Draft Audit Finding from State Auditor Crit Luallen
Department of Neighborhoods - Invoices
During our FY 2009 audit of accounts payable, transactions selected for testing included an invoice submitted by Metro Department of Neighborhoods in the amount of $15,000. During FY 2009, Metro Department of Neighborhoods was responsible for neighborhood outreach and organizing community events. This agency housed the divisions of Brightside, Community Outreach, Office of International Affairs, MetroCall and the Mayor's Special Events Office, and in FY 2009 was funded primarily through the General Fund. In requesting the supporting documentation for this transaction, we were notified that the documentation was under review by Metro Internal Audit. Upon contacting Metro Internal Audit, we were made aware that the invoice appeared to be fabricated because it did not match the appearance of other invoices submitted by the vendor. Furthermore, additional evidence indicated instances in which several other vendor invoices processed by the Metro Department of Neighborhoods also did not match the vendor's standard invoice. All of the questionable invoices look basically the same with the exception of the vendor's logo, which had been copied onto the invoice in most cases.
Evidence indicates that 36 invoices from 15 separate vendors processed between July 1, 2007 and June 30, 2009 appear to be created by someone other than the vendor. These 36 invoices were approved for payment, generating checks to the 15 vendors totaling $368,660. Because investigations by Metro Internal Audit and Metro Public Integrity are not yet complete, there is a potential that other invoices have been handled in this manner and not yet detected.
Also, a review of the documentation indicates that one of the 15 vendors was a business owned by an employee of the Metro Department of Neighborhoods. Evidence suggests this vendor was paid $14,900 over three fiscal years. One of the three payments making up the $14,900 paid to this vendor is included in the 36 questionable invoices identified above. This raises concerns of a possible conflict of interest, especially since the payment is not supported by valid, detailed documentation to justify the purchase.
Due to the nature of the concerns raised by this information, Metro Internal Audit suspended its review and submitted the documentation to Metro Police Public Integrity Unit. The APA deferred its investigation and communication of this matter several weeks to avoid interfering in the preliminary stage of an investigation.
The auditors did not do procedures beyond a review of evidence gathered in ongoing investigations, and therefore were not able to ascertain the cause for, or source of, the questionable invoices. Evidence exists indicating these invoices may represent prepayments or deposits to vendors for upcoming events and future services. However, if prepayments or deposits were required, it is unclear why the invoices were not generated by the vendor.
Also, due to the similarity of the invoices in question, there is indication that the invoices were likely created by department personnel. The creation of invoices by agency personnel is an extremely poor business practice which increases the risk of fraud, misappropriation, and accounting errors such as authorization for duplicate payments for the same service. Although on rare occasions there may be a practical business need to pay deposits or prepayments on certain services, those payments should be supported by valid supporting documentation.
Furthermore, the payments made to a business co-owned by a department employee constitute a related party transaction at a minimum. Related party transactions in and of themselves are not illegal, but there is an increased risk of unethical behavior which should be mitigated by full disclosure and transparency. The failure to fully itemize the payments on the business's standard invoices only increases this risk.
The weaknesses noted above indicate an extremely high risk of unethical business practices. Whereas there may be legitimate business needs for prepayments and deposits, all payments for goods and services should be evidenced through valid supporting documentation obtained from the vendor or evidenced through contractually scheduled payments. This supporting documentation should be of sufficient detail for identifying the business purpose of the payment.
Recommendation:
We recommend that Metro Internal Audit complete its review of this matter to ascertain the cause and extent of the invoicing practice noted, and to fully investigate the conflict of interest identified. We further recommend that Metro Internal Audit's report be referred to the Auditor of Public Accounts for review upon completion, and also to Metro Public Integrity for determination on whether additional investigation is warranted.
We further recommend Metro Office of Management and Budget immediately prohibit this practice, and communicate the prohibition to all Metro departments. Furthermore, Metro Office of Management and Budget should train accounts payable employees on detecting potentially fabricated pay documents, and reiterate procedures for reporting questionable items so they may be reviewed.
Management's Response and Corrective Action Plan:
As the auditors noted, this is an ongoing investigation of the Office of Internal Audit (OIA) and the LMPD Public Integrity Unit (PIU). As the information listed above is currently held by OIA and PIU, we do not have the complete information to respond in full to the comment above. However, any failure to follow established procedures by staff will be addressed by additional training, increased supervision and / or discipline as deemed appropriate and necessary by management. Once the OIA and PIU investigations are complete, we agree that the findings should be reviewed by the Auditor of Public Accounts and we pledge to take any additional corrective action necessary.
OMB does prohibit the practice of using any non-vendor generated invoices. OMB provides training and operational guidance to departments regularly, including information on invoice processing. Only original invoices, or an authorized copy if the original is destroyed or lost, may be submitted for payment.
