OFFICE OF THE MANAGING DIRECTOR

AUDITOR’S REPORT

FISCAL YEARS 2006 - 2009

www.philadelphiacontroller.org

June 22, 2010 Camille Cates Barnett, Ph.D., Managing Director Office of the Managing Director 1401 John F. Kennedy Boulevard Suite 1430 Philadelphia, PA 19102 We have examined the financial affairs and operations of the Office of the Managing Director for fiscal years 2006 through 2009 pursuant to the requirements of Section 6-400 (c) of the Philadelphia Home Rule Charter. A synopsis of the results of our work is provided in the executive summary to the report. Except for the lack of a written agreement for art work on loan from the Atwater Kent Museum, the conditions giving rise to the findings and recommendations contained in this report occurred under former managing directors. We discussed our findings and recommendations with your staff at an exit conference and included your written response to our comments as part of the report. Our recommendations have been numbered to facilitate tracking and follow-up in subsequent years. We believe that, if implemented by management, these recommendations will improve internal controls and the effectiveness and efficiency of your office’s operations. We would like to express our thanks to you and your staff for the courtesy and cooperation displayed toward us during the conduct of our work. Very truly yours,

ALAN BUTKOVITZ City Controller cc: Honorable Michael A. Nutter, Mayor Honorable Anna C. Verna, President and Honorable Members of City Council Members of the Mayor’s Cabinet

OFFICE OF THE MANAGING DIRECTOR

EXECUTIVE SUMMARY

Why The Controller’s Office Conducted the Examination Pursuant to the requirements of Section 6-400 (c) of the Philadelphia Home Rule Charter, we examined the financial affairs of the Office of the Managing Director (MDO) as part of our audit of the City of Philadelphia’s basic financial statements. The focus of our examination was limited to determining if department management had suitably designed and placed in operation internal controls and complied with any laws and regulations related to its expenditure, petty cash, and inventory activity. What The Controller’s Office Found Our review noted that the MDO did not have in place a written agreement stipulating the terms and conditions for the city’s display of artwork on loan from the Atwater Kent Museum. We observed nine paintings; however, only eight paintings are listed under the city’s fine arts insurance policy. Thus, one painting, the appraised value of which we were unable to determine, may not be insured by the fine arts policy. Failure to document the loan of artwork in a written agreement could lead to a misunderstanding as to the ownership of the assets or terms of the loan. Some of the other deficiencies we observed are listed below. If management does not take corrective action, then asset misappropriation and/or abuse could occur and not be detected timely.

• The MDO failed to properly reconcile the petty cash fund to its authorized balance of $4,000. Our analysis

noted unreconciled differences in each month of our audit period ranging from overages of $1,324 to shortages as large as $2,128. We also noted the following conditions:

o Twenty-seven fund reconciliations and three bank reconciliations showed no indication of being

independently reviewed and approved, as required by Standard Accounting Procedures. o The petty cash custodian performs both bank and fund reconciliations. Standard accounting procedures

and effective internal controls require that these reconciliations be performed by an employee independent of cash custodial duties.

o Ten checks totaling $1,450 were outstanding for periods ranging from one to five years. Standard accounting procedures require that stop payments be issued for such checks and the related funds transferred to the Unclaimed Monies Funds.

• We noted several personal services deficiencies including the failure of the MDO to adequately segregate

certain payroll duties, to prepare performance reports for civil service employees, or to conduct background checks for new employees.

• The MDO still did not maintain documentation to support the results of physical counts of inventory, or

sequentially account for pre-numbered issue and receipt forms. Additionally, we were informed that perpetual inventory records prior to July 2008 did not exist due to computer malfunctions that caused the destructions of those records.

What The Controller’s Office Recommends The Controller’s Office has developed a number of recommendations to address these findings. The recommendations can be found in the body of the report.

CONTENTS

Page INTRODUCTION Background.............................................................................................................................1 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS ...............................................................3 FINDINGS AND RECOMMENDATIONS No Written Agreement For Assets On Loan ..........................................................................5 Controls Over Petty Cash Need Strengthening.......................................................................5 Personal Services Deficiencies ...............................................................................................6 Status of Prior Year Findings Personal Property: Significant Amount Of Lost Equipment Still Carried On The MDO Books.............................................................................7 Improved MDO Oversight Of Inventory Helped; Did Not Eliminate All Previously Noted Problems ................................................................8 Annual Performance Evaluations Not Prepared ............................................................9 Grant Accounting Deficiency Still Exists......................................................................9 AGENCY RESPONSE Camille Cates Barnett, Managing Director...........................................................................10

INTRODUCTION

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BACKGROUND Powers and Duties

Under the Philadelphia Home Rule Charter of 1951, the city managing director is appointed by the mayor. The function of the Office of the Managing Director (MDO) is to oversee, support, and assist the city’s thirteen operating departments. The MDO provides direction to the thirteen departments to ensure the efficient and effective provisions of city services. Additionally, the MDO is also involved with a number of other activities that include the following:

• Coordinating inter-departmental responsibilities and ensuring accountability for the

provision of services. • Reviewing, revising, and updating the city’s emergency operations plan to meet federal

and state requirements. • Coordinating, evaluating, and reporting on emergency response management exercises

involving departmental, commercial, private, and volunteer services. • Develop the chemical emergency response plan required by the Emergency Planning

and Community Right-To-Know Act. • Coordinating grant management services for criminal justice agencies, and managing

pertinent research, planning and development for criminal justice projects • Managing the justice facilities and system improvement program. • Optimizing costs and minimizing the use of energy at city facilities. • Advising the Police Commissioner for the purpose of improving performance and

improving community relations. Management

For the period under audit, Pedro Ramos and Loree Jones, served as the managing directors, and the MDO had eight budgetary operating divisions as follows:

- Administration - Police Advisory Commission - Municipal Energy Office - Vacant Lot Cleaning Program - Graffiti Fighting - Targeted Assistance Program - Office of Emergency Management - Criminal Justice Coordinating Office

The MDO is located on the 14th floor of the Municipal Services Building, 1401 John F. Kennedy Boulevard. As of the close of fiscal year 2009, the MDO employed 126 full-time individuals. Approximately seventy-seven percent of them were non-civil service (exempt) employees.

INTRODUCTION

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Financial Resources

Management has responsibility for establishing and maintaining controls to safeguard the financial resources for which it is accountable. Safeguarding controls are designed to (1) prevent or timely detect unauthorized acquisition, use, or disposition of assets, (2) ensure the reliability of financial reporting and (3) to comply with applicable laws and regulations. During fiscal 2006 through 2009, management of the MDO was accountable for the following appropriations, revenues and assets:

Appropriations: Operating Funds Capital Funds Total appropriations

Fiscal 2009

$25,895,369 25,579,000

$51,474,369

Fiscal 2008

$18,413,552 21,502,000

$39,915,552

Fiscal 2007

$17,433,132 22,548,000

$39,981,132

Fiscal 2006

$20,131,752 21,312,000

$41,443,752

Estimated Revenues: Non-Tax Revenue From Other Governments Total Estimated Revenues

$3,565,000 3,577,000 $7,142,000

$1,415,000 2,727,000

$4,142,000

$3,863,000 3,217,000 $7,080,000

$9,113,000 5,981,000

$15,094,000

Assets (Year End Balances) Petty Cash Materials & Supplies

Personal Property Inventory Total assets

$4,942

$250,195 1,761,249 $2,016,386

$3,853 186,620

1,506,969 $1,697,442

3,801 202,961 1,221,952 $1,428,714

$4,002 238,138 1,062,678 $1,304,818

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REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE

AND OTHER MATTERS We annually audit the basic financial statements of the City of Philadelphia, Pennsylvania as of and for its June 30 fiscal year end and issue a report thereon. Those statements include financial transactions of various city departments and agencies. We conduct our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we consider the City of Philadelphia’s centralized and departmental internal controls over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City of Philadelphia’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City of Philadelphia’s internal control over financial reporting. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the Office of the Managing Director’s (MDO) ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the city’s financial statements that is more than inconsequential will not be prevented or detected by the MDO’s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the MDO’s internal control.

C I T Y O F P H I L A D E L P H I A O F F I C E O F T H E C O N T R O L L E R

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Our consideration of the MDO’s internal control over financial reporting was limited to determining if its internal control components for expenditure, petty cash, and inventory activity were suitably designed and placed in operation during fiscal years 2006 through 2009, and would not necessarily identify all deficiencies in the internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as described above. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City of Philadelphia’s basic financial statements are free of material misstatement, we perform centralized and departmental tests of compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. Our consideration of the MDO’s compliance with certain provisions of laws, regulations and contracts was limited to tests of expenditure, petty cash, and inventory activity during fiscal years 2006 through 2009. Grant compliance was tested and reported on as part of our single audit in accordance with Office of Management and Budget Circular A-133. Our departmental tests disclosed no instances of noncompliance or other matters by the MDO that are required to be reported under Government Auditing Standards. We noted certain other conditions that are not required to be reported under Government Auditing Standards, but nonetheless represent deficiencies in internal control over financial reporting, that should be addressed by management. These conditions are listed in the table of contents and included in the findings and recommendations section of the report. The MDO’s response to the findings identified in our audit are described in the accompanying agency response section of the report. We did not audit the MDO’s response and, accordingly, we express no opinion on it. This report is intended solely for the information and use of the management of the City of Philadelphia, the MDO, and City Council and is not intended to be and should not be used by anyone other than these specified parties.

May 13, 2010 ALBERT F. SCAPEROTTO, CPA Deputy City Controller

FINDINGS AND RECOMMENDATIONS

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NO WRITTEN AGREEMENT FOR ASSETS ON LOAN Beginning October 14, 2008 the Atwater Kent Museum, based only on an oral agreement, lent the Office of the Managing Director (MDO) nine paintings for display in its administrative offices. We observed these paintings while conducting field work related to our audit. We were informed that the original term of the loan was for a six month period ending April 20, 2009. However, this period has been extended with no specific end date. MDO officials informed us that a written agreement was initiated but never finalized. The Risk Management Division of the Office of the Director of Finance informed us that the paintings on loan from the Atwater Kent Museum are insured under the city’s fine arts insurance policy. However, the schedule of covered items provided by Risk Management personnel included only eight paintings valued at $155,000. As part of our testing, we physically observed nine paintings on display and matched each painting by artist and title to a listing of loaned artwork provided by the Atwater Kent Museum. Accordingly, it appears as though one painting, the appraised value of which we were unable to determine, may not be insured under the city’s fine arts insurance policy. To ensure there is no misunderstanding as to the ownership or terms of the loan, we recommend that the agreement that led to paintings being loaned to the MDO by the Atwater Kent Museum be formalized in a written document. [11006.01] In addition, to fully indemnify the city in the event of loss, damage or theft, we recommend that MDO management ensure that all paintings on loan are included in the city’s fine arts insurance policy. [11006.02] CONTROLS OVER PETTY CASH NEED STRENGHTENING The MDO maintains a petty cash fund with an authorized balance of $4,000. The purpose of the fund is to provide cash to meet incidental expenditures such as travel reimbursement, parking, postage, etc. During the course of our review, we noted deficiencies in the department’s accounting of the fund. Fund reconciliations prepared by MDO personnel prior to January, 2008 were not properly completed because they failed to reconcile available cash to the authorized fund balance. Additionally, our analysis noted unreconciled differences in each month of our audit period ranging from overages of $1,324 to shortages as large as $2,128. We also noted the following conditions:

• Twenty-seven fund reconciliations and three bank reconciliations showed no indication of being independently reviewed and approved, as required by Standard Accounting Procedures. It is imperative that these reconciliations be reviewed considering that, due to staff limitations, the petty cash custodian performs both the bank and fund regulations. These functions are generally segregated in an effective system of internal control.

FINDINGS AND RECOMMENDATIONS

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• Ten checks totaling $1,450 were outstanding for periods ranging from one to five years. Standard accounting procedures require that stop payments be issued for such checks and the related funds transferred to the Unclaimed Monies Funds.

• A manual recordkeeping system was maintained and used as the basis for preparing

fund and bank reconciliations, resulting in operating inefficiencies and increased risk of errors and difficulty in identifying errors. Prior to the end of our field work and based on our recommendation, the department invested in a computerized check writing software program. However, MDO personnel continue to prepare bank reconciliations manually rather than utilizing the program’s ability to automate that function.

These conditions increase the risk of loss or theft of funds or represent opportunities for increased efficiencies. Accordingly, we recommend that management:

• Ensure that all fund reconciliations properly reconcile available cash to the authorized fund balance. [11006.03]

• Investigate and resolve all overages and shortages in accordance with SAP No. E-4401.

[11006.04]

• Ensure that all bank and fund reconciliations are reviewed and approved by supervisory personnel, and when staffing levels permit, consider assigning the responsibility for performing bank and fund reconciliations to someone other than the petty cash custodian. [11006.05]

• Place a “stop payment” order and draw a transfer check payable to the City of

Philadelphia – Unclaimed Monies Fund for the sum of all checks outstanding for over one year. [11006.06]

• Utilize the check writing software program to automate the preparation of bank

reconciliations. [11006.07] PERSONAL SERVICES DEFICIENCIES Our review and testing of the MDO’s controls over its personal services functions disclosed certain conditions requiring management’s attention. Inadequate Review Procedures The city’s payroll system is designed to employ two levels of review of on-line postings. Our testing determined that the individual authorized to perform the executive review function, routinely also provides the supervisory review. The automated system allows for an individual authorized to perform the executive review to also perform the supervisory review. However, in an effective system of internal control, this should only occur when the supervisory level employee is on leave time when payroll is processed. By allowing the same employee to

FINDINGS AND RECOMMENDATIONS

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routinely perform both the supervisory and executive review functions, there is an increased risk of errors or fraud occurring without being detected. Therefore, we recommend that management assign the responsibility for the supervisory and executive review of on-line payroll postings to separate employees to properly segregate these duties. [11006.08] Background Investigations Not Performed The MDO did not conduct background investigations of new employees as required by Mayor’s Executive Order No. 1-05. The executive order requires such investigations to be conducted for every person offered either a civil service or exempt employment position. Our review determined that such investigations were previously conducted. However, when the employee responsible for initiating the background checks transferred to a different division, the practice was not continued because the current staff was not aware of this requirement. We therefore recommend that the MDO reinstitute the practice of conducting background investigations for new employees in accordance with Mayor’s Executive Order No. 1-05. [11006.09] STATUS OF PRIOR YEAR FINDINGS As part of our current work, we followed up on conditions requiring management’s attention, which we discussed in our last audit report. We will continue to pursue these conditions and report on them until management takes corrective action or until changes occur, making our recommendations obsolete. Personal Property: Significant Amount Of Lost Equipment Still Carried On The MDO Books In our prior report we commented that our inquiries and observations determined that MDO management had not placed enough priority on keeping its personal property asset records up to date. We disclosed that $127,000 of items that had been missing for several years, continued to be carried on its personal property records, causing the city’s financial statements to be overstated. To address this condition, we recommended that the MDO petition the Office of the Director of Finance for approval to have these missing assets removed from its personal property records, and to timely submit Detailed Reports of Loss (Loss Reports) in the future. Subsequent to the completion of field work for our current audit, we were provided with a Loss Report prepared by the MDO and submitted to Finance for the removal of all items identified as missing, with the exception of five items totaling less than $7,000. We believe the MDO took sufficient corrective action to consider this comment resolved. We will however, continue to monitor this condition to ensure that the MDO continues to timely review and update its property records. [11001.04]

FINDINGS AND RECOMMENDATIONS

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Improved MDO Oversight Of Inventory Helped; Did Not Eliminate All Previously Noted Problems Our prior report disclosed control weaknesses relating to materials and supplies inventory valued in excess of $200,000 and used in connection with various neighborhood cleanup and beautification programs. Specifically, we noted that:

• Pre-numbered forms were not used and sequentially accounted for to substantiate the receipt or issue of inventory items.

• No evidence, in the form of an initial and date on count sheets, existed to document

independent oversight of the annual physical count of materials and supplies on hand and comparison to perpetual records.

• The MDO had initiated, but not yet completed, the implementation of our prior

recommendation to value the inventory using the “moving average cost” method as required by Procurement Department Directive No. 92.

Our current testing confirmed that the MDO had properly implemented the use of the “moving average cost” method for valuing its inventory. We therefore consider this aspect of the prior year comment resolved. [11003.03] Our current testing also disclosed that, although the MDO implemented the use of pre-numbered issue and receipt forms, these forms were not sequentially accounted for by an employee independent of inventory storekeeping duties. As a result, a form authorizing the issue of lesser quantities of supplies could be substituted with a form showing higher, unauthorized quantities without detection. In addition, we found that the MDO again could not provide count sheets, initialed and dated, to document the annual inventory physical count or the existence of independent oversight of the process. Documented independent oversight would represent a compensating control reducing the risk of undetected error or fraud, as a result of the physical count being performed by the storekeeper. Finally, we were informed that all inventory records prior to July 2008 were lost due to a computer malfunction. Therefore, we could not test the accuracy of postings to perpetual records made during that period. To strengthen controls over materials and supplies, we again recommend that MDO management require that the numeric sequence of pre-numbered issue and receipt documents be periodically accounted for [11003.01]. We also continue to recommend that count sheets used to document the annual inventory physical count be signed by the storekeeper and an employee providing independent oversight, and maintained for audit. [11003.02]

FINDINGS AND RECOMMENDATIONS

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Finally, we recommend that management consult with the Division of Technology for the proper means of backing up the computerized inventory records to prevent the recurrent loss of data. [11006.10] Annual Performance Evaluations Not Prepared In previous reports, we disclosed that the MDO had not prepared annual performance reports for its civil service employees. Our current audit again found that the MDO did not have procedures in place to ensure that performance reports are prepared as required by Civil Service Regulation No. 23.033. Failure to complete performance reports, as required, deprives employees of the opportunity to review and discuss their strengths and weaknesses in a timely fashion. It could penalize employees who may be entitled to performance bonus points on promotional tests. Further, as an integral part of the City’s progressive discipline system, it could weaken management’s position when dealing with poorly performing employees. To comply with Civil Service Regulations and to ensure proper human resource management, we again recommend that the MDO prepare an annual performance evaluation for all its civil service employees [11003.05]. Grant Accounting Deficiency Still Exists Our fiscal 2005 review noted that the MDO again did not prepare a reconciliation of amounts billed to grantor agencies with amounts recorded in the city’s FAMIS accounting system. Failure to prepare and submit the required reconciliation reports to the Office of the Director of Finance’s Grants Accounting and Administration Unit hinders the grant Single Audit process which, if not completed timely, could lead to the imposition of sanctions by federal grantor agencies. Our current year review noted that the required reconciliation reports were prepared by the MDO and submitted to the GAAU. We therefore consider this finding resolved. [11000.01]

RESPONSE TO AUDITOR’S REPORT

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RESPONSE TO AUDITOR’S REPORT

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