Internal Audit Department

Audit Report 2017-3

Facilities Management Division:

2015 Fiscal Year-End Inventory

Dwight E. Brock Clerk of the Circuit Court

and Comptroller

3299 Tamiami Trail East

Suite #402

Naples, FL 34112-5746

www.collierclerk.com

Issued: February 22, 2017

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Prepared by: Patrick Blaney, Senior Internal Auditor

Report Distribution: Board of County Commissioners

Leo Ochs, Jr., County Manager

Nick Casalanguida, Deputy County Manager

Jeff Klatzkow, County Attorney

Len Price, Administrative Services Department Head

Dennis Linguidi, Facilities Management Division Director

Cc: Dwight E. Brock, Clerk of the Circuit Court

Crystal K. Kinzel, Director of Finance & Accounting

James D. Molenaar, Internal Audit Manager

TABLE OF CONTENTS

SUMMARY ..................................................................................................................................2

OBJECTIVES ...............................................................................................................................2

SCOPE ..........................................................................................................................................2

BACKGROUND ..........................................................................................................................2

OBSERVATIONS ........................................................................................................................3

SUBSEQUENT IMPROVEMENTS ............................................................................................5

CONCLUSION .............................................................................................................................5

EXHIBIT A ...................................................................................................................................6

The files and draft versions of audit reports are confidential and exempt from public records requests during

an active audit under Nicolai v. Baldwin (Aug. 28, 1998 DCA of FL, 5th District) and §119.0713, Florida

Statutes. Workpapers supporting the observations noted within this report become public record and will be

made available upon request once the final audit report has been issued.

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Internal Audit provided a draft of this report to the Administrative Services Department and the Facilities Management

Division for management response on April 27, 2016. County management provided that response on May 18, 2016.

Summary This review generated the following observations regarding the Facilities Management Division’s 2015 fiscal year-

end inventory:

Facilities Management Should Develop Proper Inventory Controls.

Reported Line Item Unit Costs Could Not Be Completely Validated.

Facilities Management Should Maintain Perpetual Inventory of Consumables.

Objectives

The objectives of the review were to validate the count of inventory items reported, and to confirm the associated

costs assigned to those items.

Scope

The audit engagement consisted of, but was not limited to, the following tasks:

Researching Facilities Management’s fiscal year-end Accounting Memoranda for 2010 through 2015;

Reviewing the division’s Inventory and Costing Process Narrative and inventory training documents;

Observing Facilities Management staff’s physical inventories of consumable supplies at various locations;

Reviewing the detail and summary records generated from those physical inventories, including copies of

actual inventory count sheets;

Inquiring of management as to the inventory and record-keeping processes;

Reviewing CMA 5809, MANAGING PERSONAL PROPERTY AND CONSUMABLE SUPPLIES; and

Testing the inventoried quantities and extended values reported.

Background

CMA 5809, MANAGING PERSONAL PROPERTY AND CONSUMABLE SUPPLIES, states that property

custodians shall designate persons to maintain an ongoing, up to date perpetual inventory of consumable items.

The Clerk’s Finance Department issued an Accounting Memorandum to County Divisions as part of its routine year-

end procedures. Among other inquiries, the Accounting Memorandum asked if the entities had any inventories at

fiscal year-end. Although it had not previously reported any inventory to Finance, at 2015 year-end the Facilities

Management Division estimated its inventory to be approximately $1.85 million.

On September 18, 2015, the Internal Controls Manager invited the Clerk’s Finance Department to attend Facilities’

physical inventory counts. The Finance Director dispatched Internal Audit to observe those inventory counts, and

then to test the resulting reported amounts. Facilities personnel conducted a physical inventory of consumable supplies

at 2015 fiscal year-end. Facilities reported the values derived from the inventory to the Finance Department for

inclusion in Collier County’s financial statements.

Facilities Management crafted an “Inventory and Costing Process Narrative” that described ordering, tracking,

safeguarding, pricing, and year-end reporting of inventories. The narrative, dated 9/30/2015, addressed review and

evaluation to minimize obsolete parts in inventory. Once identified, obsolete parts are to be disposed in accordance

with the Purchasing Policy. Internal Audit observed obsolete items being segregated from usable inventory during

Facilities’ count. Facilities staff stated that those items would be disposed in accordance with approved procedures.

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Observations

1) Facilities Management Should Develop Proper Inventory Controls.

The Facilities Management Division had not reported the existence of its physical inventory. This is borne out in the

Division’s annual responses to the Finance Director’s fiscal year-end Accounting Memoranda (Exhibit A). When the

Division realized in 2015 that it carried inventory, its incomplete records and basic physical count yielded results that

were fraught with errors.

CMA 5809, MANAGING PERSONAL PROPERTY AND CONSUMABLE SUPPLIES, defines consumable

supplies, or consumables, as tangible personal property with a useful life of less than one year or an acquisition value

of less than $1,000. Per Section 5809-4 B, the property custodian is to designate the person(s) responsible for

inventorying consumables. This section requires the maintenance of an ongoing, up to date perpetual inventory of

consumables. Facilities Management’s responses to the fiscal year-end Accounting Memoranda are not in compliance

with this CMA. Inattention to detail, insufficient training, or an attitude of “going through the motions” when

completing the annual Accounting Memoranda may have contributed to the ensuing inaccurate inventory reporting

over the years.

The effects of not recognizing year-end inventories include the potential loss of assets due to inadequate tracking, the

waste of overstocking certain items, and inaccurate entries to the county financial statements.

Recommendation:

Facilities Management should strengthen its physical inventory procedures in order to reduce the risks of loss,

waste, and inaccurate financial reporting, and to comply with the intent of prudent asset safeguarding

expressed in CMA 5809.

County Management Response:

“Facilities Management had certain controls in place for the inventory stored in buildings. These controls are

comprised of secured access, cataloging and barcode organization, a system to track inventory items, a process for

receiving and distributing parts, and routine internal spot check audits for random samples.

The Facilities Management Division will continue to work diligently to meet inventory management requirements.”

2) Reported Line Item Unit Costs Could Not Be Completely Validated.

Facilities Management estimated its inventory to be approximately $1,850,000 in its Accounting Memorandum

response. Facilities staff used historical costs to value approximately 70% of the inventory. Facilities valued the other

30% by estimating fair market value and discounting it 24% “based on the average percentage of the Grainger contract

(current parts supplier).”

To test the values assigned to line items, Internal Audit selected the highest cost per unit items from the greatest total

dollar location as a sample. The greatest total dollar location was “Building W – 2nd Floor/System” and the majority

of its consumables were valued at historical cost. There were 25 line items reported with unit costs of $1,000 or more.

Facilities’ Internal Controls Manager supplied supporting documentation for costs of 24 sample items.

For the remaining sampled item, a Leviton porcelain extension mogul valued at $3,554.69, Facilities reported an

“Error in Entry.” No valuation support was provided. However, Internal Audit found Leviton porcelain extension

moguls on the Grainger website priced at $7.20 and $6.36 each.

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Facilities provided documentation of comparable costs that were less than the costs reported to Finance for eight

(32%) test items. Comparable costs that are less than reported costs indicate that inventory valuation may be

overstated.

Facilities provided comparable costs that matched reported costs for ten (40%) test items, and comparable costs that

exceeded costs reported to Finance for six (24%) more test items. Therefore, although Facilities Management failed

to maintain all records of acquisition costs, staff was able to provide support for the costs of 16 of 25 (64%) sample

items.

Facilities Management’s 9/30/2015 “Inventory and Costing Process Narrative” detailed procedures to record prices

at the time of purchase. The Narrative further included a contingent method for costing inventory should the

acquisition price not be recorded initially. These procedures may improve future inventory valuation.

Assets recorded in financial statements need to reflect reasonably accurate costs. If historical cost is not recorded at

the time of acquisition, then the opportunity to capture costs accurately may be lost.

Recommendations:

Since CMA 5809 mandates that management maintain perpetual inventory records, acquisition costs should

be properly recorded as consumable supplies are received.

Management should document inventory acquisition costs for audit purposes.

County Management Response:

“The Facilities Management Division will continue to work diligently to meet inventory management requirements.”

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3) Facilities Management Should Maintain Perpetual Inventory of Consumables.

In its response to the 2015 fiscal year-end Accounting Memorandum, Facilities Management asserted the existence

of inventory in 30 trucks. Facilities had not previously recognized the inventory carried in these trucks. This loss of

control of an up-to-date perpetual inventory of consumables refutes the concept behind CMA 5809, MANAGING

PERSONAL PROPERTY AND CONSUMABLE SUPPLIES, which embraces the prudent utilization and

safeguarding of consumable supplies. The potential effects of this lack of control include purchasing parts already in

stock, overstocking certain items, carrying obsolete parts, and accounting inaccurately for assets.

Recommendation:

Facilities Management should comply with CMA 5809’s perpetual inventory of consumables requirement in

order to control and report inventory properly.

County Management Response:

“The Facilities Management Division will continue to work diligently to meet inventory management requirements.”

Subsequent Improvements

In 2016, the Facilities Management Division updated its “Inventory and Costing Process Narrative.” The narrative

now includes materials as well as parts. It states that the Division may internally conduct or outsource its annual year-

end inventory count. If outside vendors perform the count, Facilities personnel will observe the process, and may test-

count random items to ensure validity.

Facilities Management has also drafted new guidelines for inventory control and procedures “to minimize stale or

obsolete parts in its stock inventory.”

Conclusion

CMA 5809-4 B (2) mandates that a designated person maintains an ongoing, up to date perpetual inventory of

consumables “at whatever level deemed appropriate by the custodian.” Management should determine what that

appropriate level is, and strive to maintain its inventory records accordingly.

Audits do not relieve management of its responsibilities. It is the responsibility of County management to understand

and implement the proper procedural controls to limit the risk of fraud, error, and misappropriation of County assets

or revenues. Internal Audit may recommend improvements, but ultimately it is the duty and decision of County

management to formulate processes and controls that ensure compliance with applicable rules and regulations.

Internal Audit acknowledges the cooperation of Facilities Management personnel for their assistance in this review.

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Exhibit A

Pertinent excerpts from the fiscal year-end Accounting Memoranda submitted by Facilities Management:

Fiscal Year-End 2010:

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Fiscal Year-End 2011:

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Fiscal Year-End 2012:

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Fiscal Year-End 2013:

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Fiscal Year-End 2014:

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Fiscal Year-End 2015: