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60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 1: Governance policies for the MSD Board did not address several critical responsibilities necessary for proper and effective oversight.

1: We recommend the Board provide in their annual orientation training for new and returning Board members a clear understanding of MSDs organizational structure and operations, their responsibilities as Board members, as well as their legal and fiduciary roles, and the purpose of the board on which they serve. In addition, the orientation should address ethical requirements of Board members and staff and any significant policy changes adopted by MSD during the previous year. 2: We also recommend that the orientation be facilitated by a knowledgeable independent party, who can participate in and oversee the orientation training. 3: We recommend that the Budget Committee perform a regular review of budget to actual expenditures to monitor costs in each account and report to the Board. 4: The name and number of budget categories should provide transparency and sufficient detail to allow Committee members to accurately identify the types of expenses attributed to each category. 5: This review should be documented in the Board and Budget Committee meeting minutes. 6: Periodically, the Budget Committee should receive and review a listing of expenditures with sufficient detail to question transactions as necessary. 7: We recommend the Board develop a whistleblower reporting policy by creating and documenting an independent process whereby employees and/or volunteers have the option to directly make the Board aware of concerns involving matters that specifically need Board oversight. 8: We recommend the Board establish methods that allow for concerns to be reported directly to their attention by all staff, including anonymous concerns, and any complaints against executive staff. 9: The Board should further develop a process by which concerns are brought to the attention of the Board and ensure a process exists to analyze, investigate and resolve issues brought to its attention. The internal audit function could be used to ensure that concerns brought to the Board are independently investigated and findings reported directly to the Board.

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Staff is preparing a comprehensive, annual Board member orientation for new and returning Board members that will cover MSDs organizational structure and operations, Board member responsibilities, their legal and fiduciary roles, the purpose of the Board, ethical requirements of Board members and staff, and significant policy changes adopted by MSD during the previous year. Board orientation training will be scheduled for all members of the MSD Board once vacant positions have been filled. MSD is working with an independent party (Center for Non Profit Excellence) that can facilitate MSD Board orientation training. Orientation will be conducted when vacant Board positions are filled. Mid-year financial reports (12-31-11 unaudited) were reviewed by the Budget Committee on January 30, 2012. Finance Department is in the process of developing standard financial reports that will be provided to the Board on a monthly basis. The reports will include a Year-to-Date Summary of expenses by category and comparison to budget. MSD expects to launch the "OpenMSD" transparency website by March 15 which will include a sortable database on all expenditure transactions. The transactions will be updated on a regular basis. The Board reviewed a demonstration of this transparency website on February 13, 2012. Review of the financial reports by the Budget Committee and Board will be documented in meeting minutes.
Staff is currently negotiating a service agreement with an ethics hotline provider (Ethics Point) which is expected to be finalized by March 1, 2012. The provider will then proceed with implementing the hotline which is expected to be on-line for employees by April 15, 2012. Staff is also currently drafting a Whistleblower Reporting Policy, which will include procedures for use of the ethics hotline to report concerns/complaints. This Policy will be presented to MSD Policy Committee for approval or the recently adopted Ethics Policy for the Board and Senior Management will be amended to include the Whistleblower Reporting Policy. The Whistleblower Reporting Policy will also be included in the Ethics Policy being drafted for all MSD employees. In addition to the whistleblower reporting policy, internal procedures are also currently being drafted to govern the receipt, analysis, investigation, and resolution of concerns and/or complaints reported through the ethics hotline and are expected to be completed within the next 30 days.

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Page 1 of 32

60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE The Personnel Committee of the Board met on January 23, 2012 and reviewed the compensation of Senior Management. The Committee provided direction to the Human Resource Director to retain a professional HR 10: We recommend the Board adopt a policy to review and approve the consultant to review MSD compensation practices for management and salary and bonus incentives of the executive staff on an annual basis to 27 X 30% employees and report back to the Personnel Committee. Compensation ensure that the compensation paid is equitable to the responsibilities and adjustments for Executive Director and senior management will be presented duties of each position. to the Personnel Committee and Board for approval. A Compensation Policy will be developed to review and approve the Executive Director and Senior Management compensation. The Personnel Committee will annually review and approve the budgeted 11: We further recommend the Board annually review MSDs personnel salary increase for non-union employees and approve the range of salary and compensation policy, including the range of increases, by which salary 27 X 30% increases for employees based upon annual performance. This procedure will increases and bonus payments are made to all staff. be documented in the Compensation Policy. 12: The salaries should be reviewed specifically by the Board to ascertain The Executive and Senior Management salaries and annual adjustments will appropriate use of funds given the mission of MSD, and such review 27 X 30% be approved by the Board and will be reflected in the minutes of the Board should be documented in the minutes. meetings. 13: These actions should be documented in the meeting minutes. 27 X 30% 14: We recommend the Board, or a designated committee of the Board, A Travel Policy is being drafted to govern the travel of all employees. The 27 X 20% pre-approve executive staff travel, including estimated costs. Travel Policy will be approved by the Board Policy Committee, and include provisions to establish an annual travel budget for the Executive Director and 15: The Board meeting minutes should document the review conducted 27 X 20% Senior Management and reporting of all travel expenses to the Board by the Board. Personnel or Audit Committee. The approval of the travel budget for the 16: We also recommend the Board require a report of the actual travel Executive Director and Senior Management will be documented in the expenses of executive staff, with Board approval, prior to expense 27 X 20% meeting minutes. Currently, all employee travel is reviewed by the Executive reimbursement. Team, with the Executive Director approving all travel in advance and 17: The expense reports should sufficiently detail the expenses associated reporting of all travel expenses and a travel summary report upon with meals, lodging, transportation, and entertainment of each trip, as 27 X 20% completion. well as the business purpose of each expense item.

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60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 2: Certain policies were not documented or sufficient to ensure accountability. 18: We recommend MSD strengthen their purchasing card procedure by 30 X 20% making it a formal policy. 19: We recommend the policy include information requiring a business purpose be documented and address how MSD or the Board will handle 30 X 20% expenses that are considered improper or disallowed expenses. 20: We also recommend the Board review purchasing card expenditures A Procurement Card Policy will be developed to govern the approval and use 30 X 20% of the Executive Director. of procurement cards. Procedures will include documentation of business 21: We further recommend MSD include a procedure concerning purpose for purchases, supervisory/management approval, an annual review reimbursement by an employee when a purchasing card is used for 30 X 20% of the purchasing levels for employees, and procedures for disallowed personal use in a formal policy. expenses and method and time for employee reimbursement to MSD. An 22: A timeframe when staff is required to reimburse MSD for any personal annual audit will be conducted by the Internal Auditor of the procurement expenditure that may have been incurred should also be included in the card expenses and reported to the Audit Committee. Annually, the Internal policy. Currently, MSD does not use credit cards and therefore has no Auditor will provide to the Audit Committee a summary of expenses by the 30 X 20% policy, but if credit cards ever become the preferred method of payment Executive Director, including procurement card purchases, travel expenses of goods, then we recommend a strong credit card policy should be and reimbursements. Currently MSD does not issue credit cards to developed. employees and has no plan to do so. 23: We recommend policies be implemented to ensure that the Board or a designated committee of the Board review and approve all executive staff reimbursements and supporting documentation to ensure the 30 X 20% reimbursements are for reasonable and necessary expenditures. Such reviews and approvals also will help ensure that duplicate payments are not made. 24: We recommend MSD adopt written policies for the backup of Policy and procedures for the backup of electronic financial information and 30 X 20% electronic financial information. the reporting of lost or missing financial records will be incorporated into a 25: Moreover, policies should include a process to report any lost or Disaster Recovery Policy and Procedure. 30 X 20% missing financial information or records. 26: We recommend MSD adopt and implement property and inventory A Property and Inventory Control Policy will be developed to identify and control policies and procedures to identify and account for all furniture, 30 X 10% account for all furniture, equipment, and other items valued over a specified equipment, or other items valued over a certain specified dollar amount, dollar amount. The procedures will include item description, vendor, with the specific dollar amount included in policy. model/serial number, acquisition date and cost where available. The Policy 27: Such policies and procedures should include recording of the following will include provisions for inventory control, disposal and reporting. This minimum information for each property item: Name of individual in policy is expected to be completed by August 15, 2012. The Policy will be receipt of furniture/equipment; Description of furniture/equipment; 30-31 X 10% communicated to employees and included in the MSD Policy Manual. Vendor name; Model and serial numbers; Acquisition date; and, Acquisition cost.

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60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE 28: We further recommend such inventory policies and procedures 31 X 10% include an annual, or periodic, physical inventory of all fixed assets. A Property and Inventory Control Policy will be developed to identify and 29: Dispositions of property should also be reflected in inventory account for all furniture, equipment, and other items valued over a specified 31 X 10% accounting. dollar amount. The procedures will include item description, vendor, 30: The property inventory and control policy should be made available to model/serial number, acquisition date and cost where available. The Policy all employees who have responsibility for property assets and should will include provisions for inventory control, disposal and reporting. This 31 X 10% include sufficient detail to ensure accurate and appropriate accounting for policy is expected to be completed by August 15, 2012. The Policy will be property inventory. communicated to employees and included in the MSD Policy Manual. 31: MSD should include its inventory and property control policies in its 31 X 10% Policy Manual.

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60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 3: MSD lacked management oversight and enforcement of established policies. 32: We recommend the MSD Board discuss with its executive management the need for proper oversight and governance of its operations. Although it is not the Boards responsibility to oversee day-to35 X 10% day business operations of the organization, the MSD Board is responsible to ensure strong leadership is in place and is working within the boundaries the Board has established. 33: We recommend the MSD Board require supervisory personnel to be re35 X 10% trained on key organizational policies. 34: The trainings should occur in-house at MSD facilities and could be MSD staff is currently reviewing policies to identify weaknesses in internal conducted by MSDs own Human Resource Department staff or its Legal 35 X 10% controls. As policies are developed or updated they will be appropriately Department staff. communicated to employees and added to the intranet web site that 35: Employee attendance for the training should be required and 35 X 10% includes all policies. Employee sessions will be conducted, including documented. documentation of attendance. The Employee Code of Conduct will be revised 36: Upon completion of training, MSD personnel should be required to to include provisions to assure management and employees are held sign an affidavit stating that they have been trained and understand their accountable in accordance with policies. responsibilities as an MSD employee to abide by the policies and 35 X 10% procedures of the organization. The statement should further acknowledge that the employee understands the consequences of not following the different policies. 37: We further recommend MSD hold its personnel accountable to the policies. If a violation of policy occurs, such as an employee not submitting 36 X 10% a reimbursement request in a timely manner the employee should understand that a reimbursement will not be made. 38: We recommend all levels of MSD management consistently follow and 36 X 10% enforce adopted policies. 39: We recommend the Board evaluate the current MSD Education Human Resources is currently reviewing and evaluating the current MSD Assistance Program to ensure it is structured to provide the best benefit to 36 X 20% Education Assistance Program. Proposed changes to the program will be the organization and the ratepayers. presented to the MSD Personnel Committee and Board for approval.

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60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 4: MSD ethics policies for Board members, appointed executive staff members, and employees were not sufficient to address conflicts. 40: To remain independent in their decision-making regarding entities doing business with MSD, or seeking to do business with MSD, Board members, executive staff, and other employees should avoid any MSD adopted an ethics policy governing the MSD Board, Executive Director, situations that are actual conflicts between their private interests and their Chief Engineer, and Senior Management staff effective January 23, 2012. duties on behalf of MSD, or that have the potential to present conflicts. 39 X 80% Procedures for reporting ethics complaints through an ethics hotline, and for Neither should they accept gifts and gratuities that compromise the the receipt, analysis, investigation and resolution of such complaints are still impartiality of their decision-making on behalf of MSD, or that give the being developed for inclusion in the newly adopted ethics policy and the appearance that MSD actions are based on personal benefit, favors, or policy to be developed for MSD employees and are expected to be completed relationships, rather than objective decision-making. by April 15, 2012. The employee ethics policy, a financial disclosure form 41: We recommend the Board establish a comprehensive code of ethics, modeled after the form utilized by Metro Government pursuant to the Metro applicable to Board members, appointed executive staff members, and all Ethics Code, and formal hearing procedures to be utilized by the MSD Board employees. MSD may want to consider having someone skilled in 40 X 90% Audit Committee to hear written and/or anonymous ethics complaints are establishing ethical standards for public employees and board members also being developed and are expected to be completed within that same assist in the drafting of such policy standards. timeframe. The Ethics Policy will be incorporated into a Policy Manual for 42: Upon adoption by the Board, the code of ethics should be employees. See Attachment A. incorporated into the two Policies and Benefits Manuals for employees 40 X 20% (unit and non-unit), as well as any manual given to Board members during orientation. An ethics training program will be developed for the Board, Senior 43: We recommend MSD provide initial training for Board members, Management and employees. Ethics training will be included in Board appointed executive staff and employees on the code of ethics, as well as a 40 X 20% member orientation (once vacant Board positions are filled by the Mayor), review annually. and employee sessions will be conducted with 120 days of adoption of the Employee Ethics Policy. 44: In developing a comprehensive code of ethics applicable to Board members, as well as appointed staff and employees, the following areas of conduct should be considered for inclusion: General standards of conduct; Contracting, subcontracting, having an agreement, or doing business with MSD; Use of official position to obtain financial benefit, privilege or The Board adopted a comprehensive Board and Senior Management Ethics advantage for self or others; Involvement in matters where an ownership 40 X 80% Policy on January 23, 2012 including these provisions. See response to interest exists; Use of confidential information; Use of MSD property, time, Finding 4, Recommendation 40. equipment; Solicitation; Acceptance of gifts and gratuities; Employment of relatives; Transactions with subordinates; Outside employment; Service on Boards and Commissions; Honoraria; Investment/ Stock ownership; Representation; Post-employment; Political activity; and, Financial disclosure.

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60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE

45: In establishing a financial disclosure policy, we recommend the MSD Board members, as well as all executive team members, annually file with an appropriate committee of the Board, and by a specified date, a statement detailing financial interests held. Required information should be prescribed by an appropriate committee of the Board.

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46: The Board should consider including the following disclosures on the prescribed form: Name, business and home addresses, telephone number and e-mail address of the filer; Title of position or office whereby filing is required; Any other occupation of the filer or filers spouse; Businesses in which the filer or filers spouse hold a specified percentage of interest. The policy should numerically state the percentage of business ownership required to be reported; Sources of income to the filer, filers spouse, or filers immediate family members exceeding a specific amount (dollar 40-41 amount should be specified in the policy); Real property owned by the filer, the filers spouse, or the filers immediate family, and its location; Creditors of the filer, the filers spouse, or the filers immediate family who are owed more than a specified amount. The policy should specify the dollar amount required to be reported; and, Sources of gifts over a specified amount, which should be stated in the policy, to the filer, the filers spouse, or the filers immediate family, except for gifts from family members. 47: The policy should further require an affirmative statement by the filer that he or she has no interest that would cause a conflict with his or her 41 official duties. 48: Sanction for noncompliance with the filing requirements also should 41 be detailed in the policy. 49: To ensure compliance with the code of ethics adopted, MSD should develop and implement policies, procedures, and responsibilities regarding reporting, investigation, and resolution of allegations of ethical 41 misconduct as detailed in the recommendations of Finding 1 regarding a whistleblower policy.

90% These recommendations have been incorporated into the Board and Senior Management Ethics Policy adopted January 23, 2012. Refer to the response provided in Finding 4, Recommendation 40.

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60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 5: Several conflicts of interest existed that gave the appearance of improprieties by certain MSD Board and staff members.
50: We recommend the MSD Board, within its comprehensive code of ethics, provide standards of conduct for conflicts of interest that prohibit Board members, appointed executive staff, and employees from the following: Having a primary contract, subcontract, or agreement with MSD, either directly, by a family member, or through a business which is at least five percent owned; Representing a person of business privately before MSD; Using his or her position to obtain a financial gain, a benefit, or an advantage for oneself, a family member, or others; Using confidential information acquired during his or her tenure to further his or her own economic interest or that of another person; Holding outside employment with, or accepting compensation from, any person or business with which he or she has involvement as part of his or her official position for MSD; and, Involvement in discussions and decisions pertaining to: - Persons or businesses from which he or she has accepted gifts or gratuities over a specified amount; - Matters involving businesses in which he or she has a direct or indirect financial interest of over five percent; - A former employer or previously owned company within the last 12 months; - Persons or businesses with which they have a partnership or financial ownership of over five percent; - Persons or businesses with which he or she competes privately; - Matters involving family members, or businesses owned by or employing family members; and, - Any other matter that presents a conflict between a personal interest and a duty to MSD and the citizens of Louisville and Jefferson County.

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51: Board members, appointed executive staff, and other employees who abstain from involvement in discussions and decisions as recommended above should not be present during such discussions, and such abstention should be documented in writing and placed in the employees personnel file or recorded in the minutes of a Board meeting.

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60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE 52: To ensure compliance with the conflict of interest policies adopted, MSD should develop and implement policies, procedures and responsibilities found in Finding 1 regarding reporting and resolution of This recommendation has been incorporated into the Board and Senior complaints. Finally, we reiterate MSDs Policy and Benefits Manuals that 46 X 80% Management Ethics Policy adopted January 23, 2012. Refer to the response state: As public servants, employees must display a high standard of provided in Finding 4, Recommendation 40. ethical behavior that ensures the public that employees do not use their positions to provide special privileges to themselves, to other individuals or organizations.

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60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 6: MSD's primary legal services contract has been with the same attorney's firm since 1984 while never being competitively negotiated or advertised. 53: We recommend that MSD designate this contract as an applicable Effective January 9, 2012, MSDs primary legal services contract was professional services contract that should be periodically advertised and 48 100% designated by the MSD Board as a professional services contract that should competitively negotiated to ensure MSDs best interests are met. be periodically advertised and competitively negotiated, and staff was 54: Due to the multiple types of legal services that can be assigned to this authorized to and has begun drafting a Request for Qualifications (RFQ) to Firm and attorney, the contract should be separated based on the type of 48 X 90% procure legal services. The RFQ separates legal services into multiple practice legal services needed. areas for purposes of procuring qualified attorneys under separate contracts 55: An analysis should be performed to determine the need for outside 48 X 80% for each area, (including the areas of special board and bond counsel), is legal services. being reviewed by a procurement evaluation team and is expected to be 56: Based on the results of the analysis, a separate request for proposals advertised by April 15, 2012. The team will also participate in the evaluation should be developed for advertising each type of service and an evaluation 48 X 80% of statements of qualifications and further recommendations concerning the committee should be created to evaluate the responses using specific procurement. On February 13, 2012 the Board directed the Legal Director to criteria. review the internal legal staff resources, consider the need for additional 57: The evaluation committee should consist of staff members that are staff and the ability to perform legal services in-house to minimize legal 48 X 80% informed and knowledgeable regarding the services needed by MSD. expenses. The Board has also directed the Legal Director to issue an RFQ for Board Legal Counsel, separate from all other legal services in order to assure 58: We recommend the Board consider whether Board Legal Counsel independent advice to the Board where appropriate. In the interim, MSD's 48 100% should be independent of all other legal services. internal Legal Director is serving as the Board's General Counsel.

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60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 7: Board Legal Counsel given approval authority in MSD Board Process. 59: We recommend the MSD Board rescind the 1984 resolution that requires a review and approval of all matters by the Board Legal Counsel 50 100% prior to presentation to the Board. Effective January 9, 2012, the MSD Board rescinded the 1984 resolution that 60: Secondary reviews by Board Legal Counsel of issues or documents requires Board Legal Counsel approval and oversight of Board matters that presented to the Board should be performed only upon request by the 50 100% addresses each of these recommendations. See Attachment B. Board, Executive Director, or Legal Director and only for the specific incidence of the request. 61: We recommend the Board not make a blanket request of the Board 50 100% Legal Counsel to review all documents or issues of a certain type.

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60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 8: Legal services contract lacks centralized oversight. 62: MSD should ensure that the internal Legal Director is responsible for legal contract compliance and reviewing all invoices associated with legal 52 X 50% service contracts. 63: The MSD Legal Director should regularly report on legal service As documented in the response to Finding 6, Recommendations 53-58, MSD 52 X 50% expenditures and any related issues to the Board. will issue an RFQ for legal services and these recommendations regarding 64: Final approval authority for Board Legal Counsel services should invoicing, expenditures, approval and reporting of legal expenses will be remain with the Board to ensure an independent counsel, but all other defined as part of the RFQ and contract documents. Staff is also drafting a legal services may have final approval by the Legal Director. Due to 52 X 50% new template contract for use with all legal services providers pursuant to departmental budgetary oversight, other MSD authorities may still need to which all legal services except for services provided by Special Board Counsel, retain final payment approval. will be provided under the direct supervision of the MSD Legal Director who 65: MSD should also develop a formal procedure for vendors to protest a will also have responsibility for monitoring and overseeing all legal services, denial of certain expenses and request in writing an additional review of to include defining the experience requirements for billing at partner or those expenses by a secondary authority. For legal service contracts, such 52 X 50% associate rates, the number of attorneys assigned to work on a particular a secondary review may be conducted by the Executive Director, the matter, approving monthly billings and expense reimbursements, not-toBoard, or a designated Board committee. exceed amounts for each case, settlement procedures, and provisions to 66: The final decision of the secondary review should be documented in prevent conflict of interest situations. Staff will present and recommend to 52 X 50% writing with an explanation as to the final decision. the Board proposed legal services contracts for approval following the 67: Individual Board members should refrain from attempting to influence procurement teams review and evaluation of statement of qualifications 52 X 50% the management process of MSD in a unilateral manner. from and preliminary selection of qualified attorneys/firms.

68: Requests for changes to management should be made during Board meetings or meetings of Board committees and have the support of a majority of the members.

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60-Day Corrective Action Update

February 14, 2012 Working Draft

STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 9: MSD's legal services contract terms are not well defined and are silent as to settlement procedures and conflict of interest disclosures.
69: We recommend that MSD amend its contract for legal services to ensure that MSD adequately controls the costs and responsibilities of the outside legal firm. Revisions should address the following areas: Specifically, define the experience requirements for billing at the partner or associate rates. The contract should require a justification if the partner rate is used by more than one attorney on the case. For optimal monitoring by MSD, the contract should require a written determination for each assigned case as to the expected number of attorney partners, associates, and paralegals, etc. This determination should also include a not-to-exceed amount to be paid to the Firm for the assigned case. The Firm must obtain written prior approval to exceed the maximum amount specified. Separate the types of legal work into individual contracts to improve monitoring efforts. Designate the MSD Legal Director to assign contracted legal work as needed. Require prior approval of any costs other than for time spent on a case by a Firm attorney from the Legal Director. This includes any costs related to travel, meals, expert witnesses, mock juries, and other costs incurred not related to the Firms time costs. Include a term that specifies the settlement process that should be followed by the Firm. Include a term that requires the Firm to disclose any actual or potential conflict of interest between MSD and any of the Firms other clients.

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Concurrent with the issuance of a RFQ for legal services, as explained in greater detail in response to recommendations under Finding 6, staff is also drafting a new template contract for use with all legal services providers pursuant to which all legal services, except for services provided by Special Board Counsel, will be provided under the direct supervision of the MSD Legal Director/Legal Counsel who will also have responsibility for monitoring and overseeing all legal services, to include defining, among other things, settlement procedures, and provisions to prevent conflict of interest situations. Staff will present and recommend to the Board proposed legal services contracts for approval following the procurement teams review and evaluation of statement of qualifications from and preliminary selection of qualified attorneys/firms.

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STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 10: MSD spent $2.1 million for co-bond counsel services with no documented justification.
70: We recommend the MSD Board formally adopt a policy to select bond counsel and a financial advisor through a competitive selection process using either a RFP or RFQ. This competitive process should assist in determining those most qualified to perform the services, while also provide an opportunity to control the costs of issuing bonds. 71: If co-bond counsel is desired, justification for co-bond counsel should be provided to the Board for its review and approval. 72: The RFP or RFQ should state the services desired, the length of the engagement, the evaluation method, the selection process, and a cost proposal to provide services. 73: If co-bond counsel is being engaged the RFP, RFQ, or engagement letter should specify the roles and responsibilities and tasks assigned to each firm to minimize potential duplication of work and costs. 74: MSD should ensure proper oversight of legal counsel to ensure work is progressing and coordinated as required by the RFP, RFQ, or engagement letter. 75: We further recommend the MSD Board be fully apprised of the RFP, RFQ, and engagement letter for procuring services, the method used to select bond counsel and financial advisor, the tasks to be performed by counsel and financial advisor, their fees and other bond issue costs.

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MSD staff is preparing an RFQ for legal services that will include services for Bond Counsel (see Response to Finding 6, Recommendations 53-58). An RFQ for Financial Advisor is being developed and will be issued by June 15, 2012. MSD has amended the contract with its existing Financial Advisor for services on a month-by-month basis until a new Financial Advisor is selected. MSD Board will be kept up-to-date on responses and selections for these professional services. Any use of Co-Bond Counsel will be justified and approved by the Board and the Board will approve the Bond Counsel.

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STATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICT


The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 11: The lack of a policy development process results in duplication of work and potentially unnecessary legal fees. 76: MSD should develop a policy or process by which policies are to be Staff will prepare and present to the MSD Board Policy Committee, for initiated and developed and subsequently brought before the Board. This recommendation to the full Board, a resolution pursuant to which the Board should include who has the authority to initiate policy development and 63 X 10% designates certain MSD policies as policies to be drafted, revised, modified who has the authority to authorize the expense of Board Legal Counsel to and monitored by MSD staff as directed and approved by the MSD Board. assist in the process. The resolution, which will be presented to the Board Policy Committee by 77: When making an initial request for a new or revised policy, use of June 15, 2012, will also serve to designate those policies to be periodically internal staff should be considered first, when possible, to ensure the most 63 X 80% reviewed by the Board. Staff will use internal resources where appropriate to cost effective methods of policy development are used. develop policies and only use external resources where appropriate. Staff will benchmark with other local and state agencies as well as the Institute for 78: A determination for the need of outside legal expertise should be Internal Auditors and other professional organizations to assist in developing 63 X 80% made in consultation with the internal legal staff. best practices for policies.

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 12: The Louisville Green Corporation bylaws specify by name the President and the special legal counsel.

79: We recommend the Louisville Green Board amend its bylaws to remove specific names of individuals. The Louisville Green bylaws should be free of any redundant or unnecessary terms that may complicate the governance of this corporation.

64

0%

80: Further, we recommend the Louisville Green Board select a legal counsel through a transparent, competitive process as similarly recommended in Finding 6.

64

0%

The bylaws of the Louisville Green Corporation stipulate that the bylaws may be amended at any regular or special meeting of the Board by an affirmative vote of six (6) members; however, the Corporations Board currently has only five (5) members. As soon as the Boards membership is increased to six (6) members, the bylaws will be amended to remove the names of the President and special legal counsel. Also, effective January 9, 2012, MSDs primary legal services contract was designated by the MSD Board as a professional services contract that should be periodically advertised and competitively negotiated, and staff was authorized to and has begun drafting a RFQ to procure legal services. The RFQ separates legal services into multiple practice areas for purposes of procuring qualified attorneys under separate contracts for each area, (including the areas of special board counsel and bond counsel), is being reviewed by a procurement evaluation team and is expected to be advertised within 30 days. The team will also participate in the evaluation of statements of qualifications and further recommendations concerning the procurement.

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 13: MSD Board provides inadequate investment oversight and lacks sufficient information. 81: MSD should, at a minimum, follow current Investment Policy and provide the Board with detailed semi-annual reports as to the holdings of 69 X 90% Staff is providing the MSD Board with quarterly reports that include all the investment program, investment activities, risk levels of the program, investments by category and amount, and any change in market value of and program strategies. those investments and investment earnings. MSD's current Investment 82: However, we recommend the policies be updated and investment Policy is being reviewed for any necessary updates, including reporting reports be provided to the Board, or to a Board investment committee as 69 X 90% requirements to MSD Board. recommended in Finding 16, on a monthly basis. 83: Board members should request such information if not provided by 69 X 90% staff. 84: MSD should follow the requirements of the current Investment Policy Following MSD's Procurement Regulations for professional services, RFP's for and annually solicit Request for Proposals for investment services that 69 X 90% Investment Management Services will be issued for annual contracts, with contain all required details of the investment management firm and the the option to renew annually up to four additional years. services being provided. At the direction of the Board, all investments in the Yield Enhancement 85: In the interests of transparency, MSD should not enter into a Program have been withdrawn and invested in government backed proprietary investment program that does not disclose all details of the 69 X 90% securities. A new investment policy is being drafted for review and approval program to the Board members. by the Board. All details of MSD investment programs will be disclosed to the Budget Committee and MSD Board.

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 14: MSD Financial advisor has conflict of interest. 86: MSD should undergo an open procurement process on a periodic basis for an experienced financial advisor to provide advice and consultation 73 X 40% related to the investment portfolio of MSD. It is anticipated that an RFQ for Financial Advisor will be issued in by June 15, 2012. The current interim contract with the financial advisor addresses 87: This contract should be separate from other financial services such as 73 X 40% conflicts of interest and is separate from services for bond issuance. the issuance of bonds, which may be negotiated on a per transaction basis.

88: The contract should require the financial advisor to be free of conflicts with any investment firm doing business with MSD. 89: All fees for an investment consultant and advisement contract should be a single fee based upon the amount of funds to be invested and the type of investments that are expected by MSD.

73 73

X X

40% 40% A fee structure for Investment Management Services will be included in the annual contracts referenced in response to Finding 13, Recommendation 84.

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 15: MSD does not have financial staff or Board members with background or specific experience in the types of investments and other related financial activities undertaken at MSD. 90: We recommend that MSD ensure that the finance staff include a person or persons with strong financial and investment knowledge and MSD posted the Budget and Finance Director position and is currently experience to enable investment and financial strategies to be based on 75 X 80% reviewing candidates. The position is expected to be filled within 60 days. the knowledge and understanding of such activities by MSD staff and not solely on the advice of third party advisors. 91: We further recommend that MSD Board membership include at least The Mayor of Louisville Metro Government is currently reviewing candidates one professional who is particularly knowledgeable in investment and for MSD Board positions in compliance with KRS 76.030. The plan is to have 75 X 50% financial management activities commensurate with the types of activities at least one of the four vacant positions to be filled with a professional with in which MSD may engage. investment and financial experience. 92: In addition, we recommend the MSD Board create an investment committee whose members are responsible for the oversight of 75 X 10% The Mayor of Louisville Metro Government is currently reviewing candidates investment activity and programs. for MSD Board positions in compliance with KRS 76.030. The plan is to have 93: The committee should include, at a minimum, one professional who is at least one of the four vacant positions to be filled with a professional with particularly knowledgeable in investment and financial management 75 X 10% investment and financial experience. It is expected that the MSD Board will activities. create an investment committee, or the duties of an investment committee 94: We recommend the investment committee receive detailed reporting will be delegated to an existing committee of the Board. These duties will of MSDs investment portfolio, all investment activities, programs, trends, 76 X 10% include oversight of investment activity and financial management programs; and strategies. reviewing detailed reporting of MSD's investment portfolio, all investment 95: The investment committee should have a thorough understanding of activities, trends, and strategies; and questioning staff and financial advisors existing investment policy, and propose additional policies as deemed 76 X 10% regarding investment activity and programs to evaluate compliance with necessary. investment policies. 96: The committee should question staff and financial advisors regarding investment activity and programs to evaluate compliance with investment 76 X 10% policies.

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 16: MSD has insufficient policies regarding investment and other financial activity. 97: We recommend that MSD undertake a comprehensive review of its Investment Policy to strengthen Board oversight and to determine what 77 X 10% changes are needed to ensure this policy fully addresses the actual investment activities conducted by MSD. 98: In addition, these policies should address the use and monitoring of external financial advisors and provide detailed guidelines related to their 77 X 10% MSD's current Investment Policy is being reviewed for any necessary updates, use. including reporting requirements to MSD Board, and guidelines for the use of derivative instruments such as swap agreements. 99: Further, we recommend MSD develop policies related to interest rate swaps that include the following: Objectives for the use of interest rate swaps; Conditions for the use of interest rate swaps; Guidelines as to the 77 X 10% terms and conditions of any MSD swap agreement; Criteria related to the use of interest rate swap counterparties; Evaluation and management of interest rate swap risks; and, Terminating interest rate swaps.

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 17: MSD lacks a formal process for initiating, performing, reporting and distribution of its internal audits.

100: We recommend the MSD Audit Committee develop and approve procedures for the internal audit function. 101: The adopted procedures should state the process for the Internal Auditor to follow in initiating an audit, including the process for the Audit Committee to be informed of and approve or authorize any audit requests not already on the annual audit plan made by management or other parties. 102: The adopted procedures should also state the acceptable time period for the Internal Auditor to allow management to respond to a draft audit report. 103: The adopted procedures should specify that the Auditor is to inform the Audit Committee if management fails to respond to the draft report within the specified time period and the process to follow to release an audit report when management fails to respond. 104: The procedures should require the Internal Auditor to inform the Committee when a draft audit is completed for the Audit Committee to review and approve the draft report prior to forwarding the report to management for response. 105: Finally, procedures should require the Audit Committee, after reviewing and approving internal audit reports, to ensure internal audit reports are presented to the full MSD Board for ratification.

78

100%

78

100%

78

100%

78

100%

Updates to the Audit Committee and Internal Audit Charters were adopted by the MSD Board on February 13, 2012. These updates include procedures for initiating internal audits, approval of audit requests by the Audit Committee, responses to audit findings by management, and approval of internal audit reports by the MSD Board. Also included were statements of responsibility for the Audit Committee to assist in performing the annual evaluation of the Internal Auditor, approve and recommend to the MSD Board an annual budget for the Internal Auditor, review and approval of the annual work plan for internal audit, and to hold at least four meetings annually, on a quarterly basis, to receive routine status updates from the Internal Auditor. The adopted Internal Audit Charter states that the Internal Auditor reports functionally to the Audit Committee and administratively to the Executive Director. The MSD organizational chart was immediately revised to reflect the reporting structure of the Internal Auditor. MSD is currently seeking further guidance from the State Auditor's Office, the Institute of Internal Auditors and other agency practices regarding the procedures for communicating preliminary draft audit reports to the Board Audit Committee prior to management review. This recommendation has been incorporated into the Audit Committee and Internal Audit Charters adopted by the MSD Board on February 13, 2012. Refer to the response provided in Finding 17, Recommendation 100.

78

90%

78

100%

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 18: Oversight of MSD internal audit function primarily performed by executive management; MSD Audit Committee is not sufficiently engaged with Internal Audit. 106: We recommend the MSD Audit Committee perform the annual 81 100% evaluation of the Internal Auditor. 107: We recommend the MSD Audit Committee approve and recommend to the full Board an annual budget for the Internal Auditor based on the 81 100% approved internal audit work plan.

108: The Internal Auditor should request directly to the Audit Committee the amount of funds estimated as necessary to conduct those audits. 109: Once approved by the Audit Committee, the annual budget for the Internal Auditor should be ratified by the full Board to be included in the MSD budget by the Finance Director. 110: We also recommend the MSD Board revise the Audit Committee Charter to include within the Committees responsibilities the performance of the annual evaluation of the Internal Auditor and the budgeting for the expenses of the Internal Auditor. 111: We recommend the MSD Board revise the organizational chart of MSD to include a direct reporting line from the Internal Auditor to the Audit Committee of the Board. 112: We recommend the MSD Audit Committee consistently approve the annual MSD internal audit work plan as required under the Internal Audit Charter. 113: Further, the Board should revise the Audit Committee Charter language to agree with the language in the Internal Audit Charter as the current Committee Charter only states the Committee is responsible for reviewing the work plan. 114: Additionally, we recommend the MSD Internal Auditor provide routine status updates on audits to the Audit Committee. This will foster continued communication between the Internal Auditor and Audit Committee members. It will allow the Internal Auditor to discuss any problems that may be encountering on an audit with the Committee in a more timely manner and will allow the Committee an opportunity to discuss any concerns they may have with the thoroughness of a particular audit or regarding other areas of the organization that they may wish to ask her to investigate.

81

100%

81

100%

81

100%

81

100%

These recommendations have been incorporated into the Audit Committee and Internal Audit Charters adopted by the MSD Board on February 13, 2012. Refer to the response provided in Finding 17, Recommendation 100.

81

100%

81

100%

82

100%

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE

115: Finally, we recommend the MSD Audit Committee consider holding quarterly meetings to ensure continued direct communication with the Internal Auditor.

82

100%

This recommendation has been incorporated into the Audit Committee and Internal Audit Charters adopted by the MSD Board on February 13, 2012. Refer to the response provided in Finding 17, Recommendation 100.

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 19: MSD provided compensation benefits that could be considered excessive for a public entity. 116: We recommend that MSD review its various methods of providing MSD will solicit RFP's from qualified HR consultants to conduct a review of compensation to executives and other staff and ensure that its the total compensation structure and programs for executives and staff, compensation structure and programs are fair and equitable to executives including initial six-month and annual salary increases for new employees, as 86 X 30% and staff and is in the best interests of the public it serves. Expenses well as annual performance salary increases for all employees. incurred by a public entity should be scrutinized due to the public nature Recommendations provided by the HR consultant will be presented to the of the business. MSD Board for appropriate action. 117: Alternative measures should be evaluated to reduce staffing and a In the future, if MSD plans to provide its employees with incentive cost-benefit analysis of any retirement buyout considered by MSD so that 86 100% compensation for any reason, a cost-benefit analysis will be performed and the Board is aware of the potential costs involved and the goals that communicated to the MSD Board for approval. should be achieved by additional compensation costs.

118: In addition, the policy providing six-month and annual salary increases and bonuses to new employees should be reconsidered because this policy could provide an excessive increase in compensation to an employee that has not been with MSD a complete year. 119: Furthermore, all forms of compensation, including performance salary increases and bonuses, should be considered if MSD wants to control or freeze its payroll budget.

86

30% Refer to the response provided in Finding 19, Recommendation 116.

86

30%

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 20: MSD did not comply with procurement guidelines when procuring certain professional services. 120: We recommend MSD implement procedures to ensure compliance Refer to the response provided in Finding 3, Recommendation 32. Special with all procurement policies, particularly those pertaining to professional provisions will be provided for procurement of professional services and 91 X 10% services. Employees responsible for procurement should be sufficiently training will be provided to employees in the procurement department. trained on those policies. employees

121: Further, we recommend MSD adopt the provisions in the Model Procurement Code in KRS 45A.740, 45A.745, and 45A.750 pertaining to the procurement of architectural and engineering services.

91

90%

MSD has adopted the local public agency provisions of the Kentucky Model Procurement Code (KRS 45A.345 through KRS 45A.460), and staff believes that the foregoing provisions allow for procedures similar to those authorized under KRS 45A.740, KRS 45A.745, and KRS 45A.750 and therefore enable MSD to award a contract for architectural or engineering related services to the best firm qualified to perform the required work on the basis of demonstrated competence and qualification for the type of professional services required and at fair and reasonable prices.

122: We recommend: Procurement Method Determination Forms be completed in a timely manner in accordance with procurement policies and used to document the method by which the agency intends to procure a service. It is a checkpoint to ensure the agency is utilizing the correct procurement method and should not be overlooked or completed after the contract is signed or services are provided; MSD centrally maintain all procurement records; and, MSD only approve payments that have a signed Purchase Order. 123: We recommend that MSDs policy of allowing the Board to waive any or all requirements related to the procurement of professional services be repealed.

92

10%

Refer to the response provided in Finding 3, Recommendation 32. In addition will evaluate a central procurement process for engineering, construction and goods and services to improve the controls, documentation, records and payments to contractors and vendors.

92

0%

MSD staff is currently reviewing Procurement Regulations to determine the appropriateness of the Board's authority regarding procurement of professional services.

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 21: Employee usage of MSD computer appears to violate policy. 124: We recommend MSD provide an updated training to its staff regarding MSD policies, including its Electronic Communications Media 93 X 10% Policy. MSD's current Electronic Communications Policy will be reviewed, updated 125: MSD should require staff to sign-in for the training and maintain the and communicated to MSD staff routinely and appropriate training will be 93 X 10% sign-in sheets in accordance with its record retention policy. provided. 126: We further recommend MSD require its personnel to periodically sign an acknowledgment to be placed in the employees personnel file, 93 X 10% when its Electronic Communications Media Policy is updated.

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 22: MSD had no formal records retention policies or records retention training for its employees. 127: To ensure MSD retention schedules and related systems and processes are being effectively carried out, we recommend MSD formally adopt records retention policies to be included in the Policies and Benefits manuals for employees. Such policies should detail employee 94 X 0% responsibilities over retaining required books, papers, maps, photographs, MSD has created a Records Retention Policy team to develop a record discs, software, e-mails, databases, and other electronically generated retention policy. The policy will detail employee responsibilities over records. retaining required books, papers, maps, photographs, discs, software, e128: We further recommend an archival policy and system be drafted and mails, databases, and other electronically generated records. All current adopted specifically regarding proper e-mail retainage. Policies should also 94 X 0% employees and new hires will be trained of records retention requirements, include training requirements. including proper e-mail retention. A comprehensive policy is needed and will 129: We recommend that all employees be formally trained on all records take up to 10 months to develop and implement. Plan is to complete by retention requirements, including the proper retention of e-mail 94 X 0% December 15, 2012. communications.

130: Upon employment, all new employees should be trained on records retention responsibilities to assure proper retainage of records. MSD also may want to consider having employees sign an acknowledgement that they have read and understand the records management policies.

94

0%

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 23: MSD accounting system coding errors led to misclassified expenditures and failure to issue 1099 forms to its contractors. 131: We recommend MSD Finance Department be more diligent in ensuring expenditures are coded to the proper projects and cost 96 X 40% categories. Internal controls over coding of accounting documents are being reviewed to 132: Further, because the MSD Finance Department personnel partially identify areas that need to be strengthened. Finance department procedures rely on the department managers and directors to assist them in will be updated as appropriate, and Finance staff will be trained on the identifying the appropriate codes to use when entering the expenditures updated procedures. Improved controls will be implemented by July 15, into the accounting system, we recommend the MSD Finance Department 96 X 40% 2012. review expenditure cost center and classification information provided by those approving the expenditure and question the information that does not appear reasonable or appropriate. 133: We recommend the MSD Finance Department require all necessary financial forms, including W-9s, prior to entering the vendor into the MSD 96 X 60% A policy is being drafted for the processing and reporting of W-9 information. accounting system. This policy will include a requirement for all necessary financial forms to be 134: Finally, we recommend MSD develop a policy that addresses financial received by Finance prior to entering a new vendor in the financial system, 96 X 60% processing activity involving the reporting of W-9 information. and it will cover the processing and reporting of W-9 activity. This policy will 135: The policy should be presented to the MSD Board Policy Committee be presented to the MSD Board Policy Committee for approval, and then 96 X 60% for approval prior to implementation. communicated to the appropriate employees. Plan is to complete this Policy 136: The policy should then be posted and distributed to all required by July 15, 2012. personnel to ensure complete institutional knowledge of the newly 96 X 60% created and adopted policy.

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 24: MSD has not reviewed the computer-based overhead process used to allocate departmental cost to capital projects.

137: We recommend MSD review the allocation process on a regular basis and ensure that the process is fundamentally sound and complies with the commonly accepted accounting basis for capitalized project cost. 138: We also recommend that MSD review the allocation process annually and document that the process has been reviewed and approved by the appropriate administrative and executive staff.

97

70%

97

70%

MSD's overhead allocation calculation is currently being reviewed for compliance with accounting standards and any necessary adjustments. Going forward, this allocation will be reviewed and approved annually by the appropriate administrative and executive staff. Plan is to complete this review prior to June 15, 2012 in order to implement in FY 2013 budget.

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 25: MSD made questionable expenditures for parties, donations, travel, training, and other items.

139: We recommend MSD refrain from spending funds for activities and items that do not provide a clear benefit to its ratepayers or help fulfill MSDs mission. 140: We recommend MSD management carefully evaluate each discretionary expenditure to ensure funds are efficiently and effectively used in keeping with its mission. 141: We recommend MSD consider seeking reimbursement of the amount it contributed to the private tribute from the MSD employee who authorized the payment with obtaining the appropriate approval from the Executive Director. 142: We recommend that the MSD Board closely scrutinize its expenditures for contributions and donations. 143: If a contribution or donation is being considered, it should have a clear and documented connection to MSDs mission or must be needed to meet a requirement of its EPA Consent Decree. 144: Further, we recommend all contributions and donations under consideration by MSD be presented to the full Board for approval to ensure Board awareness and management accountability MSD. 145: We recommend MSD no longer use public funds for Holiday parties and celebrations. 146: We recommend MSD closely scrutinize travel and conferences, particularly of out-of-state travel. 147: We recommend MSD management also closely scrutinize the number of employees allowed to attend a single conference or meeting. Further, the MSD Board should approve out-of-state travel after being provided with estimated travel costs. Subsequent to the travel, the actual travel expenses should be reported to the Board.

102

80%

102

80%

As of January 5, 2012, MSD's Interim Executive Director has applied a freeze to all discretionary spending, including travel; meals and food; dues, fees, licenses, and subscriptions; donations, contributions, and sponsorships; and overtime. All exceptions to this freeze are reviewed on a case-by-case basis by Senior Management. Policies are being drafted to govern contributions and donations, travel, and training. These policies are expected to be finalized by June 15, 2012. Funds will not be budgeted for events such as holiday parties or celebrations. As of November 29, 2011, full reimbursement was received for the amount contributed to the private tribute.

102

80%

103 103

X X

80% 80%

103 103 103

X X X

80% 80% 80% A spending freeze has been applied to all discretionary spending. Refer to the response provided in Finding 25, Recommendation 139.

103

80%

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 26: MSD uses Internal Revenue Service's (IRS) commuting valuation rule to calculate the taxable value of assigned vehicles regardless of the employee's compensation levels. 148: We recommend that MSD comply with IRS guidelines to ensure that MSD staff is currently reviewing IRS guidelines and will make changes the personal benefit of an assigned vehicle is valued appropriately for tax necessary so that employees are taxed at the appropriate rates for assigned purposes. The MSD policies should be amended to reflect how controlled 104 X 80% take-home vehicles. This review will be complete and appropriate action employees will be determined and the method that will be used to taken by April 15, 2012. calculate the taxable benefit of assigned vehicles.

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The State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations. PERECENT REPORT ACTION IN RECOMMENDATIONS ACTION RECOMMENDATION STATUS/COMMENTS PAGE PROGRESS COMPLETE Finding 27: The MSD Board allowed a corporation under its authority to administratively dissolve before conveying the corporation's property to MSD. 149: We recommend the MSD Legal Director take the necessary actions to An Application for Reinstatement of P-B Corporation has been filed with the address the situation regarding the dissolved corporation and its related 105 X 80% Kentucky Secretary of State along with an application to have MSDs Legal property. Director designated as the registered agent of the Corporation in place of MSDs former Executive Director. MSDs Legal Director will be responsible for 150: We also recommend the MSD Board and its Executive Management ensuring the reinstatement process is completed and will prepare and evaluate its processes to ensure tasks undertaken by employees are present all necessary paperwork to transfer the Corporations assets to MSD reasonably aligned with their job responsibilities. While it is not upon reinstatement so the Corporations existence is no longer necessary 105 X 80% inappropriate for the former Executive Director to have filed annual and the Corporation can be appropriately and finally dissolved pursuant to reports on behalf of the Corporation, it is more reasonable and allows for and as required by state law. Approval is expected from the state within 3 better continuity for the MSD Legal Department to perform that function. months, by May 15, 2012.

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