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HomeMy WebLinkAbout01.04-Orange County Sanitation District - PDF Final 2017 Fictitious Vendors.pdf ORANGE COUNTY SANITATION DISTRICT AGREED-UPON PROCEDURES REVIEW FICTITIOUS VENDOR ANALYSIS FOR THE 21-MONTH PERIOD OF JULY 1,2015 TO MARCH 31, 2017 INDEPENDENT ACCOUNTANTS' REPORT ON APPLYING AGREED-UPON PROCEDURES Board of Directors Orange County Sanitation District Fountain Valley, California We have performed the procedures set forth in this report, which were agreed to by the management of the Orange County Sanitation District, Fountain Valley, California (the District), for the 21-month period of July 1, 2015 to March 31, 2017. The District's management is responsible for establishing and maintaining internal controls over cash disbursements to ensure there are no fictitious vendors. The sufficiency of these procedures is solely the responsibility of the management of the District. Consequently, we make no representations regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. The procedures performed and the results of those procedures are as follows: Intemal Controls 1. The District provided narratives and/or interviews regarding how the Vendor Master File (VMF) is maintained. The narrative and/or interviews included: a. What data fields are maintained for each vendor. b. What procedures are used to set up a new vendor. c. What personnel are authorized to set up a new vendor. d. Identified employees who have access to the VMF and also have authority to approve invoices,purchase orders, or receiving documents. e. Identified the Information Technology (IT) employees that have access to the VMF and/or have the ability to make additions,deletions, or changes to the VMF. f. Determined if any high-level officials obtain a periodic report of new vendors added to the VMF. g. If the District makes "manual" or "emergency" payments to vendors that do not go through the regular approval and review procedures, identified personnel responsible for verifying that the vendor has been approved and added to the VMF. Results: a. The VMF included the following data fields: • Vendor name • Type of vendor(vendor versus employee) • Address, city, state, and zip code • Tax Identification Number • Type of company: C (corporation),N (any other type), P (individual/sole proprietor), and E (exempt) • Business phone(can add fax number,but is not mandatory) • Email (not mandatory) - 1 - 2875 Michelle Drive,Suite 300,Irvine,CA 92606 •Tel: 714.978.1300• Fax:714.978.7893 Offices located in Orange and San Diego Counties Internal Controls (Continued) 1. (Continued) Results (Continued): b. New vendors are entered into the system by the Purchasing Department. A W-9 must be scanned into the system as support for the existence of the new vendor. Also the tax identification number (TIN) must be entered into the system. By entering in the TIN number, the District can verify that the vendor does not already exist in the system to avoid duplicate entries. c. Only the Purchasing Department can make changes to the VMF and add new vendors. d. The Accounts Payable Department has access to the VMF and can approve invoices. However, the Accounts Payable Department cannot make changes to the VMF; therefore, this does not cause an issue for segregation of duties. e. The IT Department has access to the VMF,but cannot make changes. f. High-level officials do not obtain a periodic report of new vendors added to the VMF; however, given the District's other controls, we do not see a need to add this procedure. Per our discussion with the finance department, the District does not believe a benefit exists for this control as they could not think of any new vendor being added that would raise a red flag. g. If a "manual" or "emergency" payment to a vendor requires setup in the VMF then the only difference from the procedure noted in "b" above is that a W-9 is not required. The W-9 will be obtained at a later date due to the emergency situation. Overall.: Only the Purchasing Department can make changes to the VMF and add new vendors. The Accounts Payable Department and non-purchasing department employees (such as the General Manager, Purchasing Manager, Department Directors, Division Managers, Supervisors, and other District staff) are responsible for approving purchases. The functions of making changes to the VMF and approving purchases are segregated. 2. The District provided the VMF and a listing of District employees, including employee addresses, the Employee Master File(EMF),as of March 13, 2017. Results: We received the VMF and EMF files.No exceptions were noted as a result of this testing. 3. The IT Manager responsible for providing the VMF and EMF in procedure #2 above signed a representation that in the compilation or transmission of the VMF and EMF, all electronic data provided was as originally recorded in the District's system and was not altered for purposes of this agreed-upon procedure. Results: The representation letter was signed by the Principal Information Technology Analyst who provided the VMF and EMF.No exceptions were noted as a result of this testing. -2 - Test for Possible Matches between Vendors and Employees 1. We compared the names and addresses of the vendors in the VMF with the names and addresses of employees in the EMF. a. We searched for exact matches of names and addresses. b. We searched for partial matches (such as variations of employee names included in the VMF and the same street name,but different house/apartment number). Results: We performed this procedure and utilized the results to select the samples for the procedures under"Exact Matches" section and`Partial Matches"section below. Exact Matches 2. Exact matches between the VMF and EMF can be due to travel or other reimbursement requests by employees that are paid outside of the payroll system. We provided the listing of exact matches to the District and requested a history of payments made (outside of payroll) for the 21-month period. We utilized the payment history to identify 15 employees with the largest aggregates payments made outside of payroll. From the remainder of the exact matches identified, a random sample of 10 was selected. Results: We provided the matches noted from procedure #1 ("Test for Possible Matches between Vendors and Employees" section) above and received the history of payments for the 21-month period from the District. We utilized the history of payments to make the sample selection for procedures#3 and#4 below within this "Exact Matches"section. In addition, during our review of the VMF,we noted some vendors that are listed multiple times. The vendors had the same address and, in some cases, the same tax identification number. We recommend the District review the VMF and remove the vendors that are listed more than once without different addresses. The vendors noted are included in "Attachment A". 3. For those 25 employees selected in procedure 42 above, we selected a sample from the payment history to test to verify the propriety of the payment. In selecting the sample of individual transactions, we followed the American Institute of Certified Public Accountants (AICPA) sample size guidance with a maximum sample size per employee of 25 transactions. Results: We selected the sample and tested the items selected in procedure #4 below within this "Exact Matches" section. 4. To verify the propriety of the payments selected in procedure #3 above, the following was performed: a. The District provided procurement policies and procedures indicating the type and amount of approvals required. b. We ensured the reimbursement request or invoice was approved in accordance with District policy noted in procedure#4a above. c. We determined the payment was for goods and/or services that are reasonable given the District's business. d. In the case of vendors selected that are not employees, we verified the District has a W-9 on file. -3 - Exact Matches (Continued) 4. (Continued) Results: The cash disbursements selected for testing were approved in accordance with the District's policies,were reasonable given the District's business, and had a W-9 on file, if applicable. No exceptions were noted as a result of this testing. Partial Matches 5. We determined the number of employees and vendor names and/or addresses that have partial matches. We provided the listing of partial matches to the District and requested a history of payments made (outside of payroll) for the 21-month period. We selected a sample based on the AICPA sample size guidance with a maximum sample size of 25. The sample selection was split with 60% of the sample selection focusing on the largest aggregate payments by vendor and 40% of the sample randomly selected. Results: We provided the matches noted from procedure #1 (`Test for Possible Matches between Vendors and Employees" section) above and received the history of payments for the 21-month period from the District. We utilized the history of payments to make the sample selection for procedures#6 and 47 below within this `Partial Matches" section. 6. For those matches selected in procedure #5 above, we selected a sample from the payment history to test to verify the propriety of the payment. In selecting the sample of individual transactions, we followed the AICPA sample size guidance with a maximum sample size per employee of 25 transactions. Results: We selected the sample and tested the items selected in procedure #7 below within this "Partial Matches"section. 7. To verify the propriety of the payments selected in procedure #6 above, the following was performed: a. The District provided procurement policies and procedures indicating the type and amount of approvals required. b. We ensured the reimbursement request or invoice was approved in accordance with District policy noted in procedure#6a above. c. We determined the payment was for goods and/or services that are reasonable given the District's business. d. In the case of vendors selected that are not employees, we verified the District had a W-9 on file. Results: The cash disbursements selected for testing were approved in accordance with the District's policies and were reasonable given the District's business with the exception of one transaction noted in the second paragraph below. Out of the 11 vendors selected for testing, 5 did not have a W-9 on file. The District did not have a W-9 on file because the vendor was set up a long time ago in the system. The W-9 was not a formally documented or consistently followed procedural step by Purchasing to obtain and append a W-9 for newly created Vendor files until the estimated timeframe of 2012. We recommend the District ensures that all vendors in the VMF have a W-9 on file. -4- Partial Matches(Continued) 7. (Continued) Out of 34 cash disbursements selected for testing, one did not have the required approval. This disbursement was a rebate to a District customer in the net amount of$17,226.25. This customer paid fees based on estimated usage and, at year-end, the District calculated the customer fees based on actual usage. In this case, the customer was owed a rebate. The District's policy is that all credits or rebates to customers should be reviewed and approved by the Controller. We did not note the Controller's initials on the customer refund. We recommend the District ensure the required approvals we obtained prior to paying customer refunds. Analvzine New Vendors 8. The District provided a list of all new vendors added during the 21-month period. Results: The District provided the listing of all new vendors added during the 21-month period. 9. The District distributed the list of new vendors to the appropriate personnel who reviewed the list and confirmed that new vendors added to the list were valid. Results: The listing was provided to the Contracts/Purchasing Assistant and the Purchasing Supervisor who signed a representation letter that, to the best of their knowledge, the new vendors consisted of valid vendors utilized by the District for appropriate District daily operations. Review of P.O. Boxes 10. We identified vendors in the VMF with P.O. Boxes as addresses and selected a sample of 25. Results: We identified the vendors in the VMF that had P.O. Boxes as addresses and selected a sample for the procedure#11 below within this "Review of P.O. Boxes"section. 11. We verified the authenticity of the vendor by performing the following procedures: a. Reviewed the form W-9 the District has on file. b. Accessed the vendor websites and/or called the vendor to verify existence. Results: We were able to verify the existence of all vendors with online websites. For 13 of the 25 vendors selected,we were not able to inspect the W-9. The District did not have a W-9 on file because the vendor was set up a long time ago in the system. The W-9 was not a formally documented or consistently followed procedural step by Purchasing to obtain and append a W-9 for newly created Vendor files until the estimated timeframe of 2012. We recommend the District ensures that all vendors in the VMF have a W-9 on file. - 5 - Disclaimer This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. We were not engaged to and did not conduct an examination or review, the objective of which would be the expression of an opinion or conclusion,respectively, on the existence of fictitious vendors.Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. However, no fictitious vendors were uncovered in this agreed-upon procedures engagement. Restriction on the Use of This Report This report is intended solely for the information and use of the Orange County Sanitation District Board of Directors and management of the District, and is not intended to be, and should not be, used by anyone other than those specified parties. A)A" i Aw-z" /1P Irvine, California August 24, 2017 -6 - ORANGE COUNTY SANITATION DISTRICT AGREED-UPON PROCEDURES REVIEW FICTITIOUS VENDOR ANALYSIS FOR THE 21-MONTH PERIOD OF JULY 1, 2015 TO MARCH 31,2017 ATTACHMENT A SECTION: EXACT MATCHES PROCEDURE#2 The following vendors were listed multiple times within the VMF: The Bank of New York Mellon Arms,International Inc City of Fullerton East Orange County Water District Biorem Environmental Inc Aecom Technical Services Inc Alfa Laval Ashbrook Simon-Hartley Inc American Chemical Society American General Life Insurance Company Associated Vacuum Services AT&T Teleconference Services Battery Systems Inc Benshaw,Inc (Regal) Calcoast(California Coastal Commission) Carollo Engineers Corporate Office City of Buena Park City of Los Alamitos City of Stanton City of Tustin City of Westminster Cortech Engineering City of Brea City of Yorba Linda Dancing Coyote Environmental Dartco Transmission Sales & Service Employment Development Dept-Cashier Eppendorf North America Inc First American Title Company Institute of Business Publications ORANGE COUNTY SANITATION DISTRICT AGREED-UPON PROCEDURES REVIEW FICTITIOUS VENDOR ANALYSIS FOR THE 21-MONTH PERIOD OF JULY 1, 2015 TO MARCH 31,2017 ATTACHMENT A(CONTINUED) SECTION: EXACT MATCHES PROCEDURE#2 JP Morgan Chase Bank,NA Lehigh Outfitters,LLC Liberty Pipeline Services Linde Electronics Specialty Gases MSC Industrial Supply Co OFS Brands Holdings Inc Opfiv Security Inc Orange County Vector Control District Parkson Corporation Pine Environmental Services LLC Powercom Quincy Compressor R.F. Macdonald Co Red Wing Shoe Store SCPLRC - Souther California Public Southland Claims Svc Inc T and D Communications Inc TCH Associates/Princeton Case West USAA United Services Automobile Assoc Vaughan's Industrial Repair Wastewater Solids Management Co Willdan Umpqua Bank Bonerts Inc South Coast Circuits Wateruse Association Gallade Chemical Inc Stratus Environmental Inc National Water Research Institute International Paper GRM Information Management Services