city vehicle fleet management - denver

Dennis J. Gallagher

Auditor

Office of the Auditor

Audit Services Division

City and County of Denver

City Vehicle Fleet Management Performance Audit

January 2011

The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is

responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the

proper and efficient use of City resources and providing other audit services and information to City

Council, the Mayor and the public to improve all aspects of Denver’s government. He also chairs the

City’s Audit Committee.

The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee

assists the Auditor in his oversight responsibilities of the integrity of the City’s finances and operations,

including the integrity of the City’s financial statements. The Audit Committee is structured in a manner

that ensures the independent oversight of City operations, thereby enhancing citizen confidence and

avoiding any appearance of a conflict of interest.

Audit Committee

Dennis Gallagher, Chair Robert Bishop

Maurice Goodgaine Robert Haddock

Jeffrey Hart Bonney Lopez

Timothy O’Brien

Audit Staff

Audrey Donovan, Deputy Director, CIA

Dawn Hume, Internal Audit Supervisor

Emily Gibson, Senior Internal Auditor, M.S.

Anna Hansen, Senior Internal Auditor, CICA

Wayne Leon Sanford, Senior Internal Auditor, CICA

Kevin Vehar, Senior Internal Auditor

You can obtain free copies of this report by contacting us at:

Office of the Auditor

201 West Colfax Avenue, Department 705 Denver CO, 80202

(720) 913-5000 Fax (720) 913-5026

Or download and view an electronic copy by visiting our website at:

www.denvergov.org/auditor

http://www.denvergov.org/auditor

To promote open, accountable, efficient and effective government by performing impartial reviews and other audit

services that provide objective and useful information to improve decision making by management and the people.

We will monitor and report on recommendations and progress towards their implementation.

City and County of Denver 201 West Colfax Avenue, Department 705 Denver, Colorado 80202 720-913-5000

FAX 720-913-5247 www.denvergov.org/auditor

Dennis J. Gallagher

Auditor

January 20, 2011

Honorable Guillermo (Bill) Vidal, Mayor

Office of the Mayor

City and County of Denver

Dear Mayor Vidal:

Attached is the Auditor’s Office Audit Services Division’s report of their audit of the City and

County of Denver’s Fleet Management program for the period July 01, 2009 through June 30,

2010. The purpose of the audit was to assess the effectiveness and efficiency of the Fleet

Management program and determine whether internal controls in place were adequate under

the circumstances. This audit included examining Denver Public Works, Denver Police, Denver

Sheriff, and Denver Fire Department.

Audit work identified several weaknesses surrounding Denver’s Fleet Management operations

that can be improved. These issues include a lack of monitoring and accountability over take-

home vehicles, inadequate controls over fuel access, opportunities to improve inventory

controls, and significant outstanding internal billing transfers. However, the audit identified a best

practice regarding parts inventory control. Public Works has appropriate controls in place to

mitigate the risk of inaccurate inventory on hand and asset misappropriation and monitor

inventory movement from receipt to disbursement. The findings and recommendations

presented in this report have identified areas to improve and strengthen the management of

the City’s Fleet.

If you have any questions, please call Kip Memmott, Director of Audit Services, at 720-913-5029.

Sincerely,

Dennis J. Gallagher

Auditor

DJG/ect

cc: Honorable Members of City Council

Members of Audit Committee

Jack Finlaw Chief of Staff

Mr. Claude Pumilia, Chief Financial Officer

Mr. David Fine, City Attorney


Bill Vidal, Mayor

January 20, 2010

Page Two




Mr. L. Michael Henry, Staff Director, Board of Ethics

Ms. Lauri Dannemiller, City Council Executive Staff Director

Ms. Beth Machann, Controller




City and County of Denver 201 West Colfax Avenue, Department 705 Denver, Colorado 80202 720-913-5000

FAX 720-913-5247 www.denvergov.org/auditor

Dennis J. Gallagher

Auditor

AUDITOR’S REPORT

We have completed an audit of the City and County of Denver’s Fleet Management program

for the period July 01, 2009 through June 30, 2010. The purpose of the audit was to examine and

assess whether Public Works maintains proper internal controls over fuel distribution, review and

assess fleet management controls for regularly scheduled vehicle service, determine whether

vehicle preventative maintenance controls and practices are adequate, document whether

City fiscal rules for vehicle use are being fully complied with, and to evaluate the effectiveness

and efficiency of fleet management controls for the City departments examined to identify

possible inefficiencies and opportunities for improvement.

This performance audit is authorized pursuant to the City and County of Denver Charter, Article

V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance

with generally accepted government auditing standards. 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. We believe that the evidence

obtained provides a reasonable basis for our findings and conclusions based on our audit

objectives.

Even though the City operates in a decentralized environment regarding fleet management,

the goals of each department are similar. The objective of effective and efficient fleet

management is to operate by providing the highest quality service at the lowest cost while

ensuring the safety and reliability of each vehicle. The audit revealed several weaknesses

surrounding Denver’s Fleet Management practices that can be strengthened. These control

weaknesses hinder the City’s ability to effectively and efficiently operate the City’s Fleet.

We extend our appreciation to the Department of Public Works, Denver Police Department,

Denver Sheriff Department, Denver Fire Department and City personnel who assisted and

cooperated with us during the audit.

Audit Services Division

Kip Memmott, MA, CGAP, CICA

Director of Audit Services


TABLE OF CONTENTS

EXECUTIVE SUMMARY 1

Finding 1: Lack of Accountability and Monitoring Over Take-Home Vehicles 1

Finding 2: Fuel Access Internal Controls are Inadequate 2

Finding 3: Opportunities Exist to Improve Parts Inventory Controls 2

Finding 4: Significant Outstanding Internal Billing Transfers 3

INTRODUCTION & BACKGROUND 4

SCOPE 11

OBJECTIVE 11

METHODOLOGY 11

FINDING 1 12

Lack of Accountability and Monitoring Over Take-Home Vehicles 12

RECOMMENDATION 17

FINDING 2 19

Fuel Access Internal Controls are Inadequate 19

RECOMMENDATIONS 21

FINDING 3 22

Opportunities Exist to Improve Parts Inventory Controls 22

RECOMMENDATIONS 24

FINDING 4 25

Significant Outstanding Internal Billing Transfers 25

RECOMMENDATION 26

TABLE OF CONTENTS (cont’d)

APPENDICES 27

Appendix A – Fiscal Accountability Rule 10.6 27

Appendix B – Results of Take-Home Vehicle Testing 33

Appendix C – Internal Billing Process Flow Chart 34

Appendix D – Fiscal Accountability Rule 7.7 35

AGENCY RESPONSE 36

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not always reimbursed by

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EXECUTIVE SUMMARY

The City and County of Denver maintains a fleet of more than 4,000 vehicles and

equipment, which are essential for providing city services and conducting city business.1

The management of the City’s fleet is decentralized and managed by three separate

Departments; Public Works, Department of Safety, and Department of Aviation. Primary

fleet management responsibilities include vehicle purchase, vehicle utilization, vehicle

maintenance, and vehicle disposal. The fleet is crucial for service provision and city

operations, and as such, it is important for the fleet to be managed efficiently and

effectively. The audit identifies several opportunities for enhancing certain fleet

management practices.

Finding 1: Lack of Accountability and Monitoring Over Take-Home Vehicles

There are approximately 475 City employees authorized to take a City vehicle home for

the purposes of responding to City emergencies occurring outside of normal business

hours. The ability to commute in a City vehicle to and from work is considered an

additional form of compensation to the employee that must be valued and accounted

for in most cases. Audit work determined that the requirements surrounding take-home

vehicles are not being complied with, monitored for enforcement, or being applied

consistently.

Problems identified included:

Internal Revenue Service (I.R.S.) required employee reimbursements to the City for

commuting in a take-home vehicle do not always occur. In addition, I.R.S. and

City regulation exemptions for public safety vehicles are not applied consistently

to all departments under the Department of Safety.2 As a result, not all

reimbursement funds are being recovered,

which could fund other city activities.

Additionally, inconsistent enforcement of

this requirement raises equity issues

between employees who comply and those

that do not comply with this requirement. This could also result in negative public

relations issues for the City.

Audit work identified 11 instances when City take-home vehicle requirements

were not followed. Specifically, audit work found four instances where Executive

Order requirements and seven instances where Fiscal Rule requirements were

violated.3

There is minimal oversight of take-home vehicles beyond the agency level.

1 Equipment includes items such as trailers, lawnmowers, and smaller motorized and non-motorized equipment.

2 The Department of Safety consists of the Denver Police Department, the Denver Sheriff Department and the Denver Fire

Department. 3 See Appendix B for take-home vehicle testing.

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Lack of controls over parts

inventory creates significant risk

of asset misappropriation

Finding 2: Fuel Access Internal Controls are Inadequate

The Division of Fleet Maintenance under Public Works has the responsibility of managing

fuel usage for City vehicles, except for Denver International Airport vehicles. Audit work

found that a lack of internal controls over the process to obtain and terminate access to

fuel significantly increases the risk that fraudulent fueling could occur. More specifically

audit work determined the following:

30 of 81 (37%) active fuel users tested within the City’s fuel management system

were no longer employed with the City.

Approximately 1,603 gallons of fuel have been obtained using ID numbers of

terminated City employees. Audit work could not determine whether or not the

fuel was obtained fraudulently.

Duplicate fueling IDs were issued to the same person on several occasions,

increasing the risk of inappropriate use of fuel.

Finding 3: Opportunities Exist to Improve Parts Inventory Controls

The Fleet parts inventory, valued at more than $2 million,4 is considered a City asset and

must be managed and accounted for properly

throughout the life of parts from receipt of the

inventory to disbursement for repairs. Audit work

determined that a lack of internal controls over

the parts inventory process at the Denver Police

Department (DPD)5 and Denver Fire Department (DFD) leads to inaccurate on hands

and inventory valuation, part out-of-stocks and overstock, increased levels of obsolete

and slow moving inventory, and creates significant risk of asset misappropriation.

Audit work identified the following inventory issues:

40% of DPD on hand part counts in the system were incorrect.

50% of DFD on hand part counts in the system were incorrect.

DFD’s parts room is operated by a single parts room manager and due to

activities and days off, the part room is occasionally unattended.

Conversely, audit work revealed a best practice with regards to parts inventory control

performed at Public Works. Public Works has appropriate controls in place to mitigate the

risk of inaccurate inventory on hands and asset misappropriation and monitor inventory

from receipt to disbursement. Specifically, the Department has designed reports that fully

utilize the inventory management system, FASTER, to monitor inventory movement and

keep costs to a minimum without compromising customer service.

4 Public Works 2009 Parts Inventory Report valued inventory at $1,567,297.32. DPD and DFD inventory value of $322,894.18

and $160,543.67 respectively was calculated from inventory listed in Task Force/FASTER in August 2010. Inventory values are unaudited. 5 The Denver Police Department also maintains all Denver Sheriff Department vehicles.

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Uncollected revenue directly

affects Public Works’ ability to

operate and effectively budget

for future activities

Finding 4: Significant Outstanding Internal Billing Transfers

Public Works’ Fleet Maintenance Division uses

Internal Billing Transfers (IBTs) as the method for

collecting revenues from various city agencies for

fleet services provided. Audit work identified a

total of 116 or $134,127 outstanding IBTs from 2009

and 2010 that have not been collected by Public

Works from various agencies.

Per Fiscal Rule 7.7, the Department is required to track funds billed and ensure they are

collected. However, Public Works does not have a process in place to follow up with

agencies when an IBT is not received. Since the Department operates in arrears the

failure to collect this revenue directly affects their ability to effectively budget and

forecast future activities.

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INTRODUCTION & BACKGROUND Fleet Management

The City and County of Denver maintains a fleet of more than 4,000 vehicles, which

include a variety of vehicles and equipment, many of which provide specialized services

to citizens and conduct City business.6 Fleet management responsibilities are

decentralized in the City, divided between three departments, the Department of Public

Works (PW), the Department of Safety (Safety) and the Department of Aviation, with PW

having the broadest fleet management responsibilities.7 Fleet Management for the City’s

vehicles and equipment encompasses much more than preventative maintenance and

repairs. Other management responsibilities include:

Managing and billing agencies for the use of the City’s shared motor pool

vehicles. These vehicles are available for short-term rental by any City employee

for the purpose of conducting city business;

Monitoring and tracking fleet utilization;

Management and maintenance of fleet databases;

Purchasing and distributing various types of fuel, supplies and parts; and

Procuring and disposing vehicles and equipment.

City Fleet Management Governance

There are a variety of City, State and Federal rules and regulations that govern the use of

the City’s fleet. These include multiple Executive Orders, Fiscal Rules, State Statutes and

Internal Revenue Service (I.R.S.) Code regulations that apply to fleet functions such as

purchasing, parking, registration, and vehicle disposition. There are three components of

regulations that were particularly relevant to this audit, including the I.R.S. Code of

Federal Regulations, Fiscal Rule 10.6 and Executive Order 25.

I.R.S. Code of Federal Regulations – I.R.S. Code of Federal Regulations, United States

Department of Treasury, Title 26, Ch. 1(A), Part 1, §1.61-21 contains all regulations

pertaining to the valuation of taxable fringe benefits. The use of any city vehicle for

personal purposes, including commuting to and from work, is considered a fringe benefit

under this section of I.R.S. Code. Thus, any City employee authorized to commute in a

city vehicle must account for this vehicle usage and it must be valued as a form of

compensation to the employee. The City mostly utilizes the I.R.S. approved “commuting

6 The City and County of Denver fleet includes approximately 1,900 units managed by Public Works and approximately 1,300

managed by the Department of Safety and 872 units managed by the Department of Aviation. Information gathered from the 2010 Budget Book, Public Works’ fleet management database, and the city website http://www.denvergov.org/RentaCityVehicle/tabid/433539/Default.aspx. 7 The Department of Aviation was excluded from the scope of the audit.

http://www.denvergov.org/RentaCityVehicle/tabid/433539/Default.aspx

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valuation rule” to value this benefit, which requires the employee to reimburse the City

$1.50 per commuting trip, or $3.00 per day.

Fiscal Rule 10.68 – This fiscal rule reinforces the I.R.S. requirements for valuing commuting

benefits, which are referred to as “take-home vehicles.” The rule provides additional

guidance on tracking commuting usage and reimbursement exemptions, which are

mostly for public safety vehicles. The rule also outlines the City’s qualification

requirements for take-home vehicles.9

Executive Order 25 – This Order essentially mirrors Fiscal Rule 10.6 and has many of the

same guidelines. The Order also requires authorized drivers of “take-home vehicles” to

respond to at least 12 emergencies within a 12-month period.

Department of Public Works’ Fleet Maintenance Division

The Department of Public Works’ Fleet Maintenance Division (PW Fleet),

housed under the Department’s Division of Finance and Administration,

oversees the main responsibilities for management of the City’s fleet

except for those vehicles utilized by Safety and the Department of

Aviation. Excluding those departments, PW Fleet is responsible for the

maintenance, repair, specification, and retirement of more than

1,90010 City vehicles and pieces of equipment. PW Fleet consists of four

sections that work to accomplish fleet management responsibilities

including, administration, maintenance operations, materials handling, and equipment

replacement.

In 2009, the 100 Best Fleets Program11 recognized the Department of PWs’ Fleet

Maintenance Division for excellence in operations and fleet management as the second

best public sector fleet in North America. The award recognizes and rewards peak

performing public sector fleet operations. In addition, the

American Public Works Association named the Fleet Director

Professional Manager of the Year.

The PW Fleet Division has also embraced the Mayor’s Greenprint

Denver Initiative through purchasing vehicles that utilize alternative

fuels and sustainable technologies.12 In fact, the Division’s Fleet has

received awards for being one of the top ten “green” fleets in

North America.13

8 See Appendix A for a complete copy of Fiscal Rule 10.6.

9 The requirements are that employee’s job duties must include responding to emergencies or non-scheduled service requests

which necessitate the use of specialized equipment and the city vehicle, a signed authorization form submitted to the Controller’s Office, a valid Colorado driver’s license, the driver must reimburse the City for commuting, and the driver’s home cannot be outside a 25 mile radius of the City and County Building. 10

2010 Budget Book pg.462. 11

The 100 Best Fleets Organization recognizes excellence in government fleet management in overall best fleet and green fleet categories based on a variety of criteria. 12

The Greenprint Denver Initiative was announced in 2006 by Mayor John Hickenlooper in an effort to increase energy efficiency and reduce emissions produced by City activities.

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Financial Structure

The daily operations of PW Fleet are accounted for using a proprietary fund structure

instead of a governmental fund structure. There are two types of propriety funds, internal

service funds, which PW operates as, and enterprise funds. An internal service fund

accounts for operations similar to those accounted for in enterprise funds, but provide

goods and services to other departments within the same government. In 2010, PW Fleet

expects to record approximately $21 million in revenue and $20 million in expenditures,

which is a decrease from 2008 levels, but an increase from 2007 levels.14

Maintenance Operations

Currently, PW Fleet utilizes seven maintenance and seven fueling locations across the

City of Denver for fleet operations. Multiple locations provide an increased level of

operating efficiency and customer service. A listing of each location is shown in Table 1

below.

Table 1-PWs Maintenance Facilities and Fuel Stations

Location Maintenance Fuel

5440 Roslyn Street, Building C X X

5440 Roslyn Street, Building D X X

Fire Station 29, 4800 Himalaya Way X

1390 Decatur Street*

1271 West Bayaud Avenue (Central Platte)* X X

7301 East Jewell Avenue X X

945 South Huron Street X

2013 South Osage X X

2000 West 3rd Avenue X X

*Decatur closed 10/1/10 and W. Bayaud opened 10/4/10

In October, PW Fleet opened a new state-of-

the-art maintenance facility that replaced the

facility at the Decatur location. The new facility,

commonly referred to as Central Platte, was

designed with “green” and energy efficient

concepts in order to reduce the carbon

footprint and the cost of the operations. This

new facility features 39,300 square feet of

service space, seven heavy equipment bays,

nine lube stations and built-in parallelogram lifts

to accommodate large trucks. Pictured is the

new Central Platte Facility, located on West Bayaud Avenue, prior to opening.

13 The 100 Best Fleets Organization recognizes excellence in government fleet management in overall best fleet and green fleet

categories based on a variety of criteria. 14

2009 and 2010 Budget Book. Audit work identified a lag in collecting revenue from agencies that affects the timing of revenue collected as noted in Finding 4.

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The Roslyn and Central Platte facilities are the main maintenance locations that also

function as central warehouses stocking

commonly used parts in addition to handling

special orders for satellite maintenance

locations. The satellite locations complete

lighter maintenance such as tire and oil

changes and maintain parts inventory to

complete those work orders. Inventory is

maintained and controlled in the same manner

at all locations.

PW Fleet is also responsible for negotiating the

purchase prices, making purchases and distributing fuel used by the City’s fleet, except

for Denver International Airport vehicles. In 2009, PW Fleet purchased almost 3 million

gallons of fuel costing $5.7 million dollars.15 In addition, some quasi-governmental

agencies16 have access to the fuel purchased by Fleet, which is regulated by

intergovernmental agreements. Fleet will invoice agencies and other authorized users for

gallons fueled each month.

Department of Safety Fleet Maintenance Division

Safety manages its own fleet of approximately 1,300 vehicles and equipment. Within

Safety, fleet management responsibilities are divided between the Denver Police

Department (DPD) and Denver Fire Department (DFD). Both Departments’ fleet activities

are funded by the general fund and do not operate through proprietary internal service

funds in contrast to the PW Fleet.

Denver Police Department

DPD is responsible for the management and maintenance of approximately 1,100

vehicles and related equipment through their

Research, Training and Technology Division. DPD

provides safety services to the citizens of the City

and County of Denver through six decentralized

districts, encompassing approximately 155

square miles, which means their vehicles are

heavily utilized. In 2010, the budget for fleet

maintenance was approximately $6 million, a

decrease of approximately $600,000 from 2009

levels.17 In addition, DPD has recently downsized

their fleet as a result of the recent economic environment.

DPD has two facilities for fleet maintenance activities, the garage where major repairs

and body work is completed and a service center where preventative maintenance

15 Types of fuel purchased consist of diesel, B100 (bio-diesel), unleaded, unleaded 91, E85, and Propane.

16 Quasi-governmental agencies include but are not limited to Denver Health and Denver Housing Authority.

17 Unaudited budget information provided by DPD.

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activities and minor repairs is completed. The garage is staffed with 18 mechanics, two

parts room employees and the service center that operates with two shifts comprised of

eight service technicians.

In addition, DPD fleet maintenance orders, maintains, repairs and equips marked,

unmarked, and special use vehicles for the Sheriff’s Department, Office of the District

Attorney, Mayors’ Office, County Courts, and four task forces. This adds to DPD’s

responsibility approximately 90 cars, vans, and bus units for the Sheriff’s Department.

Denver Fire Department

DFD maintains a fleet maintenance facility in one central location. In 2010, the budget

for DFD fleet maintenance was approximately $3.2 million, down approximately $1.3

million from 2009 levels.18

Fleet maintenance responsibilities are comprised of maintaining specialized fire

apparatus, approximately 200 vehicles and a parts inventory. In order to properly

maintain their fleet and keep costs to a minimum, DFD mechanics have a fully functional

machine shop used to make and repair parts

and apparatus needed to properly maintain

the fleet. All 16 mechanics must be ready to

respond if needed to the scene of accidents,

fires and any other emergency if immediate

repairs are necessary. Both vehicles and

specialized apparatus must be maintained to

meet standards required by the National Fire

Protection Association. Aerial ladders, breathing apparatus, ground ladders and fire

hoses are some examples of equipment maintained.

Consolidated Activities

Even though the City has a decentralized model for fleet management, there are some

activities outside of maintenance that are consolidated between the PW and Safety

Fleets. These activities include, use of fleet management systems, fuel activities, a vehicle

replacement fund and the City’s annual vehicle auction.

Fleet Management Systems

The City utilizes two information systems for daily fleet management activities that are

shared between PW Fleet and Safety, FASTER and FuelForce. PW utilizes FASTER,

implemented in September 2010, for tracking all vehicle maintenance and repair

activities for both PW Fleet and Safety.

PW Fleet expects that the new FASTER system will improve the efficiency and

effectiveness of operations such as technician performance analysis, warranty

management, and parts control. For example, FASTER will provide more effective

18 Unaudited budget information provided by DFD.

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tracking of warranties on vehicles, parts, and equipment, which PW Fleet estimates will

save $671,561 over the first five years.19

PW Fleet manages and maintains FuelForce, the City’s software system that tracks,

monitors, and administers fuel usage for all city vehicles including several quasi-

governmental agencies such as, Denver Health and the Denver Housing Authority

through special inter-governmental agreements. PW bills agencies monthly for fuel

usage.

In order to access fuel, the employee must enter unique identifying information issued to

them by PW Fleet. FuelForce will automatically recognize if any of the entered

information does not agree with the information stored in the database and deny

access for fuel.

Planned Fleet Replacement and Retirement

New vehicle and equipment purchases for all City departments and agencies are

funded through the Planned Fleet Replacement Special Revenue Fund, except for those

operating with enterprise funds (i.e. Denver International Airport). Revenues for this fund

come from General Fund transfers and interest income. Each department and agency

prepare a list of prioritized fleet replacements, which are then submitted to the Budget

and Management Office for a final decision on which replacements will be purchased

during the budget cycle. In addition, the City has an informal Utilization Committee that

meets periodically to review and identify under-utilized vehicles. Agencies with under-

utilized vehicles are given the opportunity to justify retaining the vehicle. The Utilization

Committee is comprised of the Director of the Budget and Management Office, Director

of PWs Fleet, a representative from the Mayor’s Office, and the Department of Finance.

As a method of budget savings in 2010, a majority of scheduled fleet replacements were

deferred, saving the City approximately S10.4 million.

PW Fleet annually conducts an auction of used fleet vehicles and equipment. Auctioned

items include cars, trucks, vans, heavy machinery, equipment and obsolete parts from all

departments and agencies in the City. The auction serves as the main avenue for retiring

vehicles once utilization criteria have been met. The auction is conducted by a

professional third party auctioneer and is open to the public, including City employees. In

2010, the annual auction sold 169 units generating $977,285.20

Barriers to Further Consolidation

Further consolidation of fleet management responsibilities between PW and Safety is an

issue that is periodically discussed by City officials. In the past, PW and Safety

representatives have never been able to move beyond the initial discussions. For

example, approximately one year ago there were efforts to consolidate parts and

inventory management, but that initiative did not progress as the departments involved

differ upon terms and administrative functions and responsibilities. Some of the obstacles

that would need to be overcome in order to consolidate the operations include:

19 Fleet Management/Maintenance Software Upgrade Proposal, October 21, 2008.

20 Preliminary unaudited auction results provided by Public Works Fleet Maintenance.

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PW operates using an Internal Service Fund, and Safety operates under the

General Fund;

Specialty equipment requirements related to DPD and DFD operations;

The DFD collective bargaining agreement that includes mechanics as classified

service for rank and grade;

Concerns about priority of repairs and criteria and responsibilities for setting the

priority; and

The need for additional support from the Mayor’s Office, PW and Safety in the

form of a strategic plan to move forward with possible consolidation.

Benchmarking Suggests that Consolidation is Common

Audit work determined that consolidation of fleet management among other cities is

common. In our benchmarking survey, the majority of city fleets indicated that police

vehicles were part of the consolidated fleet program. It is less common for fire vehicle

fleet consolidation due to the specialized nature of fire vehicles, equipment and

maintenance standards. Nevertheless, at least 50% of survey respondents indicated that

fire vehicles were part of the consolidated fleet program.21 The Auditor’s Office will

address the feasibility of consolidating fleet operations separately in a Special Advisory

Report (SAR) that is scheduled to be released during the first quarter of 2011.

21 We benchmarked the following municipalities—Washoe County, NV, Thornton, CO, Fairfax County, VA, Peoria County, IL,

Long Beach, CA, Aurora, CO, Oklahoma City, OK, Austin, TX, and Des Moines, IA. Responses were also solicited from Denver PW. Benchmark criteria is from the International City/County Management Association’s (ICMA) Comparative Performance Measurement Report on fleet performance based on demographic/organizational data on different fleet management jurisdictions. Additional criteria consisted of types of vehicles, weather, and services provided.

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SCOPE

The audit assessed the effectiveness and efficiency of the City and County of Denver

Fleet Management program for the period July 01, 2009 through June 30, 2010. City

entities included with the scope included Denver PWs, Denver Police, Denver Sheriff, and

Denver Fire Departments.

Denver International Airport (DIA) was excluded from the audit scope because it

operates as a separate City and County of Denver enterprise fund and is highly

regulated by the Federal Aviation Administration. DIA Fleet Management operations will

be examined in a subsequent Audit Services audit engagement.

OBJECTIVE

The objective of this audit was to evaluate the effectiveness and efficiency of fleet

management operations, and to review and assess internal controls over maintenance

practices and fuel distribution.

METHODOLOGY

We utilized several methodologies to achieve the audit objective. These evidence

gathering techniques included, but were not limited to:

Interviewing key Public Works, Department of Safety, Controller’s Office and

Budget and Management Office personnel;

Reviewing State and Federal regulations regarding fleet utilization reporting;

Reviewing City Fiscal Rules and Executive Orders for compliance requirements;

Reviewing department policies and procedures for fleet maintenance, fuel

distribution, internal billing and fleet vehicle acquisition and disposition;

Reviewing prior internal and external audits regarding fleet management;

Reviewing data regarding controls for take-home vehicles, fuel usage and

vehicle utilization;

Observing auction process;

Touring fleet maintenance facilities for Public Works and the Department of

Safety;

Observing inventory processes and procedures regarding parts management for

Public Works, Denver Police Department22 and Denver Fire Department; and

Surveying other cities regarding fleet management practices and measurements.

22 The Denver Sheriff Department vehicles are maintained by the Denver Police Department.

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FINDING 1

Lack of Accountability and Monitoring Over Take-Home Vehicles

As of June 30, 2010, City agencies reported that there are 475 employees authorized to

take vehicles home, with DPD, DFD and PW being the largest take-home vehicle

entities.23 Take-home vehicles play an important role in the City’s operations to ensure

that critical services to citizens are available 24 hours a day, seven days a week,

everyday of the year. Certain employees are granted the use of a take-home vehicle to

ensure that emergencies are responded to regardless of the day and time of the

emergency. Some examples of emergencies that might require City employee

assistance outside of business hours include snow removal, street flooding, power

outages, unsafe street conditions and various public safety emergencies.

Employees authorized to take a vehicle home generally use the vehicle, a city asset, for

personal use commuting to and from work.24 With a few exceptions, the personal use of

the city vehicle is considered an additional form of compensation to the employee, in

other words, a fringe benefit. As such, specific responsibilities and requirements exist to

ensure that this personal use is accounted for properly and that take-home

authorizations are limited only to those employees who truly need the vehicle to perform

their job responsibilities. The intent of Internal Revenue Service (I.R.S.) Code, Fiscal Rule

10.6 and Executive Order 25 is to ensure that take-home use is properly documented,

accounted for and transparent.

Audit work determined that requirements surrounding take-home vehicles are not being

monitored, complied with, or applied consistently. The numerous problems identified by

audit work regarding take-home vehicles ultimately create the perception that the City

does not view managing take-home vehicle usage as a high priority.

Non-Compliance with I.R.S. Code of Federal Regulations

I.R.S. Code provides regulations pertaining to employers on how to value fringe benefits,

including the use of a company vehicle for commuting.25 It requires that all employees

taking a vehicle home, unless they are exempt as a “Qualified Non-Personal Use

Vehicle,” reimburse the City for the personal commuting use of the vehicle.26 Audit work

found that these required reimbursements do not always occur and in other cases do

not occur within the pay period for which the car was used.27 The Controller’s Office

23 This information was obtained from the last report prepared by the agencies and submitted to the Budget and Management

Office. The exact number of authorized take-home users is unknown, as audit work determined there are several inaccuracies contained in this report. 24

Personal use of a take-home vehicle is limited to commuting to and from work. 25

I.R.S., Code of Federal Regulations, United States Department of Treasury, Title 26, Ch. 1(A), Part 1, §1.61-21. 26

Qualified non-personal use vehicles generally include vehicles such as clearly marked police and fire vehicles and unmarked vehicles used by law enforcement officers if the use is officially authorized. 27

The City utilizes the I.R.S. defined “Commuting Valuation Rule”, which requires reimbursements of $1.50 per one-way trip or $3.00 a day for most employees.

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reported that if the employee does not submit a trip log,28 the deduction will not be

processed. Additionally, there is no follow up process for collecting trip logs that are not

submitted.

The funds recovered for commuting reimbursement are a source of revenue to the City

and therefore, if all employees taking vehicles home are not reimbursing properly, the

City is not recovering funds it should otherwise be collecting. Further, there could be

potential penalties assessed by the I.R.S. for unreported income for both the City and

employee receiving the benefit. Additionally, inconsistent enforcement of this

requirement raises equity issues between employees who comply and those that do not

comply with this requirement. This could also result in negative public relations issues for

the City.

Consistent Violations of Fiscal Rule 10.6 & Executive Order 25

Auditors found multiple instances where Fiscal Rule 10.6 and Executive Order 25 take-

home vehicle requirements were not being followed. Overall, there was a lack of

documentation regarding take-home vehicle usage; as a result it was difficult to

determine if some of the employees reviewed truly qualified for a take-home vehicle.

Table 2 below displays the number of violations audit work found with respect to each

requirement.

Table 2 – Summary of Violations29

Requirement Number of Violations in a Sample of 17

Executive Order 25 4

Fiscal Rule 10.6 7

Types of violations that audit work found include:

Half of the employees sampled did not have current, fully executed authorization

forms. Four of the authorizations obtained were signed after the audit request was

made;

The Controller’s Office did not have authorization forms on file for any employees

in our sample and reported they do not receive these for any employee; and

The number of emergency responses the employee is making with the take-home

vehicle is often not tracked, making it impossible to determine if they have met

the requirements for a take-home vehicle.30

28 Trip logs are required by Fiscal Rule 10.6 to be submitted at the end of each pay period to the Controller’s Office. The log

tracks commuting mileage and number of commuting trips, along with emergencies responded to in the City vehicle. 29

Some violations in this table are for the same requirement that is part of both the Fiscal Rule and Executive Order. Reference to all audit work results regarding take-home testing can be reviewed in Appendix B. To perform the testing, a judgmental sample of 17 take-home vehicles was selected. Vehicles tested in the sample included eight from Denver Police Department, two from Denver Sheriff Department, five from the Department Public Works and two from the Department of Parks & Recreation. The number of vehicles chosen from each agency was based on the total number of take-home vehicles for that agency.

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Personnel assigned take-home vehicles are required to submit this documentation. These

violations illustrate that the City does not have a good command over take-home

vehicles, creating the perception that monitoring take-home vehicles is a low priority for

the City.

Issues with the Department of Safety’s Management of Take-Home Vehicles

The Department of Safety, mainly the Denver Police Department and Denver Fire

Department, are some of the largest users of take-home vehicles, which is appropriate

given the nature of their work. Many emergencies responded to by these Departments

require immediate response, along with the use of the specialized equipment located on

or in the vehicle. As such, when there is an after hours emergency, there is not time for

these employees to pick up the vehicle and special equipment prior to responding.

Some examples of emergencies Safety personnel respond to with their take-home

vehicles include: traffic fatalities, hostage situations, homicide investigations, gang

crimes, bomb squad incidents, arson incidents, and hazardous materials incidents.

As noted, I.R.S. Code requires employees to reimburse the City for personal use of an

employer provided vehicle as an additional form of compensation to employees. There

are two exemptions to this requirement for public safety vehicles. The first exemption,

“Qualified Non-Personal Use Vehicle,” is established by the I.R.S. Code. This exemption

generally includes vehicles such as clearly marked police and fire vehicles. Owing to the

design of these vehicles, it is unlikely that employees will use the vehicle more than

minimally for personal use and therefore they are exempt from reimbursement

requirements.31 The City established a second exemption for a “Full Use Public Safety

Vehicle.” This exemption can only be granted by the Manager of Safety and exempts

the user from both reimbursement and emergency tracking requirements. Table three

below outlines the differences in the types of take-home vehicles.

30 In most cases, an employee must have 12 emergency responses within a 12-month period as one requirement to qualify for a

take-home vehicle. 31 Other vehicles that generally qualify include unmarked vehicles used by law enforcement officers if the use is officially authorized, ambulances and hearses, vehicles designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds, school buses, along with other vehicles.

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Reimbursement exemptions are

not consistently applied by the

Department of Safety

Table 3 – Summary of Take-Home Vehicle Types

Types of Take-Home Vehicles

Take-Home Vehicle Qualified Non-Personal Use Vehicle

Full Use Safety Vehicle

Regulation Sources

I.R.S. Code, Fiscal Rule and Executive Order

I.R.S. Code, Fiscal Rule and Executive Order

Fiscal Rule and Executive Order

Who Qualifies Those required to commute in the vehicle for a non-compensatory business reason.

Vehicles generally including clearly marked police and fire vehicles and unmarked vehicles used by law enforcement officers.

Employee's assignment requires immediate response to emergency situations on a 24-hour on-call basis.

Who Authorizes

Agency Head Agency Head Agency Head and Manager of Safety

Special Conditions

Users must respond to 12 emergencies in a 12 month period outside of normal hours, submit trip logs accounting for commuting mileage and reimburse the City for commuting usage.

Users must respond to 12 emergencies in a 12 month period outside of normal hours, but are exempt from tracking/reimbursing for commuting.

Users are exempt from emergency response quotas and tracking/reimbursing for commuting.

Audit work identified several issues with the application of these exemptions within the

Department of Safety. First, all of DPD’s approximately 250 take-home vehicles are full

use safety vehicles; however, no vehicles sampled had the required Manager of Safety

authorization. In addition, on the authorization forms received there was no designation

for the Manager of Safety’s approval signature.

Audit work also found that guidance surrounding

the application of these exemptions is insufficient

and the compliance with such guidance is

inconsistent. For example, since all of DPD’s take-

home vehicles are classified as full use safety

vehicles, personnel using them do not reimburse the City for commuting. Conversely,

both DFD and Sheriff Department (Sheriff) personnel reimburse the City for their

commuting usage, even though they are generally assigned take-home vehicles for the

same reasons as DPD personnel.32 This apparent inconsistency demonstrates that the

exemptions provided by the I.R.S. Code, Fiscal Rule and Executive Order are not being

applied consistently for all departments under the authority of the Manager of Safety for

vehicles being used for very similar purposes.

32 In December 2009, DFD and Sheriff reimbursed the City $3,771 for take-home usage.

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It is questionable whether or not

attending meetings and

employee convenience is

justification for taking a City

vehicle home

Additionally, the justification provided on some DPD take-home vehicle authorization

forms is out of compliance with the City’s Fiscal Rule and Executive Order. For example,

one DPD take-home vehicle authorization form states such a vehicle assignment is

justified when an employee, "is required to attend

numerous meetings, many fall outside normal shift

hours making it impractical for this person to pick

up and drop off a company vehicle.” However,

both the Fiscal Rule and Executive Order state

that full use public safety vehicles can only be

authorized for situations where the employee's

assignment requires immediate response to emergency situations on a 24-hour on-call

basis, requiring the use of specialized safety or emergency equipment. It is questionable

whether or not attending meetings and employee convenience is justification for taking

a vehicle home or for designating City vehicles as a full use public safety vehicle.

Further, many justifications provided on DPD take-home vehicle authorization forms

conflicted with justifications reported by the Department to the Budget and

Management Office (BMO). BMO’s list of take-home vehicle assignments is the only

comprehensive citywide record of this information. Although, take-home vehicles make

up only a small component of the overall budget for each agency, the take-home

vehicle information reported is used in making budget decisions. BMO evaluates vehicle

utilization on an annual basis and provides this analysis to agencies for management

decision making. As noted, in 2010, the BMO addressed significant City budget issues in

part by deferring fleet purchases. The failure to provide accurate information to BMO

means take-home vehicle assignments cannot be properly assessed and figured into

these types of critical budget decisions and agency management vehicle utilization

decisions. The BMO’s listing is also the only form of take-home vehicle oversight beyond

the agency level.33

In addition to these issues, audit work identified one instance where a DPD take-home

vehicle was not parked at the work location when the employee was on vacation at the

time. According to the current DPD Collective Bargaining Agreement, an employee

cannot be on-call while on vacation. Since one requirement for a full use public safety

vehicle is being on-call on a 24 hour basis, the vehicle should have been parked at the

work location while the assigned officer was on vacation.34

Lack of Monitoring and Enforcement Create Several Negative Effects

Audit work determined that there is little oversight and monitoring over take-home

vehicles, which is the primary cause of the violations and inconsistencies discussed

above. Because of the lack of monitoring, clarity and enforcement of regulations, the

33 As noted in the background, the City has an informal Utilization Committee that periodically reviews vehicle usage. However,

this committee does not review take-home vehicle assignments. 34

When auditors inquired further about the work schedules of the other DPD employees in the testing sample, all the employees were reported to be always on-call. This was despite an interview that was conducted earlier in the audit where DPD reported that on-call schedules rotate and that vehicles are not taken home when they are not on-call to comply with “full use public safety vehicle” requirements.

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There may be missed

opportunities to eliminate some

take home vehicles, which

would reduce City costs

City is out of compliance with the I.R.S Code of Federal Regulations, Fiscal Rule 10.6, and

Executive Order 25 pertaining to take-home vehicles. There are several negative effects

resulting from non-compliance with these regulations, including:

Since proper controls and guidance do not exist over documenting take-home

vehicle usage, processing payroll deductions and applying reimbursement

exemptions, the City is not recovering all funds associated with take-home

vehicles. These unidentified and uncollected commuting reimbursement funds

could be allocated to help fund other City activities.

Without accurate and adequate

documentation of take-home vehicle

assignments and justifications, the City is

prevented from adequately reviewing

and assessing vehicle assignments and

utilization. As a result, there may be missed

opportunities to eliminate some take-home vehicles that are not necessary to city

operations. Reducing the amount of take-home vehicles would result in reduced

costs to the City for vehicle maintenance, fuel and other vehicle related

expenses.

The lack of documentation over take-home vehicles may create a negative

perception that the City is not transparent about personal use of City assets.

Additionally, inconsistent enforcement of reimbursement requirements results in

inequities between personnel assigned take-home vehicles. Additional

documentation would provide more control over take-home vehicles and would

enhance transparency and accountability over take-home vehicles.

RECOMMENDATION

We offer the following recommendation to improve accountability and strengthen

internal controls over take-home vehicles.

1.1 The Controller’s Office should revise Fiscal Rule 10.6 to include:

a. Specific requirements regarding "full-use safety vehicle" and "qualified

non-personal use vehicle" to ensure consistent application for all Safety

departments. This should include language on how these exemptions

apply to other City agencies as well.

b. Specific requirements to ensure reimbursement is remitted to the City by

personnel for take-home vehicle usage. Specifically, requirements should

address full-time and intermittent usage, a method to monitor usage and

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circumstances when the annual lease value method35 would be imposed

after failing to submit required trip logs.

1.2 The Mayor should revise Executive Order 25 to formalize the existing Utilization

Committee and require that:

a. The Committee consists of representatives from the Department of Safety,

PWs, the Mayor’s Office, Budget and Management, and other agencies

at the Mayor’s discretion.

b. The Committee meet annually to consider the most recent take-home

vehicle reports submitted by agencies prior to budget finalization.

c. The Committee review take-home vehicle usage for each agency and

make policy and budget adjustments as necessary.

d. The Committee be given specific authority to approve or deny take-home

usage based on Fiscal Rule and Executive Order requirements.

1.3 The Department of Safety should create policies and procedures to ensure

compliance with take-home vehicle requirements. These procedures should

include:

a. A process to review the appropriateness of take-home vehicles across all

departments under the Department of Safety to ensure that only those

take-home vehicles that meet the requirements of qualified non-personal

use and full use public safety vehicle are authorized and documented.

b. Requirements to ensure that all authorizations are completed properly,

including the Manager of Safety’s signature authorizing “full use public

safety vehicles” and providing adequate justifications for take-home use

that demonstrate the benefit to the City and the need for the vehicle.

35 The annual lease valuation method uses the fair market value of the employer-provided vehicle for the year utilized to

determine the annual lease value, as defined by I.R.S.

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FINDING 2

Fuel Access Internal Controls are Inadequate

The Fleet Management Division within Public Works (PW Fleet) is responsible for

negotiating fuel prices as well as purchasing and distributing fuel. As part of this

responsibility, PW Fleet manages and maintains an information system, FuelForce, which

is used to control fuel access at fueling locations throughout the City.

To obtain access to fuel at a City fueling location, employees must first obtain a fuel

identification (ID) number from PW Fleet. In order to obtain a fuel ID, PW Fleet requires the

employee’s supervisor to email PW Fleet with the person’s name and agency. To obtain

access to fuel, the person must enter their ID number, the required fueling information

and the fuel pump number into a key pad at the fueling site that is linked with FuelForce.

Fuel usage is billed to agencies monthly based on the vehicle number fueled.

Audit work found that a lack of internal controls over the process to obtain and

terminate access to fuel creates a significant risk that unauthorized fueling could occur.

More specifically, inadequate maintenance and management of the FuelForce

database has increased the risk for fraudulent activity.

Significant Weakness in Controls of Fueling Database

Auditors obtained a listing of all active fuel ID numbers for all City agencies from

FuelForce and selected two samples for testing. The first sample of 81 IDs was selected at

random from the list of 8,381 active fuel IDs. Audit work revealed that 37% of the active

fuel IDs sampled belonged to terminated employees with two of the IDs showing fueling

activity after termination. Additionally, as illustrated in Table 3 below, 22% of active fuel

IDs sampled have never been used raising the question of why they are necessary.36

Table 3 – Test 1 Results

Test #1 Results

Fuel IDs

assigned to

terminated

employees

Fuel IDs

used after

termination

Fuel IDs never

used

30 of 81 (37%) 2 18 of 81 (22%)

The second audit sample consisted of duplicate names selected from the active fuel ID

listing. There were at least 750 duplicate names in the fuel ID listing. We reviewed 23 sets

36 Due to the way authorization records are kept by Fleet, it was impossible to determine why IDs were issued and never used.

It could be a combination of factors that include, incorrect ID numbers issued, the ID was not needed, the employee transferring to another job where fuel access was not required.

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Significant opportunities exist

for improving fuel access

controls

of duplicates and identified that multiple fuel IDs were assigned to 13 employees, with

one instance of fueling activity after termination of employment, as shown in Table 4.

Table 4 – Test 2 Results

Test #2 Results

Multiple fuel IDs issued to one person

Multiple fuel IDs showing fueling activity

Fuel IDs active after

employment end

13 of 23 (56%) 1 of 23 137

The results of this testing identified several weaknesses in the integrity of the database. In

both samples, it is apparent that the process to deactivate fuel IDs after an employee

ceases to work for the City is a significant control failure. The termination dates of some of

these employees in the sample date back to 1990. This control failure is especially

important since fuel IDs may have been inappropriately used after employees have left

the City.38 Specifically, audit work found that approximately 1,603 gallons of fuel were

obtained with fuel IDs belonging to terminated City employees. Evidence obtained

during the audit could not prove or disprove that this fuel was obtained fraudulently,

partially due to the lack of video cameras at fueling stations.39 These results are also

particularly alarming, given that the overall sample of fuel IDs tested was approximately

1% of all active IDs in FuelForce. As a result, the risk exists for substantive fraud.

In addition, auditors observed that sometimes

nicknames and middle names are given to obtain

fuel access, which made tracking down

employment history difficult. In some instances, no

first name was given to obtain fuel access. There was

also one case where an active fuel ID with a fueling history as recent as September 2010

was from an ID of a person that has no record of employment with the City, when

compared to PeopleSoft and CSA Records.40

Several Factors Contribute to Poor Controls Over Fuel Access

The process to obtain and terminate fuel access is very informal, which has led to many

of the problems described above. First, requesting access to fuel through an email does

not provide PW Fleet with a way to track who is granting access to fuel and the

information gathered about the driver is often inconsistent and incomplete. Further, steps

37 This employee was laid off in 2004 and the ID number remained active at the time of testing. This ID was used as recently as

September 2010 to obtain fuel. Auditors could not determine if this fuel was obtained fraudulently. 38

Auditors did not obtain any strong evidence to support the terminated employees were the ones using the fuel IDs after the end date of employment. 39

At the time of the audit, only two fueling sites had video cameras and footage was only kept for the ten previous days. 40

It is possible that this person did not give a correct or full name to Fleet at the time the ID was created or that the person is employed with a quasi-governmental agency and the department associated with this ID was improperly entered.

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are not taken to verify if the person requesting access is indeed the employee’s

supervisor. In addition, if an error is found in a fuel ID, a new one is issued rather than

correcting the error, which is partially the reason why there are so many duplicate names

in the active fuel IDs.

For terminating fuel access, PW Fleet currently relies upon the agencies to notify them

about employee separation from the City, which often does not happen. Fleet will send

an annual reminder memo to agencies reminding them to report any terminations.

However, no additional steps are taken by PW Fleet to ensure only current employees

have active fuel IDs.

RECOMMENDATIONS

We offer the following recommendation to strengthen internal controls regarding the

management of the Fuel Force system.

2.1 The Fleet Management Division should create a formal process to grant and

terminate access to fuel which includes:

a. Developing policies and procedures for the process including a

standardized form that requires agency information, employee full name

and ID number and supervisor signature.

b. Using employee ID as the fuel ID to eliminate duplicates and create an

audit trail.

c. Requiring edits to a fuel ID if an error is found rather than creating a new

ID.

d. Performing regular reconciliations between PeopleSoft records and the

active fuel ID list to remove terminated employees. At a minimum, these

reconciliations should be performed every six months.

e. Requiring annual positive confirmations from all entities with fuel access

regarding validity and necessity of fuel users. This confirmation should

include language stating the fuel user will protect the fuel ID and notify

Fleet in the event their fuel ID is compromised.

2.2 When the Fleet Management Division invoices agencies for fuel usage, the

invoice detail should include the name associated with the fueling ID used to fuel

each vehicle so the agencies can review for appropriateness.

2.3 The Fleet Management Division should install video cameras at all fueling sites

and consider obtaining additional data storage to allow for a minimum of 60

days of footage available for review.

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FINDING 3

Opportunities Exist to Improve Parts Inventory Controls

An essential component of fleet management is effective control and management of

parts inventory. Inventory is considered an asset and must be adequately maintained,

meaning that inventory should be monitored throughout the life of the part from receipt

of the inventory to disbursement for repairs or returns to the vendor for credit.

Best Practice Identified for Parts Inventory Control

Last year PWs Fleet Management commissioned Laird Consulting to perform a Lean

Process Review of their parts operation.41 The review focused on inventory control,

storerooms, staffing, processes and procedures, and customer service. The results of the

study strengthened controls regarding the management of parts inventory. This study

and the new FASTER system has allowed PWs to improve their inventory operating

procedures to better monitor parts inventory while keeping costs to a minimum without

compromising customer service.42

One basic inventory control used by PW Fleet is securing the parts room behind a locked

door allowing only authorized personnel to enter. All parts activity, whether it is shipping

or receiving, cycle count audit adjustments, or work order requests is tracked in the

FASTER system. Each part is assigned a unique number and a corresponding barcode

that is used to monitor the movement of the part throughout the part’s life cycle. For

example, when a part is required for repairs and maintenance, it is scanned and relieved

from inventory before it leaves the parts room. This action ensures the custody of the part

is monitored at all times.

Cycle counts are completed during each quarter in addition to a yearly physical

inventory count to ensure that inventory on hand is accurate and stocking issues can be

resolved timely.43 Handheld units are used to complete both the cycle counts and the

annual inventory. The 2009 annual physical inventory resulted in an adjustment of

$1,151.40 or 0.07% of total inventory value.44

Tracking all parts activity in FASTER and incorporating the recommendations of the Lean

Process Review has allowed the PW parts manager to improve the efficiency and

effectiveness of the parts operations. Because of this, we consider PWs inventory

operating procedures to be an internal best practice that Denver Police and Denver Fire

Departments could leverage within their parts operations.

41 A Lean Process Review is design to reduce waste, improve processes and incorporate best practices common within the

industry. 42

Public Works Fleet Maintenance operates all satellite facilities with the same policies and procedures. 43

A cycle count is an inventory management technique designed to maintain the accuracy of inventory on hand with the amount recorded in the system. 44

2009 Parts Department Year End Inventory Report provided by Public Works Fleet Parts Manager.

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Weakness in Department of Safety Parts Inventory Controls

Audit work determined that a lack of internal controls over the parts inventory processes

at the DPD and DFD leads to inaccurate on-hands and inventory valuation, inventory

out-of-stocks and overstock, increased levels of obsolete and slow moving inventory, and

creates significant risk of asset misappropriation.45

The stockroom supervisor is responsible for the organization, shipping and receiving,

purchasing, part management, and inventory procedures for the parts room. The FASTER

fleet management system is used by both DPD and DFD to manage inventory. All parts

are assigned a unique number and barcode that is used to monitor part activity in the

system for the life of the part, but the DPD and DFD have not fully implemented the

barcode option of the system in contrast to PW. DPD has assigned barcodes to each

part number but has not started using the handheld units and DFD has yet to assign

barcodes to each part. Officials from both Departments identified resources constraints

as the rational for not fully integrating the barcode method to monitor and track

inventory. Both departments operate their parts room with limited resources; the DPD

parts room consists of two employees, a supervisor and an assistant, and DFD only has

one full-time parts manager.

Audit work included a test of DPD and DFD parts inventory for accuracy by choosing 10

parts randomly from the shelf and verifying the on-hand parts in the system and choosing

another 10 parts from the system and verifying the on-hand shelved parts.46 Both types of

tests were combined to get the total amount of accurate on-hand parts. Results for DPD

indicated that 8 (40%) of the on-hand parts tested were not accurate and 10 (50%) of

the on-hand parts tested for DFD were not accurate. The majority of these differences

resulted from parts not charged to a work order and parts not returned to stock when

they were pulled but subsequently not used for a work order.47

Several Factors Contribute to the Weak Inventory Controls

The failure to utilize the inventory system as designed is the main factor hindering the

ability of DPD and DFD to effectively monitor and track inventory. For example, parts

issued to DPD mechanics are not removed from the system when issued; but instead are

tracked on a manual log. Mechanics and the Parts Department personnel reconcile the

parts used in work orders to the hand written log when repairs are complete rather than

within the automated system.

Similarly, the one full-time DFD parts manager cannot be in the parts room at all times

and the door is not secure allowing for unauthorized access to the parts room. The

individual retrieving a part is “on their honor” to write down the item in a notebook or on

a form that the DFD parts manager uses to update the system. If a part taken from the

parts room is not recorded on the notebook or form, the inventory is not updated. In

addition to the lack of security over the parts room, the lack of resources for both

Departments has impacted cycle counts, which are not being completed regularly. On

45 The Denver Police Department also repairs all Denver Sheriff Department vehicles.

46 The sample from the system was judgmentally selected choosing parts that had an on-hand recorded.

47 A work order is used to document and initiate maintenance and repairs required for City vehicles.

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occasion, a DFD cadet or light duty employee is called to assist with cycle counts and

the annual inventory in an effort to maintain inventory integrity. However, this assistance

has not been frequent enough to maintain accuracy.

Proper inventory controls will help ensure sufficient equipment is available to meet daily

operational requirements, prevent equipment loss, ensure accuracy of the inventory

valuations, and improve budgeting and forecasting of inventory.

RECOMMENDATIONS

We offer the following recommendations to assist the Denver Police Department and the

Denver Fire Department to improve parts inventory controls.

3.1 DPD and DFD should establish inventory operating procedures similar to Public

Works to record parts inventory activity within FASTER as it occurs. Procedures

should address:

a. Parts charged to work orders at time of disbursement.

b. Parts returned to stock and to vendors.

c. Secure access to the parts room by assigning an alternate parts room

custodian.

d. Incorporate the use of the barcodes for tracking purposes.

3.2 DPD and DFD should perform cycle counts regularly to ensure on-hand accuracy

of inventory.

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FINDING 4

Significant Outstanding Internal Billing Transfers

An Internal Billing Transfer (IBT) is an invoice used by city agencies and departments to bill

each other for internal services. For PWs Fleet Maintenance Division, the IBT is the main

revenue source used to fund its operations.

When the Fleet Division performs a service for an agency, PWs Finance and

Administration Division staff creates and sends an IBT to the agency for services rendered.

The agency should review the billing and ensure its accuracy. After verifying accuracy,

an authorized person within the agency should sign the IBT and send it back to Fleet

Maintenance via PWs Finance, who sends the completed IBT to the Controllers Office

where it is uploaded and posted within PeopleSoft.48

Audit work identified a breakdown in the IBT collection process. The breakdown occurs in

two different ways during the IBT retrieval process from agencies. First, city agencies do

not consistently return the IBTs to PWs as required. Instead, agencies generally send the

IBT directly to the Controllers Office thus bypassing a step in the process. Bypassing this

step does not allow PWs personnel to easily track IBT status and in doing so to identify

unprocessed and unpaid IBTs. A second, related control breakdown can occur when

city agencies never return an IBT to PWs or the Controllers Office thus causing an

outstanding billing transfer.

Fiscal Accountability Rules mandate PW Fleet to ensure payments are for services

rendered to city agencies are received. PWs Fleet is not in compliance with this rule

regarding the internal billing transfer procedure. Specifically, the City’s internal billing

transfer procedure noted in Fiscal Accountability Rule 7.7 states, “The billing agency shall

track all bills including the receipt of payment.”49 Although PW Fleet does track all the

billing transfers, it does not have a follow-up procedure or an individual designated to

follow-up with agencies about missing or outstanding internal billings.

As a result of these control deficiencies, audit work identified 116 outstanding IBTs

equating to approximately $134,000. The 116 outstanding IBT represents approximately

8% of total IBTs created and sent to city agencies during our audit period. Since PW Fleet

is funded by these internal billings, it is important that all IBTs are paid to cover the

operating costs for services already rendered.50 The failure to collect these outstanding

funds could create undue hardship on PW Fleet management for budgeting and

forecasting activities. Outstanding IBTs are summarized in Table 5.

48 See Appendix C for a flow chart of the Internal Billing Process.

49 See Appendix D for Fiscal Accountability Rule 7.7.

50 It is possible that PW Fleet has hundreds of thousands dollars of outstanding IBTs in previous years.

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Table 5 – Summary of Outstanding IBTs

OUTSTANDING IBTs 7/1/09-6/30/10

Year Dollar Amount # of IBT

2009 $35,275.16 56

2010 $98,851.96 60

Total Outstanding $134,127.12 116

RECOMMENDATION

We offer the following recommendation to assist the Public Works Finance and

Administration Division monitor and collect timely all internal billing transfers.

4.1 Public Works should ensure compliance with the City's Fiscal Accountability Rules by

creating robust policies and procedures outlining the recovery of outstanding internal

billing transfers. Specifically, the policies and procedures should:

a. Identify staff responsible for recovery of the outstanding balances, if deemed cost

beneficial, and recover the IBTs identified in the audit period and include prior

years if applicable.

b. Create, with assistance from the Controller’s Office, an internal direct billing

procedure to ensure revenue is received timely.

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APPENDICES

Appendix A – Fiscal Accountability Rule 10.6

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Appendix B – Results of Take-Home Vehicle Testing

Fleet Management Audit

Take-Home Vehicle Testing - Summary of Findings

7/1/2009 - 6/30/2010

Requirement Results of Test Work

The driver is required to reimburse the City for

commuting, unless they drive a "qualified non-

personal use vehicle" (Fiscal Rule 10.6, XO25, IRS

Regulations)

2 instances of no reimbursement were identified

Trip Logs must be submitted no later than five

business days after the end of each bi-weekly

work period. (Fiscal Rule 10.6)

Several instances were identified where

reimbursements were processed in large chunks due to

untimely submission of trip logs.

The agency head has approved and executed

an authorization form (Fiscal Rule 10.6, XO25)

7 of 14 did not have current, fully executed

authorizations. Four of the authorizations were signed

after the audit request was made.

The agency head has submitted an authorization

form to the Office of the Controller (Fiscal Rule

10.6)

0 of 14 had authorization forms submitted to the

Controller.

The department or agency head shall submit to

the Controller's Office a Taxable Vehicle Use

Agreement (Fiscal Rule 10.6)

No valid agreements were produced. The only

agreement that was provided was executed after the

audit request was made.

Department or agency heads must annually

review all authorizations for take-home use on or

before June 30th of each year and shall state

the findings in a report to the Controller. (Fiscal

Rule 10.6)

The Controller's Office does not receive this report.

Department or agency heads shall also submit a

status report on or before June 30th of each year

to the Director of Budget and Management of

all vehicle assignments (Fiscal Rule 10.6, XO25)

BMO does receive this report. However, it is not

adequately updated by the agencies and audit work

found incorrect vehicle assignments and vehicles no

longer owned by the City on the most recent report.51

At a minimum, it must be demonstrated that

take-home drivers are required to respond to

City emergencies or immediate service requests

on a periodic basis, at least 12 occasions within a

12-month period. (XO25)

Audit work found that tracking of emergency

responses is haphazard at the agencies. In one

instance, auditors were given a list of snow

emergencies to demonstrate meeting this requirement;

however, this person was on vacation for one of the

dates listed.

51 It should be noted that it is not a requirement in the Fiscal Rule or Executive Order that the report to BMO be accurate.

However, in order for the information to be useful, it must be accurate, which is why it is included in this list.

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Appendix C – Internal Billing Process Flow Chart

Internal Billing Transfer (IBT) Process

Public Works Finance and Administration

PWFA senior

accountant retrieves

billing reports from

shared folder with PW

Fleet

Fund, org & amount

entered into Access

database

Reconcile dollar

amount entered with

report supporting

documentation

Legend

PWFA – Public Works Finance and Administration

CO – Controller’s Office

Each department,

agency, and office

are billed separately

Is there a

billing

discrepancy?

CO verifies agency

approval & correct

fund/org codes

IBT transaction entered

into PeopleSoft by CO

PW Fleet & PWFA work

with agency to resolve

billing discrepancy

No

Yes

IBT returned to PWFA

and sent to the CO

IBT created in

Access

database

PWFA sends IBT and

supporting

documentation to

dept/agency for

approval signature

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Appendix D – Fiscal Accountability Rule 7.7

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AGENCY RESPONSE

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city vehicle fleet management - denver

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