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Home My WebLink AboutFCS-15-091 - 2nd Quarter Audit Status ReportStaff Report rR finance and Corporate Services Department www.kitchener.ca REPORT TO: Audit Committee DATE OF MEETING: June 29, 2015 SUBMITTED BY: Corina Tasker, Internal Auditor, 519 - 741 -2200 ext. 7361 PREPARED BY: Corina Tasker, Internal Auditor, 519 - 741 -2200 ext. 7361 WARD(S) INVOLVED: ALL DATE OF REPORT: June 20, 2015 REPORT NO.: FCS -15 -091 SUBJECT: 2nd QUARTER AUDIT STATUS REPORT RECOMMENDATION: No recommendation required. The following information is being provided as an update and assurance on internal audit matters, in accordance with the Audit Committee Terms of Reference. BACKGROUND: The following report provides a summary of the Internal Audit activities completed during the period of April 2015 to June 2015. The chart below shows the audit contained in this report. Emglovee Expenses Compliance and Controls The following items are currently in progress and will be brought forward at a future audit committee meeting in 2015: Community Resource Centres Comprehensive Audit Office of the Mayor and Council Organizational Review * ** This information is available in accessible formats upon request. * ** Please call 519- 741 -2345 or TTY 1- 866 - 969 -9994 for assistance. 2 -1 REPORT: 1. Employee Expenses — Compliance and Controls Audit Status: Complete, May 27, 2015 Background and Audit Objectives Employees are empowered to purchase goods and services on behalf of the City of Kitchener in order to perform their jobs. For purchases <$3000 they can do so through using a corporate VISA card if they have one, or by using their own funds and being reimbursed through petty cash (for <$100) or cheque requisition ( >$100). In 2014, individual purchases that were less than $3000 totaled $3,460,309. Of that, 69% (or $2,372,269) was purchased by employees though the corporate VISA card, or by using their own funds and being reimbursed through petty cash or cheque requisition. Payment Method Amount Corporate VISA $1,994,527 Petty cash $60,9226 Cheque Requisition $316,816 Total $2,372,269 Employees are reimbursed for expenses related to travel and conferences including registration fees, mileage, flights, hotels, meals, and other related expenses using the same methods of payment. All travel and conference related expenses are to be submitted on a travel and expense form and paid through a cheque requisition. Travel and conference claims for 2014 were $165,685 CAD and $34,055 USD. This includes $17,177 CAD of Council conference expenses. These amounts are included in the $2.3M above. Employees may also claim mileage and parking for business related use of their personal vehicle. This is claimed through the mileage and parking form and paid through payroll. In 2014 the mileage and parking claims were as follows: Expense Type Amount Mileage $135,167 Parking $60,926 All of these expenses are collectively known as employee expenses and are the subject of this audit. The objective of this review is to document the employee expense processes in order to assess whether adequate controls exist within the process. A sample of expenses was examined to ensure compliance with Council and internal policies. Methodology This audit included the following activities: • Interviews with Accounting staff related to process flows, policies, and risk points • Review of published policies • Review of best practice in employee expense process and policy • Review of past audits 2-2 Test of a random sample of 2014 expenses including; • All Council expenses • Petty cash • VISA • Cheque requisitions including conference expenses • Mileage and parking Summary This audit found that in general the City has very sound processes and controls in place related to employee expenses. Expenses were related to legitimate business reasons and had the required backup to support the claims. There were no cases of fraud uncovered and only 1 instance of an employee circumventing the purchasing by -law in order to expedite the purchase using a corporate credit card. Staff within the Accounting division are very diligent and skilled at looking for non- compliance with policy and end up catching the majority of errors and omissions. Consistent with best practice, the main area for improvement is to consolidate all stand -alone policies into a one master policy and instruction for employees where they can find guidance not only on the policy itself but also on how to submit each type of expense for reimbursement. Currently guidance for each expense type or payment type is found in a different document and location which is confusing. It is also recommended that wording be added or clarified around various policy issues which are commonly misunderstood or unknown by staff. Past Audits Petty Cash Internal Audit does surprise petty cash counts of all outlying locations on an annual basis. The float is counted to ensure that the cash plus the petty cash vouchers equal the float amount. Recommendations have been made in past years regarding the physical safety of the cash as well as the accuracy of the reconciliations. The 2013 audit found that all cash variances were considered minor and records were generally organized and current. Controls appeared to be sufficient and staff was following established policies. A deeper review of cash deposit processes was done in 2014 at all locations in lieu of the cash counts. VISA An audit of the corporate credit card program was completed in February 2011. The audit compared the City's program with best practice and made several process and policy recommendations. The audit also looked at a sample 45 random statements, representing 25% of the monthly volume, which revealed that 13 statements (or 29 %) contained policy deviations which should have been caught and corrected by the supervisor or through the audit process within the administrative areas responsible for reviewing the statements. This was due to an inconsistency in what each area was looking for when reviewing the statements. Recommendations were made to standardize the process. A follow -up audit was conducted in July 2012. Staff in both the Supply Services and Accounting divisions implemented all of the recommendations, thus improving controls and consistency across divisions. Statements are now audited in a consistent manner across all divisions, there is a process for tracking and disciplining staff with repeat non - compliance with policy, and the administrative staff who are auditing the statements have been trained on what to look for. Cardholders and authorized approvers have also received training on what is expected of them. 2 -3 Based on the findings from the random sample of statements in the follow -up audit, the percentage of statements passing through both the authorized approver and the audit staff with no deviations increased from 71 % in 2011 to 83% in 2012. Mileage and Parking An audit of mileage and parking claims was completed in June 2010. The purpose of the audit was to review staff compliance with new eligibility requirements for paid parking resulting from a CRA audit and to identify issues of abuse or non - compliance and recommend corrective action if required. The audit found that the majority of parking and mileage claims for 2009 and the first quarter of 2010 had been accurately claimed, recorded and paid. A few minor errors noted during the audit may be attributed to the high volume of transactions using only manual processes at that time. It was recommended that these manual processes be automated in order to significantly reduce the time to perform these tasks and improve accuracy and efficiency. The development of improved claim form templates using embedded formulae would present substantial improvements. A follow -up audit was conducted in March 2010. It was found that many improvements had been made to the processes used to record, approve and pay these expenses. Staff developed a set of new templates that use formulae and protected cells to streamline calculations and approvals. Management has become increasingly diligent in reviewing all employee claims for mileage and parking and the results from that audit indicate that this has been very effective in limiting or eliminating non - compliance or abuse of parking claims. No significant issues were identified in that audit and all claims appeared to be compliant with policy. Controls and Compliance Testing Petty Cash Petty cash is used to reimburse employees for purchases less than $100 which they have paid for with their own funds. Expenses paid through petty cash totaled $60,926 in 2014. A sample of 58% (or $35K) of 2014 petty cash vouchers were selected for review. The hardcopy backup for all 2014 petty cash vouchers within the sample was reviewed using the following criteria: • Voucher was authorized by the appropriate person, and the custodian and person receiving the cash signed in the appropriate spot on the voucher • Business reason for the expense was provided • No alcohol or tobacco was purchased • No personal items / loans / cashing of personal cheques • Not used to pay a vendor directly The nature of the purchases was noted as well as any anomalies. Findings: The process appears to be working well and controls are strong. A handful of errors were caught by accounting prior to issuing replenishment cheques to Petty Cash custodians for such things as wrong signatures or not providing a business reason. Emails in the file show the follow -up and resolution with staff. 2 -4 In general the expenses are not excessive and do not appear to be fraudulent. The main categories of expenses being claimed through petty cash include such things as program or office supplies, license renewals, medical notes, meeting expenses (refreshments), food for programs, cab fare, transponder refunds, and uniform alterations. There were a few instances where the auditor felt the business reason was not clear or that the signature lines had been filled out incorrectly. For example, the authorizer and the person receiving the cash were the same person. These instances and associated dollar amounts were minimal. For any instances where there was parking, per diems or training fees claimed, the cheque file was cross referenced for the employee to ensure they had not also claimed for those expenses on the travel and conference form. No duplications were found. VISA, Cheques, and Mileage The corporate VISA card may be used for purchases less than $3000 wherever VISA is accepted. In 2014, $1,994,527 worth of purchases were made using corporate VISA cards, which included conference expenses. Cheques are issued to employees who have paid for expenses with their own funds which are greater than $100 (petty cash limit) or when a corporate VISA was not used either because the vendor did not accept VISA or the employee did not have a card. Cheques issued to employees in 2014 totaled $316,816 which included conference expenses. All employees who had VISA charges, had received a cheque, or claimed mileage and parking in 2014 were consolidated into one master list. From this list of 783 unique employee names, a 5% sample (or 39 names) was selected by choosing every 20th name from the alphabetical list. Within this list there were two employees who had all 3 types of expenses and 7 employees who had 2 types of expenses, allowing for a cross - reference and more complete picture of the employee expense claim habits. Overall this resulted in the following sample sizes by expense type: Although the VISA sample ended up being smaller than the overall desired sample of 5 %, the VISA process and statements have been audited in detail on two other occasions and therefore were not considered a high risk for this audit. Criteria: VISA: • Authorized by supervisor • Business reason provided for expenses • No personal expenses • Alcohol is not permitted for meals where only City staff attended • Names of attendees listed for all meals • Original receipts attached 2 -5 VISA Cheque Mileage / Parking Sample total 10 18 22 Population 299 343 380 Sample size 3% 5% 6% Although the VISA sample ended up being smaller than the overall desired sample of 5 %, the VISA process and statements have been audited in detail on two other occasions and therefore were not considered a high risk for this audit. Criteria: VISA: • Authorized by supervisor • Business reason provided for expenses • No personal expenses • Alcohol is not permitted for meals where only City staff attended • Names of attendees listed for all meals • Original receipts attached 2 -5 Cheques: • Authorized by supervisor • Business reason provided for expenses • No personal expenses • Alcohol is not permitted for meals where only City staff attended • Names of attendees listed for all meals • Original receipts attached • Conference form attached for all training, conferences or seminars • Conference form authorized by director or DCAO Mileage and Parking: • Authorized by supervisor • Location and business reason noted for each trip Findings: 64% or 25 of the 39 employees had no issues with the expenses claimed. There were no issues with any of the cheques issued. The following minor issues were found with the VISA and Parking and Mileage claims: Mileage and Parking Some claims were submitted more than 6 months past the date of travel. When claims are not submitted on a timely basis it becomes more difficult for management to remember what their staff was doing and whether the mileage claims are legitimate. Having said that, there is currently no policy to indicate when claims must be submitted. Therefore, it is recommended that a quarterly time frame for submitting claims be added to the policy for mileage and parking claims. For mileage claimed when attending a conference it is recommended that staff be reminded periodically to ensure that the conference form is filled out even if only claiming mileage. This ensures the costs are captured with the rest of the conference expenses. On the forms where the location was not noted, management was questioned on how they can verify the mileage claimed. By -law enforcement and Risk Management have their trips logged in AMANDA and the claims database respectively. They also rely on what the average or normal total claim amount is as a guide. Engineering has no supplementary system and simply relies on the claims looking reasonable. It is recommended that management be reminded periodically that they should be able to verify the mileage as being correct. What method they use to do that is left to their discretion. Handwritten forms should not be accepted. Employees without computer access should be allowed to either use a computer or submit their expenses to an administrative staff for input. The form calculates the correct reimbursement using current rates and applies parking as required. VISA The errors found on the VISA statements were minimal and did not represent fraudulent activity but rather a lack of awareness of the proper procedure. 2 -6 It is recommended that staff be reminded periodically to ensure that the conference form is filled out even if all expenses are prepaid on the VISA card with no claims for per diems or other expenses. This ensures the costs are captured with the rest of the conference expenses. It is recommended that staff be reminded periodically to ensure taxable benefit forms are filled out for all cash or near -cash gifts or recognition. Management should also be reminded to look out for this when approving expenses. Conference Expenses A 5% sample (or 8 of 148) of the list of employees submitting conference expenses was reviewed. The sample was reviewed to ensure valid receipts were attached to the conference forms, per diems were claimed appropriately, and the form was approved by the director or DCAO. All forms reviewed had the required elements. There was evidence on many of them that Accounting had thoroughly checked the expenses such as googling the mileage claimed, questioning staff on per diems and other expenses. It is clear that this process is highly scrutinized and the risk of fraudulent expenses or expenses that are not within policy being paid is very low due to the thoroughness of the staff member responsible for this task. Council Expenses All 2014 and January to March 2015 Council employee expenses were reviewed including petty cash, VISA, cheques, mileage and parking. Overall the expenses claimed by Council were very low and no issues were found. Cheques were issued for office supplies / home office, event tickets and conferences. Councilors do not have their own corporate credit cards and therefore their administrative staff purchase on their behalf or they use their personal cards. The administrative staff uses their corporate cards mostly for event tickets for members of Council. There is also limited use for conference registrations and expenses. There is very limited use of petty cash. It is used mostly for smaller dollar event tickets for Council or for refreshments for meetings or events. Six of the eleven council members claim mileage, and none claim parking as they do not pay for parking. There was only one instance of mileage being claimed for a 1 -day conference with no accompanying conference form; and one instance of the mileage form not being submitted on a timely basis (i.e. submitted annually). Conclusion This review included documenting and thoroughly reviewing controls around employee expenses. In general the controls are satisfactory. The controls coupled with the diligence of Accounting staff who are auditing expenses before paying them will limit the ability for fraudulent activity. The compliance testing performed during this audit attests to this fact. The auditor has no concerns with these processes. 2 -7 ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN: Work falls within the Efficient and Effective Government plan foundation area of the Strategic Plan. The goal of Internal Audit work and service reviews is to protect the City's interests and assets through • ensuring compliance with policy, procedures and legislation • ensuring adequate controls are in place to protect our assets • ensuring our operations are as efficient and effective as possible This helps support the financial goal of long term financial stability and fiscal accountability to our taxpayers. FINANCIAL IMPLICATIONS: There are no financial implications related to this report. COMMUNITY ENGAGEMENT: Members of the community have been informed of the results of this audit status report through the posting of this report on the internet on June 24, 2015. ACKNOWLEDGED BY: Dan Chapman, Deputy CAO, Finance and Corporate Services 2 -8 r"N1,06C Jr aPPPgd- I, (D `J 0 (D U) Lo -4--a C) CN E E 0 C- =3 H N N,,0C m Jr V a) E O 2-0 Cn C� •U CU C: C C= a) E � Q � 4) L O �= CU � L C- CU CU Q � cn N N ry O 7" l N N,,0C lie 1, 7" V .o C� m M O cn Q � � O � cn N r"N1,06C Jr in ca =3 U) aPPPgd- I.- (D AC -a C- N N 74 N L � C) LO U H N 74 N N,,0C J Jr C6 O U s= � ca U I E U s= O O � U U I � UJ � Ca a) cu O O Lf O w U U U O 00 c� s= O .N s= C6 I W �-n M rl i N r"N1,06C Jr (n (D (n X W 0 Q E rm- le wl N,,0C m , Jr In 7" l 1 N C� � � O � � N � O O U .V C). Q V E to CU Jc: •� 0 M 0 '— 1 1 O O m O -0 to C: O .— m � > O O O L C: 05; 05; M> In 7" l 1 N N,,0C m , Jr Cn C� O Cn L. C= C: O O C/) a) C= C/) M C/) C/) O O C: C/) .- C/) C/) O � O a) E C: CY) O O Cn J cm C= cn O c cn a) CU cn Cu Jc: C: L O � � 0. 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