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 










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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 




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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. 






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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. 
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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. 














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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). 

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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
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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. 
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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. 
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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. 

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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
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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. 










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