INTERNAL AUDIT REPORT

INTERNAL AUDIT REPORT Audit of Byron Shire Council Light Fleet Fuel Cards Page 1 of 17 Internal Audit - 17/05/11 Distribution For Action By For The Information Of - 1 -

CONTENTS Item Page EXECUTIVE SUMMARY... 3 SUMMARY OF INTERNAL AUDIT OBSERVATIONS & RECOMMENDATIONS... 4 APPENDIX 1- DETAILED REPORT... 9 OTHER RISK AND CONTROL MATTERS NOTED DURING THE INVESTIGATION:... 17 Page 2 of 17 Internal Audit - 17/05/11 217Byron Shire Council Fuel Cards

EXECUTIVE SUMMARY Audit of Byron Shire Council Light Fleet Fuel Cards Overview: The purpose of this investigation was to examine and report on any weakness in the system or method of control of current BSC Light Fleet fuel card operation. It involved examination of the: Key Findings & Recommendations A summary of key findings and recommendations is provided. This summary is supported by a more comprehensive report at Appendix 1 which provides a basis for the observations and recommendations. These observations and recommendations have been discussed with the relevant members of the BSC. This report includes observations and recommendations where BSC management may have already implemented some action plans to address the identified matters. Page 3 of 17 Internal Audit - 17/05/11 issue and control of fuel cards accounting procedures principal (custodial) driver arrangements carpool arrangements As well is interviewing relevant BSC staff, the investigation was based on analysis of transactions from the Caltex fuel card system that was introduced in July/August 2010. Audit Objectives: 1. To examine and report on any weakness in the system or method of control of the current Fleet fuel card operation 2. To ensure that Fraud and Corruption Risks are identified and appropriate internal controls are in place Accordingly the scope of this audit is to: 1. Ensure appropriate policies and procedures are in place 2. Ensure compliance with relevant policies and procedures and 3. Ensure sufficient controls are in place for the prevention of fraud Implementing Management Action Plans Whilst each nominated staff member or manager is responsible for implementing the nominated action plans to address each accepted internal audit recommendation, we suggest that the Executive Manager Community Infrastructure oversee this process to ensure the benefits of this internal audit engagement are maximised. 317Byron Shire Council Fuel Cards

SUMMARY OF INTERNAL AUDIT OBSERVATIONS & RECOMMENDATIONS Item Key Audit Observations and Recommendations Internal Audit Rating High Moderate Low Implementation Date 1 Issue and Control of Fuel Cards There is a high incidence of inaccurate data being supplied by drivers when purchasing fuel. As such a key control is lost. Page 4 of 17 Internal Audit - 17/05/11 1) That the importance of providing accurate information be emphasised to staff. 2) That logbooks be provided to all vehicles to facilitate the accurate recording of kilometres travelled. 3) That the Caltex "odometer validation" setting be turned on 4) That an analysis of costs and benefits of the AusFleet upgrade be undertaken to allow IT to determine the appropriate priority for this task. 417Byron Shire Council Fuel Cards

Item Key Audit Observations and Recommendations Internal Audit Rating High Moderate Low Implementation Date 2 Accounting Procedures Page 5 of 17 Internal Audit - 17/05/11 1) That the purpose of each trip be recorded to assist validation that purchases of fuel that are made outside of the Byron Shire conform to official procedures 2) That the list of staff who use vehicle arrangements allow the purchase of fuel outside of the Byron Shire be available to the Fleet Officer and Manager Finance 3) That the list of custodial drivers who do not have general approval to purchase fuel outside of the Byron Shire, notify the accounting staff when taking leave 4) That an analysis of costs and benefits of the AusFleet upgrade for FBT processing, be undertaken to allow IT to determine the appropriate priority for this task 517Byron Shire Council Fuel Cards

Item Key Audit Observations and Recommendations Internal Audit Rating High Moderate Low Implementation Date Page 6 of 17 Internal Audit - 17/05/11 3 Driver Arrangements The current procedures as outlined in "Gen Terms of Use - Light Motor Vehicle Fleet" (# 1037780) are not being followed by all staff. In particular there is confusion regarding obtaining fuel outside of the Byron Shire and when on leave. 1) That managers ensure that BSC staff are aware of their obligations under section 7 of the "General Terms of Use - Light Motor Vehicle Fleet" Procedures. 2) That the review of the section 7 conditions of concern to the Consultative Committee, and those other "grey areas" that require determination to avoid mis-interpretation, be given high priority. 617Byron Shire Council Fuel Cards

Item Key Audit Observations and Recommendations Internal Audit Rating High Moderate Low Implementation Date 4 Carpool Arrangements Carpool arrangements details are not being recorded adequately in all areas. It is important for such usage to be monitored for reasons which include: identification of the driver where speed fines, toll infringements, parking fines, et cetera are subsequently received by Council Page 7 of 17 Internal Audit - 17/05/11 1) That a car booking sheet which allowed vehicles to be booked up to say, a week in advance, be used to record: name of officer requiring the vehicle expected time out/time in actual time out/time in purpose of the journey 2) That the vehicle log book details be completed, including the name of the staff member who borrowed the vehicle and, in particular, fuel purchases and/or any abnormal events such as damage to the vehicle, parking tickets, et cetera the also noted 3) That information regarding fuel usage be provided to the Fleet Officer for review. 717Byron Shire Council Fuel Cards

Item Key Audit Observations and Recommendations Internal Audit Rating High Moderate Low Implementation Date 5 Fraud and Corruption Risks Basic checks included: cards cannot be issued if the vehicle does not exist cards are cancelled and shredded when the vehicle is disposed of database check for unusual transactions such as too large/small to be plausible staff are advised of what the card can be used for and required keep cards secure fuel consumption of each vehicle is reasonable and consistent Page 8 of 17 Internal Audit - 17/05/11 The procedures for issuing and cancelling cards do not provide any realistic opportunity of misuse. Due to the current situation where different databases and sources of information are not linked, detailed analyses of Caltex and BSC data must be done manually and are therefore timeconsuming. This limitation will be overcome when the Ausfleet upgrade is able to be implemented. This audit did not detect any unusual or unreasonable transactions after amending data that had been incorrectly provided to the Caltex system. Should fraud be detected in the future, a copy of the tax invoice may prove useful. That the tax invoice as well as the eftpos slip be obtained from the Caltex service station 817Byron Shire Council Fuel Cards

APPENDIX 1- DETAILED REPORT Context: Byron Shire Council operates a mixed fleet of stationary and mobile plant in motor vehicles that are used in normal business activities associated with a rural general purpose local government authority. The activities include water and sewer reticulation: road, bridge and drainage construction and maintenance; parks maintenance and construction; and coastal and estuary works. The Light Fleet consists of 39 utilities and 54 motor vehicles. Turnover for the Light Fleet occurs approximately when the vehicle reaches 75,000 km or three years of age for four cylinder vehicles and 120,000 km or five years for six cylinder and commercial utilities.. Page 9 of 17 Internal Audit - 17/05/11 Workshop staff for plant and motor vehicle servicing, use the Ausfleet system to record specific details, such as job cards and maintenance history, purchase and sale details, for each individual plant item. The Workshop Supervisor is responsible for allocating and administering the fuel cards associated with the Light Fleet. Initially the fuel cards were supplied by Mobil Oil Australia. On 27 May 2010, Mobil Oil announced the sale of its metropolitan fuel outlets to 7Eleven. Mobil also announced that it would cease to offer its fuel card. A subsequent report from the Manager Works and the Superintendent Workshop and Stores, recommending that a new card for the Light and Yellow Fleets be obtained from Caltex, was accepted by the BSC Executive Team in June 2010. The Caltex Starcard replaced the Mobil card in July 2010 with transition period through to August 2010. Due major projects such as the upgrade of the Civica system, IT staff have not had the resources to map the raw Caltex transaction data into the BSC Authority system. It is expected that IT will be able to consider this project in the second half of 2011. In the meantime, accounting staff are keying the relevant information from the Caltex sources into Authority. Accordingly, at this time information on fuel card transactions are available from Caltex as monthly summaries as well as raw data from all transaction fields. Issue and Control of Fuel Cards The Caltex cards are issued and controlled by the Workshop and Store Superintendent who with the Manager Works, performs many of the duties previously done by the Fleet Officer. The registration and type of fuel are e-mailed to Caltex, who provide the card and the pin after about a week. Purchases are restricted to fuel and oil. The relevant details are input to a spreadsheet which is on the system. Please note that for the purpose of this report these tasks will be referred to as being performed by the "Fleet Officer". If there is a change in the custodial driver through resignation or swap, the card is sent back to the Fleet Officer who undertakes a card and vehicle check before the vehicle and the card are reassigned to another driver. This check includes inspection of the vehicle to ensure it is in sound, clean and tidy condition. 917Byron Shire Council Fuel Cards

A new card is issued for a new vehicle. On change over, details of the sold vehicle are noted and the old card is shredded. A new card can also be issued to replace a lost card. The Fleet Manager has five spare cards, one of which is loaned to the custodial driver until a replacement card arrives from Caltex. Page 10 of 17 Internal Audit - 17/05/11 The Fleet Officer monitors the kilometres travelled for each vehicle in a spreadsheet where odometer readings are supplied by the custodial drivers at the end of each month. This information is used to identify which vehicles are getting close to replacement. It is also used by Accounts staff to identify those vehicles that are in danger of not meeting their FBT targets. In addition these figures can also be used as a check on: ensuring servicing is occurring at the appropriate times the accuracy of kilometres recorded in the Caltex reports and the pattern of use, and therefore to highlight abnormal usage, of the vehicles. This information will become increasingly valuable once the AusFleet upgrade, recommended by the Uniqco consultants and endorsed by the IAC, is implemented. (Note: IT has stated that the AusFleet upgrade is not straightforward - it requires considerable "back end" change. IT does not have the resources to make these changes at this time) However, the accuracy of the data is dependent on the correct kilometres being reported by the principal driver. While most principal drivers (custodians) of the vehicles do report these figures each month, it is clear from the spreadsheet data from both Caltex and the Fleet Officer that this does not always occur. For October 2010 in the Fleet Officer s spreadsheet there were 18 missing figures, in November there were 15, in December 26 and in January 13. In addition, several of the figures that were provided are obvious approximations, as can be seen by the rounding to the nearest hundred or even thousand kilometres. A similar situation occurs in the Caltex reports. In January 2011, Manager Finance sent a memo to all staff indicating that the appropriate details were not being input and reminding staff that accurate information was a condition of the use of BSC vehicles. Due to the combination of duties, the Fleet Officer/Workshop Supervisor has limited time available to manage these systems. In particular he has only limited time and resources to undertake detailed analysis of these data let alone to chase up missing figures. Observation 1: If the drivers are not accurately recording odometer readings for each fuelling and for the end of month reports, a key control is lost. Observation 2: 1017Byron Shire Council Fuel Cards

Analyses of current spreadsheet data are not straightforward due to such issues as: the possibility of fuel also being supplied from the depot the possibility of fuel being purchased privately incorrect odometer readings carpool utilisation, where the vehicle can be used by other than the nominated driver the issue of loan cards - while fuel charged to loan cards are recorded by Caltex, extra processing is required to identify the normal card and add the details to it the possibility of other equipment that are loaded at the back of work vehicles and refuelled at the same time Observation 3: The Caltex cards have a setting called "odometer validation" that can be turned on. This will give the driver a "warning" decline if: Page 11 of 17 Internal Audit - 17/05/11 the reading and it is not sequential to the previous reading the driver has not entered a reading at all the reading is more than 1500 km from the previous reading 5) That the importance of providing accurate information be emphasised to staff. 6) That logbooks be provided to all vehicles to facilitate the accurate recording of kilometres travelled. 7) That the Caltex "odometer validation" setting be turned on 8) That an analysis of costs and benefits of the AusFleet upgrade be undertaken to allow IT to determine the appropriate priority for this task. Accounting Procedures As for the Fleet Officer, the accounting staff have only limited time available for review and analysis of the Light Fleet data that are supplied from Caltex sources, reports from Authority, or information provided from the Fleet Officer. While some general reviews can be done, e.g., observing when the odometer readings have obviously not been recorded correctly, or noticing if the amount of fuel purchased at any one time far exceeds the capacity of the vehicle, in-depth analyses are not attempted. Furthermore, the accounting staff do not have information to allow them to readily perform such analyses. For example although the accounting staff receive monthly Caltex summary reports of fuel purchases by vehicle that include location of the service station, it is not possible for them to identify when the cards have been used inappropriately out of the shire. That is to say, it is not known whether or not fuel was purchased outside of the Byron Shire when the vehicle was being used on official 1117Byron Shire Council Fuel Cards

BSC business or whether such purchases were allowable due to the specific employment agreement of the vehicle custodian. Identification of inappropriate use is further complicated in that that the vehicles are available for use by staff other than the vehicle custodian. With regard to the FBT, the accounting staff provide warnings to those custodial drivers who appear in danger of not achieving their proposed targets, and therefore are susceptible to paying penalty tax. However it is then up to that staff member to work with the Fleet Officer to identify a suitable swap, negotiate the swap and have that arrangement approved by the General Manager. The FBT processing will also be made more efficient once the AusFleet upgrade has been completed. Page 12 of 17 Internal Audit - 17/05/11 Observations: the data that are available are not being used to their maximum potential to ensure the most efficient and effective use of the Light Fleet resource the switch to the Caltex system has provided more inherent controls than were available under the Mobil arrangement. In particular under the Caltex system the driver has to input the relevant details whilst making the purchase of fuels, rather than having the operator do this. Other purchases are recorded electronically. As well as limiting the possibility of miss-keying information, it also reduces the possibility of fraud, for example by additional purchases being simply described as fuel and entered as the one item. 5) That the purpose of each trip be recorded to assist validation that purchases of fuel that are made outside of the Byron Shire conform to official procedures 6) That the list of staff who use vehicle arrangements allow the purchase of fuel outside of the Byron Shire be available to the Fleet Officer and Manager Finance 7) That an analysis of costs and benefits of the AusFleet upgrade for FBT processing, be undertaken to allow IT to determine the appropriate priority for this task Driver Arrangements The current procedures "General Terms of Use - Light Motor Vehicle Fleet" (#1037780) outlines the obligations relating to the use of BSC vehicles. Section 7. "Fuel and Fuel Cards" provides guidance regarding fuel cards. Point 7.7 states: "Unless otherwise authorised in writing, employees: a) can use Council Fuel cards at approved fuel suppliers located within the Byron Shire at any time except that employees allocated Vehicles on a Commuter Use or Restricted Use basis must not use Council Fuel cards during any period of leave; b) can use Council Fuel cards at approved fuel suppliers located outside of the Byron Shire only when the travel is for Council business. c) At all times must only use Council Fuel Cards for the purchase of fuel, oils or transmission fluid is for a Council Vehicle and any other purchases on Council Fuel Cards are strictly forbidden." 1217Byron Shire Council Fuel Cards

As mentioned above neither the Fleet Officer nor the accounting staff checked for inappropriate use of the fuel cards outside of the Byron Shire. However a detailed review of the Caltex monthly vehicle summaries indicated that many staff used their fuel cards at service stations outside of the Byron Shire. It seems that there is genuine confusion as to whether travel between work and home is regarded as travel for Council business or not. Furthermore, in considering the Caltex reports for December, it was clear that some staff were using the fuel cards while on leave, contrary to 7.7(a). Finally, in discussions with Executive Manager Community Infrastructure, it seems that other areas of the Procedures, such as whether or not the leave procedures apply to flex-leave, are still to be determined. The Consultative Committee requested a review of these conditions prior to the Christmas 2010 and the Executive Team has agreed for this to take place. Page 13 of 17 Internal Audit - 17/05/11 Observation: Apart from having a pool of vehicles available for operational purposes, the BSC benefits from its leasing arrangements by attracting and retaining skilled and valued staff. From the employee's perspective, there were not only financial rewards but benefits in both prestige and morale. It was clear from both discussions with staff and a review of correspondence regarding the "General Terms of Use - Light Motor Vehicle Fleet" (#1037780), that there was considerable risk of discontent and loss of morale if concerns regarding these "grey areas" were not addressed in a timely fashion. 3) That managers ensure that BSC staff are aware of their obligations under section 7 of the "General Terms of Use - Light Motor Vehicle Fleet" Procedures. 4) That the review of the section 7 conditions of concern to the Consultative Committee, and those other "grey areas" that require determination to avoid misinterpretation, be given high priority. Carpool Arrangements Under the BSC lease arrangements, light vehicles must be available for general staff use on Council business during core periods during the day. Accordingly, keys are handed in to a specific point in each of the major divisions in Mullumbimby and also at the depot. It is important for such usage to be monitored for reasons which include: identification of the driver where speed fines, toll infringements, parking fines, et cetera are subsequently received by Council identification of the driver where abnormal use/damage has occurred identification of the driver where fraud has occurred 1317Byron Shire Council Fuel Cards

identification of the driver where the fuel card has been used inappropriately to assist in the best day-to-day use of the vehicles to assist in the review of overall usage of BSC vehicles for longer term planning. A review of the monitoring procedures adopted in each area showed that current monitoring procedures ranged from detailed to non-existent. Page 14 of 17 Internal Audit - 17/05/11 4) That a car booking sheet which allowed vehicles to be booked up to say, a week in advance, be used to record: name of officer requiring the vehicle expected time out/time in actual time out/time in purpose of the journey 5) That the vehicle log book details be completed, including the name of the staff member who borrowed the vehicle and, in particular, fuel purchases and/or any abnormal events such as damage to the vehicle, parking tickets, et cetera the also noted 6) That information regarding fuel usage be provided to the Fleet Officer for review. Observation: Executive Manager Community Infrastructure has indicated that real-time computer systems are available for the allocation and monitoring of the carpool on the BSC wide basis. These systems may provide a better means of ensuring the best use of the carpool vehicles. 5. Fraud and Corruption Risks: Basic checks included: cards cannot be issued if the vehicle does not exist cards are cancelled and shredded when the vehicle is disposed of 1417Byron Shire Council Fuel Cards

database check for unusual transactions such as too large/small to be plausible staff are advised of what the card can be used for and required keep cards secure fuel consumption of each vehicle is reasonable and consistent Ideally the role of the internal auditor is not to perform these checks but confirm that the staff who should be responsible are doing them. Frequency and intensity checking would reflect the assessed risk and the cost of checking. Furthermore automation of databases together with a well-designed report may well detect any significant issues and be aligned with the billing cycle. Procedures for the Issue and Cancellation of Fuel Cards: The procedures for the issue and cancellation of fuel cards were investigated by reviewing details provided by the Workshop and Stores Superintendent and the Manager Works. This investigation confirms that cards are cancelled and shredded when the vehicle is disposed of and, while theoretically possible for a fuel card to be issued if the vehicle did not exist, any transactions made with such a card would be quickly identified by the BSC accounting staff. Page 15 of 17 Internal Audit - 17/05/11 Database Check for Unusual Transactions (Including Fuel Consumption): As reported previously, resource and information limitations prevent the Workshops and Stores Superintendent or the accounting staff from running detailed checks. Furthermore, for anything other than a superficial analysis, information from a range of sources would be required. At this time such an analysis would require considerable time and resources. While automation of databases together with a suitable report would provide a convenient alternative, IT resources are not currently available for this task. However, as recommended earlier in this report, it is proposed that a cost benefit study be undertaken to allow IT to give this work appropriate priority in their future project program. Accordingly analyses of the data provided by Caltex were undertaken for this audit. A check of: the raw data for quantities purchased for the Light Vehicles did not detect any abnormal or unusual transactions the raw data for December, sorted by cardholder, indicated that some fuel purchases were made while staff were on leave the raw data, sorted by location of the service station, and the monthly Caltex summaries of transactions by staff member, indicated that the fuel purchases were being inappropriately made out of the Shire 1517Byron Shire Council Fuel Cards

The analysis of fuel consumption required the merging of monthly Caltex spreadsheet data with that of the Fleet Officer spreadsheet of custodial drivers by the vehicle details. The merge was based on registration numbers. As the Caltex data included heavy fleet vehicles, there was not a one-to-one correspondence between the two databases. Accordingly the records need to be manipulated manually in order to achieve the desired combination. The merged database was then sorted by vehicle type to allow the like-with-like comparison of litres per 100 km. Once again, the interpretation of these figures was found to be quite complicated due to: Page 16 of 17 Internal Audit - 17/05/11 the possibility of fuel also being supplied from the depot the possibility of fuel being purchased privately incorrect odometer readings carpool utilisation, where the vehicle can be used by other than the nominated driver the issue of loan cards - while fuel charged to loan cards are recorded by Caltex, extra processing is required to identify the normal card and add the details to it the possibility of other equipment that are loaded at the back of work vehicles and refuelled at the same time leave Four apparent cases of abnormally high fuel consumption were detected. However upon more detailed analysis using other sources of information it seemed that in all cases, these results were due to incorrect kilometres being input when the fuel was purchased. Procedures for Providing Appropriate Advice to Staff: As reported previously, this audit has detected various instances of where the procedures for the use of BSC fuel cards have not been followed. Observations: 1) The above analyses are unlikely to detect instances of fraud due to collusion between a driver and a service station attendant. Although unlikely, especially given the Caltex system of recording transactions, this could occur if the attendant was willing to add the cost of, say, food/drink etc manually to the costs of fuel or oil. 2) Should fraud be detected in the future, a copy of the tax invoice may prove useful. 3) The tax invoice copy of a fuel card purchase should have the kilometres recorded that have been supplied to the Caltex system, and so would enable the driver to check its accuracy. That the tax invoice as well as the eftpos slip be obtained from the Caltex service station 1617Byron Shire Council Fuel Cards

OTHER RISK AND CONTROL MATTERS NOTED DURING THE INVESTIGATION: Mention has been made of the limitations of time and resources for both the Fleet Officer and the accounts staff to monitor fuel card transactions under current circumstances. Introduction of the recommendations from this report such as the introduction of log books to all cars and subsequent analysis is likely to increase pressure on these staff. Page 17 of 17 Internal Audit - 17/05/11 1717Byron Shire Council Fuel Cards