CITY OF PHILADELPHIA OFFICE OF THE CITY CONTROLLER Philadelphia, Pennsylvania LAW DEPARTMENT REVIEW OF CONTRACT COMPLIANCE PROCEDURES APRIL 2011
Ms. Shelley R. Smith, City Solicitor Law Department 17 th Floor, One Parkway Building 1515 Arch Street Philadelphia, PA 19102 April 4, 2011 An agreed-upon procedures review of the Law Department s contracts with co-counsel for the collection of delinquent real estate taxes for the period July 1, 2008 through June 30, 2010 was performed with the assistance of Clifton Gunderson LLP. The purpose of the engagement was to assess and determine the level of performance of the co-counsel collection firm, as well as their level of compliance with contractual terms. A synopsis of the results of this review is provided in the executive summary. The findings contained in the report were discussed with department officials at an exit conference. We included the Law Department s written response to the findings as part of the report. We believe that, if implemented by management, these recommendations will improve the Law Department s ability to monitor co-counsel s level of performance as well as compliance with contractual requirements. We would like to express our thanks to the management and staff of the Law Department for the courtesy and cooperation shown during the conduct of this review. Very truly yours, cc: Honorable Michael A. Nutter, Mayor Honorable Anna C. Verna, President and Honorable Members of City Council Richard Negrin, Managing Director and Other Members of the Mayor s Cabinet ALAN BUTKOVITZ City Controller
CO-COUNSEL CONTRACT COMPLIANCE EXECUTIVE SUMMARY Why the Controller s Office Conducted the Examination At the request of the City of Philadelphia s Law Department, the City Controller s Office, with the assistance of Clifton Gunderson LLP Certified Public Accountants and Consultants, reviewed selected invoices for fees and other expenses associated with the collection of city and school delinquent taxes as remitted to the department by a co-counsel collection firm (Co-Counsel). The objectives of the review procedures, to which the Law Department agreed, were to: (1) assess Co-Counsel s performance in collecting delinquent taxes and (2) assess Co-Counsel s compliance with terms and conditions of its contracts, including the accuracy and completeness of invoices. What the Controller s Office Found City of Philadelphia (City) records indicate that for the 24 month period that ended June 30, 2010, the City paid Co-Counsel $5.5 million to collect $47.6 million in delinquent taxes. This level of performance equates to about 12 cents in costs for each dollar collected. However, tests of Co-Counsel s invoices for compliance with terms and conditions of its contracts were inconclusive. As shown below, between 75 percent and 91 percent of the commission amounts, which were subjected to testing, could not be conclusively corroborated. Information systems used by the Law Department to monitor Co-Counsel s invoices were incomplete, not up-to-date, and difficult to navigate. Additionally, documentation supporting invoiced amounts was not only excessive, but often subjective and open to differing interpretations as a result of vague contract language. Type of Commission / Contract Year Commissions Tested Uncorroborated Commissions Uncorroborated as a percent of amount tested Direct Collection / 2005 $22,188 $16,555 75% Direct Collection / 2009 $19,182 $17,440 91% Lock Box Collection / 2005 $60,130 $53,998 90% Lock Box Collection / 2009 $31,970 $24,840 78% What the Controller s Office Recommends The Law Department should consider amending its Co-Counsel contract to state in detail the specific documentation required to support Co-Counsel s invoices, eliminate any onerous and unnecessary requirements, and clarify when Co-Counsel is entitled to commissions earned. The Law Department also needs to work with other city agencies, such as the Revenue Department and City Treasurer s Office, towards improving the timeliness and quality of information available in various city databases needed by Law Department personnel to validate fees earned and reimbursable expenses claimed by Co-Counsel.
TABLE OF CONTENTS PAGE INDEPENDENT ACCOUNTANT S REPORT ON APPLYING AGREED-UPON PROCEDURES...1 FINDINGS AND OBSERVATIONS...12 SUMMARY OF RESULTS OF PROCEDURES...15 AGENCY S RESPONSE Shelley R. Smith, City Solicitor...16 AUDITOR S COMMENTS ON AGENCY S RESPONSE...23
Α1 Mr. Alan Butkovitz City Controller Office of the Controller City of Philadelphia 1230 Municipal Services Building 1401 John F. Kennedy Boulevard Philadelphia, PA 19102-1679 We have performed the procedures enumerated below, which were agreed to by management of the City Controller s Office and the City Law Department, solely to assist the City s management in assessing and determining the level of performance of the Co-Counsel collection firm ( Co-Counsel ), as well as their level of compliance with contractual requirements for the period July 1, 2008 to June 30, 2010. This agreed-upon procedures engagement was conducted in accordance with standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. The procedures and associated results are as follows (also refer to Appendix A for a summary of results): 1. We obtained and read the Contracts and related Amendments between the City of Philadelphia (City) and Co- Counsel for the collection of delinquent real estate taxes for the City and the School District of Philadelphia. (Contract No. 0520022 for the period through 12/31/08 (the 05 Contract ) and Contract No. 0920753 for the period from 1/1/09 through 12/31/10 (the 09 Contract ), which itself incorporates certain terms of the 05 Contract during parts of 2009). 2. We obtained the six invoices selected by the City Law Department which represent one invoice from each of the Contracts for each of the three types of fees billable by Co-counsel under the Contracts: Contingent Fees for Direct Collections; Contingent Fees for Lock Box Collections; and Eligible Expenses and performed the following: Invoice description Fees Billed Invoice #0077 Lock Box Collections 05 Contract $177,507.48 Invoice #0099 Lock Box Collections 09 Contract $ 67,733.94 Invoice #0078 Direct Collections 05 Contract $ 28,329.79 Invoice #0094 Direct Collections 09 Contract $ 22,993.64 Invoice #2 Eligible Reimbursable Expenses 05 Contract $237,122.12 Invoice #3 Eligible Reimbursable Expenses 09 Contract $190,676.43 η 1
2.A. For each of the two Lock Box Collection invoices and the Direct Collection invoice under the 05 Contract, we obtained the supporting Cashier 20 or Non-Cashier 20 reports from the City s TIPS revenue accounting system, and selected 100 items from each of the reports using a stratified cumulative monetary amount (CMA) sampling method. Each invoice contained individual line items representing tax payments received for a specific tax year and property. Each property is identified by a unique BRT number assigned by the City. The 100 items selected from each report were based on the summarized total of all tax year collections for each individual BRT number. Many of the BRT s we selected had multiple payments on the reports, which represented collections of multiple year taxes for the property represented by the BRT number. The following documents the total number of specific tax years reviewed as part of the samples selected: 1. Direct Collections (05 Contract) 269 specific tax years 2. Lock Box Collections (05 Contract) 466 specific tax years 3. Lock Box Collections (09 Contract) 286 specific tax years For every payment received for each selected BRT, we performed the following: 2.A.I. We determined through review of the Contracts and discussion with City Law Department personnel what type of supporting documentation was expected to be received from Co-Counsel to support invoices for Direct Collections under the 05 contract and for Lock Box collections under both the 05 and 09 contracts. The supporting documentation expected to be received from Co-Counsel for these invoices is the TIPS collection reports which are produced by the City s Department of Revenue. No exceptions were noted, all invoices were accompanied by the appropriate TIPS collection reports. 2.A.II.. For each of the items selected in step 2.A., we performed the following procedures: 2.A.II.a. Obtained internal City documentation from City Law Department personnel (for example, TIPS screenshots and collection reports, check copies from WebExtender). We obtained internal City documentation using the BRT numbers by accessing read-only TIPS screenshots for each selection as instructed by City Law Department personnel. Due to personnel constraints, City Law Department personnel were unavailable to provide copies of the TIPS 2
documentation as originally intended, therefore, we were granted readonly access to the TIPS system to locate the documentation on-line. See step 2.A.II.c. for discussion of the procedures involving the WebExtender system. 2.A.II.b.We compared the supporting information included in the invoices to the TIPS screenshots to determine the validity of the collections. Direct Collections (05 Contract) For 1 of the 100 BRT s selected, we were unable to locate evidence of the payments posted in the TIPS screenshots. The TIPS report that accompanies this invoice included all 5 tax years that were reported as paid related to this BRT, for which Co-Counsel claimed a total commission of $468.55, however the payments could not be located in the same TIPS electronic system that was used to generate the report. City Law Department Personnel could not explain this exception. Lock Box Collections (05 Contract) No exceptions were noted. Lock Box Collections (09 Contract) No exceptions were noted. 2.A.II.c. We reviewed the imaged check copies from WebExtender and determined if the check was received from a third-party (for example, title company) or from the taxpayer. We attempted to review the imaged check copies from WebExtender to determine if the check was received from a third-party (for example, title company) or from the taxpayer. We were given read-only access to the WebExtender system since City Law Department personnel were unavailable to provide the check copies as originally intended. Direct Collections (05 Contract) for 46 of the 100 BRT s selected, we were unable to view the imaged check copies in the WebExtender system. Co-Counsel invoiced the City $5,878.04 in commissions for these 46 BRT s. Lock Box Collections (05 Contract) for 88 of the 100 BRT s selected, we were unable to view the imaged check copies in the WebExtender system. Co-Counsel invoiced the City $46,226.76 in commissions for these 88 BRT s. 3
Lock Box Collections (09 Contract) for 85 of the 100 BRT s selected, we were unable to view the imaged check copies in the WebExtender system. Co-Counsel invoiced the City $23,535.07 in commissions for these 85 BRT s. After we were unable to view all of the imaged check copies in the Web Extender system, City Law Department personnel informed us of an alternative procedure we could perform to view the checks for Lock Box collections by gaining access to the City s Lock Box account used by Co-Counsel. As the City Law Department personnel had not previously accessed the Lock Box account electronically, we were given read-only access to the Lock Box account and instructed by the City s Treasury Department on how to navigate the search capabilities provided by the financial institution. In attempting to perform this alternative procedure, we discovered that the lock box account was only searchable by deposit date, and the dates in the City s TIPS system did not include accurate deposit dates. We attempted to search for an initial twelve BRT s based on the postmark date in TIPS and we were unable to find and view those checks in the financial institution s Lock Box imaging system. 2.A.II.c.i. If the check was received from a third-party, we obtained from Co-Counsel and reviewed the signed payment agreement to verify the involvement of Co-Counsel in the collection. According to the City Law Department personnel, the supporting documentation needed to show involvement of Co-Counsel in the collection is a Petition and Rule (P&R) order. Once we determined that several checks had been received from third parties, we discussed with City Law Department personnel their expectation of appropriate documentation that would support Co-Counsel s involvement in the collection. We were informed that the P & R order was the primary documentation required to demonstrate Co-Counsel s involvement in the collection when payment was received from third-parties. We did not contact Co-Counsel directly, but we provided to the City Law Department personnel a listing of the BRT numbers from our sample for which payment had been made by third parties. The City Law Department provided the list to Co-Counsel and Co- Counsel returned the list to the City Law Department with the applicable P&R order numbers identified. We obtained that list from City Law Department Personnel and the results are summarized below. We considered BRT s that did not have a 4
P&R order number identified by Co-Counsel to be exceptions as described below. Direct Collections (05 Contract) Of the 54 BRT s for which we were able to view the imaged check copies in step 2.A.II.c. above, we identified 23 payments made by third parties. For 18 of the 23 third-party payments identified, we were unable to obtain evidence from Co-Counsel of a Petition and Rule (P&R) order related to the specific property represented by the BRT number. Co-Counsel invoiced the City $10,676.47 in commissions for these 18 third-party payments. Lock Box Collections (05 Contract) Of the 12 BRT s for which we were able to view the imaged check copies in step 2.A.II.c. above, we identified 8 payments made by third parties. For 5 of the 8 third-party payments identified, we were unable to obtain evidence from Co-Counsel of a Petition and Rule (P&R) order related to the specific property represented by the BRT number. Co-Counsel invoiced the City $7,777.11 in commissions for these 5 third-party payments. Lock Box Collections (09 Contract) Of the 15 BRT s for which we were able to view the imaged check copies in step 2.A.II.c. above, we identified 6 payments made by third parties. For 3 of the 6 third-party payments identified, we were unable to obtain evidence from Co-Counsel of a Petition and Rule (P&R) order related to the specific property represented by the BRT number. Co-Counsel invoiced the City $1,304.46 in commissions for these 3 third-party payments. 2.A.II.d. We recalculated the contingent attorney fees billed by Co- Counsel for each selected item. All fees billed were recalculated without any underpayment or overpayment exception in excess of $20. The net recalculation of fees for all selected items indicated an overpayment of $54.70. 2.A.II.e.. For items selected from Lock Box Collection invoices, we compared the date of the imaged check copies from WebExtender to the date of collection per the TIPS report or screenshot. Lock Box Collections (05 Contract) Of the 12 BRT s for which we were able to view the imaged check copies, we compared the date of 5
the imaged check copies from the WebExtender image to the date of collection in the TIPS screenshots, and noted that in all cases the dates of the checks were prior to the dates of collection entered in TIPS. Differences between the dates ranged from 11 to 61 days. We were unable to determine deposit dates of the checks; therefore, we were unable to compare the check dates to the deposit dates. Lock Box Collections (09 Contract) Of the 15 BRT s for which we were able to view the imaged check copies, we compared the date of the imaged check copies from the WebExtender image to the date of collection in the TIPS screenshots, and noted that in all cases the dates of the checks were prior to the date of collection entered in TIPS. Differences between the dates ranged from 3 to 87 days. We were unable to determine deposit dates of the checks; therefore, we were unable to compare the check dates to the deposit dates. 2.B For the Direct Collection invoice under the 09 Contract, we obtained the supporting Non-Cashier 20 report from the City s TIPS real estate tax system, and selected 100 items from the report using a stratified CMA sampling method. Each invoice contained individual line items representing tax payments received for a specific tax year and property. Each property was identified by a unique BRT number assigned by the City. The 100 items selected from each report were based on the summarized total of all tax year collections for each individual BRT number. There were a total of 176 specific tax years reviewed as part of the sample selected: For every payment received for each selected BRT, we performed the following: 2.B.I. We determined through discussion with City Law Department personnel what type of supporting documentation is expected to be received from Co-Counsel to support invoices for Direct Collections under the 09 contract. The supporting documentation expected to be received from Co-Counsel was TIPS collection reports which are produced by the City s Department of Revenue, Petition and Rule (P&R) orders, dunning letters, and/or automated dialing call sheets. All of the 176 specific tax years selected were included in the TIPS reports, of those, 170 were supported by dunning letters, five were supported by automated dialing call sheets and one was supported by a P&R order. 2.B.II. For each of the items selected in step 2.B., we performed the following procedures: 6
2.B.II.a Obtained internal City documentation from City Law Department personnel (for example, Petition and Rule (P&R) orders, TIPS screenshots and collection reports, check copies from WebExtender). We obtained internal City documentation using the BRT numbers by accessing read-only TIPS screenshots for each selection as instructed by City Law Department personnel. Due to personnel constraints, City Law Department personnel were unavailable to provide copies of the TIPS documentation as originally intended therefore we were granted read-only access to the TIPS system to locate the documentation online. See Step 2.B.II.e.for discussion of the procedures involving the WebExtender system. 2.B.II.b. We compared the supporting information included in the invoice to the internal documents provided by the City Law Department to determine the validity of the collections. All collections claimed for the selected items were agreed to the TIPS screenshots and collection reports. No exceptions were noted. 2.B.II.c. For those items selected that are supported only by dunning letters, we determined, from reading the supporting documentation, the date that the letter was issued to the taxpayer and compared that to the date of collection from the TIPS report or screenshot to verify that the date of contact with the taxpayer was within 75 days prior to the date of collection. For all 170 payments supported by dunning letters, the date of contact with the taxpayer was within 75 days prior to the collection date. No exceptions were noted. 2.B.II.d For those items selected that were supported only by automated dialing call sheets, we determined, from reading the supporting documentation, the date that the taxpayer was contacted and compared that to the date of collection from the TIPS report or screenshot to verify that the date of contact with the taxpayer was within 75 days prior to the date of collection. For all five payments supported by automated dialing call sheets, the date of the call made to the taxpayer was within 75 days prior to the collection date; however, there was no evidence shown on the dialing call sheets submitted by Co-Counsel that contact with the taxpayer was actually achieved. Co-Counsel invoiced the City $321.22 in commissions for these 5 accounts. 7
2.B.II.e We reviewed the imaged check copies from WebExtender and determined if the check was received from a third-party (for example, title company) or from the taxpayer. We attempted to review the imaged check copies from WebExtender to determine if the check was received from a third-party (for example, title company) or from the taxpayer. We were given read-only access to the WebExtender system since City Law Department personnel were unavailable to provide the check copies as originally intended. For 22 of the 100 BRT s selected, we were unable to view the imaged check copies in the WebExtender system. Co-Counsel invoiced the City $4,299.71 in commissions for these 22 accounts. 2.B.II.e.i. If the check was received from a third-party, obtain and review the signed payment agreement to verify the involvement of Co- Counsel in the collection. Once we determined that several checks had been received from third parties, we discussed with City Law Department personnel their expectation of appropriate documentation that would support Co-Counsel s involvement in the collection. We were informed that the P & R order was the primary documentation required to demonstrate Co-Counsel s involvement in the collection when payment was received from third-parties. We did not contact Co-Counsel directly, but we provided to the City Law Department personnel a listing of the BRT numbers from our sample for which payment had been made by third parties. The City Law Department provided the list to Co-Counsel and Co-Counsel returned the list to the City Law Department with the applicable P&R order numbers identified. We obtained that list from City Law Department Personnel and the results are summarized below. We considered BRT s that did not have a P&R order number identified by Co-Counsel to be exceptions as described below. Of the 78 BRT s for which we were able to view the imaged check copies in step 2.B.II.e. above, we identified 14 payments made by third parties. For all 14 third-party payments identified, we were unable to obtain evidence from Co-Counsel of a Petition and Rule (P&R) order related to the specific property represented by the BRT number. Co-Counsel invoiced 8
the City $13,210.21 in commissions for these 14 third-party payments.. 2.B.II.f. Recalculate the contingent attorney fees billed by Co-Counsel for the selected item. All fees billed for the 176 selected items were recalculated without any underpayment or overpayment exception in excess of $20. The net recalculation of fees for all selected items indicated an overpayment of $0.93. 2.C. For each of the two Eligible Expense invoices, we obtained the supporting spreadsheets prepared by Co-Counsel, and selected 50 items using a stratified CMA sampling method. Each invoice contained individual line items which represented various types of expenses related to the Sheriff s sale for a property represented by the BRT number. The 50 items selected from each spreadsheet were based on the summarized total of all expenses for each individual BRT number. Many of the BRT s we selected had multiple expenses on the spreadsheets. For every expense reported for each selected BRT, we performed the following: 2.C.I. We determined through review of Contracts and discussion with City Law Department personnel what type of supporting documentation is expected to be received from Co-Counsel to support invoices for Eligible expenses. The supporting documentation expected to be received from Co-Counsel was TIPS screenshots indicating that a Sheriff s sale was actually held, and Petition and Rule (P&R) served on the taxpayer and granted by the court. For each of the items selected in step 2.C., we performed the following procedures: 2.C.I.a Obtained the internal City documentation from the City Law Department for selected items (for example, Petition and Rule (P&R) orders, TIPS screenshots). We obtained internal City documentation using the BRT numbers by accessing read-only TIPS screenshots for each selection as instructed by City Law Department personnel. Due to personnel constraints, City Law Department personnel were unavailable to provide copies of the TIPS documentation as originally intended. 9
2.C.I.b. Compared the supporting information included in the invoice to the internal documents provided by the City Law Department to determine whether the claimed expenses are Eligible Expenses incurred by Co- Counsel and properly assessed against the taxpayer. Eligible Expenses (05 Contract) For 3 of the 50 BRT s selected, we were unable to locate evidence of the expenses posted in the TIPS screenshots. There were 9 expenses reported as incurred by Co- Counsel related to these BRT s, for which Co-Counsel claimed a total of $3,910.00 for reimbursement. Also, for 1 of the 50 BRT s selected, we noted that the BRT was included on the City s Recall list as provided by the City Law Department. Therefore, this property should not have gone to Sheriff s sale. There were 4 expenses reported as incurred by Co-Counsel related to this BRT, for which Co-Counsel claimed a total of $1,220.00 for reimbursement. Eligible Expenses (09 Contract) For 5 of the 50 BRT s selected, we were unable to locate evidence of the expenses posted in the TIPS screenshots. There were 14 expenses reported as incurred by Co- Counsel related to these BRT s, for which Co-Counsel claimed a total of $3,580.00 for reimbursement. 2.C.I.c. We reviewed the expense detail history shown in the TIPS screenshot and verified that the amounts billed by Co-Counsel do not include costs incurred by the City Law Department or Sheriff s Office. Eligible Expenses (05 Contract) For 3 of the 50 BRT s selected, we were unable to locate evidence of the expenses posted in the TIPS screenshots. Therefore, we were unable to conclude if the costs were incurred by the City Law Department or Sheriff s Office, in which case, Co-Counsel would not have been entitled to reimbursement. Eligible Expenses (09 Contract) For 5 of the 50 BRT s selected, we were unable to locate evidence of the expenses posted in the TIPS screenshots. Therefore, we were unable to conclude if the costs were incurred by the City Law Department or Sheriff s Office, in which case, Co-Counsel would not have been entitled to reimbursement. 2.C.I.d We reviewed the TIPS account history to verify that the Sheriff s sale of the property took place and that the related taxes were paid and collected in full prior to the date of the invoice from Co-counsel. 10
No exceptions were noted. 2.C.I.e We ascertained that the amounts and nature of the expenses billed by Co- Counsel complied with the contract terms and conditions for Eligible Expenses. Nature of the expenses billed by Co-Counsel included title search, petition and rule filing fees, property inspection fees, and sheriff sale costs. No exceptions were noted. ******* We were not engaged to and did not conduct an examination, the objective of which would be the expression of an opinion on the Co-Counsel s compliance with the criteria outlined within this report. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of the City s management, and is not intended to be and should not be used by anyone other than the specific parties. Α1 Philadelphia, Pennsylvania February 24, 2011 11
CITY OF PHILADELPHIA CO-COUNSEL CONTRACT COMPLIANCE AGREED-UPON PROCEDURES FINDINGS AND OBSERVATIONS During our performance of the agreed-upon procedures related to Co-Counsel s compliance with contractual requirements, we identified the following observations: Finding #1: Observation The Co-Counsel Contract contains provisions for the calculation of the three types of fees billable under the Contracts: Attorney fees for taxes collected and deposited to the Lock Box account (Lock Box fees); Attorney fees for taxes collected and deposited directly to the City Revenue Department (Direct Collection fees); and Reimbursement for Eligible Expenses incurred by Co-Counsel. The contract has provisions discussing the collection efforts required by Co-Counsel and in some cases the documentation required to be provided in support of the invoices submitted under the contract. The documentation requirements are subjective and open to differing interpretations by outside parties. The 2009 Contract has additional documentation requirements for Invoices submitted for the Direct Collection Fees. These additional requirements have resulted in excessive amounts of documentation being provided with each invoice, in some cases, boxes of documentation accompany the invoice. Given the volume of the documentation it is extremely cumbersome and difficult for City Law Department personnel to review the invoices to validate that the fees claimed by Co-Counsel have been earned. The fees claimed by Co-Counsel for Direct Collections are also the smallest portion of the three types of fees. Finding #2: Observation Many of the concerns raised by City Law Department personnel in our discussions could not be supported by the contract language or the documentation submitted with the Co-Counsel invoices. Contract language does not appear to support the goals and objectives of the Law Department s intended business relationship with Co-Counsel. For example, we were told that Co-Counsel was not entitled to fees when the taxes were paid by a third party. However, our reading of the contract indicates that fees for third party payments can be earned if Co-Counsel can demonstrate that its collection activities contributed to the collection. Under the 2009 Contract, the documentation requirements for this type of collection are the same as the documentation requirements for the Direct Collection fees in Section 4.2 (a) (i) of the Contract. The proof should include such evidence as a Payment Agreement, an individual bill sent to the Taxpayer, proof of service of a lawsuit or petition and rule, log of a telephone call, or the like. All evidence considered is to be reasonably considered. 12
Finding #3: Observation CITY OF PHILADELPHIA CO-COUNSEL CONTRACT COMPLIANCE AGREED-UPON PROCEDURES FINDINGS AND OBSERVATIONS The information systems used by the City Law Department to monitor the Co-Counsel contract are not kept up to date and are difficult to navigate. City Law Department personnel are not proficient in the use of these systems and must rely on colleagues in the Revenue or Treasury Department to resolve questions regarding the use of the systems and the validity of the information in them. The TIPS system used by The City Law and Revenue Departments to track payments of real estate taxes has incomplete information related to the deposit dates of collections. The WebExtender system which is supposed to contain electronic images of deposited checks is extremely incomplete, as we found that some collections received in 2009 had not yet been entered into the system as of September 2010. The check imaging system for the Lock Box account used by Co-counsel was not previously accessed by Law Department personnel prior to our attempts to review check copies as a part of this engagement. Personnel from the City s Treasury Department instructed us as to the use of the Lock Box system. Recommendations 4. The City Law Department should consider amending contract terms to align more closely with the business objectives of the contract. If there is a concern that Co-Counsel does not have adequate internal controls to maintain compliance with the contract terms, an annual audit clause could be added, requiring Co- Counsel to submit an annual audit of its internal controls related to the City contract (a SAS 70 type report). Since it is impractical and not cost effective to have Law Department personnel review the voluminous documentation that Co-Counsel is currently submitting with its Direct Collection invoices, a lower commission rate could be negotiated with a less onerous documentation requirement. If the Law Department is concerned that Co-Counsel has not demonstrated to their satisfaction the level of collection effort that caused the Direct Collections to be made, then the documentation standard should be amended to eliminate items that do not meet the Department s standards. (e.g. phone logs, dunning letters). If it is the intention of the Law Department to not pay Co-Counsel s fees when taxes are remitted by a third party (e.g. title company) due to refinancing, sale or other third party circumstance, then the contract language should be amended to eliminate the current clause that allows such payment (the except and to the extent language in Section 4.2 (b) of the Contract). 13
CITY OF PHILADELPHIA CO-COUNSEL CONTRACT COMPLIANCE AGREED-UPON PROCEDURES FINDINGS AND OBSERVATIONS If it is the intention of the Law Department to only pay Co-Counsel s fees for third party payments on an exception basis when Co-Counsel has actively participated in collection activities that led to the refinancing or sale, then specific documentation requirements that will meet the Law Department s expectations should be added to the contract rather than just referring to a general description of acceptable documentation as is currently the case. 5. The City Law Department should work with the City Revenue Department and the City Treasurer s Office to improve the recordkeeping process for collection of delinquent taxes. The WebExtender System should be kept up-to-date with copies of checks deposited in both the City s direct collection accounts as well as the Lock Box account used by Co- Counsel. The City Revenue Department should consider adding a dedicated cashier for direct collections that are paid by third parties (e.g. title companies) or otherwise devising a system to track collections that are not paid directly by the taxpayer. This will assist the Law Department in analyzing the invoices submitted by Co-Counsel to identify third party payments. 14
CITY OF PHILADELPHIA CO-COUNSEL CONTRACT COMPLIANCE AUP SUMMARY OF RESULTS Co-Counsel Invoice Description Total Commissions Invoiced BRT's Selected Specific Tax Years Sampled Total Commissions Sampled Checks Not Imaged in Web Extender Total $ of Commissions Associated with Check Exceptions Imaged Check Copies Reviewed Payments Paid By Third Parties Total $ of Commissions from Third Party Payments Third Party Payments W/ No P&R Order Total $ of Third Party Payments W/ No P&R Order Direct Collections - 05 Contract $ 28,329.79 100* 269 $ 22,187.63 46 $ 5,878.04 54 23 $ 13,507.60 18 $ 10,676.47 Lock Box Collections - 05 Contract $ 177,507.48 100 466 $ 60,129.52 88 $ 46,226.76 12 8 $ 13,265.81 5 $ 7,771.11 Lock Box Collections - 09 Contract $ 67,733.94 100 286 $ 31,969.70 85 $ 23,535.07 15 6 $ 5,949.23 3 $ 1,304.46 Co-Counsel Invoice Description Total Commissions Invoiced BRT's Selected Specific Tax Years Sampled Total Commissions Sampled Checks Not Imaged in Web Extender Total $ of Commissions Associated with Check Exceptions Imaged Check Copies Reviewed Payments Paid By Third Parties Total $ of Commissions from Third Party Payments Third Party Payments W/ No P&R Order Total $ of Third Party Payments W/ No P&R Order Direct Collections - 09 Contract $ 22,993.64 100 176 $ 19,181.58 22 $ 4,229.71 78 14 $ 13,210.21 14 $ 13,210.21 Co-Counsel Invoice Description Specific Tax Years Supported By Dunning Letters Total $ of Commissions Associated with Dunning Letters Specific Tax Years Supported By Automated Dialing Total $ of Commissions Associated with Automated Dialing Specific Tax Years Supported By P&R Orders Total $ of Commissions Associated with P&R Orders Direct Collections - 09 Contract (Cont.) 170 $ 18,647.17 5 $ 321.22 1 $ 213.19 Co-Counsel Invoice Description Total Expenses Claimed BRT's Selected Individual Expenses Sampled Total Expenses Sampled Expenses Not Reflected in TIPS $ of Expenses Associated with TIPS Exceptions Expenses Associated with BRT on "Recall" List $ of Expenses Associated with Recall Exceptions Eligible Expenses - 05 Contract $ 237,122.12 50 130 $ 43,820.00 9 $ 3,910.00 4 $ 1,220.00 Eligible Expenses - 09 Contract $ 190,676.43 50 114 $ 33,320.00 14 $ 3,580.00 0 $ - Notes *- For 1 of the 100 BRT's selected, we were unable to locate evidence of the payments posted in the TIPS screenshots, however, the BRT # was included in the TIPS collection Reports provided to Co-Counsel by the City Revenue Dept. There were 5 tax years reported as paid related to this BRT, for which a total commission of $468.55 was claimed. 15
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21 AGENCY S RESPONSE
22 AGENCY S RESPONSE
AUDITOR S COMMENTS ON AGENCY S RESPONSE The City s Law Department requested this review of its contracts with Co-Counsel for the collection of delinquent real estate taxes. Members of the Law Department provided the accounting firm of Clifton Gunderson with the population of data to be tested. Based on input from the Law Department, Clifton designed the procedures for the engagement. Ultimately the procedures used on the engagement were agreed to and approved by the Law Department in an engagement letter. The engagement required Clifton Gunderson to perform certain procedures, which included comparing documentation submitted with co-counsel s invoices to data provided by the city. Some of the procedures that Clifton Gunderson was asked to perform proved very difficult because the city s information systems, which were the sources for this data, were difficult to navigate, and the available data was often incomplete. In response to Clifton Gunderson s findings, the Law Department prepared a chart attempting to extrapolate the findings to Co-Counsel s invoices. However, the department improperly extrapolated the findings to accounts for which Co-Counsel did not bill the City. While the Law Department disagrees with some of the report s findings, it does concur with the report s observations that it is extremely cumbersome and difficult to review co-counsel s invoices and documentation. And, while disputing the report s finding that contractual requirements are subjective and open to differing interpretations, the Law Department indicated that it is attempting to simplify requirements for future contracts. 23