HomeMy WebLinkAboutAgenda Report - May 1, 2019 H-01AGENDA ITEM t{-l
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AGENDA TITLE:
MEETING DATE: May 1 ,2019
PREPARED BY: Accounting Manager
Receive and File the Agreed-Upon Procedures Applying to lnternal Controls Over
the City's Procurement (For the Period July I ,2017 through September 30, 2018)
by The Pun Group
RECOMMENDED ACTION Receive and file the following reports and agreed-upon procedures
applying to internal controls over procurement submitted by The
Pun Group, LLP and the lnternal Services Department for period
July 1 , 2017 through September 30, 2018.
BAC KGROUND IN FORMATION During the initial site visit and review of the City, in August, the
Accounting Manager, (new at this time), and the auditors were
becoming familiar with City processes. Both parties noticed
possible inconsistencies in contracting, specifically in purchase and
change order processes and procedures, with City policy and
ordinances requiring substantial review.
Staff recommended from a time and fiscal resources standpoint to amend the contract with the Pun
Group, LLP and enter into an agreed-upon procedure review on internal controls over procurement. The
Pun Group, LLP, performed procedures over the procurement process. ln total nine procedures were
tested for compliance with the City's current policies. Of the nine procedures performed, eight had
findings that require corrective action by staff. Staff is currently in the process of reviewing the findings
and developing a corrective action plan.
The Pun Group, LLP issued a report on its procedures and findings. Vanessa Burke, Partner of the Pun
Group, LLP will be present to discuss the report and answer questions during the Council meeting.
FISCAL IMPACT:By law and good management practice, the City's internal controls over
procurement were conducted in accordance with attestation standards
established by the American lnstitute of Certified Public Accountants.
FUNDING AVAILABLE: Not applicable.
Melissa Munoz, Accounting
i["L"
Andrew Keys,
APPROVED:
City Manager
, City Manager
A MEMBER OFCity of Lodi, CaliforniaIndependent Accountants’ Report onAgreed-Upon Procedures Applying toInternal Controls Over the City’s ProcurementFor the Period July 1, 2017 through September 30, 2018May 1, 2019A MEMBER OF
A MEMBER OFAgendaAbout the FirmScope of WorkProcedures, Associated Findings and ResponsesConclusionA MEMBER OF13516
A MEMBER OFThe Pun Group, LLP is a full service Certified Public AccountingFirm located in California, Nevada, and Arizona specializing in allindustries, with special focus in Governmental and Not-for-Profitentities.Our Partners Group has been providing auditing, accounting andadvisory services to numerous governmental and not-for-profitentities throughout the United States since 1989.With over 100 years of combined experience in the governmentalindustry, we have been a trusted business partner to our clientsand have earned our reputation as one of the most respectedand socially responsible accounting firms.The Pun Group, LLP is an independent member of Allinial Global, an association of over 100 independent accounting and consulting firms. Based in North America, Allinial Global offers international support by connecting its member firms to providers and global networks of accounting firms worldwide.About the FirmA MEMBER OF1
A MEMBER OFCity of Lodi, CaliforniaSCOPE OF WORKA MEMBER OF
A MEMBER OF• This agreed-upon procedures engagement was conducted in accordance with attestation standards established by theAmerican Institute of Certified Public Accountants (AICPA).• We performed procedures agreed to by the City of Lodi (“City”) and the Pun Group, LLP (“Firm”), on internal controlsover the City’s procurement and as further described in Resolution # 85-173 “Resolution Adopting a Formal Policy andProcedure to Govern Contract Change Orders”. The sufficiency of these procedures is solely the responsibility of theCity. We make no representation regarding the sufficiency of the procedures described either for the purpose for whichthis report has been requested or for any other purpose.• For the period from July 1, 2017 to September 30, 2018.• City management is responsible for the internal controls over the City’sprocurement and as further described inResolution # 85-173 “Resolution Adopting a Formal Policy and Procedure toGovern Contract Change Orders.”• We were not engaged to and did not conduct an examination or review, the objective of which would be the expressionof an opinion or conclusion, respectively, on internal controls and accordingly, we do not express such an opinion orconclusion.• Had we performed additional procedures, other matters might have come toour attention that would have beenreported to you.• Management’s responses have been incorporated into this presentation.We have not evaluated the implementationand / or effectiveness of these responses as part our agreed upon procedures engagement.Scope of WorkA MEMBER OF3
A MEMBER OFCity of Lodi, CaliforniaPROCEDURES, ASSOCIATED FINDINGS AND RESPONSEA MEMBER OF
A MEMBER OFFinding(s):Procedure No. 1 – City Purchasing PoliciesThe City's purchasing policy was adopted by City Council in 2011 and the City's change order policy wasadopted by resolution in 1985. Procurement is a complex function that is guided by numerous policiesand statutes. Accordingly these policies are critical to ensuring that procurement, agency staff, and allstakeholders follow the proper procedures and rules and have a clear and consistent understanding of therequired regulations. The absence of a current updated set of policies andguidance can create a lack ofconsistency in how procurement work is carried out and can expose the organization to increased risksand frustrations with outside vendors and those within the organization.The City's governing policy documents are more than 8 years old and the change order policy is morethan 30 years old. These policies should be evaluated within the current operating environment andwithin the states guidelines and updated.A MEMBER OFThe City is in the process of updating the purchasing policy and will bring it to City Council for adoptiononce complete. The City Manager will appoint a Purchasing Officer througha formal appointment, inwriting and communicated.Management’s Response:5
A MEMBER OFFinding(s):Procedure No. 1 – City Purchasing PoliciesLodi Municipal Code (LMC) section 3.20.020 established the position of purchasing officer and the"purchasing officer shall be appointed by the city manager and shall be thehead and have generaloversight of the purchasing functions of the city. The duties of the purchasing officer may be combinedwith those of any other office or position." We were unable to verify the formal appointment of apurchasing officer within the City and recommend that if that function is delegated that formal appointmentbe made in writing and communicated.A MEMBER OFThe City is in the process of updating the purchasing policy and will bring it to City Council for adoptiononce complete. The City Manager will appoint a Purchasing Officer througha formal appointment, inwriting and communicated.Management’s Response:6
A MEMBER OFFinding(s):Procedure No. 2 – Purchasing Manual & Conflict of InterestThe City has not updated its purchasing policies and procedures to bring itinto compliance with therequirements of the Code of Federal Regulations, Title 2, Uniform Administrative Requirements, CostPrinciples, and Audit Requirements for Federal Awards (2 CFR Part 200) commonly referred to as the"Uniform Guidance" which require allnon-federal entities to "document whether it is in compliance withthe old or new standard, and must meet the documented standard". The City has also not formallydocumented whether it has decided to extend its applicable date of compliance with 2 CFR part 200 to beeffective beginning July 1, 2018. As a result, the City is not in compliancewith the procurement policyprovisions of 2 CFR part 200 and the Uniform Guidance. Not updating the City’s procurement policy couldlead to future findings and questioned costs related to federal awards.A MEMBER OFThe City is in the process of updating the purchasing policy and will bring it to City Council for adoptiononce complete. The City will comply with the new Federal requirements in 2 CFR part 200.Management’s Response:7
A MEMBER OFFinding(s):Procedure No. 3 – Segregation of Duties - Procure to Pay There is a lack of segregation of duties between the ability to authorize and enter new vendors into thesystem and processing of accounts payable. The City's Finance Technicianhas access to the vendormaster file and can also update and process accounts payable. As a result, there is an increasedexposure to fraud risk without other compensating or mitigating controlsand the Finance Techniciansaccess and user roles should be limited.A MEMBER OFThe City has corrected this finding after the agreed upon procedures were completed. The FinanceTechnicians may make the changes to the vendor master file, once changes are completed, theAccountant or Supervising Accountant reviews the changes made to the vendor master file, ensuringchanges made are correct, and approves the vendor file prior to any checks or EFT payments are madeto the vendor. This process is done through an automated workflow in the City’s accounting system.Management’s Response:8
A MEMBER OFFinding(s):Procedure No. 4 – Compare P.O. to Invoice PaymentThere are no findings to report.A MEMBER OF9
A MEMBER OFFinding(s):Procedure No. 5 – Documentation for Purchase OrdersWithin fifty-five (55) purchase orders tested with a value of approximately $15.3 million, two (2) out of fifty-five (55) purchase orders with a total of $12,124 were missing documentation for department solesourcing of a purchase under $10,000.A MEMBER OFAfter the City Manager appoints the Purchasing Officer and the updated policy is completed, theappointed Purchasing Officer will provide training to City staff to ensure compliance. The City hascorrected one of the findings for missing documentation for department sole souring a purchase order.Management’s Response:10
A MEMBER OFFinding(s):Procedure No. 6 – Change Order AuthorizationFour (4) change orders with a total value of approximately $647,000 out of asample of twenty-one (21)change orders with a total value of approximately $2.3 million were missing City Council approval.A MEMBER OFAfter the City Manager appoints the Purchasing Officer and the updated policy is completed, theappointed Purchasing Officer will provide training to City staff to ensure compliance.Management’s Response:11
A MEMBER OFFinding(s):Procedure No. 7 – Change Order AuthorizationThe change order policy authorizes the City manager to approve change orders in excess of 10% of theformal contract or in excess of $25,000 to avoid extraordinary delay of work or to protect the safety ofhuman life and the environment at or near the work site. The policy states "The City Manager shall reportthe change orders and the amounts to the City Council at the next regular meeting". Four (4) out of thetwenty-one (21) change orders over $25,000 tested and identified in the finding for Procedure No. 6 werealso not reported to City Council at the next regularly scheduled meeting.A MEMBER OFThe City has begun reporting change orders to City Council on a quarterly basis. The reportingrequirements to City Council will be addressed in the updated purchasing policy that City staff is currentlyworking on. The new requirements will be enforced by the Purchasing Officer appointed by the CityManager to ensure compliance.Management’s Response:12
A MEMBER OFFinding(s):Procedure No. 8 – Change Order Within Contract ScopeWithin twenty-one (21) changes orders tested with a value of approximately $2.3 million, seven (7) out ofthe twenty-one (21) changes orders with a value of approximately $773,000were outside the originalscope of work when compared to the original scope of work described in the initial contract. Six (6) of theseven (7) changes orders with a total of $723,000 were made for unknown existing conditions tounderground utilities or City requested items and were entered into with one vendor on one projectbetween December 2016 and March 2018. One (1) change order in the amount of $50,000 out of thetwenty-one (21) tested was entered into after the initial contract maximum amount was exceeded but theadditional work was required by the City.A MEMBER OFThe City will work to ensure that staff are trained on the new updated purchasing policy. The City isworking on updating the purchasing policy and will update it to confirm with Public Works constructionprojects and ensure compliance with the updated policy.Management’s Response:13
A MEMBER OFFinding(s):Procedure No. 9 – Budgetary Control of ExpendituresPer the City's budget policy the legal level of budgetary control is at the department level. We identifiedsixteen (16) services budget line expenditures were $5,000 or greater than the revised budgeted amountsfor all funds. Thirty-one (31) supply budget line expenditures were $5,000 or greater than the revisedbudgeted amounts for all funds. Although we identified expenditures in excess of budget line items, thedepartments were still within or attheir approved budget appropriations.A MEMBER OFThe City monitors the budget to ensure departments stay within their approved budget appropriations.City staff will work with departments on better budgeting at the expenditure level and monitoring theexpenditure lines.Management’s Response:14
A MEMBER OFCity of Lodi, CaliforniaCONCLUSIONA MEMBER OF
A MEMBER OFVanessa I. Burke, CPA, CPFOEngagement Partnervanessa.burke@pungroup.com(925) 974-3394Kenneth H. Pun, CPA, CGMAManaging Partnerken.pun@pungroup.com(949) 777-8801 2121 North California Boulevard Suite 290Walnut Creek, CA 94596“It is our commitment to only practice with the highest professional ethics and standards. We believe we owe that to the profession, our clients, and ourselves.”Contact InformationA MEMBER OF16