Public Works Warehouse InventoryMLAN\iBEAC
BUDGET AND PERFORMANCE IMPROVEMENT
Internal Audit Division
TO: Jorge M. Gonzalez, City Manager
INTERNAL AUDIT REPORT
VIA: Kathie G. Brooks, Budget and Performance Improvement Director
James J. Sutter, Internal Audita~~ . FROM:
DATE:
AUDIT:
PERIOD:
June 30, 2010 A
Public Works Warehouse Inventory Audit
Fiscal Year Ended September 30, 2009
This report is the result of an annually scheduled audit of the Public Works Warehouse Inventory as
of September 30, 2009, performed in conjunction with the external auditor's annual financial audit of
the City. This audit did not include testing of quotes received, prices invoiced, quantities received,
etc. and their supporting documentation as those topics were covered in two recently completed
audits entitled Public Works Department Inventory Processing and Public Works Department
Warehouse Purchasing.
INTRODUCTION
The Public Works warehouse located at 451 Dade Boulevard, supplies materials for all phases of
Public Works operations. These materials are received for and issued to the various divisions
(Water, Sewer, Storm Water, Engineering, Environmental, Streets and Streetlights) and are either
charged to specifically assigned job orders or individual vehicles.
When the Public Works warehouse purchases inventory during the fiscal year by City check through
purchase orders and Requests for Direct Payment, general ledger account number 191-4400-
000481 (Inventory Purchase MX Stock) is debited and the MX Stock pooled cash account is
credited. The Inventory Purchase MX Stock account is related to bond monies received by the City
and needs to be reported separately.
The monies are subsequently reclassified or assigned to the appropriate divisions/areas as
designated by warehouse personnel in Cityworks when the inventories are issued. Similarly, the
corresponding pooled cash account is also adjusted. These adjustments are done via journal entry
number 005 monthly by a Financial Analyst Ill based on data received from the Cityworks report
called Warehouse Issue Report Summary.
These reclassification entries are needed because warehouse personnel do not always know who
will use the inventory at the time of purchase as some parts may be used by a number of different
division/area (bolts, screws, etc.) at a later date. Therefore, this Inventory Purchase MX Stock
account is continually decreasing as parts are issued until the balance is so low that the account
needs to be replenished.
As part of the inventory tracking process, job order numbers are created to track the cost of labor,
materials, and equipment used in projects performed by the Public Works Department; allow the
Department to know the cost of the projects; and recover the cost of repair or replacement of City
We ore commilled to providing excellent public se1vice ond .safety to oil who live, work, ond ploy in our vibront, tropicol, historic community.
Internal Audit Report
Public Works Warehouse Inventory Audit
June 30, 2010
property damaged by or caused by an outside party. Small materials and equipment that are not job
specific are charged to the individual truck number where the crew is assigned for such personal
items as tools, raincoats, etc. to record disbursement at no charge. These items cannot be charged
to a specific job and their issuance can be monitored by warehouse personnel to help ensure that
departmental employees are not misplacing or being careless with City property.
In addition to material receipt, storage and distribution, the warehouse orders, maintains and
supplies parts to outside contractors in support of other City capital projects. This may occur In
instances where either the outside contractor damages City materials during his work (the contractor
pays for materials ordered through a special budget code and work order), or when the City agrees
to supply the materials and the contractor provides the labor (in this case, the City pays for both the
materials and the labor). According to the Warehouse Supervisor, this occurred an estimated ten
times during the audit period, with one recent example being the purchase of two meter boxes by
G.T. McDonald for installation at 1111 Lincoln Road after the existing ones were inadvertently
damaged by the contractor.
Received parts are accepted by warehouse staff and compared to the packing slip for
completeness. In addition, the charged prices are checked against those quoted to confirm their
agreement. Once approved, the inventory is accepted, entered into the Cityworks system and
ultimately paid through normal procurement channels.
Conversely, parts are issued to authorized personnel upon the proper completion of Public Works
originated three-part Inventory Issuance (MX-1) forms. Among other information, these pre-
numbered sequential forms require the preparer to enter the date, job order number, part number,
quantity, part description, job location and issuer name. The cost assigned to the item is based on
the Cityworks calculated weighted average cost which factors in each time that the item has been
purchased since 1984 The white copies of the form are maintained internally by the warehouse clerk
and filed by the associated number to ensure that all are accounted for. The yellow copies are sent
to the respective Operations supervisor (Water, Sewer, etc.), typically at week's end. The pink final
copy is given to the employee receiving the inventory. The Operations supervisors are to
periodically compare the yellow and pink copies to ensure that quantities and costs match and to
investigate any differences.
Warehouse personnel currently consists of a Warehouse Supervisor, a Storekeeper Ill, two
Storekeeper lis, a Municipal Service Worker I and an Administrative Aide I. These personnel
interact with the Procurement Division, Finance Department, and vendors in the purchase and
delivery of goods, inventory issuances and payments. They all have the ability to receive and enter
inventory in the Cityworks System, implemented in April1, 2006, whose purchase was authorized by
City Commission Resolution No. 2006-26231. However, any changes or additions/deletions to the
inventory in the Cityworks system are limited to the Warehouse Supervisor and Storekeeper Ill.
A majority of the Public Works inventory is stored inside the warehouse located at 451 Dade
Boulevard. It is the largest and most secure facility, as it is protected by cameras and locked
alarmed doors. Other inventory storage locations on the property also protected by cameras include
the following:
• Yard 1-A secure fenced area, with a covered roof, located directly south of the warehouse
at the bottom of the loading dock ramp. This secure area is used to safeguard such larger,
frequently issued items as selected clamps, valves, glands, etc.
• Yard 2-A secure fenced area located south of Yard 1, by the water tanks, and bordering
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Miami Beach Senior High School. The items stored in this area consist primarily of light
poles, hydrants, pipe, offsets, and caps.
• Central Yard Area-City vehicles, as well as assorted equipment and inventory are stored in
the middle of the yard.
Finally, large slower moving inventory was moved to fenced facilities located at 75th Street and
Dickens Avenue and 81 st Street and Hawthorne Avenue. Examples of inventory stored in these
facilities are selected bends, sleeves, light poles and concrete bases.
A full physical count of the Public Works inventory is taken at the end of each fiscal year by
warehouse personnel. Internal Audit conducts test counts to verify their count, with any noted
differences counted again with a supervisor until a consensus is reached as to the correct total.
Once the final count is agreed upon, warehouse personnel adjust the inventory count numbers in
the Cityworks system and a new value for the inventory at fiscal year end is calculated. This
inventory value is then forwarded to the City's Finance Department which prepares a journal entry to
adjust the applicable general ledger beginning fiscal year inventory balances to equal the previous
fiscal year's year end physical count inventory values.
Public Works warehouse inventory was valued at the following amounts for the last five fiscal years:
9/30/2005 9/30/2006 9/30/2007 9/30/2008 9/30/2009
$1,797,500 $1,981,523 $2,194,784 $2,015,324 $2,215,242
This Fiscal Year 2008-09 ending inventory of $2,215,242 was 9.92% higher than the previous fiscal
year. Internal Audit conducted test counts of one hundred twenty-five (125) part numbers totaling
5,473.80 items with a value of $628,632.40 or 28.38% of the current inventory value. We commend
Public Works warehouse staff that faced occasional interruptions due to the need to disburse
emergency items during the approximately two weeks that the warehouse was closed for inventory.
OVERALL OPINION
Based upon the results of the test counts and the inventory reports, we recommend that the
valuation of $2,215,242 be used as the September 30, 2009 inventory value. The annual physical
inventory of the items was conducted in an effective and timely manner, and the corresponding
valuation was deemed reasonable. In conducting our inventory counts and reviewing the internal
controls surrounding the inventory, we noted shortcomings in the following areas in need of
improvement, with any repeat of prior year's findings noted by an asterisk:
•
II
•
A comparison of the Citworks count with Internal Audit's verified sampled physical counts
found differences totaling $643.49 for 31.20% of the tested items which represented an
improvement over the last two years but is still well above the desired maximum internal goal
of 10%. *
Obsolete inventory has not been regularly discarded prior to the annual physical counts
thereby overstating the fiscal year end carrying balance.
Possible improvements to the camera system protecting 451 Dade Boulevard are listed
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•
•
•
which should increase their effectiveness.
Noted security weaknesses included staff having possession of master keys to open gate
locks protecting inventory in remote yards, unsupervised access to charge out inventory
items and an inoperable main facility front gate. These items were mentioned to warehouse
management as they may increase the City's risk exposure of the likelihood that City
property could be damaged or misappropriated. *
The City's water tanks located at 751h Street and Dickens Avenue are not properly
safeguarded from unauthorized intruders.
The Public Works Department had not updated its policies and procedures to better detail
the newly instituted warehouse and Cityworks practices. *
PURPOSE
The purpose of this audit is to determine whether Public Works warehouse inventory is sufficiently
counted, valued and recorded; properly safeguarded from theft and breakage; and that entries are
correctly recorded in the City's Financial System.
SCOPE
1. Confirm that documented operating policies, standards and procedures exist to ensure
efficient and effective administration of the warehouse and that there is compliance with
these policies, standards and procedures, as well as all laws and regulations.
2. Confirm that warehouse inventory items are stored at all locations in an orderly manner, are
clearly labeled, are properly safeguarded and are reasonably valued.
3. Confirm that the physical inventory was performed in an efficient, effective and timely
manner with sufficient personnel and adequate procedures to ensure an accurate count.
4. Confirm by test counts that the final inventory report accurately reflects the final inventory
valuation as determined by the physical count and that this information is communicated to
the external auditors and reported in the City's Financial System.
5. Confirm the financial viability of the Public Works inventory fund over the long term.
FINDINGS, RECOMMENDATIONS AND MANAGEMENT RESPONSES
1. Finding -Physical Count Comparison
Internal Audit conducted test counts of one hundred twenty-five (125) part numbers totaling
5,473.80 items with a value of $628,632.40 or 28.38% of the current inventory value. Our
test counts were compared to Public Works staff's physical counts and if they agreed then
the corresponding total was used as the final count. If they disagreed, then the item was
counted again with a supervisor until a consensus was reached as to the total. This verified
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count was then used as the basis for the item's inventory valuation.
These sampled items' verified counts were compared with the amounts listed in Cityworks
initial 09/24/09 report's recorded count. These counts should be equal as Cityworks uses
the perpetual inventory method meaning that the item's inventory balance is increased as
parts are received and reduced accordingly as they are issued.
Testing showed that a count difference existed for 39 of the 125 total sampled part numbers
or 31.20% although sometimes the Cityworks count was higher and other times the physical
count was higher. A net immaterial overage of $643.49 of the tested inventory value
resulted as sometimes the sampled part's cost was high and other times it was relatively
inexpensive. The Cityworks inventory totals were subsequently adjusted to reflect the full
inventory physical count recorded by Public Works' staff, with the adjustments for Internal
Audit counts, to help ensure that valuation is reasonably correct as of 09/30/09.
The reasons for the difference (shrinkage, improper record keeping, incorrect part numbers,
etc.) between the verified count and the Cityworks count could not be determined. Although
still much higher than the desired internal goal of 10% or less, this fiscal year's percentage
difference of 31.20% represents an improvement over the last two years 40.83% and
47.97%.
Recommendation( s):
The compensating control of performing full scale physical inventory counts should continue
to be performed as the present difference materially exceeds the desired 10% maximum
goal. Public Works Department management should also more closely review this process
to determine where the breakdowns are occurring so that procedures and internal controls
can be created and/or amended to help achieve desired levels going forward.
Management Response:
Although improvements were made Management continues to strive to reduce the
percentage difference and meet or exceed the 1 0% goal or better. Staff will flowchart
process to identify potential problems and identify improvement opportunities within 60 days.
At 90 days staff will reassess, make necessary adjustments, set targets, and provide training
to staff as needed. At year end Public Works Management will evaluate results.
2. Finding -Obsolete Inventory
Inventory occasionally becomes obsolete due to technological improvements, time, etc. and
loses much or all of its value. Unless these items are scrapped and their value downgraded,
the fiscal year end inventory carrying value will be inflated. Inquiries found that Public Works
has not performed this exercise during the past three years. Warehouse staff met with
operational supervisors during this year's physical count and it was determined that 2,652.00
items from water, street lights and pump shops having a value of $139,445.18 were obsolete
and were therefore removed from inventory and not included in the final inventory valuation.
Recommendation(s):
Public Works materials and equipment should be reviewed annually before the fiscal year
end physical inventory is completed to determine if any items are obsolete so that their
carrying value can be adjusted accordingly. Obsolete inventory should be disposed in
accordance to the Procurement Division's Surplus and Confiscated Property Auction
Procedures.
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Management Response:
Obsolete parts are associated mostly with pump station equipment. Staff will forward a
separate memorandum to Internal Audit Dept. Director requesting specific assistance and
next steps for dealing with obsolete parts in general. Once this is clarified it will be
incorporated into the policy and procedures manual. Staff will flowchart process and
address every 6 months to check for obsolete parts and provide management report on how
obsolete parts were handled.
3. Finding -Security Cameras
The Public Works facility located at 451 Dade Boulevard is now protected by thirty-two digital
cameras to record daily activities as seven new cameras have been added during the past
year. The system hardware, computer monitors and digital video recorder are safeguarded
in the Control Room, which is continually staffed. These cameras are primarily used as a
detective measure or are reviewed only after an incident has occurred to help determine
fault. Sixteen cameras' activities can be viewed on one computer monitor called "Bank 1"
and the remaining sixteen are visible on the other monitor called "Bank 2". Review of these
cameras during a 08/10/09 interim site visit and inquiries with staff detected the following
shortcomings:
a. Five items totaling $2,107.49 that were already charged out and were being stored in
a container inside the Public Works yard were misappropriated on 07/10/09. There
were no cameras at the time focused directly on this area and parked vehicles
obstructed the view of the other cameras distantly aimed toward the three
containers. A police report was filed and case number 2009-26296 was assigned.
To date, the offenders have not been caught and a new camera was installed that
records all activities at these storage containers to help prevent similar occurrences.
b. Two cameras, bank 2 camera 2 and bank 2 camera 4, were not functioning as only a
blank screen was shown. One of these cameras supposedly recorded activities in
yard 2 which may be more subject to misappropriation due to its location behind the
water tanks and bordering Miami Beach Senior High School.
c. None of the cameras oscillated to cover a larger area.
d. Camera angles were not properly positioned so as to better protect Public Works
inventory. For example, cameras were not covering and recording daily activities
inside the electrical room, warehouse or yard 1, areas in which most of the inventory
is stored.
Recommendation(s):
The positioning and effectiveness of the cameras should be more frequently reviewed to
maximize their benefit to the City. Furthermore, the manufacturer should immediately be
notified of any malfunctioning cameras so that they can be promptly repaired. Public Works
procedures should clearly define who has the responsibility for ensuring that the cameras
are operational and for performing periodic random reviews of the recordings.
Management Response:
With respect to a): A new camera was installed that records all activities at these storage
containers to help prevent similar occurrences
With respect to b): At the time of inventory, cameras were working. Additional cameras were
added prior to this inventory as well as additional lighting in the yard. The responsibilities of
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ensuring the cameras are operational and notifying the manufacturer immediately of any
defects are assigned and in place. Cameras are positioned properly and the monitors are at
the control room operator's desk in order to maximize monitoring.
With respect to c): These are fixed cameras. Cost of replacing 32 cameras will exceed
$55K. We will evaluate the installation of oscillating cameras at key locations.
With respect to d): Contractor was notified to correct.
Appropriate camera and monitor procedures will be included in the warehouse policies and
procedures manual that will address monitoring frequency responsibilities.
4. Finding -Security Weaknesses
The following security weaknesses were identified during testing that could increase the
possibility that City assets may be misappropriated, vandalized, damaged by the weather,
etc.:
a. Both the 75th Street and Dickens Avenue and 81 81 Street and Hawthorne Avenue
facilities perimeter fences were secured with standard 3252 model locks. Numerous
Public Works Department personnel have the master key and therefore can easily
obtain unsupervised access to the facilities and their contents. These locations
presently do not have any compensating controls such as security cameras, security
personnel, etc.
b. The main facility's (451 Dade Boulevard) front gate was made inoperable due to the
renovations of Fire Station #2 and Miami Beach Senior High School. However,
Internal Audit believes that renovations have progressed enough so that the gate
can be re-installed to help prevent access by unauthorized individuals, especially
during non-peak working hours.
c. Charged out inventory was observed unprotected lying outside the three storage
containers positioned directly east of the old pumping station at 451 Dade Boulevard
where the theft addressed in finding number 3a occurred. Public Works
management promptly secured this area upon notification.
Recommendation( s):
The implementation of the following recommendations should help better protect the City's
assets stored at the three tested Public Works facilities:
a. Greater security precautions should be taken at these remote facilities to better
prevent unauthorized entry. Included among the ideas suggested are new locks
whereby keys are only given to designated Public Works personnel, a separate
fenced area could be created to safeguard inventory, etc.
b. The front gate should be made functional as soon as possible.
c. Public Works Department personnel should secure all unused items in the storage
containers or be subject to possible disciplinary actions.
Management Response:
a. Possession of keys are designated to supervisors and responsible maintenance
staff.
b. New front gate will be installed no later than May 1, 2010.
c. During working hours, there may be times that unused materials or small equipment
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may be outside a respective division container until the end of the day.
5. Finding-Water Tanks Safety
Water tanks located at 75th Street and Dickens Avenue were only protected by a chain link
fence. Gaps in the chained gates, missing sections of barb wire, overhanging tree limbs,
etc. can make unauthorized access easier.
Recommendation(s):
Public Works Department management should better enforce the yard parking rules and
discipline anyone that does not conform. Meanwhile, the water tanks at the 75th Street
location may be better safeguarded through repairing fencing deficiencies and pruning
nearby trees.
Management Response:
Public Works Department Operations conducts repairs and pruning on an on-going basis at
this location. Unfortunately, this is a recurring problem due to trespassing kids and
transients. New heavy duty locks with special keys have been purchased and installed. The
Public Works Operations Division Director has approval to duplicate keys.
6. Finding-Policies and Procedures
Although descriptive and covering a wide array of topics, the Public Works Department's
policies and procedures were last revised (effective 10/01/02) and did not fully address
warehouse operations. Some of the previous procedures changed with the implementation
of the Cityworks System in April 2006. This process is known entirely by few and should be
better documented to avoid further difficulties if personnel change.
Recommendation(s):
The Public Works Department's operating policies and procedures should be updated as
soon as possible and should more descriptively outline current warehouse operations.
Policies and procedures serve both as a benchmark to measure individuals' performance
and as an instruction manual in the event employees' change.
Management Response:
Operations Management is working on revising the Policies and Procedures, no later than
June 30, 2010.
EXIT CONFERENCE
An exit conference was held on June 8, 2010 in the Office of Budget & Performance Improvement.
Participants included Jorge Cano (Administration and Business Officer), Michael Alvarez
(Infrastructure Division Director), James Sutter (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:MC:mc
Audit performed by Mark Coolidge (Senior Auditor)
F:\obpi\$AUD\INTERNAL AUDIT FILES\DOC09-1 0\REPORTS-FINAL\PUBLIC WORKS INV RPT 09.doc
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cc: Jorge Gomez, Assistant City Manager
Fred Beckmann, Public Works Director
Michael Alvarez, Infrastructure Division Director
Patricia Walker, Chief Financial Officer
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