HomeMy Public PortalAboutExhibit MSD 30P2 - Demolition Contracts - Contractor Payment Process August, 2017This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD.
Demolition Contracts – Contractor Payment Process FY ’17 AUDIT PLAN - ADDITION
Metropolitan St. Louis Sewer District
Special Engagement
Demolition Contracts – Contractor Payment Process
August, 2017
This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD.
Demolition Contracts – Contractor Payment Process I FY ’17 AUDIT PLAN - ADDITION
The St. Louis Metropolitan Sewer District
Special Engagement
Demolition Contracts – Contractor Payment
Process
August, 2017
Table of Contents
Introduction and Scope .......................................................................... 1
Objectives .............................................................................................. 2
Methodology ........................................................................................... 3
Overall Conclusion and Results ............................................................. 4
Opportunities for Improvement ............................................................... 5
Acknowledgements ................................................................................ 8
INTRODUCTION AND SCOPE
This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD.
Demolition Contracts – Contractor Payment Process 1 FY ’17 AUDIT PLAN - ADDITION
This engagement was not part of the original FY ’17 audit plan. It was added to the plan and performed
as a result of communications received from the Engineering Division regarding District payments
made for demolition contracts. In January of 2017, it came to the attention of the Engineering Division
that, in prior years, advance payments had been made by the District for work for certain demolition
contracts; one contractor was specifically identified by Engineering. Such advance payments are not part
of the normal payment processes of the District. As such, Engineering notified Internal Audit of the
occurrences, which prompted the performance of this audit. The advance payments identified by
Engineering appeared to be isolated to the one contractor and to one District Division Inspector, who has
since retired.
Key information based on Internal Audit’s limited review:
• There is no indication that the contractor was overpaid for the work performed. The advance
payments amounted to approximately $367,000 or 45% of the overall contract amounts for three
demolition contracts.
• At the time, the contactor was bonded and insured for the work.
• The contractor has since been removed from the District’s prequalified contractor listing due to
performance issues.
- (That is, prequalified status was revoked by the District.) For any future work the contractor
will have to reapply and be reapproved and added to the prequalified contractor listing by
the District.
• Internal Audit identified no information indicating that the Division Inspector or any other
personnel profited in any way from allowing the advance payments.
Scope
The scope of this engagement focused on payments to contractors occurring in calendar years 2015
and 2016. The scope excluded the lump sum contracts administered by the District’s Construction
Management (CMs) firms (a different process). From this “net” population, the focus was refined to
review payment transactions from the following categories:
1. Contracts assigned to the retired division inspector.
2. Other demolition contracts – contracts not assigned to the retired division inspector
3. Contracts under the program manager who was assigned to the three identified
demolition contracts.
4. Contracts not included in categories one through three.
Selections were made from each category. All demolition contracts from category one were
reviewed.
OBJECTIVES
This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD.
Demolition Contracts – Contractor Payment Process 2 FY ’17 AUDIT PLAN - ADDITION
Objectives
The overall objectives of this engagement were to verify:
No other instances of advance payments to contractors occurred.
The District’s current internal controls related to the processing of contractor payments are
adequately designed and implemented. Payments are:
- Accurately prepared
- Based on work performed
- Adequately supported by appropriate documentation:
• Properly prepared payment application form
• Daily inspection reports
• Documented reviews and approvals
- Supported by provisions of underlying contract
Assets are adequately safeguarded.
- District stakeholder interests are protected.
METHODOLOGY
This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD.
Demolition Contracts – Contractor Payment Process 3 FY 2016 AUDIT PLAN
Methodology
To accomplish the above objectives, Internal Audit (IA):
• Met with Management to discuss the nature of and the details around the identified
advance payments made to the demolition contractor.
• Held discussions and performed walkthrough procedures with personnel from
Engineering to gain an understanding of the procedures utilized to generate, review,
approve, and process payments to contractors.
• Identified the populations of contracts, as categorized in the Scope section.
- Made selections from each category
• Performed detail testing for payments made for each selected contract. Reviewed to
ensure:
- Mathematical accuracy
- Project progress was proportional to amount of payment
- Supporting documentation was adequate, including:
• Properly prepared payment application form
• Daily inspection reports
• Documented review and approvals
- In compliance with contract terms
OVERALL CONCLUSION AND RESULTS
This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD.
Demolition Contracts – Contractor Payment Process 4 FY 2017 AUDIT PLAN - ADDITION
In the opinion of Internal Audit, in all significant respects, the controls and procedures utilized for the contractor payment process complied with established policies and are effectively designed
and implemented, except for the process to control potential “advance” payments. It should be
taken into account that the process owner did identify and self-report this issue and also initiated steps, prior to this engagement, to strengthen the area. This issue and two other items are
discussed in detail in the Opportunities for Improvement section of this report.
Initial Inherent Business Process Risk: Moderate Risk #
Overall Assessment of Engagement Results: Generally
Satisfactory **
____________________________________________________
DEFINITIONS
How Results Are Assessed ** Engagement results are evaluated as Satisfactory, Generally Satisfactory or Unsatisfactory.
• Satisfactory (clean opinion) – No significant engagement findings2 or material
weaknesses3 were noted. Engagement findings1 may have been noted.
• Generally Satisfactory (qualified opinion, i.e. “except for”) – Results contain
significant engagement findings2. No material weaknesses3 were noted.
• Unsatisfactory (adverse opinion, immediate Management attention required) –
Significant engagement findings2 and/or material weaknesses3 were noted.
Types of Findings 1. Engagement Finding (#Low Risk): An engagement finding is a condition that could adversely affect the organization but is less severe than a significant engagement finding or significant deficiency. Classification includes
process or control deficiencies that are not significant deficiencies as well as includes other low risk or low impact conditions. 2. Significant Engagement Finding (# Moderate to High Risk): A significant engagement finding is a condition that could adversely affect the organization. Definition includes all types of findings, such as irregularities, waste,
ineffectiveness, conflicts of interest, illegal acts, errors, and significant deficiencies in internal control over financial reporting as well as other significant internal control weaknesses. From a financial reporting perspective, a significant deficiency is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is
less severe than a material weakness, yet important enough to merit attention by those charged with governance. 3. Material Weakness (# High Risk): A material weakness is a deficiency, or a combination of deficiencies, in internal
control, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected and corrected in a timely basis. For internal audit purposes, the definition also includes material and/or severe irregularities, waste, ineffectiveness, conflicts of interest, illegal acts, errors, and other material
control weaknesses, etc.
(The term “material weakness” should be thought of as a serious category of significant engagement findings and/or significant deficiencies. However, not all significant engagement findings and significant deficiencies are material weaknesses.)
^ - Definitions are based on guidance from the IIA Standards, GAAS, and the PCAOB.
# - Risk is assessed at the District (Entity) Level. (Risk to the District as a whole)
OPPORTUNITIES FOR IMPROVEMENT
This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD.
Demolition Contracts – Contractor Payment Process 5 FY ’17 AUDIT PLAN - ADDITION
Issue 1 – Payment Process – Prevention of Advance Payments
Condition:
To improve the overall controls around the payment process and ensure the prevention of any
potential advance payments (as described in the front of the report) from occurring in the future, Management is taking the following steps:
• All current Division Inspection and Program Manager Staff are being made aware of the advance payment issue identified in this report. Additional training is being performed to
ensure procedures are clearly understood and properly performed.
• The Construction Program Procedures Manual will be updated to specifically and clearly address this issue. o The updated manual will serve as the training document for any new staff.
• The agenda template is being updated to formerly address the issue of how and when
any lump sum items are to be paid. Recommendation:
IA recommends the District:
• Continue the efforts to fully develop and implement the processes and procedures listed
above.
Risk Rating at District (Entity) Level: Moderate Risk Rating at Business Process Level: High
Process Owner Response:
The Engineering Department agrees with the recommendations presented above.
Date of Implementation: All current Division Inspectors and Construction Management Staff were made aware of the
advance payment issue in January 2017 when the issue came to light. Additional training was
performed on July 14, 2017 to ensure procedures are clearly understood and properly performed.
The Construction Program Procedures Manual was updated on July 24, 2017 to specifically address the payment of lump sum items and this updated manual will serve as a training
document for any new staff. The Pre-Construction agenda template was updated on July 14, 2017 to ensure that the topic of
how and when any lump sum items are to be paid is addressed with the contractor prior to the start of the project.
OPPORTUNITIES FOR IMPROVEMENT
This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD.
Demolition Contracts – Contractor Payment Process 6 FY ’17 AUDIT PLAN - ADDITION
Issue 2 – File Documentation
Condition:
When reviewing project file documentation file, IA noted the following regarding the daily
inspection reports prepared and provided by the District’s Construction Inspectors:
• Of the nine (9) projects reviewed, files for three (3) of the projects were missing daily
inspection reports for certain days or certain periods.
o IA is under the belief that reports were prepared by the inspectors at the
time of the project. However, the fact remains that the reports in question
could not be located or provided at the time of our engagement.
Recommendation:
IA recommends the District:
• Take steps to ensure construction inspection documentation is properly maintained.
Steps may include:
o The addition of a step to the existing standard project close-out checklist to
verify that Daily Inspection Reports are in the construction project file.
o The performance of additional training to reinforce documentation
maintenance requirements.
Risk Rating at District (Entity) Level: Low
Risk Rating at Business Process Level: Moderate
Process Owner Response: The Engineering Department agrees with the recommendations presented above.
Date of Implementation:
The standard project close-out checklist was updated on July 10, 2017 to add an item relative
to the verification that all Daily Inspection Reports are in the construction project file. Additional training on documentation maintenance was conducted on July 14, 2017.
This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD.
Demolition Contracts – Contractor Payment Process 7 FY ’17 AUDIT PLAN - ADDITION
Issue 3 – Mobilization Payments
Condition:
Regarding payments for mobilization, IA noted the following:
• For one project 100% of mobilization costs ($39,000) were paid in December of 2015. Work
did not start until February of 2016.
• For another project, 100% of all project mobilization costs ($558,000) were paid in the first
month for what was described as phase 1 of overall the project. The project is to be
performed in several phases over a two-year period.
• For a third project, 20% of mobilization costs were paid in December of 2016. However, work
did not start until after April 2017 (4-month gap).
Based on the items above, it appears that:
o In some cases, mobilization costs may be paid earlier than necessary or earlier than required
by contract.
o There may be inconsistencies in the amounts paid, for example 100% versus 20%.
Recommendation:
IA recommends the District:
• Take steps to ensure project specifications are adhered to. Steps may include:
o Providing additional training around the processing of payment mobilization costs.
o The addition of language to the Mobilization Payment agenda item for the Contractor Pre-Construction Meeting to further clarify when the Mobilization payments will be
made.
Risk Rating at District (Entity) Level: Low Risk Rating at Business Process Level: Moderate
Process Owner Response:
The Engineering Department agrees with the recommendations presented above. Date of Implementation:
Additional training was performed on July 14, 2017 to ensure that staff has a clear understand as to how and when the mobilization payment should be made based on the standard project specification
language.
ACKNOWLEDGEMENTS
This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD.
Demolition Contracts – Contractor Payment Process 8 FY ’17 AUDIT PLAN - ADDITION
Internal Audit Engagement Team:
MSD Internal Audit:
Todd Loretta Brown Smith Wallace:
Steve Strohman Katy Churovich
We would like to thank District personnel for their excellent cooperation and assistance
during this engagement.
Specifically, we would like to express our gratitude to the following:
Engineering: Rich Unverferth
Marie Collins
Matt Bacon Allen Muehlher
Dan Nichols