City of Los Angeles Office of the Controller
Audit of Neighborhood Councils’ Expenditures
January 12, 2010
Wendy Greuel City Controller
TABLE OF CONTENTS EXECUTIVE SUMMARY……………………………..……..…….………………….……..…..… 1 CONTROLLER’S ACCOUNTABILITY PLAN ………………………………….……………….. .. 10 INTRODUCTION, BACKGROUND AND METHODOLOGY ……….……….………………..……... 16 AUDIT FINDINGS AND RECOMMENDATIONS ………………..……….………………….... … ...21 SECTION I: DEPARTMENT OF NEIGHBORHOOD EMPOWERMENT’S OVERSIGHT …… ..21 SECTION II: NEIGHBORHOOD COUNCILS EXPENDITURES …………..……….………. 32 APPENDIX………………………………………...………………………………...………….. 42 ATTACHMENT I
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AUDIT OF NEIGHBORHOOD COUNCILS’ EXPENDITURES
EXECUTIVE SUMMARY BACKGROUND The Los Angeles Citywide system of Neighborhood Councils was created following the enactment of the City‘s new Charter, which was approved by voters in June 1999. A primary goal of the Neighborhood Council (NC) Program is to promote public participation in City governance and decision-making processes, so that government is more responsive to local needs and requests by creating opportunities for partnerships with local constituents. As part of the NC Program, the Department of Neighborhood Empowerment (DONE or the Department) oversees NC activities. According to the City Charter, the NCs have the following roles and powers: ¾ Subject to applicable law, the City Council may delegate its authority to neighborhood councils to hold public hearings prior to the City Council making a decision on a matter of local concern. ¾ Each neighborhood council may present to the Mayor and Council an annual list of priorities for the City budget. The Mayor shall inform certified neighborhood councils of the deadline for submission so that the input may be considered in a timely fashion. ¾ Neighborhood councils shall monitor the delivery of City services in their respective areas and have periodic meetings with responsible officials of City departments, subject to their reasonable availability. On May 25, 2001, the City Council approved the implementation plan for a Citywide System of Neighborhood Councils. The adopted plan established the following six goals and objectives for the NC Program: 1. Promote public participation in City governance and decision-making processes, so that government is more responsive to local needs and requests and so that more opportunities are created to build partnerships to address local needs and requests. 2. Promote and facilitate communication, interaction, opportunities for collaboration among all Certified Neighborhood Councils regarding their common and disparate concerns. 1
3. Facilitate the delivery of City services and City government responses to Certified Neighborhood Councils’ problems and requests for assistance by helping Certified Neighborhood Councils to both identify and prioritize their needs and to effectively communicate those needs. 4. Ensure equal opportunity to form Certified Neighborhood Councils and participate in the governmental decision-making and problem solving processes. 5. Create an environment in which all people can organize and propose their own Certified Neighborhood Councils so that they develop from the grassroots of the community. 6. Foster a sense of community for all people to express ideas and opinions about their neighborhoods and their government. There are currently 89 NCs located in seven regions within the City. Effective July 1, 2009, each NC can receive up to $45,000 a year in funds to be used for community outreach, community projects, operating expenses and grants. Prior to this fiscal year, each NC received an allocation of $50,000 per year. Over the last four years, from fiscal year (FY) 2005-06 through FY 2008-09, neighborhood councils spent approximately $15 million on their activities, an average of $3.7 million a year. NCs have three options for accessing and spending their funds. They can use credit cards assigned to them, request city checks to pay vendors, or make cash purchases after withdrawing cash using the credit cards. On November 28, 2006, our office completed a performance and financial audit of DONE. The audit report contained 25 recommendations, including ten that addressed expenditures made by NCs. The primary objectives of this current audit were to evaluate DONE’s oversight for ensuring the appropriateness of NC expenditures and to determine whether NCs are spending their funds only for eligible expenditures. As part of the audit, we selected a sample of purchases made by 12 NCs to determine whether the expenditures were for allowable items. We also selected a sample of 14 NCs (including three of the 12 that we sampled for expenditures) to determine whether they could account for equipment bought with City funds. SUMMARY OF AUDIT RESULTS With approximately $4 million each year in taxpayer funds committed to the NC Program, one would expect DONE to have stronger controls over NC expenditures. As a separate department, DONE management has a responsibility to establish an effective internal control environment to minimize the risk of inappropriate expenditures.
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Although DONE is charged with the responsibility of providing oversight over NC expenditures, it has not performed these functions adequately. DONE has not monitored NCs’ cash advance limits, has not followed up when NCs fail to comply with the documentation requirements, is severely behind in reviewing quarterly expenditure reports submitted by NCs, and has never reconciled its NC accounts to official City records. DONE’s lax oversight has allowed NCs to operate with insufficient financial controls, resulting in an environment susceptible to fraud. Six NCs have been or are currently under investigation by the Police Department for approximately $276,000 in questionable credit card purchases. Given DONE’s poor oversight, fraudulent activities could be occurring at other NCs as well. This audit also found widespread non-compliance with DONE’s current policies by the NCs. Several NCs appeared to have split purchases to avoid the $1,000 per transaction credit card limit, almost half of the NCs violated the cash advance policy at least once during FY 2008-09, and several NCs are severely behind in submitting support documentation for their expenditures. One NC has not submitted any documentation for expenditures in over three years. We also found that NCs spend a high percentage of their funding on office leasing, temporary staffing, equipment, and donations. Problems related to DONE’s oversight are not new and were previously cited in our 2006 audit of DONE. The 2006 report contained several recommendations, that if adequately implemented, would have provided stronger oversight and accountability over NCs’ expenditures. Following are findings from the 2006 audit, in which we found the same or similar problems in this current audit. •
• • •
DONE did not exercise proper oversight and enforcement of policies and procedures related to NCs expenditures. For example, NCs did not consistently submit sign-in sheets to support food expenditures, and some NCs split payments which allowed them to bypass dollar limits on transactions. Budgets submitted by NCs were not performance based and served little purpose. DONE’s bank account was not being properly reconciled. As a result, DONE was unaware that the account was overdrawn. DONE was substantially behind in reviewing credit card and petty cash purchases made by NCs.
The prior audit also recommended that DONE management work with appropriate parties to amend Ordinance #176704 (the ordinance outlining DONE’s responsibilities) to provide DONE with the explicit authority to monitor, regulate, or provide oversight over NCs. Although DONE has consulted with various parties, such as the Neighborhood Council Review Commission, DONE’s role with respect to providing oversight still has not been explicitly clarified. This lack of clarification may have contributed to the continuing problems identified in our audit. 3
To improve accountability over public funds, more stringent controls need to be placed over NC expenditures. The first step is for City officials (the Mayor and Council) to work with DONE and the NCs to clarify and redefine the purpose of the NC Program and the types of activities and corresponding expenditures the NCs can incur in support of the goals and objectives for the program. The City must then establish acceptable documentation guidelines for NCs to support their expenditures. On a positive note, we commend DONE for making expenditure data for each NC available on its website. Because the NC Treasurer usually keeps the “books,” the website provides an avenue for other NC Board members and for residents to check how the monies allocated to their NCs are being spent. This helps increase transparency. According to DONE management, posting NC expenditures on DONE’s website has resulted in several referrals of potential inappropriate expenditures to the Los Angeles Police Department. This audit’s key findings include the following: KEY FINDINGS
NCs have wide latitude on how they can spend their funds. The City has never performed a formal assessment of the types of expenditures being made by NCs to determine whether these expenditures and their corresponding activities are in line with the goals and objectives of the Neighborhood Council Program. The intent of the NC Program is to establish a forum where issues affecting each local neighborhood can be discussed at the local level and then communicated to the Mayor and City Council. However, an NC can purchase almost anything as long as the expenditure is approved by the NC’s Board. Other than the cost of leasing office space, operational supplies, equipment, and temporary staffing, we noted that the majority of NCs’ expenses are for food and donations. During FY 2008-09, NCs made $175,000 in credit card purchases from restaurants, fast food establishments, and grocery stores. There are no restrictions on the total amount that can be spent per event nor any limit placed on the amount per meal. Also, DONE does not require the NCs to maintain sign-in sheets for the event so that NCs can demonstrate that the amount of food purchased was consistent with the number of attendees. City departments are required to maintain this type of documentation. NCs also make donations of equipment or money to City departments as well as to several non-profit organizations and schools. Oftentimes these expenditures were made at the request of City officials.
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In summary, NCs have wide latitude on how they can spend their allocated funds. City management, working with DONE and the NCs, needs to formally assess the types of expenditures being made by NCs to determine whether the expenditures are related to the goals and objectives of the Neighborhood Council Program.
DONE has never reconciled its NC accounts to official City records. This has resulted in a $5.6 million discrepancy between total available cash per the City’s records and total rollover amounts for the NCs. Ideally, at the end of each fiscal year, the total rollover amount for all NCs should equal total cash on hand. During FY 2009-10 budget deliberations, it was discovered that DONE’s fund does not have enough cash to support the accumulated rollover amounts for the NCs. As of June 30, 2009, cash on hand was only $1.6 million while the accumulated rollover balance was $7.2 million, a discrepancy of $5.6 million. The discrepancy appears to have compounded over the years because DONE has never performed annual reconciliations of its NC records to the City’s official records. Until September 2009, DONE was not even aware that it had a balance of approximately $160,000 in its old Bank of America checking account that should have been closed in 2007. DONE reconciled the accounts for the last three years, from FY 2006-07 to FY 200809. The Department believed that it only needed to review expenses for these three years because the NCs are only allowed a maximum of three years’ funding (i.e., $150,000) at a time. We understand this logic. However, since an annual reconciliation has never been performed, expenses and funding since inception must be considered to give an accurate picture of each NC’s financial position. Without at least going back to FY 2004-05 when the rollover rule became effective, DONE is not likely to be able to derive accurate available balances for each NC.
DONE does not require NCs to provide financial reports as stipulated in the adopted Plan for a Citywide System of Neighborhood Councils. Even though the adopted plan for a Citywide NC system already includes a provision for the NCs to submit financial reports, DONE has not prescribed the formats for the reports or enforced the requirement to submit them. The Department needs to design or acquire a standardized basic software financial reporting package or templates that can be used by all NCs. The financial reports should show beginning available balance, new funding available, expenditures incurred, and ending available balance. The reports should also account for funding by year to show the remaining funds by fiscal year. NC reports can then be compared to City records at least annually to more readily identify any discrepancies.
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DONE has not been monitoring NCs to determine whether they are staying within their quarterly and annual credit card limits. To ensure that NCs do not spend more than their annual appropriation, DONE established quarterly and annual credit card limits to control the amount of purchases that NCs can make within a given period. These limits have been in place since NCs began receiving funds in fiscal year 2002-03. To determine whether the credit limit controls are working effectively, we reviewed NC credit purchases made by all 89 NCs during FY 2008-09. We noted several cases where DONE approved certain NCs to exceed the $6,250 limit for a given quarter. However, DONE did not go back in subsequent quarters to appropriately reduce the limit back to $6,250, allowing the NCs to essentially have new higher quarterly limits. Because the annual credit card limit is ineffective, 13 of the 89 NCs spent more than their annual allocations. As of September 23, 2009, DONE had programmed new quarterly limits for credit cards assigned to only 33 of the 89 NCs. Since the funding for each NC was reduced from $50,000 to $45,000, new limits should be programmed to ensure that NCs without rollover funds do not exceed their annual allocations.
DONE still does not review NCs’ budgets. Our 2006 audit noted that each NC establishes their own budget categories and dollar amounts and DONE did not evaluate the reasonableness of NCs’ budgets. This resulted in a wide variance in how each NC prioritized its funding. Subsequent to the 2006 audit, DONE established four standardized categories for NC budgets – operations, neighborhood grants, community outreach and community improvement projects. While standardizing templates and instructions are improvements over prior practices, DONE still does not evaluate the reasonableness of allocations as long as the budget is approved by the NCs’ Board, and there is still no evidence that DONE reviews NC budgets.
NCs have incurred $880,000 in purchases for which they have not submitted quarterly reports within the required timeframes. Consequently, DONE is unable to determine whether NCs are spending their funds on allowable expenses and whether the expenditures are reasonable. NCs have up to 90 days after the end of a quarter to submit a report detailing their expenditures. We noted that several NCs are severely delinquent in submitting the required reports. As of September 30, 2009, 68 NCs had at least one overdue credit card expenditure report, going as far back as March 2006. The total purchases associated with these overdue reports is $880,000. Twenty-four of the 68 NCs have at least four quarters that are overdue, and seventeen NCs have not submitted expenditure reports in over a year. Some NCs indicated that it is not unusual for DONE to lose documents that they have submitted. 6
DONE could not provide any evidence that it adequately followed up with delinquent NCs to obtain the missing supporting documentation. Even though DONE can suspend funding for delinquent NCs, it rarely has.
Even when NCs submit the quarterly reports, DONE may not review them. As of August 2009, NCs had submitted 364 quarterly statements that had not yet been reviewed. DONE’s approach is to review 100% of expenses. Since DONE is substantially behind in its reviews, it is often reviewing expenses that are several years old and for which documentation may be difficult for the NC to locate due to turnover in staff. DONE needs to develop a plan to keep the reviews up-to-date so that it is not always reviewing old documentation. This should include reviewing expenses on a sample basis.
There is lax oversight over cash advances. Between July 2007 and June 2009, NCs withdrew over $400,000 in cash advances. Of this amount, approximately $45,000 did not comply with DONE’s polices for making withdrawals. DONE’s policies, as communicated as part of its frequently asked questions published on its website, restrict NCs to $500 in cash advances every 30 days. There is no control to enforce this limit. Between July 2007 and June 2009, thirtyeight of 89 (43%) NCs obtained cash advances that exceeded $500 within a 30-day period. Several NCs obtained more than $500 in one day. In total, NCs withdrew approximately $45,000 in cash advances that exceeded the $500 limit. Several NCs that we visited could not properly account for their cash. One NC could not account for at least $410 and another could not account for up to $6,000 in cash withdrawals, nor did it have expenditure receipts. An additional NC made regular monthly cash withdrawals, even though the funds were not needed. This NC had a cash balance of $2,500 which represents five months of withdrawals. We also noted that a high percentage of the purchases made with petty cash funds were for food items and were made from vendors who accept credit cards. For example, purchases made with cash from vendors such as Subway, Smart & Final, El Pollo Loco, Domino’s Pizza and Ralphs could have been made with credit cards.
Several NCs appeared to have split purchases to circumvent the $1,000 per credit card transaction limit. In FY 2008-09, 79 purchases totaling over $124,000 made by 39 NCs appear to have been split to avoid requesting approval from DONE. DONE’s policies limit credit card purchase by NCs to $1,000 per transaction. The intent is to ensure that NCs receive approval for transactions over $1,000, allowing DONE the opportunity to scrutinize high dollar transactions before they are made. An analysis of credit card purchases between July 2008 and June 2009 disclosed 7
approximately 79 purchases made by 39 NCs totaling $124,113 that appeared to be intentionally “split” to bypass DONE’s requirement that credit cards only be used for purchases of $1,000 or less. Some NCs indicated that they have to split purchases because it takes DONE a long time to process requests for warrants.
Five out of 14 NCs that we tested were unable to account for 27 equipment items that were sampled as part of our physical observations. NCs purchase a variety of equipment type items such as office equipment, furniture, computers, software, and electronic items. DONE does not have a process in place so it can effectively identify what items an NC should have or to monitor these equipment purchases to ensure that the NCs still have the items. We attempted to verify a total of 308 equipment items at 14 NCs and were able to account for 215. The NCs indicated that another 48 of the items were donated to other parties. Items donated included flat panel TVs, memory mattress pads, computers and printers, a surveillance van, a four wheel drive vehicle, Sony playstation systems and video games. We could not locate 27 items at five NCs. Missing items included computers, translation machines, wireless microphones, ham radios and cameras. We were informed that some of these items are with prior Board members who no longer participate in NC Board activities. The remaining 18 equipment items are appropriately in the possession of current Board members.
The details of each of our findings are discussed in the audit findings and recommendations section of this report. REVIEW OF REPORT A draft report was provided to DONE management on December 3, 2009. We discussed the contents of the report with management on December 14, 2009. The Department concurred with the accuracy of the report’s findings. The Department attributes several problems to a lack of staffing resources. For example, there is only one staff available to provide oversight over the NC’s expenditures. Currently, this individual spends a significant amount of time preparing court documents for various embezzlement court cases. DONE also indicated that solving several of the problems identified in this report will require a collaborative effort with City officials and other City departments. For example, City officials (i.e., the Mayor and Council), working with DONE and the NCs, need to clarify and redefine DONE’s role. Also, the Department will require assistance from the Office of the Controller and the Treasurer’s Office to ensure efficient processing of payments, to minimize opportunities for inappropriate expenditures, and to ensure DONE’s accounts are properly reconciled.
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We considered the comments provided by the Department before finalizing this report. We would like to thank management and staff for their cooperation and assistance during the audit.
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CONTROLLER’S ACCOUNTABILITY PLAN RECOMMENDATIONS
PAGE REFERENCE
MAYOR COUNCIL DEPARTMENT ACTION ACTION ACTION REQUIRED REQUIRED REQUIRED
SECTION I: OVERSIGHT
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1. DONE management should consult with the City Administrative Officer and the City Attorney’s Office to determine the feasibility of implementing procedures to help verify that prospective NC treasurers do not have a history of activity that would be unsuitable for the position. 2. DONE management should explore the feasibility of reconciling its subsidiary accounts from program inception in order to determine accurate account balances for each NC. 3. DONE management should develop procedures to perform annual reconciliations of its subsidiary accounts. 4. DONE management should work with the Office of the Treasurer to investigate the $160,000 balance in its old Bank of America checking account, close the account, and determine the proper disposition of the funds. 5. DONE management should develop or acquire basic financial report software or templates for NCs to use. The software or template should allow NCs to track the beginning available balance, new funding available, expenditures incurred, and the ending available balance. The reports should also account for funding by year to show the remaining funds by fiscal year. 6. DONE management should require the NCs to submit financial reports at least annually and use the reports to identify any discrepancies with City records.
22
CAO, City Attorney, DONE
23
DONE
23
DONE
24
City Treasurer, DONE
25
DONE
25
DONE
10
RECOMMENDATIONS
PAGE REFERENCE
7. DONE management should provide necessary training to the NCs on how to utilize the financial report software/templates and how to prepare the required reports. 8. DONE management should consider reviewing expenses on a sample basis. The sample items could be selected based on factors such as the dollar amount of the expenditures and the NC’s history in submitting quality documentation. 9. DONE management should fully implement the budget recommendations in our prior report unless Council decides that it is acceptable for NCs to spend their allocations as they wish. The prior report states that DONE should improve the budget process by:
25
MAYOR COUNCIL DEPARTMENT ACTION ACTION ACTION REQUIRED REQUIRED REQUIRED DONE
26
DONE
27
DONE
27
DONE
a. Working with the Mayor, NCs, and the Board of Commissioners to establish a budgetary framework that clearly identifies goals and associated priorities for the Neighborhood Council Program. b. Requiring NCs to submit a budget that links the goals and priorities to the budget. This could include placing restrictions on the percentage of funds that can be used for certain categories. c. Monitor NCs to ensure they spend their funds in accordance with their budget. 10. DONE management should review NC budgets and provide appropriate feedback to the NCs in a timely manner.
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RECOMMENDATIONS
PAGE REFERENCE
11. DONE management should complete programming of new quarterly credit card limits to reflect the new reduced funding for each NC. 12. DONE management should develop procedures to ensure that any increases in quarterly credit card limits are reverted back to the original amount in subsequent quarters. 13. For NCs that request an increase in the quarterly limit, DONE management should adjust their subsequent quarterly allocations to ensure the NCs do not exceed their annual allocations (plus any rollover). 14. DONE management should work with US Bank to implement Merchant Category Codes for NC credit cards. 15. DONE management should limit each NC to no more than two credit cards, unless justified under rare circumstances. 16. The Mayor and Council, working with DONE and the NCs, should clarify and redefine the mission of the Neighborhood Council Program and formally adopt DONE’s policies with respect to the types of allowable expenditures and the documentation required to support these expenditures.
29
MAYOR COUNCIL DEPARTMENT ACTION ACTION ACTION REQUIRED REQUIRED REQUIRED DONE
29
DONE
29
DONE
29
City Treasurer, DONE DONE
29
31
12
X
X
RECOMMENDATIONS
PAGE REFERENCE
MAYOR COUNCIL DEPARTMENT ACTION ACTION ACTION REQUIRED REQUIRED REQUIRED
SECTION II: NCS’ EXPENDITURES
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17. DONE management should establish formal policies, procedures, and protocols for properly addressing those NCs that do not provide required documents, which could include the suspension of any future funding. These procedures should require formal communications from DONE management when NCs continually do not respond to requests for information.
34
DONE
18. DONE management should change the requirement for when expenditure reports and support documentation is due, from 90 days to 30 days after the end of the quarter. 19. DONE management should reiterate procedures on documentation requirements to the NCs. 20. DONE management should suspend funding to NCs that fail to provide requested documentation by DONE’s deadline.
34
DONE
35
DONE
35
DONE
37
DONE
37
DONE
21. DONE management should discontinue the cash advance option and consider implementing an imprest petty cash system for neighborhood councils whereby a fixed sum is set aside for petty cash. 22. DONE management should ensure neighborhood councils submit expenditure receipts, totaling the original amount (i.e., fixed sum established in recommendation #21) or requested amount, to replenish their petty cash funds.
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RECOMMENDATIONS
PAGE REFERENCE
23. DONE management should provide NCs with outstanding invoices with one final deadline to submit adequate documentation. 24. Before paying any invoice, DONE management should scrutinize the documentation for validity and ensure that the invoice has not already been paid. 25. DONE management should reject and return remaining invoices to NCs that have not been fully supported by the deadline. 26. DONE management should reiterate to NCs the requirement that any purchases exceeding $1,000 be approved by DONE and monitor the NCs for compliance. Continuous violations should result in cancellation of the credit cards. 27. DONE management should consider requiring NCs to purchase equipment through the demand warrant process. 28. DONE management should require NCs to notify the Department when equipment items are purchased or donated by the NC. 29. DONE management should record equipment in a tracking system at the time an NC makes an equipment purchase. 30. DONE management should require each NC to perform periodic physical inventories of assets and submit the result to the Department. This could be done on a biennial basis as is currently done by City departments. 31. DONE management should conduct periodic physical inventories, on a sample basis, to confirm the existence of equipment items.
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MAYOR COUNCIL DEPARTMENT ACTION ACTION ACTION REQUIRED REQUIRED REQUIRED DONE
38
DONE
38
DONE
39
DONE
40
DONE
40
DONE
40
DONE
40
DONE
41
DONE
RECOMMENDATIONS
PAGE REFERENCE
32. DONE management should develop a transition process whereby equipment and any other NCs’ properties and records are properly transferred to new officers. DONE field staff could be utilized to coordinate transition of inventory, cash, and equipment. 33. DONE management should establish acceptable documentation standards to properly confirm to DONE that receiving organizations actually received donated goods and money. 34. DONE management should attempt to locate the missing equipment items.
41
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MAYOR COUNCIL DEPARTMENT ACTION ACTION ACTION REQUIRED REQUIRED REQUIRED DONE
41
DONE
41
DONE
INTRODUCTION, BACKGROUND AND METHODOLOGY ______________________________________________________________________________ HISTORY AND MISSION The Los Angeles Citywide system of Neighborhood Councils was created following the enactment of a new City Charter, which was approved by voters in June 1999. A primary goal of the Neighborhood Council (NC) Program is to promote public participation in City governance and decision-making processes, so that government is more responsive to local needs and requests by creating opportunities for partnerships with local constituents. Sections 908-910 of the City Charter states the following with respect to the roles and powers of the NCs: ¾ Subject to applicable law, the City Council may delegate its authority to neighborhood councils to hold public hearings prior to the City Council making a decision on a matter of local concern. ¾ Each neighborhood council may present to the Mayor and Council an annual list of priorities for the City budget. The Mayor shall inform certified neighborhood councils of the deadline for submission so that the input may be considered in a timely fashion. ¾ Neighborhood councils shall monitor the delivery of City services in their respective areas and have periodic meetings with responsible officials of City departments, subject to their reasonable availability. On May 25, 2001, the City Councils approved the implementation plan for a Citywide System of Neighborhood Councils. The adopted plan established the following six goals and objectives for the NC Program: 1. Promote public participation in City governance and decision-making processes, so that government is more responsive to local needs and requests and so that more opportunities are created to build partnerships to address local needs and requests. 2. Promote and facilitate communication, interaction, opportunities for collaboration among all Certified Neighborhood Councils regarding their common and disparate concerns. 3. Facilitate the delivery of City services and City government responses to Certified Neighborhood Councils’ problems and requests for assistance by 16
helping Certified Neighborhood Councils to both identify and prioritize their needs and to effectively communicate those needs. 4. Ensure equal opportunity to form Certified Neighborhood Councils and participate in the governmental decision-making and problem solving processes. 5. Create an environment in which all people can organize and propose their own Certified Neighborhood Councils so that they develop from the grassroots of the community. 6. Foster a sense of community for all people to express ideas and opinions about their neighborhoods and their government. The plan was amended in November 2002 and in May 2005 to include guidelines for the Department of Neighborhood Empowerment’s (DONE or the Department) mission and goals. The functions of the Department include assisting NCs in preparing petitions for recognition or certification, identifying boundaries that do not divide communities, and organizing themselves, in accordance with the plan. It also arranges the biannual Congress of NC meetings, assists NCs with the election of their officers, and arranges training for NCs’ officers and staff. The Department is also responsible for monitoring NC expenditures by reviewing quarterly reports and petty cash reconciliations and by providing guidelines for allowable and non-allowable expenditures. GOVERNANCE While DONE’s general manager is responsible for day-to-day activities of the neighborhood councils, the seven-member neighborhood council Board is responsible for setting and overseeing policy, approving contracts and leases and promulgating rules and regulations. The members of the Board of Neighborhood Commissioners are appointed by the Mayor and confirmed by the Council. FUNDING THE NEIGHBORHOOD COUNCILS DONE’s NC Funding, Fiscal Operations and Grant Procurement Division (Funding Division) is responsible for ensuring that NCs receive their yearly allocations. Funds appropriated in the City budget each year for certified NCs are placed in the Department of Neighborhood Empowerment Fund and later allocated into the NCs’ sub-accounts. There are currently 89 NCs located in seven regions within the City. Effective July 1, 2009, each NC can receive up to $45,000 a year to be used for community outreach, community projects, and operating expenses. Prior to this fiscal year, each NC received an allocation of $50,000 per year. In FY 2009-10, the City appropriated approximately $4 million for expenses to be incurred by the 89 NCs. Table 1 below shows estimated NC expenditures over the last few years. As shown in the table, NCs’ expenditures have steadily increased from 17
approximately $2.2 million in FY 2005-06 to over $5 million in FY 2008-09. From FY 2005-06 to FY 2008-09, the neighborhood councils expended a total of $15 million, an average of $3.7 million a year. Table 1 The Department of Neighborhood Empowerment Fund FY 2005-06 Budget Department of Neighborhood Empowerment (1)
Actual
FY 2006-07 Budget
Actual
FY 2007-08 Budget
Actual
FY 2008-09 Est. Budget Actual
FY 2009-10 Adopted
$ 5,087
$ 3,920
$ 4,491
$ 4,390
$ 4,336
$ 4,182
$ 3,946
$ 3,703
$ 3,320
Neighborhood Council Program(2) $ 8,759
$ 2,235
$ 10,545
$ 3,131
$ 11,325
$ 4,525
$ 10,569
$ 5,069
$ 4,050
Total
$ 6,155
$ 15,036
$ 7,521
$ 15,661
$ 8,707
$ 14,515
$ 8,772
$ 7,370
$ 13,846
(1) - These amounts represent the Department of Neighborhood Empowerment's expenses for monitoring the neighborhood councils. Approximately 80% is for salaries. (2) - These amounts represent the expenditures by the neighborhood councils. Budgeted amounts include rollover balances except for FY 2009-10. The rollover balances may have been overstated as discussed in Finding #2 of this report.
Source: City Budget books
On March 25, 2009, the Council passed Ordinance No. 180623, to amend Section 5.517 of the Admin Code to authorize the transfer of unencumbered money in DONE’s fund to the Reserve Fund or the Unappropriated Balance at the end of each year. The following are the types of funds which would generally fall into the category of unencumbered funds: ¾ NCs with funds on hand in excess of $150,000. ¾ Unexpended funds allocated for new NC certifications. ¾ Funds previously allocated to NCs which become decertified during the course of the year. ¾ Unexpended/uncommitted funds in the Department of Neighborhood Empowerment Budget.
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EXPENDITURES NCs can use funds appropriated in the budget each year for costs related to the functions, operations, and duties of being a certified NC. This includes, but is not limited to, the cost of leasing space for office use, meetings or storage; purchases of office equipment, computers, and supplies; and expenditures for communications, such as the costs associated with newsletters, postage, or printing written materials. At the discretion of each NC, and as approved by DONE, all or part of the funds appropriated may be used for neighborhood improvement projects. NCs have three options for making purchases: • • •
Use credit cards for purchases of up to $1,000 at a time. Submit a request for City checks for purchases over $1,000 or in cases where the credit card cannot be used. Use petty cash (up to $500 per 30 calendar days) for miscellaneous items.
CREDIT CARD PURCHASES NCs are encouraged to use their credit cards for most of their transactions. In general, cards are issued to NCs’ treasurers. However, backup cards can be issued to other NCs’ board members. The number of cards issued to NCs ranges from one to four, with most NCs having only one card. There are currently 126 cards assigned to the 89 NCs. The NCs are allowed to use the cards for purchases of up to $1,000 per transaction. A withdrawal of up to $500 for petty cash is allowed every 30 days. DONE attempts to limit credit card charges to $5,625 per quarter which is one-fourth of the current annual credit card allocation of $22,500. However, as discussed later in this report, DONE does not enforce the limit. The Department receives consolidated monthly credit card statements from a credit card company (currently US Bank) and makes payments directly to the company. The statements list transactions by credit card number, which allows the Department to identify purchases and cash advances made by each NC. DEMAND WARRANTS In instances where a City check is needed to pay for services or products, NCs must submit a completed check request form (“Request for Neighborhood Council Paper Check – Demand Warrant”) along with the original invoice, copy of the NCs’ budget, Business Tax Registration Certificate Number (BTRC), and IRS Form W-9 or Employer Identification Number (EIN). Once the request is received, it is reviewed by DONE’s Funding Division to determine whether all the required documents are attached. If all the documents are attached, the request is forwarded to DONE’s Accounting Section for payment. However, if the request is missing any required documents, a letter is sent to 19
the NCs requesting them to provide the missing document. suspended until the documents are received.
The check process is
The Accounting Section reviews the request to determine whether the expenditure is allowable and included in the NC’s approved budget. If it is, proper approvals are obtained, and the request is submitted to the City Controller to issue the check. OBJECTIVES, SCOPE AND METHODOLOGY The primary objectives of this current audit were to evaluate DONE’s oversight for ensuring the appropriateness of NC expenditures and to determine whether NCs are spending their funds only for eligible expenditures. We also reviewed applicable prior audit recommendations to determine whether DONE has implemented them. Our audit was performed in accordance with Generally Accepted Government Auditing Standards (GAGAS). 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. Our audit covered the period from July 2007 through September 2009. Fieldwork was conducted between August 2009 and December 2009. In conducting our audit, we interviewed DONE management and staff and reviewed applicable policies and procedures to obtain an understanding of the key processes for NC funding, NC expenditures, and DONE’s oversight over NC expenditures. As part of the audit, we selected a sample of purchases made by 12 NCs to determine whether the expenditures were for allowable items. We also selected a sample of 14 NCs (including three of the 12 that we sampled for expenditures) to determine whether they could account for equipment bought with City funds. The remainder of this report details our findings, comments and recommendations.
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AUDIT FINDINGS AND RECOMMENDATIONS SECTION I. OVERSIGHT As part of our audit, we evaluated DONE’s oversight over the NC funding program to determine whether NCs have spent their funds on allowable items. Appropriate oversight would help ensure that City funds are being properly spent and that all funds have been accounted for. Finding #1: DONE has not provided adequate oversight over NC expenditures. This lack of oversight may have contributed to potential fraud occurring at a minimum of six NCs. As discussed throughout this report, DONE has failed to provide adequate oversight over NC disbursements. Our audit disclosed that DONE does not monitor NCs cash advance limit, does not follow-up when NCs do not comply with documentation requirements and does not track NC equipment purchases. Further, as discussed below, DONE is severely behind in reviewing quarterly expenditure reports, does not monitor NC quarterly and annual credit card expenditure limits and has never reconciled its NC accounts to official City records. The lack of oversight by DONE has allowed NCs to operate with insufficient financial controls, resulting in an environment susceptible to fraud. Six NCs have been or are currently under investigation by the Los Angeles Police Department (LAPD) for questionable purchases and for using City credit cards to purchase personal items. DONE management indicated that posting NC expenditures on DONE’s website resulted in these cases being referred to the LAPD. The amount of questionable purchases made by these NCs totaled approximately $276,000. Most of the purchases occurred between 2006 and 2008. Despite the fact that three of these NCs had not submitted quarterly expenditure reports for several quarters, DONE did not follow up with the NCs to obtain the reports nor did it terminate their funding. Another potential factor that could be contributing to fraud is that NC treasurers and other individuals who are assigned credit cards are not required to undergo any background checks, and they are not bonded. We recognize that since NC functions are performed by volunteers, any rigorous background checks may deter some citizens from participating in the NC Program. Nevertheless, a basic background or credit check could help provide information about potential card holders that DONE could evaluate to make a determination whether a City credit card should be issued to the individual.
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Regardless of whether a background or credit check is required, stronger oversight by DONE would have helped identify these cases in a more timely manner. Due to DONE’s poor oversight over NC expenditures, fraud could be occurring at other NCs as well. For example, many NCs have not submitted support documentation for their expenditures or could not account for their petty cash funds. The remainder of this section discusses additional weaknesses in DONE’s oversight over NCs. Recommendation 1. DONE management should consult with the City Administrative Officer and the City Attorney’s Office to determine the feasibility of implementing procedures to help verify that prospective NC treasurers do not have a history of activity that would be unsuitable for the position. Finding #2: DONE has never reconciled its NC accounts to official City records. This has resulted in a $5.6 million discrepancy between total appropriation amounts for the 89 NCs and the cash balance per the City’s records. Also, DONE does not know the available balance of each NC. Proper accounting principles dictate that a subsidiary ledger be established for a group of similar accounts whose combined balances equal the balance in a specific general ledger account. In the case of the neighborhood council system where there are 89 similar councils, a subsidiary account for each council should be established to maintain separate balances and transactions for each NC. The combined balance of every account in the subsidiary ledger should equal the balance of all NCs in the general ledger. A periodic reconciliation of NC subsidiary accounts to the overall NC funding account should help identify any discrepancies. According to DONE, subsidiary accounts were established in 2002. However, until 2007, debit card expenditures (as discussed below, NCs previously used debit cards instead of credit cards) were not posted to the subsidiary accounts because the bank did not provide enough detail to identify which NC made the debit card purchases. Since all expenses were not allocated to specific NCs, the Department does not know the amount of available funding for each NC. During FY 2009-10 budget deliberations, it was discovered that DONE’s Fund does not have enough cash to support NCs accumulated rollover amounts.1 As of June 30, 2009, cash on hand was only $1.6 million while the appropriation account was $7.2 1
Beginning FY 2004-05, each NC has been allowed to carry forward to the following year any unspent allocations for a maximum of three years. As a result, a NC cannot accumulate more than $150,000 at any one time.
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million, creating a discrepancy of $5.6 million. Ideally, at the end of a fiscal year, these two amounts should be equal, since the appropriation amount would represent amounts to be rolled over. To resolve the discrepancy, in May 2009, DONE initiated a reconciliation of its financial records with the assistance of staff from the Office of the Controller’s Accounting Division and the City Administrative Officer. The Department concluded that the NC Funding Program account had been over appropriated through the years. This means that appropriation or rollover amounts shown for each NC had been overstated. The discrepancy appears to have compounded over the years because DONE has never performed annual reconciliations of its NC records to the City’s official records. DONE attempted to reconcile its cash balance to the appropriation amounts to determine each NC’s rollover amount. However, instead of starting from inception, DONE reconciled the accounts for the last three years, from FY 2006-07 to FY 2008-09. The Department believed that it only needed to review expenses for these three years because the NCs are only allowed a maximum of three years’ funding (i.e., $150,000) at a time. We understand this logic. However, since an annual reconciliation had never been performed, expenses and funding since inception must be considered to give an accurate picture of each NC’s financial position. At a minimum, DONE should have started its reconciliation from at least FY 2004-05. DONE stated that another reason it did not go back to inception is that subsidiary accounts for each NC were not established until recently, and there are no records to properly allocate debit card expenditures back to individual NCs. However, we noted that Bank of America issued statements to individual NC card holders. So it may be possible for DONE to request historical debit card records for each NC directly from the bank. Debit card records along with the City demand warrant records could be used to determine estimated expenditure amounts for each NC for each year from inception. The expenditures could then be compared to annual funding amounts for each NC to determine any rollover balances. While it may be labor intensive and costly, the only way to properly reconcile its books and determine accurate rollover amounts for each NC is for DONE to reconcile NC’s expenditures since the inception of the program. Recommendations DONE management should: 2. Explore the feasibility of reconciling its subsidiary accounts from program inception in order to determine accurate account balances for each NC. 3. Develop procedures to perform annual reconciliations of its subsidiary accounts. 23
In addition, Bank of America recently notified DONE that it is holding a balance of approximately $160,000 in the Department’s old account that was used for the prior NC charge card program. Until recently, the Department was unaware of the existence of the account. If DONE had properly reconciled its accounts it should have known that $160,000 still remained in the bank. The NC charge card program was operated by the Bank of America up until September 2007 and was setup as a debit card program. The debit card program required the Department to upload funds into its Bank of America checking account so NCs could charge against the account. This checking account should have been closed and the remaining funds transferred when DONE switched to US Bank in September 2007. We contacted the Office of the Treasurer to determine why the account was still open. Treasurer staff confirmed that the account should have been closed and that it will be closed once it determines where to transfer the remaining balance. Recommendation 4. DONE management should work with the Office of the Treasurer to investigate the $160,000 balance in its old Bank of America checking account, close the account, and determine the proper disposition of the funds. Finding #3: DONE does not require NCs to provide financial reports as stipulated in the adopted Plan for a Citywide System of Neighborhood Councils. Going forward, for DONE to properly reconcile its records to the NCs’ records, it must require the NCs to periodically provide basic financial reports. The 2001 City Council adopted Plan for a Citywide System of Neighborhood Councils already includes a provision for the NCs to submit financial reports. Article III, Section (d) of the Plan states, “each certified NC’s governing body shall include a treasurer whose duties shall include maintaining the NC’s book of accounts, as prescribed by DONE, and submitting an account statement to DONE no less than once and no more than twice during each fiscal year.” DONE has not prescribed the formats for the reports or enforced the requirement to submit them. The Department needs to design or acquire a standardized basic software financial reporting package or templates that can be used by all NCs. The financial reports should show the beginning available balance, new funding available, expenditures incurred, and the ending available balance. The reports should also account for funding by year to show the remaining funds by fiscal year. NC reports can then be compared to City records at least annually to more readily identify any discrepancies. The financial report package must be simple enough to allow treasurers without a formal accounting background to use it to report their NC’s financial activities. 24
Recommendations DONE management should: 5. Develop or acquire basic financial report software or templates for NCs to use. The software or template should allow NCs to track the beginning available balance, new funding available, expenditures incurred, and the ending available balance. The reports should also account for funding by year to show the remaining funds by fiscal year. 6. Require the NCs to submit financial reports at least annually and use the reports to identify any discrepancies with City records. 7. Provide necessary training to the NCs on how to utilize the financial report software/templates and how to prepare the required reports. Finding #4: DONE is severely behind in reviewing quarterly expenditure reports. As of August 2009, NCs had submitted 364 quarterly statements that had not yet been reviewed. As further discussed in Section II, NCs are required to submit quarterly expenditure reports to DONE. As discussed in finding #8, many NCs do not submit the required reports. However, even when NCs submit the reports, DONE may not review them. As of August 2009, NCs had submitted 364 quarterly reports that had not yet been reviewed. 233 (64%) of the reports relate to expenditures prior to July 1, 2008. DONE’s approach is to review 100% of expenses. Since DONE is substantially behind in its reviews, it is often reviewing expenses that are several years old and for which documentation may be difficult for the NC to locate due to staff turnover. DONE attributes the delays in reviewing the expenses to a shortage of staff. There is only one employee assigned to conduct the reviews. We agree that under the current environment where some NCs either are reluctant to submit documentation for their expenses or they submit poor documentation (which may require follow-up calls to the NC), keeping current on the reviews is a formidable task. In fact, under this environment, DONE is likely to fall further behind in its reviews. However, once NCs begin submitting quality documentation, one employee may be sufficient to complete the reviews. In the meantime, DONE needs to develop a plan to keep the reviews up-todate so that it is not solely reviewing old documentation. This should include reviewing expenses on a sample basis. The sample items could be selected based on factors such as the dollar amount of the expenditures and the NC’s history in submitting quality documentation.
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Recommendation 8. DONE should consider reviewing expenses on a sample basis. The sample items could be selected based on factors such as the dollar amount of the expenditures and the NC’s history in submitting quality documentation. Finding #5: DONE has not reviewed the budgets submitted by NCs. DONE requires each NC to submit a yearly budget showing how they propose spending their available funds. The purpose of a budget is to help NCs plan, in advance, all activities they will undertake during the year and to ensure that all their spending takes place in accordance with DONE’s funding policies. A well-designed budget properly allocates funds to administrative costs, community improvement and outreach events to meet the program goals and associated priorities for the NC system. Our 2006 audit noted that each NC establishes their own budget categories and dollar amounts and DONE did not evaluate the reasonableness of NCs’ budgets. This resulted in a wide variance in how each NC prioritized its funding. Subsequent to the 2006 audit, DONE established four standardized categories for NC budgets – operations, neighborhood grants, community outreach, and community improvement projects. Also, for FY 2009-10 budgets, DONE provided templates and instructions on how the budgets should be completed. We reviewed 20 recently submitted budgets and noted that they were prepared in accordance with DONE’s instructions. While standardizing templates and instructions are improvements over prior practices, DONE still does not evaluate the reasonableness of allocations as long as the budget is approved by the NCs’ Board. For example, there are still no guidelines on the approximate percentage of funds that should be spent on various activities. NCs can choose to essentially allocate all funds to one category which defeats the purpose of establishing four budget categories. Although we recognize the individuality of each NC, we believe that NCs as a system were founded to serve a similar purpose. Thus, spending patterns to achieve program goals should be relatively similar. There is still no evidence that DONE reviews NC budgets. According to DONE, 64 NCs submitted their budgets for FY 2009-10. However, as of September 17, 2009, DONE management had not reviewed or approved the budgets. DONE indicated that it is developing procedures for annual NC budget reviews and approvals. To be an effective monitoring tool, a budget must be timely, reasonable and reflect organizational priorities. Therefore, it is important for DONE to review NC budgets in a timely manner to ensure that budgets are detailed, reasonable, reflect the NC system priorities, and are approved by NC Boards.
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Recommendations DONE management should: 9. Fully implement the budget recommendations in our prior report unless Council decides that it is acceptable for NCs to spend their allocations as they wish. The prior report states that DONE should improve the budget process by: a) Working with the Mayor, NCs, and the Board of Commissioners to establish a budgetary framework that clearly identifies goals and associated priorities for the Neighborhood Council Program. b) Requiring NCs to submit a budget that links the goals and priorities to the budget. This could include placing restrictions on the percentage of funds that can be used for certain categories. c) Monitor NCs to ensure they spend their funds in accordance with their budget. 10. Review NC budgets and provide appropriate feedback to the NCs in a timely manner. Finding #6: DONE has not been monitoring NCs to determine whether they are staying within their quarterly and annual credit card limits. To ensure that NCs do not spend more than their annual appropriation, DONE established quarterly and annual credit card limits for the NCs. Annual and quarterly credit card limits are designed to control the amount of purchases that NCs can make within a given period. These limits have been in place since the NCs began receiving funds in FY 2002-03. The annual credit card limit is set at $22,500, which is 50% of a NCs $45,000 annual allocation (prior to FY 2009-10, the limit was $25,000), and the quarterly limit is one fourth of the $22,500 or $5,625. Prior to FY 2009-10, the quarterly limit was $6,250 (one-fourth of $25,000). For NCs with multiple credit cards, the annual allocation is divided among the number of cards assigned to the NC. DONE can temporarily increase the quarterly limit upon an NC’s request. As the program administrator, DONE has access to US Bank’s system so that it can enter the limits for each credit card. To determine whether the credit card limit controls are working effectively, we reviewed NC credit purchases made by all 89 NCs during FY 2008-09. We noted several cases 27
where quarterly expenses exceeded the $6,250 limit. A review of the approval documentation and current charge limits disclosed that, for the increases that were approved, DONE never went back in subsequent quarters to appropriately reduce the limit back to $6,250. This allowed the NCs to essentially have new higher quarterly limits. Consequently, 13 of the 89 NCs went over their annual credit card limit. This testwork also revealed that the annual limit is not working properly since the NCs were able to spend more than their annual allocations. Table 2 identifies those NCs that exceeded their annual credit limits. Table 2 Neighborhood Councils that Exceeded their Annual $25,000 Credit Limit in FY 2008-09
NC Harbor Gateway North Historic Highland Park Hollywood United Downtown Los Angeles North Hills West Empowerment Congress SOUTHEAST Encino Bel Air-Beverly Crest Mid-Town North Hollywood Sunland-Tujunga Sylmar Hollywood Studio District Lincoln Heights
July-Sept 2008 $14,316 $9,417 $11,024 $7,696 $7,880 $7,334 $5,395 $7,130 $4,296 $7,201 $4,548 $7,555 $7,424
Oct-Dec 2008 $12,832 $13,967 $10,574 $9,362 $7,153 $7,586 $10,884 $9,276 $11,873 $8,994 $7,815 $15,822 $11,600
JanMarch April-May Total 2009 2009 Expended $18,424 $17,900 $63,472 $9,866 $8,238 $41,488 $6,215 $7,823 $35,635 $11,752 $4,469 $33,279 $7,686 $10,016 $32,735 $4,575 $12,490 $31,985 $9,934 $4,143 $30,356 $8,268 $5,363 $30,037 $6,508 $7,325 $30,003 $8,499 $5,114 $29,808 $8,098 $8,689 $29,150 $3,664 $2,077 $29,118 $6,216 $2,780 $28,021
Source: DONE's Records
Although for NCs with rollover funds, spending more than their one year allocation may not necessarily create financial problems, the lack of this limit control could allow an NC with no rollover funds to spend more than its annual allocation, creating a negative balance and a discrepancy within the Fund. It is likely that the ineffectiveness of this control contributed to the discrepancy problem discussed earlier in finding #2. As of September 23, 2009, DONE had only programmed 27 credit cards with new quarterly and annual limits for FY 2009-10. Since the funding for each NC was reduced from $50,000 to $45,000, new limits should be programmed to ensure that NCs without rollover funds do not exceed annual allocations. We also noted the following with respect to the credit card administration: The Merchant Category Codes DONE has not implemented the Merchant Category Codes (MCC) for credit cards issued by US Bank. The MCC is a feature that restricts locations where purchases can 28
be made or the types of items for which credit cards can be used. The City uses MCC on purchasing cards assigned to City departments. DONE also used MCC on NC cards previously issued by the Bank of America. Implementing MCC would serve as another control to ensure NCs only use the credit cards to purchase acceptable expenditure items. Assignment of Credit Cards DONE currently has 126 credit cards issued to 86 NCs. The credit cards are typically issued to NC treasurers. However, DONE’s policies allow multiple credit cards as requested by some NCs. The number of cards issued ranges from one to four, with most NCs having only one card. Currently, 23 NCs are assigned two credit cards, seven are assigned three, and one has four. Having an excessive number of credit cards makes it more difficult to control and manage card activity. In addition, in light of the lack of oversight by DONE and the apparent abuse of credit cards by some NCs, each NC should be limited to two credit cards. Recommendations DONE management should: 11. Complete programming of new quarterly credit card limits to reflect the new reduced funding for each NC. 12. Develop procedures to ensure that any increases in quarterly credit card limits are reverted back to the original amount in subsequent quarters. 13. For NCs that request an increase in the quarterly limit, adjust their subsequent quarterly allocations to ensure the NCs do not exceed their annual allocations (plus any rollover). 14. Work with US Bank to implement Merchant Category Codes for NC credit cards. 15. Limit each NC to no more than two credit cards, unless justified under rare circumstances.
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Finding #7: NCs have wide latitude on how they can spend their funds. The City has never performed a formal assessment of the types of expenditures being made by NCs to determine whether these expenditures and their corresponding activities are in line with the goals and objectives of the Neighborhood Council Program. A primary goal of the Neighborhood Council (NC) Program is to promote public participation in City governance and decision-making processes, so that government is more responsive to local needs and requests and so that more opportunities are created to build government partnerships to address local needs and requests. The intent of the program is to establish a forum where issues affecting each local neighborhood can be discussed at the local level and then communicated to the Mayor and City Council. As mentioned earlier, there are currently 89 NCs, and they are allocated $45,000 each year. The NCs are directed to spend their funds under four categories: operations, outreach, community improvement and neighborhood purpose grants. While DONE has developed a listing of acceptable and unacceptable purchases, we noted that an NC can purchase almost anything as long as the expenditure is approved by the NC’s Board. In general, the only prohibited expenses are: Alcohol, tobacco, firearms, and adult entertainment products Endorsement of a religion Gift Cards Any purchases and/or capital improvement projects that increase the value of private property ¾ Purchases that violate State and City conflict of interest laws ¾ ¾ ¾ ¾
Other than the cost of leasing office space, operational supplies, equipment, and temporary staffing, we noted that the majority of NCs’ expenses generally fall under the following two categories. Food Purchases During FY 2008-09, NCs made $175,000 in credit card purchases from restaurants, fast food establishments, and grocery stores. We noted that the only requirement is that the expenditures be shown as approved in the NC’s meeting minutes and be supported by a receipt. There are no restrictions on the total amount that can be spent per event nor any limit placed on the amount per meal. Also, DONE does not require the NCs to maintain sign-in sheets for the event so that NCs can demonstrate that the amount of food purchased was consistent with the number of attendees. City departments are required to maintain this type of documentation. For example, one NC spent approximately $18,140 (36% of its $50,000 in annual allocation) for food. Approximately $10,924 was spent in restaurants for 30
meetings, and another $7,216 was spent in supermarkets. Another NC spent approximately $6,640 for food, including $4,392 from restaurants and $2,248 from supermarkets. Neither of these two NCs submitted sign-in sheets or support documentation to show who attended the meetings and whether the meetings were open to neighborhood residents. Donations NCs make donations of equipment or money to City departments such as Department of Recreation and Parks, Los Angeles Police Department and Los Angeles Fire Department. For example, NCs donated flat panel TVs, memory mattress pads and computer equipment to LAFD and LAPD stations. NCs have also donated money and equipment to several non-profit organizations and schools. Oftentimes, these donations were made at the request of City officials. In summary, NCs have wide latitude on how they can spend their allocated funds. The City needs to formally assess the types of expenditures being made by NCs to determine whether they are in line with the goals and objectives for the Neighborhood Council Program. Recommendation 16. The Mayor and Council, working with DONE and the NCs, should clarify and redefine the mission of the Neighborhood Council Program and formally adopt DONE’s policies with respect to the types of allowable expenditures and the documentation required to support these expenditures.
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SECTION II. NEIGHBORHOOD COUNCILS’ EXPENDITURES Neighborhood Councils (NCs) are issued credit cards through US Bank for NCs to access funding for purchases up to $1,000 per transaction and to obtain cash advances of no more than $500 every 30 calendar days to use for petty cash. NCs are required to submit to DONE a quarterly report of their credit card expenditures, along with documentation (e.g., receipts) to support the expenditures. This requirement does not apply to expenses made via checks, since the documentation should be submitted prior to issuance of the check by the Controller’s office. NCs are also required to submit quarterly petty cash expenditure reconciliation forms detailing petty cash expenditures. Both the quarterly report of credit card expenditures and the petty cash reconciliation are due 90 days after the end of the quarter. Finding #8: NCs have incurred $880,000 in purchases for which they have not submitted quarterly reports within the required timeframes. Consequently, DONE is unable to determine whether NCs are spending their funds on allowable expenses and whether the expenditures are reasonable. As of September 30, 2009, 67 NCs had at least one overdue credit card expenditure report, going as far back as March 2006. The total purchases associated with these overdue reports is $880,000. Without these reports showing how the NCs spent their allocated funds, it is impossible for DONE to determine whether funds were spent for reasonable and appropriate NC-related expenses. Twenty-three of the 67 NCs have at least four quarters that are overdue, and seventeen NCs have not submitted expenditure reports in over a year. However, it should be noted that some NCs have indicated that it is not unusual for DONE to lose documents that they have submitted. The NCs continue to receive funding even though they are not submitting supporting documentation for their expenditures. The following table shows NCs that have not submitted reports in at least one year (i.e., at least four delinquent reports).
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Table 3 Neighborhood Councils with Delinquent Quarterly Reports As of September 30, 2009
Neighborhood Council Empowerment Congress North Greater Cypress Park Historic Cultural Sunland-Tujunga Northwest San Pedro United Neighborhoods Wilmington Harbor City Pacoima Coastal San Pedro East Hollywood Hollywood United Mar Vista Community Rampart Village Greater Wilshire Northridge East Winnetka Empowerment Congress Southwest Greater Echo Park Elysian Greater Griffith Park Mid City West Los Angeles Woodland Hills - Warner Center
No. of Quarterly Dollar Amt of Reports Associated Overdue Purchases 13 10 10 10 9 9 9 8 8 6 6 6 6 6 5 5 5 4 4 4 4 4 4
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
59,366 62,719 9,741 81,496 22,472 27,936 14,312 29,931 17,761 23,745 26,274 70,396 10,825 6,330 2,561 20,480 24,008 927 20,932 8,352 12,126 17,549 15,259
Last Report Submitted 3rd Quarter (Jan. - Mar. 2006) 2nd Quarter (Oct. - Dec. 2006) 2nd Quarter (Oct. - Dec. 2006) 2nd Quarter (Oct. - Dec. 2006) 2nd Quarter (Oct. - Dec. 2006) 3rd Quarter (Jan. - Mar. 2007) 2nd Quarter (Oct. - Dec. 2006) 4th Quarter (Apr. - Jun. 2007) 4th Quarter (Apr. - Jun. 2007) 2nd Quarter (Oct. - Dec. 2007) 2nd Quarter (Oct. - Dec. 2007) 2nd Quarter (Oct. - Dec. 2007) 2nd Quarter (Oct. - Dec. 2006) 2nd Quarter (Oct. - Dec. 2007) 3rd Quarter (Jan. - Mar. 2008) 3rd Quarter (Jan. - Mar. 2008) 4th Quarter (Apr. - Jun. 2008) 4th Quarter (Apr. - Jun. 2008) 4th Quarter (Apr. - Jun. 2008) 3rd Quarter (Jan. - Mar. 2009) 3rd Quarter (Jan. - Mar. 2007) 4th Quarter (Apr. - Jun. 2007) 3rd Quarter (Jan. - Mar. 2007)
Source: DONE's Records
DONE’s monitoring of quarterly reports is ineffective. It does not have formal policies and protocols for sanctioning NCs when they do not submit the expenditure reports. DONE stated that it sends e-mails to the NCs requesting the reports and the documentation. However, DONE could not provide documentation of these e-mails. Also, DONE stated that these e-mails are sent by accounting staff and not by management. It is imperative that DONE obtain the expenditure reports and support documentation in a timely manner. Ninety days may be too long to wait for NCs to provide the required reports and documentation. We noted that NCs frequently have changes in Board members and sometimes prior Board members do not always turn over financial and inventory records to the new members. Shortening the timeframe for the required
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reports/documentation would help ensure that any potential problems are identified in a more timely manner. Recommendations DONE management should: 17. Establish formal policies, procedures, and protocols for properly addressing those NCs that do not provide required documents, which could include the suspension of any future funding. These procedures should require formal communications from DONE management when NCs continually do not respond to requests for information. 18. Change the requirement for when expenditure reports and support documentation is due, from 90 days to 30 days after the end of the quarter. Finding #9: Two of the 12 NCs that were selected for our audit did not provide any documentation to support expenditures for the period we requested. Consequently, $39,000 in expenditures and cash advances made by these NCs over the 12 month audit period are questionable. We selected a sample of 12 NCs to determine whether expenditures made by NCs were for allowable expenses and whether the expenses were supported by proper documentation. Our sample consisted of seven NCs that had not submitted quarterly reports in over eight or more quarters. The other five NCs had submitted the required reports on a regular basis. Through DONE, we contacted the seven NCs that had not submitted quarterly reports and requested these NCs to provide (or make available) supporting documentation for expenses made between April 2008 and March 2009. Two NCs did not respond to the request. These NCs made $34,639 in purchases and obtained $4,612 in cash advances during the 12 month review period. For the 10 NCs that provided documentation, we reviewed $120,858 in expenses and noted that all $120,858 was spent for allowable items (as discussed in finding #7, there are very few unallowable items). However, $3,136 was not properly supported. Specifically, DONE’s procedures require NCs to include a copy of the Board minutes in support of any food purchases. Our sample disclosed $3,136 in food purchases that were not supported by Board meeting minutes.
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Additional observations include the following: ¾ An NC inappropriately used a credit card to purchase $4,630 of gift cards from several grocery stores and donated cash totaling $650. DONE’s policies preclude purchasing gift cards or donating cash without DONE’s approval. ¾ NCs use credit cards to pay for temporary staffing instead of requesting checks from DONE as required. For example, one NC paid a part-time staff over $20,000 (approximately 40% of its annual funding) in one year using its credit card. Since DONE has contracts with several temporary staffing agencies, this amount should have been paid through DONE’s contract and not with credit cards. This NC also utilized two pay rates for another part-time staff hired from AppleOne. For work performed within the same month, the individual was paid $33.75 per hour for some hours and $20.25 per hour for other hours. There was no explanation why two different rates were paid. ¾ An NC’s credit card was charged three times for a purchase made on April 15, 2009, totaling $1,108. The NC indicated that it purchased only one item for $369, but it was charged three times. As of September 17, 2009, the NC had not requested a refund for the amount it claimed was overcharged by the merchant. These observations highlight the need to reiterate procedures on appropriate support documentation for expenditures. Recommendations DONE management should: 19. Reiterate procedures on documentation requirements to the NCs. 20. Suspend funding to NCs that fail to provide requested documentation by DONE’s deadline. Finding #10: There is lax oversight over cash advances. Between July 2007 and June 2009, NCs withdrew over $400,000 in cash advances. Of this amount, approximately $45,000 did not comply with DONE’s polices for making withdrawals. In addition, several NCs could not properly account for their funds. In order to transact business more expeditiously and efficiently, the neighborhood councils are allowed to establish petty cash funds to cover small and necessary emergency expenditures. DONE’s policies, as communicated as part of its frequently asked questions published on its website, restrict NCs to $500 in cash advances every 30 days to use for petty cash. Further, DONE requires NCs to submit a petty cash
35
quarterly reconciliation which shows petty cash purchases and the petty cash balance. However, NCs do not consistently comply with this requirement. As of September 30, 2009, 68 NCs had not submitted petty cash reconciliations for a total of over 227 quarters. Without these reconciliations, DONE cannot tell how much each NC has on-hand at a given time. Currently, there are no policies or procedures on the maximum amount an NC can have in petty cash. A high amount of cash on hand increases the risk of misappropriation or misuse of the funds. Further review of cash advances disclosed the following: ¾ Between July 2007 and June 2009, we noted 38 of 89 (43%) NCs obtained cash advances that exceeded $500 within a 30-day period. Some of the NCs obtained more than $500 in one day, including three NCs that obtained between $1,000 and $2,000 in one day. In addition, one NC withdrew more than $6,000 in three months when the maximum amount was $1,500. In total, NCs withdrew approximately $45,000 in cash advances that exceeded the $500 limit. See Attachment I for a complete list of NCs that violated the “$500 within a 30 day cycle” policy between July 2007 and June 2009. ¾ Another NC that we visited withdrew $3,500 in cash advances during FY 200809. The NC Treasurer indicated there is a balance of $280 cash on hand and provided reconciliation reports for the first three quarters. Based on the three reconciliation sheets provided, the NC could not account for $410. ¾ An NC was not able to account for approximately $6,000 in cash advances. The last reconciliation submitted to DONE was as of June 2008, and it shows a balance of $2,500 in petty cash funds. The NC withdrew an additional $3,500 during FY 2008-09. During our visit in September, we were told the NC had just elected new Board members. The NC representative who met with us indicated that the new Board members do not have any cash, and they could not locate receipts or petty cash records maintained by the NC’s prior Board. ¾ One NC that we visited continues to withdraw cash on a consistent basis and maintain the money in a checking account. The balance in the checking account was $2,500. A review of their petty cash reconciliation sheet shows this NC is missing $170 from its petty cash fund. ¾ A high percentage of the purchases made with petty cash funds were for food items and were made from vendors who accept credit cards. Purchases were made with cash from Subway, Smart & Final, El Pollo Loco, Domino’s Pizza, Ralphs, etc. These purchases could have been made with credit cards. These findings indicate that DONE needs to increase its oversight over cash advances. For example, DONE had the understanding that the $500 limit was coded by the bank.
36
However, DONE could not provide the bank agreement indicating the $500 limit nor could it show that it has tested this feature to ensure that it works. DONE should consider implementing the City’s adopted guidelines for petty cash. The City’s imprest guidelines require departments to establish a “fixed” amount for each petty cash fund. Cash on hand plus receipts for disbursements should be, at all times, equal to the originally established fixed amount. To replenish a petty cash fund, departments must submit expenditure receipts totaling the original or requested amount. Implementing these guidelines would strengthen controls over the NCs’ petty cash funds by minimizing cash on hand and by ensuring receipts and proper documentation exist to support any replenishment. Recommendations DONE management should: 21. Discontinue the cash advance option and consider implementing an imprest petty cash system for neighborhood councils whereby a fixed sum is set aside for petty cash. 22. Ensure neighborhood councils submit expenditure receipts, totaling the original amount (i.e., fixed sum established in recommendation #21) or requested amount, to replenish their petty cash funds. Finding #11: NCs do not always provide adequate supporting documentation for vendor invoices submitted to DONE for payments. As a result, DONE’s records show outstanding invoices totaling over half a million dollars that were not paid because of insufficient documentation. We found that NCs do not always submit invoices for payment in a timely manner. Twenty-four invoices that we reviewed were submitted an average of 182 days after NCs received the services/goods. In addition, when DONE requests NCs to provide additional supporting documents, DONE stated that the NCs do not always provide them. In fact, DONE’s records show approximately $510,000 in accounts payables. Approximately $389,192 of this amount relates to FY 2008-09 invoices, while some of the remaining invoices date back to 2004. DONE stated that these invoices were not paid because of insufficient supporting documentation and that although NCs were advised of the documentation needed, they did not respond. Although we were not able to confirm that the NCs were properly notified of insufficient documents, we noted two instances where the vendors submitted the invoices directly to DONE because the vendors had not received payment. One of the invoices was for a $2,820 lease payment covering two months in 2007. The vendor submitted the invoice to DONE in 2009. 37
DONE, in conjunction with appropriate City departments and the NCs, needs to decide how to properly resolve these invoices. Care must be taken to ensure that each outstanding invoice is valid and that it has not already been paid. For instance, we noted one case where an NC requested a $431 payment from AppleOne Company for hours worked by a temporary staff even though the same hours were already paid with a credit card. Because of the possibility that NCs could have paid some of the invoices with their credit cards, it is imperative that before any invoice is paid, it is properly scrutinized and appropriate supporting documentation is obtained. It should be noted that we sampled expenditures made by five NCs through the demand warrant process which had been approved for payment by DONE. All expenditures were properly supported and were for allowable items. Recommendations DONE management should: 23. Provide NCs with outstanding invoices with one final deadline to submit adequate documentation. 24. Before paying any invoice, scrutinize the documentation for validity and ensure that the invoice has not already been paid. 25. Reject and return remaining invoices to NCs that have not been fully supported by the deadline. Finding #12: Several NCs appeared to have split purchases to circumvent the $1,000 per credit card transaction limit. In FY 2008-09, 79 purchases totaling over $124,000 made by 39 NCs appear to have been split to avoid requesting approval from DONE. As stated earlier, DONE’s policies limit credit card purchases by NCs to $1,000 per transaction. The intent is to ensure that NCs receive approval for transactions over $1,000 and to provide DONE the opportunity to scrutinize high dollar transactions before they are made. An analysis of credit card purchases between July 2008 and June 2009 disclosed approximately 79 purchases made by 39 NCs totaling $124,113 that appeared to be intentionally “split” to bypass DONE’s requirement that credit cards only be used for purchases of $1,000 or less. For example, one NC made three purchases on the same day from K-Mart for a total of $2,262. Another NC paid Subway $2,025 but split the transactions three times to avoid the per transaction limit. Since the amount in each of these cases was over $1,000, the NC should have submitted a request to DONE using the demand warrant process. These are just two examples. Attachment I provides a listing of the 39 NCs who 38
appeared to have split purchases. Some NCs indicated that they have to split purchases because it takes DONE a long time to process requests for warrants. Recommendation 26. DONE management should reiterate to NCs the requirement that any purchases exceeding $1,000 be approved by DONE and monitor the NCs for compliance. Continuous violations should result in cancellation of the credit cards. Finding #13: Five out of 14 NCs that we tested were unable to account for 27 equipment items that were sampled as part of our physical observations. NCs purchase a variety of equipment type items such as office equipment, furniture, computers, software, and electronic items. Some equipment is used by the NCs themselves, and as previously indicated, others are donated to City departments, neighborhood schools, and other non-profit organizations. DONE does not have a process in place to effectively identify what items an NC should have or to monitor these equipment purchases to ensure that the NCs still have the items. For example, as NCs purchase equipment items, DONE does not enter these items into a database which could be used to help track the items. Further, DONE does not have policies and procedures that require NCs to maintain inventory listings and to conduct periodic physical inventories to confirm the existence of the items. At the instructions of the Council, in March 2009, DONE required each NC to submit an inventory listing including the location of items. However, DONE had no way of knowing whether the listings were complete. In addition, DONE has not performed any physical observations to confirm the existence of these items. Because of DONE’s lack of controls, we attempted to conduct a physical inventory at 14 NCs. We used the equipment listings provided by the NCs as well as the FMIS data of NC credit card expenditures. We attempted to verify a total of 308 equipment items. We noted the following: ¾ We verified 215 equipment items. ¾ Eighteen equipment items are in the possession of Board members. We confirmed with the Board members that they have these items. ¾ The NCs indicated that 48 (approximately 15%) of the items were donated to other parties. Items donated include flat panel TVs, memory mattress pads, computers and printers, a surveillance van, a four wheel drive vehicle, Sony playstation systems and video games. The majority of these items were donated to LAPD, LAFD and RAP. We were able to confirm that these departments received some of the items. 39
¾ We could not locate 27 of 308 (8%) items at five NCs. Missing items include computers, translation machines, wireless microphones, ham radios and cameras. Two NCs indicated that four of these items are with their prior Board members. ¾ Some NCs have equipment items that were not on the listing provided to DONE. ¾ One NC did not maintain or submit an inventory listing to DONE. The NC indicated that it only has a laptop, a printer and a projector. We physically observed the laptop and the printer. Per the Treasurer, the projector is in a Board member’s possession. During our visit, we noted the following other issues related to equipment items: ¾ We noted a poor transition process between NCs’ Board members. NCs’ outgoing Boards do not always return equipment in their possession to the incoming Board. As discussed above, the equipment items that we were not able to locate at some of the NCs were purchased by prior Board members but were not properly transferred to new Board members. Although DONE has a field representative assigned to each NC, these staff are not involved in ensuring that after the election of new Board members, all activities and records are properly transitioned. ¾ There are no clear verification guidelines for what documentation is needed to show that receiving organizations actually received the items NCs claimed to have donated. Although we observed request letters and NC Board minutes supporting some of these donations, there are usually no acknowledgement letters or any other indication that would show that the items or amounts donated were actually received by the recipients. Recommendations DONE management should: 27. Consider requiring NCs to purchase equipment through the demand warrant process. 28. Require NCs to notify the Department when equipment items are purchased or donated by the NC. 29. Record equipment in a tracking system at the time an NC makes an equipment purchase. 30. Require each NC to perform periodic physical inventories of assets and submit the result to the Department. This could be done on a biennial basis as is currently done by City departments.
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APPENDIX I OFFICE OF THE CONTROLLER AUDIT OF NEIGHBORHOOD COUNCILS’ EXPENDITURES Ranking of Recommendations Finding Number 1.
2.
Description of Finding Section I - Oversight DONE has not provided adequate oversight over NC expenditures. This lack of oversight may have contributed to potential fraud occurring at a minimum of six NCs.
DONE has never reconciled its NC accounts to official City records. This has resulted in a $5.6 million discrepancy between total appropriation amounts for the 89 NCs and the cash balance per the City’s records. Also, DONE does not know the available balance of each NC.
Ranking Code N
Recommendations 1. DONE management should consult with the City Administrative Officer and the City Attorney’s Office to determine the feasibility of implementing procedures to help verify that prospective NC treasurers do not have a history of activity that would be unsuitable for the position. DONE management should:
U
2. Explore the feasibility of reconciling its subsidiary accounts from program inception in order to determine accurate account balances for each NC.
U
3. Develop procedures to perform annual reconciliations of its subsidiary accounts.
U
4. Work with the Office of the Treasurer to investigate the $160,000 balance in its old Bank of America checking account, close the account, and determine the proper disposition of the funds.
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Finding Number 3.
4.
5.
Description of Finding DONE does not require NCs to provide financial reports as stipulated in the adopted Plan for a Citywide System of Neighborhood Councils.
DONE is severely behind in reviewing quarterly expenditure reports. As of August 2009, NCs had submitted 364 quarterly statements that had not yet been reviewed. DONE has not reviewed the budgets submitted by NCs.
Ranking Code
Recommendations DONE management should:
N
5. Develop or acquire basic financial report software or templates for NCs to use. The software or template should allow NCs to track the beginning available balance, new funding available, expenditures incurred, and the ending available balance. The reports should also account for funding by year to show the remaining funds by fiscal year.
N
6. Require the NCs to submit financial reports at least annually and use the reports to identify any discrepancies with City records.
N
7. Provide necessary training to the NCs on how to utilize the financial report software/templates and how to prepare the required reports.
U
8. DONE should consider reviewing expenses on a sample basis. The sample items could be selected based on factors such as the dollar amount of the expenditures and the NC’s history in submitting quality documentation. 9. DONE management should fully implement the budget recommendations in our prior report unless Council decides that it is acceptable for NCs to spend their allocations as they wish. The prior report states that DONE should improve the budget process by:
N
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Finding Number
Description of Finding
Ranking Code
Recommendations a. Working with the Mayor, NCs, and the Board of Commissioners to establish a budgetary framework that clearly identifies goals and associated priorities for the Neighborhood Council Program. b. Requiring NCs to submit a budget that links the goals and priorities to the budget. This could include placing restrictions on the percentage of funds that can be used for certain categories. c. Monitor NCs to ensure they spend their funds in accordance with their budget.
N
6.
DONE has not been monitoring NCs to determine whether they are staying within their quarterly and annual credit card limits.
N
N
N 44
10. DONE management should review NC budgets and provide appropriate feedback to the NCs in a timely manner. DONE management should: 11. Complete programming of new quarterly credit card limits to reflect the new reduced funding for each NC. 12. Develop procedures to ensure that any increases in quarterly credit card limits are reverted back to the original amount in subsequent quarters. 13. For NCs that request an increase in the quarterly limit, adjust their
Finding Number
Description of Finding
Ranking Code
N
N 7.
NCs have wide latitude on how they can spend their funds. The City has never performed a formal assessment of the types of expenditures being made by NCs to determine whether these expenditures and their corresponding activities are in line with the goals and objectives of the Neighborhood Council Program.
U
Recommendations subsequent quarterly allocations to ensure the NCs do not exceed their annual allocations (plus any rollover). 14. Work with US Bank to implement Merchant Category Codes for NC credit cards. 15. Limit each NC to no more than two credit cards, unless justified under rare circumstances. 16. The Mayor and Council, working with DONE and the NCs, should clarify and redefine the mission of the Neighborhood Council Program and formally adopt DONE’s policies with respect to the types of allowable expenditures and the documentation required to support these expenditures.
Section II- Neighborhood Councils’ Expenditures 8.
NCs have incurred $880,000 in purchases for which they have not submitted quarterly reports within the required timeframes. Consequently, DONE is unable to determine whether NCs are spending their funds on allowable expenses and whether the expenditures are reasonable.
DONE management should: U
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17. Establish formal policies, procedures, and protocols for properly addressing those NCs that do not provide required documents, which could include the suspension of any future funding. These procedures should require formal communications from DONE management when NCs continually do not respond to requests for information.
Finding Number
9.
10.
11.
Description of Finding
Two of the 12 NCs that were selected for our audit did not provide any documentation to support expenditures for the period we requested. Consequently, $39,000 in expenditures and cash advances made by these NCs over the 12 month audit period are questionable. There is lax oversight over cash advances. Between July 2008 and June 2009, NCs withdrew over $400,000 in cash advances. Of this amount, approximately $45,000 did not comply with DONE’s polices for making withdrawals. In addition, several NCs could not properly account for their funds. NCs are not providing adequate supporting documentation for vendor invoices submitted to DONE for payments. As a result, DONE’s records show outstanding invoices totaling over half a million dollars that were
Ranking Code
Recommendations
N
18. Change the requirement for when expenditure reports and support documentation is due, from 90 days to 30 days after the end of the quarter. DONE management should:
U
19. Reiterate procedures on documentation requirements to the NCs.
U
20. Suspend funding to NCs that fail to provide requested documentation by DONE’s deadline. DONE management should:
N
21. Discontinue the cash advance option and consider implementing an imprest petty cash system for neighborhood councils whereby a fixed sum is set aside for petty cash.
N
22. Ensure neighborhood councils submit expenditure receipts, totaling the original (i.e., fixed sum established in recommendation #21) or requested amount, to replenish their petty cash funds. DONE management should:
N
23. Provide NCs with outstanding invoices with one final deadline to submit adequate documentation.
N
24. Before paying any invoice, scrutinize the documentation for validity and ensure that the
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Finding Number
Description of Finding not paid because of insufficient documentation.
Ranking Code
N
12.
13.
Several NCs appeared to have split purchases to circumvent the $1,000 per credit card transaction limit. In FY 2008-09, 79 purchases totaling over $124,000 made by 39 NCs appear to have been split to avoid requesting approval from DONE. Five out of 14 NCs that we tested were unable to account for 27 equipment items that were sampled as part of our physical observations.
U
Recommendations invoice has not already been paid. 25. Reject and return remaining invoices to NCs that have not been fully supported by the deadline. 26. DONE management should reiterate to NCs the requirement that any purchases exceeding $1,000 be approved by DONE and monitor the NCs for compliance. Continuous violations should result in cancellation of the credit cards.
DONE management should: D
27. Consider requiring NCs to purchase equipment through the demand warrant process.
N
28. Require NCs to notify the Department when equipment items are purchased or donated by the NC.
N
29. Record equipment in a tracking system at the time an NC makes an equipment purchase.
N
30. Require each NC to perform periodic physical inventories of assets and submit the result to the Department. This could be done on a biennial basis as is currently done by City departments.
N
31. Conduct periodic physical inventories, on a sample basis, to confirm the existence of
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Finding Number
Description of Finding
Ranking Code
Recommendations equipment items.
U
32. Develop a transition process whereby equipment and any other NCs’ properties and records are properly transferred to new officers. DONE field staff could be utilized to coordinate transition of inventory, cash, and equipment.
N
33. Establish acceptable documentation standards to properly confirm to DONE that receiving organizations actually received donated goods and money.
N
34. Attempt to locate the missing equipment items.
Description of Recommendation Ranking Codes U- Urgent-The recommendation pertains to a serious or materially significant audit finding or control weakness. Due to the seriousness or significance of the matter, immediate management attention and appropriate corrective action is warranted. N- Necessary- The recommendation pertains to a moderately significant or potentially serious audit finding or control weakness. Reasonably prompt corrective action should be taken by management to address the matter. The recommendation should be implemented within six months. D- Desirable- The recommendation pertains to an audit finding or control weakness of relatively minor significance or concern. The timing of any corrective action is left to management’s discretion. N/A- Not Applicable
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Attachment I NCS THAT VIOLATED CASH ADVANCE AND SPLIT PURCHASE POLICIES
1 2 3 4 5 6 7 8 9 10 11 12 13
NC Name Arleta Arroyo Seco Atwater Village Bel Air-Beverly Crest Boyle Heights CANNDU Canoga Park Central Alameda Central Hollywood Central San Pedro Chatsworth Coastal San Pedro Del Rey
14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51
Downtown Los Angeles Eagle Rock East Hollywood Elysian Valley Riverside Empowerment Congress CENTRAL Empowerment Congress NORTH Empowerment Congress SOUTHEAST Empowerment Congress SOUTHWEST Empowerment Congress WEST Encino Foothill Trails District Glassell Park Granada Hills North Granada Hills South Greater Cypress Park Greater Echo Park Elysian Greater Griffith Park Greater Toluca Lake Greater Valley Glen Greater Wilshire Harbor City Harbor Gateway North Harbor Gateway South Historic Cultural Historic Highland Park Hollywood Hills West Hollywood Studio District Hollywood United LA-32 Lake Balboa/West Van Nuys Lincoln Heights MacArthur Mar Vista Community Mid City Mid City West Mid-Town North Hollywood Mission Hills North Hills West
Cash Advance
Split
Violation(1)
Purchases (2)
X X
X
X X
X X X X
X X
X X X
X
X
X
X
X X
X
X X X
X
X
X X X X
X X X X X X X X
X X X X X X X
X
X X
X X X
Attachment I NCS THAT VIOLATED CASH ADVANCE AND SPLIT PURCHASE POLICIES
52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89
NC Name North Hollywood Northeast Northridge East Northridge West Northwest San Pedro Olympic Park P.I.C.O. Pacoima Palms Panorama City Park Mesa Heights Pico Union Porter Ranch Rampart Village Reseda Sherman Oaks Silver Lake South Robertson Southeast-Central Studio City Sun Valley Sunland-Tujunga Sylmar Tarzana United Neighborhoods Valley Village Van Nuys Venice Voices of 90037 Watts West Adams West Hills West Los Angeles Westchester/Playa Del Rey Westside Wilmington Wilshire Center/Koreatown Winnetka Woodland Hills - Warner Center
Cash Advance
Split
Violation(1) X
Purchases (2)
X X
X X
X
X X
X X X X X X
X X X
(1) Violations for the period July 1, 2007 through June 30, 2009. (2) Violations for the period July 1, 2008 through June 30, 2009. Source: DONE's Records
X X
X X X X X X
X
