Internal Audit Report

Transcription

1 Internal Audit Report TxDOT Internal Audit Division

2 Objective To determine if objectives are being met and are in compliance with current regulations. Opinion Based on the audit scope areas reviewed, control mechanisms require improvement and only partially address risk factors and exposures considered significant relative to impacting reporting reliability, operational execution, and compliance. The organization's system of internal controls requires improvement in order to provide reasonable assurance that key goals and objectives will be achieved. Improvements are required to minimize existing process variation and control gap corrections that may result in potentially significant negative impacts to the organization including the achievement of the organization's business/control objectives. Overall Engagement Assessment Needs Improvement Title Findings Control Design Operating Effectiveness Rating Finding 1 Inventory Management X X Needs Improvement Finding 2 Lease Management X X Needs Improvement Management concurs with the above findings and prepared management action plans to address deficiencies. Control Environment Real Estate Management and Development Division (RMD) facilitated the sale of marketable TxDOT owned real property deemed not actively associated with a current or future construction project for TxDOT use. RMD established and uses a disposition process premised on the requisites statutes that incorporate requirements and guidance for: approvals for sale (Division Director, Commission, and Governor) timelines for approval and advertising evaluations of value, etc. To facilitate the disposition process in 2014, RMD hired a third party to identify marketable properties in select districts. This provided a list of potential property for disposition to assist RMD in meeting its objectives. RMD also relied on, and still does today, district personnel and the public to make them aware of marketable properties. With potential marketable properties being brought to RMD by a variety of parties, RMD is challenged with maintaining and prioritizing communication to the districts, to facilitate the disposition or leasing of property for future revenue generation purposes. Since July 2016, RMD has been working on the real property lease management process by centralizing invoicing and payment activities through the Financial Management Division (FIN), RMD also works each lease to ensure their contracts and requirements are current. In December 2016, the RMD function underwent an organizational restructure and now reports to the Right of Way Division (ROW). February

3 Summary Results Audit testing completed requiring management action. Finding Scope Area Evidence Based on interviews and observation performed during fieldwork, it was determined that: No searchable, centralized, property 1 2 Inventory of TxDOT Owned Property Transactions: Leasing of TxDOT Property Audit testing completed not requiring management action. Scope Area Transactions: Dispositions of TxDOT Property Transactions: Leasing of TxDOT Property inventory within TxDOT was available. Deeds are filed in the TxDOT records warehouse using a unique identifier, the Right of Way Control Section Job (RCSJ). However, of 12 properties reviewed, 11 properties RCSJ numbers were not immediately known locating the deed. A review of 146 lease contracts identified one or more of the following issues applicable to one or several of the contracts: Contract Terms Expired certificates of insurance (78) Expired leases (15) Expired bonds (9) Incorrect classifications (2) Payments Delinquent payments (25 over 12 contracts) with outstanding balances totaling $150,736 Evidence 11 of 11 (100%) dispositions tested exhibited: o Appropriate approvals based on the Texas Transportation Code o Required supporting documentation demonstrating approval of sales, timing of approvals and advertising, and property valuations Fiscal year (FY) 2015 General Capital Assets has proper disclosure of the 2015 dispositions 5 of 5 (100%) leases tested had appropriate approvals in accordance with the TxDOT Leasing Policy Manual Audit Scope The audit scope focused on TxDOT s real estate management activities during FY The audit of TxDOT owned property inventory included locating property deeds both within TxDOT and external to TxDOT (as needed, in places such as the county clerk s office or the county February

4 appraisal districts for the selected counties). In addition, state transportation agencies in other states were interviewed to understand their property management practices. The audit also focused on property disposition transactions and leasing transactions that either occurred or commenced within FY These transactions were reviewed for legal, policy, and financial statement disclosure compliance. Specifically, approvals, advertising compliance timelines, certificates of insurance, current bonds, and current lease contracts were reviewed. Each selected disposition and lease transaction where money was received was traced through to the State Highway Fund. In addition, a review was performed of the FY 2015 Annual Financial Report s General Capital Asset note for property dispositions as the FY 2016 report was not yet completed. The audit was performed by Kathy Baca, Franciou Niclas, Rita Ruiz, and Lindsay Bibeau (Engagement Lead). The audit was conducted during the period from September 1, 2016 to November 30, Methodology The methodology used to complete the objectives of this audit included: Reviewed TxDOT internal documents, such as RMD Standard Operating Procedures and manuals for both dispositions and leasing to identify key procedures that were to be performed. Reviewed sections of the Federal Code and Texas Code to identify applicable regulations for managing, leasing or disposing of real property. Conducted interviews with key personnel in RMD, ROW, and Financial Management divisions, and in various districts, such as, the division directors, accounting section directors, and district engineers to discuss the leasing and disposition processes, risks, concerns, and reporting disclosures. Conducted interviews with state transportation agencies in other states to gain further understanding of their property management in their respective states. Judgmentally selected six Texas counties to compare TxDOT property listings to properties found on the dispositions listing and performed deed research. Judgmentally selected five leases commenced within FY 2016, eleven dispositions from FY 2016, and reviewed for approvals, fair market value, appraisals, and supporting documentation as they apply to the leases and/or dispositions. Background This report is prepared for the Texas Transportation Commission and for the Administration and Management of TxDOT. The report presents the results of the Real Estate Management Program audit which was conducted as part of the FY 2017 Audit Plan. The Real Estate Management & Development Division (RMD) consolidated into the Right of Way Division (ROW) in December Prior to the consolidation, RMD was established in 2014 with responsibility for identifying marketable TxDOT properties and facilitating their sale. In order to initiate this potential revenue stream, a third party was hired to assist in the initial identification of TxDOT owned real property for metro areas of three districts. In FY 2016, RMD performed 19 dispositions, generating approximately $39 million in revenue. February

5 In July 2016, management of property leases was centralized through RMD in an effort to streamline the process from the districts. As of September 2016, RMD was managing 143 leases that generated approximately $1.2 million in FY We conducted this performance audit in accordance with Generally Accepted Government Auditing Standards and in conformance with the International Standards for the Professional Practice of Internal Auditing. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. Recommendations to mitigate risks identified were provided to management during the engagement to assist in the formulation of the management action plans included in this report. The Internal Audit Division uses the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control Integrated Framework version A defined set of control objectives was utilized to focus on reporting, operational, and compliance goals for the identified scope areas. Our audit opinion is an assessment of the health of the overall control environment based on (1) the effectiveness of the enterprise risk management activities throughout the audit period and (2) the degree to which the defined control objectives were being met. Our audit opinion is not a guarantee against reporting misstatement and reliability, operational sub-optimization, or non-compliance, particularly in areas not included in the scope of this audit. Benchmarking Through discussions with state transportation agencies in other states, it was noted that one state leverages their decentralized nature along with a centralized system to maximize the monitoring of the real property management process. The Right of Way agents in each district are required to input their properties directly into a system used by the agency of this state. An annual review of each district is then performed to determine if there is supporting documentation for a sample of the real properties within the agency s system. This monitoring process provides additional assurance to that state s agency that is aware of their real property in the event of a sale or lease contract. February

6 Detailed Findings and Management Action Plans (MAP) Finding No. 1: Inventory Management Condition The property inventory management system does not provide assurance that TxDOT has a complete or real-time inventory of property owned and that is supported through property deeds. Currently, RMD objectives are handled mainly through manual means that are not scalable should a disposition strategy continue. Effect/Potential Impact Without a complete and real-time property inventory, TxDOT could lose out on disposition opportunities of properties that may be in surplus for TxDOT. RMD has conveyed it has had challenges with fulfilling their objectives and even incurred expenses in 2014 to hire a third party to commence an inventory for three districts to assist with determining size and value of surplus properties. Criteria Section of the Government Code requires that a state agency to maintain the property records required, and at all times, the property records must accurately reflect the property possessed by the agency. Cause A centralized, searchable, property inventory system has not been established at TxDOT. Many TxDOT property acquisitions pre-date the current retention policy/process used to account for the validity and accuracy of records. In addition, the utilization of common nomenclature is not being consistently applied regarding land transactions within TxDOT, such as acquisitions or dispositions of property. Evidence Based on interviews and observations performed during fieldwork, it was determined that: There is no centralized searchable property inventory within TxDOT. Property deeds can be stored at the 1) records warehouse, 2) the districts, or 3) within the Right of Way Division (ROW). One property, formally pending commission approval for sale, was found to be no longer owned by TxDOT. The deed obtained through research was superseded by a previous sale. Within TxDOT, the records warehouse files deeds using the unique identifier of the RCSJ. However, of twelve properties reviewed, eleven properties had a RCSJ number that were not immediately known prior to locating the deed. During fieldwork, five counties from five different districts were interviewed and observed to further assist in identifying TxDOT assets contained in external entity databases, such as the county clerk s office or the county appraisal districts. Key challenges in identifying TxDOT properties included: none of the counties had records dating prior to 1957 most databases in use were not established until the year 2000 or later February

7 there was a variety of nomenclature used to designate TxDOT as the grantee or grantor listed on the deed, such as: Texas, State of State Highway Department State of Texas People of the State of Texas Management Action Plan (MAP): MAP Owner: Gus Cannon, Director, Right of Way Division MAP 1.1: Meet with Procurement, Contract Services, Information Management, and TxDOT s thirdparty service provider for Information Technology to discuss TxDOT ECM (Enterprise Content Management) Discovery Session with the vendor DataBank. Completion Date: March 15, 2017 MAP 1.2: Hire a Real Estate Management Section Director, who will be responsible for implementation of MAPs 1.3, 1.4, and 1.5. Until this section director position is filled, the Director of the Right of Way Division will provide oversight for the implementation of the MAPs referenced. Completion Date: October 15, 2017 MAP 1.3: Using the bidding process, as necessary, hire a professional real estate record management consultant that will develop a real estate records management program for TxDOT. Completion Date: April 15, 2017 MAP 1.4: Work with the Professional Real Estate Records Management Consultant to develop and document a real estate records management program to be used by TxDOT. Completion Date: August 15, 2017 MAP 1.5: Right of Way Division will communicate the developed process created in MAP 1.4 with an internal memorandum and implementation of this process will include the scanning of hard copy documents such as real property deeds. Completion Date: August 15, 2019 February

8 Finding No. 2: Lease Management Condition Oversight of TxDOT real estate leases valued at approximately $1.2 million annually does not include effective monitoring of delinquency aging of payments, expiration of contracts, and other contract requirements. Effect/Potential Impact Lapsed contractual requirements or contracts could result in noncompliance with state law. Ineffective monitoring can also result in loss of revenue. Criteria Title 43 in the Texas Administrative Code Rule states that lease of a highway asset in written form should include the following: A performance bond when considered necessary by the department Adequate public liability insurance for the leased asset, by the lessee at the lessee s sole expense; naming the department as an additional insured and including other endorsements as determined to be necessary by the department TxDOT Leasing Real Property Dispositions Standard Operating Procedures (SOP) states the following: Finance will provide a monthly accounts receivable aging report to Real Estate Management and Development (RMD) Lease Management Maintains the electronic lease agreement inventory and all appropriate document according to lease terms Monitor expiration of insurance certificates and bond documents and obtains proof of current coverage Inspect lease area thirty days after the commencement of the lease Communicates with lessee regarding upcoming expirations dates and lease obligations in accordance with lease provision Cause Real Estate leases were stored and managed by the district in which the property was located. Through audit testing and inquiry, it was concluded that there was no designated employee with primary responsibility to manage leases from the commencement of the contract to contract termination in all the districts. The previous decentralization of this process in the districts allowed for required monitoring to be overlooked, which allowed contractual requirements and contracts to lapse. Evidence During fieldwork an analytical review of lease contractual requirements was performed on 146 leases, as of October 28, These requirements are required by statute, and protect TxDOT in the event of property damage. This review of the lease contracts identified one or more of the following issues and can be applied to one or several of the contracts: Contract Terms Expired certificates of insurance (78) February

9 o As of November 28, 2016, 14 certificates were reinsured, leaving 64 leases with expired certificates of insurance Expired leases (15) Expired bonds (9) o As of November 28, 2016, 1 bond was renewed leaving 8 leases with expired bonds Incorrect classifications (2) Payments Delinquent payments (25 over 12 contracts), with outstanding balances totaling $150,736 were initially identified in our audit work. o As of November 4, 2016, nine leases were brought current, leaving 3 leases with delinquent payments totaling $102,180 In addition to the analytical procedures discussed above, additional detail testing was performed of five leases initiated in fiscal year 2016 identified one or more of the following situations for which documentation could not be provided: Performance of 30 day inspection once the lease has begun, as required by Leasing- Real Property Dispositions Standard Operating Procedures (5 leases) Proof of payment that the lease execution was at Fair Market Value. This is a joint lease between TxDOT and the General Land Office (GLO), and this lease type is still being ascertained by RMD (1 lease) Aging reports for leases that are past due leases (5 leases) Management Action Plan (MAP): MAP Owner: Gus Cannon, Director, Right of Way Division MAP 2.1: Right of Way will establish a monitoring process to ensure any active lease, including joint leases such as the General Land Office (GLO) joint lease, has current certificates of insurance, bonds, payments, or lease contracts. Completion Date: August 15, 2017 MAP Owners: Gus Cannon, Director, Right of Way Division Casey Rowe, Accounting Manager, Financial Management Division MAP 2.2: Right of Way will work with the Financial Management Division to develop and implement aging reports as a monitoring tool to identify payments that are past due. Completion Date: August 15, 2017 February

10 MAP Owner: Gus Cannon, Director, Right of Way Division MAP 2.3: Update the Leasing Manual and Standard Operating Procedures to include a high level understanding and the detailed process, respectively, of the following: the updated inspection process collection escalation process (such as payment collections and aging reports), and the monitoring process for required leasing documentation (i.e. bonds, certificate of insurance, contracts) Completion Date: August 15, 2017 February

11 Observation and Recommendation Audit Observation (a): Prepaid Lease Revenue Prepaid lease revenue is currently being recorded on a cash basis method and not being adjusted to accrual method at year-end for reporting purposes, as required by The Governmental Accounting Standards Board. Effect/Potential Impact Without proper adjusting entries at year-end, revenue can be overstated. Audit Recommendation Although immaterial to financial statements of TxDOT, Financial Management Division should gain an understanding of the current lease process and determine what the proper adjusting entry should be made on an on-going basis. February

12 Summary Results Based on Enterprise Risk Management Framework Closing Comments The results of this audit were discussed with/provided to the Right of Way Division Director and the Real Estate team on January 20, The Internal Audit Division appreciates the cooperation and assistance received from the Right of Way Division during this audit. February