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Home My Public Portal AboutExhibit MSD 70C - Review of Inventory Management ProcessThis 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. Review of MRO Inventory FY 2022 AUDIT PLAN Metropolitan St. Louis Sewer District Review of the Inventory Management Process: MRO Inventory (Maintenance Repairs Operations) Fiscal Year 2022 February 2022 Exhibit MSD 70C 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. Review of MRO Inventory I FY 2022 AUDIT PLAN The St. Louis Metropolitan Sewer District Review of the Inventory Management Process: MRO Inventory (Maintenance Repairs Operations) February 2022 Table of Contents Introduction and Scope .......................................................................... 1 Objectives .............................................................................................. 2 Methodology ........................................................................................... 4 Overall Conclusion and Results ............................................................. 5 Opportunities for Improvement ............................................................... 6 Acknowledgements ................................................................................ 9 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. Review of MRO Inventory 1 FY 2022 AUDIT PLAN The area of MRO Inventory (Maintenance Repairs Operations Inventory) was last reviewed by Internal Audit (IA) in 2017 (report issued April of 2017). For the past three fiscal years, the District’s balance for MRO Inventory value was approximately: o $8.3 million at 6/30/19 o $8.0 million at 6/30/20 o $8.5 million at 6/30/21 The District’s Materials (Inventory) Management sites consist of the following nine (9) main locations: 1. Lemay: • Lemay Treatment Plant • Lemay Pump Station 2. Bissell: • Bissell Treatment Plant • Bissell Pump Station 3. Sulphur: • Sulphur Yard • Sulphur Garage/Shop 4. Grand Glaize: • Grand Glaize Hub (yard and small warehouse) • Grand Glaize Garage • Grand Glaize Treatment Plant 5. Mintert • Mintert Yard/Warehouse • Mintert Garage/Shop 6. County Pump Station 7. Lower Meramec Treatment Plant 8. Missouri River Treatment Plant 9. Coldwater Treatment Plant To manage the inventory items and the overall MRO process, the District utilizes an IBM operations system called MAXIMO, which is an asset/maintenance/work order management system. Scope The scope of this engagement consisted of a review of the District’s processes and controls utilized to manage and administer the District’s MRO Inventory assets. Inventory transactions and data for the period of September 2018 through September 2021 (3-year period) were reviewed, analyzed, and tested. 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. Review of MRO Inventory 2 FY 2022 AUDIT PLAN Objectives The overall objective of this engagement was to ensure that the processes and procedures used to manage the District’s MRO Inventory are designed and implemented in a manner that ensures inventory assets are properly safeguarded and utilized in a manner that is effective and efficient. Specifically, Internal Audit (IA) focused on ensuring:  Policies and procedures around the inventory management process are adequately designed, documented, and maintained.  The various sub-processes are adequately designed and implemented, which includes adequate separation of duties across and within the sub-processes below: – Warehouse Management:  Adequate safeguards are in place. o Secure – access is restricted/limited. Small Tools – high priority.  Assets are properly organized (bin-located). o Housekeeping – Purchasing/Ordering Stock-Materials:  Adequate system controls are in place.  Stock/inventory levels are appropriate. o Excess and Obsolete (E&O) identification. o Critical spare identification.  Proper review and approvals. – Receiving:  Physical receipt – Items are stored properly and timely.  Proper review and approvals. – Issuance:  Generation of issuance/pick ticket: o Materials are assigned properly (materials assigned make sense). o Procedures to physically “pick” materials are adequate. o Adequate reviews and approvals. OBJECTIVES (CONT’D) 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. Review of MRO Inventory 3 FY 2022 AUDIT PLAN – Cycle Counts/Inventory Adjustments:  Cycle count frequencies are adequate. (Coverage is adequate.)  Variances are adequately reviewed and researched.  Adjustments/Updates are properly reviewed, monitored, and approved. 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. Review of MRO Inventory 4 FY 2022 AUDIT PLAN Methodology To accomplish the above objectives, IA:  Obtained and reviewed District policies and documentation related to the management of the MRO Inventory.  Performed site visits and conducted interviews and walkthroughs with District personnel. Observed storage and movement of inventory assets and observed operations in real time. – Developed an understanding of and identified: • Key controls and processes used to manage and administer the District’s inventory assets. • Roles and responsibilities of District personnel. • Process and/or control gaps or deficiencies, if any. – Performed test counts of items while on site  Obtained access to the District’s Operation’s system: – MAXIMO (asset/maintenance/work order).  Reviewed, analyzed, and tested inventory data and transactions obtained from the operating system. Areas reviewed included: – Consumption (turnover) and stock levels. – Cycle count performance and results. – Inventory adjustment activity (overlaps with cycle counts). – Transaction activities by system user  Obtained and reviewed listings of system access: – Reviewed for inappropriate access. – Reviewed for separation of duties conflicts. 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. Review of MRO Inventory 5 FY 2022 AUDIT PLAN In the opinion of Internal Audit, in all significant respects, the controls and procedures utilized to manage and administer the District’s MRO Inventory are effectively designed and implemented. However, IA did note a few opportunities for further strengthening processes and improving the District’s efforts to effectively manage and control the inventory maintained at the various District sites. These opportunities 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: 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. 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. Review of MRO Inventory 6 FY 2022 AUDIT PLAN 1. Inventory Levels and Excess and Obsolete (E & O) Condition: When analyzing the quantities and types of inventories the District maintains on hand, IA noted the following regarding inventory levels: • Inventory-on-hand quantities exceeded the average annual consumption for the previous three (3) years by 10.04 times (8.75 – in prior audit). • A total of 9,395 or 75% of 12,541 items (SKUs), as of 9/24/21, had not been used in over 360 days (1 year). (72% in prior audit) o In addition, 7,727 or 62% of 12,541 items (SKUs) had not been used in over 731 days (2 years). (58% in prior audit)  It should be noted that Operations did start an initiative a few years back to reduce or better manage the amount of inventory maintained on hand, potentially reducing operational costs.  It appears to IA that this initiative lost some momentum with the arrival of the pandemic and the uncertainty of parts/supplies availability caused by the pandemic. Supply-chain disruptions certainly influenced the management of inventory levels. Recommendation: To help reduce the amount of inventory maintained on hand and potentially reduce operational costs, IA recommends that Management continue and/or re-prioritize the aforementioned initiative and start to “ramp up” efforts to: • Establish effective optimum stock levels and order points. • Accurately identify critical spares. o Identify non-critical items.  Identify and address E & O items. Risk Rating at District (Entity) Level: Low Risk Rating at Business Process Level: Moderate Process Owner Response: Operations agrees with the recommendation. This is an ongoing effort within operations. Operations over the past two years has identified and classified more items as critical spares as part of the overall asset management program. Operations has continued on a smaller scale due to Pandemic managing inventory and removing non-usable items. The Materials Management department is establishing annual goals to meet this requirement. Over time this will bring us in line with audit recommendation. Date of Implementation: Reinitiate efforts January 2022 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. MRO INVENTORY 7 FY 2022 AUDIT PLAN 2. Separation of Duties Condition: In reviewing inventory system transactions and user access for the system, IA noted the following: - Separation of duty conflicts exist as follows: o Eight (8) individuals have the system ability to order, receive, issue out, enter counts and/or make inventory adjustments, etc. o This number has decreased significantly from the nineteen (19) individuals identified in the prior audit. Management has made significant progress in this area. o Management has also made significant improvements to the controls around the security rights to the system Inventory Module. No unauthorized access was identified in this engagement. (Unauthorized access was identified in the prior audit.) Recommendation: IA recommends that Management continue efforts to eliminate or mitigate any existing separation of duty conflicts. Potential steps include: o Adjusting system access as necessary. o Adjusting processes to ensure duties are physically performed in a manner that maintains adequate separation of duties and/or mitigates the extent of any existing conflicts. o Increasing the workload or responsibilities of the Operations Purchasing Group. IA also recommends that Management continue the processes and efforts to properly control and authorize security rights and access to the system Inventory Module. Risk Rating at District (Entity) Level: Low Risk Rating at Business Process Level: Moderate Process Owner Response: Operations agrees with this point. There are established reports that identify transactions and individual making the entry. These reports are reviewed monthly. The residual individuals identified are part of the Materials Management group and perform the functions as part of their job requirement. Date of Implementation: Ongoing 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. Review of MRO Inventory 8 FY 2022 AUDIT PLAN 3. Review and Approval of Inventory Adjustment Transactions Condition: In reviewing inventory adjustment activities/transactions, IA noted the following: • Adjustment transactions are not supported by any type of documented independent review or approval by Management.  The Inventory Operations Supervisor does monitor and oversee inventory adjustment activities. However, often, he is not independent of the transactions or activities.  It is preferable that Management personnel not directly involved with the transactions perform a review of inventory adjustment activities.  To mitigate this review/approval weakness in the process, Operations did create a Materials Management Adjustment Committee (MMAC), which consists of Upper Management personnel not directly involved with inventory transactions. Finance personnel is also included on the Committee. However, over the past couple years, the Committee has not been meeting regularly. For the Committee to be an effective oversight mechanism for inventory activities (including adjustments), the Committee needs to convene on a more regular basis (quarterly would be ideal). Recommendation: IA recommends that Management develop a more a formal meeting schedule and policy for the Material Management Adjustment Committee (MMAC) and re-prioritize this initiative. Risk Rating at District (Entity) Level: Low Risk Rating at Business Process Level: Moderate Process Owner Response: Operations agrees and has implemented. Date of Implementation: Immediately. 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. Review of MRO Inventory 9 FY 2022 AUDIT PLAN Internal Audit Engagement Team: MSD Internal Audit: Todd Loretta Armanino: Ron Steinkamp Bret Simmons Megan Cable Justin Jacobs Chrisy Pedroli 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: Operations: Bret Berthold Ceasar Rossi Cathy Politte Abby Myer Chonelle Brown Finance: Jean Ferguson Jessica Berry Victor Moore