1

COAST COMMUNITY COLLEGE DISTRICT

Audit Engagement

OCC Aviation Part 1 of 2

An Audit of the Payment Process for Aviation Expenditures

Office of Internal Audit Rachel A. Snell, Director CIA, CFE, CRMA, CICA

May 2014

Providing value-added services in an independent, ethical, and collaborative environment

1

Audit Engagement: OCC Aviation

An Audit of the Payment Process for Aviation Expenditures

What’s Inside Objective, Scope, Methodology………….…2

Background………………3

Criteria……………………..4

Audit Engagement Results …..…………….…..4

Contracting & Purchasing Practices…………….…………..…4

Maintenance Purchases & Payments………………….……...5

Instruction Purchases & Payments……………….………...6

Other Observations………….…8

Attachment A..………...9

Attachment B………….10

Attachment C………….11

Summary of Results & Action Plan………….….12

Chancellor Jones,

The Office of Internal Audit conducted an Audit Engagement related to the OCC Aviation Program (Program). The objectives were to determine 1) the extent to which payments were timely and supported and 2) whether transactions were recorded accurately. This is part 1 of a two-part series, which addresses the first objective.

To accomplish this task, we performed the following work:

• Reviewed relevant criteria; • Interviewed relevant stakeholders; • Analyzed relevant documentation and information systems;

and • Assessed risk and controls, including the potential for fraud,

waste, and abuse.

As a result, we identified control weaknesses that often hindered the aviation program’s ability to operate efficiently and effectively. Contracts were not always procured, payments were not always timely, and invoices were not always supported. This is primarily due to:

• Non-compliance with Board policies and procedures • Limited Program accountability • Program decision-making without review and approval of OCC

leadership.

In pursuit of continuous improvement, we made recommendations geared toward following Board fiscal policies and procedures, formalizing accountability, and clarifying roles and responsibilities of Program personnel. A summary of the results is located on page 12 of the report. If you have any questions, I can be contacted at (714) 438-4602 or rsnell1@mail.cccd.edu.

Rachel Snell, Director

2

Objective, Scope, and Methodology

At the request of the OCC President, Internal Audit reviewed the payment process for Aviation program expenses.

As per Board Policy, Internal Audit uses the International Professional Practices Framework (IPPF) to guide the performance of its activities. For this project, no independence or objectivity issues were noted amongst the team members. Board Policy 6330 requires the Internal Auditor to perform an annual review of purchasing practices. The work performed herein was done so as part of this requirement.

Objectives:

• To determine the extent to which payments are timely and supported; • To determine whether aviation program transactions and ensure they are recorded accurately

and completely in applicable accounting systems. (Part 2)

Scope:

• January 2013 through December 2013, payments made to Sunrise Aviation. (Part 1)

Methodology:

In order to perform our work, we performed the following tasks:

• Reviewed relevant criteria, including Board Polices (BP)/Administrative Procedures (AP) BP 3050, BP/AP 6300, BP/AP 6330, and BP/AP 6340;

• Conducted interviews with relevant stakeholders at OCC and District Office; • Reviewed and analyzed payment documentation, contracts, and other relevant documentation; • Assessed risk and controls, including the potential for fraud, waste, and abuse; • Analyzed information systems used related to the audit scope.

Team Members:

• Rachel Snell, Director • Tracy Young, Team Member

3

Background

The Orange Coast College (OCC) President requested an audit of the Aviation Program’s payment process amid concerns that staff may not be following Board and campus fiscal policies and procedures.

OCC’s Aviation program (Program) resides within the Career & Technology Education (CTE) Department. The Program has one full-time faculty member, who reports to the Dean of CTE, and an hourly employee (reportedly a former student of a faculty member). Program funding is derived from the general fund, but direct programmatic expenses are paid through ancillary funds. The Program also receives contributions from a donor, who is also reportedly a former student of a faculty member, and some of these contributions are used to pay for the Program’s hourly employee. [See Attachment A]

Campus departments monitor and oversee contracts as part of their fiscal responsibility. Classified and hourly staff review invoices to ensure the campus received the good or service at the quality expected prior to submitting payment requests to the department head. In some instances, faculty members may perform this review, in addition to providing instruction, and generally report to a Dean, who reports to the Vice President (VP) of instruction. Once approved by the department, the Dean or his staff forward payment requests to the Bursar’s Office, which reports to the VP of Administration. The Bursar’s Office submits payment requests related to veteran students to Admissions and Records, which reports to the VP of Student Services, prior to forwarding these requests to Fiscal Services at the District Office. [See Attachment B]

According to staff, the Program enrolled approximately 50 students since inception (Fall 2010) and issued 19 licenses and ratings. OCC owns four aircraft, three of which were purchased with general fund monies, and one was purchased through the OCC Foundation.1 To operate the Program, OCC uses vendors to provide various services. Sunrise Aviation provides flight instruction, maintenance, and tie down service at John Wayne Airport, and therefore, most of the direct programmatic expenses are associated with this one vendor. Students finance their studies via personal funds, financial aid, or education assistance through the Department of Veteran Affairs (DVA).

Flight instruction is offered on campus and at John Wayne Airport (through Sunrise Aviation). Non-VA students pay $2500 to start the program, which OCC uses to cover costs of flight instruction provided by the vendor. Students deposit additional funds once their balance is below $500. In turn, OCC pays the vendor $2500 in advance.2 VA students do not provide $2500 in advance of instruction, since OCC verifies eligibility for DVA reimbursement. The vendor submits itemized invoices and support documentation that clearly shows the type of flight instruction provided, number of hours, and the rate charged. These “payment packets” are routed through the payment approval process, and ultimately submitted to the DVA for reimbursement.

1 Director of Internal Audit verified aircraft inventory. According to staff, one aircraft as of May 2014 is used for flight instruction. 2 As of April 2014, OCC is no longer making these advance payments to the vendor.

4

Criteria

• Board Policy (BP) and Administrative Procedure (AP) 6300: o Campuses responsible for ongoing fiscal stability and stewardship of available resources. o Management establishes staff accountability and adequate controls to ensure fiscal

objectives are met. • AP 6330:

o Purchases approved by the Administrative Services Office in advance, unless for emergencies or blanket purchase orders

o No commitments are to be made by faculty, staff or management members outside of established District routines, and if so, they may not be accepted by the District.

• BP 6340: o Delegates contracting authority to the Chancellor o Contracts are not enforceable until they are in written form and ratified by the Board.

• Aviation Contracts: o Maintenance: vendor submits invoices monthly, and campus pays within 15 days. o Flight instruction: vendor submit invoices monthly, and campus pays within 30 days

Audit Engagement Results

Overall, the process used to pay for Program expenses, when working effectively, enables the campus to comply with Board fiscal policies and make payments timely. However, we determined that contracts were not always procured, payments were not always timely, and invoices were not always supported with documentation to verify amounts paid. This was primarily due to:

• Non-compliance with Board policies and procedures • Limited Program accountability • Program decision-making without review and approval of OCC leadership.

These control weaknesses often hindered the Program’s ability to operate efficiently and effectively.

Contracting and Purchasing Practices: Contracts were not always procured

Currently there is no written contract for maintenance or flight instruction, despite these services being paid for and delivered. Administrative support staff (in CTE or the Program) was not always utilized to monitor and oversee contracts in accordance with department fiscal responsibilities. For example:

1. Last maintenance contract—May 2010- May 2011; Board approved in May 2010. 2. Current maintenance contract—September 2012- June 2013, but there is no record that it

was reviewed and/or approved by OCC Leadership, the Chancellor, or the Board of Trustees. 3. Last flight instruction contract—June 2013-December 2013; Board approved in October

2013.

The Program hired an hourly employee, but the contracts expired prior to the employee’s employment.

5

The vendor stated that the Program engaged in a verbal, “good faith” agreement to provide services. Both disagreed with the insurance provisions and conducted business without meeting the District’s insurance requirements, stating that they did not meet aviation industry standards. In February 2014, Internal Audit worked with Risk Services, CTE, and the Program to revise the contract and assist with obtaining appropriate insurance; however, as of May 2014, the contracts have not been approved or ratified by the Board, and insurance has not been purchased.

In summary, operating without written contracts and appropriate insurance coverage is not only non-compliant with Board policies and procedures, but also hinders the District’s ability to protect students in the event a threat to life or property should occur, or itself from liability. In response to the concerns, OCC’s Office of the President committed to evaluating the Program’s operational structure in order to use administrative support resources to assist with contract management and monitoring and to alleviate faculty of non-instructional responsibilities. Furthermore, OCC provided training to personnel on a contract database, in order to increase the timeliness of contract renewals.

Maintenance Purchases and payments: Payments not always made timely or supported

For calendar year (CY) 2013, OCC paid approximately $11,000 for maintenance services. Three of the four (75%) invoices were paid timely, but one payment was made 36 days after the invoice date. The OCC Bursar’s Office received the invoice more than 30 days after the invoice date. According to the Program, the vendor did not always submit invoices timely.

Table 1: Maintenance and Tie-Down Payments CY 2013

Service Invoice # Invoice Date Invoice Amount Check Date Days Elapsed Annual Inspection & Services 0608 03/25/13 4,042.07 04/30/13 36

Annual Inspection & Services 0617 08/02/13 3,560.97 08/14/13 12

Vacuum System (estimate invoice) E117 08/02/13 2,153.20 08/14/13 12

Tie-Down Rental-Revised Invoice 0164 09/10/13 1,540.00 09/17/13 7

Total $ 11,296.24

Since OCC is currently operating without a maintenance contract, we compared “good faith” contract terms to the rates paid by OCC. We found that the invoices did not always provide sufficient information to verify the amounts billed or the work performed. For example, invoices reference an Annual Inspection, but no 100 hour or 50 hour inspections, and contain rates that appear higher than contracted rates. The Program asserted that these inspections were completed and amounts billed were accurate, but did not provide support documentation to Fiscal Services or Internal Audit in order to verify the assertions. 3 [See Attachment C]

3 We also noted a similar discrepancy with invoice 0577. Charge billed for annual inspection at 23 hours/$110 per hour, for a total of $2,530. The difference from the contract rate of $500 is $2,030.

6

Table 2: Maintenance Payments Compared to Contract Rates CY 2013

Service Invoice # Invoice Rate Invoice Amount Contract Rate Difference

Annual inspection 0608 24 hours @ $110/hr $2,640 $500 <$2140> Annual inspection 0617 24 hours @ $110/hr $2,640 $500 <$2140>

Total $5280 <$4,280> In summary, the Program’s opposition to provide support documentation does not ensure the fiscal responsibility and stewardship required by Board Policy, and it hinders the ability of those charged with fiscal responsibility to ensure services were provided and paid at the correct rate.

To address the issues identified above, OCC’s Office of the President committed to requiring the vendor to provide the necessary documentation to support invoices. Furthermore, the Program asserted it would request documentation from the vendor related to the invoices in Table 2 so that Fiscal Services could review and reasonably ensure OCC paid appropriate amounts for maintenance services.

Flight Instruction Purchases and payments non-VA: Payments not always made timely or supported

For calendar year 2013, there were 4 out of 7 (57%) payments processed 32 to 117 days late. According to staff, the Program regularly reviewed invoices more than one to two weeks after the invoice date, a practice which continued after hiring an hourly employee. The Program received invoices, which were not always provided timely to the hourly employee for reconciliation purposes. Furthermore, when invoices were ultimately received, the totals on the support documentation did not always reconcile to the invoice amount, since these payments were “advance payments” and not necessarily tied to actual services delivered.

Table 3: Flight Instruction Payments for Non-VA students CY 2013

Service Invoice # Invoice Date Invoice Amount Check Date Days Elapsed Flight Training-Non VA 0147 01/11/13 2500.00 02/12/13 32

Flight Training-Non VA 0148 02/01/13 2500.00 05/29/13 117

Flight Training-Non VA 0149 03/04/13 2500.00 03/13/13 9

Flight Training-Non VA 0154 05/15/13 2500.00 06/20/13 36

Flight Training-Non VA 0156 06/04/13 2500.00 06/20/13 16

Flight Training-Non VA 0170 10/13/13 2500.00 12/04/13 52

Flight Training-Non VA 0178 12/01/13 2500.00 12/04/13 3

Total

$ 17,500.00

During the audit, the Program cancelled flight instruction, without consultation with OCC leadership, which according to the vendor, temporarily displaced students. Upon further review, we learned that the Program reconciled the invoices to the support documentation, but did not forward the payment request to fiscal staff for processing.

7

In summary, neither the Program nor Fiscal Services had a written agreement by which they could reconcile services delivered to terms and conditions for which payments would be made, placing the campus at risk for paying for services not rendered or paying an unreasonable rate. The Program’s continued resistance to provide support documentation furthers the inability of those charged with fiscal responsibility to ensure services are provided at the correct rate, prevents timely payment, and disrupts instruction to students.

To address the issues identified above, OCC’s Office of the President asserted that it will require the vendor and the Program to provide the necessary support documentation to support flight instruction invoices.

Flight Instruction—Purchases and payments VA: Payments not always made timely or supported

For the VA Payments, 13 of the 17 (76%) were processed between 38 and 91 days from the invoice date. Payments were initially late due to the same issues described for non-VA students. Once this process was honed, payments were generally processed timely.4 In December 2013, payments were late because invoices were received during winter recess, and personnel was unavailable. Since invoices required faculty review prior to payment, the Program was unable to perform reviews until faculty returned to campus, which was approximately late January. As a result, invoices were not forwarded to Fiscal Services for payment until February 2014.

Table 4: Flight Instruction Payments for VA students CY 2013

Service Invoice # Service Date Invoice

Date Invoice Amount

Check Date

Days Elapsed

Flight Training – Student 1 155 Jan-Jun 2013 5/22/13 17,399.24 8/21/13 91 Flight Training - Student 2 158 Jan-Jun 2013 6/12/13 5,079.88 8/21/13 70 Flight Training - Student 3 159 Jan-Jun 2013 6/12/13 5,300.48 8/21/13 70 Flight Training - Student 4 160 Jan-Jun 2013 6/12/13 4,289.00 8/21/13 70 Flight Training - Student 4 161 7/1/13 - 8/15/13 9/10/13 2,464.28 10/18/13 38 Flight Training - Student 2 162 7/1/13 - 8/15/13 9/10/13 3,119.32 10/18/13 38 Flight Training - Student 1 163 7/1/13 - 8/15/13 9/10/13 9,232.10 10/18/13 38 Flight Training - Student 3 165 8/26/13 - 9/30/13 10/10/13 67.20 11/19/13 40 Flight Training - Student 4 167 8/26/13 - 9/30/13 10/10/13 2,293.68 11/19/13 40 Flight Training - Student 1 168 8/26/13 - 9/30/13 10/10/13 5,171.64 11/19/13 40 Flight Training - Student 2 169 8/26/13 - 9/30/13 10/10/13 1,155.88 11/19/13 40 Flight Training - Student 1 172 10/1/13 - 10/31/13 11/5/13 6,352.30 11/21/13 16 Flight Training - Student 4 173 10/1/13 - 10/31/13 11/5/13 1,622.10 11/21/13 16 Flight Training - Student 4 174 11/1/13-11/15/13 11/18/13 2,067.00 12/4/13 16 Flight Training - Student 1 175 11/1/13-11/15/13 11/18/13 3,509.20 12/4/13 16 Flight Training - Student 1 180 12/1/13 - 12/16/13 12/16/13 4,439.60 2/12/14 58 Flight Training - Student 4 181 12/1/13 - 12/16/13 12/16/13 2,301.00 2/12/14 58

Total 75,863.90

4 Currently there are multiple approvers within the OCC VA Office, which also delays payment processing. This multi-layered approval pyramid was designed due to concerns with tracking funding between multiple accounts, which will be reviewed in part 2 of this project.

8

Overall, we concluded that administrative inefficiencies resulted in payment delays, but documentation indicated that invoices were supported. Although we noted some anomalies in the number of flight instruction hours provided, we relied upon the Program’s subject matter expertise to determine the accuracy and necessity of the flight instruction provided.

Other Observations

As recently as April 2014, Program staff reportedly made a purchase using personal funds without obtaining prior approval. Board Policy disallows this practice, and the campus is not obligated to provide reimbursement for purchases made without prior approval. The Program’s current purchasing and contracting practices do not always align with the fiscal responsibilities required by Board policy, allow for decision making by staff to which delegated authority is not granted, and further perpetuates non-compliance with District and campus fiscal policies and procedures.

Although there is a perception of conflict of interest with regard to the hiring of an hourly employee, we confirmed with Human Resources that there were no incidences of non-compliance with District hiring policies. Likewise, there were no concerns identified during the course of the audit regarding the use of funds donated by a former student of the program. There is concern, however, that due to the sizeable contributions from the donor, that there is the potential for undue influence over OCC operational activities. According to the District’s Professional Ethics policy, all District employees shall “avoid conflicts of interest, or even the appearance of conflict of interest, between their obligations to the District and private business or personal commitments and relationships.”

Due to the perceptions of conflict of interest, it is especially important to follow policy and campus reporting structures in order to maintain the operational credibility of the program as well as to maintain the fiscal responsibility of the District.

9

Attachment A

10

Attachment B

11

Attachment C

12

Summary of Results and Action Plan

Finding 1: OCC’s Aviation Program is operating without contracts and appropriate insurance, and administrative support staff is not always used efficiently and effectively to assist with contract monitoring and management. Recommendation 1: OCC should ensure that the Program operates in compliance with purchasing and contracting policies and procedures and clarifies the role of support staff such that contracts are managed and monitored on an ongoing basis. Management Response/Action Plan: OCC President has charged the VP of Instruction and the Dean of CTE to conduct a Program evaluation and develop an action plan/ timeline. This plan will include, but is not limited to:

• Roles and responsibilities of Program personnel, including contract management and monitoring duties;

• Timeline for obtaining contracts and insurance • Review of the Program’s operational structure • Action plan for ensuring compliance with Board purchasing and

contracting policies/procedures. • Consideration of posting an RFP for flight instruction and other

services.

Due Date: 08/31/14 Responsible Party: John Weispfenning, VP Instruction, OCC Doug Benoit, Dean of CTE, OCC

Finding 2: OCC’s Aviation Program is not always able to demonstrate that contracted services were provided, billed accurately, or supported with documentation, elements which are necessary to ensure fiscal accountability. Recommendation 2: OCC should ensure that vendors provide accurate, detailed invoices, and it should ensure that invoices are reconciled timely and submitted to fiscal services with the appropriate support documentation for payment processing. Management Response/Action Plan: OCC President has charged the VP of Instruction and the Dean of CTE to work with the Program and the current vendor to ensure support documentation and detailed, accurate invoices are submitted so that support staff may perform reconciliations more timely.

Due Date: 08/31/14 Responsible Party: John Weispfenning, VP Instruction, OCC Doug Benoit, Dean of CTE, OCC