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Home My Public Portal AboutExhibit MSD 70I - Review of Project Accounting 03-2020This 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 Project Accounting FY 2020 AUDIT PLAN Metropolitan St. Louis Sewer District – Internal Audit Review of Project Accounting March, 2020 Exhibit MSD 70I 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 Project Accounting I FY 2020 AUDIT PLAN The St. Louis Metropolitan Sewer District Review of Project Accounting March, 2020 Table of Contents Overview and Scope .............................................................................. 2 Objectives and Methodology .................................................................. 3 Overall Conclusion and Results ............................................................. 5 Opportunities for Improvement ............................................................... 6 Acknowledgements ................................................................................ 9 OVERVIEW 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 Project Accounting 2 FY 2020 AUDIT PLAN The District is responsible for wastewater collection and treatment as well as storm water management for all of St. Louis City (66 square miles) and 454 miles (approximately 90%) of St. Louis County. Infrastructure and/or system improvements are a major part of the District’s annual activities and a major part of the District’s overall budget. The District’s large investment in capital improvements is a result of several factors: • Consent Decree issued in 2012 (focus is elimination of sewer overflows). • Ongoing/recent regulatory requirements. • Identified system/infrastructure deficiencies requiring intervention or improvement. As such, the District has been in the process of planning for and performing major infrastructure/system improvements over the past several years as part of the Capital Improvement and Replacement Program (CIRP). There are numerous projects and contracts in various stages of completion. District expenditures in this area are significant. The District has budgeted approximately $1.75 billion in project costs to the CIRP over the past five (5) fiscal years. The District Board-approved budgets for the CIRP are as follow: • FY ’16: $299.5 million (229 projects) • FY ’17: $378.5 million (212 projects) • FY ’18: $339.1 million (173 projects) • FY ’19: $381.6 million (196 projects) • FY ’20: $350.1 million (153 projects) A Project Accounting audit engagement was last performed approximately five years ago. Scope: The scope of this engagement consisted of a review of the project accounting and documentation processes utilized by the Engineering, Finance, and Treasury departments. For contract activities/transactions, IA focused on projects that were completed/finalized during Fiscal years 2018 and 2019. OBJECTIVES AND METHODOLGY 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 Project Accounting 3 FY 2020 AUDIT PLAN Objectives: The overall objectives of this engagement were to ensure that the District is capturing and recording authorized and supported project costs in a complete, accurate, and timely manner. Internal Audit (IA) performed procedures to: • Ensure processes and controls are effectively designed and implemented. o Ensure adequate separation of duties. • The capital budget and District assets are adequately safeguarded. o Project costs do not exceed approved budgets amounts. o Project costs are properly reviewed, approved, and authorized. • Ensure project costs are adequately supported and documented. • Ensure all project-related costs are accumulated, captured, and accurately and properly processed. o Project cost amounts contained in the Project file documentation agree to the amounts contained in the Oracle sub-ledger (GL = Project File). • Ensure the communication and coordination procedures utilized between the various departments are designed and operating effectively. o No gaps or “holes” within the inter-department processes exist. Methodology: To accomplish the above objectives, Internal Audit (IA): o Performed walkthrough procedures with District personnel to gain an understanding of the procedures and processes utilized by the District for: - The overall flow of information and data between the departments (Engineering/Treasury/Finance) and the various system modules. - Initializing and approving each project (includes Board approval). - Establishing and approving the funding and the budget for each project (Engineering/Treasury/Finance). o Includes system setup in the District’s award and project budget systems. OBJECTIVES AND METHODOLGY 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 Project Accounting 4 FY 2020 AUDIT PLAN - The accumulation and recording of costs by Engineering personnel for each project through the pay application process: o Procedures utilized by the Field/Division Inspectors to monitor and measure the progress of each project (IA visited actual projects with District inspectors). o Creation and completion of pay application documentation. o Review, approval, and processing of each pay application. - Processing of payment of pay applications by Finance/AP personnel. - The capturing and recording of project costs on the District’s general ledger by Finance personnel. o Includes the application of District labor and overhead costs to the individual projects.  Made a selection of thirty (30) projects for review and testing. For each project, IA reviewed and tested: o Engineering project file/documentation o Finance project file/documentation o General Ledger • Tested/reviewed for: - Completeness of the documentation - Accuracy of the documentation - Agreement/consistency between sources/departments o Engineering = Finance = General Ledger - Cost compliance with budget and ordinance amounts - Appropriate approvals throughout the various stages of each project. 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 Project Accounting 5 FY 2020 AUDIT PLAN In the opinion of IA, in all significant respects, the controls and procedures utilized to perform the project accounting function complied with established policies and are effectively designed and implemented and are sufficient to satisfy internal control objectives. Initial Inherent Business Process Risk: Moderate Risk # Overall Assessment of Engagement Results: Satisfactory** ** Engagement results are evaluated as satisfactory, generally satisfactory or unsatisfactory. • Satisfactory (clean opinion) – No significant engagement findings or material weaknesses were noted. • Generally Satisfactory (qualified opinion, i.e. “except for”) – Results contain significant engagement findings. No material weaknesses were noted. • Unsatisfactory (adverse opinion, immediate Management attention required) – Significant engagement findings and/or material weaknesses were noted. ^ DEFINITIONS 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. 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. 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 Project Accounting 6 FY 2020 AUDIT PLAN 1. Approvals of Initial Pay Applications The Program Manager reviews and approves the initial pay applications as they are prepared for initial submission to the various contractors. However, the processes in place during fieldwork did not ensure this review and approval was formerly documented. Note: Once the pay application is returned from the contractor with a documented approval from the contractor, a documented approval is provided by the Program Manager. However, it is important to obtain a documented approval prior to the initial submission of the pay application to the contractor. Recommendation: IA recommends that Management take steps to ensure that all pay applications, prior to submission of the application to the contractor, receive a documented approval from the Program Manager. Risk Rating at District (Entity) Level: Low Risk Rating at Business Process Level: Moderate Process Owner Response: The Construction Management Division has modified the process to include a stamp on each of the initial payment applications (yellow sheet). The stamp provides a line that the Program Manager will be required to initial and date to document his/her approval prior to submission of the initial payment application to the contractor. Implementation Date: Implemented. 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 Project Accounting 7 FY 2020 AUDIT PLAN 2. Project Files (Engineering) – Missing Documentation When reviewing and testing project files, IA noted the following: 1. Portions of the Daily Field Summaries were missing for four (4) projects. 2. The Field Binder Sheets (field calculation sheets) were missing for two (2) projects. a. It is important to maintain these sheets as they are an essential part of the support for each pay application form. The pay application forms (Contractor’s Pay Estimate Reports) are the basis for the monthly progress payments to the various contractors. - It should be noted that for one of the two (2) projects above, IA did obtain another document (Excel spreadsheet) that was used by a Civil Engineer from the Engineering Division to verify the accuracy of the original field calculation sheets. (This additional review procedure is relatively new and was just added in recent years.) - It should also be noted that the project folders in question were initialed as being “complete” by the Civil Engineers and Program Manager as part of the final review process. Monthly work estimate schedules were also present. Management, as we do, believes the sheets were in the file at the time of final review/preparation and were used as support for the pay application process. Recommendation: IA recommends that Management: 1. Take steps to re-emphasize and re-communicate the importance of properly completing and maintaining the Daily Field Summaries. These efforts should be directed towards the Field Inspectors and the Division Inspectors. 2. Take steps to ensure the Filed Binder Sheets (field calculation sheets) are properly maintained in the project file supporting documentation. These efforts should be directed towards the Field Inspectors, the Division Inspectors, and the Program Managers. Risk Rating at District (Entity) Level: Low Risk Rating at Business Process Level: Moderate 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 Project Accounting 8 FY 2020 AUDIT PLAN 2. Project Files (Engineering) – Missing Documentation (Cont’d) Process Owner Response: 1. During the scope period processes were altered for the Daily Summary sheets, which resulted in some confusion and inconsistencies. In order to address the audit findings and eliminate any confusion that may have existed, the Construction Management Division has established a new procedure for completion, submission, review, and saving of the daily forms. This includes timelines for the completion of this process. On February 27, 2020 a meeting was held with the Construction Inspection team and training was completed on the new process. 2. We know these calculation books were created because the Civil Engineers and Program Managers each initialed that the project folder was complete upon final review. However it is possible that these calculation books were pulled out for some type of quantity verification after the project was reviewed and not refiled properly. To address this issue, the quantity calculations book is now being broken down, scanned, and saved as part of the project file when the project is completed. This will allow us to find these records even if the hard copy of the calculations book is separated from the file. Implementation Date: Implemented. 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 Project Accounting 9 FY 2020 AUDIT PLAN Internal Audit Engagement Team: MSD Internal Audit: Todd Loretta Brown Smith Wallace: Bret Simmons Justin Schoenberger 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: District Personnel: Engineering: Rich Unverferth Allen Muehlher Angela Silberschlag Steve Valli Steve Kadyk Matt Bacon Deb Jarvis Jim Roth Bonnie Hubert Finance: Jessica Berry Kurt Ahrens Jennifer Rice Dea Dlugos Treasury: Marla Hart