Audit of. Inventory Controls at Transportation Services Department

Transcription

1 Audit of Inventory Controls at Transportation Services Department November 16, 2012 Report #

2 MISSION STATEMENT The School Board of Palm Beach County is committed to providing a world class education with excellence and equity to empower each student to reach his or her highest potential with the most effective staff to foster the knowledge, skills, and ethics required for responsible citizenship and productive careers. E. Wayne Gent Superintendent of Schools School Board Members Frank A. Barbieri, Jr., Esq., Chair Debra L. Robinson, M.D., Vice Chair Marcia Andrews Monroe Benaim, M.D. Karen M. Brill Jennifer Prior Brown, Esq. Charles E. Shaw Audit Committee Members Gregory S. Daniel, Chair Noah Silver, CPA, Vice Chair N. Ronald Bennett, CPA Max Davis Michael Dixon, CPA Richard Roberts, CPA David Talley Representatives Frank A. Barbieri, Jr., Esq., School Board Chair E. Wayne Gent, Superintendent of Schools Sheryl Wood, Esq., General Counsel Lori Bonino, Principal Representative Debra Wilhelm, CTA President

3 Audit of Inventory Controls at Transportation Services Department Table of Contents Page PURPOSE AND AUTHORITY 1 SCOPE AND METHODOLOGY 1 BACKGROUND 2 CONCLUSIONS 1. No Written Procedures for Ordering, Receiving, Issuing Parts and 2 Determining the Optimal Level of Inventory 2. Inventory Items Deleted from Records Without Justification 3 3. Discrepancies in Physical Inventory 4 4. Inaccurate and Incomplete Receipting Procedures 6 5. Inaccurate Year-End Inventory Balance in PeopleSoft General Ledger 8 Due to Human Errors APPENDIX A. Management s Response Transportation Services Department 10 B. Management s Response Chief Operating Officer 16

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5 THE SCHOOL DISTRICT OF LUNG CHIU, CPA SCHOOL BOARD PALM BEACH COUNTY, FLORIDA INSPECTOR GENERAL FRANK A. BARBIERI, JR, ESQ., CHAIR DEBRA L. ROBINSON, M.D., VICE CHAIR OFFICE OF INSPECTOR GENERAL MARCIA ANDREWS 3318 FOREST HILL BLVD., C-306 MONROE BENAIM, M.D. WEST PALM BEACH, FL M E M O R A N D U M KAREN M. BRILL JENNIFER PRIOR BROWN, ESQ. (561) FAX: (561) CHARLES E. SHAW E. WAYNE GENT, SUPERINTENDENT TO: FROM: Honorable Chair and Members of the School Board E. Wayne Gent, Superintendent of Schools Chair and Members of the Audit Committee Lung Chiu, CPA, Inspector General DATE: November 16, 2012 SUBJECT: Audit of Inventory Controls at Transportation Services Department PURPOSE AND AUTHORITY Pursuant to the District s Audit Plan, we have audited the Inventory Controls at the Transportation Services Department for July 2011, through April The primary objective of this audit was to assess the adequacy of controls and procedures for maintaining optimal inventory levels for parts, and ordering, receipting, issuing, and safeguarding of inventory items. SCOPE AND METHODOLOGY The audit was conducted in accordance with Generally Accepted Government Auditing Standards, except the required peer review. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This audit was performed during March, May, and August 2012, and included: Interviewing staff, Reviewing sample invoices, Physical inventory counts of sample parts at six parts facility locations, and Reviewing software used to maintain inventory records. Draft audit findings were sent to the Transportation Services and Chief Operating Officer for review and comments. Management responses are included in the Appendix. The final draft report, with management responses, was forwarded to Legal Services Department for review and input. We appreciate the courtesy and cooperation extended to us by District staff during the audit. The final draft report was presented to the Audit Committee at its November 16, 2012, meeting. 1

6 BACKGROUND Transportation Services Department (Transportation) maintains approximately 1,985 different inventory parts for over 2,000 cars, trucks, buses, and tracks; other non-stocked parts are also ordered when needed. The department provides two types of services on District vehicles, 1) Preventive Maintenance- which is a scheduled maintenance to keep the vehicles operating effectively and efficiently; and 2) Repair Services- which is repairing District vehicles when break downs occur. Preventive Maintenance and Repair Services are performed at six locations in the District: Central, North, South, East, West, and Royal Palm Beach facilities. Inventory parts are managed through AssetWorks, a maintenance management software. AssetWorks allows Transportation to (1) keep track of all District vehicles, (2) track the ordering, receiving and optimal levels of inventory for parts, and (3) track warranty information for vehicles and parts. The exhibit below shows the total amount of inventory parts purchased for the last four years and the value of the inventory parts at year-end: Inventory Parts Purchases/Year End Balances Fiscal Year Purchases Year-End Balance $1,861, $814, ,692, , ,564, , ,848, , Source: PeopleSoft General Leger CONCLUSIONS 1. No Written Procedures for Ordering, Receiving, Issuing Parts and Determining the Optimal Level of Inventory Transportation Services has no written procedures for ordering, receiving and issuing parts. Nor are there written procedures for conducting year-end inventory counts or safeguarding inventory parts. The lack of written procedures makes it difficult for management to determine the optimal inventory levels and reordering points and ensure purchased inventory is properly received and accurately accounted for. Shop foremen create work orders in AssetWorks for vehicles in need of preventive maintenance or repair work. The shop foreperson then assigns vehicles to mechanics. Mechanics either perform the preventive maintenance or diagnoses repair issues and determine the parts needed. Mechanics then write down what parts are needed, the vehicle number and the work order number on an untitled, unnumbered sheet of paper which they take to the parts shop. Technicians in the parts shop write down the part number, date, and their initials on the same sheet. If the parts being requested are in stock, the parts are issued to the mechanic. If the parts are not in stock, the parts are ordered by the parts shop. Parts are ordered and received by the parts shops sometimes by the same person. 2

7 The current procedures indicate that there is no supervisor review and approval for the requesting and issuance of parts by mechanics; and there is no separation of duties between the ordering and receiving processes. Also, there is no evidence that the parts which are currently tracked in AssetWorks are monitored to determine if the proper selection of parts are being stocked and sound purchasing policies are being followed. Recommendation Transportation Services should establish written procedures for the ordering, receiving, issuing, inventorying and safeguarding inventory parts. These procedures should include the justification and determination of optimal levels of inventory parts. Management s Response from Transportation: Concur. An internal procedure was being followed, but it was not a written or formalized process. Per the 3 October 2012 Board approval of agenda item Integrated Supply Agreement with the School District of Palm Beach County, an outside vendor will assume all district repair parts management and control. Transportation Services will no longer be responsible for ordering, managing, or distributing vehicle repair parts. All repair parts will be owned and distributed by the vendor (NAPA) per the agreement. The current on-hand repair parts inventory will be purchased and managed by the vendor. A process for ordering repair parts from this vendor will be implemented for Transportation Services. (Please see page 10.) 2. Inventory Items Deleted from Records Without Justification The AssetWorks inventory management system allows users to add, subtract, or change information regarding parts. These changes can be related to quantity, value, quantity at a different price, or unit price. Some explanations shown for quantity only deletions in the comment section of the adjustment screen in AssetWorks were; input wrong part number, and input wrong quantity. Some adjustments did not show any explanation for the change. The current adjustment procedure is for the central shop supervisor to make all changes in AssetWorks. However, it could not be verified if all of the adjustments involving part deletions were administered by an authorized person. A report in AssetWorks called Detail Adjustments Report shows the part number, part description, whether the adjustment was an addition, or subtraction, the unit quantity, the unit value, and the date of the adjustment. However, the report does not show the reason for the adjustment or the user ID of the person who made the adjustment. Inventory parts adjustments in which parts quantities were deleted from the inventory system were not supported with supervisor approval and documentation for the need of deletions. The exhibit below shows deletions in the inventory system without justification for the last three fiscal years: 3

8 Inventory Part Deletions Without Justification Fiscal Year Number of Part Deleted Total Dollar Value of Deletions $129, , , , Total $484, Source: AssetWorks Detail Adjustment Reports Recommendation Transportation Services should ensure that the ability to make adjustments in the AssetWorks system be limited to only authorized supervisors. Most importantly, adjustments to inventory records should be approved by supervisor, supported with documentation which shows justification for the deletions. Management s Response from Transportation: Concur. These items were removed from the inventory and transferred to the district s warehouse and sold on the public surplus auction or returned to vendors for parts credits. Parts adjustments are completed daily and sometimes hourly. The Parts Supervisor was given authority to add and delete repairs from the system. Parts are deleted and added because of obsolesces, or because the part is not longer made. Per the 3 October 2012 Board approval of agenda item Integrated Supply Agreement with the School District of Palm Beach County, an outside vendor will assume all district repair parts management and control. Transportation Services will no longer be responsible for ordering, managing, or distributing vehicle repair parts. All repair parts will be owned and distributed by the vendor (NAPA) per the agreement. The current on-hand repair parts inventory will be purchased and managed by the vendor. A process for ordering repair parts from this vendor will be implemented for Transportation Services. (Please see page 10.) 3. Discrepancies in Physical Inventory As of May 9 and 10, 2012, the AssetWorks system had a total inventory balance of 34,271 items on hand, with a total value of $694, A sample of 60 inventory parts, with quantities of 14,482, and a total value of $61, from the system were selected for review. The sample size represents 9% of the total dollar value of parts at the inventory dates. Our inventory observation noted 20 items with more physical inventory quantity than those on record, valued at $7, On the other hand, we noted that 13 items with physical inventory quantity less than those on record, valued at $9, The exhibit below lists the parts with variances. 4

9 Physical Inventory Variance List Location Parts # Parts Description Discrepancy Total Dollar Value Central Tire 11R $2, Central 8154 Freon Central Tire P Central 566 Coolant CC East Oil 829 1, East 738 Compressor East 566 Coolant CC East 8154 Freon North 1548 Seat Cover Brake Linning XK QP North 711 North 401 Coolant (Dex-Cool) Royal Palm Beach Transmission Fluid South 8154 Freon South 808 Oil Filter South 155 Oil Filter South 817 Fuel Filter South 566 Coolant CC South 7783 Fuel Filter West Oil West Tire P Total Over 1,359 $7, Central Oil (2,099) ($3,988.10) Central Tire P235 (1) (82.87) East Tire 11R22.5 (2) (652.50) East 1548 Seat Cover (2) (56.76) East 1227 Wiper Blade (15) (41.40) North Oil (1,220) (2,708.40) North 1229 Wiper Blade (1) (7.23) North 1043 Oil Filter (1) (1.93) Royal Palm Beach Oil (737) (1,510.85) Royal Palm Beach 1545 Seat Cover (1) (13.87) West 8154 Freon (35) (159.25) West 869 Fuel Filter (3) (22.53) West Transmission Fluid (32) (12.80) Total (Under) (4,149) ($9,258.49) Recommendation Discrepancies between physical inventory counts and inventory systems records should be fully investigated. At least one spot inventory check of a sample of parts should be done once a year, in addition to the full inventory count done at year-end. 5

10 Management s Response from Transportation: Concur. Some items were replenished, but exceeded the required on-hand quantities because multiple orders were made. Some overages occur when a part is re-stocked after the orders were submitted. Some shortages occurred because some items were not charged to work orders accordingly or the work order was closed before the items were charged properly. Per the 3 October 2012 Board approval of agenda item Integrated Supply Agreement with the School District of Palm Beach County, an outside vendor will assume all district repair parts management and control. Transportation Services will no longer be responsible for ordering, managing, or distributing vehicle repair parts. All repair parts will be owned and distributed by the vendor (NAPA) per the agreement. The current on-hand repair parts inventory will be purchased and managed by the vendor. A process for ordering repair parts from this vendor will be implemented for Transportation Services. (Please see page 10.) 4. Inaccurate and Incomplete Receipting Procedures Between July 1, 2011, and April 30, 2012, Transportation Services paid $2,155, for parts through 5,389 invoices. A statistical sample of 155 invoices were randomly selected for review (with a value of $305,457.93, or 14% of the total invoices). The review of the selected invoices found that: (a) Two invoices, with a total value of $1,278.54, for the purchase of non-stock parts, could not be traced to work orders. (b) Three invoices, with a total value of $4,185.00, included parts valued at $1, had quantities less than the invoice quantities. (c) Two invoices had parts with core credits worth $110 which could not be traced to refunds. (d) Twelve invoices, with a total value of $20,313.72, did not have receiving signatures. The exhibit below shows a list of the sample invoices that had exceptions: 6

11 Invoices with Exceptions Invoice # Invoice Amount Parts/Credit Value (a) Could not trace to receipt in inventory system or work order , Sub-total $1, $ (b) Quantity received less than invoice quantity $2, $ Sub-Total $4, $1, (c) Credit for returned items could not be traced to refund Sub-total $ (d)no receiving signature on invoice $3, $3, , , , , , , , , , , , , , , Sub-total $20, $20, Total $26, $21, Recommendation To protect the best interests of the School District, Transportation should verify (1) all goods were received and (2) the billing was accurate and consistent with the Contract prior to payment. Management s Response from Transportation: Concur. 7

12 Invoices are required to be sent directly from the vendor to the Accounting Department. Official receipt and acceptance of the goods is the receipt entered into the District s ERP system by the Transportation Department. Transportation verifies that all goods are received and are not damaged prior to entering the receipt in the system. The ERP system is configured for a three-way match. The invoice is systematically matched to the PO and the receipt entered by Transportation. Payment is not processed until the voucher is matched and available budget is verified. Because of the volume, Transportation receives a copy of the invoice from the vendor to facilitate receipt of the goods in the system but is not required to sign the invoice in addition to entering the receipt in the system. Per the 3 October 2012 Board approval of agenda item Integrated Supply Agreement with the School District of Palm Beach County, an outside vendor will assume all district repair parts management and control. Transportation Services will no longer be responsible for ordering, managing, or distributing vehicle repair parts. All repair parts will be owned and distributed by the vendor (NAPA) per the agreement. The current on-hand repair parts inventory will be purchased and managed by the vendor. A process for ordering repair parts from this vendor will be implemented for Transportation Services. (Please see page 11.) 5. Inaccurate Year-End Inventory Balance in PeopleSoft General Ledger Due to Human Errors Updates to the PeopleSoft general ledger inventory account are made when inventory parts are purchased and received. Transportation Services is responsible for notifying Accounting Services of decreases to the PeopleSoft general ledger inventory account balance due to parts being issued on work orders or adjustments needed after physical inventory counts at yearend. As of June 30, 2011, the PeopleSoft general ledger Inventory Account indicated a balance of $669,974.81, which was $6, more than the balance indicated by the AssetWorks inventory reports. The report was printed after the year-end physical inventory counts and necessary adjustments. The discrepancy was due to the following human errors: The final inventory report for the East Facility was overstated by $7, due to an adjustment was done twice for items that had not been counted. The final inventory for the South Facility was overstated by $2, because the final inventory amount did not include the adjustments made after the July 19, 2011, physical inventory count. Unit prices for 20 inventory parts were not included in the inventory system, resulting in understatement of $3,

13 Recommendation Written procedures for conducting the year-end inventory process should be developed and implemented to ensure consistency in the process and accuracy of inventory balance. Management s Response from Transportation: Concur. The final physical inventory report forwarded to the Accounting Department had an error of $6, that represents less than 1% of total inventory. Written procedures have been developed although once the NAPA contract is implemented the District will no longer hold inventory. Per the 3 October 2012 Board approval of agenda item Integrated Supply Agreement with the School District of Palm Beach County, an outside vendor will assume all district repair parts management and control. Transportation Services will no longer be responsible for ordering, managing, or distributing vehicle repair parts. All repair parts will be owned and distributed by the vendor (NAPA) per the agreement. The current on-hand repair parts inventory will be purchased and managed by the vendor. A process for ordering repair parts from this vendor will be implemented for Transportation Services. (Please see page 11.) Management s Response from the Chief Operating Officer: I have reviewed your audit of Inventory Controls at Transportation Services Department and the management response provided by Mr. Sanches and have no additional information to add to this report. (Please see page 16.) End of Report 9

14 Appendix A Management s Response Transportation Services Department 10

15 Appendix A Management s Response Transportation Services Department 11

16 Appendix A Management s Response Transportation Services Department 12

17 Appendix A Management s Response Transportation Services Department 13

18 Appendix A Management s Response Transportation Services Department 14

19 Appendix A Management s Response Transportation Services Department 15

20 Appendix B Management s Response Chief Operating Officer 16