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HomeMy WebLinkAboutStaff Report 4499 City of Palo Alto (ID # 4499) Finance Committee Staff Report Report Type: Action Items Meeting Date: 2/18/2014 City of Palo Alto Page 1 Summary Title: Staff Response to Inventory Management Audit Title: Staff Response to Inventory Management Audit From: City Manager Lead Department: Administrative Services Executive Summary On February 18, the Finance Committee will review the City Auditor’s “Inventory Management Audit.” Staff from the departments of Administrative Services, Utilities, Public Works, and Information Technology has prepared the attached response (Attachment A) to the Auditor’s findings and recommendations. In the response, staff acknowledges that improvements can be made in inventory control while informing the Finance Committee of the context of inventory activities, actions taken to date to enhance management of goods, and future work to address Auditor recommendations. Attachments:  Attachment A: Staff Response to Inventory Management Audit (DOCX) Attachment A 1 TO: Houman Boussina, Acting City Auditor FROM: James Keene, City Manager DATE: February 18, 2014 PREPARERS: Lalo Perez, Chief Financial Officer Val Fong, Director of Utilities Mike Sartor, Director of Public Works Jonathan Reichental, Chief Information Officer SUBJECT: City Manager’s Preliminary Response to the “Inventory Management Audit” Response City staff would like to thank the Auditor’s Office for a detailed Inventory Audit with worthwhile recommendations to investigate and act upon. It is important to note that this audit was conducted at Management’s recommendation. Fundamentally, staff believes there is room for improvement in areas cited in the Auditor’s conclusion including:  Controls to ensure accuracy and completeness of inventory records  Accountability for inventory movements  Enforcing citywide inventory management standards and continuous improvements What is being accomplished and what requires attention is discussed in department responses below. For example, where the Auditor recommends using the City’s SAP inventory system, which staff will seek to maximize, there are current and new emerging systems that could be used more cost effectively to achieve cited goals. These systems will be examined. Because the City’s inventory is geographically dispersed; controlled by different departments; and covered by older policies and procedures, staff requested the Auditor conduct an analysis of our goods management and compare it to best practices. Although Management’s perspective and emphasis may be slightly different from that of the Auditor, it has developed an action plan to improve current practices and address the Auditor’s recommendations. There are always a number of themes and natural tensions at play between best practices and operational needs in appropriately managing inventory. These include:  A tension between operational needs and efficiencies, particularly in regards to emergencies, time sensitive projects, or running a 24/7 operation versus tight and accurate inventory control demands Attachment A 2  A tradeoff between precise inventory control and accuracy and the costs necessary to achieve such goals. Over the past decade, two positions have been eliminated at the warehouses as a consequence of balancing budgets  Limited physical space at the Regional Water Quality Control Plant and MSC warehouses as well as at the MSC yard. Goods will occasionally be stored in available spaces making centralized versus decentralized storage of goods problematic  The City of Palo Alto is unique as a municipality given ownership of all utilities. This adds complexity to the receipt, evaluation, storage, and management of goods, although not absolving need for best practice The Auditor cites the Municipal Code as assigning to the Administrative Services Department (ASD) the principal responsibility for inventory management. As a full service City providing general and utility services, this responsibility is more complicated and diffused than in other jurisdictions. In addition to updating policies and procedures to reflect best practices, ASD will include language that makes responsibility for the transitioning and safeguarding of goods clear. This may include recommended modifications to the Municipal Code. Once an item is removed or issued from City warehouses, it becomes the user department’s responsibility to safeguard that item. ASD staff will work closely with departments to educate and ensure that achievable best practices are followed. Finding 1: ASD and City departments should implement the City’s inventory management policies and procedures citywide to achieve inventory goals and objectives Recommendations: 1. ASD and City departments should implement the City’s inventory management policies and procedures citywide to achieve inventory goals and objectives 2. ASD should review its inventory accounting policies and correct any misstatements in the City’s accounting records ASD An updating of citywide inventory policies and procedures is necessary. ASD is committed to revising them and to working with departments to implement. Our goals and objectives are and will continue to be aligned with those of the (Federal) Government Accountability Office (GAO) guidelines cited in the Auditor’s Report. In addition, ASD will propose changes to code, policies and procedures that define department responsibilities for tracking and safeguarding goods that leave the warehouses. Ongoing meetings among departments involved in inventory management will be scheduled. Attachment A 3 ASD has reviewed the Auditors pre and final findings concerning its accounting policies with the City’s outside financial auditor firm Macias, Gini and O’Connell (MGO), and concluded that there were no material misstatements in the City’s FY 2013 accounting records pertaining to inventory. Utilities To implement policies and procedures, staff will evaluate existing (e.g., SAP) and potential new systems to enhance the monitoring and controlling of inventory. City staff agrees that it would be advantageous to have a single inventory management system for all the materials used by the City. It is important, however, to evaluate whether there are cost effective solutions providing sufficient benefit to justify the expense of implementing and operating the systems. From a business process and/or cost perspective, SAP may not be the optimal system for inventory management. In addition, the IT department is leading the review and assessment of the SAP system for ongoing use. For example, detailed tracking of low price items such as bolts and nuts once they leave the warehouse would require more labor and increase costs. It is likely that these increased costs would exceed the value of the materials. The Utilities Department stores over $82,000 in inventory at an unsecured location without oversight Utilities It is not uncommon for Utilities to have a store of low priced and revolving stock items (average cost of less than $5 each for items such as nuts, bolts, washers, etc. amounting to 17,500 such items) for general use outside of the materials management system. For operational and cost reasons, it is impractical to keep an up-to-date manual inventory system. If it is deemed necessary to inventory these parts, an automated system is required to streamline the inventory management. The costs and benefits of such a system would be compared to determine the cost effectiveness of such a system. In the short-term, a locked door at the “unsecured location” to restrict access to the storage area will be added. The Utilities Department disposed of at least $31,000 in unused materials that had expired Utilities The Utilities use a variety of materials that do have defined shelf lives. There are instances in which older, unique goods may be kept for repairs. The Utilities department does acknowledge the disposal of items that were no longer useful. In the future, Utilities will be sure to observe all City procedures for surplus or obsolete inventory, including items no longer useful. Utilities and ASD will work together to better track expiration dates using SAP or other tracking systems ASD It should be noted that Stores staff does date and color code items on shelves so that the oldest items are pulled from inventory first. Again, this is an important area needing ongoing inter- department cooperation to manage goods appropriately. Attachment A 4 The Utilities Department has not managed its meters and transformers using an inventory management system with sufficient controls Utilities There are two reasons to implement a centralized inventory management system: 1) to prevent the unauthorized use, physical deterioration, or theft of property, and 2) to manage the inventory in the most cost effective manner. The majority of the $2.5 m illion of materials managed by the Utilities Department that are not in the warehouse are transformers, poles, switches, and meters. These materials have an extremely low risk of theft. They are specialized goods that have no functionality or resale value outside of utility use and for the most part are heavy and bulky and cannot be transported without a flat -bed truck and crane. In addition, these materials are designed for exterior use and are not subject to deterioration from the elements and long-term storage. A significant number of transformers are stored for the sole purpose of emergency repairs. The Utilities recognize that efficiencies could be gained through better management of its inventories. It is unclear, however, whether these efficiencies will result in significant savings to the City. The management of transformers and switches has been delegated to the Util ities Department historically because these items required ordering from four months to one year in advance of delivery. Because of the long-lead time required for ordering, an engineer has been assigned to manage the transformers and another engineer has been assigned to the switches. Each engineer manages the specifications, ordering, receipt, testing, and payment for the equipment, and enforces manufacturer’s warranty claims. The inventory and management functions not currently handled in SAP could b e added, but implementation of these changes would require extensive and costly modifications to the system. These changes would entail: in ventory ordering, testing, and tracking procedures evaluated by the engineers and the field crews. Staff plans to conduct a cost benefit analysis prior to implementing changes to the system to assess the benefits relative to the expense of implementing a centralized inventory system. The discrepancies in the transformer counts cited in the audit report were due to a transition or change in the inventory management systems taking place at the time of the audit. The transformers have been managed in an Access Database and Utilities was in the process of transferring this function to the GIS system. Following the transition to the GIS system, all transformers were inventoried and accounted for. It should be noted that transformer inventory is not updated on a daily basis because they are used for emergency replacements and projects. At any given time there are approximately 440 transformers in stock. Transformers could be removed from inventory during any time of the day depending on the situation. The Electric Utility does conduct a monthly physical count in the yard and reconciles any discrepancies on a regular basis. Management of the transformers Attachment A 5 in the yard could benefit from the installation of an RFID system, so staff will evaluate the costs of a purchase and its benefits. It should be noted that transformer inventory is not updated on a daily basis beca use they are used for emergency replacements and projects. Transformers could be removed from inventory during anytime of the day depending on the situation. The Electric Utility does conduct a monthly physical count in the yard and reconciles any discrep ancies on a regular basis. Management of the transformers in the yard could benefit from the installation of an RFID system, so staff will evaluate the costs of a purchase and its benefits. The Utilities Department supports creation of a consistent process for management of meters similar to those for managing other items stored in the warehouse. The majority of new gas and water meters are stored in the warehouse and released to the meter shops when requested. Due to limited space in the meter shops, Utilities will procure some large containers for meters that are being staged for deployment. Utilities will also work with Stores to identify a storage location for electric meters. ASD To assure Council that meters and transformers are accurately recorded in the financial system and statements, it is important to explain their treatment. Meters and transformers are considered to be capital assets (as opposed to inventory) and, as such, are capitalized and depreciated over their useful lives. In total, the City owns over 3,000 transformers and all were recorded as capital assets at time of purchase. The transformers rotate in and out of service over the course of their lives, but only the acquisition and disposal activities are recorded in the capital asset system. This is standard accounting policy for the industry and is appropriate treatment from a financial accounting perspective. The Public Works Department has not used the City’s SAP inventory system to manage at least $773,000 in materials, including emergency replacement parts at the RWQCP Public Works Public Works staff will work with ASD to evaluate includ ing non-stock inventory in SAP versus currently keeping track of it manually. If SAP is upgraded to allow inclusion of non-stock inventory, Public Works will work with ASD to add these materials into SAP. In the meantime, the department will maintain and improve its records of non-stock inventory for the following:  Long lead-time repair parts expensed to the Wastewater Treatment Fund  Raw sewage screening presses  Specialty sewage sludge incinerator fire bricks  Industrial combustion air fans for the sewage sludge incinerator  Activated sludge ceramic air diffusers  Air pipes for the activated sludge  Extra pipe fittings Attachment A 6  Sludge and sewage pumps The emergency repair parts listed above are high value and low turnover. They have a very low risk of theft, and it is unlikely they would be deemed to have any value outside the context of a wastewater treatment plant. These items are on hand for the life of the equipment (typically 10-50 years). It is possible that the repair parts go unutilized for the life of the equipment, but the repair items are needed immediately if machinery breaks down in in a 24/7 operation that involves health and safety issues for the City. The Regional Water Quality Control Plant (RWQCP) Warehouse is small and incapable of storing a large number of items. Some non-stock equipment is kept at the RWQCP warehouse for easier organization and access by forklift, but there is limited space there as well for additional non-stock inventory. As a consequence, large non-stock items (e.g., the incinerator refractory bricks and sewage incineration fans) are stored in a large area under the fixed film reactors known as the “towers.” The towers are unlocked facilities, though they are not accessible to the public. Some areas of the plant are home to containers (i.e., steel storage shipping style container) that have been used recently to house non-stock inventory. This has allowed staff to better organize and de-clutter the towers and main water quality warehouse. Moreover, non-stock inventory is closer to the treatment process where it will eventually be installed. All non -stock items are stored in a sheltered area for protection against the elements and they sit ready for preventative maintenance and potential corrective repairs. The $773,000 in estimated non-stock inventory is expensed to the wastewater treatment fund and is stored for long periods as emergency and corrective repair parts. PWD will work with ASD staff to determine the appropriate accounting methodology for non-stock items. The Information Technology (IT) Department has not used the City’s SAP inventory system to manage at least $919,000 in materials at the MSC warehouse Information Technology Staff agrees that the current manual Equipment Delivery Log system to track the inflow and outflow of equipment is not optimal. An SAP solution utilizing material reservations is now being implemented for the release of laptops, monitors, and other frequently purchased IT equipment. A procedure is also being put in place to ensure that the MSC warehouse will only receive IT goods for which material reservations are made. Since the Auditors conducted their review, staff determined on December 10 that of the $919,000 of IT equipment at the MSC warehouse identified in the audit, an estimated $300,000 worth of monitors, laptops, desktops, and other equipment were being stored at the MSC warehouse awaiting the opening of the Mitchell Park facilities. Another $17,000 worth of mobile data equipment for police vehicles was awaiting installation. An estimated $137,000 of the $919,000 identified from Purchase Orders was for warranties and licenses which are not Attachment A 7 physical items stored at the warehouse. All other goods valued at $465,000 have been withdrawn for operational purposes. The inflow and outflow of IT equipment is fluid as most equipment is on a standard replacement schedule and the demand for IT equipment is high. IT has requested and PW will install a cage at the MSC warehouse to separate IT equipment from other goods and foot traffic. It should be noted that no individual can walk through warehouse storage areas during regular hours unless accompanied by warehouse personnel. To improve security in the storage room at City Hall, IT worked with Public Works to establish badge access to the door entry, a ceiling-height gate to secure the specific IT area, and badge access to the gate.” ASD To verify that laptops, desktops, monitors and other items are accurately recorded in the financial system and statements, staff is providing the following explanation. If these items are over $5,000, they are considered to be capital assets (as opposed to inventory) and, as such, would be capitalized and depreciated over their useful lives. As stated in the City’s fixed asset policy, those assets that have a cost below $5,000 on an individual basis are not capitalized, but rather are expensed at the time of purchase. Since these items were below the $5,000 threshold, they were appropriately recorded as expenditures when they were purchased. As such, there is not a material misstatement in the City’s accounting records. Finding 2: ASD should improve controls to ensure the accuracy of inventory at the MSC and RWQCP Recommendation: 3. ASD should update and enforce inventory count policies and procedures to help ensure consistent and accurate inventory records. The update should at minimum require blind inventory counts, sufficient documentation of counts and adjustments, and appropriate segregation of duties. ASD should consider implementing controls included in the GAO publication titles “Executive Guide Best Practices in Achieving Consistent, Accurate Physical Counts of Inventory and Related Property” ASD ASD already has implemented several of the above recommendations’ components. It has, for example, instituted blind counts. It is important to note that the MSC warehouse has a relatively small staff half of which are used to deliver mail, goods, packets , and transport library books throughout each workday. Due to budget reductions in prior years , 1.0 FTE was reduced at the MSC warehouse and 1.0 FTE reduced at the RWQCP. Segregation of duties is difficult with limited staff and multiple responsibilities. Nevertheless, ASD will determine what improvements can be made within existing staff levels and which will require additional FTE. The Auditor correctly points out a higher error count at RWQ CP. Part of the error found is attributable to items that have been expensed, are in excess of project needs, and are housed at the site. Held for future replacement needs, these items were not entered formally into the Attachment A 8 inventory system. ASD will work with the departments and the SAP business group to avoid this issue and to improve counts. Other items, such as a rebuilt Maxon valve, fall into the uncounted category of stock as well. While staff agrees that such goods should be tallied in inventory, this example demonstrates an honest effort to maximize use of existing resources and maintain parts for emergencies. Public Works The RWQCP is a 24/7 operation with a high level of liability and risk to health and safety should processes and equipment not work properly. Staff requires access to parts, supplies, and equipment at a moment’s notice. The RWQCP non-stock inventory at the RWQCP is exclusively sewage treatment equipment. These items are specialized industrial equipment. While they have high value, they have no functionality or resale value outside of the plant. The risk of loss from theft of this equipment is slight and an important point when evaluating the level of needed inventory control, storage policies, and up -to-the-minute inventory accuracy. PWD staff will work with ASD to evaluate options to improve inventory controls and accuracy at the RWQCP without impacting critical operations. Additional staffing may be required resulting in increased costs to the City and our partners. PWD will work with ASD to evaluate the cost and benefits of adding staff. Finding 3 – Inventory records do not evidence accountability for all inventory transactions. About $1 million in inventory was issued without SAP reservations, which should be used to document and evidence the need and authorization for inventory transactions. Utilities Utilities supports the use of a reservations system designed to meet the needs of field personnel. Maintenance or capital improvement work that is planned in advance can conform to procedures stemming from a reservations system. Conversely, emergencies and urgent needs at the job site (which may be prompted by unanticipated field conditions) req uire materials on short notice. If a system can be established that allows quick field entry into a reservations system, the amount of materials pulled without reservations could be either larg ely or completely eliminated. An analysis should be performed to determine if a system to allow quick system reservations can be implemented cost effectively and in conjunction with the SAP system. Alternatively, a stand-alone system can be developed as long as the parameters for such a system and its use are pre-determined and consistent with how the balance of the City’s inventories are handled. Furthermore, if the City decides to replace SAP with another system, it would make sense to delay the purchase and implementation of a system compatible with SAP, and instead, incorporate inventory management requirements in the scope of work for a new replacement system. Attachment A 9 ASD As Utilities states above, the reservation system is used, but there was a need for what is termed “un-planned goods” which was a requirement of Utilities when SAP was implemented. If field crews need items that were not part of the original reservation, they come to the MSC, provide a job number which is entered into SAP , and withdraw items that are then charged to the work order. There is no new reservation generated but the items are charged accordingly and can be tracked in SAP. Segregation of duties has not been established at either the RWQCP or the MSC warehouse locations. ASD As stated under Finding 2, there is one storekeeper assigned to the RWQCP, a 24/7 operation, and four FTE at the MSC warehouse. Prior to a series of budget reductions, each operation had an additional 1.0 FTE. To achieve best practice segregation of duties, as well as other functions, additional FTE would be required at the RWQCP and potentially at the MSC warehouse as well. The warehouse Supervisor has implemented segregation of duties to the extent possible at the MSC where entering and posting duties are now segregated. Public Works Public Works supports ASD with updating policies and procedures, conducting blind counts, and any improvements to custody, counting, and inventory adjustments. The department recommends, however, that the RWQCP warehouse should continue to operate as an open warehouse with paper based reservations entered retrospectively. Currently, there is one storekeeper present at the warehouse and this allows a reasonable level of control. Due to budget reductions several years ago, staffing at this warehouse fell from 2.0 to 1.0 FTE. Changes to current operations will result in inefficiencies, increased personnel costs, and more administrative work for supervisors. Staff estimates that at least an additional 3.0 FTE and other system changes would be needed to convert RWQCP operational practices to a closed warehouse system. Salary and benefits for the 3.0 FTE is estimated at $371,000 annually and these positions would add incremental allocated charges to the Wastewater Treatment Fund. New positions and costs would have to be reviewed and shared with the partners. With a closed warehouse, operational problems will occur when sewage treatment repair parts needed while electricians, maintenance mechanics, wastewater treatment plant operators, and supervisors waited in line to receive a complex set of parts and worked through the difficult administrative process of identifying repair parts from behind a counter. For reasons of cost impacts, regulatory compliance, and a work efficiency viewpoint, Public Works respectfully disagrees with implementation of a closed warehouse reservation system. Nearly all of the repair work at the Water Quality Control requir es the use of unplanned goods to keep the wastewater treatment plant working. Public Works is supportive of improving Attachment A 10 checkout procedures, accurate documentation for unplanned goods, and investigating other methods and systems that can be used to ensure co nsistent and accurate inventory records and prevent potential fraud. Staff used a generic account in SAP known as “Stores1” that is accessible using a shared password to issue about $8.5 million in inventory…. A generic account has been utilized at the warehouse. Staff will work with the SAP team to quickly implement specific accounts and to add a computer to establish better controls. Finding 4: The City’s warehouses have significant quantities of unused or infrequently used inventory. The Utilities Department and ASD did not ensure about $130,000 in cable was used prior to transitioning to a new cable type, resulting in dead stock and potential waste. ASD In the past six months, Stores staff sent out slow moving stock reports to affected departments. Departments responded as to which items were no longer needed and justified those requiring continued storage. The warehouses recently have been pulling dead stock from the shelves. The next step will be to return, sell, or recycle inventory. More frequent, periodic reports on aged goods will be sent to departments. The Audit cites a low and decreasing turnover rate. The deletion of unused stock will partially address this issue. In addition, reports on minimum and maximum levels must be more actively used and analyzed to gauge the necessary level of inventory. To pare dead stock and optimize turnover or use of goods, consistent communication and coordination among departments will be necessary. Utilities The Utilities agree that more communication and more reports on unused stock are necessary. To effectively use and manage aging stock, all items must be entered in the SAP system so it can be identified and ordered through the reservation system. Regular, periodic reports must be generated to eliminate dead stock and Utilities will work with ASD to develop a timetable for ongoing reports and responses. Public Works Staff is cooperating with the review of potential dead stock by removing slow moving items and adjusting minimum and maximum inventory quantities to reflect current operational needs. An initial review process already has been completed with ASD staff on slow moving inventory. Early implementation of the Auditor’s findings is expected to create a marginal amount of new space in the RWQCP warehouse. Public Works agrees with the statement that “improved management of inventory levels may lower dead stock and result in increased space available,” but there will nonetheless remain an unabated need for the $3.0 million warehouse expansion Attachment A 11 project identified in the RWQCP’s Long Range Facilities Plan to address overcrowding issues in the existing warehouse. Emergency repair parts are typically needed for the life of the sewage treatment equipment. Even with the absence of equipment failure for over 10 years, there is a need for specific items on hand that will prevent critical failures. As a result, there will be lower inventory turnover rates. Much of the RWQCP plant equipment is specialized sewage treatment equipment that cannot be obtained from local vendors such as Home Depot. This equipment is needed on a 24/7 basis and can require a long lead time (e.g., days to months) for delivery. Public Works supports managing and reviewing the slow moving stock on a more periodic basis to verify that items are needed. Finding 5: The City has not properly secured access to the Municipal Services Center Recommendation 5.9: Perform a Citywide physical access risk assessment in collaboration with the Utilities Department, Office of Emergency Services, the IT Department, and the Police Department in order to effectively identify, prioritize, and address access control weaknesses. Public Works (PW) Public Works is in the process of replacing the 40 year old hard key syste m for most exterior and critical interior doors with a card reader system eliminating the need to issue hard keys. The cards are person specific and are issued to City staff and City approved contractors for access to their business areas. All City staff and contractors must pass a fingerprinting/background check prior to issuance of a card. PW staff will work with OES, IT and Police staff to identify potential weaknesses and continue to pursue recommendations for improvement such as installation of surveillance systems at critical entry ways should budget allow. Recommendation 5.10: Develop policies and procedures to address the management of citywide physical security. Policies and procedures should address: a. Designation of roles and responsibilities to ensure physical security controls appropriately restrict and monitor access. b. Management (administration) and proper use of the City’s access control systems. c. Processing departmental requests to grant or modify employees' physical access. d. Granting restricted access to non-employees. e. Ensuring access is timely modified or revoked when roles and responsibilities change. Public Works In conjunction with the Public Works Department’s A merican Public Works Association (APWA) accreditation process, staff will review and revise current policies and procedures for City facility security along with developing new policies and procedures where none currently exist. Attachment A 12 The procedures will document roles, responsibilities and processes for on-going system maintenance. Recommendation 5.11: Configure the fleet access control system to support the City’s security goals and objectives or determine if the AMAG Technology Inc. Symmetry Security Management System should replace it. Public Works Prior to the audit, PW staff was in the process of converting the Fleet Data system over to the AMAG access control system primarily because the vendor support for the old fleet system has been virtually nonexistent. Additionally, it has not been until very recently that the AMAG technology access control system had the capability to support the vehicle entry system. The complete transfer of all vehicle access to the AMAG technology control system should be done by the end of the fiscal year. The AMAG technology access control system will be able to track vehicles entering the yard and produce required reporting. Recommendation 5.12: Review and update AMAG Technology Inc. Symmetry Security Management System access authorization records to ensure access card holders can be uniquely identified. Access cards (especially generic or group cards) should only be assigned with a documented and approved business need. Public Works PWD staff has initiated review of the current authorization records and has updated/removed some records already. Staff will continue to ensure that card holders can be identified and generic or group cards are not issued unless there is a unique business need. PW D staff will update the existing Access Request Form to include a more comprehensive section requiring hiring managers to explain the business needs of an employee for the requested access and/or documenting the need for generic or group card issuance. During the audit, a list of people having access to the MSC warehouse was found to have multiple inaccuracies. The Warehouse Supervisor met with Public Works to review the list and all unauthorized personnel were removed from the system. In the future, staff from each department will meet semiannually to review the list of staff seeing access to the MSC warehouse. The Warehouse Supervisor will approve the final list. Recommendation 5.13: Assess the adequacy of records of individuals assigned keys and take necessary corrective actions to ensure the accuracy and completeness of the records. The Public Works Department should identify and prioritize replacement or rekeying of locks for high risk areas if records do not identify who is in possession of the keys or if the keys issued were of the type that can be duplicated. Public Works PWD staff will review physical key records and update them to reflect the current issuance of keys. Prior to the audit staff began replacing the City’s 40-year-old key system with a new Attachment A 13 Schlage Primus key system, adding card access readers to key locations, and adding cameras in specific locations improving security throughout the City. In conjunction with review of City security with Office of Emergency Services (OES), IT and Police personnel, PWD staff will identify high risk areas, evaluate the number of access keys issued and reissue new keys if it is recommended. Recommendation 5.14: Improve physical security at the City Hall storage area. Appropriate actions include, but are not limited to, enforcing appropriate key or card access controls and securing areas that have inadequate fencing. Public Works Since the audit, Public Works staff added card access control to the storage area door, added card access control to the IT cage inside this room, and extended the IT cage fence to the ceiling. Conclusions Overall, City staff believes it has made conscientious efforts to preserve and safeguard the goods it purchases for operating and capital needs. Staff at the warehouses take their work seriously and are open to improvements which is one of the reasons the City Auditor was asked to help review current practices. Line departments have a primary responsibility to maintain services for the health and safety of the public, but acknowledge as well that efforts to improve inventory control are necessary. The flow of communication and coordination among the departments needs improvement. Staff acknowledges lapses in keeping up with best practices, but believes this is primarily due to subpar staffing, the press of business/project needs, and the tendency to defer to those needs. Moreover, in its efforts to be cost conscious (rehabilitating equipment and saving excess, unique material), some best practices (e.g. high turnover of inventory, precise counts) have been somewhat overlooked. Staff will explore further use and improvement of SAP and other existing and new systems to close risks cited in the report. We will measure SAP capabilities and the costs to implement them against other systems. New systems such as Radio Frequency Identification (RFID) or bar coding will be evaluated with IT assistance to better track inventory, especially those items such as utility poles which are not located in or near one of the warehouses. Improvements to inventory control cited by the Auditor will cost money, either through the addition of personnel or to modify or purchase management systems. These costs will be assessed and brought to Council’s attention as it works to prioritize and allocate limited City resources to other needs. Finally, staff appreciates the Auditor’s work on this report. The findings are useful to improve the tracking, optimal use, and safeguarding of City assets.