Forensic Investigation City of Reading February 29, 2016 s BAKER TILLY Candor. Insight. Results. Sw erec srs AKER TITLY INTERNATIONALines!) ideal he) deed ee) td tid tet ie Ot a tt Mayor Wally Scott City of Reading Forensic Investigation This plan is consistent with the Mayor's campaign promise to implement a forensic audit to ensure that budget figures are accounted for and he will enact positive change for the City, Baker Tily has structured this proposal to identify specific areas of risk for the City to focus its forensic investigation, as well as identifying other financial and operational risks the City faces to assist the effort of implementing Positive Change for the City. Our response is structured as follows: Beker Tily Qualifications ~ About Beker Tilly ~ Forensic Accounting Governmental Accounting ~ Internal Controls ‘Our Understanding of Your Needs ~ Initial Concerns and Observations » Operational and Financial Areas of Risk ‘+ Cash Receipts and Cash Disbursements + Cash Reconciliation Process + Off Balance Sheet Bank Accounts + Accounts Receivables + Fix Assets © Loans / Grants + Revenue + Expenditures ©. Pension Reporting © Time Card Approval © P-Card Activity How Baker Tily Can Help Phase | ~ Phase Il ~ Phase Ill ~ Estimate of Costs In addition to focusing the investigation on financial and operations risks at the City, the Mayor has also requested Baker Tilly to perform a forensic investigation of the operational and financial records at the Reading Parking Authority (the "Parking Authority’) and the Reading Area Water Authority (the “Water Authority’). Baker Tilly intends to structure a similar process for both the Parking Authority and the Water Authority by analyzing the historical financial performance to identify and assess the financial and operational risks that exist. Baker Tilly will reate proposals for the Parking Authority and Water Authority to address the risks and exposure to fraud, waste and abuse.nie on co ela hela heel Mayor Wally Scott City of Reading Forensic Investigation Baker Tilly also recommends that the City consider employing legal counsel for the forensic investigation. This is an important consideration for the investigation because the relationship between accountants and clients does not provide the same protection that is provided in the attorney and client relationship. ‘Above all, Baker Tilly believes the City deserves exceptional service and a plan to ‘address specific areas of risk for the City to ensure Positive Change occurs at the City We look forward to the opportunity to discuss the details of our proposal and answer any ‘questions you may have through the process. Please do not hesitate to contact us with ‘any questions or concerns. Regards, BAKER TILLY VIRCHOW KRAUSE, LLP _— Lu Mp amt Mr David Duffus, CPA/ABVICFF, CFE James T. O'Brien, CPAICFF Partner Partner P: 412607 6404 215972 2308, Email: ¢ Email james chrien@takertily comBAKER TILLY QUALIFICATIONS i INITIAL CONCERNS AND PRELIMINARY OBSERVATIONS. HOW BAKER TILLY CAN HELP eae rer OTN a cy Contents = BAKER TILLY Parer enero ees ry etre 7. cee Colom enc Baker Tily Vechow Krause, LLP Is an independently owned and managed member of Baker Tily Internationaltte 1 Lhd Baker Tilly Qualifications About Baker Tilly Baker Tilly is a top twelve accounting firm per Accounting Today's 2014 "Top 100 Firm: list, with 2 reputation for deep industry knowledge, technical expertise, and leadership. Baker Tily is a partnership, with 292 partners in 29 cities across the country, including Philadelphia, Pittsburgh, Reading, New York, Washington, DC, Chicago, Detroit, Minneapolis, and Dallas. Clients from around the country receive fraud, forensic, audit, advisory, and tax services from Baker Tily's more than 2,500 experienced professionals. ‘These clients span numerous industries including a large client base within the public sector. Baker Tilly was founded in 1931 and has since grown steadily, broadening our services and expanding our geographic presence to meet the evolving needs of our clients. Our ccentral objective is to use our industry specialization to help our clients improve their businesses. Originally, @ regional certified public accounting firm, Baker Tilly has over the years, broadened its service offerings and expanded its geographic presence to meet the evolving needs of its clients. AS an independent member of Baker Tilly Intemational, we bring you access to market-specific knowledge in 133 countries. FLVS Practice ‘The forensic accountant's world consists of assisting attomeys and their clients in the financial matters of a dispute for commercial tigation, an insurance claims, or a forensic investigation that is documenting and reconstructing the financial activity. Typically, forensic accountants research, quantify and present the financial impact of a dispute as it relates to a legal action. In order to be effective, forensic accountants must communicate their findings in a simple, clear and easy to understand manner. We believe our forensic investigation approach is cost effective, while at the same time also being comprehensive to appropriately address our client's needs. Our investigative process involves continual communication with our client as we unravel and document the alleged fraud. Investigating allegations of fraud involves interviewing witnesses, assembling evidence and writing expert reports while always being aware that the findings may be introduced into the legal system with our team acting as expert witnesses or in @ consulting capacity. Our team follows the Fraud Theory Approach; analyzing data, creating and testing a hypothesis and refining and amending that hypothesis as the circumstances dictate. Inherent in this approach are efficiencies that allow our team to never stray far from “point,” finding out all the facts necessary to resolve the allegation(s) and quantify the damages suffered. With offices in Philadelphia, Pittsburgh, New York City, Dallas, Chicago, and Atlanta , our Forensic, Litigation & Valuation Services (FLVS) practice group operates on a national platform serving clients across the United States and intemationally. Our professionals: have been qualified and have provided expert testimony in state and federal courts throughout the United States.at et ee (Our FLVS professionals have diverse skills and vast experience, Our assembled team of ‘experienced forensic accounting professionals has been retained to assist counsel and their clients on complex matters throughout the country. Our team consists of professionals who have experience in providing investigations in the following areas: Financial investigations» Employee ThefvEmbezzlement ‘Asset Misappropriation > Expense Reporting Schemes Medicare Fraud Inventory Losses Money Laundering Insurance Fraud Healthcare Billing Bani/Mortgage Fraud Improprieties Whistleblower Suits Ponzi Schemes Kickback arrangements Phony Vendor Scams Procurement Fraud Governmental Accounting Practice Baker Tilly's audit and accounting practice is organized by industry specialization, allowing our professionals to offer clients 2 deep understanding of their respective industries. Our Government Accounting Practice has a decades-long record of providing forensics, consulting, advisory services, and single auditfinancial management consulting services to a variety of similarly sized municipal entities. Baker Tily understands the issues governments face, providing more than 225,000 hours, annually, to the public sector. Our extensive experience provides us with the ‘specialized knowledge and insight to find effective solutions. In addition, the Government ‘Accounting Practice’s success and experience working with other public sector clients enable them to apply strategies and techniques that have been successful with similar cents Our government clients rely on our expertise to meet their specific auditing, accounting, forensic and operational needs. From helping you manage and optimize your resources to clearly and accurately reporting your funding sources and patterns, you can expect a practical approach, technical insight, and a thorough understanding of the governmental accounting world to work on the City’s behalf, delivering the precise services you need, when you need them, ‘Across the United States, our governmental clients include 346 municipalities and 50 counties. Our public sector specialists are active in national and state organizations, participate in ongoing continuing education to obtain industry certifications, and speak {and author articles on industry trends Internal Audit ‘Our Baker Tily Internal Audit team has extensive experience in partnering with ‘organizations to create, maintain, and grow successful, long lasting, and flexible internal audit functions. (On more than 1,000 engagements, our work as intemal auditors and consultants has helped senior management to attain diverse benefits including ‘Baker Tity chow Krause, LLP isan Independently owned and managed member of Baker Tily Internationali se ad | Enhanced controls; Improved risk mitigation; 7 Increased efficiencies; a Better strategic alignment with the organization's objectives; Streamlined processes and risk management approaches, resulting in cost savings; Better reporting Integration of leading practices into operations and internal control environments; and Access to tools, templates, and resources not available internally. We are continually working witn organization to help eveluate their contol stucture and related organizational design to enable them to achieve their mission and attan thei 1 internal aust goals via outsourcing and co-sourcing arrangements Benefits of Working with Baker Tilly | a a i ca cae ls ee i with the Mayor and the City to pursue the Positive Change as a forward-looking, ee cancel Cue ace ee a ee Se Boker Tily Virchow Krause, LLP is an independently owned and managed member of Bake Tity IntemationalNe @ anh Initial Concerns and Preliminary Observations Mayor Scott raised concerns surrounding limited oversight with respect to the procurement process for capital projects. The Mayor raised these concems as a result of the FBI's focus on the City’s contracting process, specifically the allegations surrounding Mayor Spencer's "pay to play’ process. As discussed more fully below, we have conducted preliminary analyses through review of selected contract documents, analyses, of publicly available information, and discussions with City personnel, including Mayor Scott. Based upon those preliminary analyses, we have identified a number of issues that cause concern, particularly in light of the ongoing FBI investigation. Specifically, we have identified: Potentially overlapping contracts related to the construction at the Waste Water ‘Treatment Plant (‘WWTP’) on Fritz Island, Ineffective and circumvented internal controls surrounding contract related disbursements. Expenditures related to the construction of the WWTP, which to date have exceeded $60,000,000, and which may have provided limited benefit to the City. ‘Allack of overall controls surrounding contracting, which has left the City with the inability to review contracts prior to award, and to identity the population of contracts that have been awarded. ‘Material weaknesses in the internal financial controls at the City, which in many situations have been identified by the City's outside aucitors since at least 2008, and which have yet to be remediated. In our opinion, these are major issues that put the City at risk for fraud, waste and abuse related to City assets, Operational and Financial Areas of Risks We also analyzed the schedule of findings that was included as part of the annual financial statement audit of the City, The period 2006 through 2014 identified significant control deficiencies and material weaknesses within the financial and operational departments of the City, including with respect to disbursements.” The nature of the findings during the audit and the number of years that the deficiency existed is alarming, Further, some of the most basic accounting functions are not being performed which raises additional questions and concems regarding the competency of the City personnel and their abilty to properly execute and report the City's financial activities. Based upon our analyses, research, discussions with Mayor Scott and our experience on similar engagements, the identified deficiencies surrounding the contracting processes ‘and various financial activities represent areas that the City needs to address in order to 8 The 2007 Audited Financial Statements were not available online.Section Header ‘mitigate the operational and financial risks as well as exposure to fraud, waste and abuse. j Operational Risk — Contracting Process ] implementation of the pretreatment program. Due to the complexity and magnitude of this project, several contracts have been ‘awarded and the amount that has already been spent by the City is @ significant concern for the Mayor. Specifically, the Mayor has raised concems surtounding the costs incurred to date, which exceed $60,000,000, and the limited progress that has been ] 1; oie J In the course of our preliminary site work, we analyzed @ small sample of the City’s ‘Accounts Payable Forms related to WWTP contracts and disbursements. Based upon that preliminary analysis, it appears that concerns about the contracting process are well founded. For example, we identified instances where purchases outside the purchase order process exceeded $10,000, which requires multiple sign-offs for proper approval Unfortunately, the signature approvals, as required on the forms, were not present. As a result, we are concemed that the operating effectiveness of the controls over cash disbursements does not exist, which has been an ongoing issue for the City since at least 2008 based upon findings communicated to the City by its external auditor. Due to the lack of oversight of the contracting process, and deficiencies regarding the appropriate approval and monitoring of purchases, the City is at a heightened risk of paying significant amounts for out of scope’ services, or for purchasing items that are inappropriate for the City operations. Furthermore, with the limited historical oversight, We are concemed that the City may experience delays in construction process which Could result in contractor disputes and costly Itigation. Financial Areas of Risk In addition to the preliminary analyses that we conducted around the City's contracting process, we analyzed communications received from the City's outside auditors.’ In performing those analyses we have identified that since at least 2008, the City has been Notified of material deficiencies within the internal control environment, including the following key areas. Ce a “As of the date of this proposal, the 2015 audit has not been performed; therefore, our observations are based on the audit reports available through December 31, 2014 a ‘] eer wien cause LAP aninpenenty oo and managed mere ae Thy erator!Smt te Se ae) 01 Section Header Segregation of Duties - Cash Receipts and Cash Disbursements For the past 7 years, the financial reports from the City's outside auditor have identified segregation of duties as an area of concem. For example, the assistant fo the director of administrative services was given the responsibility to sign on behalf of numerous other individuals, thus eliminating critical review steps in the control process. As a result, there were instances where no documentation existed to evidence that certain members of management had reviewed numerous disbursements which was required under the policy. We are concerned that the City has not addressed the lack of segregation of duties with respect to disbursements for over 7 years. As a result, we believe the risk is s0 prevalent throughout the City that the likelihood of the ability to misappropriate assets is substantial. Furthermore, the fact that this was a control deficiency that was identified in every year between 2008 and 2014 and no one was held accountable or responsible for remediating the significant control weakness is alarming. Management asserted as part of their action plans that the segregation of duties issues would be remediated; however, the same issue was reported year after year. Management did not hold personnel accountable and action plans were not implemented as evidenced by the repeated findings. Managements’ responses year after year were as follows: 2010 ~ As of December 2010, a City Controller was added to the Administrative Services Department. A new procedure has been put into place where the Controller and Purchasing Coordinator sign off on all Accounts Payables and Purchase Orders The Director of Administrative Services signs off on all Accounts Payables and Purchase orders over $4,000 and the Managing Director signs off on Accounts Payables and Purchase Orders over $10,000. Each Department Director must sign ff on all of their Accounts Payables and Purchase Orders. 2011 — A new procedure has been put into place where the Controller and Purchasing Coordinator signs off on all Accounts Payable and Purchase Orders. The Director of Administrative Services signs off Accounts Payable and Purchase orders ‘over $4,000 and the Managing Director signs off Accounts Payables and Purchase Orders over $10,000 respectively. Each Department Director must sign off on all of their Accounts Payables and Purchase Orders 2012 — Management is requiring all authorized signers to be responsible for reviewing payments. Dollar thresholds for the review process are being reviewed for improved efficiency. 2013 - Management is requiring all authorized signers to be responsible for reviewing payments. The assistant to the finance director is no longer permitted 10 sign on behalf of other individuals and changes to dollar thresholds have been made. The City continues to increase the use of electronic purchase orders, with the Administrative Services department directing that City departments to make use of the electronic purchase order process whenever possible, 2014 - The City will enhance its controls over disbursements while improving the timeliness and efficiency of its payment to vendors. ‘Baker Tily Virchow Krause, LLP is an independently owed and managed member of Baker Tiy InternationalBaker Tily chow mks Section Header Cash Reconailiation Process ‘The 2012, 2013 and 2014 audits identified that the preparation of bank reconciliations for the main operating account did not occur. This is @ major red flag concem which also ‘exposed the City to fraud, waste and abuse. Most receipts and disbursements flowed through the main operating account and the response from finance regarding the lack of reconciliation was tumover in finance personnel, a lack of undersianding of all the transactions that are accounted for through the account, and a lack of standard operating procedures prevented the City from accurately reconciling the account. The reconciling of bank accounts is one of the most basic tasks an accounting department performs, as well as one of the most important control functions preventing fraud, waste and abuse. It is alarming that this is an issue that is presented in the findings year after year with nothing ever changing. Management asserted as part of their action plans that the bank reconciliation issues would be remediated; however, the audit finding never changed. Management did not hold personnel accountable and action plans were not implemented as evidenced by repeated findings. Managements’ responses year after year were as follows: 2012 — Management has assigned responsibility to personnel to prepare the bank reconciliations and agree to the associated trial balance accounts. 2013 - Management has accepted the auditor's recommendation and is currently ‘conducting bank account reconciliations on a monthly basis. 2014 — Management is establishing the operating procedures for preparing a timely ‘bank reconciliation, and will be setting up a training for all staff members involved in ‘activity affecting the GDA bank account in order to streamline the reconciliation process, and aid in preparing a timely reconciliation Without accurate bank reconciliations, the City cannot be sure that the financial activity is being recorded properly with the general ledger and also increases the risk for misappropriation of assets to go undetected ‘The schedule of findings indicated that reconciliations were completed in August 2015 for the months ended November and December 2014, as well as January and February 2015 noting a consistent variance of approximately $250,000. We believe a variance of $250,000 is significant Off Balance Sheet Bank Accounts In 2014 the audit also identified that an off balance sheet bank account was discovered. ‘Specifically, the City assumed collection of delinquent recyciing accounts back from a third party collector. These receipts were deposited into a bank account in order to track them separately. The transactions within this account became material, totaling over {$200,000 of receipts during the year, but no account activity was reported within the ‘general ledger until transfers were made to move the money into the recycling fund bank account. Having cash accounts off the general ledger can increase the risk of misappropriation of assets and compromise the accuracy of financial reporting, The issues identified around cash are significant and evidence @ weak internal control environment within the accounting department Krause, LLP isan independent owned and managed member of Baker Ty IntersstonalAccounts Receivable Based on discussion with Mayor Scott, additional concerns exist regarding the collections of delinquent accounts related to property and ACT 511 Taxes (eamed income tax). The 2010 and 2071 audit identified that there were inadequate support of the accounts receivable balance for water and sewer operations as of the balance sheet date. The report that was generated by management did not appear to accurately reflect the outstanding balances at year-end. In addition, there was no evidence that anyone was monitoring or analyzing the report information throughout the year as evidenced by the unadjusted balances in the tral balance received. ‘Management asserted as part of their action plans that this issue would be remediated, however, the issue was reported in 2010 and then again in 2011. Management did not hold personnel accountable and action plans were not implemented as evidenced by the following responses 2010 — As of August 2011, the outstanding bill report is run monthly. Also, the Citizens Service Center has a process in place that will begin collection efforts as ‘soon ag an account is considered in arrears, 2011 - As of 6/1/12, the billing function for water and sewer has been moved to the Reading Area Water Authority (RAWA). The Controller and Director of Administrative Services are working closely with RAWA through the transition process. Furthermore, it is our understanding based upon the auditors’ findings that there were other issues associated with accounts receivable that exist that raise concems of the financial operations at the City. Specifically, during 2014 it was identified that the accounting department only records accounts receivable at year-end for governmental funds, ‘The lack of appropriate monitoring and recording of accounts receivable throughout the year is @ significant cause for concern, Specifically, minimal monitoring of receivables Can result in weak collection efforts and understated revenue, leaving the City with the risk of being underfunded, Fixed Assets In 2013 and 2014, the reporting of fixed assets was also identified as an internal control weakness. Specifically. expenses relating to construction in process were not tracked and capitalized in the proprietary funds during the year. In 2013 the auditors identified that the City had a process in place whereas larger invoices that were paid were segregated by the accounts payable clerk for further review by the accounting and treasury manager. During the 2013 fiscal year, no further procedures were performed on these invoices to determine whether they should be capitalized and tracked for ongoing projects, or expensed. It was also noted that depreciation was not calculated or reported throughout the year. Finance suggested that given the turnover in several key finance epariment positions, the schedules for governmental fixed assets were not maintained throughout the year and were not received until August 2015. Utimately, the City was riot in compliance with generally accepted accounting principles related to reporting capitalized assets, The reporting of fixed assets and properly recording depreciation are some of the basic functions and responsibilities of the accounting department. The lack of continuity of personnel in this department coupled with the lack of proper oversight of ‘Boker TilyVrchow Krause, LLP is an independently owned and managed membar o Boker Ty Inernational4 Section Header financial reporting and tracking of fixed assets exposes the City to risk of misappropriation of assets and material misstatement of the financial statements Loans / Grants There are concerns that the City is not spending taxpayer money prudently and failing to take advantage of grants and loans available. Further, there were concerns surrounding the reporting of grant receipts, expenses and timely applying for reimbursements. Specifically, in 2010, 2011, 2012 and 2013 the auditors noted that certain grant funds were received by the City and passed-through to the sub recipients without the proper documentation for expenses and other reports being received to properly monitor the grant. Instances were also noted where the actual award and its related expenditures were not recorded on the City’s general ledger in full nor was the grant coordinator aware of grant extensions that were processed by others. Additionally, during 2012 other concems were raised with respect to the compliance with grant requirements. Specifically, a monthly reconciliation from the program expenses to the related drawdowns was not completed accurately and timely throughout the year, and therefore no control was in place to prevent expenses being incurred within the proper draw down taking place timely. There was also no procedure in place that appointed & specific individual to be responsible for the cash management requirement of the Federal Highway Grant, In 2014, the auditors identified that the City was approved for an H2O grant totaling $1,000,000 from the Pennsylvania Department of Community and Economic Development. This grant was to be used to reimburse 66 percent of the eligible costs up to $1,000,000 for the rehabilitation of a digester at the sewer treatment plant. As of December 31, 2014, over $850,000 had been spent on the project, but no requests for payment were submitted and approved by the grantor. Therefore, the City is using texpayer money to fund the rehabiltation as opposed to utilize grant funds that have been allocated for that purpose. In 2014, the auditors identified that the City was also awarded a PENNVEST loan in the ‘amount of $10,013,950 to support the 42° sewer force-main project. Total draw downs on the loan through December 31, 2014 were $508,043 while the City incurred project costs in excess of $12,800,000. Management asserted as part of their action plans that the grant issues would be remediated; however, grant issues were reported year after year. Management did not hold personnel accountable and action plans were not implemented as evidenced by the following responses: 2010 ~ The City recently added a grants accountant to staff. This accountant will work closely with the Grants Coordinator to ensure that proper documentation is retained, Staff will prepare and maintain a comprehensive listing of awards. Coordination between Reading Redevelopment Authority and grants staff will be improved 2011 = The Grants Accountant will work closely with the Grants Coordinator to ensure that proper documentation is retained. Staff will prepare and maintain a comprehensive listing of awards. Coordination between reading Redevelopment Authority and grants staff will be improved.pm Section Header 2012 — Management has assigned responsibilty and scheduled timing of the preparation of the schedule of grants with the appropriate accounting personnel and has developed a process to review the report for completeness and accuracy and to reconcile the detailed report to the general ledger. ‘The City has been paying for the costs incurred on both projects noted above without the timely filing of the required reports to obtain reimbursement funds. This delay in receiving funds has @ negative effect on the City’s cash flow and could jeopardize the receipt of future funding, The lack of monitoring of grants is a significant concern and suggests that the City is using taxpayer money to fund projects, instead of grant and loan money that have been awarded specifically for projects. Revenue As previously discussed, the completeness of revenue and collection efforts by the City is another area of exposure. Specifically, with respect to real estate tax revenue, in 2011 it was discovered that no reconciliation of the taxes levied to the taxes collected was being performed to monitor the collection activity. The City lacked documentation for the ascessed taxes, collected taxes and outstanding taxes. Real estate taxes are a material source of revenue for the City and the lack of monitoring over the collections is @ major concer During 2014 an account that held collections from delinquent recycling accounts was discovered to be held separately from the City's general ledger. These were funds that could have benefited the City and its operations; however, they were unaccounted for which increases the risk of misappropriate of assets. There are also concerns whether or not there are other accounts that are not recorded on the general ledger that could be conduits for inappropriate activity Expenditures Segregation of duties with respect to cash disbursements has been an audit finding during every audit since 2008 and based on our preliminary review of accounts payable forms, policies and procedures are not being followed Pension Reporting ‘The auditors reported every year between 2008 and 2014 that there had been turnover in the pension administrator position as well as the payroll process migrating from an internal payroll process to an external payroll processor. This tumover and change in payroll process has not allowed any individual to gain comfort with the requirements of the Form AG-385 and an understanding of the reports necessary to camplete the form ‘accurately. Throughout the audit, several instances were identified where the pension eligible pay reported on the AG-385 report did not agree to the pensionable wages ‘amounts reported from the payroll processing company. Management asserted as part of their action plans that this issue would be remediated; however, the issue was reported year after year. Management did not hold personnel accountable and action plans were rot implements as evidenced by the following responses: 2010 - The Pension Office has a new Pension Coordinator and she meets on a weekly basis with the Administrative Services Director. The preparation of the AG385 for 2010 involved the Pension Coordinator, City Auditor, Controller, ‘Boker Tily Virchow Krause, LLP isan independently owned and managed member of Baker ily IntomationalSection Header ‘Acoounting Manager, Administrative Services Director and his Confidential Secretary. Staff expects the fling to be error free. 2011 - The preparation of the AG385 for 2011 involved the Pensions Coordinator, City Auditor, Controller, and Accounting Manager. Staff expects the 2011 fling to be error free, 2012 ~ Management will assign a person to review AG 385 for accuracy. 2013 - Management is in the process of developing and documenting operating procedures within the administration area which includes the pension functions, Cross training will be provided to a member of the management team. 2014 - Management has developed and documented operating procedures within the administration area which includes the pension function, Cross training has ‘occurred so multiple staff are trained in the process Due to the lack of competence at the pension administrator level, the City is at risk of overpaying pension benefits ifthe pensionable pay is overstated Furthermore, in 2013, the City pension boards procured one actuarial firm to perform all three Act 208 actuarial studies, Previously each plan had a separate actuary, During the time period in which the report was being filed, the pension coordinator position was. vacated leaving others to assemble the required documentation. In addition, since the last valuation, the City has also changed payroll processing procedures from an internally performed process to an external payroll processing company. With the change in actuaries, personnel, and payroll systems, the City was unable to complete the required report by the March 2014 deadline. The report was submitted to the Commonweaith at the beginning of July 2014. The tardiness of the report could have delayed the state pension aid calculation for the City. The lack of oversight and reporting issues icentified in this area raises concerns over the controls around payroll processing and the risks associated with ghost employees, unauthorized access, lack of segregation of duties, etc. Lastly, pension compliance issues were identified within the 2008, 2009, 2010, 2011 and 2012 audits, Specifically, numerous benefits have been granted to union employees that ‘were not within the parameters of the established codes. The City has granted benefits that are out of compliance with state code for third class cities. As a result, the pension subsidy from the Commonwealth covers a smaller portion of the pension obligation since it will not factor the excess benefits into its calculation. This ultimately results in higher costs to the City. Management asserted as part of their action plans that this issue would be remediated; however, the issue was reported year after year. Management did not hold personnel accountable and action plans were not implemented as evidenced by the following responses: 2010 ~ The Act 47 Recovery Plan is taking an active role in all negotiations which results in negotiating new labor contracts that comply with all applicable state and local laws. 2011- The Act 47 Recovery Plan is taking an active role in all negotiations which results in negotiating new labor contracts that comply with all applicable state and local laws. Boker Tily Vichow Krause, LLP isan independently onned and managed member of Baker Tily Intemationala a ee ee ee Section Header 2012 - The pension compliance issue will be reviewed as part of the ongoing and future labor contract negotiations with Act 47 guidelines. Without the proper oversight of the pension reporting and compliance the City could be liable for excess costs that are not appropriate and could have been avoided. Time Card Approval In each year between 2010 and 2013, the audit identified several instances of unsigned and unapproved time cards through the testing of payroll. It was determined that the hours were properly allocated based on the time cards; however, a lack of supervisory ‘approval was noted. Management asserted as part of their action plans that this issue would be remediated; however, the issue was reported year after year. Management did rot hold personnel accountable and action plans were not implemented as evidenced by the following responses: 2010 - Management is looking into switching payroll systems and as part of this, electronically collect time and require management to authorize time records. This will replace the need for timesheets. In the meantime, the timekeepers will be periodically reminded that all timesheets should be signed prior to being sent to payroll. The City Auditor will be asked to periodically review time sheets for proper authorization 2011 — As of September 1, 2012, the City will no longer host payroll software. The processing of payroll will be conducted by ADP. One of the changes includes electronic time capture. As part of the process an employee will “clock’ in and out for the day using a biometric machine. This will become the employee's electronic approval. Also, all time will need to be electronically approved by 2 supervisor or manager before being sent to payroll 2012 — Management is currently working through a transition process onto an electronic time capture platform whereby employees will clock in and out of work Using a paperless process. Time data will be approved electronically by supervisory personnel 2013 - Management will ensure, via operating procedure, that a review, approval {and signature by the employee’s cupervisor of one’s time occurs. ‘The lack of supervisory approval can allow errors in the time charged or allocated among divisions to pass undetected and lead to possible misappropriation of funds, More specifically, this could infitrate departments where significant overtime occurs, such as the fire and police departments, which represent the largest expenditures to the City. ‘The lack of contro's over the approval process for overtime exposes the City to the risk of overtime reporting abuse and excess costs. Procurement Card (“P Card”) During the 2010 and 2011 audit, purchasing cards that were in possession of certain department directors were only being approved by the same director before payment. No ‘monitoring review wes being performed at the upper management level to ensure only allowable costs were being charged. Due to turnover in key management positions, this monitoring activity was not taking place for a good portion of the year. Management [Baker ily Vichow Krause, LLP is an independenty cuned and managed member of Baker TityInernationalSection Header asserted as part of their action plans that this issue would be remediated; however, the issue was reported over multiple years. Management did not hold personnel accountable and action plans were not implemented as evidenced by the following responses: 2010 - The Managing Director and the Director of Administrative Services will review ‘monthly card statements for propriety. 2011 ~ In addition to the new policy that requires the Director of Admin Services to sign off on all changes, another policy is being developed which will define what is considered to be an acceptable charge. \without the proper segregation of duties and independent approval, misappropriation of assets may occur without being detected. P Cards are an area within an organization that generally has @ lot of exposure to risk of abuse, The lack of approvals and segregation of duties with respect to P Cards could be prevalent throughout the City and could lead to excess costs: Nem e i J] wie tey verze i pnt ant gi rent Ty ersee Mamba _How Baker Tilly Can Help Baker Tilly believes that the most cost effective solution to provide the City with an efficient work plan is a phased approach that includes a plan to implement the positive change for the City with its financial and operational activity, Establishing the work scope and areas of focus up front will allow the City to understand the process, while ensuring that our work is focused on the areas deemed to be the highest risk. Our goal is to address the City's concerns, identify areas of exposure and mest the objectives of the City in an efficient and effective manner. The following section provides details of our preliminary planned procedures. We envision that Phase | will Include an analysis of the following Overall Contracting Process; All Contracts Associated with and Payments to Date with Respect to the WWTP; Cash Reconciliation Process; Cash Disbursements; Procurement Process; Payroll Revenue Collection Process; Pension; and Grant and Other Contributions. Phase I! will include: Comprehensive reporting of findings & recommendations, Phase Il will include: ‘Ongoing monitoring of capital projects; ‘Ongoing monitoring of financial operations; and > Internal contra! documentation and remediation procedures Phase | Baker Tily’s FLVS team will focus its Phase | investigation on the City's contracting process, WWTP and the financial operations. Baker Tilly has incorporated into our Phase | plan the expertise and experience of members from our Government audit team. Baker Tilly serves over 1,000 government and municipal authorities. Our audit team is familiar with the challenges that government organizations face and has experience providing operational support and assisting clients in improving internal controls and ensuring the accounting department is operating effectively. We anticipate that the our eliverable for Phase | will be reporting of our procedures, observations, findings and. recommendations.meta Section Header Risk(s): ‘The lack of oversight and monitoring of capital projects, the contract process and the lack of Iransparency with respect to the terms and conditions of outstanding contracts exposes the City fo the following risks: Uncisclosed related party transactions; Kickback schemes; No-bid awards; Excessive change orders Delays, Contract overiap, Unnecessary contracts; and ‘Accountablity for the Project, Forensic Objective: To identify inappropriate activity surouncing the contracting process, identify intemel control ‘weaknesses, implement strong internal controls and ensure contols are operating effectively. Scope: thrae — five years Koy Activites: Perform a walkthrough ofthe bidding / contracting process (Obtain alsting ofall outstanding contracts ‘Analyze selected contracts (selections based on dollar value, nature of the services provided, relationship with vendor, etc.) ‘Analyze payments to vendors / contractors to determine the appropriateness of disbursements Review and analyze change orders issued to contractors / vendors and Interview procurement personnel to understand the contract scope of work, roles and responsibilies of contractors and to determine if related party relatonships exst Deliverable: A database of all outstanding contracts and @ summary oftheir terms and 2 reporting of our findings and recommendations Analysis of the WWTP Project Risk(s): ‘The lack of oversight and monitoring of capital projects and contract process as well asthe lack of transparency with respect tothe terms and conditions of outstanding contracts exposes the City to the rks of: Undisclosed related party transactions Kickeack schemes No-bid awards Excessive change orders ‘Baker Tily Virchow krause, LLP isan independently owned and managed member of Baker TilyInemational‘Section Header Analysis of the WWTP Project Delays (project deaciine is February 28, 2018) Non compliance with the Consent Decree Misuse of grant funding Contract overlap ‘Scope: Entire Project Objective: ‘Obtain an understanding of the bidding / contract awarding process, and snalyze the project costs, to determine whether the contract achieved the desired results. In addtion, our forensic analysis, will focus on determining whether inapproptate activity hes occurred surrounding the WWTP projects and provide the City withthe tools to mitgate the future risks related to fraud, waste and abuse. Koy Activities: (Obtain and analyze all contracts associated with the WWTP, ‘Analyze payments to vendors / contractors to determine the nature of the disbursements and whether they comply with the contractual requirements; Review and analyze change orders issued to contractors / vendors; Interview procurement personnel to understand the contract scone of work, roles and responsibiities of contractors and to determine if related party relationships exist, and Provide recommendations to strengthening controls and propose / implement ongoing ‘monitaring activities to monitor construction projecis and mitigate the risk of fraud, waste and abuse, Deliverable: Create a database of all outstanding contracts and a summary oftheir terms and reporting of our findings ang recommendations regarding the contracts and reisted spending. POET eokerculcccs Riskis): Historically, the City has felled to perform reconciliations between the bank accounts and the ‘general ledger. The falure to perform reconcliabons exposes the city to the risk of cash larceny, ‘skimming, and the enistence of off balance sheet accounts that could be the conduit for inappropriate activities. Further, the financial statements are at risk of being materially misstated because of the potential for inaccurate information that is recorded in the general ledger. ‘Scope: 20/2 ~ present Objective: Identity any inappropriate activity with respect to the cash reconciliation process, implement policies and procedures that wil ensure that cash reconciliations are performed appropriately, timely and are reviewed and approved by appropriate personnel Key Activities: With the assistance of the BT Government audit team, the forensic team will perform 2 ‘Baker Tily Vechow Krause, LLP is an independently onned and managed member of Baker Tily Internationalal _ Cn ee ee ee eee Section Header URIS uare walkthrough of the monthly reconciliation process and assess the internal controls; ‘Analyze the reconciliation between the general ledger and the bank statement, ‘Analyze the appropristeness ofthe reconciling items; and Implement policies and procedures to contralto effectively reconcile the bank accounts Deliverable: Reporting of our findings and recommendations. Rooke ete eae Risk(s): Historically, there have been numerous issues with respact to segregation of duties and the proper ‘Suppor, review and approvals of cash disbursements. Additionally, there have historically been Issues with approvals for procurement card reimbursements, “The lack of proper oversight of cash disbursements and procurement can expose the City to larceny of cash, fettious vendors, kickback schemes, collusion and misappropration of assets. ‘Scope: 2013 ~ Present — Based on finding, we may need to analyze adcitional years, Objective: To identity inappropriate activity, identify internal control weaknesses, and ensure that controls are implemented around the procurement and vendor approvals processes. n addition, Baker Tilly wil ‘StUGtUre a process to ensure controls are operating effectively on a go forward basis. Key Activities With the assistance of the BT Government audit team, the forensic team will perform walkthrough of the policies and procedures in place surrounding cash disbursements, Obtain the bank statements from the City's operating accounts, ‘Analyze cash disbursements per the bank statements and determine whether the transaction ‘was appropriate and adequate suppor forthe transaction exists, ‘Analyze disbursements associated with the significant line items on the financial statements 10 Understand the nature and determine whether the transaction was sppropriate and adequate ‘suppor forthe transaction exists, Analyze the completeness of the vendor list by determine whether the vendors identiied through our cash disbursements testing and analysis of contract payments thet vendors are included on the master ls ‘The BT Government audit team will perform 2 walkthrough of the cash disbursements procedures to obtain an understanding ofthe intemal controls, and Identty any wesknesses in intemal control and provide recommendations Deliverable Reporting of our findings and recommendations. ‘Boker TilyVrchow Krause, LLP is an indeperdenty oomed and managed member of Baker Tay iterationseel fee ea Ls het Section Header eee beeen) Risk(s): Historically there were issues surrounding capitalizing and depreciating fied assets. By not capitalizing and depreciation assets appropriately, the City is at risk of asset misappropriation and ‘material misstatements on the financial statements Scope: 2013 and 2014 Objective: ‘To identty inappropriate activity, verily the existence of fixed assets, determine whether fixed asset ‘additions are captured appropriately, identify internal control weaknesses and ensure that internal ‘contro are implemented properly snd operating effectively on a go forward basis. Key Activities = With the assistance ofthe BT Government aucit team, the forensic team wil perform a walkthrough of the policies and procedures in place surrounding cash disoursements, = Through our testing of expenditures / cash disbursements we wil also verfy that expenses were recorded properly, = Obiain the listing of fixed assets and fixed asset additions and verify that items exist. Deliverable Reporting of our findings and recommendations. Enea neue Risk(s): Dee to the history of turnover, the transition from internal payroll process to ADP and lack of approvals on timecards, the City is at risk of misappropriation of funds through payroll schemes, ‘such as fraudulent overtime, ghost employees, and pay rate compliance. Additionally, due to the lack of competency of personnel, the City has had issues with complying ‘with the fotm AG-385 reporting requirements, Form AG-385 is used to compute the City’s allocation Of state aid for pension plans andior volunteer frefighiers’ relie! associations. False statements made on form AG-385 is punishable under 18 Pa. CS Section 4904, Further, in the past benefits ‘were granted to union workers outside the parameters of the established codes. The lack of competency and oversight could lead to overpayment of pension benefits and material misstatements on the financial statements, ‘Scope: 2012— Present Objecti To understand the payroll process, the current policies and procedures and how employees are added to the system, To understand the overlme approval process, identify any inappropriate activity, internal control weaknesses, and ensure that controls are implemented and operating effectively on 3 go forward basis. With respect o the pension reporting process, our objective ‘would be to understand From AG-385 reporting process, the reconciliations of the internal pension reporting to ADP and identify internal control weaknesses, and ensure that controls are Implemented and operating effectively on a go forward basis, Key Actvties: \With the assistance of the BT Government audit team, the forensic team will perform a walkthrough ofthe polices and procadures in place surrounding payroll and the pensions ‘Baker Tily Virenow Krause, LLP is an intopendenty owned and manage member of Baker Tily Internationaleae on a eo ae | faker Tily Vechow Krause, LLP isan independently ownes and mar Section Header ede Lee een) reporting process; = Analyze overtime payments and determine i the appropriate policies and procedures wore followed: = Perform an analysis ofall payroll activity to identity the possibilty for ghost employees es well 8s confirmation of the approved pay scale for employees: = Analyze the Form-385 for accuracy and completeness and reconcile to payroll records; ‘and = Analyze pension benefits granted Deliverable: Reporting of our findings and recommendations. eae hee a Riok(e): Historically there have been issues with the lack of reconciliation between taxes levied and taxes. Collected, as well as a lack of documentation supporting the assessed taxes, collected taxes and outstanding taxes, Tax revenue is a major funding source for the City and without the proper policies and procedures in place the City is at risk of miseppropriation of funds, and significant ‘wrte-ofs of receivables which could lead to underfunding ofthe City's operations. Scope: 2013 present Objective: To understand the collection process, identify any inappropriate activity, identity missing documentation, and ensure that the City has the procedures in place to collect the revenue that itis owed. Koy Activities With the assistance of the BT Govemment audit team, the forensic teamBaker Tilly will perform a walkthrough of the policies and procedures in place surrounding the revenue collection process; Obtain an understanding of the City's revenue collection efforts; and Analyses ofthe taxes levied and collected, accounts receivable, and delinquent accounts, Deliverable: Reporting of our findings and recommendations. eee Risk(e): ‘The city participates in state or federally assisted grant programs that are subject to program ‘compliance audits by the grantors or their representatives. The City is potentialy liable for any ‘expenditure which may be disellowed pursuant to the terms of these grant programs. Given the City’s history of compliance issues with respect to grant awards and expenditures not being properly decument or reportad on the general ledger, the City could be liable for unexpected expencitures as a result of issued identified during a compliance auctt 14 member of Baker Tit IntemationalLe Section Header reece! ‘Scope: 2013 - Present Objective: Determine whether inappropriate actvty has occurred with respect to the use of grant funds, ‘assess intemal controls recording the sources and uses of grant funds and ensure the City is in ‘compliance on a go forward basis. Key Activitios Obtain a listing of all grants the City has been awarded ‘Analyze the uses of grant funds and determine whether the appropriate documentation is maintained to support the expenses ‘The Beker Tily Government audt team will perform a walkthrough of the cash disbursements, procedures to obtain an understanding of the intemal controls, Identity any weaknesses in internal control and provide recommendations, Deliverable: Reporting of our findings and recommendations, Assistance with the implementaton of recommendations and manitaring of cash reconciliation process on a go forward basis. Phase II Rone) ‘Scope: We expect at the completion of our Phase | work to provide the City with a comprehensive report setting forth our findings, observations and recommendations related to the Phase | areas of ‘analyses. The specific format and contents ofthe report wil be dictated by our Phase | work Phase lil Pena) Risk(s) ‘Without the proper oversight of ongoing capital projects, the City is at risk of cost overruns, out of scope changes, excessive change orders and potential Contractor disputes that could lead to costly litigation, ‘Scope: Evaluation of selected historically and newly awarded contracts, Key Activities: To ensure that contract terms are followed to protect the City from unexplained cost overruns, ‘Beker Tily Vicnow Krause, LLP s an independently owned and managed member of Baker Tly Internationaleee — — a re | — Section Header eae een) ‘costly delays, and mitigate the risk of inappropriate activity Analyze of contract terms ‘Analyze of payments and progress to date Review and analysis of change orders Perform ongoing reviews of payment applications and change orders throughout the ‘construction process Deliverable ‘Status updates with management and periodic repors of our findings and recommendations eee ean eaae) Risk(s): City personne! fail to implement polices end procedures recommended by Baker Tilly as a result the forensic investigation, Scope: Control improvement recommendations provided as @ result ofthe Baker Tily forensic analysis of cash receipts, cash disbursements, fixed asset report, grants, pension reporting, and payroll, Key Activities: To ensure that any new or improved policies and procedures are implemented by City personnel ‘our BT Government auditing team wil Assist the City with implementation and training, Monitor the operating effectiveness of controls; and Perform ongoing revions and tosting of transactions. Deliverable ‘Status updates with management and periodic reports of our observations. eon aol ete ecu ee ‘A byproduct of a forensic investigation is the identification of gaps and weaknesses in intemal Controls based upon any inappropriate activty identified. AS @ result, recommendations for improving internal controls are provides. However, our Phase | investigation only targets speciic ‘areas within the City, A comprehensive intemal control assessment may be necessary to ensure thatthe proper policies and procedures are dacumented and controls are in place to mitigate the risk associated with inappropriate activity throughout all of the financial operations at the City Risk(s): Without the proper policies and procedures in place, there is an increased risk for inappropriate activity to occur, ‘Scope: Following is a complete list of ress our internal control team is capable of assessing. The internal ‘control team will leverage the FLVS team's knowledge of the internal controls assessed during ‘Baker Till Vrchow Krause, LLP san independenty owned and manages member of Baker ily Intemational