HomeMy WebLinkAbout2009 04 27 Regular 600 Forensic InvestigationCOMMISSION AGENDA
ITEM 600
April 27, 2009
Regular Meeting
Consent
Informational
Public Hearin
Re ular X
MGR. /DEPT.
Authorization
REQUEST: City Manager requesting the Commission to review the Report of Findings from Phase 1 of
the Forensic Investigation and provide direction for proceeding with Phase 2.
PURPOSE: This agenda item is needed for the Commission to review the Report of Findings from Phase 1 of
the Forensic Investigation and provide direction for proceeding with Phase 2.
CONSIDERATIONS:
On February 23, 2009, the Commission authorized the City Manager to proceed with a forensic investigation and
approved a "two-phased approach" to facilitate this process (only Phase 1 was authorized at that time).
Phase 1 included authorization for the City Manager to enter in a contract with Berkowitz, Dick, Pollack & Brant,
CPA's to perform the following tasks:
Meet with the Mayor, City Commission and key staff to discuss and determine the specific concerns
regarding the need for a forensic investigation.
Review specific accounting records and other appropriate documents to assist the firm in developing a
scope of services for Phase 2.
Issuing a Report of Findings to include a Scope of Services and Budget for Phase 2.
Berkowitz, Dick, Pollack & Brant has now completed its work under Phase 1 and issued the attached report (a
representative from Berkowitz, Dick, Pollack & Brant will be in attendance at this meeting to present the report).
Their report includes a suggested scope of services that includes six potential procedures that they feel would be
appropriate for Phase 2 of the forensic investigation as follows:
A. Review of contract data.
B. Review of controls in selected areas.
C. Detailed interview with former City Manager including an investigation of certain financial issues.
D. Review of current procedures with best practices in selected areas.
E. Evaluate the sustainability of the current employee benefit programs.
F. Design and assist with implementation of a Commission management reporting package.
Detailed descriptions of each area noted above are included in the attached report.
Based on discussions with representatives from Berkowitz, Dick, Pollack & Brant, the City Manager recommends
that the Commission proceed with items A, B and D only, at this time.
Accordingly, it would now be appropriate for the Commission to either:
Issue an RFP utilizing the scope of services derived in Phase 1 to procure a forensic auditing firm to
perform Phase 2 (A, B & D), or
Contract with Berkowitz, Dick, Pollack & Brant to perform Phase 2 (A, B & D), or
Not proceed with Phase 2.
FUNDING:
If the Commission agrees to utilize Berkowitz, Dick, Pollack & Brant for Phase 2 of the forensic investigation,
their fee for services for Phase 2 (A, B & D) would be (not to exceed) $39,500 plus out-of-pocket expenses of
(not to exceed) $2,000.
RECOMMENDATION:
The City Manager recommends that the City Commission proceed with Phase 2 of the Forensic Investigation and
choose from one of the following options for procuring a firm to perform this phase:
1. Direct the City Manager to issue an RFP to procure a forensic auditing firm to perform Phase 2
of the forensic investigation utilizing items A, B & D from the scope of services developed in
Phase 1, or
2. Direct the City Manager and City Attorney to enter in a contract with Berkowitz, Dick, Pollack
& Brant to perform Phase 2 of the forensic investigation utilizing items A, B & D from their
scope of services developed in Phase 1 and authorize an expenditure of (not to exceed)
$39,500 plus (not to exceed) $2,000 for out-of-pocket expenditures for this phase.
ATTACHMENTS:
Phase 1 Report of Findings.
Phase 2 Proposal from Berkowitz, Dick, Pollack & Brant.
COMMISSION ACTION:
ATTACHMENT 1
CITY OF WINTER SPRINGS FLORIDA
Report of Findings -Phase I
L7ER.KQWITZ ~I~K.PC7LLACK&~-RANT
GERT[FIED PtIBLG ACCC~SINTANTS & CC3NSULTAN7'S. LLP
City of Winter Springs Florida
Report of Findings -Phase I
Table of Contents
Introduction and Scope ..............................................................................................2
Executive Summary ....................................................................................................2
Summary of Procedures and Findings ..................................................................................4
Potential Governance Considerations ...............................................................................7
Phase Trvo Scope and Estimated Costs .............................................................................9
City of Winter Springs Florida
Report of Findings -Phase I
April 16, 2009
Introduction and Scope
Pursuant to an engagement letter executed March 6, 2009 Berkowitz Dick Pollack & Brant Certified
Public Accountants & Consultants, LLP ("BDPB") was retained to assist the Mayor and Commission
of the City of Winter Springs Florida ("Winter Springs") in evaluating the need for a forensic
investigation. The work was designed to be done in two phases as follows:
Phase 1
Phase 2
1. Interview the Mayor and Commission to determine what their specific concerns are
regarding the need for a forensic investigation.
2. Interview key purchasing and accounting personnel to help identify potential risk areas.
3. Review selected accounting records to determine scope and time required for Phase 2.
4. Develop preliminary analysis report and define Phase 2 scope and budget.
1. Extract detailed information to be tested in high risk areas for a period of 24 months.
2. Schedule information for all purchases/expenditures identified above.
3. Where necessary compare measurable data for number of units purchased, standard unit
pricing etc.
4. Document results and recommend if additional work is required.
The engagement letter only authorized phase 1.
BDPB did not audit, review or compile the financial statements of Winter Springs, nor did BPDB
perform any type of review of Winter Spring's books and records.
Executive Summary
BDPB interviewed the Mayor and Commission as well as the Interim City Manager, Finance
Director and Assistant to the prior and Interim City Manager. We also performed a brief phone
interview of the prior City Manager Ron McL.emore. The interviews were conducted to determine if
there were any areas of concern regarding the operations of the City under the prior City Manager
and any potential need for further investigation including a possible forensic investigation. We also
discussed during our interviews possible internal control weaknesses which may have permitted an
environment for abuse.
2
City of Winter Springs Florida
Report of Findings -Phase I
We found the following range of responses from the Mayor and the Commissioners:
• There are no known problems with anything done by the prior city manager, Ron
McLemore.
• The prior manager Ron McLemore, had control over every contract and bid
within the City. It is unknown that if he abused this power and gave bids to
person or persons who may have not acted in the City's best interests. This calls
all agreements into question to see if they were competitively bid and if the work
performed was warranted.
• Some specific areas of concern regarding contracts were public works projects,
parks and recreation projects, building department, capital projects and
landscaping in general.
• Specific contractors were recommended so that permits and licenses could be
obtained. Others felt that this pressure may have been required in order to
obtain contracts.
• Serious deficiencies exist in the financial reporting to the Commission and a lack
of transparency in general is of concern.
• Questions were raised about Tropical Storm Fay expenditures and
reimbursements
• Concerns regarding internal control environment in general that many areas
could be overridden by the manager without adequate knowledge of the
applicable staff and the City Commission.
• We heard concerns that the lack of internal control may have allowed the prior
manager to treat the City as his personal business and checkbook.
The interviews with the Interim City Manager, Finance Director Assistant to the Prior and Interim
City Manager supported the following:
Purchasing is in fact decentralized which lends itself to possible inconsistent treatment of
how bids and contracts were administered.
Due to the size of the city, all internal audit functions are staffed from the finance
department. There is no dedicated internal audit function to check that procedures are being
followed and that policies are consistently applied.
3
City of Winter Springs Florida
Report of Findings -Phase I
The interviews indicated that risks exist in procurement due to its decentralized nature, in utility
billing due to its size and complexity, in all cash related functions due to the nature of risks associated
with cash and in general due to a lack of internal audit function.
Summary of Procedures and Findings
Interviews
We interviewed the following:
Name Title
John F Bush Ma or
Jean Hovey Commissioner
Seat One
Rick Brown Commissioner
Seat Two
Gary Bonner Commissioner
Seat Three
Sally McGinnis Commissioner
Seat Four
Joanne M. Krebs Commissioner
Seat Five
Michelle Greco Finance Director
Kevin Smith Ci Mana er
Jan Palladino Assistant to the
City Mana er
Our interviews showed a large range of concern regarding certain areas of Winter Springs
from those who felt that this exercise was unnecessary to those who felt that additional
investigation is warranted.
Major areas of concern were as follows by department or function:
Purchasin¢
Purchasing is decentralized which means that each department is responsible for their own
actions with regard to purchasing. We did find in the policies and procedures manual the
following requirements:
4
City of Winter Springs Florida
Report of Findings -Phase I
There are specific rules for purchasing which state that all expenditures under $2,500 only
need a quote. Expenditures between $2,500 and $25,000 need 3 quotes. All expenditures
over $25,000 require a formal Request for Proposal, piggyback another governmental
entities contract or are designated as sole-source.
However, we could not verify that these policies were strictly adhered to as each department
had control over its purchasing function. The prior City Manager appeared to have final
control over this area. Additionally, there was no internal audit function to check that the
policies were being followed. The accounting function may have been able to detect certain
problems but whether all bids were obtained, the best contract was chosen and if sole source
rules were met is outside of the accounting function.
Public Works including Capital Proiects
Some of the interviews highlighted questionable items in this area as they are contract
intensive and carry a higher risk. Due to the fact that much of the expenditures are for items
that are usually not supplied by city staff or personnel, a higher level of scrutiny may be
indicated. Some of the items questioned included professional services contracts and capital
items including specific expenditures in a park.
Urban Beautification and Landscaping
Questions were raised about contracts, particularly those related to landscaping.
Additionally, there were questions about certain raises given in urban beautification and if
standard procedures with proper controls were adhered to.
Finance
Some of the interviews highlighted the past problems with money management policies and
guidelines. There were additional comments on the need to create a management financial
package for the Mayor and Commission on a regular basis. There was also a call for
increased transparency.
Some interviewees questioned the long term sustainability of the retirement plan.
City of Winter Springs Florida
Report of Findings -Phase I
Buildins Department
The contracts in the building department were questioned. There was also a common
sentiment that improvement in the efficiency of the department was necessary to make
things customer friendly and streamline the permitting process.
There were reports that there was pressure put on certain members of the community to use
certain vendors in order to obtain permits and licenses. There were similar complaints about
zoning issues.
Internal Audit
Due to Winter Spring's size of government there are not sufficient resources to have a
dedicated internal audit function.
Other
The ability to control all functions by the prior City Manager was also cited in a few
interviews. The potential for abuse of power was discussed. It appears that there were
limited cases where this could have occurred and those cases were relayed to us verbally
without all facts presented.
It was also noted that there appeared to be an override of the controls and separation of
duties in the payroll and Human Resources area.
Documentation Obtained
We received copies of the following:
a. All available written policies and procedures for finance and purchasing
b. Copies of resolutions of all budget changes and transfers for fiscal years
2006/2007 and 2007/2008
c. Community visioning letter
d. New commissioner education package
e. Sample forms such as for utility billing write-off authorizations
f. Waste-Pro contract
g. Selected vendor information as requested.
6
City of Winter Springs Florida
Report of Findings -Phase I
We summarized the following summary from the vendor information:
As of 3/9/09
Year Ended 9/30/2004 9/30/2005 9/30/2006 9/30/2007 9/30/2008 9/30/2009
Est. # vendors with expenditures
exceeding $25,000tyear 100 100 90 100 100 40
$ for vendors exceeding $25,000
er ear in 1,000's 18,600 22,300 13,700 19,500 15,200 5,400
Est. # vendors > $2,500 less than
$25,000 290 300 300 285 280 180
Approximate total # vendors 2400 2300 2300 2200 2300 3200
Approximate total expenditures
in 1,000's 21,500 25,300 17,000 22,500 18,200 7,200
Potential Governance Considerations
The following items should be considered for potential discussion and actions to be taken:
1. An internal audit function might be set up to test for adherence to policies and procedures.
This could be done using an outside contractor or it could be done using a rotation of staff/
departments to check on procedures not affecting their own departments.
2. All expenditures over a designated amount (i.e. $2,500) could be listed and included as part
of the consent agenda each month to provide for greater transparency.
3. A periodic financial report could be included in the consent agenda to educate the Mayor
and Commission on the highlighted financial condition of Winter Springs.
4. A hotline (either internally or using an outside service) could be used to receive
tips/comments on possible areas for improvement or impropriety. Further discussion would
need to take place regarding who receives these tips and how they are investigated.
7
City of Winter Springs Florida
Report of Findings -Phase I
5. A review of purchasing guidelines might be undertaken to set forth specific policies and to
set criteria for no-bid circumstances.
6. A further review of internal controls might be necessary to assist determining if additional
weaknesses exist.
Phase Two Scope and Cost Estimate
Possible procedures for phase two:
A. Review of Purchasing within the City Manager's Authority
Review 20 vendors per year for two years with expenditures greater than $25,000. Check for contract,
compliance with bid procedures (if any) and adequacy of supporting documentation for invoices. For
a selection of up to 10 vendors, a detailed review of the invoices on a test basis to ensure that what
was billed was received.
Check an additional 20 vendors with expenditures less than $25,000 but greater than $2,500, each
year for a two year period (on a random and judgmental basis). We would then check approximately
25% of the invoices for those vendors. If we see any issues with the initial test, we will increase the
scope and number of years as mutually determined.
B. Review of Controls in Selected Areas
Review the current internal control policies for a variety of areas including payroll and human
resources, utility billing and credits, building department, and procurement.
Review auditors working papers and findings to see particular internal control issues noted as
weaknesses. Review auditor's working papers to see the number and dollar value of journal entries
to highlight areas where issues may exist.
Vouch pay raise data and documentation for 10 employees per year for two years.
City of Winter Springs Florida
Report of Findings -Phase I
Sample 25 credits per year to review adherences to internal control policies over utility billing credits.
Interview building department employees to determine adherence with policies and procedures. Test
the controls noted during the interview process for compliance by selecting 15 transactions per year
for two years.
Interview departments involved in procurement for adherence with policies and procedures. Test
controls over procurement procedures by testing 10-25 transactions (no less than 3 contracts or
awards per department) per year for compliance with controls as noted during the interviews (we will
not test controls the interviews indicate are not being followed).
Reconcile areas with material cash to ensure general ledger data agrees to detailed records selecting
a monthly, weekly or daily amount to compare to the detail (depends on how detailed records are
recorded). Highlight any areas that may indicate weaknesses in internal controls.
C. Detailed interview with former manager including an investigation of certain financial issues
This would require cooperation from Mr. McLemore and potential use of an investigator.
D. Review current procedures with best practices in selected areas
There are a variety of best practices regarding cash management, building department issues, payroll
and human resources, as well as other departments which could be reviewed to ensure that Winter
Springs is taking advantage of current best practices and technology.
E. Evaluate the sustainability of the current employee benefit pro rg ams
This would require assistance from an actuary and the budget only includes our analysis and not any
necessary actuarial studies.
F. Design and assist with the implementation of a Commission management reporting nacka¢e
Review existing financial report and design monthly or quarterly reporting packages for the Mayor
and Commission that would recap significant financial transactions and provide cash flow
information.
City of Winter Springs Florida
Report of Findings -Phase I
Estimated Pricing for Phase 2
Section Price Range
A $11,000 - $25,000
B $11,000 - $20,000
C $3,000 - $6,000
D $6,000 - $12,000
E $7,500 - $12,500
F $5,000
This report is based upon the scope of work described previously and the information obtained
to date. Had we performed additional procedures, other matters might have come to our
attention that would have been reported to you.
ery t your
~~ ~
Ric and Pollack
For the Firm
10
ATTACHMENT 2
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Icirgltonr. 305-379-7000
"IaU Free: 800-y~1-1CPA (1272)
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Apri121, 2009
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Fiftecnrh Flaw
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Telephan€: 954-7 t 2.3600
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Faz: 954-312.3030
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Mr. Kevin Smith, City Manager
City of Winter Springs
1126 East SR 434
Winter Springs, Florida 32708
Dear Mr. Smith:
This is an agreement between Berkowitz Dick Pollack & Brant Certified Public Accountants &
Consultants, LLP, (hereinafter referred to as the Firm) and the City of Winter Springs doing business at
1126 East SR 434, Winter Springs, Florida 32708, (hereinafter referred to as the Client).
It is agreed as follows:
1. The Firm will provide the following services described as Items A, B and D per Report of
Findings - Phase I dated April 16, 2009:
a. Review of purchasing within the City Manager's authority.
b. Review of controls in selected areas.
c. Review current procedures with best practices in selected areas.
d. Develop a written report based on our findings.
2. This Agreement will remain in force until canceled by either party. It is recognized by the
parties that outside the terms of the Agreement, the Firm is available to provide other services
upon written request by the Client. Such services shall be provided under the same terms and
conditions as those covered by this Agreement unless documented by a separate Agreement.
3. With respect to financial, statistical and personnel data relating to the services provided which
are deemed confidential bylaw and which are submitted to or obtained by the Firm in order to
carry out the Agreement, the Firm will instruct its personnel to keep such information
confidential to the extent provided by law. Any data obtained, which is subject to the Florida
Public Records Act and the Sunshine Law, is exempt from this provision.
The working papers prepared in conjunction with our work are the property of our Firm,
constitute confidential and proprietary information and will be retained by us in accordance
with our policies and procedures, unless such papers constitute a public record which must be
disclosed pursuant to the Florida Public Records Act.
The Firm shall comply with all applicable Federal, State, Seminole County and City laws, code
and ordinances, and with all applicable rules and regulations promulgated by local, state and
national boards, bureau and agencies as they relate to the Agreement and/or the provision of
Services hereto.
Mr. Kevin Smith, City Manager
City of Winter Springs
Apri121, 2009
Page 2
4. Client will advise the Firm, with sufficient notice, of the work to be performed by the Firm.
Should information become known that would make the Firm's continued involvement in this
engagement inappropriate, the Firm reserves the right to withdraw from this engagement.
Client has read and agreed to the fees, billing policy and other terms and conditions as specified
in Exhibit A. Exhibit A and its terms and conditions are an integral part of this agreement.
This agreement contains all the understandings between the parties and supersedes all prior
offers, negotiations and agreements relating to the subject matter hereof.
If any provision of this agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remaining provisions shall nevertheless continue in full force without being
impaired or invalidated in any way, unless such partial invalidity materially affects the intent of the
parties.
The Client will indicate its agreement with the contents of this letter and Exhibit A dated April
21, 2009 by signing this letter and returning it to the Firm. We have enclosed an extra copy of this letter
and Exhibit A for your records.
In the event you have any questions or comments, please contact me.
j f/,~ ry t yo s
r^` c
Richard A. Pollack
For The Firm
BDPB:Ire
Enclosure
Mr. Kevin Smith, City Manager
City of Winter Springs
Apri121, 2009
Page 3
ACCEPTED AND AGREED:
City of Winter Springs
Please include the following information
regarding the Client representative to whom the
Firm will send its invoices:
Name
Title
Company
Address
Phone Number
Fax Number
Date
E-mail Address
Exhibit A
Berkowitz Dick Pollack & Brant
Certified Public Accountants & Consultants, LLP
Fees, Billing Policy and Other Terms and Conditions
Apri121, 2009
Fees for this engagement will not exceed $39,500.00 and plus of out-of-pocket costs not to exceed
$2,000. for the initial trip and will be based on the time spent by various members of the Firm's staff at
regular professional rates in effect at the time services are rendered. These hourly rates are currently as
follows:
Directors $420
Associate Directors $325 - $340
Managers $250 - $315
Supervisors $155 - $210
Seniors $140 - $150
Staff $110 - $135
Paraprofessionals $ 75 - $100
All services and expenses will be billed periodically and shall be payable within thirty (30) days of
receipt of such billing. In the absence of the Firm's receipt of a written objection to any invoice within thirty
(30) days of the date it is rendered, the Client will be deemed to have accepted and acknowledged, as
correct, the services rendered as described in the invoice and the value thereof. It is agreed that the Client
will be responsible for the payment of the Firm's charges. In the event it is necessary for the Firm to incur
attorney's fees and costs to collect outstanding fees, the Client agrees to pay such reasonable fees and costs
of collection, but only to the extent that a court of competent jurisdiction has determined that the Client has
failed to properly pay the Firm's charges.
The Firm may, at it sole discretion, suspend services to be provided pursuant to this agreement if an
invoice from the Firm to the Client becomes 15 days overdue. The Firm, at its sole discretion, may not
resume work until all outstanding invoices are paid in full. The Firm charges interest at the rate of twelve
percent (12%) per annum on any past due amount. If the Firm is not paid, it may cease all work until paid
and/or withdraw from this engagement. If the Firm elects to terminate the Firm's services for nonpayment,
the Firm's engagement will be deemed to have been completed. The Client will be obligated to compensate
the Firm for all time expended, but not to exceed $39,500.00. The Client agrees that the Firm shall not be
responsible for any consequences, including any financial damages, pertaining to the Firm's suspending work
as described above.
Any dispute arising under this agreement (including but not limited to the scope, nature and quality
of services performed by the Firm, the Firm's fees and other terms of the engagement) shall be submitted
to mediation. A competent and impartial third-party, acceptable to both parties, shall be appointed to
mediate, and the Client and the Firm shall pay an equal percentage of the mediator's fees and expenses.
If the dispute is not resolved in mediation, the mediation shall terminate and the dispute may be settled in a
court of competent jurisdiction located in Seminole County, Florida. No litigation proceedings shall be
commenced under this agreement until at least 60 days after the first joint meeting among the Client, the
Firm and the mediator.
Our engagement with you is not intended to shift risks normally borne by you to us. Except to the
extent finally determined to have resulted from the Firm's gross negligence or willful misconduct, the Firm's
maximum liability to the Client for any reason, including the Firm's negligence, relating to the services under
this letter shall be limited to the fees paid to the Firm for the services or work product giving rise to liability.
Any liability of the Firm to the Client shall not include any special, indirect, consequential,
incidental, punitive, or exemplary damages or loss nor any lost profits, savings, or business opportunity.
Exhibit A
Berkowitz Dick Pollack & Brant
Certified Public Accountants & Consultants, LLP
Fees, Billing Policy and Other Terms and Conditions
Page 2
If, in a proceeding or lawsuit in which the Firm is not a party and the Firm or any of its directors,
partners, agents or employees, is requested, pursuant to subpoena or other legal process to produce
documents and/or to give testimony upon oral examination (at deposition, hearing or trial) relating in any
way to the services provided pursuant to this engagement, the Client shall pay the Firm at standard billing
rates for its professional time and expenses, including reasonable attorneys' fees, incurred in responding to,
and complying with, such subpoena or legal process.
To the extent permitted by law and subject to any applicable limitations imposed pursuant to section
768.28, Florida Statutes. The Client hereby indemnifies the Firm, or any of its directors, partners, agents or
employees and holds them harmless from all claims, liabilities, losses and costs arising in circumstances
where there has been a misrepresentation by a member of the Client's management, including those charged
with corporate governance, regardless of whether such person was acting in the Client's interest.
During the term of the Agreement and completion of this engagement, the Firm agrees to maintain
professional malpractice insurance with minimum coverage of $1,000,000.00 per claim.