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HomeMy Public PortalAboutExhibit MSD 11A16 Collection Services Audit December 2009Exhibit MSD 11A16 oilection Service Audit IN December 8, 2009 t. Louis Sewer District Table of Contents Executive Summary 3 Detailed Observations & Recommendations 10 Management Acknowledgement 14 Opportunities for Improvement 15 Appendix: A - Contents of the Observations & Recommendations 18 Executive Summary t. Louis Sewer District Background During fiscal year 2008-2009, the Metropolitan Sewer District (District) had four contracts with collection agencies and two contracts with law firms that handle delinquent customer accounts. Customer accounts are considered delinquent if the customer has not paid their bill within 31 days of the billing date. At that point a late fee of .75% of the balance per month is assessed and added to the outstanding balance. Before placing a customer account with a collection agency, the District has an internal collection process within the Finance Department's Accounts Receivable (A/R) section. If customers have still not paid the District after 120 days, the customer is notified that the bill will be sent to one of the four collection agencies: 1. Credit Control, LLC (CRC) 2. Consumer Collection Management, Inc. (CCM) 3. Revenue Assurance Professionals, LLC (RAP) 4. Medicredit Corporation (aka TOG, The Outsource Group) The collection agencies contact the delinquent customers by both letter and telephone to encourage payment. Each of the collection agencies uses skip - tracing techniques to acquire valid addresses and phone numbers to contact the delinquent customer. As long as the account is delinquent, late fees will be added to the outstanding balance for collection. When payments are received on delinquent accounts, the collection agency receives a portion of the collected amount (whether the payment is made directly to the collection agency or to the District). Any funds collected directly by the collection agency are deposited to an MSD account and the collection agency invoices the District for their portion of the amounts collected (17%). If after a period of time no payments are received on a delinquent account, the District will usually recall the account from the collection agency. The District will then determine whether to send the account to a law firm for litigation. The law firms will send a demand letter to the customer and then file suit to recover the outstanding amount at the time of filing (any additional fees and charges after the court filing date must be handled in a separate collection effort from the lawsuit). The District uses two law firms: 1. John Heimos (Heimos) Law Firm 2. The Gusdorf Law Firm 3 t. Louis Sewer District The law firms receive a fee (16%) of any payments received for accounts in their status and also invoice the District any related expenses (i.e. court cost). The District may also recall accounts from the law firms depending on the situation. As part of the District's internal collection process, liens may be filed on the property. Accounts are classified into various account statuses that help define whether the delinquent accounts should be pursued. The statuses include several dollar thresholds and include: • Property owner is deceased • Bankruptcy • Foreclosed property • Property in a tax sale • Whether water service has been cut-off • Non collectible accounts Collection of delinquent accounts is generally governed by the FDCPA (Fair Debt Collection Practices Act) under the Federal Trade Commission (FTC). Delinquent accounts placed with collection agencies or law firms as of 6-30-09: Per MSD Inventory report 7-1-09 Count Actual outstanding CRC 12,142 11,413,420 CCM 10,068 8,533,743 RAP 14,408 12,746,597 TOG 13,096 11,615,565 Heimos 3,289 7,629,756 Gusdorf 2,759 7,849,008 Audit Objectives & Scope The objectives of the review were: • Evaluate the collection agencies' and law firms' compliance with their contract terms. • Evaluate collection efforts relative to agencies and law firms stated processes, including ensuring older accounts are still actively pursued. • Evaluate the remittance of funds collected by the agencies and law firms. • Other procedures as deemed necessary. 4 t. Louis Sewer District The review period addressed accounts placed with the collection agencies and law firms during the period July 1, 2008 through June 30, 2009. Sample of accounts were as follows: • Prior accounts - 10 accounts for each of the 6 agency/firms placed prior to FY 2008-2009 = 60 accounts • Current accounts - 25 accounts for each of the 6 agency/firms placed during FY 2008-2009 = 150 accounts • Invoiced accounts - 25 accounts with an invoiced amount for each of the 6 agency/firms during FY 2008-2009 = 150 accounts Approach & Methodology To accomplish the audit objectives, Internal Audit: • Obtained and reviewed documentation such as contracts, the District's request for proposal, the agencies' and firms' proposals, policies and procedures, and other pertinent documents to obtain an understanding of the collection processes utilized by each agency and law firm. • Conducted testing on a sample basis to determine overall compliance with the contracts and reasonableness of the collection efforts. • Conducted testing on a sample basis to determine that the funds collected by the agencies and law firms was remitted in full in a timely manner, and that fees were charged in accordance with the contract. • Conducted testing on a sample basis to determine compliance with any other key terms of the contracts and RFP. • Developed findings and recommendations, and suggested any process improvements as applicable. Conclusions and Summary of Observations and Recommendations Overall, the firms and agencies were in compliance with their agreements. However, there are recommendations for the following observations, which if implemented, could assist MSD in strengthening its procedures, improving its processes and meeting its overall strategic objectives: 1.1 Update process to prevent placement of Government accounts with collection agencies. 1.2 Verify supporting documentation for court costs before payment to law firm. 5 ;t. Louis Sewer District 1.3 MSD should ensure required policies and processes are documented in the contract documents and internal policies and procedures. These items are discussed below in the section, Detailed Observations and Recommendations. 6 Metropolitan St. Louis Sewer istrict Engagement Name: Collection Services Audit Fieldwork Completion Date: November 6, 2009 Audit Reporting Date: December 8, 2009 Initial Inherent Risk: High Overall Audit Rating: Satisfactory Issue Risk Rating Director Mgt Response Action Date 1.1 MSD performs Moderate Jan Management concurs. November 2009 collection efforts on government accounts, rather than placing with collection agencies. However, MSD does not flag these accounts to prevent transfer to the collection agencies. MSD relies on the collection agencies to identify and return the accounts. Zimmerman However, we respectfully disagree with the risk rating/exposure assigned to this observation. As a professional courtesy to other governmental entities, the District tries not to assign related accounts to collection agencies and to collect them internally instead. However, whether collected internally or by a collection agency the most important factor is that the ultimate goal of collecting the balance due is met and this is achieved when accounts are assigned to agencies. The District's current billing and collections system does not accommodate specific flagging of government accounts that would make them collection exempt automatically. In order to implement such technology additional cost would be incurred by the District. The District has plans to upgrade its billing and collection system within the next two to three years and this item will be 7 Louis Sewer District considered while investigating such. In the interim, the District will query its system on a regular basis in an attempt to identify such accounts based on their naming conventions (i.e. City of, State of, etc) and recall them from collections and manually set them to be collection exempt. 1.2 Law firms bill Moderate Jan Management concurs. December 2009 MSD for court costs incurred in its collection efforts. However, the invoices do not include supporting documentation to allow verification that the costs billed are valid and accurate costs. Zimmerman While this recommendation is considered too voluminous for 100% review and prohibitive based on current staffing, the Department will require the law firms to provide such supportive documentation and review it on a sample basis for each invoice. The District will also implement the recommended reasonableness testing. 1.3 Minimum Low Jan Management concurs. This is standards and Zimmerman However, management considered an processes for law respectfully disagrees that ongoing effort firms, besides the RFP is the place to as the those required by law, present such policy and procedures should be considered and procedure documents. The Department is are reviewed documented in the currently in the process of at least RFP to ensure documenting procedures annually and more consistent for its major processes. updated to processing, avoid As these procedures reflect misunderstandings become available they are changes in the related to responsibilities over the accounts, and ensure a more equal basis for shared with the agencies and firms as separate documents. Highest priority has been placed process. 8 It. Louis Sewer District evaluating the law on those that aid in the firms. collections process. To date procedures for the Also, there may be following processes have some policies that been documented: are not Deceased owner account incorporated into processing, Lien the RFP and/or placement and releasing, MSD's written Accounts for Legal policies and Referral and Remittance procedures. processing. The Department will continue to document all of its major processes and provide them as appropriate to the agencies and firms. Internal Audit gratefully acknowledges the cooperation of the Finance Department and Accounts Receivable section during this audit. Internal Audit was not restricted from access to information to complete the audit. Access to all departmental records and personnel were provided by Management as requested. 9 It. Louis Sewer District DETAILED OBSERVATIONS AND RECOMMENDATIONS 1.1 Update process to prevent placement of Government accounts with collection agencies Observation/Finding: MSD performs collection efforts on government accounts themselves, rather than placing with collection agencies. MSD prefers to deal with government agencies directly since agencies often receive and pay differently than a commercial organization - such as a local municipality waiting to receive funds from the state or federal government to make payment to MSD. MSD is confident of eventual payment so it is unnecessary to involve a collection agency. However, MSD does not currently have a process to flag these accounts to prevent transfer to the collection agencies. MSD relies on the collection agencies to identify and return the government accounts. This increases the risk that the accounts will not be recalled and MSD will be liable to pay the commission fees on accounts that would generally be collectible by MSD. During our review, we noted that collection agencies currently had government accounts placed with them. Based on a query of the 7/1/09 monthly inventory report, we identified 131 accounts with a balance of $54,132 that was currently placed with the 4 collection agencies. Most of the accounts had been placed in 2008 and 2009. When this was pointed out, MSD did recall the accounts for their internal processing. If the accounts had all been collected at 17% commission, the agencies would have been paid $9,202 in commissions for their work. However, there may have been accounts previously collected resulting in fees paid to the agencies. Risk Rating / Exposure: Moderate - Due to MSD potential liability for commissions on accounts that would generally be collected. Recommendation: We recommend that management review again methods to classify government accounts in a manner where the accounts are not placed with the collection agencies rather than relying on the agencies to return the government accounts after they have been placed with them. 10 t. Louis Sewer District Manager / Response with implementation date: Management concurs. However, we respectfully disagree with the risk rating/exposure assigned to this observation. As a professional courtesy to other governmental entities, the District tries not to assign related accounts to collection agencies and to collect them internally instead. However, whether collected internally or by a collection agency the most important factor is that the ultimate goal of collecting the balance due is met and this is achieved when accounts are assigned to agencies. The District's current billing and collections system does not accommodate specific flagging of government accounts that would make them collection exempt automatically. In order to implement such technology additional cost would be incurred by the District. The District has plans to upgrade its billing and collection system within the next two to three years and this item will be considered while investigating such. In the interim, the District will query its system on a regular basis in an attempt to identify such accounts based on their naming conventions (i.e. City of, State of, etc) and recall them from collections and manually set them to be collection exempt. Tentative implementation date: November 2009 1.2 Verify supporting documentation for court costs before payment to law firms Observation/Finding: Per contract, the law firms are allowed to bill MSD for court costs incurred in its collection efforts of MSD accounts. However, the invoices submitted by the law firms do not include supporting documentation for the costs actually paid by the firms. As such, MSD cannot independently verify that the costs billed are valid and accurate costs. Based on limited testing, we did not note any instances of unsupported invoices. Risk Rating / Exposure: Moderate Recommendation: We recommend that management require the law firms to include supporting documentation of court costs with its invoices and management verify the supporting documentation before making payment to the law firms. MSD may also consider alternative review procedures to gain a comfort level of the validity of charges invoiced. One alternative may be to do a reasonableness 11 t. Louis Sewer District review. For instance, some costs are set fees by the City/County for the particular type of action. A reviewer should be able to note whether a fee agrees to those established rates. Also, the reviewer can verify the account to MSD's system to make sure the debtor is actually an MSD account and that duplicate charges have not been previously billed for the account. Manager / Response with implementation date: Management concurs. While this recommendation is considered too • voluminous for 100% review and prohibitive based on current staffing, the Department will require the law firms to provide such supportive documentation and review it on a sample basis for each invoice. The District will also implement the recommended reasonableness testing. Tentative implementation date: December 2009 1.3 MSD should ensure required policies and processes are documented in the contract documents and internal policies and procedures. Observation/Finding: We noted the following: A. The complete Contract documents are comprised of the contract, MSD's Request for Proposal and the contractor's response to the RFP (Proposal). These documents taken together should govern the collection process. Even though MSD's RFP outlines various performance measures and the firms' proposals outline their processes for pursuing the accounts, MSD's RFP does not specify the minimum processes the District expects its subcontracted Law firms to follow when pursuing delinquent accounts (this may be acceptable to some degree). As a result, the firms may employ significantly different practices, timing of procedures, etc. While the attorneys' practices are driven by the legal system, there may be additional practices MSD may require. Minimum standards, besides those required by law, should be considered and documented to ensure more consistent processing, avoid misunderstandings related to responsibilities over the accounts, and ensure a more equal basis for evaluating firms. 12 t. Louis Sewer District B. There may be some policies that are not incorporated into the RFP and/or MSD's written policies and procedures. Some examples are: • Government accounts are not to be placed with collection agencies and law firms. • If a customer files a Chapter 7 bankruptcy and the account is with a law firm, then the account is recalled. But if the customer files a Chapter 13 bankruptcy, the account stays with the law firm to oversee the Trustee payments. Undocumented policies may result in failure to properly apply or adhere to those policies. Risk Rating / Exposure: Low Recommendation: We recommend that MSD consider establishment of minimum standards within the RFP and/or require the law firms to document how minimum standards will be addressed in their proposals. We recommend MSD formalize any of its unwritten policies and procedures related to accounts placed for collection with the collection agencies and law firms. Manager / Response with implementation date: Management concurs. However, management respectfully disagrees that the RFP is the place to present such policy and procedure documents. The Department is currently in the process of documenting procedures for its major processes. As these procedures become available they are shared with the agencies and firms as separate documents. Highest priority has been placed on those that aid in the collections process. To date procedures for the following processes have been documented: Deceased owner account processing, Lien placement and releasing, Accounts for Legal Referral and Remittance processing. The Department will continue to document all of its major processes and provide them as appropriate to the agencies and firms. Tentative implementation date: This is considered an ongoing effort as the procedures are reviewed at least annually and updated to reflect changes in the process. 13 It. Louis Sewer District Management Acknowledgement I have reviewed the report including management responses. I agree with the observations and recommendations, unless otherwise indicated, and will take the appropriate measures and responsibility for implementing the corrective actions with the specified timeframes. Process owner's signature Is/ Janice M. Zimmerman, Director of Finance 14 Opportunities for Improvement t. Louis Sewer District The following are suggested opportunities for improvement in the management of the collection process that the Finance Department should consider but need not respond to in this audit report. While these suggested changes could improve or enhance the Division's system of internal controls or operational efficiency, their impact is lower than the recommendations noted above. 1) Evaluate the number of subcontractors to fit the collection workload - The District reviews the performance and adequacy of subcontracted work on an on -going basis. We encourage the District to continue its process of continuous evaluation and improvement. Towards that end it is suggested that the District identify factors to be considered in determining an optimal number of subcontractors to work with and adjust the number of firms accordingly. For instance: • With fewer collection agencies, there may be an opportunity for increased consistency in the collection strategies if accounts are pursued by same agencies. An obvious concern would be the ability of agencies to handle increased workloads. This would require further evaluation by the District. The agencies state they are capable of handling additional capacity since their automated systems can handle the incremental increase. Depending on how the accounts are distributed to the remaining agencies (i.e. based on client name and splitting the alphabet), the agencies could be more efficient by working accounts they have received previously and by receiving all related accounts by a customer name. • With fewer collection agencies, there may be an opportunity for the District to operate more efficiently. For example, having two agencies instead of four, there would be two fewer agencies to transfer information to each day, fewer monthly reconciliations to review, and fewer invoices to process to pay the agencies even though the number of customer accounts are the same (just distributed to fewer agencies). • With more collection agencies and law firms, there may be an opportunity for increased collection rates on accounts as the agencies have fewer customer accounts to work. 15 t. Louis Sewer District 2) Reduce accounts in recall status - Discussions with Collection agencies and District personnel indicate there may be bottlenecks and delays in recalling accounts to the District for potential litigation. This process involves the District evaluating whether the account is worth the additional expense of litigation and placing the account with a law firm. For instance, the agency RAP, noted as of October, it has 1,418 accounts totaling $3.2m that have been referred back to the District for litigation, but are still waiting recall by the District. These accounts were referred back during the period January 2009 to October 2009. If delinquent account processing is delayed during the litigation processing, the District may need to increase the law firms used or look for alternative methods to speed the litigation process. The Finance Department has began taking steps to address this, such as hiring additional staff and utilizing overtime hours, and involving the law firms in the upfront research on accounts that potentially may be forwarded for litigation. 3) Reduce bottlenecks in the lien process - A bottleneck may exist in placing liens on property for delinquent customers. Since the use of liens is about as strong a practical leverage as the District has in getting payment, the District should make sure it uses this leverage to full advantage (i.e. the District cannot turn water service off, avoids stopping sanitary sewer service, and avoids reporting delinquencies to credit reporting services). If a bottleneck exists, the District should investigate methods of processing the backlog, i.e. more efficient processing, use of technology, outsourcing. The District notes they are already considering a Request for Proposal to identify resources to assist in the lien process and may consider sale of liens. 4) Utilization of intermediate collection methods - In reviewing the collection process with collection agencies, it appears that some delinquent customers wait to make payment until the account is placed with a third party collection agency. The District should review use of a step in between their internal collection process and that of a collection agency that may prompt payment without placing the account with a collection agency. Some collection agencies provide a customer relations assistance program that may speed payment before placement to a collection agency. The programs are intended to be a more customer friendly approach to encouraging payment as compared to typical collection agency methods. The District has apparently reviewed this type of plan in prior years but decided against them. Periodic revisit of the service and the cost may be warranted. 16 t. Louis Sewer District 5) Reduce manual processes and paper load - Review opportunities with collection agencies and law firms to reduce the manual processes and hard copy reporting where practical to take advantage of technology and speed the overall process of collecting on delinquent accounts, i.e. reduce the amount of hard copy documents for recalled accounts; file change of address information electronically. 17 t. Louis Sewer District Appendix A — Contents of the Observations & Recommendations The following is an overview of the content for the observations and recommendations contained in this report. • Observation: Presentation of key operational and/or service issue. • Exposure & Risk Rating: Assessment of the issue implications and value assignment of likelihood and impact of the identified issue / risk: The three categories are as follows: High: Observations that pose a significant risk to the District Moderate: Observations that pose a moderate risk to the District Low: Observations that pose a minor risk to the District • Recommendation: Suggestions to assist management in formulating an action plan to address the issue / risk. • Management Response: To be submitted to Internal Audit Services within 10 business days of receipt of final draft report by assigned stakeholders. Internal Audit will present this information to the District's Audit Committee until the issue / risk is resolved or sufficiently mitigated. 18