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September 27, 2013 Saundra Kee Borges, Acting Chief Operating Officer City Of Hartford Capital Improvement Project Management and Administration Audit Report 1403

From: H. Patrick Campbell, Chief Auditor Tele: 860.757.9951

HPC

I. Executive Summary In accordance with our audit plan for the fiscal year ending June 30, 2014, we completed an examination in July 2013 of the Management and Administration of City of Hartford Capital Improvement Projects. The purpose of the examination was to evaluate and test internal accounting and operating controls, the accuracy and propriety of transactions processed, the degree of compliance with established operating policy and procedures, and to recommend improvements where required. The results of our audit were reviewed with K. Burnham, Former Director, Department of Public Works; T. Deller, Director, Department of Development Services, J. Molleda, Former Director, Finance Department; A. Matta, City Architect, Department of Public Works; and, other responsible members of operating management. The summary which follows includes only the exceptions disclosed and recommended operating improvements. As noted in the details that follow, management has noted actions taken or planned, including timeframes, to resolve each finding and/or recommendation in this report. We thank Department of Public Works, Department of Development Services, and Finance Department management and staff for their cooperation and courtesies extended to us during our audit. Background Three City of Hartford (City) departments are involved in the management and administration of the City’s Capital Improvement Project (CIP) program. The Department of Development Services is responsible for CIP program process management; the Department of Public Works is primarily responsible for CIP program construction management; and, the Finance Department is primarily responsible for the CIP program fiscal management. The projects fall into one of six major categories: Public Safety, Public Facilities, Parks and Recreation, Infrastructure, Development and Education Facilities. The MUNIS Financial Management System (MUNIS) is used to account for and control CIP financial activity. For the fiscal year ending June 30, 2013, the CIP budget totaled approximately $158 million. For the six months ended December 31, 2012, more than $48 million in CIP funds had been expended. General In general, we found that while the Department of Public Works had fairly extensive policies and procedures relating to the CIP program and process, we noted that policies, procedures and controls relating to a number of key CIP processes were either not fully documented and/or needed improvement. This included, but was not limited to, periodically performing reviews of and following-up on and closing-out older

City Of Hartford Capital Improvement Project Management and Administration Audit

projects with unexpended balances or projects with negative balances in MUNIS; processing and documenting change orders; reconciling CIP balances requiring funding in MUNIS with related bond, investment and bank account fund balances; and, reviewing, approving and paying CIP invoices. Scope The scope of our audit included various reviews and tests of transactions recorded up to and through the calendar year ended December 31, 2012. The following audit procedures were performed: Reviews and evaluations of policies, procedures and related internal operating and accounting controls; Tests of invoices and change orders and related review and approval processes; Reviews of funding processes from budgeting to close-out and related reconciliations; Reviews to determine the effectiveness and efficiency of processes and functions; and Reviews of various management and analytical reports. II. Audit Results Various tests, noted in the scope section above, and reviews of related operations disclosed the following: Project Financial Review and Close-Out Process Various tests of CIPs and related balances as of December 31, 2012 and reviews of related operations disclosed the following: 1. The Finance Department process and related procedures for periodically performing reviews of and following-up on and closing out older projects with unexpended balances or projects with negative balances in MUNIS were not fully documented and needed some improvement. 2. There were eight CIPs with negative balances totaling more than $340,000 in MUNIS. These CIPs were one to six years old. It was not clear what, if any, action had been taken by the Finance Department to identify, follow-up on and resolve these CIPs with negative balances. DPW management informed us that after we brought this to their attention, they developed a plan of action to work with Finance Department management to follow-up on and resolve these negative balances and close-out the related projects. 3. There were 89 CIPs with unexpended balances totaling more than $21 million over five years old. This included two CIPs with balances totaling $40,958 that were 13 years old. Again, it was not clear what, if any, action had been taken by DPW management to follow-up on and address these older CIPs. We were also informed by the City Treasurer that this is problematic because under Internal Revenue Service rules, bond proceeds have to be spent within a designated period of time and can’t remain outstanding for extended periods. DPW management informed us that, after we brought this to their attention, they identified six older inactive projects including four with
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City Of Hartford Capital Improvement Project Management and Administration Audit

unexpended balances totaling $3.4 million over five years old that they took action to work with Finance Department management to reallocate to other projects. 4. Both Finance and DPW management indicated that the process for and activities relating to following-up on and addressing old and/or inactive CIPs with unexpended balances and CIPs with negative balances could be improved and better documented. Finance Department management noted that, although related procedures are not documented, they review all projects on a quarterly and annual basis and informs DPW of any budget issues, negative balances or incorrect account classifications. We recommend that Finance Department management work with DPW management to review, evaluate and follow-up on old and/or inactive projects with unexpended balances and projects with negative balances that are outstanding and/or closed-out in MUNIS. In addition, we recommend that DPW management work with Finance Department management to take action to improve the process and document related procedures for periodically performing reviews of and following-up on and closing out older projects with unexpended balances or projects with negative balances in MUNIS. DPW management also informed us that project management software was being used to monitor and manage project status. Management Action Plan Completion Date: December 31, 2013 Responsible Persons: J. Ruffo, Interim Director, Finance Department; K. Chapman, Interim Director, Department of Public Works; T. Deller, Director, Department of Development Services; and, S. K. Borges, Acting Chief Operating Officer for ensuring follow-up and resolution Finance Department management will work with DPW management to review, evaluate and follow-up on old and/or inactive projects with unexpended balances and projects with negative balances that are outstanding and/or closed-out in MUNIS. In addition, DPW management will work with Finance Department management to improve the process and document related procedures for periodically performing reviews of and following-up on and closing out older projects with unexpended balances or projects with negative balances in MUNIS. Department of Development Services management also noted that after the start of our review they have been working in cooperation with DPW to determine if there are any dollars that have not been committed, are left over that can be reallocated, or projects that are no longer being pursued so the dollars can be reallocated. They hope to complete this review in the next four weeks. They also indicated that there is an issue with MUNIS that does not allow them to accurately track CIP dollars and are working with Metro Hartford Information Services (MHIS) to address this. Change Order Processing DPW records and maintains change orders in an EXCEL spreadsheet. At the time of our review, a total of 225 CIP change orders totaling over $7.3 million were recorded in the DPW spreadsheet for 67 CIPs. Five CIPs accounted for 37% of the total number and 60% of the total dollar value of the change orders recorded. Various tests of 13 change orders totaling more than $480,000 for one CIP and reviews of related change order processes, procedures and controls disclosed the following:
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City Of Hartford Capital Improvement Project Management and Administration Audit

1. DPW was not able to provide us detailed documentation to support two change orders totaling $7,564.85. DPW management pointed out that this represented 1.6% of the dollar value of the change orders tested and 0.1% of the total dollar value of the population of the change orders noted. 2. As previously noted, DPW records and maintains change orders in an EXCEL spreadsheet. DPW management informed us that change order data cannot be recorded in and accounted for in MUNIS because it does not have the required functionality. 3. There is centralized electronic repository for change orders and related documentation. In addition to being maintained in hard copy format, DPW management informed us that the protocol is for change order data to be scanned and maintained in an electronic format by project managers. As previously noted, however, hard copy documents can be misplaced and/or lost. DPW management also informed us that they scan and forward copies of change orders to the Finance Department, but the Finance Department does not maintain an electronic file, folder or database of these scanned documents. 4. Change orders have an extensive and robust review and approval process. However, because MUNIS does not have the necessary functionality, change orders must be transferred manually to different people and locations for these reviews and approvals. This is not the most effective or efficient way of processing change orders and as with any manual process is prone to delays, errors, omissions and other problems. It is not clear why MUNIS does not have the functionality and ability to electronically provide for this review and approval through the workflow process as it does with purchase order requisitions. 5. While DPW records change order data and activity in the EXCEL spreadsheet as noted above, the reasons for the change orders are not noted in the spreadsheet. DPW management informed us that this information is noted in the change order back up documentation and includes owner changes, unforeseen conditions, design errors and other conditions. Because this information is not recorded in the EXCEL spreadsheet, it limits the ability to perform reviews and analyses to determine the propriety and root cause of the change orders, what if any follow-up and resolution is required and what can or should be done to prevent change orders from occurring in the future. To improve the efficiency and effectiveness of and controls over the change order process, we recommend that DPW management work with Finance Department management and MHIS to determine the feasibility of enhancing MUNIS to the greatest extent possible to allow for the electronic review, approval and filing of change orders. This should help to prevent the misplacement and/or loss of change order documentations as noted in the two instances noted above. In addition, we recommend that DPW management take action to develop a process and related procedures for performing a root cause analysis of future change orders to identify trends, determine underlying issues and apply the information derived from these reviews to future projects to minimize the number, effect and impact of change orders going forward . Finance Department management informed us that they have historically discussed with DPW management another way to handle change orders that they believe would be more effective. According to Finance Department management, the MUNIS Contract module is designed to more effectively handle change orders and related processes. Phase one of the MUNIS Contract module was recently completed by the Finance Department and is using it for all active leases.

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City Of Hartford Capital Improvement Project Management and Administration Audit

Management Action Plan Completion Date: November 29, 2013 Responsible Persons: J. Ruffo, Interim Director, Finance Department; K. Chapman, Interim Director, Department of Public Works; T. Deller, Director, Department of Development Services; and, S. K. Borges, Acting Chief Operating Officer for ensuring follow-up and resolution Finance Department management will work with DPW management and MHIS determine the feasibility of either enhancing MUNIS to allow for the electronic review, approval and filing of change orders or utilizing the Contract module to account for CIPs. In addition, DPW management will take action to develop a process and related procedures for performing a root cause analysis of future change orders to identify trends, determine underlying issues and apply the information derived from these reviews to future projects to minimize the number, effect and impact of change orders going forward. Reconciliation of CIP Funding Balances in MUNIS and Related CIP Bond, Investment and Bank Funds Periodic reconciliations are not being performed between CIP funds being maintained in bonds, bans, banks and investment accounts and related CIP project balances being maintained in MUNIS that require funding. The bonding of CIPs generally only takes place when the project is anticipated to begin in the near term. As a result, a CIP may be approved and recorded in MUNIS, but not funded. At the time of our review, there was more than $32 million in CIP funds in bond, ban, investment and bank accounts. It was not readily apparent which active or planned projects this bonding was associated with and/or if the full $32 million in CIP funds available was necessary for the related projects in process or planned to be initiated. As previously noted, we found that there were numerous older, inactive CIPs with remaining fund balances that were not closed out. In addition, we were informed that many funded CIPs are either delayed or are worked on at a much slower pace than anticipated. As a result, CIP funds are either not being expended or are expended in smaller amounts than anticipated on these projects. This would generally result in an excess amount of bonding, banning and unexpended CIP funds. This, in turn, could result in unnecessary interest and other investment related expenses. We recommend that Finance Department management perform a comprehensive reconciliation between CIP funds being maintained in bond, ban, investment and bank accounts and related CIP project balances being maintained in MUNIS that require funding. Action should then be taken to follow-up on and resolve any variance identified. Procedures should also be developed, documented and implemented for periodically performing these reconciliations and follow-up resolutions in the future to ensure that CIP funding balance requirements for projects in process or planned to be initiated are in sync with the underlying CIP bond, investment and bank account balances. At a minimum, action should be taken to minimize financing requirements and related costs to the greatest extent possible. Management Action Plan Completion Date: December 31, 2013 Responsible Person: J. Ruffo, Interim Director, Finance Department; K. Chapman, Interim Director, Department of Public Works; T. Deller, Director, Department of Development Services; and, S. K. Borges, Acting Chief Operating Officer for ensuring follow-up and resolution We believe that the type of reconciliation recommended by Internal Audit is not feasible as it requires additional staffing resources in the
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City Of Hartford Capital Improvement Project Management and Administration Audit

Finance Department. We will further consider the cost benefit of performing such a review and reconciliation in the future and take action to as noted to minimize CIP financing requirements and related costs to the greatest extent possible. Follow-up on Prior Audit Report Finding and Recommendation In our City of Hartford Hartford Public School System Construction Process and Controls Audit Report IAD Report 1006, we identified a number of issues and concerns regarding construction project recordkeeping and retention. In particular, we noted that the school construction process included third party construction contract managers and several City and Hartford Public School System (HPSS) departments i ncl udi ng the City Finance Department, Treasurer’s Office, Capital Projects management, Department of Public Works, HPSS Chief Operating Officer and related senior management i n t h e HPSS Buildings and Grounds Department. Each City and HPSS o p e r a t i o n i n v o l v e d maintained s e p a r a t e construction project documentation and the third party construction contract managers maintained detailed project files including bid and subcontractor invoice documentation. As a result of this review, we found that the City and HPSS had no formal process f o r e n s u r i n g t h a t a l l c o n s t r u c t i o n r e l a t e d documentation was being properly maintained, stored, safeguarded and retained for future reference and audit. This problem was brought to light again recently when the City attempted to request reimbursement from the State of Connecticut for the 5% of the funds normally retained for these projects. Due to the problems we noted in our previous audit, the City had difficulty locating and providing the State with the documentation necessary to obtain reimbursement for these retained funds. We noted that the City had to hire a highly paid consultant to locate and compile the documentation necessary to o btain reimbursement from the State of Connecticut for retained funds for school construction projects that occurred over the last ten years. We recommended that DPW management take action to document the process and related procedures to ensure that all required school construction documentation is retained and maintained on file in a central location for future reference and audit. Management Action Plan Completion Date: December 31, 2013 Responsible Person: J. Ruffo, Interim Director, Finance Department; K. Chapman, Interim Director, Department of Public Works; and, S. K. Borges, Acting Chief Operating Officer for ensuring follow-up and resolution We will take action to document the process and related procedures to ensure that all required school construction documentation is retained and maintained on file in a central location for future reference and audit. MUNIS CIP Financial Accounting and Reporting We were informed by Finance Department management that MUNIS does not have the required functionality to accurately account for CIP financial data from one fiscal year to the next. As a result, a significant amount of manual intervention and work must be performed on CIP accounts each year by Finance Department employees to ensure that CIP financial data is being properly accounted for in MUNIS from one fiscal year to the next. As previously noted, manual processes are not effective or efficient and are prone to errors and omissions. Finance
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City Of Hartford Capital Improvement Project Management and Administration Audit

Department management noted that a project was initiated to fix this problem and it is currently in the work schedule for the Financial System Manager after temporarily being put on hold. We recommend that Finance Department management take action to expedite the resolution of this problem to ensure that CIPs are properly accounted for in MUNIS on a year-to-year basis and related and improve the effectiveness and efficiency of the related process. Management Action Plan Completion Date: December 31, 2013 Responsible Person: J. Ruffo, Interim Director, Finance Department; and, S. K. Borges, Acting Chief Operating Officer for ensuring follow-up and resolution This issue relates to budget only, not actual financial data. We are working to change the internal process to address the budget issues that developed with the MUNIS 9.3 upgrade. Because MUNIS changed the way it calculates carry forward budgets, Finance needs to change the way budgets are recorded and maintained in MUNIS. The Financial Systems Manager will continue this project after the migration to MUNIS 10.3 is done in September 2013. This change will require action from all appropriate departments to maintain. Anticipated completion of this process change is December 31, 2013. CIP Invoice Review, Approval and Payment Process Various tests of 101 invoices totaling more than $2.5 million on three CIPS and reviews of related approval and payment processes disclosed that all the invoices appeared to have been properly processed, approved and paid. We did note, however, that the invoice review and approval process and related procedures were not documented. As a result, it was not clear what steps were required and taken by each individual involved in the review and approval process. We recommend that DPW management document the process and procedures relating to the review, approval and payment of CIP invoices. This should include, but not be limited to, what specific steps are required and taken by each individual involved. Management Action Plan Completion Date: December 31, 2013 Responsible Person: : K. Chapman, Interim Director, Department of Public Works; T. Deller, Director, Department of Development Services; and, S. K. Borges, Acting Chief Operating Officer for ensuring follow-up and resolution We will document the process and procedures relating to the review, approval and payment of CIP invoices including the steps that are required and taken by each individual involved.

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City Of Hartford Capital Improvement Project Management and Administration Audit

Other Matters A number of other matters relating to Capital Improvement Projects came to light independent from our audit tests and reviews. These matters will be reviewed and addressed separately under a subsequent special review.

Distribution: Internal Audit Commission Members City Council Members K. Chapman, Interim Director, Department of Public Works A. Cloud, City Treasurer T. Deller, Director, Department of Development Services J. Figueroa, Acting Chief of Staff, Mayor’s Office A. Matta, City Architect, Department of Public Works J. Mazzuoccolo, Manager, McGladrey and Pullen, LLP J. Ruffo, Interim Director, Finance Department J. Sanchez, Director, Management and Budget Department P. Segarra, Mayor

Audit Team: P. Campbell J. Garvis

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