HomeMy WebLinkAboutStaff Report 13461
City of Palo Alto (ID # 13461)
Policy and Services Committee Staff Report
Report Type: Action Items Meeting Date: 8/10/2021
City of Palo Alto Page 1
Summary Title: Asset Capitalization Audit Activity Report
Title: Office of the City Auditor Presentation of the Asset Capitalization Audit
Activity Report
From: City Manager
Lead Department: City Auditor
Recommendation
The City Auditor recommends that the Policy & Services Committee consider the
following actions:
1) Accept the Asset Capitalization Review report and corresponding
recommendations for improvement; and
2) Forward the Asset Capitalization Review report to City Council for consent.
Executive Summary
Baker Tilly, in its capacity serving as the Office of the City Auditor, performed a review
of asset capitalization practices focusing on construction in progress in accordance with
the FY2021 Audit Plan approved by City Council.
Through the audit activity, the Office of the City Auditor identified four (4)
recommendations. The Administrative Services Department concurred with each
finding and has drafted action plans for each item.
The Office of City Auditor will perform periodic follow up procedures to validate that
corrective actions have been implemented.
Background
In FY2020, the City of Palo Alto recorded a $12.6M adjustment to the $142.1M
construction in progress balance (out of $596.3M capital assets as of 6/30/2020) for
governmental activities to correct improperly capitalized expenses in the construction in
progress account. The adjustment was made to write off the expenses that should have
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City of Palo Alto Page 2
been reported as part of Public Works functional expenses in the year the costs were
incurred but instead reported as capital assets in prior years. This adjustment was
identified by staff and discussed during the Finance Committee meeting on December
1, 2020.
The Office of the City Auditor included an audit activity related to the adjustment in the
FY2021 Audit Plan approved by City Council. The objectives of this review were to:
1) Identify the cause of the $12.6M capital asset adjustment made during FY2020 by
evaluating the process to record and report the costs associated with CIP.
2) Determine whether adequate controls are in place to ensure that costs associated
with CIP are properly categorized and recorded in accordance with the accounting
policy and relevant accounting standards.
Discussion
The attached report summarizes the analysis, audit findings, and recommendations.
Timeline, Resource Impact, Policy Implications
The timeline for implementation of corrective action plans is identified within the
attached report. All corrective actions are scheduled to be implemented by FY 2023
Stakeholder Engagement
The Office of the City Auditor worked primarily with the Administrative Services
Department, and engaged with additional stakeholders, including the City Managers
Office and Office of the City Attorney, as necessary.
Environmental Review
Environmental review is not applicable to this activity.
Attachments:
• Attachment A: Asset Capitalization Audit Report (FINAL DRAFT)
• Attachment B: City Manager Response to Asset Capitalization Audit
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1
City of Palo Alto
City Auditor’s Office
Asset Capitalization Review –
Construction In Progress
July 30, 2021
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Executive Summary
Purpose of the Audit
Baker Tilly, in its capacity serving as the Office of the City Auditor, performed a review of asset capitalization
focusing on construction in progress (CIP) in accordance with the FY2021 Audit Plan approved by City
Council. The objectives of this review were to:
1) Identify the cause of the $12.6M capital asset adjustment made during FY2020 by evaluating the process
to record and report the costs associated with CIP
2) Determine whether adequate controls are in place to ensure that costs associated with CIP are properly
categorized and recorded in accordance with the accounting policy and relevant accounting standards
Report Highlights
Finding: Description of Finding
(Page 9) The cause of the $12.6M adjustment, initiated by City staff, made to the CIP account in
FY2020, which was to remove improperly capitalized costs, was due to staff’s
incomplete execution of a periodic review and correction of the costs in the CIP
account, a key internal control, in previous years.
The following current CPI processing practices cause difficulties in executing a
periodic review of the costs effectively:
Capital projects are set up using work breakdown structure (WBS) elements to
track Design and Construction tasks, not to track capitalizable and non-
capitalizable costs separately.
All costs are settled to the CIP account on a monthly basis whether or not
costs are capitalizable. Some projects are described as recurring maintenance
and repair projects for which all costs are expenses and should be settled to
cost centers (expense), not to the CIP account (capitalizable costs).
The Fixed Asset Policy is outdated and does not provide a robust CIP policies
and procedures including the criteria for categorizing project costs and the
required actions by various responsible parties for initiating and tracking the
project costs for proper capitalization in the SAP system.
Key Recommendations
Create capital projects in the SAP system in a manner that WBS elements are
set up to keep track of capitalizable and non-capitalizable costs separately. Non-
capitalizable costs should be settled to cost centers.
Formalize a periodic review of the CIP account by establishing and following a
review schedule, documenting a review, and requiring a supervisory review
and approval.
Implement a mechanism to receive the status of the project completion and
assets placed in service from the responsible departments in a timely manner.
Periodically review the fixed asset policies and enhance the CIP section in the
policies to provide guidance regarding the CIP process to the accounting team
and the responsible parties such as the Office of Management and Budget,
Business Analysts, and project managers.
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Table of Contents
Executive Summary ........................................................................................................................................................... 2
Purpose of the Audit ..................................................................................................................................................... 2
Report Highlights ........................................................................................................................................................... 2
Introduction ......................................................................................................................................................................... 4
Objective........................................................................................................................................................................... 4
Background ..................................................................................................................................................................... 4
Process Overview .......................................................................................................................................................... 5
Scope................................................................................................................................................................................. 6
Methodology .................................................................................................................................................................... 6
Compliance Statement.................................................................................................................................................. 6
FY2020 $12.6M Adjustment ......................................................................................................................................... 7
Audit Results ....................................................................................................................................................................... 9
Finding .............................................................................................................................................................................. 9
Recommendation ......................................................................................................................................................... 10
Appendix ............................................................................................................................................................................ 11
Appendix A: Page 72 of FY2020 Comprehensive Annual Financial Report ................................................. 11
Appendix B: CIP processes for Governmental Fund/Internal Service Fund and Enterprise Fund ........ 12
Appendix C: Management Response ..................................................................................................................... 14
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Introduction
Objective The purpose of this review was to:
1) Identify the cause of the $12.6M capital asset adjustment made during
FY2020 by evaluating the process to record and report the costs associated
with construction in progress (CIP)
2) Determine whether adequate controls are in place to ensure that costs
associated with CIP are properly categorized and recorded in accordance
with the accounting policy and relevant accounting standards
Background Approximately 110 projects had activities during FY2020 and/or had balances as
of the end of FY2020 in the CIP account for governmental activities. These
projects are included in the current or prior years’ Adopted Capital Budget that
provides the details such as project descriptions and completion schedules.
In FY2020, City of Palo Alto (the City) recorded a $12.6M adjustment to the
$142.1M CIP balance (out of $596.3M capital assets as of 6/30/2020) (Appendix
A) for governmental activities to correct the improperly capitalized expenses in
the CIP account. The adjustment was made to write off the expenses that should
have been reported as part of Public Works functional expenses in the year the
costs were incurred but instead reported as capital assets in prior years. This
adjustment was discussed during the Finance Committee meeting on December
1, 2020.
The CIP account consists of the costs of construction projects undertaken but
not yet completed. It is reported as nondepreciable capital assets and includes
costs such as direct labor costs, overhead allocations, materials, and other costs
incurred in placing an asset in service. Once an asset is in service, the
associated CIP costs are reclassified to the appropriate assets such as buildings,
and then the costs of an asset are expensed over the life of an asset through
depreciation. On the other hand, the costs for maintenance and repair projects to
retain the current condition and value rather than adding value or extending the
useful life of assets are expensed as incurred.
As shown in the Table 1, the CIP account balances have been increasing over
the years, especially from 2018 to 2019.
Excerpts from City of Palo Alto Fixed Asset Policy
Construction-in-Progress
Construction-in-Progress (CIP) consists of construction projects subject to
capitalization.
Maintenance
Maintenance expenses keep assets in normal operating condition and do not
extend the life of the asset beyond the expected useful life determined at
acquisition. Therefore, maintenance costs are expensed and not capitalized.
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Table 1: CIP Balances – Governmental Fund / Internal Service Fund
As of 6/30/2015 6/30/2016 6/30/2017 6/30/2018 6/30/2019 6/30/2020
Balance $ 39,333K $ 46,527K $ 62,661K $ 69,343K $ 104,465K $ 139,365K
Source: City of Palo Alto Comprehensive Annual Financial Report
Process Overview The accounting team is responsible for processing capital asset transactions in
the SAP system while Office of Management Budget is responsible for initially
setting up a project in the SAP system based on the annual adopted budget.
In the SAP system, the City tracks projects costs using work breakdown
structure (WBS) elements. Each project can have multiple WBS elements to
allow project tasks to be organized into a hierarchy to track capitalizable and
non-capitalizable costs separately (Figure 1). The costs on a WBS element can
be allocated (or “settled”) periodically to either cost centers (for non-capitalizable
costs) or the CIP account (for capitalizable costs) using a Settlement Rule.
The flowchart in Appendix B shows the current CIP process for Governmental
Fund and Internal Service Fund. The City currently uses WBS elements to track
the costs for Design and Construction tasks separately. Costs (timecards and
invoices) are entered in the SAP Financial Accounting module with a WBS
number and then posted in the SAP Project System module. On a monthly basis,
a Sr. accountant runs a settlement rule to settle costs to the CIP account in the
SAP Asset Accounting module.
The key controls in tracking and recording the project costs in the CIP account
are:
Periodically reviewing the costs recorded in the CIP cost centers (SAP
Financial module) to ensure that a project identifier (i.e. WBS) is recorded for
each cost
Periodically reviewing the costs recorded for the CIP projects (SAP Project
module) to ensure that (1) non-capitalizable costs are removed from the CIP
account and settled to appropriate cost centers no later than the end of the
fiscal year and (2) capitalizable costs are reclassified to fixed assets as soon
as assets are placed in service
A mechanism to identify the completed projects and assets placed in service
Figure 1: Project WBS Structure (Example)
Capital
Project
WBS
Level 1
WBS
Level 2
WBS
Level 3
WBS
Level 3
WBS
Level 2
WBS
Level 3
Settle to Cost Center
(Non-capitalizable)
Settle to CIP (Capitalizable)
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1 Government auditing standards require an external peer review at least once every three (3) years. The last peer review of the Palo
Alto Office of the City Auditor was conducted in 2017. The Palo Alto City Council approved a contract from October 2020 through
June 2022 with Baker Tilly US, LLP (Baker Tilly) and appointed Kyle O’Rourke, Senior Consulting Manager in Baker Tilly's Public Sector
practice, as City Auditor. Given the transition in the City Audit office, a peer review was not conducted in 2020 and will be conducted
in the second year of Baker Tilly’s contract.
Scope The Baker Tilly team focused on the processes and controls encompassing
costs recorded in the CIP account for governmental activities. We reviewed the
details of the CIP costs and projects adjusted in FY2020. We also interviewed
the accountants, Office of Management and Budget personnel, and
Departmental and Software Business Analysts.
Methodology The Baker Tilly team performed the following procedures to understand the
nature of the adjusted costs and projects and the circumstance of the
adjustment:
Reviewed the FY2020 $12.6M CIP adjustment worksheet listing project
names, cost details, and adjustments
Reviewed the project information in FY2016 – FY2021 Adopted Capital
Budget documents
Interviewed the accountants who identified and processed the adjustments
We also performed the following procedures to assess the process and internal
controls in place to track and record the cost associated with CIP:
Reviewed the fixed asset policies
Interviewed the accountants to discuss the process and internal controls in
place
Reviewed the documents evidencing the key controls in place
Interviewed an SAP Function Business Analyst to learn the basic SAP system
configuration
Interviewed the Office of Management Budget personnel to understand the
project setup in the SAP system
Reviewed the best practices by discussing with the subject matter expert at
Baker Tilly and by researching various fixed asset policies
Compliance
Statement
This audit activity was conducted from March 2021 to May 2021 in accordance
with generally accepted government auditing standards, except for the
requirement of an external peer review1. Those standards require that we plan
and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
The Office of the City Auditor greatly appreciates the support of the Administrative
Services Department in conducting this audit activity.
Thank you!
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Detailed Analysis
FY2020 $12.6M
Adjustment
The Baker Tilly team reviewed the costs and projects adjusted in the CIP account in
FY2020 and interviewed the accountants who identified and processed the
adjustments to understand the nature and circumstances of the adjustments.
The FY2020 CIP adjustment was part of the concentrated effort of CIP account
review that started in FY2019. The accountants made some adjustments in FY2019
($2.5M) and continued their efforts in FY2020, which resulted in the $12.6M
adjustment. They expect their CIP account review to be up to date in FY2021.
Summarized in the table on the next page is the information obtained from the
FY2020 CIP worksheet and schedule, Adopted Capital Budget documents, and the
fixed asset accountants. We learned that:
The adjustments were made for 21 projects.
All costs remaining in the CIP account were written off by the FY2020
adjustment for 17 projects, as those costs were non-capitalizable (Column F). It
was noted that many project names indicate repair and maintenance for which
costs are to be expensed (i.e. non-capitalizable costs).
Out of 21 projects, 13 projects were recurring projects (Column D) for which the
types of costs (capitalizable and non-capitalizable) can be predictable to
determine how the costs should be settled.
The older expenses included in the FY2020 CIP balances were incurred in
FY2010 through FY2018 (Column E) and totaled approximately $8.3M.
The capitalizable costs totaling $473K for four (4) projects were reclassified to
fixed assets in FY2020 (Column F), but some of them were completed or
purchased in FY2012, FY2013, or FY2014.
o The identified fixed assets included:
Public Art
Software, machine, and installation service that improved parking
Newly installed streetlights
Building automation
o The costs that were written off included:
Temporary public art
Consultant
Study/Survey
Design
Payroll
Miscellaneous costs
Supplies and materials related to repairs and maintenance
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Table 2: Summary of $12.6M Adjustment by Project
A
Project
Number
B
Description
C
Prior year expenses
written off in FY2020
D
Scheduled Project End
Date
E
Costs recorded in CIP in:
F
Nature of Adjustments
AC-14001 Baylands Facility & Exhibit Improvements (53,738) FY2019 FY2017 - FY2019 Removed all costs recorded in CIP
AC-86017 Art In Public Places (82,589) Recurring FY2019 In addition to the written-off costs, there were
FY2019 costs moved to fixed assets
OS-00001 Open Space Trails & Amenities (286,674) Recurring FY2019 & FY2020 Removed all costs recorded in CIP
OS-09001 Off-Road Pathway Resurfacing and Repair (493,062) Recurring FY2010 - FY2020 Removed all costs recorded in CIP
PE-09003 City Facility Parking Lot Maintenance (1,066,648) Recurring FY2014 - FY2019 Removed all costs recorded in CIP
PE-15020 Civic Center Waterproofing Study (54,493) Spring 2021 FY2016 - FY2019 Removed all costs recorded in CIP
PE-15028 Baylands Levee Improvements (503,097) Fall 2017 FY2015, 2016, 2019 Removed all costs recorded in CIP
PE-17002 CIP City Hall Floor 3 Remodel (22,355) Fall 2018 FY2019 Removed all costs recorded in CIP
PE-17006 Baylands Flood Protection Levee Improvement (266,666) Fall 2021 FY2018 & FY2019 Removed all costs recorded in CIP
PE-17008 CIP City Hall Floor 4 Remodel (533,727) Winter 2018 FY2017 - FY2020 Removed all costs recorded in CIP
PE-17009 CIP City Hall Floor 5 Remodel (562,410) Fall 2017 FY2017 - FY2020 Removed all costs recorded in CIP
PE-18002 High St Parking Garage Waterproofing & Repairs (31,728) Spring 2021 FY2018 - FY2020 Removed all costs recorded in CIP
PF-00006 Roofing Replacement (996,598) Recurring FY2018 - FY2020 Removed all costs recorded in CIP
PF-02022 Interior Finishes Construction (75,238) Recurring FY2019 & FY2020 Removed all costs recorded in CIP
PF-15005 Emergency Facility Improvements (146,408) Recurring FY2015 - FY2017 Removed all costs recorded in CIP
PG-09002 Parks & Open Space Emergency Repairs (812,793) Recurring FY2012 - FY2020 Removed all costs recorded in CIP
PL-12000 Transportation and Parking Improvements (2,405,358) Recurring FY2012 - FY2020 In addition to the written-off costs, there were
FY2012-18 costs moved to fixed assets
PO-05054 Street Lights Improvements (534,469) Recurring FY2012 - FY2020 In addition to the written-off costs, there were
FY2017 costs moved to fixed assets
PO-12001 Curb & Gutter Repairs (1,561,525) Recurring FY2012 - FY2020 Removed all costs recorded in CIP
CB-16002 Cubberley Roof Replacments (1,794,232) Recurring FY2017 - FY2020 Removed all costs recorded in CIP
CB-17001 Cubberley Repairs (327,830) Recurring FY2018 - FY2020 In addition to the written-off costs, there were
FY2018 costs moved to fixed assets
TOTAL ADJUSTMENTS (12,611,640)
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Audit Results
Finding The cause of the $12.6M adjustment made to the CIP account in FY2020 to remove
improperly capitalized costs was incomplete execution of a key internal control, a
periodic review and correction of the costs in the CIP account, in previous years.
The accountants initiated a detailed review of the costs in the CIP account in
FY2019 when they noticed the increase in the CIP account balance and continued
their concentrated efforts in FY2020. Their review identified that the costs recorded
in previous years (FY2010 through FY2019) had to be written off ($12.6M) or were
supposed to be reclassified to the appropriate assets in previous years ($473K).
This demonstrates that a periodic review of costs for CIP projects (a key internal
control) to mitigate a risk of improperly reporting capital assets in the City’s
government-wide financial statements was not performed. Otherwise, these costs
would have been properly reported as expenses in the year the costs were incurred
or as other capital asset items when an asset was placed in service. Additionally,
the assets could not be depreciated until they were reclassified from the CIP
account.
According to the City’s Fixed Asset Policy, the costs in the CIP account should be
reclassified to the appropriate assets upon the earlier occurrence of substantial
completion, occupancy, or when the asset is placed into service, and maintenance
costs are expensed and not capitalized. The Governmental Accounting Standards
Board (GASB) Statement 34 requires that capital assets be depreciated over their
estimated useful lives.
The following current practices appear to cause difficulties in executing a periodic
review of the costs in the CIP account effectively:
The Office of Management Budget sets up Capital projects using WBS elements
to track Design and Construction tasks for a budgeting and departmental
planning purposes, not to track capitalizable and non-capitalizable costs
separately for an accounting purposes. As a result, both types of costs are
included in one WBS element. This process requires more efforts to review
costs to ensure proper classification. It was noted that Enterprise Fund uses a
work order system in which operation work orders are settled to cost centers
and expensed and capital service orders are used for capitalizable costs and
settled to the CIP account.
All costs are settled to the CIP account on a monthly basis whether or not costs
are capitalizable. Some projects are described as recurring maintenance and
repair projects for which all costs are expenses (unless a repair project evolves
into a project requiring capitalization), and therefore, they should be settled to
cost centers, not to the CIP account. As a result, there are more costs to be
reviewed and removed in the CIP account than necessary.
Fixed Asset Policies have not been reviewed and updated since 2012. There
are two Fixed Asset Policies: Fixed Asset Policy for General Fund and Internal
Service Fund is dated March 2012; Enterprise Fixed Asset Policy is dated March
2014. The Fixed Asset Policy for General Fund and Internal Service Fund
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includes only a paragraph for CIP regarding the requirements for a periodic
review and timely recording of fixed assets. It does not provide a robust CIP
policies and procedures including the criteria for categorizing project costs and
the required actions by various responsible parties for initiating and tracking the
project costs for proper capitalization in the SAP system. It was noted that only
the Enterprise Fixed Asset Policy requires periodic submission of a capitalization
and retirement form from the departments.
Recommendation The City should strengthen the internal controls over CIP to ensure that capital
project costs are properly recorded and reported by implementing the following:
1. Capital projects should be created in the SAP system in a manner that WBS
elements are set up to keep track of capitalizable and non-capitalizable costs
separately. Non-capitalizable costs should be settled to cost centers. The
accounting team should work with the Office of Management and Budget
personnel and Business Analysts to define the criteria and procedures and to
maximize the use of the SAP functionality to improve the efficiency and
effectiveness of the process. As the City is planning to improve the SAP
functionality in FY2022, the accounting team should take this opportunity to
ensure the SAP system will be configured to meet their needs.
2. The costs recorded in the CIP account should be reviewed periodically to
ensure expenses are removed and costs for the completed assets are
reclassified in a timely manner. To ensure that this key control works effectively
after the concentrated efforts end in FY2021, the accounting team should
formalize the process by establishing and following a review schedule,
documenting a review, and requiring a supervisory review and approval.
3. The accounting team should implement a mechanism to receive the status of
the project completion and assets placed in service from the responsible
departments in a timely manner. Although a fixed asset accountant reviews the
annual and mid-year budget documents and occasionally reach out to the
departments, this internal control should be formalized and performed more
effectively to ensure that the costs are reclassified to assets and start
depreciation (if applicable) in a timely manner.
4. The accounting management should enhance the CIP section in the policies to
provide guidance regarding the CIP process to the accounting team and the
responsible parties such as the Office of Management and Budget, Business
Analysts, and project managers. The CIP policies and procedures should
include the requirement for project setup, a periodic review of project costs,
monitoring and reporting the project completion status, and so on. Additionally,
the accounting management should evaluate and update the fixed asset policies
periodically to ensure that requirements are appropriate for the current process,
system used, and accounting standards. According to Government Finance
Officers Association, this should be done no less than once every three years
based on a predetermined schedule.
2.a
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Appendix
Appendix A: Page 72 of FY2020 Comprehensive Annual Financial Report
2.a
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Appendix B: CIP processes for Governmental Fund/Internal Service Fund and Enterprise Fund
Construction in Progress - Governmental Fund/Internal Service Funds
Of
f
i
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o
f
M
a
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a
g
e
m
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n
t
a
n
d
B
u
d
g
e
t
Fi
x
e
d
A
s
s
e
t
A
c
c
o
u
n
t
a
n
t
(Go
v
e
r
n
m
e
n
t
a
l
&
In
t
e
r
n
a
l
S
e
r
v
i
c
e
F
u
n
d
s
)
Fi
x
e
d
A
s
s
e
t
Ac
c
o
u
n
t
i
n
g
S
u
p
e
r
v
i
s
o
r
Pa
y
r
o
l
l
&
AP SAP FI
Capital Project Fund 471/472
- Capital outlay
- CIP CC #
- Exp AC #
SAP PS
Data with WBS #
in SAP-FI gets
posted
Run Settlement
Rules
Adopted Capital
Budget
Questica
New project
with dummy
project code
Timecards
- WBS #
Invoice or JE
- WBS #
- CIP CC #
- Exp AC #
SAP PS
Create new project
- system-generated project
code
- WBS #
- Cost Center
SAP FI-AA
Capital Project Fund 471/472
- Construction in Progress
Costs to be
expensed?
SAP FI-AA
Create Fixed Asset and
then retire the asset
immediately
Yes
Run ZPSR01
Detail report
Populate
spreadsheet
CIP471 N-5
RollForward
Quarterly
Review all costs
posted in each
CIP#
Project
Completed?
Month-end
Define
Settlement Rules
Month-end
Run GD13 (CIP
Cost Center)
Report
Review CIP
projects with CIP
cost centers for
missing WBS#
Note corrective
actions, if any, in
the spreadsheet
Review the
spreadsheet
Process
transactions for
correction
No
SAP FI-AA
- Create new Fixed Asset #
- Move CIP to Fixed Assets
Yes
Approve the
corrective
actions
No Action
Necessary
Year-end
labor costs allocation
process (True-up)
Adjustment
needed?
Yes
No
SAP-FI
Initiate a journal
entry
SAP-FI
Review and post a
journal entry
Monthly
CAT 7 – payroll costs
are processed 8th
week after the end of
each month
Year-end
Reconciliation of
Fixed Assets and
Capital Outlay
External
Auditor
Budgeting
process
Fixed Asset
Policy
March/April
Mid-year Budget
Review Report
Occasionally
Check with
departments for
completed projects
Run ZPSR01
Budget vs
Actual Report
End of posting
process
Review the
spreadsheet
Schedule
N-10
No Action
Necessary No
Run ZFIR43
Profit & Loss
Report
SAP-PS
Project
System
SAP-FI
Financial
Accounting
SAP-FI-AA
Asset
Accounting
Key Control Need
Improvement
WBS elements are not set up to separate
capitalizable costs and non-capitalizable costs
Capitalizable costs and non-capitalizable costs are
mixed in a WBS element
Therefore, all costs are settled to CIP So many to be reviewed
by one accountant
Manual approval – signature on hard copies, e-
mail, comments in spreadsheet, meetings
Current year s non-capitalizable costs are not settled
to Cost Center
[But, this is the way to correct prior year costs]
Dated March 2012
Has not been reviewed/updated
2.a
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Construction in Progress - Enterprise Funds
OM
B
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Fi
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AP
Ut
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D
e
p
a
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t
m
e
n
t
SAP FI
Funds 522,523,524,527,533
- Capital outlay
- CIP CC #
- Exp AC #
SAP PS
Data with ORD# in
SAP-FI gets posted
Month-end
Run Settlement
Rules
Adopted Capital
Budget
Questica
New project
with dummy
project code
Timecards
- ORD #
Invoice or JE
- ORD #
- CIP CC #
- Exp AC #
SAP PS
- system-generated project
code
- WBS# or ORD#
- Cost Center
SAP FI-AA
Utility Funds
- Construction in Progress
(Acct 56030)
Run ZPSR01
Detail report
Populate
RollForard
spreadsheet
called Resume
Quarterly
Reconcile G/L and
FA Module
Project
Completed?
Create
Settlement Rules
Review the
spreadsheet and
reports
SAP FI-AA
- Create new Fixed Asset #
- Move CIP to Fixed Assets
Yes
No Action
Necessary
No
Bi-weekly
Charge
Payroll to
ORD
Work Order
# 5xxxxxxx
Service Order
# 4xxxxxxx
Run GD13 report
for Construction In
Progress (Acct 56030)
Enterprise
Summary Input
Sheet Form
Reach out to the
department for
clarification
Enterprise Fixed
Asset
Capitalization &
Retirement Form
Quarterly
Funds
522,524,527
Utility Project
Coordinator
completes a form
Quarterly
Funds 523,533
Electrical Engineer
completes a form
Budgeting
process
Create new
project in SAP
Create Orders
in SAP
Enterprise Fixed
Asset Policy
Monthly
JE
processing
Weekly
Invoice
processing
Monthly
Review CIP
projects with CIP
cost centers for
missing WBS# &
ORD#
Adjustment
needed?Yes
SAP-FI
Initiate a journal
entry
SAP-FI
Review and post a
journal entry
No Action
Necessary
No
Utility
Construction in
Progress
Account Report
End of posting
process
Enterprise Fixed
Asset
Capitalization &
Retirement Form
Annually
Funds
525,526,528
Fund Manager
completes a form
As needed
Funds 530
Fund Manager
completes a form
Enterprise
Summary Input
Sheet Form
Occasionally
Check with Fund
Manager via e-mail
for completed
projects
SAP-PS
Project
System
SAP-FI
Financial
Accounting
SAP-FI-AA
Asset
Accounting
Key Control Need
Improvement
Public Works Funds (525,526,528,530) use only WBS
Utility Funds (522,523,524,527,533) use both WBS and Orders
Documents are maintained in the shared drive.
Supervisor may ask questions but does not
document approval
Will settle to cost
center = Exepense
Will settle to
Construction in
Progress = Asset
Dated March 2014
Has not been reviewed/updated
2.a
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Appendix C: Management Response
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree and
Target Date and Corrective Action Plan
To be completed 6 months after Council acceptance and
every 6 months thereafter until all recommendations
are implemented
Current Status Implementation Update and
Expected Completion Date
Finding: The costs in the CIP account were not reviewed and corrected in a timely manner in previous years
1. Capital projects should be created in the
SAP system in a manner that WBS elements
are set up to keep track of capitalizable and
non-capitalizable costs separately. Non-
capitalizable costs should be settled to cost
centers. The Accounting team should work
with the Office of Management and Budget
personnel and Department and System
Analysts to define the criteria and procedures
and to maximize the use of the SAP
functionality to improve the efficiency and
effectiveness of the process. As the City is
planning to improve the SAP functionality in
FY2022, the accounting team should take this
opportunity to ensure the SAP system will be
configured to meet their needs.
Administrative
Services
Concurrence: The administration concurs
with this recommendation.
Target Date: FY 2023
Action Plan:
With the Administrative Services
Department as the lead, staff will work
across the stakeholders including
accounting, budget, engineering, and
departmental teams on the recommended
changes to clearly identify capitalizable and
noncapitalizable costs. Staff implemented a
new structure for WBS codes within the past
five years to apply additional clarity in use,
which has taught the organization that
changes such as these are both multi-system
changes and business practice changes.
Therefore, the core stakeholder group will
evaluate what is feasible to streamline the
process and to fully maximize functionality.
Accounting guidelines will serve as the
authoritative source for when a project is
capitalizable or non-capitalizable which will
be included in the fixed policies and
procedures.
2.a
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Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree and
Target Date and Corrective Action Plan
To be completed 6 months after Council acceptance and
every 6 months thereafter until all recommendations
are implemented
Current Status Implementation Update and
Expected Completion Date
2. The costs recorded in the CIP account
should be reviewed periodically to ensure
expenses are removed and costs for the
completed assets are reclassified in a timely
manner. To ensure that this key control
works effectively after the concentrated
efforts end in FY2021, the accounting team
should formalize the process by establishing
and following a review schedule,
documenting a review, and requiring a
supervisory review and approval.
Administrative
Services
Concurrence: The administration concurs
with this recommendation.
Target Date: FY 2022 Q2
Action Plan:
As noted in the audit, staff completed a
concentrated effort of cleanups and reviews
in FY 2019 and FY 2020 and has identified
projects of which the nature of expenses are
recurring maintenance and repair projects.
In FY 2021, staff has already implemented a
second and final historical review and clean-
up effort with a process moving forward of
review quarterly at minimum. In FY 2022,
these projects will be directly settled into
cost centers.
In the absence of a software system change
as discussed in recommendation 1, the at
minimum quarterly manual review by the
accounting team will review the CIP projects
including a supervisory approval.
In Progress Staff has already
implemented a monthly
manual review process in FY
2022, and will ensure full
supervisory review as part of
the first Q1 financial close
scheduled to end September
30, 2021, and completion by
December 31, 2021.
3. The fixed asset accounting team should
implement a mechanism to receive the
status of the project completion and assets
placed in service from the responsible
departments in a timely manner. Although a
fixed asset accountant reviews the annual
and mid-year budget documents and
Administrative
Services
Concurrence: The administration concurs
with this recommendation.
Target Date: FY 2022 Q3
Action Plan:
The Accounting Team will establish a
business process for departments to follow
including a standardized form, instructions,
2.a
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occasionally reach out to the departments,
this internal control should be formalized
and performed more effectively to ensure
that the costs are reclassified to assets and
start depreciation (if applicable) in a timely
manner.
and training for departments to utilize to
ensure timely reporting of project
completion status.
4. The accounting management should
enhance the CIP section in the policies to
provide guidance regarding the CIP process
to the accounting team and the responsible
parties such as the Office of Management
and Budget, Business Analysts, and project
managers. The CIP policies and procedures
should include the requirement for project
setup, a periodic review of project costs,
monitoring and reporting the project
completion status, and so on. Additionally,
the accounting management should
evaluate and update the fixed asset policies
periodically to ensure that requirements are
appropriate for the current process, system
used, and accounting standards. According
to Government Finance Officers Association,
this should be done no less than once every
three years based on a predetermined
schedule.
Administrative
Services
Concurrence: The administration concurs
with this recommendation.
Target Date: FY 2022 Q3/Q4
Action Plan:
The Accounting team will review and update
the CIP policies and procedures to the
extent necessary and practical to clarify and
implement these standards. It is expected
that this update will include documentation
of several the other action plans outlined in
this audit as well. The City attempts to
routinely update internal policies and
procedures, though due to limited resources
and competing priorities this is not always
completely in a timely manner. As part of
annual operating procedures, staff will work
to complete this review more routinely as
resources allow.
2.a
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Memorandum
DATE: August 5, 2021
TO: Kyle O’Rourke, City Auditor
FROM: Kiely Nose, Administrative Services Director/Chief Financial Officer
CC: Ed Shikada, City Manager
SUBJECT: City Manager Response to Asset Capitalization Audit Report
The City of Palo Alto Administrative Services Department appreciates the City Auditor’s work in
preparation of this audit and acknowledges that the audit has identified recommendations which are
addressed in the appendix. In FY 2020, staff identified a gap in accounting internal practices in how
capital expenses were categorized and capitalized or not in financial reporting. A historical review was
undertaken with the largest correction brought forward as part of the FY 2020 Annual Comprehensive
Financial Report (ACFR) with continued work to finish review in FY 2021. This review was coordinated
with the City’s independent auditors, Macias, Gini, and O’Connell (MGO) throughout this review process
and year end reporting.
Baker Tilly reviewed the process that staff had identified for correction and improvement and has
assisted staff in providing a basis for ongoing correction of the gap in the future. Workflow
documentation included in this audit will ensure the continuity of operations despite challenges in staff
resources including loss of capacity and institutional knowledge. The appendix states the action steps for
each recommendation and staff expect to work on these during the coming fiscal year within existing
resources. Progress on implementation will be routinely reported after the City Council accepts the
audit report until all recommendations are addressed.
2.b
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