Audit Comm Aviation Acquision and Rel
Internal Audit Report Acquisition and Relocation Department Audit January 1, 2006 through December 30, 2008 Issue Date: September 1, 2009 Report No. 2009-14 Internal Audit Report Acquisition (Org. No. 3336) Audit Period: January 1, 2006 December 31, 2008 Audit Period: July 1, 2005 June 30, 2008 Table of Contents Internal Auditor's Report ...................................................................................................... 3 Executive Summary ............................................................................................................ 4 Background ......................................................................................................................... 5 Audit Objectives .................................................................................................................. 5 Audit Scope ......................................................................................................................... 5 Audit Approach .................................................................................................................... 5 Conclusion ........................................................................................................................... 6 Findings and Recommendations ......................................................................................... 7 1. Incomplete Accountability over Rent Collection 2. Inadequate Controls over Cash Collection 3. Noncompliance with Port Procurement and Disbursement Policies and Procedures 2 Internal Audit Report Acquisition (Org. No. 3336) Audit Period: January 1, 2006 December 31, 2008 Audit Period: July 1, 2005 June 30, 2008 Internal Auditor's Report We havecompleted an audit of the department activities for the Acquisition and Relocation. The purpose of the audit was to identify and assess department operations to determine whether management has established adequate controls: 1. To ensure Port's assets (including expected rent revenue) are adequately safeguarded against mis/abuse, and are properly accounted for at all times. 2. To promote and ensure compliance with Port policies in disbursements and procurements. We reviewed information relating to fiscal years 2006-2008. We conducted the audit using due professional care. We planned and performed the audit to obtain reasonable assurance that department controls are adequate and operating as intended relating to the areas audited. The department did not have adequate controls in areas examined. Nothing came to the auditor's attention to suggest instances of misappropriation, but controls implemented and exercised by management were not effective in ensuring sufficient safeguards over Port assets and compliance with established Port policies and procedures. The auditor noted: 1) numerous instances of noncompliance with procurement policies, 2) incomplete accountability of rent income including penalty, and 3) inadequacies in cash payment processes. We extend our appreciation to the Acquisition and Relocation Department for their assistance and cooperation during the audit. Joyce Kirangi, CPA Sr. Internal Audit Manger 3 Internal Audit Report Acquisition (Org. No. 3336) Audit Period: January 1, 2006 December 31, 2008 Audit Period: July 1, 2005 June 30, 2008 Executive Summary Audit Scope and Objective The purpose of the audit was to identify and assess department operations to determine whether management has established adequate controls 1. To ensure Port's assets (including expected rent revenue) are adequately safeguarded against mis/abuse, and are properly accounted for at all times. 2. To promote and ensure compliance with Port policies in disbursements and procurements. We reviewed information relating to fiscal years 2006-2008. Background The main function of the Acquisition and Relocation Department is to manage the real property acquisitions and relocations in the areas surrounding the airport in support of the Port's Noise Remedy Program and capital improvement projects. The Noise program began in 1971 and is designed to mitigate aircraft noise in neighborhood communities. The program involves the buy-out or insulation of single-family houses, multi-family buildings, and institutional buildings; buying out mobile home parks, insulating owner-occupied, multi-family homes, and purchasing residential properties in the approach zone for the third runway. The department administers its acquisition and relocation activities according the federal Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 as amended. Audit Result Summary The department did not have adequate controls in areas examined. Nothing came to the auditor's attention to suggest instances of misappropriation, but controls implemented and exercised by management were not effective in ensuring sufficient safeguards over Port assets and compliance with established Port policies and procedures. The auditor noted: 1) numerous instances of noncompliance with procurement policies, 2) incomplete accountability of rent income including penalty, and 3) inadequacies in cash payment processes. 4 Internal Audit Report Acquisition (Org. No. 3336) Audit Period: January 1, 2006 December 31, 2008 Audit Period: July 1, 2005 June 30, 2008 Background Acquisition manages property acquisitions and relocations to mitigate effects of the airport in neighboring communities. Resources used for relocations are financed largely through federal grants under the Uniform Act of 1970 and FAA Order 5100.37A. Thus much of Acquisition activity is subject to federal regulations as well as Port's own policies and procedures. The department receives rent from acquired real and personal properties. The revenue income is viewed as program income under applicable federal grants and as such decreases otherwise reimbursable expenses. For the period under audit, the department expenses were as follows. DESCRIPTION 2006 2007 2008 Salaries & benefits $360,434 $413,548 $471,171 All other costs 88,565 98,649 157,112 Internal dept transfer 38,638 40,323 46,932 Source: Responsibility Report the majority of department expenses are allocated to capital projects at year end. Audit Objectives The objective of the audit was to identify and assess department operations to determine whether management has established adequate and effective controls: 1. To ensure Port's assets (including expected rent income) are adequately safeguarded against mis/abuse, and are properly accounted for at all times. 2. To promote and ensure compliance with Port policies in disbursements and procurements. Audit Scope The scope of the audit covered the period of January 1, 2006 through December 31, 2008. Audit Approach To achieve the audit objective, we performed the following procedures: Obtained an understanding of the department operations and the significant compliance requirements. Reviewed department controls related to the audit areas. Obtained and analyzed relevant financial and non-financial data. 5 Internal Audit Report Acquisition (Org. No. 3336) Audit Period: January 1, 2006 December 31, 2008 Performed audit procedures to achieve the audit objective. Audit Period: July 1, 2005 June 30, 2008 Conclusion The department did not have adequate controls in areas examined. The controls implemented and exercised by management were not effective in ensuring sufficient safeguards over Port assets and compliance with established Port policies and procedures. However, nothing came to the auditor's attention to suggest instances of misappropriation. The auditor noted: 1) numerous instances of noncompliance with procurement policies for example, lack of evidence of competitive selection, 2) incomplete accountability of rent income including penalty, and 3) inadequacies in cash handling processes. 6 Internal Audit Report Acquisition (Org. No. 3336) Audit Period: January 1, 2006 December 31, 2008 Findings and Recommendations Audit Period: July 1, 2005 June 30, 2008 1. Incomplete Accountability over Rent Collection The department does not have adequate controls over rent collection. Acquisition administers Port's relocation programs for affected homes and businesses in neighboring communities of the airport. In doing so, the department becomes an incidental landlord of the acquired property until the property is vacated through relocation. In transition, the department enters into a lease agreement whereby the tenant agrees to a rent with generally expected lease provisions (e.g., late payment penalty etc.). The actual rent income for the period under audit was approximately $1.2 million. Controls necessary to provide reasonable assurance and accountability over rent collection include, but are not limited to, policies and procedures to establish a baseline expectation as to how much and how often rent revenue is expected. The baseline is followed up with adequate management monitoring to include independent reconciliation between expected rent and collection rent. The auditor noted that management monitoring controls were either absent or cursory in nature. As a result, for the period under audit, all expected rent income cannot be completely accounted for with available written documentation. The auditor noted a number of exceptions as follows: 1. The department has no billing system for over 277 non-business accounts. Rent for those customers was largely on a self-reporting basis. 2. Rent analysis and/or expectations from those non-business accounts were not adequately monitored. Consequently, management was not able to assess whether received rent was complete in relation to what should have been collected. 3. The terms of the lease agreement were not consistently and completely enforced. Certain rents and penalties were not assessed or collected; they were said to have been forgiven. However, the auditor could not find supporting documentation to substantiate that fact. a. In a test sample of 10 late rent payments, 6 payments were not assessed penalty that totaled $150. b. The final settlement at closing/move-out is design to remedy all outstanding amounts owed to the Port, but the auditor noted numerous instances where such settlements did not occur. In a test sample of 21 rented units, we noted ~$ 13,000 and ~$1,500 in uncollected back rents and penalty, respectively. c. In a test sample of 25 properties, we noted that 10 (40%) lease agreements were either not signed or were signed beyond a reasonable period (14 days). 7 Internal Audit Report Acquisition (Org. No. 3336) Audit Period: January 1, 2006 December 31, 2008 The department appears to have viewed the rent as an ancillary function of the overall relocation program, rather thanAudit Period: July 1, 2005 June 30, 2008 an equally important part among many. Consequently due diligence, including management monitoring, exercised on rent collection was less than would be expected in order to properly collect all expected rent income. Uncollected rents and fees represent a loss of public financial resources without any feasible means of recovery. If not addressed, the observed control inadequacies will continue to materialize in financial losses, and the department's struggle over accountability of rent revenue will likely continue. Recommendations We recommend that Port management: 1. Strengthen controls related to rent collection. 2. Document rent reductions or collections efforts. 3. Enforce lease agreement terms and conditions. 4. Monitor any future 3rd party management agreements and operations. Management Response Management Response to Exception Item #1 The certified rent roll (which reflected the expected rent revenue at the time the property was purchased) was prepared for both Tyee and Town and Country Mobile Home Parks by outside legal counsel prior to purchasing the properties. This was considered the expected rent income receipt starting point. As tenants moved out of the park, expected rent receipts on the rent roll were reduced until all tenants had moved from a particular property. Management Response to Exception Item #2 When ownership of the parks was transferred to the Port, the rent roll provided at property closing reflected the baseline billing. This document was used for subsequent monthly rent reconciliations. Tenants paid their rent according to the signed lease agreement. No monthly billing or statement was sent to the tenant. This represented a typical residential leasing operation; there was no automated residential billing system. Rent expectations were monitored monthly by Port staff via the monthly report provided by either the property management consultant (via email) or the internal daily rent roll activity report. Management Response to Exception Item #3.a and #3.b Due to financial challenges (extremely low incomes) and circumstances of the tenants prior to 2008, Port staff adopted a more lenient rent collection stance. Port Acquisition and Relocation staff uniformly forgave the rent for any partial month of occupancy as an additional relocation benefit and incentive for the tenant to move in a timely manner. In late 2008, an increase in the number of financially stable tenants allowed the department to recover the uncollected rent revenue when the unit was sold to the Port. In essence, owed rent is treated as a line item deduction payable to the Port at escrow closing. Acquisition and Relocation activities are regulated by federal law, the Uniform Relocation Assistance Act of 1970, 49CFR, Part 24.207(f) an Agency (the Port) may deduct from relocation payments any rent that 8 Internal Audit Report Acquisition (Org. No. 3336) Audit Period: January 1, 2006 December 31, 2008 the displaced person owes the Agency; provided that no deduction shall be made if it would prevent the displaced person from obtainingAudit Period: July 1, 2005 June 30, 2008 a comparable replacement dwelling as required under relocation provisions" Eviction is contrary to the department's mission, a violation of federal law and would jeopardize federal funding. Management Response to Exception Item #3.c Per Port legal staff recommendation, Port Acquisition and Relocation staff were advised not to contact the tenants of a property the Port did not yet own, prohibiting staff and consultants from presenting and obtaining executed lease agreements prior to the property's transfer to the Port. This fostered collaborative, productive and positive negotiations with the property owner and reduced or prevented potential claims by the park owner for lost revenue due to the tenants moving because of the Port's actions. Timing of the actual acquisition was subject to many variables and presenting leases to property tenants was appropriate only after negotiations with the property owner had reached a settlement. Every effort was made to obtain signed leases from each tenant. Unfortunately, tenants were often uncooperative and refused to sign any lease presented to them by the Port. Overall Management Response Acquisition & Relocation Department Staff efforts to collect must be viewed within the framework of the department's mission: to acquire noise impacted property, to relocate persons, and to clear that property for public use under eminent domain. Aviation Property Acquisition Department is the only department within the Port of Seattle that facilitates Eminent Domain real estate takings under provisions of the Federal Uniform Relocation Act of 1970 (URA). We collected rents as we were able and tailored our collection efforts to each tenants' unique financial circumstances as evidenced by the change in policy in 2008 when our relocation activity moved into more financially stable tenants. Future rent collection variances will be more completely explained and documented in the occupants' relocation diaries. Port Acquisition and Relocation staff's primary function is to relocate tenants and administer FAA grant spending. Any rent collected on this property is considered an FAA grant "offset" and reduces the grant reimbursable amount. Management Response to Recommendations 1. Acquisition and Relocation Department staff, upon recommendation of the Internal Audit team, has increased its oversight and controls of rent collection. 2. All instances of rent variances will be documented in each tenant's relocation and acquisition diaries. 3. Future lease agreements will be standardized if possible to reflect uniform terms and conditions. rd 4. Port staff will closely oversee future 3 party residential property management agreements. 2. Inadequate Controls over Cash Collection The department does not have adequate controls over processing of cash collection which includes personal checks, cashier's checks, and money orders. The department collects and processes monthly rents from the acquired property either directly at the department's location or indirectly through the third-party property management company. The department has processed an average of ~$1,200,000 in rent payments for the past three years. 9 Internal Audit Report Acquisition (Org. No. 3336) Audit Period: January 1, 2006 December 31, 2008 Risk of misappropriation is significantly higher in cash than in any other financial medium. Such high inherent risk requires adequateAudit Period: July 1, 2005 June 30, 2008 controls to prevent and detect potential irregularities. In the absence, management cannot be reasonably assured of accurate and complete receipt of all incoming payments. The auditor noted a number of weaknesses in cash handling procedures. While no instances of misappropriation were noted, the extent of exceptions clearly indicates that controls over cash processing was not adequate. The auditor noted the following weaknesses over cash handling: 1. Inadequate segregation of duties. Incompatible individual duties such as opening, recording, depositing, and reconciling payments have not been properly segregated. 2. Inadequately controlled physical access to incoming payments. The payment drop -off box is not secured. All staff members have access to the area, making it difficult to establish accountability if payments are missing. 3. In a test sample of 14 rent payments, 57% of received payments were not processed timely with a time lag ranging between 3 to 33 days. 4. Inadequate oversight of the 3rd party property management company a. One checking and one money market account were opened in the Port's name and managed by the company without Port management review or monitoring. b. The 24-hour state law deposit requirement of public funds was not observed. c. Checks were drawn monthly from the bank account by the management company for its services. There was no monitoring by Port management. No written policies or procedures and the lack of knowledge over necessary controls to properly monitor and improve processes contributed to the noted exceptions. In its current state, this condition will likely continue to hamper the department's ability to establish full accountability over public resources and to fix responsibility in cases of wrongdoing. Recommendations We recommend that Port management: 1. Strengthen controls related to cash collection by establishing monitoring. 2. Deposit funds within 24 hours. 3. Establish segregation of employees where no employee can control any cash transaction from beginning to end. 4. Obtain a secure lock box and a safe for cash deposits. Management Response Management Response to Exception Item #1 Keys and deposit box access will be installed and assigned to designated staff and it will be segregated from the daily receipt and deposit preparation staff. 10 Internal Audit Report Acquisition (Org. No. 3336) Audit Period: January 1, 2006 December 31, 2008 Management Response to Exception Item #2 Audit Period: July 1, 2005 June 30, 2008 A tamper-proof, secure drop box for after hours rent payments has been ordered and will be installed by the end of August, 2009. Management Response to Exception Item #3 Auditor test compared the date written on check against the date of deposit, which is not necessarily a validation of the true date of when a check was presented to Port for rental payment (e.g. tenant dated check September 1, 2008, but did not present to Port staff until September 22, 2008). All checks are now date stamped and endorsed as soon as received. Management Response to Exception Item #4.a, #4.b and #4.c While we believe that adequate controls were in place for cash collections, strengthened controls that we will implement include: 1. Distributing daily cash receipt reports to management. 2. Distributing monthly rent delinquency reports. 3. Explaining deposits that appear to be more than 24 hours between receipt and deposit and listing them on an exception worksheet. Overall Management Response This property will be occupied and rent collected for less than six months (expected to be completely vacated prior to the end of 2009). Also, there are no additional properties of this nature to be acquired and managed by the Port. As such, we feel the additional cash collection controls to be implemented (as stated above) will significantly improve the departments accountability of the revenue for the remaining six months of this property management function, at which point, we expect all property to be vacant and no additional income to be received. Management Response to Recommendations 1. Department management will take an active role in the monitoring of the cash collection process. 2. Funds will be date-stamped upon receipt and exceptions to the 24-hour rule will be considered on a case-by-case basis. 3. Accountability and chain of control procedures will be implemented immediately, segregating cash collection from cash receipt documentation. 4. A secure, lockable box for cash deposits has been installed with limited access control. 3. Noncompliance with Port Procurement and Disbursement Policies and Procedures The department does not have adequate controls over procurement and disbursement. Port procurement policies and procedures are designed to promote equitable, just, and economical procurement of goods and services while ensuring compliance with applicable federal and state rules and regulations. In essence, compliance with Port policies and procedures would provide general public with equal access to contracting opportunities at the Port through a competitive selection process. Noncompliance however would increase risk of inappropriate (e.g., favoritism) and uneconomical (e.g., non-competitive rate) procurement of goods and services. 11 Internal Audit Report Acquisition (Org. No. 3336) Audit Period: January 1, 2006 December 31, 2008 The auditor tested a sample of fourteen (14) service consultants and noted the following noncompliance items: Audit Period: July 1, 2005 June 30, 2008 1. Five (5) instances where the department retained no documentation related to procurement. The auditor independently confirmed that each was advertised, but the documentation as to application, interviews, and selection was not maintained. 2. Five (5) instances where services, subject to Professional Service Agreement (PSA) and Small Works (SW) procurement policies and procedures, were procured without evidence of competitive selection. 3. One (1) instance where charged services to a S-type (i.e., open order contract) were out of the original scope of service. The out-of-scope services should have been subject to a separate procurement and selection process. 4. One (1) instance where the auditor noted a series of $100 overpayments for a total of $1,300 to an appraisal service provider. 5. One (1) instance where the Port overpaid a 3rd party property management service company by ~$8,000. Lack of management monitoring of the terms of the agreement contributed to the overpayment. A general lack of knowledge on applicable Port procurement policies and procedures contributed to the noted exceptions. If not corrected, department's procurement practices will likely continue to be inadequate and questioned in regard to equal access to procurement opportunities at the Port, as well as the economical use of public resources on such contracts. Recommendations We recommend that Port management: 1. Strengthen controls related to procurement and disbursements and ensure that the entire department has the knowledge base necessary to comply with Port policies, procedures, and guidelines. 2. Ensure that every procurement file contain adequate documentation to clearly identify compliance with Port policies and procedures. 3. Recover the $1,300 and ~$8,000 overpayments noted in the finding. Management Response Management Response to Exception Item #1 Competitive bidding was performed for all of the consultant services. A previous audit (Moss Adams, 2007) cited this same issue and corrective action was taken. All competitive bid documentation is now retained in accordance with regulations. Management Response to Exception Item #2 For repairs of replacement homes, vendors were not selected by the Port but rather by the displaced person. In the case of selecting commercial moving companies, the lower of two bids for a particular household move was selected. In addition, small business participation in department expenditures represented over 70% of the payments. A global bid process for many of these services was possible 12 Internal Audit Report Acquisition (Org. No. 3336) Audit Period: January 1, 2006 December 31, 2008 but would have not achieved this level of Disadvantage Business Enterprise, Minority Business Enterprise and Small Business Enterprise participation. Audit Period: July 1, 2005 June 30, 2008 Management Response to Exception Item #3 Recent CPO training and guidance has already improved contract procedures and adherence to Port policies. All department personnel have attended the CPO-1 workshop and the department is in full compliance as of March 2009. Management Response to Exception Item #4 Overpayments listed reflect rate and fee schedule changes for appraisal work that weren't adequately documented and amended to the original service agreement. Consultant had increased their fees for appraisal reports that required an adjustment to the value of the subject property without adequately informing the Port of Seattle of their fee schedule (from $400 to $500 per review appraisal). Management Response to Exception Item #5 This is a contract interpretation issue between vendor (Phillips Real Estate) and Port staff. It appears that Port overpaid vendor $500 per month for services over a 16 month period ($2,500 each billing month was paid as opposed to $2,000 plus $500 for eligible reimbursable costs). The overpayment of $8,500 has been brought to the attention of the vendor and they have agreed with the Audit Team's discovery and interpretation of the agreement. They will reimburse the Port for the overpayment. Management Response to Recommendations 1. All Acquisition and Relocation Department staff have attended required CPO-1 training and have increased their knowledge and awareness of the new Port procurement procedures. 2. All current and future Procurement and Service Agreement files now have multiple levels of management oversight and control for compliance with established Port procedures. 13
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