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AUDIT OF THE LOS ANGELES WORLD AIRPORT’S FINANCIAL OPERATIONS
Submitted to the
City of Los Angeles Office of the Controller
Vasquez & Company LLP
JUNE 12, 2013
TABLE OF CONTENTS
EXECUTIVE SUMMARY ..................................................................................................... 1 CONTROLLER’S ACCOUNTABILITY PLAN .................................................................. 6 BACKGROUND, OBJECTIVES, SCOPE AND METHODOLOGY ................................ 12 AUDIT FINDINGS AND RECOMMENDATIONS ............................................................. 15 SECTION I: ORGANIZATIONAL AND GENERAL MATTERS .................................. 15 SECTION II: FINANCIAL PLANNING AND RISK MANAGEMENT .......................... 23 SECTION III: BUDGET DEVELOPMENT AND CONTROL ........................................ 24 SECTION IV: REVENUE MANAGEMENT AND DEVELOPMENT ............................ 26 SECTION V: CONTRACT MONITORING AND PROCUREMENT ............................ 28 SECTION VI: CAPITAL ASSET MANAGEMENT AND INVENTORY CONTROL .. 29 SECTION VII: DEBT MANAGEMENT AND BOND FINANCING ............................... 32 SECTION VIII: REGULATORY COMPLIANCE AND FINANCIAL REPORTING .. 34 SECTION IX: INFORMATION TECHNOLOGY ............................................................. 35 SECTION X: OTHER MATTERS ....................................................................................... 38
The Los Angeles World Airports (LAWA or the Department) is a proprietary, self-supporting City of Los Angeles department that owns and operates the Airport System, consisting of three FAA-certified airports: (Los Angeles International, LA/Ontario International, and Van Nuys) and the noncertified LA/Palmdale Regional Airport. The firm of Vasquez & Company LLP (Vasquez) was engaged by the Los Angeles City Controller’s Office to conduct a performance audit to assess the effectiveness and efficiency of LAWA’s financial operations, and identify opportunities for improvement. The audit focused on internal controls, processes, personnel and systems relevant to its core financial activities. Background As a department of the City, LAWA is governed by a board (the Board of Airport Commissioners, or BOAC), appointed by the City’s Mayor. The LAWA organization consists of operating departments reporting to a Chief Operating Officer or Chief Executive Officer. Key functions provided by these departments are operations, facilities management, security, development including capital expansion, and administration including finance, budget, information technology and internal audit. LAWA is responsible for the physical elements of the airports it operates, which include runways, fueling facilities, passenger terminals and ground transportation facilities. From these capital assets LAWA generates revenues in the form of aircraft landing fees, lease fees, concession fees from tenants and parking fees. As a self-supporting department with no tax base, these revenues must be sufficient to fund LAWA’s operating, maintenance and capital expenses, debt service and required reserves. Annual revenues and capital grants for LAWA were approximately $1.1 billion in fiscal year 2012, while expenses were $809 million, resulting in an increase in net assets of approximately $279 million. The Los Angeles International Airport (LAX) is the predominant airport in the LAWA system, and is the sixth busiest airport in the world. Although the economic recovery is progressing slowly, LAX passenger traffic increased by 3.8% in fiscal year 2012 as compared to fiscal year 2011. LAWA is in the midst of a multi-billion-dollar capital improvement program aimed at modernizing LAX, centered around a new international terminal, replacement of the central utility plant, terminal renovation, improved baggage handling and screening facilities, and new or upgraded moving walkways, escalators and elevators. Objectives, Scope and Methodology The primary objective of the audit was to assess the effectiveness and efficiency of LAWA’s financial operations, and identify opportunities for improvement. Our audit was performed in accordance with Generally Accepted Government Auditing Standards (GAGAS) and covered conditions, activities and processes as of June 30, 2011, with consideration given to current
conditions when considered relevant to the conclusions reached. The specific audit objectives included identifying LAWA’s significant/core financial activities and assessing the Department’s fiscal organizational structure, policies and procedures over these core financial activities, skills of personnel, financial information systems, fiscal processes, budgeting and management controls, and overall system of internal controls. In order to develop an understanding of the control environment, organizational structure and processes related to the identified fiscal areas, we conducted numerous interviews, observed business processes, reviewed finance-related documents and performed analyses of accounts, reports and data. Summary of Audit Results Overall we found that LAWA’s policies and procedures pertaining to core financial activities are comparable to those found in a governmental enterprise environment, and are generally up-todate and communicated to appropriate personnel. The organization structure provides for key functions and reasonable reporting relationships. Personnel interviewed possessed qualifications commensurate with their roles and demonstrated an adequate understanding of their responsibilities. Information technology is in a transitional state as new system implementations are underway, planned or recently completed. The internal control systems with respect to fiscal processes, budgeting and management were found to be designed appropriately to safeguard assets and promote adherence to BOAC and management approved policies and procedures. Notwithstanding the above general observations, we found that the Department’s executive management lacks sufficient support and relies extensively on outside consultants in carrying out key modernization management functions. Further, there are opportunities to strengthen controls and processes to maximize revenues, ensure LAWA assets are effectively managed, strengthen security over the use of information technology, ensure accuracy and completeness of financial reporting, and obtain more meaningful management information from its accounting systems. The following summarizes the audit’s key findings: Organizational and General Matters 1. LAWA lacks the position of Chief Financial Officer which generally enhances the coordination of financial planning, budgeting and monitoring of actual results in relation to financial plans while also providing a focal point of responsibility for the development, implementation and continual review of internal accounting and administrative controls. 2. The key positions of CEO, Chief Operating Officer (COO), Director of Airport Development, and Director of Capital Development and Budget are filled by qualified, experienced executive-level personnel. However, restrictions of the City’s Civil Service Classification Plan as well as inadequate training programs have limited the availability of experienced supporting staff capable of stepping into their positions in the event of an
unexpected vacancy. Succession planning to ensure the orderly transition of responsibilities at key executive levels has not occurred. 3. LAWA does not have a robust and independent internal audit function. The Internal Audit Division reports to the Deputy Executive Director of Administration, who also manages many of the departments subject to audit. Also, the Internal Audit Division lacks sufficient personnel, further decreasing its ability to perform, coordinate, review and follow up on financial, compliance and operations audits. 4. Communication of BOAC and management’s goals, strategies and plans, both short-term and longer-term, is not adequate to ensure awareness by Department staff. As a result, opportunities to gain insights and knowledge from those serving LAWA’s constituents may be lost. Financial Planning and Risk Management 5. LAWA does not have a complete Enterprise Risk Management Program for the purposes of proactively identifying risks and developing mechanisms to effectively manage or eliminate risks to achieve LAWAs operational objectives. Budget Development and Control 6. The LAWA budgeting process does not include consideration of levels of performance in relation to budgeted costs. The LAWA cost accounting system does not provide cost information by activity or unit as needed to effectively implement performance-based budgeting. Accordingly, because the accounting system does not measure and report performance measures or the costs of achieving any specific level of performance, data is not available to implement a comprehensive performance-based budget. Revenue Management and Development 7. Self-reported revenues from airlines and concessionaries are validated by LAWA auditors on a test basis, yet identified underpayments do not result in expanded testwork and further investigation in accordance with LAWA’s policies and documented procedures. 8. Interest and penalties resulting from late payments pursuant to contractual agreements (such as airlines and tenants) are not consistently charged or computed by the Revenue Asset Management System as provided for by contract terms and conditions. LAWA has successfully managed to achieve a high collection rate of receivables; however, a formal process for the calculation, recording and, when appropriate, waiver of late fees is important to ensure transparency, consistency and equitable treatment of all contractors. Contract Monitoring and Procurement 9. Management of compliance with procurement contracts is weakened by process deficiencies and the lack of initial and continual involvement of Designated Contract Administrators to adequately oversee the procurement processes for cost effectiveness, efficiency and compliance with LAWA policies and relevant laws and regulations.
Capital Asset Management and Inventory Control 10. There is no regularly scheduled physical count of capital assets, including furniture and equipment, fleet inventory, and supplies inventory. The weapons inventory used by LAWA police has not been subjected to an externally validated physical count by internal or external auditors, thus limiting the assurance that these items are properly safeguarded, reported and available to LAWA security personnel. 11. Reports of construction expenditures produced by PROLOG, LAWA’s construction management system, do not consistently agree with construction project expenditures as reported in the general ledger. The PROLOG-generated construction expenditure reports are provided to Executive Management for their use in evaluating the progress and costs of the capital improvement program. Debt Management and Bond Financing 12. LAWA’s debt management policy is incomplete and has not been updated for at least six years to address matters such as the criteria for selecting debt instruments, establishing a targeted debt service coverage ratio, and identifying personnel responsible for debt management. Regulatory Compliance and Financial Reporting 13. LAWA provides limited financial reporting to the governing body, and reports to management omit budgetary compliance information and statements of cash flows. Information Technology 14. LAWA’s IT systems could benefit from more frequent data backup, disaster recovery plan testing, enhanced procedures for change management, expanded and updated documentation, and improved methodologies for software selection.
Other Matters Independent Reconciliation of LAWA Costs to Rates and Charges 15. The fees and charges which generate a large majority of LAWA revenues are based on calculations which are not independently validated by the LAWA Deputy Executive Director, Comptroller who maintains LAWA’s official accounting records. Recording Encumbrances 16. There is no centralized area or individual assigned responsibility for monitoring LAWA divisions to ensure that commitments are properly encumbered.
Review of Report A draft of this report was provided to LAWA on February 12, 2013. We discussed the draft report with LAWA management at an exit meeting held on February 27, 2013, and we considered comments and additional information provided as we finalized this report. We would like to thank LAWA management and staff for their cooperation and assistance during the audit.
CONTROLLER’S ACCOUNTABILITY PLAN
Mayor Council Department Action Action Action Required Required Required
Organization and General Matters 1. LAWA’s Executive Management should establish the position of Chief Financial Officer with a reporting relationship directly to the Chief Executive Officer (CEO). The skills associated with a CFO for a large complex organization such as LAWA should include experience with organizational leadership, business risk management, performance management, strategic planning, debt financing, integration of current technology into finance-related functions, and the ability to understand and explain complex financial issues, strategies, and opportunities in addition to comprehensive interim and annual historical reports of financial position and results of operations. 2. LAWA should identify critical positions such as the Executive Director, Chief Operating Officer, Director of Airport Development and Director of Capital Development and Budget, and supplement their positions with additional qualified support personnel. LAWA, in conjunction with appropriate City officials, should evaluate the position classifications in relation to the Civil Service System and develop new or revised position classifications as appropriate. These new position classifications will be beneficial in selecting personnel who can ultimately be trained and mentored to assume the role of the C-level executives if needed. In addition, LAWA should require all divisions/departments to implement staff cross training, document key processes, and support all significant decisions by appropriate documentation. 3. LAWA should provide the Internal Audit Division a more independent organizational placement,
equip the function with more senior leadership, and provide greater access to information and a more prominent role in monitoring LAWA’s overall compliance with approved policies, legal requirements, management directives and the internal control framework. While staffing reductions may be balanced by allowing the Division to outsource audits, it is essential that Internal Audit employ and retain personnel who are competent to perform a meaningful risk assessment, monitor the status of prior audit deficiencies and recommendations, direct and evaluate the work of external contracted auditors, and perform short-term investigations when the need arises. 4. LAWA should endeavor to consolidate, codify, communicate and publish on its intranet all significant policies and procedures. These should be updated routinely as new additions and revisions occur. Management should also develop methods to disseminate organizational goals, strategies and plans throughout the organization at a level of detail appropriate for the subject matter. Methods may include a formal process of communicating and linking the organization’s goals, objectives and strategies to those of each division and each employee within the division, as well as expanded use of the LAWA intranet, meetings, and training sessions.
Financial Planning and Risk Management 5. To enhance the risk identification and management processes, and consistent with best practices, LAWA should work to develop and implement an overall organization-wide ERM. The ERM should provide a structured and continuous process for identifying, assessing, responding to and reporting on opportunities and threats that affect the achievement of LAWA’s objectives. The ERM should also incorporate an integrated approach to information technology risk management that provides for the identification, measurement,
monitoring and controlling of technology-related risks throughout LAWA, and that will be treated as an essential management function of the organization.
Budget Development and Control 6. LAWA should prepare for the implementation of performance budgeting by acquiring or developing the tools to identify, analyze and report the costs of key activities. LAWA should coordinate the performance based budgeting process with the establishment of goals and objectives for divisions and the organization.
Revenue Management and Development 7. LAWA should consider the following actions: a) Consider incorporating the responsibility for audits of self-reported revenues into the Internal Audit Division. b) Expand documentation to include explanations as to why deviations from LAWA policy appeared reasonable to the auditor. A “coverage” target should be established, so that management can gain a level of comfort that a reasonable range (5% or 10%) of total self-reported revenues is being reviewed. Any decisions to negotiate audit results or forego expanded tests of apparent system deficiencies should require the documented review of top management. c) Consider engaging an external consultant specializing in this area to conduct one or more audits as a co-sourcing opportunity, in order to evaluate their approach and methodology and, if deemed beneficial, incorporate lessons learned into future LAWA audits. LAWA can then utilize best practices to develop a revised program for LAWA’s revenue compliance audit activities. Development of a coverage minimum should be established as a goal for the department.
8. LAWA should take the following actions: a) Revise policies and procedures to incorporate a consistent approach to calculating penalties and interest pursuant to contractual agreements. In addition, a consistent policy should be communicated and enforced regarding the waiver of interest and penalties. b) Ensure that any write offs or “forgiveness of amounts” are reviewed and approved by someone independent of the contract monitoring and negotiation function. Further, LAWA should perform consistent calculations of these penalties and interest amounts.
Contract Monitoring and Procurement 9. LAWA management should further develop, clarify, communicate and integrate into the initial project phases the roles of DCAs and Project/Contract Managers in order to optimize divisional administrative expertise and ensure adherence to LAWA Procurement Policies and Procedures. Also, DCA training on LAWA Procurement Policies and Procedures should be extended to any and all project cost managers.
Capital Asset Management and Inventory Control 10. LAWA should ensure that inventory counts are conducted periodically at the division level and ultimately every two years as an organization. A department (Internal Audit, Financial Accounting or Procurement) should be assigned the responsibility of collecting the information regarding interim asset counts, reconciling the counts to the general ledger and verifying the count results. A department (Internal Audit, Financial Accounting or Procurement) should be assigned the responsibility of collecting the information regarding interim asset counts, reconciling the counts to the general ledger and verifying the count results. 11. LAWA should investigate the feasibility of
integrating the PROLOG and SAP systems. If this is not realistic, the LAWA Financial Services Division should obtain copies of the PROLOG reports and related reconciliations on a timely basis and ensure that costs and liabilities are recorded in the SAP general ledger system when incurred. Further, management should inform users of the PROLOG reports of the potential misstatement of costs in order to more accurately evaluate project costs. Debt Management and Bond Financing 12. LAWA should create a process and timeline for the expansion of its debt management policy. The Finance and Budget Division should also review its use of external consultants and ensure that their methodologies and conclusions are appropriately monitored, understood and validated by qualified internal personnel.
Regulatory Compliance and Financial Reporting 13. LAWA finance personnel should provide complete financial reporting packages to management, the BOAC and the Audit Committee on a monthly basis. These should include information with respect to sources and uses of cash and budgetary comparisons to demonstrate compliance with approved budgets, and should be published on the LAWA web site as a demonstration of transparency and full disclosure in financial reporting.
Information Technology 14. IT Security management at LAWA should address the noted opportunities for improvement in the areas of: a. operational plans for IT security systems b. disaster recovery testing c. daily offsite storage of tape data backup media. d. change management framework e. version management controls
f. close out and documentation of completed changes within the Change Management System g. documentation of data flow diagrams outlining how SAP interfaces with other applications and databases. h. use of a formal software selection methodology i. implementation of a Project Quality Management System.
Other Matters 15. LAWA management should assign the Deputy Executive Director, Comptroller responsibility for understanding the methodology utilized to identify costs and re-calculating the user rates and charges assessed to recover them. 16. LAWA management should assign to the Deputy Executive Director, Comptroller responsibility for ensuring that all expenditures are analyzed for indications of recurring payments which may be due to financial commitments. Evidence of commitments in the form of leases, contracts and purchase orders should be reviewed and agreed to the related encumbrance recorded in the accounting records.
Background, Objectives, Scope and Methodology Background As a self-supporting proprietary City department, LAWA plans, constructs and maintains its own buildings, and controls its own funds in accordance with the City Charter. LAWA has no tax base and therefore must generate sufficient revenues to fund its operating and capital expenses, debt service and required reserves. The Mayor of the City of Los Angeles appoints, subject to City Council approval, the sevenmember Board of Airport Commissioners (BOAC). The BOAC formulates airport policy. The City Council and BOAC approve LAWA’s annual budget. An Executive Director, appointed by the Board and confirmed by the Mayor and City Council, is responsible for implementing Board policies and overseeing LAWA’s day-to-day operations. LAWA is subject to the provisions of the Los Angeles City Charter and is subject to civil service employee rules and regulations. Because LAWA operates commercial service airports, it is also subject to the Federal Aviation Administration's (FAA) regulations, guidelines and directives in administering its three airports. All of LAWA’s operating departments report to the Chief Operating Officer, other than the Airport Development Group which reports directly to the Chief Executive Officer. The LAWA operating departments are listed below. Airport Development Group Administration Commercial Development Operations and Emergency Management Law Enforcement and Homeland Security LAWA Facilities Management Group Finance and Budget Information Management and Technology Group
An overview of the LAWA organization is provided on the following chart.
Board of Airport Commissioners
Airports Development Group
Chief Operating Officer
Finance and Budget
Information Management & Technology Group
Commercial Development Group
Operations & Emergency Management
Law Enforcement & Protection Services Group
Facilities Management Group
The LAWA Comprehensive Annual Financial Report (CAFR) reported total assets at June 30, 2012 in excess of $8.6 billion, of which $5.3 billion represented capital assets. LAWA reported $480 million of unrestricted net assets, or 59% of 2012 expenses. Annual revenues and capital grants for LAWA were approximately $1.1 billion in fiscal year 2012, while expenses were $809 million, resulting in an increase in net assets of approximately $279 million. A summary of fiscal year operating results in 2012, 2011 and 2010 follows: Summary of Operating Results (Amount in Thousands) FY 2012 Total revenue and capital grants Total expenses Increase in net assets
$ $ 1,088,862 $ 809,370 279,492 $
1,041,618 $ 834,071 207,547 $
1,048,977 765,513 283,464
Objectives, Scope and Methodology The objective of this audit was to assess the effectiveness and efficiency of LAWA’s financial operations, and identify opportunities for improvement. Specific objectives were to identify LAWA’s significant/core financial activities and assess the following areas with respect to the impact on the successful functioning of these financial activities. The areas assessed were: the Department’s fiscal organizational structure, policies and procedures over core financial activities, skills of personnel, financial information systems, fiscal processes, budgeting and management controls, and systems of internal controls.
Our audit was performed in accordance with Generally Accepted Government Auditing Standards (GAGAS). Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The scope of our audit covered conditions, activities and processes as of June 30, 2011, with consideration given to current conditions when considered relevant to the conclusions reached. Fieldwork was conducted between May 2012 and September 2012, although additional analysis was conducted through October 2012. In conducting our audit, we: interviewed management and staff of selected departments; reviewed relevant policies and procedures to obtain an understanding of key processes; reviewed reports issued by external independent auditors, internal auditors and concessionaire auditors; reviewed reports, official statements and covenants regarding LAWA’s outstanding debt; reviewed reports and selected records regarding LAWA’s construction program; and analyzed selected accounting records during the audit period and then selected samples of records for further review. The project was conducted in two phases. Phase I constituted the data gathering/planning phase during which preliminary issues were identified for further investigation during Phase II. Phase II efforts focused on detailed substantive testing as required to research issues identified during Phase I. The Phase I efforts resulted in the identification of seven significant/core fiscal cycles which were assessed in accordance with the criteria previously described. LAWA’s significant/core financial activities selected for review were: Financial Planning and Risk management
Budget Development and Control Revenue Management and Development Contract Monitoring and Procurement Capital Asset Management and Inventory Controls Long Term Debt Management and Bond Financing Regulatory Compliance and Financial Reporting
In order to develop an understanding of the control environment, organization structure and processes related to the identified fiscal cycles, we conducted numerous interviews, observed business processes, reviewed finance-related documents and performed analyses of accounts, reports and data. In Phase II we performed further inspection, examination and analysis in those areas identified as meriting further review. The remainder of this report details our findings, comments and recommendations.
Audit Findings and Recommendations SECTION I - ORGANIZATIONAL AND GENERAL MATTERS ______________________________________________________________________________ As LAWA has intensified its efforts on updating and renovating the airport facilities, modernizing financing alternatives, and implementing state-of-the-art technology, the need for a senior-level finance official with a broad knowledge base and skill set has become apparent, but has not yet transitioned into the creation of a Chief Financial Officer (CFO) position. Other members of LAWA’s executive management team have been recruited or promoted from within the organization, as necessary to provide the top talent needed to lead the Department during these demanding times. However, there has been little succession planning for these positions and the limited depth of support suggests a lack of available personnel to step into vacant positions at the chief executive management level. Other opportunities to strengthen the organization include enhancing the independence of the internal audit function and initiating efforts to increase communication throughout the Department. LAWA Lacks the Position of Chief Financial Officer Finding #1: The LAWA organization does not include the position of CFO which enhances the coordination of financial planning, budgeting and monitoring of actual results in relation to financial plans, while also providing a focal point of responsibility for the development, implementation and continual review of internal accounting and administrative controls.
A CFO provides the development and communication of entity-wide financial strategy, long and short-term financial planning and budgeting, and the identification and consideration of financial alternatives, all of which should be based on an analysis of historical financial information in consideration of the organization’s goals and objectives. The CFO should act as an advisor to the Chief Executive Officer (CEO), helping to shape and, when appropriate, challenge the Department’s strategy. Particularly at LAWA, with its ongoing and planned renovations and improvements, sensitivity to community and environmental concerns, evolving use of technology, and intense regulatory environment, a CFO’s skills in interpreting, analyzing and presenting financial information to facilitate problem identification, understanding of options and available opportunities are crucial to the organization. At LAWA, the responsibilities normally associated with a CFO are divided into two positions: 1) a Deputy Executive Director, Comptroller (accounting and financial reporting) and 2) the Director of Capital Development and Budget (financial planning, operational and capital budgeting, revenue management, debt management, and capital financing). The coordination of efforts between these functions is hindered as they primarily focus on their respective areas (historical results versus future planning) without the central vision and focus on the overall financial condition and strategies of LAWA as a complete organization. Further, while financial presentations are made to the governing body, particularly with respect to the financial implications of on-going construction and renovation programs (based on the work of the Director of Capital Development and Budget), limited historical financial reporting of actual financial results (based on the work of the Deputy Executive Director, Comptroller) is provided to the governing body, and such reporting omits statements of financial position and budgetary compliance information. Our review determined that many of the typical CFO responsibilities lie primarily with the Director of Capital Development and Budget. These responsibilities include operational and capital budgeting, financing, reporting the Board of Airport Commissioners (BOAC), reporting to Executive Management, representing LAWA at industry airport organizations, cash flow analysis, managing the negotiations with airlines in relation to rates and charges and managing many of the consultants involved in the financing and rate setting process. While this position is acting as a de-facto CFO in many aspects, it lacks the oversight of the historical financial information which is critical to accurately projecting future financial results. It also is not placed at a sufficiently senior level within the LAWA framework to ensure appropriate oversight, communication and authority on finance-related matters throughout the organization. This position also lacks the depth of supporting staff resources to ensure continued financial oversight if the Director of Capital Development and Budget were to leave the Department. In a public sector environment characterized by continuing change, competition and increasing demands to deliver quality services within a framework of responsible financial and resource management, the role of the CFO is critical to achieving success. The CFO is responsible for effectively communicating on financial matters, providing high-level leadership, establishing an appropriate financial management framework, instituting and maintaining strong financial management systems and processes, and understanding and ensuring compliance with relevant federal, state and local finance-related laws and regulations. The CFO’s functions should also include contributing to strategic initiatives, providing advice to the governing body and to the entire organization on finance-related matters, implementing and enforcing an effective internal
control framework and establishing reporting relationships with those at the division/departmental level who have responsibility for the procurement and use of LAWA resources and accounting-related matters. Further, a CFO should occupy a senior position within the organization, which provides the authority and allows the vision to focus on organizationwide improvements and facilitate change and advancement. Without the position of a chief financial officer knowledgeable of LAWA’s financial risks, strategies, plans, budget assumptions, financing options, management and reporting functions, the Department may not realize the benefits of top-level financial assessment, guidance, communication and accountability as would be expected from a CFO. LAWA not only risks incomplete information and analyses, but also risks ineffective communication of important financial considerations to the BOAC and executive management, and a lack of potential coordination between independent divisions/departments with respect to finance and accountingrelated matters. Recommendation #1: LAWA’s Executive Management should establish the position of Chief Financial Officer with a reporting relationship directly to the Chief Executive Officer (CEO). The skills associated with a CFO for a large complex organization such as LAWA should include experience with organizational leadership, business risk management, performance management, strategic planning, debt financing, integration of current technology into finance-related functions, and the ability to understand and explain complex financial issues, strategies, and opportunities in addition to comprehensive interim and annual historical reports of financial position and results of operations. ______________________________________________________________________________ Lack of Organizational Depth and Succession Planning Finding #2: For the key positions of CEO, Chief Operating Officer (COO), Director of Airport Development, and Director of Capital Development and Budget, LAWA does not have back-up personnel capable of stepping into their positions. LAWA lacks a succession plan in the event of an unexpected vacancy. Complex and evolving organizations require stability and consistency during times of transition at the leadership level. Tools which ensure steadiness and minimize disruption of operations include succession planning, personnel who are trained in their responsibilities and cross-trained in those of other positions, effective sustainable processes and comprehensive documented policies and procedures. LAWA, as a department of the City of Los Angeles, is subject to the civil service employee rules and regulations. These civil service regulations influence LAWA’s ability to develop and maintain a succession plan. Employee promotions, retention, incentives and rewards are subject to stipulated rules which may conflict with the identification, mentoring, training, retention and ultimately promotion of the most qualified individuals to assume executive-level management positions. These restrictions hinder LAWA’s ability to manage the risks associated with concentrating all key functions in a limited number of executive-level positions.
The top leadership positions at LAWA require senior-level personnel with specialized industry expertise. Their primary duties and responsibilities are summarized below. Chief Executive Officer – The position of CEO is responsible for developing and implementing high-level strategies, making major business decisions, managing the overall operations and resources, representing the organization to the public and regulatory bodies, and acting as the main point of communication between the governing body (BOAC) and LAWA operations. At LAWA the CEO is the Executive Director. Chief Operating Officer – The COO is responsible for operations management, meaning the development, design, operation, and improvement of the systems that LAWA utilizes to serve its constituency. The COO is responsible for ensuring that operations are efficient and effective and that the proper management of resources and provision of services to customers occurs. This position also ensures that resources are utilized effectively and efficiently, facilitates communication of LAWA’s goals and objectives to lower-level operational staff, is a key participant in organizational planning, maintains and monitors staffing levels and productivity, and motivates staff to drive maximum performance. The Director of Airport Development – This position is responsible for the multi-billion dollar modernization of Los Angeles International Airport (LAX) and oversees all major construction projects at LA/Ontario International Airport and Van Nuys Airport. The Director of Capital Development and Budget – As previously discussed, this position directs, guides and oversees the functions of planning, operations, capital budgeting, operational budget development and monitoring, determination of user charge rates and fees, debt management and the allocation of direct and indirect costs. The key positions described above are filled by qualified, experienced personnel who joined LAWA with or subsequent to the appointment of the CEO in 2005. Considering the dynamic nature of LAWA’s operational and modernization activities, the organization requires an accomplished executive team that is capable of developing and executing strategies to meet the challenges attendant with rapid growth and modernization. However, there is limited mid-level staffing support for each of these positions and no apparent succession planning in the event the positions become vacant. Restrictions of the City’s Civil Service Classification Plan as well as inadequate training programs have limited the availability of experienced supporting staff capable of stepping into the executive positions in the event of an unexpected vacancy. While LAWA has five Deputy Executive Directors (of Administration, Commercial Development, Law Enforcement & Homeland Security, Facilities Management and Operations and Emergency Management), the requirements of these positions do not incorporate the organizational strategy, planning, financing, construction management and operations components that are key aspects of the roles of the CEO, COO and Director of Airport Development and Director of Capital Development and Budget. The level of staffing, while appropriate for maintaining current operations, does not include personnel who have been trained and mentored to step into these very demanding executive-level positions.
It is also relevant that the CEO is appointed by the Mayor. The possibility of turnover at this key position could lead to significant turnover at other executive management positions, and accordingly is likely a negative factor in LAWA’s ability to recruit top talent for its executive management ranks. The importance of the CEO position is self-evident. With respect to the COO, recent studies note that large and complex organizations have found it increasingly difficult for one person alone to have total oversight of the operations of an entire organization. Therefore, additional executive management positions frequently supplement or replace the COO position, and provide an additional source for succession planning and knowledge sharing. One of these executive management positions is typically the Chief Financial Officer which, as noted previously, LAWA does not have. Accordingly, while it could be assumed that the COO can serve as the replacement in the absence of a CEO, at LAWA the complete lack of support for the COO position negates this as a viable alternative. Limited depth of personnel and lack of succession planning can be mitigated by effective sustainable processes and comprehensive documented policies and procedures. However, there has been a relatively short tenure of the occupants of these key management positions, and the high level of activity (new construction, managing during a recession, upgrading of systems, negotiation and renewal of critical airline and tenant contracts) has demanded management’s time to the detriment of creating, communicating and documenting sustainable processes. A central codified set of policies and procedures does not exist at LAWA. LAWA has retained and recruited highly qualified senior-level personnel. However, restrictive civil service regulations, limitations on the number of positions exempt from these regulations, and the uncertainty associated with a structure in which the entire BOAC and Executive Management could be replaced pursuant to a mayoral election heightens the risk of losing key organizational talent. Recommendation #2: LAWA should identify critical positions such as the Executive Director, Chief Operating Officer, Director of Airport Development and Director of Capital Development and Budget, and supplement their positions with additional qualified support personnel. LAWA, in conjunction with appropriate City officials, should evaluate the position classifications in relation to the Civil Service System and develop new or revised position classifications as appropriate. These new position classifications will be beneficial in selecting personnel who can ultimately be trained and mentored to assume the role of the C-level executives if needed. In addition, LAWA should require all divisions/departments to implement staff cross training, document key processes, and support all significant decisions by appropriate documentation. ______________________________________________________________________________ Independence of the Internal Audit Function Finding #3: The Internal Audit Division at LAWA lacks the framework to be an effective Internal Audit Organization. As one of the largest airports in the world, with more than $1 billion in revenues, LAWA merits a robust internal audit function lead by a senior executive-level director. The position of Director of Internal Audit should report to the head of the BOAC’s Audit Committee and have
significant interaction with the Chairman of the BOAC, the CEO, members of the Audit Committee, and other board members. The Director of Internal Audit should have a full grasp of operations, strategies and constraints in order to assess LAWA’s financial and compliance risks as necessary to plan and execute financial and operational audits. Qualifications for such a top level position include advanced relevant education, significant experience in the profession of internal auditing and, ideally, in the industry, and the ability to work successfully in partnerships with various internal and external stakeholders. At LAWA the head of the Internal Audit Division is a manager classification. The position description states that the Internal Audit Manager “reports to the Chief Financial Officer or other senior manager” and “receives assignments stated in terms of broad objectives and work is reviewed in terms of results obtained.” Qualifications for the position are a bachelor’s degree in business administration, accounting or other related field; CPA or Certified Internal Auditor credential; and 3 years experience managing financial and performance auditing activities in a governmental audit organization or public accounting firm. These qualifications do not ensure the experience, credibility, leadership and industry knowledge that are merited for this position at a billion dollar enterprise. Further, the standards for the professional practice of internal auditing require that the organizational status of the internal auditing department be sufficient to permit the accomplishment of its audit responsibilities. While a dual-reporting relationship is possible (to the Audit Committee and to Senior Management), internal auditors must be objective, and objectivity requires that internal auditors do not subordinate their judgment on audit matters to others. The Internal Audit Division was created in 2005 in response to a City Council Motion (Council File No. 04-2416), which stated that the newly-created internal audit unit should report directly to the BOAC “to provide a direct line of communication with the individuals responsible for oversight of the department”. The Motion also requested LAWA (and other City departments covered by the motion) to “strengthen their internal audit capabilities, including any additional staffing and resources that are necessary”. At LAWA the Internal Audit Manager presents the annual audit plan to the BOAC’s Audit and Ethics Committee. The Internal Audit Plan is the product of a risk assessment, which identifies divisions and functions to be audited based on certain risk factors. However, the risk assessment results can be modified by LAWA management prior to presentation to the BOAC’s Audit and Ethics Committee. Further, LAWA Executive Management reviews and may request modifications to Internal Audit reports prior to their presentation to the BOAC’s Audit and Ethics Committee. In addition, when matters from other LAWA personnel are brought to the attention of Internal Audit, the Division does not have the authority to commence an investigation regarding allegations without management approval. If management determines that the allegation is not material or significant, the investigation will not take place. These actions, while contrary to the principles of an independent internal audit function, may be due to the perception that the Internal Audit Manager does not have the operational understanding or perspective to evaluate the relevant risks and the optimal use of internal audit resources.
Internal Audit has also experienced staff reductions in recent years. Presently, Internal Audit has a staff of four auditors, and functions primarily to facilitate contracted audits or minor special projects. While staffing reductions may be balanced by allowing the Division to outsource audits, it is essential that Internal Audit employ and retain personnel who are competent to perform a meaningful risk assessment, monitor the status of prior audit deficiencies and recommendations, direct and evaluate the work of external contracted auditors, and perform short-term investigations when the need arises. A strong independent internal audit department can serve as a crucial resource for an organization, like LAWA, that is experiencing a significant amount of change. Limiting the independence of the Internal Audit division may redirect the audit focus from areas that are LAWA’s high risk areas. Recommendation #3: LAWA should provide the Internal Audit Division a more independent organizational placement, equip the function with more senior leadership, and provide greater access to information and a more prominent role in monitoring LAWA’s overall compliance with approved policies, legal requirements, management directives and the internal control framework. While staffing reductions may be balanced by allowing the Division to outsource audits, it is essential that Internal Audit employ and retain personnel who are competent to perform a meaningful risk assessment, monitor the status of prior audit deficiencies and recommendations, direct and evaluate the work of external contracted auditors, and perform short-term investigations when the need arises. ______________________________________________________________________________ Organizational Communication Finding #4: Communication of BOAC and management’s goals, strategies and plans, both short-term and longer-term, is not adequate to ensure awareness by Department staff. As a result, opportunities to gain insights and knowledge from those serving LAWA’s constituents may be lost. The BOAC has directed executive management of LAWA to initiate and implement an ambitious plan to modernize, improve and provide for previously deferred maintenance and upgrade of airport facilities. Plans include areas requiring urgent attention as well as longer term development goals. Although management has implemented various measures designed to foster communication of goals, objectives and strategies, such as meetings, open forums, newsletters and web site postings, communication of these initiatives to lower level employees has not been effective and those we interviewed were generally not aware of LAWA’s long-term plans and current initiatives. In addition, Executive Management appears to have overall goals and objectives, some of which are shared with division directors; however, it appears that many employees below that level are not involved or knowledgeable of future plans or changes. LAWA continues to function primarily in a reactive mode and therefore staff is working diligently to complete their daily tasks while remaining unaware of any impeding changes or goals.
There is currently no process for the establishment of individual performance goals which are linked to Division goals and ultimately to the overall LAWA goals. Such a system could facilitate the communication of goals and of strategies employed and planned to attain those goals. However, staff does not have the benefit of performance goals and measures which would improve top-down communication as well as facilitate effective performance of staff’s daily duties and responsibilities, and further the accomplishment of organizational goals and objectives. LAWA also does not have codified and comprehensive standard operating policies and procedures addressing finance, budget, accounting and financial reporting sections. The absence of centralized and current policies and procedures is of heightened importance in the current environment of change due to large-scale improvement and modernization. A changing organization leads to evolving policies and procedures. Communication of new policies and procedures is critical to managing the risk associated with organizational change. The lack of formal codified policies and procedures presents a risk that revised policies may not be implemented and conflicting policies may co-exist. LAWA is a large organization with numerous divisions and departments. Each division/department focuses on their primary tasks or roles. Some divisions have as few as three members, and communication between them is limited unless necessary for completion of daily tasks or projects. The small size of the executive management team reduces the time available for communication with staff throughout the organization. The existence of multiple divisions further complicates effective communication. And finally, the absence of individual performance goals and measures linked to the organization’s goals and performance measures as well as the lack of codified, comprehensive documented policies and procedures obstructs employees’ efforts to obtain current information in these areas. Communication throughout an organization the size of LAWA is challenging. However, in order to ensure that all members of a cohesive organization strive to further the entity’s mission and achieve its goals and objectives, and do so in a cost effective and efficient manner and in compliance with BOAC policies and management’s directives, all employees must have access to pertinent information on a timely basis. RECOMMENDATION #4: LAWA should endeavor to consolidate, codify, communicate and publish on its intranet all significant policies and procedures. These should be updated routinely as new additions and revisions occur. Management should also develop methods to disseminate organizational goals, strategies and plans throughout the organization at a level of detail appropriate for the subject matter. Methods may include a formal process of communicating and linking the organization’s goals, objectives and strategies to those of each division and each employee within the division, as well as expanded use of the LAWA intranet, meetings, and training sessions.
SECTION II - FINANCIAL PLANNING AND RISK MANAGEMENT LAWA has initiated an aggressive modernization and improvement program with attendant increases in staffing and contracting activities and upgrades to the technology environment. Significant change increases risk, and accordingly LAWA’s need for a formal Enterprise Risk Management (ERM) Process is heightened. ______________________________________________________________________________ Lack of Formal Enterprise Risk Management (ERM) Processes Finding #5: LAWA does not have a formal Enterprise Risk Management Program for the purposes of proactively identifying risks and developing mechanisms to manage or eliminate risks to the achievement of LAWA objectives. LAWA has also not implemented a complete enterprise-wide information technology (IT) risk management process for further understanding of its internal technology control structure and potential control weaknesses, and creating an effective plan of action for controlling those risks. The goal of an effective enterprise risk management program is to help an entity, on an organization-wide level, identify, document, prioritize, and mitigate risks whenever possible. This allows management to manage risks proactively, predicting when a risk will occur and assessing the impact it will have on the organization. A 2008 report issued by the City of Los Angeles Controller recommended that all City departments implement an organization-wide ERM program; in order to identify, assess, aggregate, monitor and mitigate risks on a consistent basis. A 2004 report by the Committee of Sponsoring Organizations of the Treadway (COSO), which is used by many large governmental entities as an internal control model, recommended that organizations implement ERM programs as part of their internal control structures and “to provide reasonable assurance regarding the achievement of entity objectives”. This concept has been further promoted through the 2002 Sarbanes-Oxley legislation and by the Securities and Exchange Commission and Public Company Accounting Oversight Board. LAWA’s Internal Audit department has conducted an organization-wide risk assessment in an effort to establish and identify areas of concern for consideration when developing their annual audit plan. The risk assessment involved accumulating data and information from the various divisions/departments at LAWA as appropriate to develop a ranking of risk. This audit risk assessment has been utilized exclusively to develop and propose Internal Audit’s audit plan. LAWA also has a risk management group but its focus is primarily on workers compensation and other insurance related matters. There is an IT Security function that incorporates a number of best-practice information security controls. However, this IT Security function is not responsible for other areas of the IT control structure that can have an impact on risk such as business continuity, application controls over data integrity, process-based controls, physical and environmental controls, systems development, staffing, vendor management, project management, data backup and restoration, and strategic planning. We are not aware of other organization-wide risk assessments and evaluations. Each of LAWA’s divisions is solely responsible for identifying, assessing, monitoring and mitigating risks within their respective divisions.
As noted previously, LAWA is a large organization that is moving quickly and has functioned primarily in a reactive mode with respect to risk management. Many or most employees are working to complete their immediate tasks, and tend to focus on their specific area or responsibilities. Executive Management has focused on those activities determined to be the most critical or crucial. LAWA captures risk at the divisional level and such risks are to be resolved by individuals (division directors) with the authority to implement the necessary changes within their division to address the risks identified. With respect to information technology, LAWA has primarily focused on IT risks to meet the current demands that external and internal threats place on an organization of its size, complexity, and notoriety. Managerial processes that allow management to better understand technology risks and controls at the various levels of the organization have not taken shape. The implementation of a formal ERM program would provide LAWA with the opportunity to conduct an organization-wide risk assessment and develop consistent methodologies for resolving and mitigating identified risks. An organization-wide approach provides guidance, measurement and consistency on handling identified risks. Retaining LAWA’s divisional approach to risk assessment continues a focus on LAWA’s divisions as independent components of the organization and does not recognize the potential effect of risk threats and management across divisions. Through a formal, structured organization-wide process, the captured information can be utilized to improve future planning and decision making. Ultimately, the purpose of all ERM programs is to establish processes which lead organizations to better decision making, improving operations and reducing the impact of risks. Recommendation #5: To enhance the risk identification and management processes, and consistent with best practices, LAWA should work to develop and implement an overall organization-wide ERM. The ERM should provide a structured and continuous process for identifying, assessing, responding to and reporting on opportunities and threats that affect the achievement of LAWA’s objectives. The ERM should also incorporate an integrated approach to information technology risk management that provides for the identification, measurement, monitoring and controlling of technology-related risks throughout LAWA, and that will be treated as an essential management function of the organization. SECTION III - BUDGET DEVELOPMENT AND CONTROL The City Council of the City of Los Angeles has adopted a phased approach to the City-wide implementation of performance based budgeting in an effort to utilize performance metrics to strengthen program evaluation, set outcome-based priorities, increase accountability, and link performance measures to resource allocation. To comply with this directive and to realize the benefits of a fully functional cost accounting system, LAWA will require an improved accounting system. Lack of Performance Based Budget Process Finding #6: The LAWA budgeting process does not include consideration of levels of performance in relation to budgeted costs. Further, the cost accounting
system does not provide costing information by activity as necessary to fully evaluate the costs of providing services to airlines, concessionaires, the general public and other stakeholders. Accordingly, because the accounting system does not measure and report performance measures or the costs of achieving any specific level of performance, data is not available to implement a comprehensive performance-based budget. Performance-based budgeting considers the relationship between program funding levels and expected results. This approach, which involves weighing accomplishments in relation to resource consumption, has been advocated by many governments at all levels since the 1990s. Recognizing that performance budgeting provides an objective basis for the allocation of scarce resources, the City of Los Angeles is undertaking an effort to implement performance budgeting Citywide. The LAWA budget is not a performance-based budget. Rather, it addresses revenues by type (landing fees, rentals, user charges) and expenses by object (salaries and benefits, materials and supplies, contractual services, etc.). These budgeted costs are not based on a targeted measure of performance, such as number of landings, square footage of building heated or miles of landing strip maintained. Such costing information, when available, allows for comparisons of cost effectiveness within LAWA and in relation to other airports. LAWA has primarily accounted for its costs by individual transaction (invoice, payroll report) aggregated by type of expenditure (payroll, materials, services and capital), and further grouped by division or subdivision for management reporting purposes. Historical accounting data has been updated on a regular basis, however, other information useful in calculating and estimating the cost of service or function has never been fully developed. Accordingly, the costs of escalator maintenance cannot be reviewed to help decide when replacements are required; the costs of electricity or water consumption at terminals cannot be compared to determine unusual variances; and costs per unit of activity are not known so that exceptional productivity or better work practices cannot be identified and acknowledged. LAWA has made attempts to estimate such data utilizing excel and extracted data, however, it is not systematically captured. LAWA has also made an attempt, via the purchase of MAXIMO, an asset management software package, to track certain facilities costs. LAWA has utilized its SAP general ledger system to effectively provide historical financial statements in conformity with generally accepted accounting principles. This information has served the organization’s needs in the past, but it is not sufficient to support strategic analysis of costs compared to productivity, or to provide automated notifications of higher than expected costs in specific functional or geographic areas. Recommendation #6: LAWA should prepare for the implementation of performance budgeting by acquiring or developing the tools to identify, analyze and report the costs of key activities. LAWA should coordinate the performance based budgeting process with the establishment of goals and objectives for divisions and the organization.
SECTION IV - REVENUE MANAGEMENT AND DEVELOPMENT LAWA’s revenues are derived primarily from airlines and concessionaires, and the amounts fluctuate based on volume of passengers served, sales, and related measures which are selfreported by the payers. It is therefore vital that the information on which the revenues are based is validated by LAWA in a comprehensive and professional manner. LAWA has been very successful with collecting amounts due and has a low rate of uncollectible accounts. However, when accounts are delinquent, it is important that all customers be treated equitably, in terms of interest and penalties applied on delinquent balances. ______________________________________________________________________________ Audits of Self-Reported Revenues Finding #7: Self-reported revenues from airlines and concessionaries are audited on a test basis and audit results are not validated in accordance with LAWA’s policies and documented procedures. Audits are performed on selected contractors based on identified risk factors. Accordingly, revenues from some sources are not subject to audit annually. For audits that are conducted, the test period is, per the audit guidance provided by the concessionaire auditors, to be two to three months total for each fiscal year within the audit period, which is generally a three-year period. However, all five of the audits we reviewed included tests of only two sample months covering the entire three years of self-reported revenues. We noted that the total amount of revenues associated with the audits selected represents a minor percentage of the total self-reported revenues. The identification of errors resulting from audit tests of a sample of transactions indicates a heightened risk for additional errors, weak systems of internal control, or improper reporting at the direction of auditee management. Accordingly, the sample size and therefore the scope of testing should be expanded. We noted that audit exceptions did not result in expanded testwork but rather were extrapolated on a non-statistical basis in order to calculate the dollars associated with the exceptions noted. Accordingly, there was no determination as to whether the errors were isolated, indicative of a larger control deficiency, or caused by changes in personnel, new systems, or other factors which could mitigate or expand the significance of the error. Errors in reporting of self-assessed revenues are indicative of poor systems or a willful failure to adhere to agreed procedures. In either event, their existence should lead an auditor to increase the risk associated with the entity, increase the sample size and place the entity on a list for increasingly frequent audits. This does not occur at LAWA. The unit that conducts audits of self-reported revenues, consisting of 6 auditors, is not part of the Internal Audit Division, although its staffing includes “Internal Auditor” positions as defined by the City of Los Angeles position descriptions and it is led by an experienced internal auditor. Considering the sensitive nature of these audits, this function should be based on annual risk assessments and performed in accordance with professional auditing standards and LAWA policy. Currently this does not occur.
The existence of two separate audit functions within LAWA was justified with the rationale that one function focuses on internal LAWA operations while the other focuses on external concessionaires, lessees, etc. However, combining these functions could allow all audit personnel to benefit from standardized processes in accordance with professional auditing standards, training programs, and enhanced review processes. LAWA would benefit by realizing efficiencies in scheduling audit staff resulting in less non-productive time. Further, the number of audits performed and the quality of audits undertaken by both functions would likely improve with additional experienced personnel available to each function. Self-reported revenues from airlines and tenants represent a significant source of revenue to LAWA. Deviations from policies can affect LAWA’s ability to negotiate with the airlines or those that owe LAWA money. In some instances, we noted that although amounts were paid to LAWA, the airlines maintained a stipulation that they did not agree with the calculated amounts. These discrepancies are then subject to discussions and negotiations. If auditors do not follow stated policies, LAWA can be subject to further discrepancies. RECOMMENDATION #7: LAWA should consider the following actions: a) Consider incorporating the responsibility for audits of self-reported revenues into the Internal Audit Division. b) Expand documentation to include explanations as to why deviations from LAWA policy appeared reasonable to the auditor. A “coverage” target should be established, so that management can gain a level of comfort that a reasonable range (5% or 10%) of total self-reported revenues is being reviewed. Any decisions to negotiate audit results or forego expanded tests of apparent system deficiencies should require the documented review of top management. c) Consider engaging an external consultant specializing in this area to conduct one or more audits as a co-sourcing opportunity, in order to evaluate their approach and methodology and, if deemed beneficial, incorporate lessons learned into future LAWA audits. LAWA can then utilize best practices to develop a revised program for LAWA’s revenue compliance audit activities. Development of a coverage minimum should be established as a goal for the department. ______________________________________________________________________________ Adherence to Contract Terms Regarding Delinquent Collections Finding #8: Interest and penalties resulting from late payments pursuant to contractual agreements (such as airlines and tenants) are not consistently charged or computed by the Revenue Asset Management System as allowed by contract terms and conditions. LAWA has as achieved a high receivables collection rate. However, an opportunity exists to improve internal controls, ensure consistent treatment of contractors, and potentially further enhance the collection rate of delinquent accounts. Interest and penalties resulting from late payments pursuant to contractual agreements are not computed automatically by the system and are therefore not charged or collected in accordance with the contract’s terms and conditions. We were informed that LAWA has a standing unwritten policy of not assessing penalties and interest on delinquent invoices, although interest is charged on approved repayment plans.
The decision as to whether and how much to charge with respect to interest and penalties rests with the Designated Contract Administrators and Division Heads who are also responsible for negotiating contract terms and monitoring compliance, thus creating independence concerns. Decisions to not charge interest and penalties result in lost income. Interest and penalties are provided for in the Airport Facilities Use Terms and Conditions. The agreement stipulates that a late charge and even an “additional late charge” are to be levied for delinquent payments. Therefore, the non-charging of late payment fees is a violation of the terms and conditions of the signed agreement or contract. All revenues subject to negotiated terms should be based on the terms and conditions of the signed agreement or contract. These revenues should be completely and accurately accounted for, monitored and reported in the financial statements. Even if the interest and penalties are written off, the calculation of such amounts provides useful information to LAWA’s management, airlines and tenants and can be useful for future negotiations or decision making processes. The reason interest and penalties were waived, according to Division Managers, was that the waivers were necessary to maintain good business relationships. We obtained the accounts receivable aging (“Top 25 over 60 days”) as of May 1, 2012. From this schedule, and using conservative interest rates, unbilled interest and penalties would exceed $834,000. Based on the nature of the amounts owed and the work performed by LAWA’s departments responsible for follow up and investigation, including the City Attorney, some of these amounts would be subsequently written off. However, other amounts would be subject to collection and would represent additional resources for the LAWA organization. Recommendation #8: We recommend LAWA take the following actions: a) Revise policies and procedures to incorporate a consistent approach to calculating penalties and interest pursuant to contractual agreements. In addition, a consistent policy should be communicated and enforced regarding the waiver of interest and penalties. b) Ensure that any write offs or “forgiveness of amounts” are reviewed and approved by someone independent of the contract monitoring and negotiation function. Further, LAWA should perform consistent calculations of these penalties and interest amounts.
SECTION V - CONTRACT MONITORING AND PROCUREMENT Recognizing the high volume of procurement activity associated with the improvement and renovation activities presently underway, LAWA has created the position of Designated Contract Administrator. The role of this position is to promote and facilitate compliance with procurement policies, laws and regulations.
Utilization of Designated Contract Administrators Finding #9: Management of compliance with procurement contracts is weakened by process deficiencies and the lack of initial and continual involvement of designated Contract Administrators. Designated Contract Administrators are not consistently involved throughout the project lifecycle and their expertise is not always utilized in providing administrative policy guidance, especially at the inception of the process. Due to their lack of involvement, instances of erroneous and/or missing information have been identified, indicating that certain contracts do not comply with the administrative requirements. These contractual deficiencies require LAWA personnel to perform additional procedures to resolve such discrepancies. It is the view of the Procurement Services Division that early and continual involvement of the Contract Administrators would significantly reduce the number of discrepancies. Our review of discrepancy reports noted that matters were identified including errors, payments after contract expiration, payments to contractors with no insurance, payments inconsistent with the purchase order, payments for services outside of the approved service period and payments in excess of authorized amounts. According to LAWA policy “A Designated Contract Administrator (DCA) is a LAWA employee that is responsible for ensuring the respective Division or Office complies with all Board of Airport Commissioners policies, regulations and other applicable laws that govern the LAWA procurement process.” This position is responsible for all aspects of contract administration from identification of potential contractors to close-out and evaluation of contractor performance on completed contracts. Their participation in the administration of contracts is an important component of the internal control structure in this important area. Project/Contract Managers lack adequate training on LAWA’s Procurement Policies and Procedures. The DCAs mitigate this weakness because they are familiar and well-trained in LAWA’s procurement policies and procedures. However, the DCAs are not included as part of the Project Team at the Project planning phase. Including the DCAs at this phase may bring value to the Project and the Project Team as they could provide up-to-date information on procurement policy and procedures that may set the project on an appropriate procurement track. In addition, the DCA’s could provide feedback on any problematic vendors or firms which LAWA has utilized in the past in order to correct or avoid future similar concerns. Recommendation #9: LAWA management should further develop, clarify, communicate and integrate into the initial project phases the roles of DCAs and Project/Contract Managers in order to optimize divisional administrative expertise and ensure adherence to LAWA Procurement Policies and Procedures. Also, DCA training on LAWA Procurement Policies and Procedures should be extended to any and all project cost managers.
SECTION VI - CAPITAL ASSET MANAGEMENT AND INVENTORY CONTROL The LAWA modernization program, coupled with hardware, infrastructure and mobile devices associated with updated technology, will greatly increase the Department’s capital assets inventory. Controls over these capital assets, including the periodic physical inventories, will
assume greater importance. While construction is underway, systems to account for construction costs, including engineering, architectural, construction contracting, legal and in-house labor, become critical in forecasting and managing costs and ensuring accountability. ______________________________________________________________________________ Absence of Periodic Inventory of Fixed Assets Finding #10: There is no regular physical inventory of capital assets, including furniture and equipment, fleet inventory, and supplies. LAWA policy does not require that the weapons inventory used by LAWA police be subjected to an externally validated physical count, and no such validation has occurred by internal or external auditors. The last physical inventory of capital assets (equipment and furniture) was in 2008. The last physical count of supplies inventory was January 2011, and this count contained errors requiring a second inventory count which was performed in June of 2012. There is no record of a physical inspection of all fleet vehicles occurring in recent years. LAWA policy requires that LAWA police conduct their own audit of all City-owned firearms. However, there has been no verification of the weapons inventory by an independent party such as the Internal Audit Division. LAWA maintains policies and procedures for fixed assets and inventories. There are also policies for the Facilities Management Group (“FMG”) which cover a comprehensive range of airport planning, engineering, environmental and maintenance services associated with the development and management of LAWA facilities. However, there is no regular physical count of capital assets, fleet vehicles and supplies inventory. Because capital assets and inventory counts were not made on a regular basis, and weapons inventory is not independently validated, there is no assurance that the recorded assets and inventory are accurate because they have not been verified by inspection. Section 2.4.1 of the Controller’s User Department Manual requires departments such as LAWA to conduct biennial physical inventories of all equipment items. It also requires that, upon completion of the inventory, all changes/discrepancies be annotated on the inventory listings and be reported to management for review and corrective action. At LAWA, responsibility for most assets falls within each division and each division is to perform periodic counts of its assigned assets. There is no central point of responsibility to monitor compliance with this area. LAWA is currently evaluating and developing policies and procedures to conduct physical inventories of capital assets, in addition to smaller equipment (i.e. phones and tablets) and has taken steps to start the inventory process for the larger more significant capital assets. LAWA’s capital assets represent a significant portion of the balance sheet. As LAWA continues to renovate, these amounts will continue to grow. Although the risk of material misstatement is somewhat reduced by the fact that many of the capital assets are immoveable, many are moveable and a physical inspection also helps to identify potential impairment or obsolescence of the asset which should be reflected in its recorded value.
Recommendation #10: LAWA should ensure that inventory counts are conducted periodically at the division level and ultimately every two years as an organization. A department (Internal Audit, Financial Accounting or Procurement) should be assigned the responsibility of collecting the information regarding interim asset counts, reconciling the counts to the general ledger and verifying the count results. ______________________________________________________________________________ Incomplete and Inconsistent Recording of Construction Expenditures Finding #11: Reports of construction expenditures produced by PROLOG, LAWA’s construction management software, do not consistently agree with construction project expenditures as reported in the general ledger. The PROLOG-generated construction expenditure reports are provided to Executive Management for their use in evaluating the progress and costs of the capital improvement program (CIP). LAWA is in the midst of a major capital improvement initiative involving the expenditure of more than $4 billion towards construction costs. To facilitate the planning, coordination, accounting and monitoring of capital costs, LAWA’s Capital Development Group has implemented a Project Control System using PROLOG, a contract monitoring system. PROLOG is not integrated with SAP, LAWA’s official general ledger system. Although PROLOG information is regularly reconciled to SAP by those who prepare the PROLOG reports, the monthly reports submitted to the Executive Management and the Board of Airport Commissioners are based on un-reconciled PROLOG information that may include material differences in project amounts when compared to SAP-generated information. Further, the PROLOG reports are not reviewed and variances from the general ledger are not investigated by the Financial Reporting Division which is responsible for LAWA’s official audited financial statements. PROLOG reports may have material differences in project amounts when compared to SAPgenerated information due to data entry errors or the timing of recording information, such as the following: 1. Initial planning costs 2. Contract retainages 3. Environmental costs 4. Research costs 5. Other costs recorded via journal voucher. These reconciling items are typically recorded in the SAP general ledger system at a later time. For example, contract retainage amounts are generally not recorded until the final retainage is to be paid. This practice may result in the omission of material unrecorded liabilities from the LAWA financial statements. During our audit we noted unrecorded contract retainage liabilities of more than $24 million. The magnitude of the capital improvement program demands complete, accurate and timely reporting of construction costs and related liabilities as required by generally accepted accounting principles and for effective financial oversight and management. However, the
PROLOG system and the SAP general ledger systems are not integrated nor are they reconciled by Finance Division personnel. The lack of integration between systems is a significant contributor to the variances noted. The existence of two accounting systems reporting conflicting information places LAWA at risk of making management decisions based on reported information which may not be entirely accurate. Significant variances between PROLOG and SAP information potentially affect these decisions. RECOMMENDATION #11: LAWA should investigate the feasibility of integrating the PROLOG and SAP systems. If this is not realistic, the LAWA Financial Services Division should obtain copies of the PROLOG reports and related reconciliations on a timely basis and ensure that costs and liabilities are recorded in the SAP general ledger system when incurred. Further, management should inform users of the PROLOG reports of the potential understatement of costs in order to more accurately evaluate project costs. SECTION VII - DEBT MANAGEMENT AND BOND FINANCING As the primary instrument for financing LAWA’s capital program, long-term debt has increased substantially in the past five years. The magnitude of LAWA’s debt demands vigilant monitoring against a comprehensive debt management policy.
Debt Management Policies Finding #12: LAWA has a debt management policy in place which is incomplete and has not been updated for at least six years. The existing debt management policy has many prudent provisions including requiring that activities be consistent with the debt management policy of the City of Los Angeles and that the BOAC and the City Council approve the issuance of debt and establishment of rates in amounts sufficient to meet the revenue requirements associated with outstanding and newly-incurred debt. The policy also recognizes that “prudent financial management requires careful monitoring of debt issuance to ensure there is not an over reliance on debt and to preserve LAWA’s access to borrowed capital at competitive borrowing rates, while always maintaining sufficient liquidity.” The policy defines and describes the risks associated with the management of debt and sets forth limitations as to the type, concentration and terms of debt instruments that are authorized. In conjunction with the monitoring function, the policy provides guidelines for evaluation of the benefits and costs of refinancing outstanding debt. The policy also recognizes that variable rate debt can be beneficial and traditionally offers lower interest rates than fixed rate debt. As a safeguard, the policy limits the maximum rate that LAWA can pay for variable rate debt instruments. LAWA is also required to monitor the performance of actual interest rates on variable rate debt against existing interest rates and periodically report the results to the BOAC.
Notwithstanding the above provisions contained within the debt management policy, the policy is, in certain areas, instructional in approach and content, and does not provide specific targets and limitations. For example, the policy does not address the following: (a) Criteria to be used to determine an approved, target debt-to-equity ratio. (b) Criteria for evaluating the issuance of senior versus subordinate bonds. (c) A process for the establishment of a target debt service coverage ratio. The minimum debt service coverage allowed by the outstanding bonds is set forth in the policy; however, this is not the targeted coverage ratio that LAWA intends to achieve. (d) Documented, approved criteria to evaluate fixed versus variable rate debt instruments. (e) Specifics with respect to the frequency with which the policy should be reviewed and updated if necessary. (f) An appropriate designation of the position charged with oversight of the debt management function. The policy assigns this function to the Deputy Executive Director of Finance. This title does not exist in the current LAWA organization. We noted that the existing debt management policy is dated 2006, and we saw no evidence of periodic updates to the policy. The comprehensive debt management policy should represent guiding principles and set forth the approved decision making process for evaluating financing alternatives. LAWA has nearly $3.7 billion in debt with plans for major new financings. To finance its capital costs, the Department relies extensively on professional service providers for overseeing the dayto-day changes in the financial market, advising LAWA personnel on the market changes, assisting in debt structuring, working with and monitoring the underwriters, analyzing financial information, and preparing annual disclosure reports. The use of consultants can provide valuable expertise; however, this practice highlights the need for consistency and guidance in the form of a comprehensive debt management policy. External consultants may also not be knowledgeable of rates, charges, City administrative codes, LAWA administrative policy, political influences, pending legislation, budgetary constraints, and capital plans. The use of consultants should be coupled with qualified internal personnel who are capable of understanding and monitoring the work performed and conclusions reached by the consultants. As discussed previously, qualifications to the level appropriate for oversight of a complex debt management program is limited to one person, the Director of Capital Development and Budget. The magnitude of debt financing required to fund the ongoing capital improvement program highlights the need for effective and comprehensive policies to facilitate strategic, consistent and sound selection and management of the various debt instruments used by LAWA. Recognizing that financing strategies, safeguards and instruments are not static, and that LAWA’s fiscal condition will change over time, Section 18 of the Debt Management Policy assigns responsibility for periodic updating of the Policy to the Deputy Executive Director of Finance. Material changes to the policy are to be proposed to the BOAC for approval.
The absence of certain key criteria from the current debt management policy reduces the usefulness of the policy for purposes of ensuring adherence to the approved debt management strategy, ongoing consistency of the debt management program, monitoring of the debt management function, and goal setting. Recommendation #12: LAWA should create a process and timeline for the expansion of its debt management policy. The Finance and Budget Division should also review its use of external consultants and ensure that their methodologies and conclusions are appropriately monitored, understood and validated by qualified internal personnel.
SECTION VIII - REGULATORY COMPLIANCE AND FINANCIAL REPORTING As a governmental entity with outstanding publicly-traded debt, LAWA is subject to regulation by Federal, State and local entities, and also is required to submit financial reports to each of these entities. Additionally, the BOAC requires timely, complete and accurate financial reporting in order to exercise its fiduciary responsibility of fiscal oversight. ______________________________________________________________________________ Limitations on the Scope of Financial Reporting Finding #13: Limited financial reporting is provided to the governing body, and reports to management omit budgetary compliance information and statements of cash flows. The Financial Reporting Section prepares on an annual basis a complete set of annual financial statements for distribution to the governing body, state and federal agencies and the public. This section also prepares and distributes monthly reports to senior management which include a report of cash balances, comparative balance sheets and year-to-date reports of revenues, expenses and changes in net assets. However, monthly reports are not provided to the Board of Airport Commissioners. Accordingly it is not possible, using information generated from the LAWA accounting system, for the governing body to monitor management’s expenditures, the effectiveness of revenue-generating activities or the liquidity and financial health of the organization. The monthly reports submitted to senior management do not include comparisons of revenues and expenses to planned and approved levels which would be necessary to monitor budgetary compliance. They also omit cash flow statements which illustrate the sources and uses of cash balances and can identify such activity as repayment (or failure to repay) debt, purchases (or sale) of fixed assets, unusual cash distributions, and decreasing cash balances. The annual financial statements in the form of a Comprehensive Annual Financial Report are provided to the BOAC, but not to the Audit Committee. There is no presentation to the Audit Committee of the content of these statements, which typically would discuss the organization’s financial health, trends in revenues and expenses, comparisons with other years and possibly other airport operations, and similar financial information. The independent auditors do not meet
with the Audit Committee to discuss the annual audit process, audit results, issues or findings and to ensure the Audit Committee is fully apprised of disagreements with management, if any, correcting entries required to report on the financial statements, management decisions to change accounting principles, unusual or improper estimates used in the preparation of the financial statements, and similar matters. The absence of comprehensive and timely interim financial reporting to management and the Board and its Audit Committee preclude the monitoring and oversight that act as a key internal control in most organizations. Effective interim financial reporting is a key tool in helping the BOAC and management fulfill their fiduciary duty of monitoring LAWA’s financial stability, conservation of resources, fiscal trends, contingencies and compliance with budgetary authority. Recommendation #13: LAWA finance personnel should provide complete financial reporting packages to management, the BOAC and the Audit Committee on a monthly basis. These should include information with respect to sources and uses of cash and budgetary comparisons to demonstrate compliance with approved budgets, and should be published on the LAWA web site as a demonstration of transparency and full disclosure in financial reporting.
SECTION IX - INFORMATION TECHNOLOGY The importance of information technology has increased for essentially all entities in recent years. As technological capabilities expand, it is not uncommon for security, documentation and risk management protocols to lag behind. This audit identified certain areas which LAWA should address to maximize the effectiveness of its use of technology while minimizing exposure to disruption, unauthorized access or loss of data. ______________________________________________________________________________ Operational Plans for IT Security Systems Finding #14: LAWA’s IT systems could benefit from more frequent data backup, disaster recovery plan testing, enhanced procedures for change management, expanded and updated documentation, and improved methodologies for software selection. LAWA’s IT staff has successfully implemented several large-scale projects with best-of-class security technologies, change management processes and weekly off-site data backup. However, there are areas in which processes and documentation could be improved to reduce risk and maximize the effective use of LAWA technology. These areas include: a. Operational Plans for IT Security Systems – LAWA has not documented operations plans to help ensure that IT security personnel are properly utilizing the various IT security platforms in place, such as security systems that include intrusion prevention, network forensics, vulnerability management, penetration testing, virus/malware detection and prevention, wireless security, anomaly detection, and security log management, and that management’s procedural directions are being followed.
b. Disaster Recovery Plan Testing - Best practice mandates that disaster recovery plans be tested at least annually. It has been over two years since LAWA performed a disaster recovery test with Sungard, its offsite disaster recovery vendor. Critical IT systems and technology platforms are not being routinely tested for operational readiness at alternate processing sites in order to ensure these can be activated to proceed with LAWA operations during a disaster. c. Offsite Storage of Critical Tape Backup Data - LAWA currently utilizes a weekly schedule for the offsite storage of tape media used for data backups. Best practice calls for a daily schedule of offsite tape backup. LAWA is at risk of losing one week’s worth of critical data in the event of a disaster or operational contingency. d. Documentation of Change Management Framework - Although LAWA management appears to have implemented an effective change management process, the process has not been formally documented. A change management process helps ensure that changes to applications, hardware, network equipment and the like are discussed prior to implementation to ensure that other areas of IT will not be unexpectedly and negatively impacted. e. Application System Version Control Management - A formal version control management process to document and track changes to vendor-provided and in-house developed LAWA application systems is not being effectively applied. The use of effective application-version controls can help IT departments mitigate security risks, such as those posed by hackers, viruses, and unauthorized changes. In addition, operational capability is determined by the versioning of an application system, which can have an impact on LAWA business processes, and compatibility with other LAWA applications. f. Change Closure and Documentation - LAWA’s change control processes do not ensure the consistent updating of affected system and user documentation and procedures. Currently, the change control process calls for an honor system of closing changes within the system by change control participants, which allows for inconsistency in properly closing a change request with the attendant updating of documentation. Failure to update change request documentation allows configuration documentation to not reflect the current system configuration. This could force LAWA to rely on contractor and employee recollection of system changes rather than structured documentation. g. SAP Data Flow Diagrams - Data flow of key SAP processes with interfaces, databases, and other applications is not documented. Specifically, SAP systems analysts are not sufficiently documenting how SAP communicates with other LAWA systems. Accordingly, plans for program or system changes may not consider the impact on other systems leading to unintended consequences. h. Software Selection Methodology - IT Management at LAWA does not utilize a formal software selection methodology prior to purchasing key application systems. A consistent and formal approach to software selection helps to ensure that software selection projects
are completed on time, within budget, and meets the business’ objectives and expectations. Not using a formalized approach to software selection puts LAWA at risk for incorrect solutions selected on the basis of an inadequate understanding of requirements. Additionally, the risk of significant requirements discovered after the selection occurs increases which can lead to costly reworking and implementation delays, and a lack of derived quality. The absence of a formal, documented approach may have contributed to the selection of the automated procurement/contract management system (Procurement Wizard), which was intended to facilitate the initiation and monitoring of contracts, but which has been in the Phase I development stage since 2004. i. Project Quality Management System - A Quality Management System not been established by LAWA Management for key IT processes, system development and acquisitions. A Quality Management System addresses several factors including responsibility assignments, approved processes, customer satisfaction, continuous improvement, quality, performance, and sustainability. Such a system helps to ensure that projects deliver value to the organization. By not having a quality management system in place, LAWA faces the risk of insufficient quality in services and solutions, resulting in faults, rework and increased costs. Recommendation #14: LAWA management should address the noted opportunities for improvement as described below: a. develop, implement and maintain standard IT security operational procedures for each of their security platforms. In addition, management should document each platform’s configuration and periodically review it for appropriateness. b. ensure disaster recovery testing is performed on a regular basis or after major changes in the IT infrastructure, or to the business and related applications. Detailed testing schedules should be based on established recovery priorities and realistic test scenarios. c. perform a formal analysis for the feasibility of daily offsite storage of tape data backup media. The level of protection should be commensurate with the value and security classification of LAWA’s data. In addition, management should perform regular testing of the quality of the tape media that is stored offsite, and ensure that the backups contain all data, programs and associated resources needed for recovery according to plan. d. develop, document and promulgate a change management framework that specifies the policies and processes, including: Roles and responsibilities Classification and prioritization of all changes based on business risk Assessment of impact Authorization and approval of all changes by the process owners and IT Tracking and status of changes Impact on data integrity (all changes to be made under system and application control rather than by direct user intervention) Operation of LAWA’s Change Management System.
e. ensure that version management controls are working properly by implementing procedures that will match a current production copy of an application to a centralized repository copy. f. ensure that all completed changes within the Change Management System are properly closed out. The closure of a change should trigger a process to update the related application documentation, including operational procedures, configuration information, application documentation, help screens and training materials. g. ensure that data flow diagrams are compiled which outline how SAP interfaces with other applications and databases. h. consider the use of a formal software selection methodology that encompasses, at a minimum, the following phases: Scoping and Planning Requirements Definition Vendor Analysis Risk Analysis Package Selection Procurement Process Conversion Capability Implementation. i. develop and document a Project Quality Management System, with input from IT management and external and internal stakeholders, which encourages a standardized and continuous approach to quality. SECTION X - OTHER MATTERS While performing our audit procedures we noted certain other matters that provide opportunities to strengthen internal controls and operating procedures. These matters and our recommendations are presented below. 15. Lack of an Independent Reconciliation of LAWA Costs to Rates and Charges A large majority of LAWA revenues are assessed pursuant to complex calculations based on costs, usage and other factors. The methodology utilized and the resulting assessments are not reviewed for accuracy by a division separate from that charged with their calculation. Aviation revenues are derived from cost recovery computations based on formulas prepared by the Rates and Charges section under the Finance and Budget Division. Concession revenues are generated through contract terms that are market-based and that are based on passenger activity or gross revenue levels. The airlines, vendors and concessionaires pay for the costs of the services and facilities they use at the airport. User charge rates to recover these costs are set pursuant to agreed-upon cost allocation formulas.
Within the Finance and Budget Division the Rates and Charges section’s primary goal is to set the rates that allow LAWA to recover its costs of managing and operating LAWA-owned airports. This section determines, analyzes and develops various rate structures, including landing fees and terminal rental rates, as well as the rates for other revenue-generating facilities owned by LAWA. In developing the rates and charges, the section utilizes information and reports including budgets, financial statements, plans and various aviation statistics and forecasts, terminal rents, and public aircraft parking charges and other cost recovery and revenue generating methodologies. The rates and charges are approved by management and the BOAC, however, the application of the approved methodology utilized is not checked or otherwise validated by the Deputy Executive Director, Comptroller who maintains LAWA’s official accounting records. We were informed that the user charge rates are reviewed by financial advisers as part of the due diligence process when LAWA issues debt, and that agencies who are subject to the rates and charges closely monitor their basis. However, external investigations into LAWA processes are not a substitute for effective internal review practices. The impact of the calculations of rates and charges on LAWA’s financial condition is highly significant. We noted that for fiscal years 2011 and 2010, LAWA generated increases in net assets of nearly $300 million each year or 26% (in 2011) and 27% (in 2010) of gross revenues. Accordingly, the calculations and the underlying data on which the calculations are based should be subject to a thorough review for accuracy by personnel independent of the preparer(s). Recommendation #15: LAWA management should assign the Deputy Executive Director, Comptroller responsibility for understanding the methodology utilized to identify costs and for re-calculating the user rates and charges assessed to recover them.
16. Recording Encumbrances There is no centralized area or individual responsible for monitoring the divisions to ensure that commitments are properly encumbered. Funds must be encumbered for items that LAWA has committed to purchase or services for which it has contracted. An encumbrance notation in the accounting system indicates that funds have been committed and are not available for expenditure of appropriation for any other cost. LAWA is required to use encumbrance accounting in order to monitor compliance with budgetary authority. Certain commitments, such as annual payroll, leases, contracts and multi-year service agreements, are intended to be encumbered centrally in connection with the associated procurement and contracting processes. However, other encumbrances, such as those that should result from an order placed with a vendor, may not be encumbered unless the personnel placing the order initiate the encumbrance accounting entry. There is no individual or department assigned responsibility to enforce or ensure that the divisions encumber funds when appropriate. LAWA has experienced budgetary overruns at the division level due to the failure to identify, record and properly account for encumbrances.
Recommendation #16: LAWA management should assign to the Deputy Executive Director, Comptroller responsibility for ensuring that all expenditures are analyzed for indications of recurring payments which may be due to financial commitments. Evidence of commitments in the form of leases, contracts and purchase orders should be reviewed and agreed to the related encumbrances recorded in the accounting records.
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