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Investigative report, audit and port plan

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					          STATEMENT BY PORT OF OAKLAND REGARDING RELEASE
    OF P-CARD AUDIT AND INVESTIGATIVE REPORT BY OUTSIDE COUNSEL
            INTO ALLEGED IMPROPER EXPENSES AND POSSIBLE
          VIOLATIONS OF TRAVEL AND ENTERTAINMENT POLICIES
                          DECEMBER 10, 2012

        The Port of Oakland is releasing today an Audit Report prepared by the Port’s Chief
Audit Officer that addresses Port practices and policies for business travel and entertainment
expenses. The Audit Report reviews the use by Port employees in 2011 of Port-issued credit
cards, called P-Cards (short for purchasing cards).

        After the Board of Port Commissioners learned of allegations in early October of this
year of improper use of P-Cards by the Port’s then-Executive Director and Maritime Director,
the Board retained the law firm of Arnold & Porter LLP to conduct an internal investigation.
The Port is also releasing today the results of that investigation in an Investigative Report issued
by that firm. The investigation confirmed the Audit Officer’s conclusions that the Port lacks
sufficient internal controls over travel and entertainment expenditures and that better oversight is
needed to ensure that money is wisely and properly spent. While the Port is a public agency, it
operates in two highly competitive business environments, facing competition from other
maritime ports along the West Coast and from other international airports in the Bay Area. Thus,
business travel and entertainment of various business contacts are necessary and appropriate for
the Port to maintain its competitive position; however, proper controls are required.

        Outside counsel’s Investigative Report concluded that Omar Benjamin, the Port’s former
Executive Director, and James Kwon, the Port’s Maritime Director, violated Port policies when
Mr. Kwon used his P-Card for expenses at two adult entertainment clubs with Mr. Benjamin and,
in addition, listed business contacts as being present when they were not. Mr. Benjamin retired
from the Port on November 9, 2012, and is no longer associated with the agency. Mr. Kwon has
also agreed to retire from the Port and will stay on as a “retired annuitant” for a seven-month
period to assist with the transition to a new Maritime Director. Deborah Ale Flint continues to
serve as the Port’s Acting Executive Director and Jean Banker continues to serve as the Acting
Maritime Director.

        At the time reports of improper P-Card use first appeared in the media in early October,
the Port was already in the process of reviewing its travel and entertainment policies based, in
part, on the Audit Report released today. Accordingly, the Port has already taken steps to
strengthen enforcement of existing expense policies and has been working to develop new
policies as needed. To continue to further those objectives, the Acting Executive Director and
her staff are releasing today a “Matrix for Responsible Expense Practices,” which sets forth a
comprehensive plan to provide Port staff clearer guidelines, better oversight, and accountability
with consequences. The plan covers six areas, including changes to three existing policies and
the Port’s code of ethics, and describes several initiatives, many of which will be substantially
completed by the end of the year and others that will be developed over the coming six months.



                                                 1
       By way of highlights:

           •   Guidelines for business entertainment and promotional activities have not been
               specific enough and spending limits have been inadequate and not uniformly
               enforced. Changes are being made to establish clear expenditure standards and
               limits as well as advance approval procedures that ensure accountability.

           •   Guidelines for spending on flights, hotels and meals have also been insufficient.
               Therefore, rules will now specify permissible levels of air travel depending on the
               length of the flight. New rules will also establish permissible spending levels for
               hotels and meals that conform with best industry practices.

           •   The number of persons holding Port P-Cards will be reduced. In addition, the
               Port will step up enforcement of the existing P-Card Policy, holding both card
               holders AND approving officials fully accountable.

        The Port employs nearly 500 hard-working men and women across the organization.
Less than 100 of those employees travel, host customers or hold P-Cards. Even fewer do so on a
regular basis, and almost all of them do so responsibly and ethically. While this investigation
has necessarily focused on examples of abuse, the investigation also found those to be isolated
instances. The investigation found instead that the vast majority of business travel and
entertainment expenditures by Port employees during the review period were for proper business
purposes.

       The Investigative Report also found that the Port lacks sufficient oversight over the value
and cost of business travel and entertainment, and that employees need to do a better job
documenting their expenses. The report concludes that “a prevailing view among some Port
employees is that expenses for business entertainment and travel have few limits, other than the
spender’s own good judgment and common sense, and should generally not be second-guessed,
even by approving officials or the Finance Department.” That culture must change immediately,
and the policy changes announced today are important steps down that path.

        Finally, the Audit Report released today from the Port’s Chief Audit Officer mentions the
possibility that Port employees may have violated certain federal and state laws in their spending
on business entertainment. Therefore, the Board has instructed its outside counsel to fully
investigate those issues and to meet with governmental authorities as appropriate to discuss any
relevant findings. The Board has also instructed its counsel to work with the Chief Audit
Officer, the Port Attorney’s Office and the Board to develop new and enhanced guidelines and
training for Port personnel to ensure that all applicable laws are complied with fully.

       The Port is committed to openness and to proper dealings at all times. The Port
recognizes there has been frustration in the media that the Audit Report released today was not
released earlier. But because the Audit Report identified potentially serious legal issues that
required careful analysis and effective remedial action, the Port exercised the right it has under
the law to consider appropriate responsive action in closed sessions. Now that the review has


                                                 2
reached an appropriate stage, the Board directed that the Audit Report and the Investigative
Report of its outside counsel be immediately released.

        The Port hopes these comprehensive actions will allow the dedicated men and women
who work at the Port to return their full attention to the business challenges we all face. Our
airport and maritime port are among the finest in the nation and we intend to maintain those high
standards. We thank our employees for their patience during this difficult time and for their
support as we move forward.



       BOARD OF PORT COMMISSIONERS
               Gilda Gonzales, President
               James W. Head, First Vice-President
               Allan S. Yee, Second Vice-President
               Cestra Butner
               Earl S. Hamlin
               Bryan Parker
               Victor Uno


       ACTING EXECUTIVE DIRECTOR
               Deborah Ale Flint




                                                3
                                                       Matrix for Responsible Expense Practices

While this Matrix is associated with the Port's investigation into inappropriate expense practices conducted by Arnold and Porter LLP,
dated 12/7/12., it sets forth a plan of action that will continue into next year providing sound policy, and best practices that will affect the
values and culture of the Port of Oakland ('Port') for years to come. This document will be maintained publically and will be updated
quarterly. The future actions and their related plans and schedule may change as we implement our recommendations and assess areas
of risk or concern. We are an organization that values continuous change and improvement. While the findings of the investigation
reveal limited problems, the vulnerability is one that we must address across the entire organization.



Summary of Current Actions                                                                           Schedule

Conduct Board of Port Commissioners ("Board") discussion on governance to set intentions and         December 10th and December 20th 2012 Board meetings
expectations of how the Board conveys its values to the public and the staff.

Report Commissioner travel expenses annually and publicly beginning with CY 12 report                March 2013

Update three existing policies and adopt best practices from the public and private sector.          Cross organizational team to assess and recommend policy
Remove redundancies and confusion by consolidating the three policies for travel related             revisions by January 31, 2013; meet and confer with labor in
expenses, purchase card use, and training, seminars and conferences. The Port retained a Big         February 2013. Report to Board for adoption in March 2013.
Four professional services firm to assist in reviewing the policies.

Ethics training is required by the State under Government code sec 53235 for specified local         Training is scheduled for January and February of 2013 at
government officials. This training is scheduled as part of the Port's annual training program for   various Port locations
this Fiscal Year. The port's training will be mandatory for all supervisors, managers and
directors. The training is also mandatory for Commissioners who receive the training every two
years.

Evaluate the number of Purchase cards (PCard) in accordance with best practices and identified       Evaluation to be completed by January 31, 2013
need. Purchase cards can be an important tool for business purposes if used properly. Best
practice research revealed that it's prudent to continually assess cardholders' needs for the card
and reduce the number of cards, where practical. All Directors will evaluate the need for
existing cards.




12/7/2012                                                                                                                                           Page 1 of 8
                                                    Matrix for Responsible Expense Practices


(Summary - cont.)
Recommended Action                                                             Schedule

Report quarterly on Purchase card use. To reinforce transparency, staff will   First report will be one quarter after revalidation of cards
report to the Board on the Purchase card use and its evaluation of the
effectiveness of the cards, needed improvements, or concerns on a routine
basis.
Enhance communication with employees about expenses practices, reinforcing     Underway
prudence and accountability.
Communicate clearly and comprehensively with employees regarding cultural      Underway
change resulting from the inappropriate expenses. Special Departmental
Meetings with the Acting Executive Director




To carry out changes and improvements to expense practices the Port will utilize a cross section of employees, industry experts and
best practices. The ultimate solutions may vary from the suggestions on the following pages, but it is our intent to solve the root of the
issues that we know about today or that we find as we further assess our current practices.




12/7/2012                                                                                                                                     Page 2 of 8
                                                       Matrix for Responsible Expense Practices


Category: Update Policy #AP406 Reimbursement Policy for Travel, Entertainment and Business Expenses
Responsible Party: Deputy Executive Director
Timetable: November 2012 – April 2013
Issue to be Addressed                                                              Recommended Action

1. Overlap of Topics with the AP405 policy: Employee Training, Seminar and         Consolidate and clarify three policies (#AP406, #AP511, and #AP405) into two
Conference, and AP511 Policy for Purchase Card Use                                 policies for travel related expenses and purchase card use procedures. Create
                                                                                   a new policy for “hosting” expenses. Policies reviewed from other similar
                                                                                   agencies separated policies that governed hosting expenses

2. Policy refers to "Reasonable" expenses and "Necessary" without defining         Establish and utilize ethics and value related practices to affect cultural change.
what they mean                                                                     Emphasize the policy's requirement that both the individual making the expense
                                                                                   and the supervisor approving the expense to exercise good judgment in the
                                                                                   appraisal of the reasonableness. Establish reasonable and necessary expense
                                                                                   language.

3. Lack of definition or expenditure limits for promotional and business hosting   Develop a new hosting policy to guide business conduct. Hosting policies are
                                                                                   common industry practice and many similar organizations have separate
                                                                                   policies governing these activities.

4. Policy does not give guidance on giving and receiving of gifts. Promotional     Develop policy with clear rules covering gifts and promotional items. Require
items are not addressed in the policy                                              disclosure as appropriate. Centralize the coordination and control of
                                                                                   promotional items.

5. Policy needs to enhance guidance on meals and spending limits                   Establish spending guidelines, possibly per diem. Address qualifying meal and
                                                                                   food purchases in the policy

6. Policy allows business class flights for anything over two hours                Adjust policy to reflect current best practices across the industry.

7. Policy needs to enhance guidance on hotel expenses and spending limits          Establish spending guidelines, possibly per diem and be specific about what
                                                                                   approval levels are able to grant exceptions.

Schedule of Actions:
        Establish employee work group to revise policy and manage internal reviews December 2012/January 2013
        Review by unions – Meet/Confer Process – February 2013
        Board report and finalization – March 2013
        Training for new policies – April 2013


12/7/2012                                                                                                                                             Page 3 of 8
                                                        Matrix for Responsible Expense Practices


Category: Update Policy #AP511 Purchase Card Use
Responsible Party: Chief Financial Officer
Timetable: November 2012 – March 2013
Issue to be Addressed                                                                Recommended Action

1. Employee and their approving official need to be held accountable for             'Enforce three-strike rule. When policy is updated and rules and approval levels
violations of the PCard policy. Need to enforce three-strike violation rule to       clearly delineated, hold PCard holders and approving officials accountable, i.e.
revoke cards.                                                                        consider imposing discipline on approving officials who review and approve
                                                                                     expenses in violation of the updated policy. Training for all P-card holders and
                                                                                     expense report personnel will be mandatory and senior management's values
                                                                                     and expectations will be developed. In addition, the Port will ask for Cal-Card's
                                                                                     assistance in providing mandatory training for Port Staff.

2. Some employees have failed to adhere to the required monthly submission           Enforce the rule without exceptions and take away the purchase card of the
of paperwork and receiving necessary approvals in a timely fashion.                  violator. Periodic reporting of violations and "questionable" items to the Board.

3. Quality of expense justification and documentation has not been consistent        Accounts payable staff will confirm that IRS rules of justification are met and will
                                                                                     be empowered to deny expenses that lack that basic justification. Fully utilize
                                                                                     technology to improve consistency of documentation.

4. No justification for use of PCard has been required; no established criteria      Establish specific criteria for employees who should receive purchase cards and
for determining per transaction and monthly spending limits                          establish spending limits.

5. Purchase cards can be an important tool for business purposes if used             Evaluate number of P-cards necessary and ensure adequate resources are
properly. Best practice research revealed that it is prudent to continually assess   provided/available to match oversight needs. Re-establish executive level
cardholders needs for the card and to reduce the number of cards where               values and expectations.
practical.
Schedule of Actions:
        Establish employee work group to revise policy and manage internal reviews - December 2012 – January 2013
        Division Directors to evaluate the number of PCards issued - January 2013
        Review by unions – Meet/Confer Process – February 2013
        Board report and finalization – March 2013
        Reauthorize PCards based on updated policy – April 2013
        Training for all cardholders and approvers – April 2013; ongoing for new card holders




12/7/2012                                                                                                                                               Page 4 of 8
                                                       Matrix for Responsible Expense Practices


Category: Update Policy #AP405 Employee Training, Seminar and Conference Policy
Responsible Party: Deputy Executive Director in collaboration with the Director of Corporate Administrative Services
Timetable: November 2012 – March 2013

Issue to be Addressed                                                          Recommended Action

1. Overlap of topics with AP406                                                Merge policies AP406 with AP405 and clearly define procedures and policies
                                                                               for each type of activity

2. There are multiple forms and approvals for travel for business, training,   Streamline the forms and approval process to make compliance and approval
seminars, or conferences - too much bureaucracy and not consistent             process easier and transparent
compliance
Schedule of Actions:
        Establish employee work group to revise policy and manage internal reviews December 2012/January 2013
        Review by unions – Meet/Confer Process – February 2013
        Board report and finalization – March 2013
        Training for new policies – April 2013




12/7/2012                                                                                                                                  Page 5 of 8
                                                        Matrix for Responsible Expense Practices


Category: Training
Responsible Party: Director of Corporate Administrative Services
Timetable: November 2012 – March 2013

Issue to be Addressed                                                            Recommended Action

1. Lack of regular training on policies #405 #406 and #511 to employees and      Corporate Administrative Services to include regular and consistent training or
approvers                                                                        all employees and commissioners in their annual training.

2. Lack of consistent training on Ethical Business Conduct (AP 17)               Corporate Administrative Services to include regular and consistent training for
                                                                                 all employees and Commissioners in their annual training schedule.

3. Mandatory State Ethics Training for Elected and Government Officials          All Port supervisors, managers, and directors will be required to attend Ethics
                                                                                 class for State Government Officials scheduled for sessions in January and
                                                                                 February 2013.

Schedule of Actions:
        Establish employee work group to develop curriculum for new policies- January 2013
        Establish annual training schedule - Jan 2013
        January and February of 2013 Ethics training sessions scheduled at various Port locations




12/7/2012                                                                                                                                         Page 6 of 8
                                                      Matrix for Responsible Expense Practices


Category: Assessment of Compliance Issues and Risk
Responsible Party: Deputy Executive Director in collaboration with Port Auditor, Port Attorney, and Chief Financial Officer
Timetable: December 2012- June 2013

Issue to be Addressed                                                           Recommended Action

1. The Port will benefit from improving its compliance programs and its         Hire a consulting firm to assess the Port’s current compliance environment
approach to expense policies and procedures.                                    around expenditures and approvals and have them develop a road map to
                                                                                improvement. The review would include an update of the Port's code of
                                                                                conduct, and modernization of our policies and processes to improve
                                                                                effectiveness.

2. Revise existing document retention policies #AP404 Retention and Handling    Legal Division will work with all other Divisions to revise and update document
of Official Files and #AP554 Electronic Communications                          retention policies for implementation. Each Division will administer hard copy
                                                                                retention and IT will administer electronic records retention.

Schedule of Actions:
        RFP for consultant services considered release in January 2013 with March contract consideration.
        Assessment to take two months and roadmap to take 2 months.
        Final report re compliance to Board in July 2013.
        Establish employee work group to revise policies AP404, AP554 and manage internal reviews; January 2013.
        Meet and confer with unions by April 2013.
        Final report re AP404, AP554 to Board by June 2013




12/7/2012                                                                                                                                       Page 7 of 8
                                                      Matrix for Responsible Expense Practices

Category: Cultural Change to further Strategic Plan Principles for a high performing workforce; improve the Port’s financial
position, and to create sustainable economic growth
Responsible Party: Executive Director
Timetable: Immediate and Ongoing

Issue to be Addressed                                                             Recommended Action

1. The Port wants to improve its value of accountability and wants to use best    1. Set expectations for code of conduct and Port values that set a standard
practices for its expense practices                                               above and beyond established policies. Set proper values and expectation from
                                                                                  the Executive level consistent with values expressed in the Strategic Plan
                                                                                  regarding organizational culture.

                                                                                  2. Reporting of progress and performance of the Matrix items will be public

                                                                                  3. Employees will be part of solutioning, engaged in open dialogue concerning
                                                                                  ethics and compliance.

Schedule of Actions:
        Draw from best practices to develop a set of values and robust communication plan to reinforce organizational values.
        Send regular surveys to employees to understand this plan's effectiveness and to gauge the success in cultural change




12/7/2012                                                                                                                                        Page 8 of 8
OFFICE OF AUDIT SERVICES


     Internal Audit Report


_______________________________


       Performance Audit

    Procurement Card Program

       Calendar Year 2011




            July 23, 2012
          Report No. IA01-13
                                 Internal Audit Report
                     Performance Audit – Procurement Card Program
                                  Calendar Year 2011



                                  Table of Contents

Transmittal Letter                                                  3

Executive Summary                                                   4

Background                                                          8

Scope and Objectives                                                9

Methodology                                                         9

Audit Findings, Recommendations and Management Responses

   1. Purchase Splitting                                            10
   2. Gifts                                                         11
   3. Expense Substantiation                                        13
   4. Non-business Meals                                            14
   5. Computer Software and Equipment                               15
   6. Questionable Purchases                                        15
   7. Approving Officials Review                                    17
   8. Business Need Justification                                   18
   9. Adherence to P-Card Policy                                    19
   10. Monthly Expense Reports                                      19
   11. Spending Limits                                              21
   12. Merchant Category Code Restrictions                          22
   13. P-Card Security                                              22
   14. P-Card Cancellation                                          23
   15. Program Oversight                                            24
   16. Duplicate Reimbursements                                     26




                                             2
                                  Internal Audit Report
                      Performance Audit – Procurement Card Program
                                   Calendar Year 2011




July 23, 2012


Board of Port Commissioners
Port of Oakland
Oakland, California


Dear Commissioners:

As the Port continues to address its fiscal challenges, management must consistently practice and
enforce austere measures to ensure that all costs incurred are reasonable and absolutely
necessary. This audit examined the Procurement Card (P-Card) Program which provides certain
employees with a mechanism to quickly procure and pay for goods and services without going
through the rigor of a traditional procurement process. This ease of use carries with it significant
risks of misuse that could result in wasteful spending, fraud and abuse if not properly managed
and controlled.

Overall, audit work disclosed that P-Cards have served as a major conduit facilitating lax
spending that in many instances violated Port policies and in some, may have also violated
federal and state laws. The results of the audit which are presented in the attached report provide
reasonable justification to eliminate the P-Card Program at best; if not, minimize the number of
P-Cards to effectively match available resources to oversight needs.

We have discussed the audit findings with appropriate members of management who are
generally in agreement and their specific responses have been incorporated in the report.

We extend our appreciation to the Port’s Chief Financial Officer and her staff for their assistance
and cooperation during the audit.


Respectfully,



Arnel Atienza, CPA, CIA
Chief Audit Officer




                                                 3
                                        Internal Audit Report
                            Performance Audit – Procurement Card Program
                                         Calendar Year 2011


                                        EXECUTIVE SUMMARY
The Port’s Procurement Card (P-Card) Program was established as a supplement to the Port’s
traditional purchasing program in order to provide a convenient and efficient method of
procuring low value goods and services directly from the vendors. Currently, the P-Card is an
internationally accepted Visa credit card issued by US Bank as part of the State of California’s
CAL-Card Purchasing Program. The Financial Services Division is responsible for the overall
administration of the P-Card Program.

The Office of Audit Services conducted an audit of the P-Card program to determine whether
there are adequate and effective internal controls in place to reduce the risk of fraud and misuse
of P-Cards, and to assess compliance with the governing P-Card policy and other applicable
policies, laws and regulations. The audit examined P-Card transactions for the calendar year
2011, including corporate cards1 transactions and selected employee expense reports deemed
necessary as part of the P-Card related issues identified in the audit process. There were 82 P-
Card holders during 2011 with total purchases of about $1.9 million mostly for travel expenses,
business meals and entertainment, and operational supplies.

Overall, audit work disclosed various instances where cardholders made improper purchases,
indicating that the internal controls currently in place are inadequate and not working effectively
in preventing the risk of fraud and misuse of P-cards. Specifically:

    I. CARDHOLDERS MADE IMPROPER PURCHASES

         1. In at least 16 instances, certain cardholders circumvented the single transaction
            spending limits by splitting purchases of goods and services totaling $89,319. As a
            preventive control, the P-Card Policy expressly prohibits purchase splitting to evade
            mandatory single transaction spending limits.

         2. Expenses for items explicitly described as gifts and expensive giveaways totaling
            $67,404 may have violated federal and state laws. Among others, the California
            Constitution forbids gifts of public funds and the U.S. Foreign Corrupt Practices Act
            prohibits bribing foreign officials. The gifts and expensive giveaways that were handed
            out locally and overseas consisted of bottles of wine and liquor, Tiffany sterling silver
            key rings, sporting events tickets including food, beverages, parking passes and tailgate
            party tickets, concert tickets, apparels, gift cards, designer leather pocket holders and
            writing pads, cosmetics, perfumes, jewelries, herbal products, etc.

         3. Cardholders failed to properly substantiate business meals and entertainment expenses
            as required under Port Policies and IRS Regulations, exposing the Port to abuse and

1
    In addition to P-Cards, the Port also has two Corporate Cards (American Express) during the audit period.


                                                           4
                                      Internal Audit Report
                          Performance Audit – Procurement Card Program
                                       Calendar Year 2011

           potential employment tax liabilities. Of the approximately $50,000 randomly selected
           samples of meals and entertainment expenses, none included substantiation that fully
           met the requirements of the IRS regulations and Port Policies. The Port may be
           obligated to include the improperly substantiated expenses in the employee’s earnings.

      4. Certain cardholders used P-Cards to purchase non-business meals totaling $1,906.
         These meals were mainly between Port employees, which under Port policy do not
         qualify as business expense and therefore should not be charged to the Port.

      5. Certain cardholders used P-Cards to purchase computer hardware, software and
         telecommunications equipment totaling $9,275 without the required prior approval
         from the IT department.

      6. P-Card charges totaling $194,087 appear questionable in terms of reasonableness and
         legitimate business need. Among others, these items include: purchases of about
         $90,000 from a Southern California vendor that currently has a suspended business
         status per the California Secretary of State Business Programs, lodging cost of up to
         $670 per night, business meals costing $75 to $100 per person, off-site managers’
         retreat, holiday cruise, cost of attending U2 concert with a Port tenant and personal
         guests, retirement luncheon for a Port employee, and cost of unnecessary/upgraded
         rental cars.

    II. INTERNAL CONTROLS NEED IMPROVEMENT

      7. As evidenced by the improper purchases in the foregoing section, approving officials2
         did not properly review and approve the monthly P-Card transactions and expense
         reports. Since they are closest to the business activities of the cardholders, approving
         officials’ review and approval is a key control in the P-Card process and provides the
         first line of defense against fraudulent, improper or abusive P-Card purchases.

      8. The process of issuing P-Cards lacks adequate business need justification. Neither the
         P-Card Policy nor the P-Card Request Form has established criteria to justify or
         demonstrate the legitimate business need for a P-Card by the requester.

      9. Even though a written policy was established and all cardholders were required to sign
         and explicitly acknowledge that they understood the policy, cardholders failed to abide
         by the P-Card policy.


2
  An approving official, who normally is the cardholder’s immediate supervisor, is responsible for reviewing,
approving and certifying cardholder’s monthly P-card statement and expense report for compliance with the P-card
policy and other applicable Port policies, laws and regulations. In all cases, a Director or a Manager is the approving
official.


                                                          5
                            Internal Audit Report
                Performance Audit – Procurement Card Program
                             Calendar Year 2011

10. The required monthly P-Card expense reports were not submitted timely, exposing the
    Port to potential employment tax liabilities. Despite repeated follow-ups, an average of
    about 27% of the cardholders did not submit the required monthly expense report
    within the prescribed deadline. Under the IRS rules, the Port may be obligated to
    include unsubstantiated expense in the employee’s annual earnings. Additionally, since
    the P-Card bill must be paid by a certain date (or incur significant penalties), the Port
    was paying bills that were not substantiated or approved by the P-Card user or
    supervisor, exposing the Port to fraudulent activity and misuse of Port funds.

11. The cardholders’ current spending limits are higher than their actual need creating
    unnecessary financial risk. About 81% of the actual purchase charges used less than
    10% of the spending limits indicating that current limits are significantly higher than
    actual needs. Additionally, since the P-Card program is mainly designed as a
    supplemental mechanism for low cost purchases, the higher limits don’t seem to
    support this intent and also makes it difficult to monitor compliance with both the
    formal and informal bid requirements.

12. The Merchant Category Code (MCC) restrictions that enable blocking of certain non-
    Port related merchants are not fully utilized. In addition to the 10 MCC currently
    blocked by CAL-Card, the MCC list contains more merchants that are not Port–related
    and therefore should be blocked automatically to mitigate risk of non-Port business
    purchases.

13. Cardholders may have allowed other staff to use their P-Cards in violation of the P-
    Card policy. There were invoices and e-mail confirmations describing the source of an
    order which indicate that a person other than the cardholder placed an order and used
    the P-Card for payment.

14. P-Cards of separated employees were not cancelled promptly; in 2 instances, P-Cards
    were not closed until about 8 months after the employees’ separation dates.

15. In the light of the foregoing findings, it appears imperative that the overall P-Card
    program oversight needs to be strengthened. The Port should consider fully adopting
    the best practice guidance provided by the CAL-Card Program, which among others,
    prescribes robust oversight thru intentionally redundant review and approval
    responsibilities over P-card activities. Alternatively, the Port should consider scaling
    back its P-card program significantly to match resources to oversight needs, if resources
    to adequately strengthen the current program are not available.




                                           6
                                  Internal Audit Report
                      Performance Audit – Procurement Card Program
                                   Calendar Year 2011



 III. OTHER ISSUES NOTED

     16. An employee received duplicate reimbursements for purchases of certain gift items and
         giveaways totaling $1,959. Additionally, this employee received reimbursement for a
         refundable deposit of about $904 which may or may not have been refunded back to the
         employee.

Specific recommendations to address the findings including management responses are included
in the detailed audit findings section of this report starting on page 10. Among others, these
recommendations include: a) significantly reducing the number of P-Cards, b) enforcing
penalties for violations of the P-Card policy, c) communicating with all approving officials their
role and what “approval and signature” means, d) providing mandatory training to all
cardholders on proper usage of P-Cards in accordance with the P-Card Policy and other
applicable policies, rules and regulations, and e) strengthening the overall P-Card program
oversight by redefining and/or reassigning the roles of the P-Card Administrator and P-Card
Coordinator.




                                                7
                                  Internal Audit Report
                      Performance Audit – Procurement Card Program
                                   Calendar Year 2011


BACKGROUND
The Port’s Procurement Card (P-Card) program was established under Port Ordinance #1606 as
a supplement to the Port’s existing purchasing program in order to provide a convenient and
efficient method of procuring low value goods and services directly from the vendors. Currently,
the P-Card program operates as part of the State of California’s CAL-Card Purchasing Program
under a Master Services Agreement with US Bank that allows state and local government
agencies to utilize the same agreement through a contract addendum process.

The P-Card is an internationally accepted Visa credit card provided to Port staff members who,
as part of their responsibilities, are required to purchase goods or services in the normal course of
performing their job duties. There were 82 P-Card holders during 2011 with total purchases of
about $1.9 million mostly for travel, business meals and entertainment, and operational supplies
as shown below:

                                       P-Card Expenses Year 2011

                                     Personnel,
                       Contractual                           Travel, 31.4%
                                       2.1%
                        Services,
                         6.6%


                                                                           Business
                                                                            Meals &
                        General &
                                                                         Entertainment,
                          Admin
                                                                             7.4%
                        Expenses,
                          20.4%
                                                             Supplies,
                                                              32.2%



The Financial Services Division is responsible for the overall administration of the P-Card
Program. There is a designated P-Card Administrator and a P-Card Coordinator whose
responsibilities include establishing control procedures, processing applications and initial set-up
of new P-Cards, updating data in the accounting system, enforcing compliance with P-Card
policy, canceling P-Cards as needed, and processing monthly payments to the bank.

The Port’s Administrative Policy AP 511 governs the use of P-Cards. Among others, this policy
prescribes procedures and guidelines with regards to P-Card issuance, usage, security, record
keeping, reconciling monthly statements, cancellation, and violations.




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SCOPE AND OBJECTIVES
The audit covered P-Card transactions during the calendar year 2011, including selected
employee expense reports and corporate card transactions deemed necessary as part of the issues
identified in the initial P-Card transactions review. The objectives of the audit were to assess
compliance with Port policies and other applicable laws and regulations, and to evaluate the
adequacy and effectiveness of internal controls currently in place to help reduce the risk of fraud
and improper use of P-Cards.

METHODOLOGY
To achieve the foregoing audit objectives, we performed the following procedures:
   • Reviewed the following documents:
       o CAL-Card Master Services Agreement, User Instructions and Management Memo
       o Port Purchasing Ordinance #1606
       o Oakland Municipal Code 2.04
       o AP 405 – Employee Training, Seminar and Conference Policy
       o AP 406 – Travel, Entertainment and Business Expense Reimbursement Policy
       o AP 511 - Purchasing Card Use Policy
       o FY 2011 Port Contract Purchase Agreements List
       o GAO Audit Guide for Government Purchase Card Program
       o IRS Publication 463 – Travel, Entertainment, Gift and Car Expenses
       o IRS Publication 535 – Business Expenses
       o IRS Publication 1542 – Per Diem Rates
       o OMB Circular A-87 – Cost Principles for State & Local Governments
       o U.S. Foreign Corrupt Practices Act
       o California Constitution Article XVI
   • Interviewed personnel from Financial Services
   • Examined P-Card transactions, corporate card transactions and employee expense reports
   • Performed various analyses and tests
   • Developed recommendations for improvement
   • Reviewed audit findings and recommendations with responsible management

AUDIT TEAM
Stella Xu, CPA, Port Senior Auditor
Lorita Chung, Port Senior Auditor


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                                          AUDIT FINDINGS

I. CARDHOLDERS MADE IMPROPER PURCHASES

    For the purposes of this audit, we followed the U.S. Government Accountability Office’s3
    definition of improper purchases as “those purchases that although intended for the
    organization’s use, are not permitted by law, regulations or organizational policy. Examples
    include meals or refreshments for government employees within their normal duty stations,
    split purchases to circumvent single purchase limits, and purchases from other than
    statutorily designated sources.” Audit work disclosed the following:

    1. Split Purchases Circumvented Spending Limits

      The Port has established mandatory single transaction spending limits ranging from $1,000
      to $25,000 that should provide cardholders with the necessary purchasing power to
      accomplish the needs of their job but at the same time limit the Port’s financial exposure
      from unauthorized purchases. The P-Card policy states that “purchases must not be split to
      circumvent the normal purchasing process for amounts exceeding the single transaction
      limits, and any violation may result in permanent, immediate revocation of purchasing card
      privileges, including appropriate disciplinary action up to termination.”

      For the purpose of this report, we define split purchases as multiple purchase transactions
      made by the same cardholder or multiple cardholders from the same vendor for the same
      item on the same day or immediately following business day.

      Audit work disclosed at least 16 instances where the single transaction limits were violated
      to consummate the intended purchases totaling $89,319; of which, $10,306 was for
      Christmas gifts, Golden State Warriors tickets and Oakland Raiders season tickets.

      Recommendation:
      R1. In reviewing the cardholders’ monthly P-card statement and expense reports, the
          approving officials and designated Finance Division staff should check for any
          “purchase splitting” and hold violating cardholders accountable by enforcing
          appropriate administrative actions as allowed per the P-Card policy. (Related
          recommendations regarding reviewing & setting proper spending limits are included
          in the internal control section of this report under finding # 11.)

3
  Often called the “congressional watchdog,” the U.S. Government Accountability Office (GAO) is an independent,
nonpartisan agency that works for the Congress mainly by investigating how the federal government spends
taxpayer dollars. It also functions as a standard setting body by establishing government auditing standards that
regulates audits of governmental entities and programs.



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   Management Response:
   R1.    Approving officials need to be responsible and educated on their role of what
         “approval and signature” means. Finance staff only has the capacity to do random
         audits. If the Port cannot get comfortable relying on approving officials and holding
         them accountable with only random checks from Finance, the Port will need to cancel
         the P-Card program. Minimally, the number of P-Cards must be significantly
         reduced.
         Finance staff was very much in support of this P-Card audit. Finance staff has been
         identifying questionable P-Card charges for many years, but unfortunately did not
         feel empowered to question many charges once approved by Directors until an audit
         was conducted for substantiation and the Port’s Travel, Entertainment and Business
         Expense Reimbursement Policy (AP 406) was clarified and updated. Going forward,
         Finance staff will enforce termination of the P-Card for violating cardholders as
         violations come to Port staff’s attention as allowed per the P-Card policy. In
         addition, Finance staff has been instructed to raise all questionable charges that
         come to its attention to the CFO. In addition, the 16 instances identified should be
         discussed with the individual violators and their supervisors.

2. Expenses for Gifts May Have Violated Federal and State Laws

   As a political subdivision of the State of California and recipient of federal grants, Port
   monies are public funds subject to federal and state laws. Although the Port currently does
   not have a policy that addresses the issue of giving gifts, there are multiple laws and
   regulations that are directly applicable or relevant to the Port:
         a) the California Constitution forbids gifts or loans of public funds
         b) the Federal Office of Management and Budget (OMB) Circular A-87, which is part
            of the Port grant assurances, does not allow reimbursement for costs of gifts and
            certain entertainment e.g., tickets to shows and sporting events
         c) the U.S. Foreign Corrupt Practices Act prohibits any U.S. person, real or corporate,
            from bribing foreign government officials to assist in obtaining or retaining
            business. The definition of payment and foreign officials are sufficiently broad to
            include employees of state-owned business enterprises (e.g. China Merchant
            Holdings) and nonmonetary benefit like travel and entertainment with no monetary
            thresholds; even the smallest bribes are prohibited.

   Audit work disclosed that the Port spent about $67,404 for items explicitly described as
   “gifts” and expensive giveaways that were primarily handed out locally and overseas to
   both local and international business partners. Such gifts consisted of:



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      Description                                                        Amount
      Bottles of wine and liquor, including leather wine case            $19,493
      Tiffany sterling silver oval key rings (costing over $100 each)    11,397
      Sporting events tickets – Oakland A’s, Golden State Warriors,
      Oakland Raiders                                                    10,929
      Apparels – golf shirts, socks, shoes, neck ties, scarf, gloves      5,598
      Designer all-leather pocket card holders and writing pads
      costing $95 to $350 each                                            3,818
      Food, beverages, parking passes and tailgate tickets at sporting
      events and concerts                                                 3,071
      Custom wood arts and frame                                          2,615
      Gift items/cards                                                    2,333
      Dictionaries and maps                                               1,897
      U2 concert tickets                                                  1,683
      Cosmetics, perfumes, jewelry/jewelry box                            1,221
      Others – Herbal extracts/fish oil capsules, honey, bags, zone       3,349
      time clock, docks golf, misc gift items
      Grand Total                                                        $67,404

Recommendation:
R2. Management should review its current practice with regards to giving gifts or
    expensive giveaways, and establish clear standards and controls to ensure proper
    compliance with applicable federal and state laws. In doing so, Corporate
    Administrative Services Division should work with the Port Attorney’s Office and
    Finance Division to incorporate such standards and controls in the applicable policies.

Management Response:
R2.    Completely agree that the Port’s Travel, Entertainment and Business Expense
      Reimbursement Policy (AP 406) as well as Employee Training, Seminar and Travel
      Policy (AP 405) need to be reviewed and updated. This was recently discussed with
      senior management and the Deputy Executive Director has agreed to take the lead
      with the assistance and concurrence of a group comprised of other senior managers,
      including the CFO.




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3. P-Card Charges Improperly Substantiated

  In conformity with applicable IRS regulations, both the P-Card Policy (AP 511) and the
  Travel, Entertainment and Business Expense Policy (AP 406) require that business
  expenses must be supported by detailed records and documents showing the amount, time,
  place or description, business purpose and business relationship of parties, i.e. names, titles,
  or other designation about the recipients or people entertained that shows their business
  relationship to the Port. Additionally, OMB Circular A-87 which is part of the Port grant
  assurances requires that business expenses must be “adequately documented” to be
  allowable. For these reasons, both policies require Port staff to obtain itemized receipts for
  every purchase, not just the credit card “charge slip” which only shows the total purchase
  amount.

  AP 406 further provides examples of unacceptable substantiation for hotel, restaurant and
  rental car charges, and specifically states that general description of business purpose such
  as “business lunch” or “business expense” are not acceptable. Per the P-Card Policy, a
  cardholder’s failure to attach an itemized receipt will constitute a violation of the policy
  which may result in permanent, immediate revocation of P-Card privileges, including
  appropriate disciplinary action.

  Audit work disclosed numerous instances where sufficient supporting documentation as
  required per the foregoing was not provided. While most of the transactions were
  accompanied by receipts, they are mostly copies of the “charge slips” which lacked basic
  information such as specific business purpose or need, complete names and relationship
  information of people entertained, and number of people for whom the goods or services
  were purchased.

  For randomly selected samples that we tested: a) none of the over $50,000 in meals and
  entertainment expenses complied with the foregoing substantiation requirement, and b) 36
  transactions totaling about $12,300 did not have supporting documentation at all or
  indicated that receipts were lost. In these cases, the P-Card charge lacks the necessary
  information to justify or substantiate a charge, makes it impossible to determine whether
  any unallowable items were purchased, and exposes the Port to potential employment tax
  liabilities. The Port may be obligated to include the unreceipted and/or improperly
  substantiated amounts in an employee’s W-2, withhold applicable employment taxes, and
  pay the corresponding employer taxes.

  Recommendations:
  R3. Both the approving officials and designated Finance Division staff should carefully
      review the supporting documents attached to the monthly P-Card expense
      reconciliation statements and require cardholders to submit any missing required



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        documentation. Repeat offenders should be held accountable by enforcing appropriate
        administrative actions as allowed per the P-Card policy.

  R4. Finance Division should consider prescribing a business expense substantiation form
      (a template/checklist) that cardholders should complete for each purchase. This form
      should capture all the required information per the foregoing policies.

  Management Responses:
  R3. Please see the response to Recommendation #1. The Port may need to also revise $25
       no receipt necessary policy that is allowed for in Travel, Entertainment and Business
       Expense Policy (AP 406).


  R4. Agreed. Finance can develop a business expense substantiation form to incorporate
      into Travel, Entertainment and Business Expense Policy (AP 406) and Employee
      Training, Seminar and Travel Policy (AP 405),


4. P-Cards Used To Purchase Non-Business Meals

  The Travel, Entertainment and Business Expense Reimbursement Policy (AP 406) states
  that a business lunch or other meal is reimbursable if the meeting is actually for a business
  purpose with Port tenants or potential tenants, suppliers, or other business associates. It
  further states that staff meeting or meeting with other employees do not constitute a
  “business meeting.”

  Audit work noted 24 P-Card transactions for purchases of meals amongst Port employees
  totaling $1,906, mostly consisting of meals between a few directors and staff.

  Recommendation:
  R5.    If so intended, the policy should be revised to clearly state that “division directors”
        are allowed occasionally to take staff to lunch based on specifically established
        criteria to ensure equity and consistency of practice Port-wide. Additionally, the
        amount should be capped and authorized through the yearly budget. In the absence of
        such clarification/guideline, the prohibition for non-business meals should be clarified
        and enforced.




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  Management Response:
  R5.    Agreed. The Port needs a clear policy on what is acceptable. This should be
        addressed in the revisions to Travel, Entertainment and Business Expense Policy (AP
        406).


 5. Equipment and Software Purchased Without Required IT Department Pre-Approval

  P-Card Policy prohibits the purchase of computer hardware, software, peripheral
  equipment, and telecommunication equipment or services without prior approval from the
  IT Department.

  Audit work noted at least 8 P-Card transactions for the purchase of printer, software and
  electronic communication system totaling $9,275 without the required IT Department pre-
  approval.


  Recommendation:
  R6. P-Card holders should be reminded to obtain IT pre-approval prior to purchasing IT
      equipment and software. Repeat offenders should be held accountable by enforcing
      appropriate administrative actions as provided in the P-Card policy.

  Management Response:
  R6. Agreed. P-Card holders and approving officials need to be responsible and educated
      on their role and held accountable. The P-Card policy should be revised to clearly
      state what constitutes acceptable IT pre-approval and how such pre-approval should
      be included in cardholder monthly statement/purchase documentation.



6. Certain Purchases Are Questionably Reasonable or Necessary

  The U.S. Government Accountability Office defines abusive purchases as “purchases of
  authorized goods or services at terms (e.g. price, quantity) that are excessive or of
  questionable organization need, or transactions that are deficient and improper when
  compared with the behavior that a prudent person would consider reasonable and
  necessary. Examples include purchases that were made at excessive cost (wasteful) or
  were not needed by the organization.” Although not necessarily abusive, the following
  examples of purchases appear questionable:




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               Description                                                                      Amount
               Purchases from a Southern California vendor that currently has a
               suspended business status per the California Secretary of State4                 $90,098
               Lodging ($300 - $670/night)                                                       83,467
               Business meals ( $75-$100 per person)                                              7,389
               Managers’ retreat (participants’ specific names undisclosed, held in
               Vintners Inn Santa Rosa CA, transportation provided by Pure Luxury
               Transportation, Napa cellars lunch with hosted wine selections)                    2,842
               Holiday cruise (for 2.5 hours, specific names undisclosed)                         2,500
               U2 Concert with a Port staff, a Tenant staff and 4 personal guests                 1,683
               4 rental cars for a conference held 2 blocks from the training venue               1,409
               Retirement luncheon for a Port employee                                            1,362
               Gift cards to division staff                                                       1,001
               Upgraded 3-days SUV rental                                                          982
               One week roaming call charges                                                       766
               Buffet lunch for international business students                                    588
               Grand Total                                                                     $194,087



      Recommendation:
      R7. To ensure consistency of Port-wide practice and reasonableness of expenditures, the
          Port should consider revising the business expense policy (AP 406) to include caps on
          certain expenses, especially travel, meals, lodging, and other entertainment expenses,
          e.g. adopt the federal per diem standards published by the U.S. General Services
          Administration or IRS Publication 1542.

      Management Response:
      R7.     Agreed. The Port needs a clear policy on what is acceptable. This should be
             addressed in the revisions to Travel, Entertainment and Business Expense Policy (AP
             406).

II. INTERNAL CONTROLS NEED IMPROVEMENT

    The ease of using P-Card carries with it significant inherent risk of abuse or improper use
    because it allows the P-Card holder to order, pay for, and receive goods and services without
    prior authorization. Accordingly, it is imperative that effective internal controls are in place

4
 Under the California Corporations Code, a company that has a suspended business status loses its powers, rights
and privileges, and technically cannot legally operate or engage in any business transactions.


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to prevent or detect any abuse or improper use. Audit work relative to internal controls over
the P-Card program disclosed the following:

7. P-Card Transactions Not Properly Reviewed by Approving Officials

 The approving official’s review of the cardholder’s monthly P-Card statement and expense
 report is the most important internal control in the P-Card process. An approving official,
 who is normally the cardholder’s immediate supervisor, is responsible for reviewing,
 approving and certifying cardholder’s monthly P-Card statement for compliance with the
 P-Card policy, procurement policy and other applicable ordinances, regulations and
 procedures. Approving officials provide the first line of defense against fraudulent,
 improper, and abusive P-Card purchases as they are closest to the business activities of the
 cardholders. Therefore, the success of an effective P-Card program depends heavily on this
 review process.

 The widespread P-Card policy violations exemplified by the improper purchases in the
 foregoing section indicate that the approving officials are not thoroughly reviewing the
 cardholders’ monthly P-card statement and expense reports before signing off to indicate
 approval. This may be attributable to their lack of adequate knowledge and training of P-
 Card policy and a wide span of control, i.e. the number of cardholders an approving official
 reviews. We noted that at least 3 approving officials have a span of control ranging from
 12 to 20 cardholders which make it too onerous for them to do the necessary “detailed”
 review of every transaction and supporting documents.

 We also noted instances where the monthly cardholders’ expense reports were not signed
 by the approving officials or signed by inappropriate approving official.

 Recommendations:
 R8. The training program for P-Card approving officials should be comprehensive enough
     to ensure they are adequately trained on how to thoroughly review the P-Card
     holders’ transactions, spot “red flags” for possible fraudulent, improper and abusive
     purchases, and communicate identified potential problems with the P-Card
     Administrator.

 R9. The approving official’s span of control should be reasonable enough to allow time for
      timely and thorough review of the monthly cardholder statements and expense
      reports. Approving authority should only be given to individuals with sufficient
      authority and knowledge to recognize and challenge unusual transactions.




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  Management Responses:
  R8. Agreed. Mandatory training should be provided. In addition, the Port should also
       revise the P-Card policy (AP 511) to make it abundantly clear that approving
       officials are reviewing and approving the cardholders’ purchases for both
       reasonableness and adherence to P-Card policy and the Port’s procurement policies.

  R9. Although the number of PCard users was reduced in the Fall of 2010, management
      should seriously reevaluate the number of P-Cards needed and limit the number of P-
      Card users to just a handful of staff or consider eliminating P-Cards, especially since
      Finance staff cannot provide the redundant review per best practice guidance
      provided by the CAL-Card Program.


8. P-Cards Issuance Lacks Adequate Business Need Justification

  The P-Card policy states “to request a P-Card, contact your supervisor for authorization to
  submit a request. Next, complete and sign the P-Card request form.” Neither the P-Card
  policy nor the P-Card request form has established criteria to justify or demonstrate the
  legitimate business need for P-Card by the requester. Accordingly, it appears that any
  employee may apply for a P-Card as long it is approved by his/her supervisor and division
  director.

  During the period under audit, the Port had 82 cardholders. A review of card usage showed
  that 11 cardholders did not use their cards for 14 months and 11 cardholders used the cards
  less than 10 times during the same period, which indicates that these employees may not
  need a P-Card. Additionally, majority of supplies and services purchased using P-Cards are
  available through the Port’s open purchase orders. If purchases are made from these
  vendors, the need for P-Cards should decrease significantly.

  Recommendation:
  R10. Finance Division should update the P-Card policy to include appropriate criteria and
       require written justification for P-Card issuance.
       (A related recommendation regarding reducing the number of current P-Cards is
       included in finding # 11).

  Management Response:
  R10. Agreed.




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9. P-Cardholders Failed to Adhere to the P-Card Policy

   One of the key effective preventive controls in a successful P-Card program is educating
   the cardholders on applicable P-Card usage requirements and restrictions, and the
   approving officials on appropriate review of cardholders’ purchases and monthly expense
   reconciliation. The training should be provided prior to issuance of the P-Card or
   designation of an individual as an approving or reviewing official.

   Although the Port historically has not provided separate trainings, the cardholders and
   approving officials are required, as part of the P-Card user agreement, to explicitly
   acknowledge that they understand the P-Card Policy and abide by it. Additionally, they are
   made aware of the requirement to submit a written expense report with appropriate receipts
   within prescribed time limit of 15 days following the end of each month.

   As evidenced by the foregoing improper purchases and other internal control violations
   discussed in this section, P-Card holders failed to abide by the P-Card Policy.

   Recommendation:
   R11. The Port should provide separate mandatory training to cardholders and approving
        officials about the proper usage and review of P-Card transactions prior to issuing P-
        Card to a new cardholder or designating an approving official. Alternatively, the Port
        could also ask CAL-Card’s assistance in providing mandatory training to Port staff if
        the Port could not provide training directly.

   Management Response:
   R11. Agreed. Likely, the Port will need to ask for CAL-Card’s assistance in providing the
        mandatory training to Port staff. In addition, the P-Card policy should have a
        separate user agreement for the approving official.


10. Monthly P-Card Expense Reports Not Submitted Timely

   Timely submission of the P-Card monthly expense reports along with the required
   supporting documents for each charge is an important control procedure as it promotes
   prompt review of card charges, identification of disputed items, and report of any suspected
   fraudulent charges. Additionally, this process ensures that the charges are coded accurately
   to the correct general ledger accounts for proper presentation in the Port’s financial
   statements.

   Under the P-Card User Agreement, the cardholder is required, and agrees to submit a
   written expense report monthly along with the original credit card charge slip, any sales


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receipts and other information regarding each charge as required by the P-Card Policy
within (15) days following the end of each month. Failure to do so will result in such
charges being deemed as non-business expense that should be reimbursed to the Port by the
cardholders within 90 days following the date such charges were made. The cardholder
further acknowledges and agrees that the Port is authorized to deduct from his/her
paycheck such charge should he/she fail to comply with the foregoing 90-day
reimbursement period.

The monthly P-Card Violations Report prepared by the P-Card Coordinator showed that
despite repeated follow-up reminders, about 27% of the cardholders did not submit the
required monthly expense report within the 15 days prescribed deadline. As of this writing,
9 reports with total purchases of about $16,500 have not been submitted to the Finance
Division; of which, at least 5 reports are 4 to 6 months overdue.

Failure to file the required monthly expense report and adequately substantiate the
expenses incurred can have federal tax consequences if certain federal guidelines on timing
and substantiation requirement are not followed. The Port may be obligated to include the
unreceipted and/or improperly substantiated amounts in an employee’s W-2, withhold
applicable employment taxes, and pay the corresponding employer taxes.

Additionally, since the P-Card bill must be paid by a certain date (or incur significant
penalties), the Port was paying bills that were not substantiated or approved by the P-Card
user or supervisor, exposing the Port to fraudulent activity and misuse of Port funds.

Recommendation:
R12. The P-Card Administrator and Coordinator should enforce the P-Card policy by
terminating the P-Cards of the violating card holders and pursuing reimbursement from
employees as deemed appropriate.


Management Response:
R12. Agreed. Finance has spent enormous amounts of time trying to enforce timely
submittal of expense reports. After numerous communications over the past 12 months,
Finance has communicated to all P-Card users that three violations of this (or any other
detected) violation of the P-Card policy will result in termination of P-Card. Finance staff
is monitoring and tracking submittal of P-Card monthly expense report very closely.
However, Finance has been focused on violations of deadlines (timely submittal of
documentation) and monthly vendor usage because Finance has limited staff/ability to
track and enforce all the potential ways the P-Card policy may have been violated. This is
further justification for the recommendation in R9.



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11. Spending Limits Significantly Higher Than Actual Needs

   Another effective preventive control to minimize the Port’s financial exposure from
   unauthorized purchases is to establish spending limits commensurate with the needs of the
   P-Card holder. An appropriately set limit helps enforce policy compliance and enables
   management to provide cardholders with purchasing power they need to meet the
   requirements of their jobs without exposing the Port to unnecessary risk. The P-Card
   currently has two limits: a single transaction limit ranging from $1,000 to $25,000 and a
   monthly total limit that ranges from $2,500 to $50,000. There appears to be no criteria for
   granting spending limits. The cardholders may request any limit as long as approved by
   their supervisor and division director.

   For the period covered by this audit, comparison of actual charges to their respective limits
   disclosed that majority of the charges used less than 10% of the spending limits.
   Specifically, 81% of the charges utilized about 10% or less of the single limits while 51%
   of the charges utilized about 10% or less of the monthly limits. It appears that the current
   spending limits are significantly higher than the actual needs. Additionally, since the P-
   Card program is designed mainly as a supplemental mechanism for the procurement of low
   cost purchases, the higher limits do not seem to align with this intended use and makes it
   difficult to monitor compliance with both the formal and informal bid requirements.

   Recommendations:
   R13. To facilitate monitoring of compliance with Port’s procurement rules, Finance
        Division should update the P-Card policy to establish appropriate criteria to align
        spending limits with the needs of the cardholders.

   R14. In coordination with responsible department heads/division directors, the P-Card
        Administrator should immediately perform an assessment of individual card holder’s
        utilization to determine both the continued need for a P-Card, and as deemed
        necessary, appropriate adjustment in the spending limits based on established criteria,
        e.g. cardholder’s actual purchase history and budgetary limits. The P-Card
        Administrator should consider significantly reducing the number of current
        cardholders.

   R15. Prospectively, the P-Card Administrator and P-Card Coordinator should perform a
        similar yearly review of each card holder’s utilization and adjust the spending limits
        as deemed necessary. Cardholders should be reminded that high dollar, non-urgent
        purchases should follow the Port’s standard purchasing procedure including the use
        of open purchase orders.




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   Management Responses:
   R13. Agreed.

   R14. Agreed.

   R15. Agreed.


12. Merchant Category Code (MCC) Restrictions Not Fully Utilized

   MCC restriction is an available effective and automated preventive control procedure
   which restricts purchases from selected merchants identified within certain merchant codes.
   Blocking certain merchant codes will not only deter non-Port purchases, but also would
   minimize the financial exposures from unauthorized purchases. This control can be easily
   activated by encoding restrictions into the cards at no or minimal cost to the Port.

   Currently, the Port’s P-Cards use the CAL-Card’s default MCC restrictions which blocks
   purchases from vendors in only ten categories and appears to be insufficient to effectively
   prevent non-Port business purchases. Our review of CAL-Card’s MCC list disclosed quite
   a number of non-Port business MCC that the Port should consider blocking, e.g. furriers
   and fur shops, antique shops, pawn shops, jewelry stores, health and beauty spas, cigar
   stores, hobby/toy & game shops, child day care services, tax preparation services,
   veterinary services, tailor/seamstress, barber/beauty shops, etc.

   Recommendation:
   R16. The P-Card Administrator and Coordinator should review the list of MCC provided
        by CAL-Card, identify those not needed for Port business, and develop a template of
        MCC restrictions to be encoded into the cards to prevent non-Port business and
        unauthorized purchases. They should also discuss with U. S. Bank if additional MCC
        restrictions can be used to block other purchases prohibited by the Port’s P-Card
        policy.

   Management Response:
   R16. Agreed.


13. P-Cards Not Adequately Safeguarded

   For security purposes, the P-Card Policy holds the cardholder responsible for safeguarding
   the P-Card and account number. No other person is authorized to use that P-Card. The
   cardholder must not allow anyone to use his/her P-Card account number. A violation of


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                   Performance Audit – Procurement Card Program
                                Calendar Year 2011

   this trust may result in permanent, immediate revocation of P-Card privileges including
   appropriate disciplinary actions.

   Audit work found invoices and e-mail confirmations describing the source of an order
   which indicate that a person other than the cardholder placed an order and used the P-Card
   for payment. The actual cardholder may or may not have placed the order or used the card
   to pay for it. In one instance, a co-worker of a cardholder was able to use the account
   number of the cardholder’s P-Card to charge a personal purchase. Although the co-worker
   claimed that it happened accidentally and the amount is not significant, this clearly
   indicates that the co-worker must have used that P-Card previously. We also noted several
   instances where P-cards were compromised and fraudulent purchases were charged,
   requiring time and effort to dispute those charges, cancel the old card, and issue a new one.

   Recommendation:
   R17. To minimize unnecessary risk of unauthorized use and purchases, P-Card holders
        should be reminded that they are accountable for safeguarding of their P-Card at all
        times. The P-Card policy should be enforced to exclude card use by anyone except
        the cardholder.

   Management Response:
   R17. Agreed. However, it should be reasonable to allow an Executive Assistant to use P-
        Card on behalf of Director.


14. Separated Employees’ P-Cards Not Cancelled Promptly

   Immediate cancellation of P-Cards belonging to separated employees is an essential control
   that eliminates the risk of unauthorized purchases or improper use of P-Cards. Per the P-
   Card policy, the approving official is responsible for advising the P-Card Coordinator and
   P-Card Administrator of the resignation, retirement, termination or transfer of any
   cardholder. The P-Card Administrator will then cancel the card.

   Audit work disclosed at least 2 instances where P-Cards belonging to separated employees
   were not closed until about 8 months after the employees’ separation dates. Additionally,
   there were 4 instances where the P-Cards were not cancelled until a month after the
   employees’ separation dates.

   Recommendation:
   R18. To ensure that only authorized active employees are using P-Cards and eliminate risk
        of improper use, P-Cards of separated employees should be canceled on the last
        “physical” work day of the separating employees. The P-Card approving officials


                                             23
                                Internal Audit Report
                    Performance Audit – Procurement Card Program
                                 Calendar Year 2011

        should be periodically reminded of this responsibility. As an additional control, the
        P-Card Administrator should consider requiring Human Resources (HR) Department
        for immediate notification once HR initiates or receives the employee separation
        form.

   Management Response:
   R18. Agreed. Finance will work with the CAS Division in ensuring that CAS notices
        Finance of all separated employees who have P-Cards.

15. Overall P-Card Program Oversight Needs To Be Strengthened

   The convenience of using P-Card carries with it significant inherent risk of improper use,
   which if not properly managed and controlled can lead to fraud, waste or abuse of an
   organization’s resources. For this reason, CAL-Card’s best practice guidance contains
   intentionally redundant reviews and approval responsibilities for people other than
   cardholders and approving officials. Under this guidance, the overall program oversight is
   generally assigned to Program Administrators and Billing Officials whose responsibilities
   include:

   The primary Program Administrator should be the “hands on” person for program
   management. This person is responsible for:
        a) developing procedures and training for approvers, cardholders and billing officials,
        b) monitoring all past due balances and working with billing official to clear unpaid
           amounts,
        c) performing random monthly audits of card transactions and reviewing
           monthly management report for program compliance and spending patterns,
        d) adding or deleting cardholders, approvers and billing officials, and
        e) establishing cardholder spending limits and Merchant Category Code restrictions.

   The Billing Official is responsible for:
        a) reconciling and processing monthly invoices,
        b) verifying that all documentation has been provided by cardholder for payment,
        c) verifying that charges have been approved for payment by the approving officials,
        d) reviewing cardholder charges, questioning any item that seems out of ordinary and
           repetitive “missing receipts” documentation, and referring those items to the
           Program Administrator.




                                              24
                            Internal Audit Report
                Performance Audit – Procurement Card Program
                             Calendar Year 2011

The Port’s P-Card Program has not completely adopted the foregoing practices as
recommended by CAL-Card program. It currently has a P-Card Administrator and a P-Card
Coordinator whose responsibilities per the P-Card policy include:
     a) the P-Card Administrator is responsible for the initial set-up and cancellation of P-
        Cards,
     b) the P-Card Coordinator is responsible for timely payment of P-Card charges to US
        Bank, distribution of relevant information to cardholders, approving officials,
        Chief Financial Officer (CFO) and Finance Division contacts.

In addition to the foregoing responsibilities, the P-Card Coordinator tracks the timeliness of
the P-Card monthly expense reports submitted by the cardholders. She also reviews the
statements for merchants who have open purchase orders with the Port. She then prepares
the monthly P-Card violation list for the CFO.

Currently, the responsibilities of the foregoing staff are limited by the time that they can
devote to manage the P-Card program because these two staff members have many other
full-time responsibilities.

Our interviews indicated that other Finance Division staff members also review the
monthly Corporate P-Card statements for items that seem out of the ordinary. They seem to
have noticed some of the questionable charges found in this audit. However, these charges
were neither further reviewed nor were communicated to cardholders and approving
officials for final resolution and enforcement of appropriate administrative action.

Recommendation:
R19. To strengthen overall program oversight, the P-Card policy should be revised to
     redefine the responsibilities of the P-Card Administrator and P-Card Coordinator
     based on the foregoing CAL-Card best practice guidance, and possibly reassign the
     role of P-Card Administrator to a staff member who has the authority and technical
     knowledge and skills to perform the redefined duties. Additionally, cardholders
     violating the P-Card policy should be held accountable by enforcing applicable
     penalties per the P-Card policy.

Management Response:
R19. There is insufficient resources in Finance to provide this level of oversight. Finance
     can provide random checks for compliance. The Port needs to reduce the number of
     P-Cards and be comfortable having cardholders and approving officials take
     responsibility; otherwise the Port needs to eliminate P-Cards. In addition there are 2
     American Express cards issued which should be cancelled, as there is no need for
     anyone to have both a P-Card and an American Express card.



                                          25
                                Internal Audit Report
                    Performance Audit – Procurement Card Program
                                 Calendar Year 2011



III. OTHER ISSUES NOTED

   Although the scope of this audit was mainly P-Card transactions, there were instances
   when we needed to review selected employee expense reports to resolve P-Card related
   issues. Our review of these expense reports disclosed:

  16. Employee Received Duplicate Reimbursements

     An employee received duplicate reimbursements for purchases of certain gifts and
     giveaways totaling $1,959. Review of supporting documents disclosed that these
     reimbursements were supported by identical receipts/invoices but included in two
     different reimbursement checks. Additionally, this employee was reimbursed for a
     refundable deposit of about $904 for equipment used in a tradeshow. It was not clear
     whether this amount was used ultimately to offset other Port-related business charges or
     refunded back to the employee.

     It was also interesting to note that this employee has a P-Card but did not use it at all.
     Instead, he opted to use his own credit card and prepare voluminous expense reports to
     request reimbursement for all of his business and travel expenses which totaled over
     $162,000 for the year 2011. The P-Card was closed earlier this year.

     Recommendation:
     R20. Finance Division staff should follow up on the foregoing items with the subject
          employee and recoup the duplicate reimbursements.

     Management Response:
     R20. Agreed.




                                             26
 




 
    REPORT OF FACT-FINDING INVESTIGATION INTO ALLEGED
     IMPROPER EXPENSES BY PORT OF OAKLAND EMPLOYEES
       AND POSSIBLE VIOLATIONS OF PORT’S TRAVEL AND
                 ENTERTAINMENT POLICIES


       by Michael J. Baker, Pamela Phillips and Dipanwita Deb Amar
                           Arnold & Porter LLP




                           December 10, 2012




 




 
 


I.     INTRODUCTION AND EXECUTIVE SUMMARY 

        On October 18, 2012, the Board of Port Commissioners of the City of Oakland 
(“Board”) asked our law firm to investigate whether certain Port of Oakland (“Port”) 
employees had improperly charged the Port for personal expenses unrelated to Port 
business or had otherwise violated Port policies on business travel and 
entertainment expenses.  The investigation was triggered by the Port learning of 
allegations that certain Port officials had used Port funds for personal benefit or 
other improper purposes.   

        In response to the Board’s request, we divided our investigation into two 
parts.  Phase One focused on the facts and circumstances surrounding submission by 
James Kwon, the Port’s Maritime Director, of expense claims for visits with the 
Port’s then‐Executive Director, Omar Benjamin, to two adult entertainment, or strip 
clubs — one in Houston in October 2008 and the second in Minneapolis in 
September 2009.  Phase Two focused on (1) determining whether there were other 
instances of possibly false or inappropriate expense claims, and (2) reviewing 
compliance with Port policies and procedures respecting business travel and 
entertainment. 

        At the time our investigation began, the Port was already in the process of 
deliberating possible changes to its travel and entertainment policies based on an 
Audit Report, dated July 23, 2012 (the “P‐Card Audit”), prepared by the Port 
Auditor.  The P‐Card Audit reviewed use by Port employees of Port‐issued credit 
cards, called ”P‐Cards.”  Because the Audit posed certain questions about statutory 
compliance and possible liability for non‐compliance, the Audit was considered by 
the Board in closed session.  The P‐Card Audit is now being publicly released 
together with this investigative report.     

        We relied on portions of the information described in the P‐Card Audit as a 
foundation for this investigation.  P‐Cards are Visa cards issued to some Port 
employees to facilitate payment of business expenses.  In 2011, the year examined 
in the audit, 82 Port employees held P‐Cards.  (Benjamin and Kwon were the only 
employees who had not only P‐Cards, but also Port‐issued American Express cards.)  
To supplement the information contained in the P‐Card Audit, with the assistance of 
the Port Auditor we also reviewed samples of expense claims that eleven individuals 
had submitted dating back to 2007.  Those persons were selected, not because they 
were suspected of any P‐Card abuse, but because they were the most active billers 
for travel and business entertainment due to their job responsibilities. 

       While our investigation is not yet completed as to certain matters, we have 
reached the following conclusions, which are discussed in greater detail later in this 
report: 




                                            
 


       1.     Improper Expense Claims for Two Strip Clubs. 

        Based on interviews with Kwon, Benjamin and others, and a review of 
relevant documents, our investigation found that Kwon used his Port P‐Card to pay 
for visits with Omar Benjamin to a nightclub in Houston in October 2008 (for 
$4,537), and a second nightclub in Minneapolis in September 2009 (for $925).  
Kwon’s expense reports identified certain business contacts as being present at the 
clubs and represented, at least implicitly, that the visits had a business purpose that 
warranted payment by the Port.  Our investigation determined that both nightclubs 
were adult entertainment, or strip clubs.   

       According to Kwon, he paid for the two visits with his Port P‐Card at 
Benjamin’s request and submitted expense claims expecting that Benjamin, in 
reviewing and approving Kwon’s claims, would correct them as necessary.  
Benjamin recalled the nightclub visits and agreed that Kwon picked up the checks, 
but said he did not realize the bills were so high and now believes he and Kwon 
were victims in Houston of a billing scam.   

       Kwon confirmed that no Port business contacts were with him at either club 
and said he did not know if Benjamin was with any business contacts while they 
were apart.  Benjamin, however, confirmed that he did not spend time with any Port 
business contacts while at the two clubs.  

       Kwon and Benjamin provided sharply differing versions of what occurred 
during the two nightclub visits.  Kwon said he variously waited alone at the bar, in a 
hallway, and outside for Benjamin, did not purchase any special adult entertainment 
services, and did not know what Benjamin was doing when they were apart.  
Benjamin, on the other hand, said he and Kwon drank together in the bar during the 
entirety of their visits at both clubs and that he also did not purchase any special 
services.   

       Regardless of what actually occurred in the two nightclubs, Benjamin and 
Kwon violated one or more Port policies regarding permissible business 
entertainment and use of P‐Cards, as well as expense approval procedures. 

       2.     Possibly Improper Duplicative Expense Claims. 

        Another Port employee, below the director level, submitted two different 
sets of expense claims that appear to be duplicative and received duplicate 
reimbursements.  The Port is in the process of investigating those claims and will 
consider disciplinary action if warranted. 

       3.     No Other Such Improper Expenditures Found. 

       Other than the specific occasions of improper expenditures described above, 
our investigation uncovered no other instances of Port employees charging 
expenses to the Port that clearly had no legitimate business purpose. 


                                          ‐ 2 ‐ 
 


       4.     Inadequate Oversight and Documentation. 

       When a Port employee incurs a business expense, whether charged to a P‐
Card or paid with personal funds subject to later reimbursement, the employee is 
required to fill out and sign an expense report in the form of an Excel spreadsheet.  
The employee submits the completed form to his or her supervisor for approval and, 
following approval, the form is passed on to the Finance Department.  If there are 
issues with the form, such as missing receipts, the Finance Department returns the 
form to the employee for further follow‐up.  However, the Finance Department does 
not make judgments over whether any expense is reasonable or necessary.  Those 
assessments are made by the employee incurring the expense and by his or her 
approving supervisor.   

        Our investigation confirmed the Port Auditor’s findings that there is 
inadequate oversight over the value and cost of business travel and entertainment 
and that employees generally need to do a better job of documenting their 
expenditures.  Lax oversight gives spenders the freedom to make their own 
individual determinations of what expenses are proper, a situation that can lead to 
abuse. 

       5.     The Appropriateness of Specific Types of Entertainment. 

       The absence of effective oversight, guidance and control over business 
entertainment prompted the Port Auditor to raise concerns over whether certain 
types of expenditures ‐‐ such as for gifts and promotional items, sporting events, 
concerts, golf outings, spa visits, and karaoke clubs ‐‐ were justified.  We questioned 
Port managers about the purpose of these expenditures.  Each stated these were 
legitimate business expenses, and each emphasized the importance of considering 
the business and cultural context in which such expenditures are made.    

        In particular, although the Port is a public agency, it is engaged in a complex 
commercial enterprise through its operation of the Oakland International Airport 
and its maritime port.  The Port faces keen competition from other maritime ports 
on the West Coast, and competition from other airports in the Bay Area.  This 
requires the Port to develop and cultivate business relationships with tenants, 
customers, suppliers, policy‐makers, and others.  Business entertainment is a 
necessary part of that process and, to be effective, must be tailored to each business 
contact’s interests and local customs.  For example, Port employees we interviewed 
advised us that an evening of karaoke, or a round of golf followed by a neck and foot 
massage and dinner, are common forms of business entertainment in some Asian 
countries.  Managers also pointed out that, unlike other public agencies, the Port’s 
budget is funded mostly through revenues generated from its own business 
activities, rather than from taxes.   

       When the expenditures identified by the Port Auditor are considered in this 
larger competitive context, many of them may well be appropriate and effective.  



                                          ‐ 3 ‐ 
 


The problem is, it is sometimes hard to tell without better documentation of the 
purpose of the activities and more effective oversight.  The Port has begun the 
process of correcting these deficiencies.  It is both improving enforcement of 
existing policies and developing new policies to provide employees clearer guidance 
and to institutionalize more effective controls.  

II.    ORGANIZATION OF THIS REPORT 

       This report is organized into the following sections.  First, we provide 
background information on the P‐Card Audit and the Port’s relevant expense 
policies.  Second, we review the various uses of Port funds that we examined, and 
identify the instances where it appears Port funds were used for an improper or 
non‐business purpose.  Third, we review a few examples of other Port policies we 
believe are not regularly followed. 

III.   PORT EXPENSE POLICIES 

       The Port’s relevant policies are the “Reimbursement for Travel, 
Entertainment and Business Expenses” (AP 406) (the “Expense Policy”), the 
“Purchasing Card Use Policy” (AP 511) (the “P‐Card Policy”), and the “Handbook on 
Ethical Business Conduct” (“Ethics Policy”).  We summarize each below. 

              A.     Expense Policy. 

       The Expense Policy (which by its terms, also applies to the Port’s prepayment 
of expenses and P‐Card use) states the following overriding rules and guidelines: 

       The Port of Oakland reimburses the Commissioners and employees 
       for reasonable and necessary travel, entertainment and other 
       expenditures incurred in the course of conducting the business of the 
       Port.  When incurring expenses on behalf of the Port, Commissioners 
       and employees must recognize the Port is a public corporation and 
       that expenses involve the use of public funds.  Adequate 
       substantiation of expenditures is required.  The nature and amount of 
       expenses incurred may vary according to the objectives of the 
       assignment, circumstances and location.  Good judgment in the 
       appraisal of the reasonableness of expenses is required by each 
       individual incurring the expenses and supervisory level approving 
       expense reports.  (Expense Policy, §406.1) 

       The Expense Policy states that when “expenditures include both business 
and non‐business (personal) items, only the business portion will be reimbursed.”  
§406.2.  Also, expenses “which are not regarded as reasonable are not 
reimbursable.”  Id.  
         
       The Expense Policy requires substantiation of expenditures in accordance 
with an IRS rule that specifies the following information be provided for each 


                                        ‐ 4 ‐ 
 


expense:  the amount of the expense; the date and place incurred; the names and 
titles of others attending; and the business purpose of the expense.  §406.4.  In 
addition, “original, itemized, detailed receipts must be provided for all expenditures 
of $25 or more.”  Id.  In the event a receipt is lost or otherwise unavailable, the 
Expense Policy requires a written statement of the circumstances, which 
explanation may or may not be accepted depending on the circumstances. 

      The Expense Policy also requires that employees submit expense reports to 
an appropriate approving authority (usually a supervisor), and obligates the 
approving authority to “review the expense reports for reasonableness and overall 
compliance with Port policy and procedures.”  §406.6. 

       Where more than one employee participates in a business activity, the 
Expense Policy requires the individual at the highest level of authority to report the 
expense, stating that it is inappropriate for an individual at a lower level of authority 
to report the expense when both participated in the activity.  §406.8.  Expenses must 
be approved by an individual at a higher level of authority than the individual on 
whose behalf the expense was incurred.  Id. 

         The Expense Policy prohibits reimbursement of meals and entertainment 
that have “no direct business purpose,” “family member expenses when 
accompanying the Commissioner or employee of Port‐related business,” and meals 
or entertainment among Port employees, unless pre‐approved by the Executive 
Director or his designee.  §406.10.   In the case of meals attended only by employees, 
the cost can be charged to the Port with the approval of division directors or other 
senior management for a “bona fide business purpose which cannot conveniently be 
addressed or discussed during normal business hours.”  §406.16.  The Expense 
Policy prohibits expenses for social events, such as birthdays, baby showers, 
weddings and other celebratory events.  §406.21.  For travel, the Port reimburses 
employees at coach fare for travel less than two hours, at coach or business class, or 
next higher class if business class is not available, for travel above two hours.  
§406.11.  For travel  longer than twelve hours, the Executive Director may grant 
staff first class travel privileges.  Id. 

        The Expense Policy requires that expenses be “reasonable,” but states no 
dollar limitation on expenditures for meals, hotels or business entertainment. 

       Once an expense is incurred by the employee, the employee is obligated to 
submit an expense report, which is typically filled out in an Excel spreadsheet, 
printed, signed by the employee, submitted to the employee’s supervisor for 
approval and then to the Finance Department.  If there are issues with the 
completeness of the expense report, for example, missing receipts, the Finance 
Department returns the expense report to the employee for further follow‐up.  
However, the Finance Department does not make judgments as to whether an 
expense is reasonable or necessary. 




                                          ‐ 5 ‐ 
 


              B.     P­Card Policy. 

        The P‐Card Policy states that “Purchasing Cards are designed to provide a 
convenient and efficient method of procuring low value goods and services.  (P‐Card 
Policy, §511.1).  Port users who routinely and repetitively make purchases will be 
able to make these purchases simply and easily when a need arises.  Purchasing 
Cards will reduce costs associated with processing requisitions, purchase orders 
and accounts payable, while creating good business relations with suppliers by 
speeding up payments to them.”  Id.  The P‐Card Policy requires that P‐Card users 
comply with the specific provisions of both the Expense Policy and the P‐Card 
Policy.  The P‐Card Policy also requires that employees “comply with the Port’s 
Procurement Policies and Procedures.”  Id. 

       Holders of a P‐Card are subject to a “purchase limit,” which refers to a per 
transaction and a per month limitation set by the employee’s Division Director.  
§511.2.  Under the P‐Card Policy, purchases “must not be split to circumvent the 
normal purchasing process for amounts exceeding” the single transaction limit.  
§511.5. 

       Because the P‐Card is a Port‐issued card, employees receive monthly 
statements and are required to justify expenditures after the charge has already 
been incurred by the Port.  Each employee is provided an electronic statement and 
required to provide various details to validate the purchase (i.e. names of 
individuals attending, business purpose, etc.). 

              C.     Ethics Policy. 

       The Ethics Policy “provides guidance for employees on ethical standards that 
apply in the performance of daily activities involved in conducting the Port’s 
business.”  (Ethics Policy §17.1).  The Ethics Policy prohibits employees from using 
Port “resources for the private advantage or gain for oneself or another.”  §17.6.  The 
Ethics Policy provides several guidelines regarding accepting gifts and promotional 
items, but does not provide any guidelines regarding giving gifts. 

IV.    REVIEW OF SPECIFIC EXPENDITURES 

        The overwhelming majority of expenses we sampled were either clearly 
business‐related or at least appeared to be so from the context and circumstances.  
While someone could question whether the amounts spent on certain events or 
items were reasonable, the best choice of locale or worth the cost, there appeared to 
be a legitimate business purpose behind each activity.  The exceptions were the two 
charges submitted by James Kwon for strip club visits with Omar Benjamin in 2008 
and 2009, and the apparent duplicate expense claims submitted by one non‐director 
employee.   We also found that some expenses for internal Port gatherings — such 
as lunches, celebratory and employee recognition events — did not comply with 
Port policies and that managers were often involved.   



                                         ‐ 6 ‐ 
 


              A.     Improper Expense Claims  

                     1.      2008 Houston Incident ­ Kwon and Benjamin 

       On December15, 2008, James Kwon, the Port’s Maritime Director, submitted 
an expense claim documenting a P‐Card charge for $4,537.00 at “D. Houston.”  The 
claim included a credit card receipt dated October 21, 2008, and described the 
expense as follows:   

       10/21/08 (Tuesday) (Intermodal Conference)  
       Drink + Dinner Reception for BN + HMM delegation  
       @ D. Houston, Houston, TX (12 people). 
       Port ‐ Omar Benjamin + James Kwon 
 
The names of ten representatives of Burlington Northern Railroad (BN) and 
Hyundai Merchant Marines (HMM) were included on the claim form.  It turns out 
that “D. Houston” is the parent company of a strip club in Houston, Texas, called 
Treasures.   

       During voluntary interviews, Benjamin and Kwon agreed on some points but 
otherwise offered different versions of the Houston nightclub visit.  They agreed 
that they were in Houston for an Intermodal Conference where they attended a 
reception for conference attendees on October 21, 2008, and at which Benjamin 
spoke the following day.  They also agreed they traveled later on October 22 to 
Dallas where they played golf and met with representatives of BN and HMM on Port 
business.   

        As for the strip club visit the evening of October 21, Benjamin and Kwon 
agreed they traveled there only with one another, and Kwon said Benjamin 
provided the address to their taxi driver.  Kwon said Benjamin left him shortly after 
they arrived and did not return for about an hour and a half.  Kwon said he sat alone 
at the bar or smoked outside the entire time and did not receive or pay for any 
special adult entertainment.  Benjamin also denied receiving any special services 
and, contradicting Kwon, said he sat with Kwon at the bar the entire visit.  Kwon’s 
lawyer showed us copies of documents he said he had obtained that, in his view, 
showed signatures more similar to Benjamin than Kwon for the purchase of adult 
entertainment dances in the club’s second floor “champagne lounge.”  Kwon’s 
lawyer did not allow us to make copies of the documents, so we have not been able 
to verify the authenticity of the documents or the signatures on them.  Benjamin 
said that Kwon’s lawyer showed him the same documents and that the signatures 
were not his.  

       Kwon said Benjamin asked him to take care of the bill when it was presented.  
Kwon said he was shocked at its size, but paid it anyway because the request came 
from his boss.  He said he used his Port credit card, rather than his personal credit 
card, due to the size of the bill.  Benjamin said he was not aware at the time that the 



                                         ‐ 7 ‐ 
 


bill was so large.  Now that he knows, he believes he and Kwon were victims of a 
billing scam since he denies purchasing anything more than drinks. 

        Benjamin and Kwon both stated they did not remember seeing any Port 
business contacts or conference attendees while at the club.  Thus, neither of them 
offered evidence of a proper business purpose for the charge.   Kwon said he 
“assumed,” given the size of the charge, that Benjamin was with Port customers 
while in areas of the club without him.  But Kwon could not identify who those 
customers might have been and acknowledged that none of the ten BN and HMM 
representatives listed on his expense claim form were there to his knowledge.  (The 
date and time stamp showing Kwon’s credit card being charged at 11:34 a.m. on 
October 21 is apparently incorrect as, according to both Kwon and Benjamin, the 
visit to the club took place in the evening.)   

       Kwon said that when he submitted the expense claim two months later, he 
assumed that Benjamin, as his supervisor responsible for approving his expense 
claims, would correct the claim form or return it to him if Benjamin felt it should be 
changed.  Kwon also said that in listing customer names on the expense form, he 
might have been confused by his visits with them the following day in Dallas.  For 
his part, Benjamin pointed out that the form was approved not by him, but by the 
then‐Deputy Executive Director, Joe Wong, and that Benjamin does not recall ever 
seeing it.  Wong, now retired, said he also does not remember the claim.     

       Although Benjamin and Kwon provided conflicting accounts of what actually 
occurred at the nightclub and the circumstances surrounding Kwon’s expense 
submission, it is clear that both individuals violated one or more Port policies 
regarding permissible business entertainment.  Kwon misrepresented on his 
expense claim form that Port customers were present when they were not and 
misrepresented the nature of the expense by describing the event as a “drink + 
dinner reception” for those customers.  Benjamin allowed a subordinate to pay for 
and submit an expense claim that Benjamin knew had no business purpose.   

                     2.      2009 Minneapolis Incident ­ Kwon and Benjamin 

         In September 2009, Kwon and Benjamin made a trip to Minneapolis with an 
Oakland vendor, GSC Logistics, to visit the headquarters of Target Corporation.  Two 
months later, Kwon submitted a expense claim for a $925.24 P‐Card charge incurred 
on September 4, 2009, at a Minneapolis establishment identified on the credit card 
bill as S.P.R. Restaurant.  He described the charge on his expense form as follows:   

       Business retention meeting  
       Target group, GSC President and rep, Omar B, James, K, etc.  
 
During their interviews, Kwon and Benjamin agreed that the charge was incurred at 
a strip club in Minneapolis.  They also conceded the expense was not business 
related, and that no Port customers, tenants or vendors were present. 



                                         ‐ 8 ‐ 
 


        Once again, their descriptions of what happened at the nightclub itself differ.  
Kwon said Benjamin provided the club address to their cab driver and left him 
shortly after they arrived, returning about an hour and a half later.  Kwon said he 
spent most of the time talking with a security guard near where Benjamin had 
entered a private area.  Benjamin, on the other hand, said he and Kwon sat together 
in the bar the entire visit.  Both men denied receiving any special adult 
entertainment services.  Kwon again said he paid the bill because Benjamin, his 
boss, asked him to.  Kwon admitted his expense report should not have included the 
expense and that he had misrepresented it as having a proper business purpose.  
For his part, Benjamin admitted allowing Kwon to pick up the check for an expense 
Benjamin agreed was not business related.  Benjamin said he had no idea the bill 
was so high until it was recently shown to him.  Benjamin, however, approved 
Kwon’s expense report by signing it, saying that neither the amount of the expense 
nor the description caught his attention at the time. 

       As with the Houston incident, it is clear that Kwon and Benjamin violated one 
or more Port policies in Minneapolis.  Kwon submitted a claim for an expense that 
did not have a business purpose and listed business contacts who were not present, 
incorrectly referring to the event as a “business retention meeting.”  Benjamin 
allowed a subordinate to pay for and submit a claim for an expenditure Benjamin 
acknowledges was not business‐related.  In addition, Benjamin signed the expense 
form signifying his approval when he knew it was not a business expense.     

                      3.      Possible Duplicate Expense Claims 

        An investigation remains underway concerning a third Port employee, below 
the director level, who submitted and was reimbursed for two sets of expense 
claims that appear to be duplicative.  Because the investigation, and any possible 
disciplinary action, is still in process, the employee’s name cannot be released at the 
present time. 

               B.     Use of Port Funds for Business Travel and Entertainment 

       Other than the specific occasions of improper expenditures described above, 
our investigation uncovered no other instances of Port employees charging 
expenses to the Port that clearly had no legitimate business purpose.  The witnesses 
we interviewed explained that while the Port is a public entity, the Port competes 
for business just as private businesses do.  Thus, it is necessary for Port employees 
to meet with, and entertain, customers, clients, or tenants that do business with the 
Port. 

        We were told that travel and entertainment by Port employees is necessary to: (i)
afford Port employees more face-to-face time with Port customers, tenants and other
business contacts than allowed by a typical meeting; (ii) allow Port employees to learn
pertinent information from and about important business contacts; and (iii) help Port
employees build relationships with Port customers and potential customers. 



                                           ‐ 9 ‐ 
 


       Business entertainment by Port employees takes many forms.  Some of the 
witnesses stated that travel to, and entertainment in, Asian countries is particularly 
important, as Asian customers expect that business and entertainment will be 
combined over several hours and sometimes a full day.  Kwon said that when he was 
hired, Benjamin charged him with generating more revenue from Asian clients.  
Kwon said that, unlike representatives from other U.S. ports who visit Asia only for 
conferences, he visits them at other times, entertains them in ways that are 
culturally acceptable, and takes time to get to know them personally.  Consistent 
with this sentiment, the Port received letters from Port customers supporting Kwon 
after news of his administrative leave was aired. 

        While the stated purposes for business travel and entertainment seem well‐
intentioned and legitimate, there have been few checks on the cost and frequency of 
such expenses.  Many employees seek supervisor approval for travel prior to a trip, 
although that does not universally happen, and approval for business entertainment 
is generally obtained after the event.  Apart from such routine approvals, there 
appear to be no limits to how many times an employee can travel or entertain a 
client, where the employee can or should go, or how much the employee can or 
should spend, other than the written standard that expenses should be “reasonable.”  
(Expense Policy, §406.1).  Nor does there appear to be much strategic consideration 
at the department level of what forms of entertainment might be most successful, 
which customers or clients are the best potential targets, or which employees might 
be best suited for productive entertainment activities.  The lack of guidelines or any 
rigorous analysis has allowed a spending culture to develop without appropriate 
controls or oversight.   

                      1.      Travel 

        A number of individuals, including Port employees and Commissioners, 
travel on behalf of the Port.  On occasion, the Port has paid for the travel costs of the 
Mayor of Oakland for Port‐sponsored trade missions.  For international travel, Port 
policies permit employees to purchase business class and (with approval) first class 
airfare.  Since many of the trips are planned or cancelled at the last minute, 
expensive fully‐refundable tickets are generally purchased.   

       Port policies provide no clear guidelines for the cost of hotels.  Kwon, for 
instance, stated that when he began working at the Port, he was told that the Westin 
and Sheraton hotel chains were considered “reasonably priced” and, thus, he tries to 
book there or at similar class levels.  Kwon also explained that sometimes, because 
of schedule changes, he books hotels at the last minute at a higher cost.  He also 
explained that he sometimes stays at five‐star Asian hotels such as the Shangri‐la 
because they provide multi‐night discounts that end up matching the Westin. 

        There also do not appear to be any guidelines on who should travel on behalf 
of the Port, for how long, or for what purpose, other than the general rules that the 
travel should be business related rather than personal.  All employees interviewed 


                                          ‐ 10 ‐ 
 


stated that travel requires approval from the employee’s manager — and there is a 
form for that purpose — but that other than the supervisor’s judgment, there are no 
other guidelines or checks on whether employee travel is necessary.  Kwon, for 
instance, estimated that he travels approximately 120 days per year.  Other 
employees interviewed — Omar Benjamin, Lawrence Dunnigan, Jean Banker, John 
Betterton, and Jahan Byrne — have also travelled on a number of occasions, but 
there appeared to be no strategic planning of how travel dollars can best be spent.   

                      2.     Meals and Drinks 

        A large portion of the Port’s business entertainment expenditures is spent on 
meals and drinks.  These expenses appear on their face to have a business purpose 
in that all of the interviewees stated that getting together with clients or potential 
clients for meals and drinks was an effective way to both bond with, and learn 
information about, them. 

        Karaoke bars are an example.  At least three interviewees explained that 
karaoke bars are a popular and entirely legitimate form of entertainment for some 
customers, particularly from Asia, and that both men and women go there.  A KTVU 
news report in October suggested that illegal activities have occurred at a karaoke 
bar in Oakland called Café Juliet.  But the Port employees who have taken customers 
there stated they were aware of no such illegal activity, and that it was a typical 
karaoke bar.  We have not conducted an independent investigation of whether 
illegal activities take place at Café Juliet, but we have seen no substantiation for the 
KTVU claim.   

                      3.     Sporting Events 

       Port expense reports show that Port employees sometimes take their 
business contacts to sporting events, such as Warriors and Raiders games.  
Interviewees said that these types of events help build business relationships and 
have led to concrete successes.    

       Golf outings are also a frequent business development activity, particularly 
with Asian customers.  Several interviewees stated that a golf outing, which can 
sometimes last a full day, allows Port employees to spend invaluable extended time 
with customers, getting to know them and learning about their business issues. 

        Related to golf, Kwon explained two incidents where he purchased golf shoes 
and golf attire with Port funds, one in Taiwan and the other in Long Beach.  He said 
he forget his shoes on a trip to Taiwan and received an unexpected golf invitation 
from an important senior executive in Long Beach.  In both cases, he said he had to 
buy shoes since they could not be rented.  He said he left the first pair of shoes in 
Taipei in a bag he customarily leaves at a hotel there and uses the shoes only when 
traveling there on business.  He said he gave the shoes purchased in Long Beach to a 
local customer representative to keep for Kwon’s business use on future visits. 



                                         ‐ 11 ‐ 
 


                      4.     Concerts 

       Port employees have taken customers or potential customers to concerts, 
including performances by U2, the Foo Fighters, Metallica and ACDC.  For the Foo 
Fighters’ concert, Port funds were used to rent a luxury suite at Oracle Arena.  The 
interviewees who have attended concerts with business contacts said they did so at 
the customer’s specific request.  These outings, we were told, help maintain strong 
business relationships, even though one employee pointed out that concerts are 
generally not a good venue to talk business. 

                      5.     Spas, Massage Parlors and “Barber Shops” 

        There were a number of expenses charged to the Port ‐‐ principally by James 
Kwon and Lawrence Dunnigan ‐‐ for spas, massage parlors and “barber shops.”  
Some of the massage parlors were in the U.S., but most of the massage parlors and 
all the “barber shops” were in Taiwan, Korea and Southern China.  We did not 
conduct an independent investigation into the establishments themselves, but both 
Kwon and Dunnigan explained that although these venues are sometimes called 
“massage parlors” and “barber shops” in English translation, in fact, they are proper 
establishments, akin to spas in the United States.  They explained that in several 
Asian countries (particularly Taiwan and Southern China), it is not unusual to spend 
a full day playing golf, going to a spa afterwards for a neck and foot massage, and 
then continuing with drinks and dinner and sometimes karaoke.  Kwon and 
Dunnigan also said there is nothing untoward about Asian massage parlors and 
“barber shops” (apparently called that because some have barber poles outside) and 
that women and children are often present at these venues.  While one can get a 
haircut at some of these facilities, they said, these sites also include saunas and 
other above‐board spa activities.  Both men stated that all expenses they incurred in 
massage parlors and Asian “barber shops” were exclusively for purchasing 
legitimate spa services to entertain Port business contacts. 

                      6.     Promotional Items and Gifts 

      A number of the expenses we reviewed were identified as “gifts.”  The 
circumstances and explanations differed. 

        Most of the gift items were “promotional,” generally falling into two 
categories. First, there are items that are distributed to large groups at conferences, 
trade shows, and other events.  At times, in lieu of paying a fee to participate in a 
conference or trade show, the Port pays for mementos that the conference sponsor 
gives free to visitors.  For example, the Port was the “pen sponsor” at one trade 
show.  We were told these types of expenditures save money ‐‐ the Port can shop 
around for the best price ‐‐ and provides prominent promotion in that the pens are 
imprinted with the Port’s logo. 

       The second category of promotional items consists of gifts to specific 
individuals.  A number of such gifts were given as part of an informal exchange, 


                                         ‐ 12 ‐ 
 


particularly with Asian customers.  Interviewees advised us that such exchanges are 
customary in Asia.  They said the Port attempts to find items representative of the 
Bay Area or the U.S. that can be easily carried overseas.  Examples have included 
small Tiffany key chains with the Port logo, carved wooden bowls made by a Bay 
Area artist, wine from Napa Valley, and liquor.  Kwon explained that he often takes 
ties for male business contacts because they are easy to pack and he sometimes 
gives perfume and cosmetic items to their wives. 

       Gifts also include holiday gifts, such as bottles of wine and liquor.   There 
appears to be no formal guidelines or supervisorial oversight for when these gifts 
should be given, to whom they should be given, the purposes for which they should 
be given, or what amounts should be spent. 

              C.      Other Violations of Port Policies 

        As noted, the Port’s expense policies contain detailed rules.  We found 
several instances where these rules were violated, in some cases, knowingly, and in 
other cases, because of a lack of clear understanding as to the letter and/or the spirit 
of the policy.  Notwithstanding these violations, it appears that most of the activities 
themselves were for a legitimate business purpose. 

                      1.     Splitting Expenses 

        The P‐Card Policy limits the amount that can be spent on a single purchase.  
We were told that the single purchase rule is designed to ensure that spending 
limits are not circumvented by employees splitting a single purchase into several 
smaller purchases.  (Expenses in excess of the P‐Card Policy spending limits must be 
processed through the Port’s regular procurement channels.)  Nonetheless, in 
several instances, employees sidestepped this policy by submitting multiple charges 
for what otherwise might be a single purchase.   

        The rule does allow some room for interpretation when purchases for two 
different reasons are combined in a single transaction.  For example, if an employee 
has a single purchase limit of $1,000, but during a two‐day stay at a hotel dines at 
the hotel both nights, his bill might be $1,200 at check‐out, which would be above 
the employee’s single purchase limit.  Paying the bill in a single charge would be a 
technical violation of the spending limit.  If, however, the employee goes to the 
trouble of asking the hotel to split the bill into two P‐Card charges, one for meals 
and the other for the room charge, the employee would be in violation of the rule 
against splitting a single purchase even though the employee could have dined 
outside the hotel and avoided the rule entirely.  This Hobson’s choice has generated 
some disrespect for the rule, suggesting it should be reviewed and, if appropriate, 
modified to better protect the Port’s legitimate interests. 




                                         ‐ 13 ‐ 
 


                      2.      Senior Person Should Pay Bill 

        On several occasions, employees violated the Expense Policy rule that 
requires the most senior person present at an event to pay the tab.   Most employees 
said the rule was routinely ignored.  Who paid the bill frequently turned on a variety 
of factors, such as who sat closest to the waiter or who was the last to leave.  Some 
interviewees pointed out that in some Asian cultures, the rule is the opposite, i.e., 
the junior‐most person picks up the bill as a sign of respect for elders.  According to 
both Kwon and Benjamin, this cultural norm explained why Kwon paid the bills at 
the Houston and Minneapolis strip clubs (although Kwon also stated that Benjamin 
explicitly directed him to pay the bill on both occasions).  The episodes in Houston 
and Minneapolis demonstrate there is good reason for the rule ‐‐ if a senior person 
is allowed to direct a junior person to pay for an event the senior person also 
attends, not only is the junior employee put in the awkward position of having to 
challenge a superior if the expense is thought improper, but the senior attendee 
might also be the expense approver, thereby sidestepping independent oversight. 

                      3.      Providing Back­Up for Expense Claims 

        A common violation of the Expense Policy has been the failure to provide 
detailed back‐up and, in a case where a receipt is missing, a detailed explanation of 
the reason.  In most instances, Port employees do provide back‐up for their 
expenses.  But the substantiation guidelines require a significant amount of detail, 
and employees often fail to provide 100 percent of the information required.  The 
violations mostly appear to be technical failures.  For example, employees often do 
not identify the names and positions of business contacts who attend events with 
them, or fail to provide details to explain the business purpose of the expenditures.       

        Good reasons exist for requiring detailed information on expense forms 
along with back‐up receipts.  The detailed back‐up allows the reviewer to assess the 
“reasonableness” of a business expense.  With such detail, the approving official can 
consider, among other things: (1) whether the person being entertained is at a 
sufficiently high level to justify the entertainment; (2) whether the items purchased 
were reasonable in quantity and price; and (3) whether a reasonable amount was 
purchased based on the number of persons who attended the event. 

                      4.      Events Attended Only by Port Employees 

       Although the Expense Policy prohibits use of Port funds for gifts and tokens 
of congratulations for Port employees, we saw a few instances where Port funds 
were used for retirement gifts and lunches for Port employees.  While the dollar 
amounts were not significant, it is difficult to justify such use of funds where other 
employees do not receive similar benefits. 

       Moreover, the Expense Policy prohibits meals or entertainment involving 
just Port employees, unless pre‐approved by the Executive Director or his designee, 
or unless the cost is approved by a division director or other senior manager as 


                                          ‐ 14 ‐ 
 


being for a “bona fide business purpose which cannot conveniently be addressed or 
discussed during normal business hours.”  §406.16.   There were several occasions 
where a Port employee (including directors) expensed meals with other employees, 
without a clear explanation of what, if any, business was discussed.   

       A notable example of expenses for only Port personnel was a retreat by the 
Maritime Department in Sonoma.  The Department arranged for bus transportation, 
business meetings in a hotel, dinner, and an overnight stay for one employee.  Kwon, 
who approved this retreat, said it was important for the group to bond and that 
valuable business was accomplished at the meeting. 

                     5.      Use of Port Funds for Personal Guests 

       One recurring violation of the Expense Policy involves Port employees taking 
personal guests (most commonly family members) to business entertainment 
events.  The most frequent example is including a spouse at a dinner, concert or 
sporting event where a business contact’s spouse is also present.  Interviewees said 
they felt it was appropriate for the Port to pay for the cost of the employee’s spouse, 
as it made the evening with the customer more comfortable.   

        Similar reasoning was used to justify a Port employee taking his child to a 
sporting event.  The explanation was that the employee believed it was permissible 
to take his son to a Raiders game because a tenant representative cancelled at the 
last minute leaving a ticket that would otherwise go unused.  One interviewee 
pointed out that Port Commissioners and senior Port executives regularly invited 
family members to Warriors games during the years when the Port purchased a 
suite. 

V.     CONCLUSION 

       Our investigation revealed that, on the whole, travel and entertainment 
expenses incurred by Port employees could be justified as business‐related.  
Exceptions were the two strip clubs described above and the duplicative expense 
payments still under review.  We also found, however, that a prevailing view among 
some Port employees is that expenses for business entertainment and travel have 
few limits, other than the spender’s own good judgment and common sense, and 
should generally not be second‐guessed, even by approving officials or the Finance 
Department. 

       We understand the Port Board and the Acting Executive Director are working 
to change that perspective by, among other things, instituting better enforcement of 
existing policies and developing new policies as needed. 

 




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