Internal Audit Report. Receivables Management Statement of Cost TxDOT Office of Internal Audit

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1 Internal Audit Report Receivables Management Statement of Cost TxDOT Office of Internal Audit

2 Objective The audit objective is to evaluate whether monitoring and accounting for outstanding construction and right of way receivables is occurring and adequate. Opinion Based on the audit scope areas reviewed, control mechanisms are unreliable in addressing risk factors and exposures considered significant relative to impacting reporting reliability, operational execution, and compliance. The organization's system of internal controls does not provide reasonable assurance that key goals and objectives will be achieved. Control gap corrections are pervasive and resulting in material negative impacts to the organization. Progress can be made within 2 quarters in addressing the highest risk areas. Management concurs with the above findings and prepared management action plans to address deficiencies. Internal Environment In the early 1990 s, local governments began contributing funds to TxDOT projects in order to have additional work completed for the benefit of the local government. Over the years, this became more popular and complex when more than one local entity became involved and the participation had a ceiling. The Financial Information Management System (FIMS) used by Finance Division (FIN) was not designed to accurately track some of these complex projects. FIN produces a monthly report through data obtained from FIMS showing amounts owed to TxDOT by third party entities, such as cities, counties and similar local governments. This FIMS report is intended to be used by the districts and Right of Way Division (ROW) to collect funds from the third parties. TxDOT policy mandates that the districts are responsible to collect the monies owed as they accrue; however, they do not all reconcile to the FIMS balance until the project is complete. April 2,

3 Summary Results Finding Scope Area Evidence 1 Interim Monitoring of Project Costs & Receivables/Collection Project Close Final Project Collection of Outstanding Receivables (Demand Process) Completed Construction/ROW Projects: Sixteen completed projects were reviewed (13 construction/3 ROW), and the following was noted in relation to close or collection activities: 9 of 16 (56%) completed projects did not execute the demand letter process as required by the Texas Administrative Code 9 of 13 (69%) completed construction projects did not have the final Statement of Cost (SOC) completed within the allotted 90-day timeframe 2 Interim Monitoring of Project Costs & Receivables/Collection Project Close Active and Completed Construction/ROW Projects: Forty active and completed construction and ROW projects were reviewed (24 active/16 completed). The following were noted in relation to misstated balances: 12 of 40 (30%) project receivables totalling $9,912,327 of the total $28,051,307 (35%) reviewed had financial errors (i.e., federal money not applied or fixed sum participation required manual process to reduce charges over their maximum) and/or charges that were incorrectly coded against the project Utility Adjustments: 4 of 18 (22%) ROW receivables for utility adjustments included in the construction phase did not have supporting documentation Audit Scope The scope of this audit was based on contracts and related receivables as reported in the January 2, 2013, Statewide Receivables Report posted on the FIN website. The total amount due at this time was $53,272,987. The audit was performed by Omar Elsaad, Romy Grimmell, Sabra Vaughan, and Jill Emery, Engagement Lead. The audit was conducted during the period from January 14, 2013 to November 22, April 2,

4 Methodology The methodology used included testing a sample of projects with receivable balances over $100,000 in the Houston, Dallas, Austin, San Antonio, Lufkin, Atlanta, Laredo, and El Paso Districts, as well as, the Right of Way (ROW) Division. Information collected and reviewed to complete the objectives of this audit included: applicable federal/state laws and regulations, department policies/procedures, and manuals prior audit reports to include reports from State Auditor s Office and TxDOT Audit Office internal documents including o Statewide Receivables Reports o Advance Funding Agreements (AFAs), proposals, budgets and plans o documentation associated with expense reviews against FIMS o documentation associated with the collection of funds o various FIMS reports reflecting participation and payment Procedures and testing performed included: interviews of key TxDOT personnel evaluation of control design and operating effectiveness for the receivables collection process Fieldwork testing included a sample of 40 receivables from the January 2, 2013 Statewide Receivables Report listing. These 40 receivables represent $28,051,307 of $53,272,987 (53%) total outstanding receivables per the report. 9 receivables for active construction projects = $8,954,664 (32%) of the sample 13 receivables for completed construction projects = $6,754,131 (24%) of the sample 15 receivables for active ROW projects = $11,869,313 (42%) of the sample 3 receivables for completed ROW projects = $473,200 (2%) of the sample Background This report is prepared for the Texas Transportation Commission, TxDOT Administration and Management. The report presents the results of the Receivables Statement of Cost Audit which was conducted as part of the Fiscal Year 2013 Audit Plan. FIN publishes a monthly Statewide Receivables Report that shows the FIMS balance to be collected by District for active/completed construction projects and ROW projects. This report helps the districts to verify the balances and open communication with the local governments to collect the funds. ROW maintains third party contracts for land acquisition separate from the construction project and uses Right of Way Information System (ROWIS) to track balances owed. Utility adjustment costs are part of ROW and may show on the Statewide Receivables Report April 2,

5 before ROW receives notification from the district to support the charges; therefore, ROW uses the report to reconcile their records with FIMS. We conducted this performance audit in accordance with Generally Accepted Government Auditing Standards and in conformance with the International Standards for the Professional Practice of Internal Auditing. 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. Recommendations to mitigate risks identified were provided to management during the engagement to assist in the formulation of the management action plans included in this report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Office of Internal Audit transitioned to Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control Integrated Framework version 2013 in December A defined set of control objectives was utilized to focus on financial, operational and regulatory goals for the identified scope areas. Our audit opinion is an assessment of the health of the overall control environment based on (1) the effectiveness of the enterprise risk management activities throughout the audit period and (2) the degree to which the defined control objectives were being met. Our audit opinion is not a guarantee against reporting misstatement and reliability, operational sub-optimization, or non-compliance, particularly in areas not included in the scope of this audit. April 2,

6 Detailed Findings and Management Action Plans (MAP) Finding No. 1: Project Close and Collection Process Condition Texas Administrative Code (TAC) rules and TxDOT policy for collecting third party receivables are not being followed by Districts or Right Of Way (ROW) staff. Districts are not submitting the final Statement of Cost (SOC) within days after the construction projects final estimates, as required. Additionally, districts are not timely in sending the First Notice Letter explaining the obligation to the third party and when the payment is due, which would commence the collection. Effect/Potential Impact untimely resolution of aging receivables non-compliance with TAC, department policy, agreement terms higher risk of losing supporting documentation as receivables age Criteria & Cause The Financial Management Policy Manual states in Chapter 4, Section 13, Certified SOCs shall be submitted to FIN no earlier than 60 days and no later than 90 days after the final payment to the contractor; FIN will review the SOC for completeness and accuracy. Once all discrepancies have been addressed, FIN will send a Concurrence Memo to the District. District will send a request for additional funds to the Local within 2 weeks of the date of the concurrence memo. If payment is not received by the due date, districts shall follow 43 TAC 5.10 Collection of Debts. Title 43, Texas Administrative Code, Subchapter B, 5.10 Collection of Debts states: (1) The division or district sends the debtor written notice of the obligation. (2) If not paid by the due date, the district or division sends a first demand letter within 30 days. (3) If not paid, the division or district sends a final demand letter. The final demand letter may include a statement that the obligation, if not paid, will be referred to the attorney general. (4) The department can refer a delinquent obligation to the attorney general for further collection efforts or utilize the "warrant hold" procedures of the Comptroller of Public Accounts authorized by Government Code, , to ensure that no treasury warrants are issued to debtors until the debt is paid. The Records Management Manual states, The record copy is the official record that must be retained to fulfil statutory retention requirements it originates or is retained at the office responsible for the operations or function the record or file concerns. The State of Texas Record Retention Schedule states that contract records, including all related documents, must be kept for four years after completion of the contract with the note: AFAs are not considered complete until the structure is removed, replaced or an original agreement is superseded by another agreement. April 2,

7 Causes for delay in finalizing SOCs include: training needed for FIN and District staff (i.e., DEV505 FIMS Third Party Funding which teaches how to generate FIMS reports and determine the status of a project's funding) staff turnover at FIN and District levels project under FIN review for concurrence of final SOC transmitted from the District Causes for not pursuing collection include: third party entities dispute the amount and collection put on hold until resolved changes that will impact the receivable balance may not exist on older receivables (i.e., change orders, other financial impacts to the project) FIMS is not programmed to detect when a maximum limit is reached and manual processes are needed to adjust amounts due staff turnover at FIN and District levels Evidence Documents were reviewed in each sampled completed project to determine whether TxDOT policy and/or TAC 5.10 was followed in collection of third party debt. Completed Construction/ROW Projects: Sixteen completed projects were reviewed (13 construction/3 ROW): 16 of 40 (40%) receivables reviewed were for completed projects totalling $7,227,330 of the total $28,051,307 (26%) 9 of 16 (56%) completed construction and ROW projects did not execute the demand letter process as required by the Texas Administrative Code 9 of 13 (69%) completed construction projects did not have the final SOC completed within the allotted 90-day timeframe 1 district did not have documentation of FIN s concurrence with the SOC Management Action Plan (MAP): MAP Owners: Brian Ragland, Director, Finance Division Bill Hale, P.E., Dallas District Engineer Michael W. Alford, P.E., Houston District Engineer Catherine Hejl, P.E., Bryan District Engineer Randy Hopmann, P.E., Tyler District Engineer John Campbell, Director, Right-of-Way Division MAP 1.1: Assess and work with necessary teams at TxDOT to implement a Fixed Participation policy with Local Government (LG) entities on future construction and ROW projects/contracts. Work with Contract Services to assess and implement a Fixed Participation policy with future LG projects/contracts in the Advanced Funding Agreement stage. Discuss April 2,

8 with LGs or other entities, as necessary, the impacts of these changes to collection activities. Finance Division personnel and respective Districts with outstanding receivables to assess, reconcile, and concur on final balances owed on Completed Construction by LG/other entities by project. A root cause assessment should be conducted and documented to understand where lapses existed in collection or between FIMS and Site Manager to eliminate future variances for each District. Further assess if both reporting systems are needed in a pre and post-erp world to avoid confusion in the future. After establishing final balances on Completed Construction, Finance will deliver new Dunning Letters (collection letters) to applicable LGs. Further explanation and guidance around deadlines and Texas Administrative Code (TAC) protocol on collecting should accompany these letters to allow the LG to better understand the approach and expectations. A periodic (to be determined by Districts/Finance) notification or confirmation process with the LGs should be created and communicated. TAC protocol should still be followed, but this process will highlight where disconnects with the LGs may exist so that they can be resolved and no longer delay payments. Collection and reporting steps surrounding the collection of receivables and the Statement of Cost process need to be documented and discussed with all relevant parties at the Division and District levels on an on-going basis. Training (in addition to DEV505) should be created and implemented to provide for the appropriate level of accountability/roles/responsibilities both internally and externally, as needed. The process and responsibilities for sending uncollectable amounts to either the Office of Attorney General or the Comptroller of Public Accounts will be developed and communicated to relevant parties. Records Management/Retention efforts also need to be strengthened to train and identify with Division/District personnel which essential records need to be stored and where (i.e., EDMS) Completion Date: October 15, 2014 April 2,

9 Finding No. 2: Construction/ROW Receivables Report Misstated Condition The process to account for Construction and ROW receivables does not include sufficient reconciliation and monitoring to ensure accurate reporting. Finance Division (FIN) posts a monthly receivables report for construction and ROW projects where third parties have accrued debt to TxDOT. From the January 2, 2013 Statewide Receivables Report, the total balance of $53,272,987 of receivables was overstated by $9,912,327 (19%) due to adjustments identified from projects reviewed in this audit. ROW is also not monitoring and reconciling the FIN monthly receivables report to determine validity of the amounts owed to TxDOT. There is a communication breakdown between the districts and ROW regarding utility adjustments in construction projects. Effect/Potential Impact inaccurate financial figures will affect the reliability of TxDOT financial reports Construction/ROW Receivables Report may be over/under stated due to project financial errors, on-going project cost errors, and communication breakdowns regarding potential utility adjustments Criteria & Cause The Contract Management Manual, Chapter 7, Section 4 states that the project manager must verify that the funding set-up in the accounting record matches the funding requirements spelled out in the Advance Funding Agreement (AFA), and that the associated cash deposits have been collected and posted properly. Further, the project managers are responsible for ensuring the accuracy of TxDOT s financial records in regards to AFAs. Various demand and monthly reports are available for reviewing by the project managers. ROW Division Standard Operating Procedures (SOP) are written for District ROW employees, and they have not been updated since ROW consolidated under ROW Division. The SOPs do not apply to the current organizational structure; therefore, no guidance for monitoring. The ROW Utility Manual, Chapter 5, Section 5 states, Preliminary plan estimates and Advance Funding Agreements (if applicable) for utility work must be forwarded to ROW Division. The Texas Transportation Code Title 6, Subtitle B, Chapter 224 Utility Relocation Costs states, In the acquisition of a highway right-of-way by or for the department, the cost of relocating or adjusting utility facilities, which cost may be eligible under law, is a cost of the acquisition. FIMS is not capable of tracking when a ceiling on fixed participation third party funding agreements is reached and manual oversight by FIN staff is required. FIN must review the account and transfer the expenditures manually or these projects will show up on the receivable list. Training to generate and interpret the FIMS reports is available on-line only, but not mandatory for District or ROW staff that should be monitoring the project costs. April 2,

10 Four ROW receivables were due to utility adjustments incurred during construction, but the Districts did not communicate/coordinate these additional charges with ROW. In addition, ROW did not monitor the receivables in a timely manner and as a result, incomplete documentation was not discovered in a timely manner. Evidence Sampled Construction/ROW Projects: 12 of 40 (30%) project receivables totalling $9,912,327 of the total $28,051,307 (35%) reviewed had financial errors (i.e., federal money not applied or fixed sum participation required manual process to reduce charges over their maximum) and/or charges that were incorrectly coded against the project. Utility Adjustments: 4 of 18 (22%) sampled ROW receivables were for utility adjustments incurred during construction in which ROW had no supporting documentation from the District. Management Action Plan (MAP): MAP Owners: Bruce Matusek - Manager, Projects Ledgers and Federal Billing Maria Maldonado - Accounting Specialist and Lead Worker Vilma Ruiz - Accounting Specialist MAP 2.1: FIN will continue to informally extend this training offer to all districts through the Accounting Specialist and formally through a written invitation by the Director of Finance on the next distribution of the subject report the online DEV 505-Third Party Funding class will continue to be available for use to educate and train the districts FIN will include a note on the Statewide Receivables Report stating that the report is an unaudited working document meant to provide timely third party receivable inform and assist the D/D/Os in identifying errors in third party receivable balances so that corrections can be made in FIMS and on subsequent reports Completion Date: April 15, 2013 incorporate into the Statewide Receivables Report the identification of those third party deposits recognized as fixed contributions for the ability to easily identify fixed third party deposits and provide greater clarity and efficiency in monitoring the report while ensuring increased accuracy Completion Date: September 15, 2013 April 2,

11 MAP Owners: Sheila Mills Director of Project Delivery Gus Cannon Director of Resource Management Section MAP 2.2: ensure Right of Way Delivery Staff (R/WPD) is made aware of any Advance Funding Agreements for Voluntary Utility Relocation Contributions on State Highway Improvement Projects in the construction contract which covers utilities in the construction contract reinstate the process of sending a monthly to ROW Project Delivery staff calling for their printing of the FIMS Demand Reports CST.5801 and CST.5202, and the reconciliation of those reports with ROWIS, and to initiate the collection of any receivables enforce SOP ROW Division Headquarters, Resource Management Section (RSM), and Financial Management Branch (FMB) will be point of contact for the Finance Division RSM FMB will print FIMS demand reports CST.5801 and REC.8501 to verify and document ROW files for project funding and local deposits in regard to ROW Agreement with local government within 5 days of set up in FIMS revise current SOP for Monitoring and Collection of Receivables to combine ROW Project Delivery and ROW Division headquarters responsibilities for monitoring and collection of ROW project receivables; project monitoring includes receivables on utility relocation for Collection of Debt by monitoring collection of debt monthly, require R/WPD staff to send documentation of collection letters sent to the local to the ROW Division headquarters office as Office of Permanent Record and to maintain copies in R/WPD files. If no response from the LPA after the last demand letter is sent, Right of Way Division will forward all demand letters to the Finance Division recommending the Comptroller of Public Accounts utilize the warrant hold procedures or the referral of the delinquent debt to the attorney general, if necessary sponsor training for district staff in collaboration with Contract Services Office and FIN for collection of ROW receivables when utility relocation adjustments are in the construction contract. Sponsor training from Right of Way Division with assistance from the Finance Division and Contract Services Office on how to utilize the FIMS reports CST.5801 and CST.5202 for monitoring deposits and understanding the project funding on Advance Funding Agreements when utility relocation adjustments are in the construction contract implement classroom training to ROW Project Delivery staff for generating and accessing FIMS reports to help understand project funding set up, reconciliation of expenditures, and ROW project funding when utility relocation adjustments are in the construction contract Completion Date: January 15, 2014 April 2,

12 Observation and Recommendation Audit Observation (a): Financial Information Management System (FIMS) Monitoring of Complex Agreements Statewide Receivables Report adjustments are sometimes attributable to the limitation of FIMS to handle complex agreements that are not being monitored and reconciled by Districts and ROW until the construction project is complete; therefore, a receivable balance could age for months before an error is discovered. Effect/Potential Impact 9 of 11 (82%) District receivables reviewed are not monitored with FIMS reports 10 of 15 (67%) ROW receivables reviewed are not monitored with FIMS reports Audit Recommendation Identify specialized programming resources to assist in finishing the IRR submission for changes to FIMS noted below: o produce a new web-based report to replace and/or supplement FIMS CST.5801 report that will allow for easy access from a PC or laptop; this new web based report should mitigate much of the uneasiness and inability to access FIMS Mainframe reports providing a greater comfort level to the users o adding front-end FIMS validity to segment 27 will mitigate number and frequency of miscoded third party deposits by verifying district, project number, and third party entity code against records in DCIS Future changes should also be considered for the pending rollout of the Enterprise Resource Planning modules impacting the Finance Division. April 2,

13 Summary Results Based on Enterprise Risk Management Framework Closing Comments The results of this audit were discussed with FIN, ROW, and the respective Districts. We appreciate the assistance and cooperation received from FIN, ROW and district management and employees contacted during this audit. April 2,