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
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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.
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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.
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;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.
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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
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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.
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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.
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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.
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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
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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.
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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.
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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
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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.
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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.
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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.
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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.
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