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					OFFICE OF INSPECTOR GENERAL

BUILDING INSPECTION ESCROWS
CONTROLS NEED STRENGTHENING TO ENSURE THE CITY AND ESCROW USERS ARE PROTECTED
May 29, 2009 Report 09-08

117 W. Duval Street, Suite 310 | Jacksonville, FL 32202 | Fax: 904.630.2470 |

www.coj.net

OFFICE OF INSPECTOR GENERAL

BUILDING INSPECTION ESCROWS
Controls Need Strengthening to Ensure the City and Escrow Users are Protected

WHY OIG DID THIS REVIEW
Operational areas of a monetary nature have high inherent risk. We conducted this review as a result of learning of discrepancies between the City’s accounting system and the Building Inspection System (generally referred to as the BID system).

WHAT OIG FOUND
In offering escrow account services to Building Inspection customers, the City of Jacksonville is providing a customer-friendly payment option. This function essentially mirrors others we have researched throughout Florida and across the United States. However, providing such a service necessitates certain internal control activities that we have found to be absent from present City processes. Primarily, routine reconciliations between the City’s general ledger and Building Inspection Division system are not being performed. Without consistent reconciliations, errors are able to scale to insurmountable proportions. We found that the discrepancies between the general ledger and the Building Inspection Division system (BID) were due to transactions that had not posted from BID to the general ledger. Prevailing across most of our review was a lack of formalized policies, procedures, etc. Each of the areas involved were missing what we believed to be critical policies. In order to establish a basis for review and accountability, consistent work product and business continuity, division management must establish formal policies, standards and procedures. This lack of deliberately designed policies and procedures would appear to have contributed to, if not directly caused, a number of our findings. Many of the remaining items dealt with operational controls surrounding the escrow function. As controls are added to the escrow function, management may find that the costs associated with this function are increasing. Management must decide if providing this service is worth the increased cost. During our review we noted that other counties and municipalities had established fee structures that ensured the users of the escrow function were directly assigned its cost.

WHAT OIG RECOMMENDS
Our recommendations center on establishing a more structured set of controls over escrow accounts. In addition, we recommend a review of the cost/benefit of providing escrow services, with a focus on the effect credit cards have had on escrow usage.

117 W. Duval Street, Suite 310 | Jacksonville, FL 32202 | Fax: 904.630.2470 |

www.coj.net

OFFICE OF INSPECTOR GENERAL

INTRODUCTION ..............................................................................................................................1 CONCLUSIONS ................................................................................................................................1 DETAILED RESULTS ........................................................................................................................2 No Regular Reconciliations Performed ............................................................................................2 Escrow Accounts Provided With Little Parameters, Standards or Control............................................2 Re-Issuing Checks........................................................................................................................3 Balances Still Exist........................................................................................................................3 Lack of Formal Authentication Standards........................................................................................3 AGENCY COMMENTS & OUR EVALUATION ........................................................................................4 OBJECTIVE .....................................................................................................................................5 SCOPE............................................................................................................................................5 METHODOLOGY ..............................................................................................................................5 PERFORMED BY ..............................................................................................................................5

117 W. Duval Street, Suite 310 | Jacksonville, FL 32202 | Fax: 904.630.2470 |

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INTRODUCTION

The Building Inspection Division resides within the Planning Department and is responsible for plan review and the issuance of building permits. The division also performs inspections to ensure compliance with local and State of Florida building codes. Building Inspection is accounted for in Special Revenue Fund 159. This activity is generally expected to be self-sustaining; that is, the revenues collected via fees associated with permit review, inspections, etc should fully support the expenditure needs of the division. Escrow accounts are offered to contractors as a convenience. Essentially contractors are allowed to open an account, deposit a sum of money and make periodic withdrawals against it as the contractor purchases permits, re-inspections, etc. After becoming aware of the escrow service being provided to the construction community, we reviewed balances within the accounting system. We initially found incorrect balances (e.g. negative escrow balances) and later discovered that balances were inconsistent between the general ledger and the BID system. As such we began what was essentially an internal controls review, largely focused on the interaction between the general ledger and the BID system.

CONCLUSIONS

Primarily, routine reconciliations between the City’s general ledger and Building Inspection Division system are not being performed. Without consistent reconciliations, errors are able to scale to insurmountable proportions. We found that the discrepancies between the general ledger and the Building Inspection Division system (BID) were due to transactions that had not posted from BID to the general ledger. Prevailing across most of our review was a lack of formalized policies, standards and procedures. Each of the areas involved were missing what we believed to be critical policies. In order to establish a basis for review and accountability, consistent work product and business continuity, division management must establish formal policies, standards and procedures. This lack of deliberately designed policies and procedures would appear to have contributed to, if not directly caused, a number of our findings. Many of the remaining items dealt with operational controls surrounding the escrow function. As controls are added to the escrow function, management may find that the costs associated with this function are increasing. Management must decide if providing this service is worth the increased cost. During our review we noted that other counties and municipalities had established fee structures that ensured the users of the escrow function were directly assigned its cost.

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DETAILED RESULTS

NO REGULAR RECONCILIATIONS PERFORMED

We found that no routine reconciliations are performed between the escrow account balances found in the general ledger and the balances found in the BID system. The Accounting Division has no formal policies, standards or procedures which mandate reconciliations between the general ledger and any secondary systems. We are recommending that the Accounting Division establish reconciliation policies, in order to provide a framework for accountability. In our analysis, at the time of our data extraction, we found that approximately 50% of the 867 escrow accounts did not have the same balance in both the general ledger and the BID system. In some of these cases, these differences would have been related to simple timing issues but; based on our testing, this appears to be the exception rather than the rule. This is an example of the need for routine review and timely corrective action.

ESCROW ACCOUNTS PROVIDED WITH LITTLE PARAMETERS, STANDARDS OR CONTROL

We found a number of control weaknesses surrounding the relationship between the City and the escrow customers. We noted that while a signed form had previously been used, with the advent of a new computer system Building Inspection ceased using a form to document the opening of an escrow account. Such a form is the ideal place to capture the escrow customer’s agreement with our policies and procedures. We recommend that a formal agreement be reestablished. In our research of building inspection units, we found that other municipalities have established fees for opening and maintaining an escrow account. Presently, the City’s Building Inspection Division does not charge anything to manage escrow accounts. Building Inspection management should review the cost/benefit of providing the escrow function, especially in light of the ability to accept credit cards. If management decides to continue this activity, we would recommend that Building Inspection formally address the feasibility of a fee structure that appropriately assesses the cost of managing escrow accounts to those using the service. In addition we found that 84% of the quantity of deposits into escrow accounted for only 43% of the dollar value of deposit transactions. In other words, many relatively small dollar deposits were being made, arguably against the intent of such a service. We recommend that Building Inspection institute a minimum escrow deposit amount.

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RE-ISSUING CHECKS

As part of the migration from the old BID system to its replacement, a new escrow deposit account was created in the accounting system. The new account was created because the old deposit account was in such disarray, having not been reconciled in years. As the old escrow accounts were reviewed, checks were issued to close out the accounts. Many of these funds had been stagnant for years; some of the businesses had closed. To affect payment, Building Inspection requested that checks be reissued. In some cases, these reissued checks were made out to individuals rather than a corporation name. The decision to issue a check in another entity’s name should not be made hastily as there are legal ramifications to doing so. We recommend that Building Inspection establish formal policies for the closing of escrow accounts; these formal policies should be part of the agreement signed by escrow users. Part of the need to reissue checks came from the age of the escrow funds. Building Inspection does not presently monitor escrow accounts for dormancy. We are recommending that this practice be established and formalized in a policy with appropriate procedures to implement said policy.

BALANCES STILL EXIST

As mentioned above, escrow funds were refunded out of one account and users were required to make a new deposit into the new account in order to reestablish an escrow account. The escrow accounts were reviewed prior to check issuance. The problems associated with the old escrow accounts can largely be attributed to the lack of routine reconciliation. As of January 20, 2009, over a year since the conversion, a balance still exists in 13 ‘old accounts’.

LACK OF FORMAL AUTHENTICATION STANDARDS

When conducting our review, we requested formal policies or standards from the City’s Information Technology Department (ITD) relative to login/authentication for systems such as the BID system. ITD was unable to provide these. We believe the establishment of standards for authentication to be of critical importance and recommend that ITD move to create these standards.

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AGENCY COMMENTS & OUR EVALUATION

Attached, as Appendix 2, is a full listing of our findings and recommendations as well as the response of the Building Inspection Division, the Accounting Division or the Information Technology Department. We have reviewed the responses and believe that they sufficiently address our concerns.

Respectfully submitted,

Pamela Markham, CPA Inspector General

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Appendix 1 : Objective, Scope and Methodology
OBJECTIVE
Our objective was to review the operations of the escrow accounts in the Building Inspection division. Specifically we wanted to determine what had caused negative account balances in the general ledger and what caused the discrepancy we had noted between balances in the general ledger and balances in the BID system. Our scope included all Building Inspection escrow accounts at the time of our review. We effectively reviewed the accounts as of November 17, 2008, as this was the timing of our data extraction. We conducted interviews with Building Inspection, Accounting and Information Technology staff. We extracted data from the general ledger for comparison against data from the BID system provided by the Information Technology Department (ITD). We then used IDEA1, a data analysis package, to review the transactions from both systems, looking for accounts where the balances did not equal. We performed general analyses including looking at numbers of transactions and transaction value, minimum and maximum values and reviewing any inconsistencies in the import.

SCOPE

METHODOLOGY

PERFORMED BY

This review was performed by Adam Mathews and Nicholas Zelaya.

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http://www.caseware.com/products/idea
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Appendix 2 : Findings, Recommendations & Responses
Finding 1 No regular reconciliation between the escrow account balances in FAMIS (the general ledger) and the BID system (building inspection subsystem) are performed. Recommendation 1 We recommend that the Accounting Division issue policies, standards and procedures (as applicable) to provide a framework for routine reconciliations. We recommend that the reconciliation be performed by an individual not affiliated with the day-to-day operations of the escrow accounts.

Building Inspection Response 1 Concur. BID will participate in the reconciliation process in whatever capacity that will be defined. Accounting Division Response 1 The Accounting Division will issue a policy directive stating that FAMIS is the official financial record of the City and that subsidiary systems/spreadsheets should be reconciled monthly, but not less than quarterly to the control accounts in FAMIS. We will also include basic standards for internal control, which will include that the reconciliation is performed by an individual not affiliated with the day-to-day operation of the escrow accounts. The Accounting Division will make itself available to review Standard Operating Procedures (SOPs) that Department’s develop for their reconciliation processes.
Finding 2 Presently, escrow accounts require no formal agreement to sign up. Building Inspection had a form in the past but is not using one presently. Recommendation 2 We recommend that Building Inspection management, with the assistance of the General Counsel’s Office, create an agreement that companies must sign when opening an escrow account. This agreement should prescribe rights and responsibilities to both parties (the City and the company).

Building Inspection Response 2 Concur. BID will coordinate with the General Counsel's Office in the creation of escrow account agreements for companies to agree to.

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Finding 3 No fees are charged to open, modify or maintain an escrow account. Recommendation 3 We recommend that Building Inspection management review the cost/benefit and necessity of providing escrow account services, specifically addressing the impact that accepting credit cards has had. If this activity is chosen to continue, we would recommend that Building Inspection consider the use of a fee structure that appropriately assesses the cost of escrow to those using the service.

Building Inspection Response 3 BID will continue escrow accounts at the direction of the Mayor’s Office. If that decision is to continue with them, then a fee structure should be implemented.
Finding 4 Fifty percent (50%) of the escrow accounts maintained by Building Inspection do not reflect the same balance in the City’s general ledger and the Building Inspection computer system. In addition, approximately one year after the new general ledger (GL) account came into use (22009), the old GL account (22005) still has a balance. Recommendation 4 We recommend that the Accounting Division develop and publish a policy addressing the accuracy of accounting records. In concert with Recommendation 1, we further recommend a standard be developed which defines acceptable parameters for balancing the general ledger with secondary systems. We further recommend a procedure describing the reconciliation.

Building Inspection Response 4 The vast majority, if not all, of the escrow account balance problems were identified by BID prior to the Inspector General’s audit and BID was in the process of coordinating with ITD to have the problems corrected. BID concurs that a reconciliation process should be developed and implemented. Accounting Division Response 4 The Accounting Division will issue a policy directive as noted in Response to Finding 1 to include accuracy of accounting records and standards. The Accounting Division will make itself available to review Standard Operating Procedures (SOPs) that Department’s develop for their reconciliation processes.

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Finding 5 Building Inspection does not have any policies, standards or procedures governing the activities surrounding escrow accounts. Recommendation 5 We recommend Building Inspection management review existing processes and develop policies, standards and procedures to formalize and govern operations. These policies, standards and procedures should be placed on the ‘portal’.

Building Inspection Response 5 Concur. BID will develop formalized escrow account policies, standards and procedures.
Finding 6 Building Inspection does not monitor escrow accounts for dormancy and has no policies/standards/procedures governing such. Recommendation 6 We recommend that Building Inspection set a dormancy time frame, whereby if an account is without activity for a set time period (one year for example) then the escrow account would be closed and the funds automatically returned to the name and address on file.

Building Inspection Response 6 Concur. BID will set dormancy time frames.
Finding 7 In reviewing deposit transactions we found that 83.7% of the quantity of transactions accounts for only 42.6% of the dollar value of transactions. Over 300 deposit transactions were for $100 or less. Recommendation 7 We recommend that Building Inspection institute a minimum escrow deposit. This will require some level of coordination with the Tax Collector as those employees would be the ones tasked with enforcing this minimum deposit amount.

Building Inspection Response 7 Concur. Minimum balances will be instituted.
Finding 8 The same generic default password is given to every contractor upon account creation, and the contractor is not forced to change it.

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In discussions with ITD we learned that no formal policy addresses authentication decisions made when implementing new software / systems. Recommendation 8 We recommend that ITD establish a policy and standards governing authentication. In addition we recommend that the Building Inspection system be ‘retrofitted’ to comply with such standards once developed.

IT Department Response 8 ITD will request from Building Inspection approval to modify the application to ensure the generic default password is changed upon next log-in by existing contractors and upon first log-in by new contractors. In regard to the recommendation that ITD establish a policy and standard governing application authentication, the ITD Enterprise Security Committee will formulate the same applicable across COJ. It is important to note that once formulated, the policy and standard will need to be aligned to by COJ business units for suitability to their specific business needs as well as feasibility for implementation within a given application.
Finding 9 Checks were ‘re-issued’ in names that were different than those originally depositing the funds. Recommendation 9 We recommend that Building Inspection include a policy on escrow refunds in their policies/standards/procedures. Building Inspection should have discussions with the General Counsel’s Office prior to affecting the issuance of checks in a name other than that which opened the escrow account.

Building Inspection Response 9 Concur. Refunds procedures will be developed based on General Counsel directions. Accounting Division Response 9 We agree with the recommendation of the Office of Inspector General that the Building Inspection Division should have consultation with the General Counsel’s Office to the extent that they have what would be considered proper legal documentation to support these refunds to someone other than the company or person on the escrow account. In our review, we found examples of individuals being paid when the company that they owned went out of business. We also saw an example where a widow of a deceased depositor to the escrow account was paid the remainder. These
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questions and concerns should be discussed with General Counsel’s office to ascertain that proper legally required documents support these refunds. All controls, whether direct, compensating, or otherwise need to be measured against their cost-benefit and their effectiveness in prevention or detection. The Building Inspection Division researches, reviews, and verifies for proper authorization before releasing the check requests for payment. To improve internal control, the Accounting Division will require a checklist as backup when the Building Inspection Division submits their check requests. Additional internal control procedures for the Accounting Division would not be cost effective due to duplication and redundancy.

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