San Diego City Audit Committee Meeting - October 19, 2016

The San Diego City Audit Committee met on October 19, 2016, with a quorum present. Committee members Tom Hebrink, Alan Spencer, and Ricardo Valdivia participated; the chair was expected to join shortly. Staff present included Deputy City Attorney Mara Elliott, Mayor's office representative Rolando Sharvel, Independent Budget Analyst Lisa Byrne, City Auditor Eduardo Luna, and committee consultant Riley Webb. The committee approved the previous meeting's record, received the City Auditor's monthly activity report, accepted the Central Stores inventory report, reviewed the semi-annual audit recommendation follow-up, accepted the Q1 FY2017 fraud hotline report, and appointed a member to the Disclosure Practices Working Group.

Consent Calendar

• The record of action from the September 21, 2016 meeting was approved by unanimous consent; no item was pulled for discussion.

Public Comments & Testimony

• No non-agenda public comment was offered at the start of the meeting.
• During the fraud hotline item, Robert McNamara (District 3) asked whether recommendations from fraud hotline investigations could be tracked through the audit recommendation follow-up process or in a separate progress report. The City Auditor's office responded that recommendations from public fraud hotline reports are already tracked with other audit recommendations, while government code privacy protections limit reporting on personnel-related cases.

Discussion Items

City Auditor Monthly Activity Report

• City Auditor Eduardo Luna reported that since the last meeting the office had issued three audit products, all on the day's agenda: the FY2016 Central Stores Inventory Audit, the recommendation follow-up report ending June 30, 2016, and the Q1 FY2017 fraud hotline report.
• The Development Services Department Expedite Permitting Audit was in report writing and was expected to be issued within three to four weeks, in time for the next committee meeting.
• Audits in field work included two IT audits (Excel implementation and SAP user access), a street light maintenance audit, and the San Diego Convention Center audit. The Convention Center audit's budgeted hours were increased from 1,400 to 2,000 hours, an additional 600 hours, due to staffing changes, the need to coordinate with multiple entities, and significant data entry requirements.
• Audits in preliminary review included Environmental Services Department Street Light Utility Billing and the Capital Improvement Program (CIP) audit. The CIP audit was to be broken into two audits: one on quality assurance for streets and one on the lifeguard tower at Children's Pool.
• This item was informational; no vote was taken.

Central Stores Inventory Audit (MGO)

• Kevin Starkey, partner with MGO, presented the fourth annual agreed-upon-procedures inventory count conducted for the City Auditor's Office under Municipal Code requirements.
• MGO sampled 257 individual stock items across Store 1 and Store 2. The estimated difference at the dollar level was a 1.10 percent error rate. Committee members noted some unit-level sample discrepancies were higher, such as 30 out of 144 items and 5 out of 10 items.
• New attachments summarized discrepancies by item. MGO observed some obsolete or damaged inventory that had not been set aside for disposal as required by administrative policy.
• Matthew Helm, Deputy Director for Purchasing and Contracting, said the department had implemented training, rolling counts, physical controls, and segregation of duties, and described a zero discrepancy rate as an aspirational goal. He also noted recent staffing changes and the need to improve communication with departments about writing off obsolete inventory.
• The committee accepted the report on a motion by Mr. Hebrink, seconded by Mr. Valdivia, passed unanimously.

Audit Recommendation Follow-Up (as of June 30, 2016)

• Assistant City Auditor Kyle Elser and Deputy City Auditor Danielle Knighton presented. As of June 30, 2016, there were 137 open recommendations across 42 audit reports. Of those, 38 were implemented or no longer applicable, leaving 98 to carry forward.
• Of the 137 open recommendations, 31 in-process recommendations were over two years old, 32 were one to two years old, 32 were under one year old, and one not-implemented recommendation was under one year old. Among the 31 over-two-year-old recommendations still in process, five were past due as of June 30, 2016; six were scheduled within six months; six within one year; ten within 24 months; one over two years; and three had no target date.
• The City Auditor's office highlighted one recommendation as no longer applicable: Development Services decided not to implement a late penalty fee after consulting the City Attorney, although streamlined deposit accounts met the intent of another recommendation.
• The office thanked Park and Recreation for completing all playground maintenance recommendations, moving a target date from 2021 to the current reporting period.
• Three reports were brought forward as significantly past due or with multiple target-date changes:
  • Industrial Wastewater Control Program: original target January 2014, moved to June 2018. Public Utilities staff said a cost-of-service study and Prop 218 process were needed; no fee changes had been made since 1984, but no rate increase was currently projected.
  • Waste Reduction and Recycling Program: original target March 2016, moved to November 2017. An RFP was issued in September and results were expected at the end of October; legislative recess and the 2015 Zero Waste Plan timeline contributed to delays.
  • Fleet Services fraud risk assessment: priority-one recommendations originally scheduled for spring 2015, with dates moved to May 2016, June 2017, and February 2018. Fleet Operations staff described a 24-month Fleet Focus upgrade project and hiring of supplemental limited positions.
• Committee members expressed concern that roughly 70 percent of recommendations remained in process and that target dates were repeatedly pushed out. Mr. Hebrink asked for a complete history of target dates so the committee could see how often dates changed. Mr. Spencer suggested the audit office develop a measurable goal to flip the ratio of implemented to in-process recommendations. He also noted the office's roughly $4 million budget and said the value of audits is realized through implementation.
• Administration and audit staff responded that 183 recommendations had been implemented over the prior two and a half years while 161 new recommendations were issued, approximately 63 percent completion, and that the strong-mayor form of government limits the auditor's ability to compel implementation. Stacey Lamedico said departments take recommendations seriously and noted training of department directors and creation of department liaisons.
• The committee accepted the report and agreed to drop the no-longer-applicable recommendation on a motion, seconded by Mr. Valdivia, passed unanimously.

Quarterly Fraud Hotline Report (Q1 FY2017)

• Fraud investigator Andy Jarita reported 44 fraud hotline complaints received in the first quarter of fiscal year 2017, more than in any of the previous 16 quarters. Ten were assigned to the City Auditor to investigate, 20 to departments, and 14 were outside the hotline's purview or did not involve city operations.
• There were 24 open city-related complaints on July 1, 2016; 30 were added for a total of 54 active complaints, the highest ever. Twenty-five were closed, leaving 29 open cases.
• Six complaints were substantiated:
  • Hiring-process abuse at Public Utilities Department: eight recommendations, all agreed to; public report issued August 4, 2016.
  • Employees enrolling children and grandchildren in Park and Recreation activities without paying required fees: two recommendations, both agreed to; public report issued August 18, 2016.
  • Unauthorized fee waivers: substantiated; confidential report provided because the employee did not personally benefit and the dollar amount was relatively small.
  • Contract awarded in violation of state law, creating a conflict of interest prohibited by Government Code Section 1090; contract was void and would be awarded to a different firm.
  • Criminal activity using a city vehicle: substantiated; San Diego Police Department was informed and corrective action taken.
  • Personal use of city equipment: substantiated; corrective action taken.
• Six additional complaints resulted in corrective actions, including verbal reminders, an administrative warning, refresher training, and reminders about acceptable use of city resources. One substance-abuse allegation was not substantiated but prompted refresher training.
• The committee accepted the report on a motion by Mr. Hebrink, seconded by Mr. Spencer, passed unanimously.

Appointment to Disclosure Practices Working Group

• Rolando Sharvel explained that the Disclosure Practices Working Group reviews city disclosures related to investors, bond documents, preliminary official statements, and the comprehensive annual financial report. Chief Financial Officer Mary Lewis clarified that the committee member's participation would be for the CAFA review and not for bond offerings.
• Alan Spencer volunteered to serve. The committee appointed him on a motion by Mr. Valdivia, seconded by Mr. Hebrink, passed unanimously, for a one-year term.

Key Outcomes

• Approved the September 21, 2016 record of action by unanimous consent.
• Received the City Auditor's monthly activity report as an information item.
• Accepted the Central Stores Inventory Audit report unanimously.
• Accepted the June 30, 2016 audit recommendation follow-up report and removed the no-longer-applicable DSD late penalty fee recommendation unanimously.
• Accepted the Q1 FY2017 fraud hotline report unanimously.
• Appointed Alan Spencer to the Disclosure Practices Working Group for a one-year term unanimously.
• The next audit committee meeting was scheduled for December 7 at 9 a.m.