Audit Report FIXED ASSET SYSTEM County Controller Stephen J. Barron, Jr., CFE As of March 31, 2010 Audit Manager Frank S. Kedl, CIA Solicitor Timothy P. Brennan, Esq. County Executive John Stoffa County Council Ron Angle, President John Cusick, Vice-President Thomas H. Dietrich J. Michael Dowd Margaret Ferraro Bruce A. Gilbert Lamont G. McClure, Esq. Ann McHale Barbara Thierry Office of the Controller County of Northampton Pennsylvania
STEPHEN J. BARRON, JR., CFE FRANK S. KEDL, CIA Audit Manager TIMOTHY P. BRENNAN, ESQ. Solicitor CONTROLLER OF NORTHAMPTON COUNTY NORTHAMPTON COUNTY COURTHOUSE 669 WASHINGTON STREET EASTON, PENNSYLVANIA 18042 PHONE (610) 559-3186 FAX (610) 559-3137 December 1, 2010 Members of the Northampton County Council John Stoffa, County Executive County of Northampton, Pennsylvania We have completed an audit of the Fixed Asset System as of March 31, 2010. The Executive Summary on page 1 summarizes the audit results and identifies opportunities for improvement, while the Audit Results section provides a detailed explanation. We acknowledge the cooperation and assistance that we received from Fiscal Affairs, Procurement, and various employees throughout the County who are responsible for the handling and recording of Fixed Assets. Their help was essential to the performance of this audit. Management s response is included in the Audit Results section of the report. Very truly yours, Stephen J. Barron, Jr., CFE County Controller Frank G. Sabol, Jr. Staff Auditor
Table of Contents PAGE EXECUTIVE SUMMARY - OPPORTUNITIES FOR IMPROVEMENT... 1 INTRODUCTION... 3 PURPOSE AND SCOPE... 4 METHODOLOGY... 4 AUDIT RESULTS... 5 Section A Internal Controls 1. Computers valued less than $5,000... 5 2. Lower threshold Fixed Assets ($300 or $500)... 6 Section B Compliance 1. Maintaining Accurate and Up-to-date Fixed Asset Inventory Records... 8 2. Maintaining Accurate Physical Identification of Fixed Assets...10 3. Fixed Asset Disposal Process...12 4. Physical Inventory of Fixed Assets...13 Section C Policies and Procedures 1. Policies and Procedures Manual...14 Section D Economy and Efficiency 1. Duplication of Effort...15 2. Storage of Obsolete and Unused Assets...16
EXECUTIVE SUMMARY - OPPORTUNITIES FOR IMPROVEMENT The following is a summary of the content of the enclosed report. See report references noted below for full detail. Section A Internal Controls 1. Improvements need to be made in maintaining inventory control over county computers in order to achieve accurate and up-to-date records. (Section:A-1, pg. 5) 2. Inventory control of lower threshold fixed assets ($300 to $500) at the Gracedale, Mental Health/Developmental Programs, and Children, Youth & Family divisions needs improvement in order to identify and maintain an accurate fixed asset inventory.(section:a-2, pg. 6) Section B Compliance 1. Improvements need to be made in the recording of fixed assets in the County Fixed Asset system. All assets should be identified on the inventory listing with the correct model number, serial number, and location within the County. Asset identification code consistency between the County Fixed Asset system and other support systems will enhance the accuracy of the fixed asset inventory.(section B-1, pg. 8) 2. Improvements need to be made to labeling and physically identifying fixed assets in order to promote an accurate physical inventory and reconciliation process.(section B-2, pg. 10) 3. Improvements need to be made in communicating the Asset Disposal policy to all county employees who are responsible for managing fixed assets in order to relieve the fixed asset inventory of items that are no longer in use. (Section B-3, pg. 12) 4. A physical inventory of all fixed assets should be performed by all responsible departments and should be reconciled by the Fiscal Department in order to improve the accuracy of the current book inventory and to comply with the Fixed Asset Accounting Procedure Manual. (Section B-4, pg. 13) 1
Section C Policies and Procedures 1. A formal update to the Fixed Asset Accounting Procedure manual and distribution to all county employees who are responsible for maintaining control over fixed assets will improve consistency in the processing of fixed assets.(section C-1, pg. 14) Section D Economy and Efficiency 1. Improvements are needed in the fixed asset coding and data entry process in order to improve efficiency and eliminate duplication of effort. (Section D-1, pg. 15) 2. Elimination of the storage trailers for old and obsolete material at Gracedale could result in an annual cost savings of $5,400.(Section D-2, pg. 16) 2
INTRODUCTION The Fiscal Affairs Policies and Procedures Manual defines a fixed asset as any purchased item with an initial unit cost of $5,000 or more, having a useful life of more than one year and can be used repeatedly without substantially altering its physical condition and usefulness by normal maintenance and repair. Three funds have exceptions to the capitalization threshold: Gracedale and Mental Health/Developmental Programs have a $500 threshold; Children, Youth & Families has a $300 threshold. The fixed asset module within the Bi-Tech financial system is maintained by the Fiscal Affairs Property Accountant who records additions, deletions and transfers. Vendors invoices which have been coded as capital outlay and meet the minimum threshold requirements are the basis for fixed asset additions. Employees throughout the County who are responsible for controlling their department s fixed assets must submit Surplus Property Disposition (SPD) forms to the Procurement Manager for all deletions and transfers of fixed assets. All approved SPD forms are forwarded to Fiscal Affairs for entry into the fixed asset module. The total capital assets, net of accumulated depreciation, as of December 31, 2009 was valued at $145,054,667 on the County s audited financial statements. Machinery and equipment which was the main focus of this audit was valued at $6,636,999. 3
PURPOSE AND SCOPE The purpose of the audit was to determine if: The process of recording all transactions related to Fixed Assets complies with County policies and procedures. The process of reconciling actual fixed assets to fixed asset inventory records is performed on a timely basis. Internal controls over the process are adequate. The processes are being done economically and efficiently. The scope of the audit included the Fixed Asset Inventory transactions through March 31, 2010 primarily for machinery and equipment. This included the process of reviewing additions, deletions, and transfers of fixed assets as well as inventory balances. METHODOLOGY Our methodology included: Holding interviews with: o the Director of Fiscal Affairs o the Fiscal Affairs Property Accountant o the Purchasing Manager and Assistant Manager o Gracedale Accounting & Receiving Departments o ACS Inventory & Network Specialists Reviewing the following Policy & Procedure Manuals: o Fixed Asset Accounting Procedure o Purchasing Manual Section 12.0 o ACS Computer & Office Equipment Disposal Policy Reviewing the following Administrative Codes: o Section 4.06 Responsibilities for fixed asset inventory and record keeping of all County Property. o Section 13.18 Disposition of County Fixed Assets. Testing for compliance with County policies and procedures including the administration of fixed asset inventory control and recordkeeping. Researching other government installations for best practices. We conducted this performance audit in accordance with generally accepted government auditing standards. 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. 4
AUDIT RESULTS Section A Internal Controls 1. Computers valued less than $5,000 OBSERVATION A review of critical assets valued at less than $5,000 was performed for computers in departments that had a fixed asset threshold of $5,000 or greater. We reviewed the ACS computer inventory listing and selected some departments to test and compare to the physical inventory. We noted the following: After locating a computer that was not listed on the ACS inventory listing we found that computers that are not connected to the County network are not included on the ACS computer inventory listing. RECOMMENDATION Improvements need to be made in maintaining inventory control over all computers at the County. The ACS inventory for County computers should be updated to include all computers. A physical inventory should be taken of all computers including network-connected and the off-line computers. Reconciliation and adjustments should be made to the ACS inventory listing. MANAGEMENT RESPONSE Albert Jordan, ACS Account Manager A physical inventory is currently being conducted in conjunction with the enterprise rollout of Microsoft Windows 7 and Microsoft office 2010. In response to the recommendation of this audit, ACS will work with the County fixed asset accountant to ensure the physical inventory, the IssueTrack automated inventory, and IFAS (ERP), where technology related assets are also fixed assets are reconciled. 5
2. Lower threshold Fixed Assets ($300 or $500) OBSERVATION There are three departments who have exceptions to the capitalization threshold of $5,000. They are Gracedale and Mental Health/Developmental Programs (MH/DP) who have a $500 threshold. Children, Youth & Families (CYF) has a $300 threshold. Our objective for this review was to use ACL, a data extraction and analysis software, to verify that the County Fixed Asset Inventory (IFAS) agreed to the ACS computer inventory listing. We noted the following: For Gracedale computers the serial numbers on IFAS included one extra digit. No records on IFAS matched the ACS inventory listing. For Gracedale computers we counted 196 computers on the ACS inventory listing compared to 186 computers on the IFAS listing. That resulted in 10 computers that were unaccounted for in the IFAS system. For CYF computers we were able to find a match for 80 out of 126 records. Most of the unmatched records were also listed on the CYF department s exceptions found during their annual inventory reconciliation. For MH/DP computers we were only able to find a match for 7 out of 126 records. Out of the 119 unmatched records there were 58 records with no serial number on the IFAS file. Also, we reviewed the process for the acquisition of wheelchairs and mattresses for 2009 at Gracedale. We noted the following: Invoices did not reflect serial numbers for wheel chairs and specialty mattresses. This resulted in no serial number being posted to the inventory within the IFAS system. No other method was used to of identify and compare items listed on the inventory to the actual chair or mattress in use. RECOMMENDATION Inventory control of records for lower-threshold fixed assets ($300 to $500), at Gracedale, MH/DP, and CYF, needs improvement. The correct serial number and model number along with other related information should be listed on the inventory listing in the IFAS system. All computers should include this information on both the IFAS and ACS Inventory systems. In order to expedite proper identification of newly-acquired fixed assets the Procurement division should notify all vendors who supply fixed assets to the County that they must furnish a serial number for each item on their invoice. MANAGEMENT RESPONSE Albert Jordan, ACS Account Manager For technology related assets please see response to A1. 6
Kathryn Anderson, Purchasing Manager To facilitate tracking of fixed asset purchases currently made through the ERP System, Procurement will require a notation that Serial Numbers be obtained as part of the Requisition submitted. In addition, the IFAS System is capable of automatically identifying fixed asset purchases by object codes thus eliminating the need for manual notification. Fiscal Affairs will consider implementation of this feature of the Fixed Asset Module at some time in the near future. Dave Pinter, Fiscal Administrator, Gracedale ACS has in-house computers on their inventory that are used internally. These computers are not included on IFAS. In respect to wheelchairs and mattresses or any other fixed asset, the storeroom will coordinate with Sherry Ficocelli, Materials Manager. The storeroom personnel will record the model number and serial number for all fixed assets and it will be given to the materials manager and the accountant for asset management. 7
Section B Compliance 1. Maintaining Accurate and Up-to-date Fixed Asset Inventory Records OBSERVATION For this part of our review we randomly chose 25 items from the Fixed Asset Inventory Listing which was extracted from the County Fixed Asset System (IFAS). Our objective was to verify that model, serial number, and asset tag numbers for fixed asset materials and equipment are properly recorded. We noted the following: 15 items did not include a model or serial number. 4 items that included model and serial numbers were physically located and identified. This equates to a 16% success rate. 5 items that included model and/or serial numbers could not be located or identified. One item was disposed of but was never removed from the inventory listing. During our inventory records review we also found that most fixed assets at Gracedale were coded to reflect the item location as stores warehouse because they go there first and are then taken to the individual floors or buildings. Items are not being coded for the end-user s location. RECOMMENDATION Based upon the results of testing, improvements need to be made in the recording of fixed assets in the County Fixed Asset system. Only 10 out of 25 items tested had serial and model numbers listed on the inventory listing. Only 4 out of the 10 identified assets could be physically traced to the actual asset. All assets should be identified with a model and serial number. Also, the location within the County where the asset is positioned should be identified on the inventory listing. MANAGEMENT RESPONSE Vic Mazziotti, Director of Fiscal Affairs In order to maintain accurate Fixed Asset records, greater priority will be given to the recording of model and serial numbers along with the physical location of newlypurchased fixed assets. If the model and serial numbers are not listed on the invoice, the departments and divisions that received the fixed asset shall be contacted to provide this information. 8
Dave Pinter, Fiscal Administrator, Gracedale The Fiscal Accountant at Gracedale will ensure that the asset department code reflects the location of the end-user. Effort will be made to coordinate, with staff, all asset transfers in conjunction with resident transfers. Transfers of any assets such as wheelchairs, mattresses, etc. will be processed with the correct asset disposal forms. 9
2. Maintaining Accurate Physical Identification of Fixed Assets OBSERVATION Fixed Assets are not being tagged with asset tag number labels. Attempts were made by Fiscal Affairs to implement this corrective action following our previous audit of August, 1994; however, no successful process was completed or activated. During our current review we also noted the following: Asset tag numbers that are assigned to newly-purchased fixed assets are not being attached to the asset. For departments who have a lower fixed asset threshold ($500 or $300) we found an asset tag number discrepancy. Asset tag numbers for computers assigned by ACS on their computer inventory listing were a 4- digit number. Asset tag numbers assigned by the Fiscal Affairs Accountant and entered into the County Fixed Asset System (IFAS) for the same computer were either a 6-digit number or a 10-unit alpha numeric. RECOMMENDATION Improvements need to be made to the process of labeling and physically identifying fixed assets. All fixed assets should be tagged with a numerical asset tag number. Based on the results of a benchmarking survey of best practices performed by our office we confirmed that the majority of government facilities, who responded to our survey, apply asset tag numbers to all fixed assets to help identify and maintain their fixed asset inventory. In order to maintain consistency and have a good cross-reference for departments with a lower fixed asset threshold ($500 or $300) we believe that asset tag numbers for computers on the ACS computer inventory listing should agree to asset tag numbers on the County Fixed Asset system (IFAS). Together, ACS and Fiscal Affairs should devise a common asset tag format and implement it into their respective fixed asset inventory systems. MANAGEMENT RESPONSE Vic Mazziotti, Director of Fiscal Affairs To implement the recommendation made in the Audit Report that all fixed assets be tagged with a numerical asset tag number to help identify and maintain their fixed asset inventory, departments or divisions receiving a newly-purchased fixed asset, will be instructed to contact the Fiscal Affairs Property Accountant, who will forward to them a fixed asset tag (numeric sequence asset tags will have to be purchased) which they can affix to the equipment. As for tagging computer equipment, a common asset tag format will be implemented between Fiscal Affairs and ACS (Affiliated Computer Services). The majority of computers that are purchased fall under the $5,000 capitalization threshold and are not currently recorded on the County s Fixed Asset portion of IFAS (ERP). 10
Dave Pinter, Fiscal Administrator, Gracedale All fixed assets will have an asset tag number assigned to them. Due to Gracedale s size and the fixed asset threshold of $500 we will coordinate asset # s with a certain color to distinguish different locations (floors) for assets. Any movement of asset would have to follow that color code and discern any movement of the asset. 11
3. Fixed Asset Disposal Process OBSERVATION The County s fixed asset disposal process is clearly written and presented in the Administrative Code (section 13.18) and the Purchasing Manual (section 12.3). After reviewing the policy we surveyed various divisions throughout the County to verify the understanding of and the compliance with the procedures contained in this policy. We noted the following: Two of the six divisions tested appeared to be unaware of the fixed asset disposal policy as stated in the Purchasing Manual and the Administrative code. A review of an inventory listing of specialty mattresses maintained by the Clinic department at Gracedale reflected numerous changes and transfers that were not forwarded to purchasing or accounting. The exact number of disposals could not be established. RECOMMENDATION Improvements are needed in the communicating of the Asset Disposal policy and procedures to the County departments who manage fixed assets. The Procurement division should issue a County-wide directive reinforcing this policy. MANAGEMENT RESPONSE Kathryn Anderson, Purchasing Manager The Intranet will be updated to include a sub-heading under County Forms to include the Asset Disposal Policy in addition to the Surplus Declaration Forms already published. A feature article will be requested to be included in an upcoming issue of the County Insider. Vic Mazziotti, Director of Fiscal Affairs Departments will be reminded that they must contact the Procurement division if they intend to dispose or transfer County-owned property. They will be required to fill out the Surplus Property Disposition form which can be accessed from the County intranet site. After this form is completed, it will be forwarded to the Procurement Manager for authorization. Fixed assets will be removed from the system by the Property Accountant only with the Procurement Manager s authorization. Dave Pinter, Fiscal Administrator, Gracedale All staff members at Gracedale, responsible for maintaining fixed assets, will be trained to help understand the correct procedures in asset disposal. Any disposal of an asset listed on Gracedale s Detail Property Accounting Ledger Report will be accompanied by the correct property disposition forms and signed by the department head and the procurement officer. A copy of the property disposition will be submitted to the accounting department. 12
4. Physical Inventory of Fixed Assets OBSERVATION We found no evidence to confirm that a total physical inventory and reconciliation of County fixed assets has been performed in the last 15 years. The Fixed Asset Accounting Procedure Manual states: A full fixed asset inventory shall be performed at least once every five years. RECOMMENDATION Physical inventory of all fixed assets should be performed by the responsible department and reconciled by the Fiscal Affairs Department as soon as possible. In order to be in compliance with the Fixed Asset Accounting Procedure Manual this process should be repeated every five years, however; based on the results of a benchmarking survey of best practices, performed by our office, we confirmed that the majority of government facilities that responded to our survey perform a physical inventory of fixed assets on an annual basis. MANAGEMENT RESPONSE Vic Mazziotti, Director of Fiscal Affairs Fiscal Affairs will send out fixed asset inventory lists to all responsible departments and divisions within the County and have them perform the inventory. Departments and divisions that do not comply with this requirement to inventory their fixed assets will be required to do so or they will be sanctioned by the Procurement Division. Dave Pinter, Fiscal Administrator, Gracedale A physical inventory will be performed at Gracedale to ensure that the current Gracedale Detail Property Accounting Ledger Report is accurate. Due to the size of Gracedale and the large number of floors included, the inventory process will include a floor by floor fixed asset count. Any transfers of residents will have to be considered during inventory. Fixed asset policies will be in place to ensure that all additions, deletions or transfers are properly recorded. 13
Section C Policies and Procedures 1. Policies and Procedures Manual OBSERVATION The Fiscal Affairs Fixed Asset Accounting Procedure manual was dated 5/1/2001. We noted that fixed asset threshold changes, which were made over the last nine years were noted in pencil. There was no formal update to this document since 2001. We were unable to locate a written policy & procedures manual for handling fixed assets at Gracedale. This division has a low fixed asset threshold of $500 and includes many departments that are responsible for the inventory of fixed assets. RECOMMENDATION The management of Fiscal Affairs should update and issue a revised Fixed Asset Accounting Procedure manual. A written detailed procedure for each specific part of the process would help define all roles and responsibilities. Also, a detail of specific procedures for divisions who have the lower fixed asset thresholds would enhance this manual. The completed manual should be forwarded to all County employees who are responsible for maintaining control over fixed assets. MANAGEMENT RESPONSE Vic Mazziotti, Director of Fiscal Affairs Fiscal Affairs will update and issue a revised Fixed Asset Accounting Procedure manual. It will include specific procedures to help define roles and responsibilities for County divisions who are custodians of fixed assets. Upon completion, the Fixed Asset manual will be distributed (with the Controllers Office approval) to all County employees who are responsible for maintaining control over fixed assets entrusted to them. Dave Pinter, Fiscal Administrator, Gracedale A uniform fixed asset accounting procedure manual will ensure that the proper policies promulgated by Northampton County are being followed by all groups involved in fixed asset control. 14
Section D Economy and Efficiency 1. Duplication of Effort OBSERVATION At Gracedale when invoices are received and identified as purchases of fixed assets they are entered into a lotus spread sheet. Assignment and entry of a fixed asset tag number is made to each item processed. Data from the lotus spreadsheet is reentered into the IFAS fixed asset system. This process appears to include a duplication of effort (entering data into a Lotus and again into IFAS). We were informed by Fiscal Affairs that since the County does not have a central receiving area the ability to integrate the Accounts Payable module and the Fixed Asset module within the IFAS system is currently not possible. RECOMMENDATION We recommend that action be taken to avoid the duplication of effort being made in the entry of data to the Fixed Asset system. There may be an opportunity to have invoices reviewed by management and fixed asset items identified and coded prior to being entered into accounts payable. Entry to accounts payable and the fixed asset system can be made simultaneously. MANAGEMENT RESPONSE Dave Pinter, Fiscal Administrator, Gracedale Accounts payable will input most of the information from the purchase order or invoice into the fixed asset system; however, careful consideration will be given to the useful life for every asset, so as to correctly value the depreciation for that specific asset. 15
2. Storage of Obsolete and Unused Assets OBSERVATION We observed 5 storage trailers located at Gracedale that are used for the storage of old and used furniture, wheelchairs, and miscellaneous equipment. Items were very old and difficult to identify by serial numbers. An estimated current value could not be established. Many items appeared to be below the $500 fixed asset threshold for the original purchase price. Items could not be identified on the fixed asset inventory listing. It appears that most of the items stored in these trailers should be disposed of. We have been told that the total monthly rental of the trailers is $450. RECOMMENDATION Since the material in the storage trailers appears to have no value and has no future use we recommend that management at Gracedale dispose all stored material and remove the trailers from the sight. This could result in a cost savings of $5,400 per year in rental expense for the County. MANAGEMENT RESPONSE Dave Pinter, Fiscal Administrator, Gracedale Most of the assets sitting in the trailers at Gracedale will be disposed of and removed from the book inventory as recommended. All unused trailers will be removed from the site. 16