in rent per month (includes state sales tax) which has remained unchanged since at least October 1, 2006. Similarly, the Fraternal Order of Police's monthly rental payments of $500 rent plus 7% state sales taxes has not been increased during the same period. c. Especially in the earlier years tested, supporting documentation for canceled checks was occasionally missing as only the check remittance was present in the provided files. Examples include but are not limited to check numbers 8664 (June 2009), 8890 (September 2009), 9334 (June 2010) and 9402 (July 2010). d. All Fitness Center credit card sales are entered into QuickBooks as having occurred from memberships even though they may have been payment for apparel, supplements, etc. As a result, membership revenues are overstated while the other revenue reported categories are understated. e. A draft copy of PAL and the Fitness Center's 2012/13 fiscal year audited financial statements was completed on June 3, 2014 which is 246 days after their September 30, 2013 year end. The timelier receipt of the annual external audit would enable the City to quicker review and analyze their financial position. Recommendation( s) The implementation of the following recommendations should help ensure the existence and completeness of maintained documentation and help provide a proper audit trail: a. PAL should maintain detailed information concerning sponsored trips and meals as to the names of attendees, the business purpose, etc. Similarly, PAL should Page 13 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 always maintain sufficient detailed information indicating who received their support and have someone attest to taking receipt of the delivered goods, monies, services, etc. b. The Executive Board should consider periodically raising their tenants' rents by having escalator clauses tied to the Consumer Price Index in their signed negotiated lease agreements. c. No further action is necessary as PAL has been correctly attaching all tested supporting documentation to the check remittances since July 2010. d. Detailed documentation should be maintained of each reportable categories credit card revenues so that they can be accurately reported in QuickBooks and on the Fitness Center's financial statements. e. Annual September 301h fiscal year end audits should be completed within a reasonable time after the close of the year (180 days or March 31 51 ). PAL's Management Response PAL's Board of Directors will take the above referenced recommendations under advisement. 7. Finding -The Executive Director Reports Simultaneously to both the City's Chief of Police and PAL's Board of Directors which could Potentially Result in Conflicts of Interest The Chief of Police appoints a full-time Miami Beach police officer as coordinator of PAL's activities (Executive Director) on a year round basis in accordance with City Resolution No. 11022. Therefore, PAL's Executive Director reports directly to the Chief of Police who ultimately determines his/her salary and position. Yet, Section 3 of PAL's approved by-laws details the Executive Director's job duties based on approval of the Board of Directors. As a result, situations could arise whereby the Executive Director receives conflicting instructions from the Chief of Police and PAL's Board of Directors prompting confusion as to the appropriate response. Recommendation ( s) The City Administration should closer scrutinize the relationship between the Police Chief's Office and PAL to determine the optimal working environment. Internal Audit recommends that the City Commission consider amending Resolution No. 11022 to have a non-City employee work as Executive Director that only reports to PAL's Board of Directors to help eliminate potential conflicts. If desired, the amended City Resolution could also require the City to provide an annual contribution to PAL which could be used to fund this Executive Director's position. City Manager's Office Response This has been addressed as PAL Executive Director Arthur Martineau now directly reports to Wendy Rich-Goldschmidt, Chief Oates Chief of Staff. PAL's Management Response PAL is opposed to a non-City employee (non-police officer) working as Executive Page 14 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 Director. The very essence of PAL's mission and success is to offer the community the ability to interact with a direct liaison of the police department. Further, this person's presence serves as a deterrent to any misconduct at the building and ensures safety to our PAL children. 8. Finding -Non-Business Expenditures are Listed that do not Necessarily Satisfy the Non- Profit Organization's Mission Statement PAL's mission statement reads "To provide a safe environment for juveniles, offer programs that emphasize education, promote self-esteem, deal with those underlying conditions that threaten the future of our youth and continue our dual mission of 'Filling Playgrounds, Not Prisons -Success Through Education' through involvement of parents, police officers and citizens of our community." Testing performed on expenditures in the general ledger provided by their independent accounting firm identified the following items that do not appear to satisfy PAL's mission statement and therefore may have been better suited to have been paid by the benefiting individuals rather that the organization: a. PAL donated $1,200 to a volunteer on June 3, 2009 for funeral expenses in times of hardship. Additional payments were noted to such worthwhile organizations as the March of Dimes, Nautilus Middle School Band, American Leukemia Society, Police Olympics, etc. b. PAL purchased $1,674 of shirts for Take Your Child To Work Day on April 16, 2010 and spent $48.42 in drinks for the Chief of Police's Christmas Party on December 20, 2010. c. Adult and senior oriented programming funded by PAL such as Art In The Park, Yoga, etc. does not benefit juveniles in adherence to their mission statement. Recommendation(s) Any payments to an organization, individual, etc. that does not satisfy PAL's mission statement should be first approved by the Executive Board of Directors, Also, PAL should not be making purchases on behalf of the City as they are a separate entity. Greatly improved since 2010, PAL management should ensure that all issued checks satisfy their business purpose. A revision to the agency's by-laws should be considered limiting expenditures to only those which directly relate to the mission of the agency. Finally, PAL should consider changing its mission statement to aiding juveniles and their families. PAL's Management Response PAL Board of Directors will review, analyze and consider the City's suggested recommendations for possible implementation. 9. Finding -Neither the Fitness Center nor the Building's Other Tenants Obtained Business Tax Receipts During the Audit Period Neither the Fitness Center nor the building's other tenants (the Fraternal Order of Police and Miami Beach Policeman's Relief and Pension fund) obtained business tax receipts during the audit period which (if applicable) are due and payable annually on October 1st Page 15 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 according to City Code Section 102-357. Recommendation( s) The building's occupants should meet with the Finance Department's Customer Service Center to determine whether business tax receipts need to be obtained. If so, they should promptly provide the necessary documentation and monies to be in compliance with City Code Section 102-357. PAL's Management Response PAL is willing to meet and discuss the issue of business tax receipts with the Finance Department. Finance Department's Management Response Once submitted, the Finance Department will process and route the Fitness Center, Fraternal Order of Police and Miami Beach Policeman's Relief and Pension Fund applications for their respective Business Tax Receipt, Certificate of Use and/or Annual Fire Fee. Applications will be routed to the appropriate regulatory departments including, but not limited to: Building, Planning and Zoning, and Fire. If any of the aforementioned entities are registered not-for-profits, they will be exempt from the Business Tax portion of their application. 10. Finding -Observed Interior Water Damage, Uncovered Electrical Outlets, Etc. Need to be Repaired as Soon as Possible to Better Protect the Building's Inhabitants Section 3 of PAL's lease agreement states "The Lessee {PAL} accepts the premises in their present 'as is' condition, and is responsible for all interior modifications and maintenance." A building walkthrough on April 24, 2014 identified such needed repairs as leaks in the roof that apparently has resulted in interior water damage, uncovered electrical outlets, small holes in the walls and unsecured exterior doors which if not completed timely could result in injury to the building's inhabitants. Recommendation(s) Although the facilities are costly to maintain as time progresses and the resident children are hard on the building, the inhabitants' safety should be a top priority and the listed above repairs plus any others known should be completed as soon as possible. In adherence to section 3, the City's Property Management Division should promptly repair the roof and the corresponding interior water damage while PAL should be responsible for all other interior repairs not directly attributed to the roof leaks. PAL's Management Response PAL recommends a meeting take place with the City Manager to discuss and resolve the above issues as soon as possible. City Manager's Office Response This will be addressed immediately. 11. Finding -Workers' Compensation Insurance was not Obtained by PAL and the Fitness Center During the Audit Period Florida Statute Chapter 440 requires that any non-construction organization of four or more part time or full time employees have workers' compensation. insurance in order to Page 16 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 protect its workers in case of an injury occurring while on the job. It was determined that both PAL and the Fitness Center satisfy this requirement as they have currently four and nine combined part and full time employees respectively but neither maintained workers' compensation insurance during the audit period. Recommendation(s) Both PAL and the Fitness Center should immediately purchase workers' compensation insurance to comply with Florida Statute Chapter 440. PAL's Management Response PAL is in the process of complying with F.S.S. Chapter 440. 12. Finding -Standard Operating Procedures were not Drafted and Followed that Accurately Depict Staff's Current Practices Standard operating procedures are beneficial as they serve as a benchmark to measure individuals' performance and as an instruction manual in the event employees are out of the office for whatever reason. In fact, the Executive Director claimed that their omission made his learning process more difficult when he began working at PAL in August 2010. PAL's standard operating procedures were still in the process of being finalized as of the completion of testing. However, the Fitness Center Manager did provide guidelines used to inform his staff of their daily duties which are displayed inside the office but they need updating and more detail. Recommendation(s) Both PAL and the Fitness Center's standard operating procedures should be completed as soon as possible and they should adequately depict current operations. PAL's Management Response PAL currently has a drafted copy of its standard operating procedures and is in the process of finalizing them. 13. Finding -Detailed Participation Records were not always Maintained for PAL's Programs Exhibits 8-1 and B-2 presented at the end of this report provide a summary of PAL's primary children programming offered along with a brief description of the program, the actual costs incurred for each year sponsored based on the provided general ledgers effective through February 28, 2014 and the number of program participants as of April 1, 2014. Participation totals were also requested for earlier periods but were not maintained by PAL management. These exhibits are provided solely for informational purposes as no conclusions were drawn from the facts presented other than PAL's continuous need to keep detailed attendance records to help justify the program's existence and any external funding received. Recommendation(s) PAL management should maintain sufficient documentation for at least the previous three fiscal years detailing the actual number of annual program participants, the funding sources, the associated expenditures, the activities performed, etc. Page 17 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 PAL's Management Response PAL Board of Directors will review, analyze and consider the City's suggested recommendations for possible implementation. EXIT CONFERENCE An exit conference was held on July 15, 2014 to discuss Internal Audit's preliminary findings and the participants included City Manager Jimmy Morales, Assistant City Manager Mark Taxis, Chief of Police Daniel Oates, Assistant Chief of Police John Buhrmaster, Captain Mildred Pfrogner, Parks and Recreation Director John Rebar, and Internal Auditor James Sutter. A second exit conference was held on July 17, 2014 with PAL President Robert Jenkins, FOP President Alejandro Bello, PAL Executive Director Arthur Martineau, Internal Auditor James Sutter, Senior Auditor Mark Coolidge and Auditor Fidel Miranda. Management responses were solicited and were received thereafter and are included in this report. JJS:MC:FM Audit performed by Senior Auditor Mark Coolidge and Auditor Fidel Miranda F:\OBPl\$AUD\INTERNAL AUDIT FILES\DOC13-14\REPORTS -FINAL\POLICE ATHLETHIC LEAGUE RPT.docx cc Kathie G. Brooks, Assistant City Manager Mark Taxis, Assistant City Manager Daniel Oates, Chief of Police Patricia Walker, Chief Financial Officer John Rebar, Parks and Recreation Director Max Sklar, Tourism, Cultural and Economic Development Director Anthony Kaniewski, Property Management Division Director Hernan Cardena, Code Compliance Division Director Arthur Martineau, PAL Executive Director Robert Jenkins, PAL President Alejandro Bello, FOP President Page 18 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 Exhibit A: Revenues and Expenses $360,000 $340,000 $320 ,000 $300,000 $280,000 $260 ,000 $240,000 $220,000 $200 ,000 $180,000 $160,000 $140,000 $120 ,000 $100,000 $80 ,000 $60,000 $40,000 $20,000 $- $300,000 $250 ,000 $200,000 $150,000 Revenues FY-2009 FY-2010 FY-2011 Expenses FY-2012 FY-2013 -cash Contributions -in-Kind Contri butions -Fund Raising & Grants -Fitness Center Inflows -Rental & Interest Income -Payroll& Contracted Labor -Legal& Professional Fees -utilities , Telephone & Building Repairs -Gifts & Donations -General& $100,000 -t----1----+-------+----'------4-------+------'------1 Administrative $50,000 $- FY-2009 FY-2010 FY-2011 FY-2012 FY-2013 Page 19 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 EXHIBIT B-1: Program Summary Listing PROGRAM NAME PROGRAM DESCRIPTION Serves Miami Beach !weens & teens who are engaging in Another Chance unhealthy behaviors by working intensively with these young people and their parents for six weeks and follow up with them afterwards by the MBPD and by peer mentors. Team sponsorship with PAL paying for the uniforms. Program Baseball keeps youngsters off the street and out of trouble during after school hours. Helps in the fight against obesity in our children. Basketball Athletic program same benefits as the baseball. Provide new book bags and school supplies to needy students of Book bag Giveaway Miami Beach. This program ensures students begin the school year on equal footing to those who can afford the supplies. Program keeps youngsters off the street and out of trouble during Boxing Program after school hours. Helps in the fight against obesity in our children. Boy Scouts Program sponsorship. Football Athletic program same benefits as the baseball. Once a month, a police officer visits a Miami Beach kindergarten Kindergarten Cop classroom and provides reinforcement of core values, along with citizenship, respect, etc. Lacrosse Athletic program same benefits as the baseball. Provide wages to youngster adults who also donate one hour PAL Summer Work service for each paid hour during summer camp, instilling a good work ethic and community service program. Program for boys and girls aged 14-21 who are interested in a Police Explorers career in law enforcement. Participants provide hundreds of volunteer hours includinq traffic Soccer Athletic program same benefits as the baseball. Thanksgiving Basket Provide baskets overflowing with canned goods, fresh produce, Giveaway dessert and a turkey at no cost to recipients. Track Club Athletic program same benefits as the baseball. Tutorial Aid boys and girls in the completion of their schoolwork. Youth Director Council I Boys and girls aged 11-18 who commit to being drug, alcohol and Youth Leadership Program tobacco free and volunteer for community service events at least (YDC) monthly. Also, includes NUMBER OF PARTICIPANTS Average FY14 as Per of Program 4/1/2014 (1) (2) 9 0 180 0 0 0 500 0 75 63 20 24 0 0 390 369 80 0 13 0 23 12 0 0 500 500 0 0 130 0 43 42 (1) Number of Participants (Average per program) was provided by PAL Administration and represents the average number of participants for the last two years. This amount could not be verified for the previous years listed in Exhibit B-2 due to the lack of participant records. (2) Number of Participants (FY14 as of 4/1/14) was determined from PAL provided rosters. Zero may indicate that program has not occurred as of 4/1/2014 for the current fiscal year or has been discontinued. Page 20 of 21 Internal Audit Report Miami Beach Police Athletic League Operational Audit September 19, 2014 E h'b't B 2 P x I I -rogram c ts OS ummarv ACTUAL PROGRAM COSTS 6/1/2009 1/1/2010 10/1/2010 10/1/2011 10/1/2012 TO TO TO TO TO PROGRAM FUNDING 12/31/2009 9/30/2010 9/30/2011 9/30/2012 9/30/2013 NAME SOURCE (7 Months) Another Chance MBC Grants $0.00 $0.00 $126.39 $3,883.77 $7,198.16 Baseball PAL 0.00 1, 165.40 1,383.55 137.50 137.50 Basketball PAL 0.00 2,745.00 (231.00) 0.00 0.00 Bookbag Gi1.eaway Donations and 349.00 12,812.47 10, 160.64 8,219.24 12,488.47 PAL Boxing Program LETF monies 0.00 0.00 0.00 14,637.00 36,320.25 from MBPD Boy Scouts PAL 0.00 819.17 4,080.90 2,102.83 1,429. 72 Football PAL 0.00 61.90 1,435.20 0.00 0.00 Kindergarten Cop PAL 590.00 3,858.18 4,788.63 5,442.74 4,129.56 Lacrosse PAL 0.00 4,526.95 20,210.32 15,469.00 3,115.00 PAL and LETF PAL Summer Work monies from 0.00 12,500.00 12,500.00 13,000.00 12,000.00 MBPD Police Explorers Fundraising and. 109.87 17,315.58 8, 190.77 16,815.03 9,592.76 PAL Soccer PAL 0.00 0.00 6,000.00 0.00 0.00 Thanksgiving Basket Donations and 14, 188.09 206.84 15,689.26 15,497.55 16,680.64 Gi\.eaway PAL Track Club PAL 0.00 19,098.29 13,780.18 73.97 0.00 Tutorial PAL 26,938.94 15,510.00 21,003.37 18,860.00 0.00 Youth Director Council/Youth Fundraising, 0.00 9,390.70 41,784.39 45,709.21 32,042.99 Leadership Program Grants and PAL (YDC) Total for Periods $42,175.90 $100,010.48 $160, 776.21 $155,964.07 $127,936.89 Page 21 of 21 10/1/2013 TO TOTALS 2/28/2014 (5 Months) $0.00 $11,208.32 18.00 2,841.95 0.00 2,514.00 0.00 44,029.82 28,699.70 79,656.95 1,013.41 9,446.03 0.00 1,497.10 0.00 18,809.11 0.00 43,321.27 0.00 50,000.00 1,626.89 53,650.90 0.00 6,000.00 15,559.03 77,821.41 0.00 32,952.44 0.00 82,312.31 6,313.28 135,240.57 $53,230.31 $640,093.86