FOLLOWUPAUDITREPORT OF INVENTORYPOLICIES,PROCEDURES&CONTROLS DEPARTMENTOFMUNICIPALDEVELOPMENT REPORTNO.

0501105F

CityofAlbuquerque OfficeofInternalAuditandInvestigations

CityofAlbuquerque
OfficeofInternalAuditandInvestigations
P.O.BOX1293ALBUQUERQUE,NEWMEXICO87103

January25,2006

AccountabilityinGovernmentOversightCommittee CityofAlbuquerque Albuquerque,NewMexico FollowUp: INVENTORYPOLICIES,PROCEDURES&CONTROLS DEPARTMENTOFMUNICIPALDEVELOPMENT 0501105F

FINAL INTRODUCTION TheOfficeofInternalAuditandInvestigationsperformedaFollowupReviewofAuditNo.01105, InventoryPolicies,Procedures&Controls,PublicWorksDepartment.Aftertheissuanceoftheaudit report, the Water Utility Division and the Wastewater Utility Division of the Public Works DepartmentwasremovedfromtheCityofAlbuquerquebyState ofNew Mexico Statuteand placed into the AlbuquerqueBernalilloWaterUtilityAuthority(WaterAuthority,)aseparate governmental entity. DuringFY2005,thePublicWorksDepartment(PublicWorks)becamepartoftheDepartmentof MunicipalDevelopment(DMD.) TheFleetManagementDivisionofthePublicWorksDepartment wastransferredtotheDepartmentofFinanceandAdministrativeServices(DFAS). Thepurposeof ourfollowupwastoreviewthestatusoftheauditrecommendationsthathadbeenimplementedby theauditee. At the time of the audit, four divisions of Public Works Department had warehouses or parts storeroomswhereinventory wasmaintainedforuseinthedepartmentsoperations,asfollows: WastewaterUtilityDivision NowpartoftheWaterAuthority. WaterUtilityDivision NowpartoftheWaterAuthority.

FollowUpInventoryPolicies,Procedures&Controls Departmentof Municipal Development January25,2006 Page2

0501105F

TrafficEngineeringDivision(TrafficEngineering)Nowadivision of DMD Twowarehouses:Signals&Signs FleetManagementDivision(FleetManagement)Nowadivision of DFAS th Twowarehouses:locatedat6 StreetandPinoYards DuetothecreationoftheWaterAuthorityandthesubsequentreorganizationofcertainCityof Albuquerquedepartmentsasnotedabove,thisfollowupreviewonlycoverstheinventoryoperations oftheTrafficEngineeringDivisionandtheFleetManagementDivisionwhichwereFindingNos.1, 3,4,and11oftheauditreport. Wedeterminedthefollowing,regardingthestatusoftherecommendationsthatweremadeinthe originalaudit: RECOMMENDATIONNO.1: TheauditdeterminedthatifthefiveCitywarehouseoperationslocatedatthePinoYardsfacility wereconsolidated, itwouldbefeasibletouse asingleinventorycontrolsystemtotrackandmonitor alloftheseCityassets.Thiscouldhelptoreduceinventoryshrinkage,increaseefficiencyandreduce costsoverallfortheCity. Theauditrecommendedthat DFASandPublicWorksevaluatethefeasibilityofconsolidatingthefive City warehouseoperationsthatwerelocatedatthePinoYardsfacility. TheAdministrationrespondedtotheauditasfollows: Undernormalconditions,theAdministrationwouldagreewiththefinding.Infact,in prior years, studies have been conducted regarding the feasibility of warehouse consolidation.However,atthistime,withacountywidevoteonunificationpending inlessthanamonthandtheuncertaintyrelatedtothenewlymandatedAlbuquerque BernalilloCountyWaterUtilityAuthority,itwouldappeartobeimprudenttoexpend limitedresourcesonsuchanactivity. ACTIONSTAKEN Thisfindingisconsideredresolved. The legislativecreationoftheWater Authority andthe merging of Fleet Management Division into DFASeliminatethefeasibilityofwarehouse consolidationandtherelatedeconomiesofscalewhichwouldhavebeengained.

FollowUpInventoryPolicies,Procedures&Controls Departmentof Municipal Development January25,2006 Page3 RECOMMENDATIONNO.3:

0501105F

Theauditnoted that theFY2003completephysicalinventory doneatFleetManagement resultedina reduction in inventoryvalueofapproximately$20,000.Aportionofthisadjustmentwasrelatedto aninventorytheftinNovember2002.Theauditdeterminedthattherecontinuedtobequantity discrepanciesforpartsinventory. We recommendedthatPublicWorksFleetManagementreviewthepossiblecausesforthequantity discrepanciesinitspartsinventoryandimplementcorrectiveactionstomitigatethecauses. PublicWorksrespondedtotheauditasfollows: PWDconcurs. FleetManagementisintheprocessofreviewingthepossiblecausesfor thequantitydiscrepanciesinitspartsinventory.Correctiveactionswillbeinstitutedas appropriate.FleetManagementwillcompletethisactivitybytheendofthefiscalyear. ACTIONSTAKEN Therecommendationshavebeenfullyimplemented. Subsequenttotheoriginalaudit,Fleet ManagementclosedthefacilitywheretheinventorytheftinNovember2002hadoccurred. Our discussions with Fleet Management personnel indicated that internal controls over inventorywerestrengthened.OIAIreviewedtheFY2005yearendphysicalinventorycount listingandnotedonly minorinventoryadjustmentswhichtotaledlessthan$1,000. RECOMMENDATIONNO.4: Theauditidentifiedthefollowingproblems: TrafficEngineeringdid nothaveaninventorysystem,eithermanualorcomputerized,tokeep recordsoftheitemscominginandissuedfromitsphysicalinventory.Itdid maintainrecords ofmaterialsandsuppliesthatwereusedbyworkcrews. Thisinformation wascontainedin work orders. However, these controls did not effectivelycompensateforthelackofan inventorysystemthatrecordedreceiptsandissues,andprovidedinformationregardingthe quantitiesofitemsonhandinthephysicalinventory. TrafficEngineeringemployeesdid notperformeithercyclecounts,oranannual100percent physicalinventorybecausetherewerenotanyinventoryrecordsinthisdivisiontocompare

FollowUpInventoryPolicies,Procedures&Controls Departmentof Municipal Development January25,2006 Page4

0501105F

with the results of any inventory physical counts. There were no written inventory procedures. TrafficEngineeringhad anoutsidestorageareainwhichlargeitems werestored.There were itemssuchaslargealuminumpolesfortrafficsignals,whichwereleftoverwhenTraffic Engineeringchanged thetrafficsignalsatanintersectionandneeded tousedifferenttypesof poles.Becausethetrafficsignalpolesaremadeofaluminum,theyhaveamarketvalueeven thoughthey wereused.TrafficEngineeringdidnothaveatrackingprocess,toensurethat itemssuchasthesethathadamarketvaluewerealwaysreturnedtothedivisionsstorage areaforlaterreuse. TheauditrecommendedthatthePublicWorksDepartmenttakethefollowingactions: PublicWorksshouldevaluatethefeasibilityofimplementingtheinventorymoduleofthe WorkManagementSystematTrafficEngineering. PublicWorksmanagementshouldensurethatTrafficEngineeringprepareswritteninventory proceduresforinventorycontrol.Thewrittenproceduresshouldidentifytheprocessesand responsibilitiesofthedifferentinventoryrelatedfunctions. TrafficEngineeringshouldimplementatrackingprocess,toensurethatitemssuchasused aluminumsignalpolesthathaveamarket value arealwaysreturnedtothedivisionsstorage yardforlaterreuse. ThePublicWorksDepartmentrespondedtotheauditasfollows: PWDconcurs.TheTrafficEngineeringDivisionisworkingwithPWDITpersonnelto develop a database that can function as an inventory module for the Division. In addition, Traffic Engineering will develop and implement a tracking process that ensuresthatuseditemswithamarketvaluebereturnedtotheDivisionsstorageyard forpossiblelaterreuse. ACTIONSTAKEN The audit recommendations have not been implemented. Traffic Engineering has not implementedaninventorysystem,eithermanualorcomputerized,tokeeprecordsofthe itemscominginandissuedfromitsphysicalinventory.TrafficEngineeringemployeesdonot performeithercyclecounts,oranannual100 percentphysicalinventorybecausetherearenot

FollowUpInventoryPolicies,Procedures&Controls Departmentof Municipal Development January25,2006 Page5

0501105F

anyinventoryrecordsinthisdivisiontocomparewiththeresultsofanyinventoryphysical counts.TrafficEngineeringhasnotpreparedwrittenproceduresforinventorycontrol.Traffic Engineeringhasnotdevelopedandimplementedatrackingprocessthatensuresthatused itemswithamarketvalueisreturnedtothedivisionsstorageyardforpossiblelaterreuse. The TrafficEngineeringmanagerstatedbecauseoflackofmanpower,TrafficEngineering couldnotmakeprogressontheauditrecommendations. FOLLOWUPRECOMMENDATIONS DMD shouldensurethat TrafficEngineeringimplements aninventory control system, eithermanualorcomputerized,tokeeprecordsoftheitemscominginandissued fromitsphysicalinventory. DMD should ensure that Traffic Engineering prepares written procedures for inventorycontrol. DMD shouldensurethatTrafficEngineeringdevelopsandimplementsatracking processthatensuresthatuseditemswitha marketvalueisreturnedtothedivisions storageyardforpossiblelaterreuse. DMD shouldensurethatTrafficEngineeringemployeesperformeithercyclecounts, oranannual100percentphysicalinventory,andcomparetheresultstoinventory records. RESPONSEFROMDMD At the time of the audit, there was no inventory system for Traffic EngineeringOperationsduetoalackofstafftodevelop,initialize,and maintainsuchasystem.Inresponsetotheoriginalaudit,twoengineering internpositionswereaddedtoTrafficEngineeringOperationstodevelop and initialize an inventory system. However, shortly thereafter, three engineeringinternpositionswerecutfromTrafficEngineeringsbudget. Traffic Engineerings remaining interns were used to accomplish the Sectionscorefunctions. Nonetheless,effortshavebeenmadetodevelopabasicinventorysystem. TheWorkManagementSystemhasverylimitedcapabilitiesandhasnot

FollowUpInventoryPolicies,Procedures&Controls Departmentof Municipal Development January25,2006 Page6

0501105F

been supported for a number of years, so it was decided to create an inventorysystemusingExcel.Theinitialcreationandinventoryforthe PavementMarkingSectionhasbeencompletedandworkhasstartedon theSignSection.WorkontheSignalSectionwillbecompletednext.Itis anticipatedthatabasicinventory systemforallSectionswillbeinplaceby July2006. OncetheinitialinventorysystemsaredevelopedforeachSection,afull 100%physicalinventorywillbecompleted.Thisisanticipatedto occurin July2006andannuallythereafter.Also,thedevelopedinventorysystem includes establishing minimum stockonhand requirements or reorder thresholdstohelpmonitorsupplies. Items returned to the shops that are reusable will be included in the inventorysystem.Itemsreturnedtotheshopsthatareunusable,butstill havesomemarketvalue(suchasdamagedaluminumsignsandpoles,and signalpoles)willnotbeinventoried.Theseitemsareplacedinaseparate recyclingdumpsterwhichissalvagedonceamonthandaccountedforby weight.Itisnotfeasibleatthistime,basedonbothequipmentandstaffing constraints, to attempt to reconcile returned material by weight and ultimatesalvageweight.DMDhasworkedwiththecrewstoensurethey understandthatscrapaluminumandsimilarmaterialsareCityproperty and must be handled and accounted for accordingly. Also, DMD has workedwithlocalrecyclingcompanieswhohaveagreedtonotifyTraffic EngineeringOperationsshouldtheyobserveanyscrapsignorsignalparts attemptingtoberecycled. RECOMMENDATIONNO.11: Theaudit determined that aninternalcontrolweakness existedwith themainCitywarehouses on lineelectronicrequisitionsystem.Usingthissystem,aCityemployeewhoisanapprovedusercan requisitionitemsfromthewarehouseelectronically.Supervisoryreviewandapprovalofthespecific orderisnotrequiredbeforetheorderisplaced. The audit recommended that DFAS implement controls to ensure that City of Albuquerque supervisorscanreviewpurchasesmadebytheir employeesfromtheInternalServiceswarehouse,via electronicrequisitions,priortotheorderbeingfilledbythewarehouse.

FollowUpInventoryPolicies,Procedures&Controls Departmentof Municipal Development January25,2006 Page7

0501105F

DFASrespondedtotheauditasfollows: DFASconcursthatsupervisorsshouldreviewitemsrequisitionedfromthewarehouse. However,theDepartmentdoesnotagreethatelectronicrequisitionsshouldnecessarily beapprovedpriortotheorderbeingfilledbythewarehouse...DFASagreesthat supervisorsshouldmonitortransactionsusingtheavailablesystemreports,whetherit isonadaily,weeklyormonthlybasisandwillreminddepartmentdirectorsofthe availabilityofCOGNOSasamanagementcontroltool. Theoverallissueofrequisition approvalwillbeaddressedwhenthe CityofAlbuquerque implementsanewfinancial system. ACTIONSTAKEN Theauditrecommendationhas notbeenimplemented.ACity ofAlbuquerque employeewho is an approved user can still requisition items from the Internal Services warehouse electronicallywithoutthesystemrequiringanysupervisory reviewandapprovalofthespecific orderbeforetheorderisfilledbythewarehouse. FOLLOWUPRECOMMENDATION DFASshouldaddress requisitionapprovalwhentheCity ofAlbuquerque implements anewfinancialsystem. RESPONSEFROMDFAS DFASagreeswiththefinding.Theissueofrequisitionapprovalwillbe addressed in conjunction with the implementation of a new purchasing/inventory system for the City. In the interim period, department directors will again be reminded of their responsibility to monitorpurchasingtransactionsusingavailablesystemreports.Aspecial effortwillbemadebyDFAStoeducatenewdepartmentdirectorsonthe availabilityofCOGNOSasamanagementcontroltool. CONCLUSION The Department of Municipal Development canadequately safeguard City assets bydeveloping procedurestoaccountforallinventories.

FollowUpInventoryPolicies,Procedures&Controls Departmentof Municipal Development January25,2006 Page8

0501105F

Weappreciatetheassistanceandcooperationof theDepartmentofMunicipalDevelopment personnel duringtheaudit.

_________________________________ PrincipalAuditor

REVIEWED:

_________________________________ AuditSupervisor

APPROVED:

APPROVEDFORPUBLICATION:

__________________________________ ___________________________________ CarmenKavelman,CPA,CISA,CGAP Chairperson,Accountabilityin Government ActingDirector OversightCommittee