Proprietary & Confidential
FINAL REPORT
City of Stockton
CAPITAL ASSETS INTERNAL CONTROLS INTERNAL AUDIT
June 7, 2022
Moss Adams LLP
999 Third Avenue, Suite 2800
Seattle, WA 98104
(206) 30
2-6500
Attachment A
Capital Assets Internal Controls Internal Audit Report
FOR INTERNAL USE OF CITY OF STOCKTON ONLY
Table of Contents
Executive Summary 1
A. Scope and Methodology 1
B. Summary of Findings and Recommendations 1
Background, Scope, and Methodology 3
A. Background 3
B. Scope and Methodology 3
C. Commendations 6
Findings and Recommendations 7
Process Improvement Opportunities 12
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EXECUTIVE SUMMARY
Moss Adams LLP (Moss Adams) was contracted by the City of Stockton (the City) to evaluate and test internal controls related to the City’s capital asset management function, including reviewing the process of acquisitions, classification, tracking, maintenance, and retirement of assets, as well as assess the overall adequacy of the asset management function. The internal audit was originally started in April 2021; however, due to delays and issues that the City encountered during the transition to their new enterprise resource planning (ERP) system, Tyler Munis (Munis) fieldwork procedures were put on hold and were not able to be completed until May 2022.
We performed a variety of procedures to test internal controls and assess the overall asset management process for adequate controls, testing the completeness and accuracy of asset listings, and assessing the asset lifecycle recorded in the system from acquisition through disposal, including the tracking, safeguarding, inventorying, and depreciating of assets on hand in comparison with best practices.
This engagement was performed in accordance with Standards for Consulting Services established by the American Institute of Certified Public Accountants. Accordingly, we provide no opinion, attestation, or other form of assurance with respect to our work or the information upon which our work is based. This report was developed based on information gained from our interviews and analysis of sample documentation. The procedures we performed do not constitute an examination in accordance with generally accepted auditing standards or attestation standards.
FINDINGS AND RECOMMENDATIONS
1. Finding
Asset additions, including property tags issued, are not being consistently documented and reported, and updates to the Capital Asset Listing in Munis are not occurring timely.
Recommendation
Update City policies to address specific requirements and responsibilities for asset addition reporting, and tagging, and consider developing training to support individual departments responsible for asset management.
2. Finding
A physical inventory of the City-wide capital assets has not been performed since 2011 and a spot check/audit process is not established, which can result in inaccurate financial reporting, a lack of accountability, and asset additions, disposals, and transfers not being identified timely.
Recommendation
Perform an annual physical inventory count of all City capital assets, update policies to provide more comprehensive guidance and requirements for performing an effective inventory, and implement a regular spot check/audit process.
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FINDINGS AND RECOMMENDATIONS
3. Finding
Asset disposals and transfers are not reported timely, which can result in inaccurate financial reporting, lack of accountability, and increased risk of misappropriation.
Recommendation
Develop policies addressing the handling of asset disposals and transfers; develop a form to consistently capture relevant information; and assign accountability for related reporting.
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BACKGROUND, SCOPE, AND METHODOLOGY
The City transitioned to a new ERP system, Tyler Munis (Munis), in fiscal year 2021. The original transition to the new ERP occurred in January 2021; however, there was a delay in reconciling capital asset data from the old system (HTE) to the new system. As a result of the delay, the capital asset additions, disposals, and other changes that occurred in fiscal year 2021 (i.e., July 1, 2020 through June 30, 2021) were not recorded in Munis until October 2021. The City then reported that they had fully reconciled the capital asset data in January 2022. The City’s Accounting and Finance Department is responsible for monitoring general ledger (G/L) activity and working with City departments to obtain the appropriate supporting documentation, to ensure that asset additions, transfers, and disposals are properly recorded in the Capital Asset Listing. In fiscal year 2021, the City reported approximately $120 million in capital asset additions.
Moss Adams was contracted by the City to perform an internal audit over internal controls related to the City’s capital asset management function and to identify opportunities for improvement. This internal audit was performed as part of the Fiscal Year (FY) 2020–2021 Internal Audit Program. The internal audit originally started in April 2021; however, due to the ERP implementation and the reconciliation delays described above, the internal audit was put on hold until early 2022 and the fieldwork procedures were completed in May 2022.
The scope of this project was focused on internal controls related to the City’s capital asset management processes and was performed to assess the following objectives:
Determine whether adequate internal controls were in place over the acquisition, classification, tracking, maintenance, and retirement of assets.
Evaluate the City’s maintenance and replacement forecasting schedules and processes. Evaluate the City’s capital asset inventory process for adequacy. Assess the reconciliation that was performed during conversion between the old system and the new system (Munis).
The procedures performed included:
Interviews and Inquiries: In order to gain an understanding of the specific processes, controls, and overall asset management function, we conducted interviews with City personnel specifically within the Accounting and Finance Department.
Document Review: We reviewed the existing City policies and other resources related to capital assets including the Asset Accountability – Capital Assets policy, Capital Equipment Inventory Number Assignment Form, GIS preventative maintenance schedules, GIS replacement forecast schedules, and the Fleet Departments Budget and Inventory forecast.
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New Enterprise Resource Planning (ERP) System Implementation Analysis: We interviewed City employees to determine how the ERP reconciliation was performed and obtained a listing of the City-wide assets data that was exported from the old system and uploaded to Munis. We performed a high-level reconciliation between the balances in the old system and Munis, and for variances identified, we requested any supporting documentation available, including the related journal entries recorded to adjust balances.
Testing: We performed the following detailed testing procedures:
○ Capital Asset Additions, Receiving, and Tagging:
− Asset Additions: To evaluate and test the City’s procedures for identifying and recording capital asset additions, we performed the procedures below. We obtained the G/L detail for all capital asset accounts for the period of July 1, 2019 through June 30, 2021. Using these listings, we randomly selected a sample of 15 purchases from each system (HTE and Munis), obtained all supporting documentation that was available to support the related purchase, and tested for the following:
○ Requested the Capital Asset Addition Form to determine if departments were submitting these prior to the system change and after the system change (even though quarterly reminders have not been performed this last year). ○ Requested the current Capital Asset Tag Log reports from the related departments showing the department is tagging and tracking capital assets they oversee and, specifically, whether the selected asset appeared to have been tagged.
○ Requested the invoice supporting the transaction and assessed whether the asset appeared to have been correctly coded to a Capital Asset G/L account. ○ Determined if those assets recorded at June 30, 2020 and before were correctly recorded in the Capital Asset Module (HTE) and whether all information on the Capital Asset Addition Form was entered into the system correctly. We obtained the G/L detail for all repairs and maintenance accounts to assess for the potential miscoding of assets as expenses between July 1, 2020 and June 30, 2021.
We attempted to quantify the potential miscoding risk and randomly selected a sample of 20 transactions from both the HTE and Munis systems and reviewed the supporting documentation to determine if the transactions appeared to be properly recorded as repairs and maintenance or if they should have been capitalized. We reviewed the City’s Capital Asset Addition Form, existing policies and procedures, and the results of the procedures performed above, and assessed whether the City appeared to have resources in place to encourage accurate and timely reporting of capital asset additions. We also assessed the existing form being used to the information/demographics required for the new ERP to determine if updates are needed for the new ERP.
− Receiving and Tagging: We analyzed the results from above and determined if departments were:
Tagging assets upon receipt.
Tracking the asset tags that have been issued via a Capital Asset Tag Log.
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Based on the results of the procedures above, we assessed whether placing accountability on individual City departments for tracking, reporting, and tagging capital assets appeared to be functioning at an acceptable level and whether departments have adequate policy resources and guidance to perform these duties independently or if these responsibilities should be centralized with another department such as Accounting and Finance.
○ Disposal/Transfer of Assets: To evaluate and test the City’s procedures and controls for identifying and recording capital asset disposals and transfers, we performed the following:
− We met with City personnel to develop an understanding of the current process in place for monitoring disposals and transfers.
− We attempted to quantify the number and amount of disposals and transfers that occurred in fiscal year 2020.
− We evaluated the City’s current policies and procedures related to disposals/transfers for adequacy in guiding the process for disposing or transferring of assets to identify opportunities for improvement of City policies and training that should occur for departments.
− We obtained any forms utilized for the disposal/transfer process to evaluate for ease of use and efficiency.
○ Physical Inventory Counts: We requested all documentation related to the most recent physical inventory counts for capital assets performed, including support for the physical counts, documentation of who performed the count, and documentation of the final reconciliation and resulting adjustments. We assessed the documentation to determine whether:
− Inventory counts were performed within the last fiscal year. − Inventory counts were performed by someone independent of those responsible for the assets.
− A full inventory was performed of all City capital assets, and the inventory process appeared to be effective and well-controlled.
− A reconciliation was performed, any variances identified were researched, and documentation of resolution was made.
We evaluated any existing instructions that are used to conduct the physical inventory counts to assess whether they promoted an accountable and accurate inventory process. ○ Maintenance: We performed inquiries to determine whether the City was tracking preventive maintenance for capital assets. We requested all preventative maintenance schedules that the Public Works Department and Municipal Utilities Department had on record to determine whether the system being used (GIS) was tracking maintenance performed, by asset class, and the related costs. We assessed the schedules for adequacy and effectiveness. We researched best practices in this area to assess what other cities are doing to track asset maintenance and assessed the overall cost of repairs and maintenance related to City assets.
○ Replacement Forecasts: We performed inquiries to determine whether the City is utilizing replacement forecasts to budget and plan for upcoming capital asset replacements. We reviewed the City policies and municipal code requirements related to maintaining replacement schedules and researched best practices for opportunities for improvement of the City’s current practices in this area.
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Although the focus of this assessment was to identify opportunities for improvement, it is important to note the areas of commendable operations. The City should be commended for the following accomplishments:
Policies and Procedures: While policies and procedures related to the asset management function were last updated in 2007, they still provide a good baseline for implementing updated policies and procedures.
Readiness for Change: During interviews, feedback from City employees indicated an eagerness to implement improvements to the asset management function.
We would like to thank City staff and management for their willingness to assist with this project.
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FINDINGS AND RECOMMENDATIONS
1. Finding Asset additions, including property tags issued, are not being consistently documented and reported, and updates to the Capital Asset Listing in Munis are not occurring timely.
Recommendation Update City policies to address specific requirements and responsibilities for asset addition reporting, and tagging, and consider developing training to support individual departments responsible for asset management.
Capital Asset Additions
Best practices require that capital asset additions are promptly tagged upon receipt and added to a centralized tracking system/listing to ensure accurate financial reporting and proper safeguarding and accountability of City assets. The City deploys a decentralized method of tracking City assets, which requires individual departments to receive, tag, and report capital assets purchased to the Finance Department for recording of the addition in Munis. Throughout fiscal year 2021, capital asset additions were not recorded in a timely manner due to the system conversion from HTE to Munis and the delays in reconciling data. As a result, capital asset purchases between July 2020 and June 2021 were not recorded as additions in Munis until October 2021, several months after the fiscal year-end.
The City invested over $120 million in capital asset additions during FY2021. The City should ensure that capital asset additions are reviewed and recorded timely, which will reduce the risk of errors and provide more accurate financial reporting for capital planning decisions.
The City’s current Asset Accountability, Capital Assets policy states that departments must complete a “notice of Inventory Number Assignment Form” to report capital asset additions to the Finance Department. However, the actual form being used for reporting additions is the Capital Asset Addition Form. When a new asset is purchased, and it is deemed to meet the City’s capitalization threshold, individual City departments are required to complete this form and provide it to the Finance Department for recording the asset in Munis, which adds the asset to the City’s Capital Asset Listing.
We assessed the form fields, and they are comprehensive with easy-to-follow instructions. However, the forms are not consistently being utilized and submitted to the Finance Department. During our testing of the supporting documentation for asset additions, we identified eight out of 11 instances where a Capital Asset Addition Form should have been completed; however, the City was unable to locate the completed forms.
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The City should consider updating the Asset Accountability, Capital Assets policy to reference the current form being utilized (the Capital Asset Addition Form) and define the timeline requirements for completing the form and submitting it to the Finance Department. The policy should also address where the completed forms will be retained and the timeline requirements for recording asset additions in Munis. Given the decentralized nature of capital asset management at the City and the responsibilities that reside with individual City departments, consider developing training for all personnel that are involved in the capital asset management function that covers the City’s policies, department responsibilities, and how to identify, tag, document, and report capital asset additions.
Receiving and Tagging
Fixed assets are assigned unique identifying tag numbers to allow for asset identification and tracking to ensure that all assets are clearly identified as City of Stockton property. Individual departments are responsible for receiving assets, tagging assets upon receipt, and tracking tags issued via a department Capital Asset Tag Log or other tracking mechanism. Departments are supposed to report the receipt and tag issued on the Capital Asset Addition Form, which is submitted to the Finance Department for recording the tag number in Munis.
During our analysis of the supporting documentation for 21 asset additions, we identified seven instances where the assets were not on the corresponding department’s Capital Asset Tag Log or other tracking report showing that a tag was issued, and one instance where a tag appears to have been issued per the related Capital Asset Addition Form; however, it was not included on the responsible department’s log. Given that Capital Asset Addition Forms are not consistently completed, as described above, and the lack of consistent tracking of tags at the department level, there was no consistent manner for ensuring that all City assets are appropriately tagged and tracked.
Departments should be responsible for tagging all City assets immediately upon receipt, and for tracking tags issued. All asset tags should be reported to the Finance Department through the completed Capital Asset Addition Form, which allows for consistent asset tracking through the Capital Asset Listing in Munis. The City should update the existing policy to clearly define tagging requirements and responsibilities as well as perform and verify a full asset tag update during the next physical inventory count during regular spot checks/audits (see recommendation 2 below).
Departments should be trained on their responsibilities for asset tagging and held accountable for ensuring that all assets can be monitored consistently using asset tagging.
2. Finding A physical inventory of the City-wide capital assets has not been performed since 2011 and a spot check/audit process is not established, which can result in inaccurate financial reporting, a lack of accountability, and asset additions, disposals, and transfers not being identified timely.
Recommendation Perform an annual physical inventory count of all City capital assets, update policies to provide more comprehensive guidance and Attachment A
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requirements for performing an effective inventory, and implement a regular spot check/audit process.
Best practices suggest that a physical inventory of capital assets be performed on a regular basis (typically annually or bi-annually) to ensure that capital assets are properly accounted for, tracked, and tagged, and to identify any missing assets timely. The GFOA recommends that, at a minimum, an inventory of tangible capital assets be performed at least once every five years. The City’s Asset Accountability – Capital Assets policy, Section IV, C.1 states:
“An annual physical inventory will be taken for all ISF and GFA equipment. Accounting will coordinate all inventories with the Resource Managers. Resource Managers are responsible for ensuring an inventory is completed for GFA Assets.
Asset listings will be distributed to the responsible departments. Upon completion of the physical inventory, departments are to return the asset listing to appropriate Resource Managers.
Departments are held accountable for any item(s) they are unable to locate. For missing item, the appropriate Resource Manager and Accounting shall be informed. Detailed explanations shall be documented on the asset register.
If in the subsequent year the same item(s) remains in an unable to locate status, they shall be removed from the City’s inventory. A list of assets disposed of in the manner will be forwarded to the City Manager for review.”
Based on discussions with the City, a physical inventory of capital assets has not been performed since 2011, and given that this was approximately 11 years ago, documentation to support the count was not available to review. In addition, the City does not have a current process in place for performing spot checks/audits of assets on regular basis. The lack of physical inventories presents the following risks:
The City’s current Capital Asset Listing may not be accurate for operational decisions and financial reporting purposes.
City asset additions that were not reported or assets (that were previously disposed of but never removed) may not be identified timely.
City assets that are transferred between departments without being reported would not be identified, which could lead to a lack of accountability. City assets that were stolen or otherwise misappropriated may go unnoticed or not be identified timely.
City assets that are not tagged by individual departments upon receipt may not be identified. City asset impairments may not be identified and recorded timely.
In compliance with the City policy, an annual inventory of assets should be performed and accountability for ensuring compliance should be assigned. The City policy should be expanded to address key aspects of an effective physical inventory, including timelines for performing the inventory and whether all asset counts are performed at the same time or if a rotating cycle will be used (i.e., different departments quarterly, ensuring full coverage each year) and responsibilities for performing the inventory, including requiring someone independent of the asset custodian to conduct the count or verify the results. The policy should also be expanded to address specific steps required Attachment A
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for performing an effective physical inventory, including verifying asset conditions, tag numbers, reporting assets on-hand that are not on the listing, etc.
Physical inventories are essential in maintaining appropriate asset records, improving physical asset controls, and ensuring the accuracy of financial reporting. Given the decentralized nature of asset management across the City, consider implementing spot checks/audits of assets on a quarterly basis, rotating between departments. Typically, spot checks/audits are performed by an independent department (such as the Finance Department) and can help identify asset additions, disposals, or transfers, that have not reported, timelier.
3. Finding Asset disposals and transfers are not reported timely, which can result in inaccurate financial reporting, lack of accountability, and increased risk of misappropriation.
Recommendation Develop policies addressing the handling of asset disposals and transfers, develop a form to consistently capture relevant information and assign accountability for related reporting.
The City’s Asset Accountability – Capital Assets policy mentions that disposals and transfers of assets should be reported; however, they do not address responsibilities, timelines, forms to be used, approvals, or other requirements in this area. Through discussions with the City, the Finance department is not being notified of asset disposals when they occur and usually only discover disposals when an asset is auctioned/sold and a related receipt is received. As a result, assets that are disposed of without a corresponding receipt and assets transferred between City departments may not reported and, therefore not recorded in the City’s Capital Asset Listing in Munis. The policy does address the handling/reporting of assets that cannot be located during physical inventories; however, as described in finding 2 above, an inventory has not been performed since 2011.
Given that asset disposals and transfers are not being consistently reported and physical inventories are not being performed, the City’s capital asset balances and the recording of related depreciation may be incorrect, resulting in inaccurate internal financial reporting. In addition, it increases the risk that the City’s large investment in capital assets is not properly controlled, given the listing assigns accountability to department custodians, which results in assets that are more susceptible to theft or misuse. Old assets can go missing, be sold, and the funds misappropriated, and it would likely not be identified.
The City should develop policies addressing the handling of asset disposals and transfers and assign accountability for related reporting. A formalized process should be in place requiring that all asset disposals and transfers be reported to the Finance Department timely and in a consistent manner.
Consider developing an Asset Disposal and Transfer Form that captures information, consistently including:
Date of request
Department name
Department contact
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Capital Asset Tag Number
Asset description, quantity, make/model, serial number, etc. For disposals, disposal type (e.g., surplus, obsolete, damaged, scrap) For transfers, the reason for transfer, receiving department, and the individual who received the asset.
Condition (e.g., poor, fair, good, excellent)
Estimated value
Department approval
Finance Department approval
Departments should be held accountable for reporting asset disposals and transfers timely. During the annual physical inventory and spot checks/audits, as recommended in finding 2 above, disposals or transfers identified that were not previously reported should be researched and corrected, and additional training should occur to ensure that departments are held accountable for reporting asset changes timely.
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PROCESS IMPROVEMENT OPPORTUNITIES
Moss Adams identified three opportunities for process improvement as a result of this internal audit. The following tables summarize these recommendations.
CATEGORY PROCESS IMPROVEMENT RECOMMENDATION
1 ERP Implementation
and Reconciliation
Although immaterial, whenever the City does a system transition, or any kind of update that requires large volumes of data to be transferred/imported in, there should be a timely reconciliation process to verify that the data transferred out/in reconciles. Variances should be identified and resolved at that time to ensure the integrity of the balances going forward. 2 Preventative
Maintenance
During fiscal year 2021, there was approximately $14 Million in repairs and maintenance expenditures. The City utilizes a GIS System to track preventative maintenance. However, there is a significant gap in asset identification and descriptions across the systems which makes it difficult to determine if the GIS System is complete (i.e., tracking all assets where preventive maintenance should be performed).
Additionally, we reviewed the Fleet Department’s maintenance forecasts managed outside of the GIS System (in Excel).
The Department is effectively planning and budgeting for capital maintenance and replacement needs. However, the forecast does not document any maintenance that has occurred or the expected future maintenance dates. As a result, it appears that City could improve on incorporating the latest service dates of when the latest maintenance occurred to track any assets that have not had maintenance performed recently.
The Asset Management Guide for Local Agencies suggests that the management of asset maintenance requires governments to develop effective asset maintenance policies. These policies must integrate and quantify the asset maintenance with service strategies and required asset performance standards. They must result in the provision of maintenance appropriate to the overall portfolio management and individual facility needs. Asset maintenance must always relate directly to service delivery needs. Asset maintenance must be considered at every stage in the life cycle of a building, from the initial acquisition throughout the building’s operational life until disposal. Along with the recommendations above regarding asset identification across systems, we recommend that the City develop a comprehensive policy regarding asset maintenance. The asset maintenance policy should include information about the following:
● What: The inventory of assets that must be maintained ● How: The types of maintenance tasks
● When: The intervals at which each asset is to be maintained (also called the maintenance schedule) ● Who: The skill level required for each maintenance task Attachment A
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CATEGORY PROCESS IMPROVEMENT RECOMMENDATION
3 Replacement
Forecasting
The GIS System does not appear to be monitoring the budgeting and forecasting of replacement costs. We have reviewed the excel document utilized by the Fleet Department, which is effectively forecasting replacement costs of assets and establishing a budgeting program for each asset, however, the forecast could be improved to document the current condition of the assets and expanded to show the budgetary impact of when those assets will be replaced (e.g., an asset with a useful life ending in 2025 should have its replacement costs included in the budget for 2025). The City should consider the following best practices when forecasting replacement costs:
● Increasing asset information stored within the GIS system to summarize each asset class, type, function, and other appropriate descriptors. Age distribution and percent of assets by type are typically used to give a picture of the current system; this includes increasing asset identification across systems improve asset monitoring. ● Quantify the condition of each asset (e.g., good, fair, poor) on a recurring basis that is realistic given the resources available. Additionally, the inspection methodology for each asset type should be documented to ensure consistent evaluations.
● Consider updating the policy with the information above and formalizing procedures in order to use the results to periodically re-evaluate the useful life of assets.
● Monitor the replacement cost and remaining life of assets to assess if assets are being managed effectively. ● Begin budgeting and maintaining a replacement fund for assets that need to be replaced after their life.
Attachment A
Attachment A