HomeMy WebLinkAboutStaff Report 2503-4318CITY OF PALO ALTO
CITY COUNCIL
Special Meeting
Monday, March 24, 2025
Council Chambers & Hybrid
5:30 PM
Agenda Item
9.Approval of Audit Reports for Grant Management And Utility Billing as Reviewed by Policy
and Services Committee; CEQA: Not A Project
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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: City Auditor
Meeting Date: March 24, 2025
Report #:2503-4318
TITLE
Approval of Audit Reports for Grant Management And Utility Billing as Reviewed by Policy and
Services Committee; CEQA: Not A Project
RECOMMENDATION
The Policy & Services Committee and Office of the City Auditor recommend City Council
approve the results of two audit reports:
1. Grant Management Audit (Attachment A, P&S Committee recommended approval on
February 11, 2025), and
2. Utility Billing Audit (Attachment B, P&S Committee recommended approval on February
11, 2025).
BACKGROUND
Baker Tilly, in its capacity serving as the Office of the City Auditor (OCA), performed a citywide
risk assessment that assessed a wide range of risk areas, including strategic, financial,
operational, compliance, technological, and reputation risks. The purpose of the assessment
was to identify and prioritize risks to develop the annual audit plan.
During the FY 2023 risk assessment, the OCA identified grant management processes and utility
billing as potential areas of risk and included these audits in their FY 2024 Audit Plan. These
audits were presented to, and approved by, the Policy and Services Committee on February 11,
2025 and are here transmitted to City Council for approval.
ANALYSIS
Grant Management Audit
The objective of this audit was to determine whether the City has adequate internal controls to
manage the grant lifecycle efficiently and effectively.
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The City receives incoming grant funding from various sources to support its services, including
federal, state, and local grants. Most of the City’s grant funding comes from federal agencies.
Audit findings and recommendations focused on three areas of improvement:
1) better coordinating oversight of grant management across departments;
2) improving recordkeeping and internal reporting of active grants in order to better monitor
grant activities and increase visibility of grant performance; and
3) more consistently assess and track efforts in pursuit and management of grant
opportunities to measure its return on investment.
OCA’s Grant Management Audit report, included as Attachment A, summarizes the analysis,
audit findings, and recommendations. The Policy and Services Committee unanimously
recommended City Council approval of this audit report on February 11, 2025.
Utility Billing Audit
The objectives of the Utility Billing Audit were to:
1) determine whether the internal controls over the utility billing process are adequate and
working effectively to ensure billing is accurate and in compliance with the City's policies and
regulations, and
2) determine whether billing adjustments are properly supported and approved.
The CPAU Department provides the City of Palo Alto with five municipal utility services:
electricity, natural gas, water, wastewater, and fiber optics. The City’s Public Works Department
also provides refuse collection and processing for recycling, compost and garbage, wastewater
treatment, and stormwater management services.
Palo Alto is the only city in California that owns and operates a full suite of municipal utility
services, including electric, fiber optics, natural gas, water and wastewater.
The OCA found utility bills and adjustments are accurately calculated in compliance with City
policies and regulations. Audit findings and recommendations focus on two areas of
improvement:
1) improving documentation and approval for some billing processes; and
2) closing some internal controls gaps to improve overall process performance.
OCA’s Utility Billing Audit report, included as Attachment B, summarizes the analysis, audit
findings, and recommendations. The Policy and Services Committee unanimously
recommended City Council approval of this audit report on February 11, 2025.
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FISCAL/RESOURCE IMPACT
The timeline for implementation of corrective action plans and the necessary resources are
identified within the attached reports.
STAKEHOLDER ENGAGEMENT
The Office of the City Auditor worked with and would like to thank several departments for
their assistance in conducting the Grant Management d Utility Billing Audits including:
Administrative Services, City of Palo Alto Utilities, City Manager’s Office, Public Works, Planning
& Development Services, Office of Transportation, Community Services, City of Palo Alto
Utilities, Library, Police and Office of Emergency Services.
ENVIRONMENTAL REVIEW
Council action on this item is not a project as defined by CEQA because the audit activities do
not involve any commitment to any specific project which may result in a potentially significant
physical impact on the environment. CEQA Guidelines section 15378(b)(4).
ATTACHMENTS
Attachment A: Grant Management Audit, January 29, 2025
Attachment B: Utility Billing Audit, January 30, 2025
APPROVED BY:
Kate Murdock, City Auditor
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January 29, 2025
City of Palo Alto
Office of the City Auditor
Grant Management Audit
Contents
Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, operate under an alternative practice structure and are members of the global
network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that
provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are
not licensed CPA firms.
EXECUTIVE SUMMARY...................................................................................................1
INTRODUCTION...............................................................................................................4
DETAILED ANALYSIS.....................................................................................................7
AUDIT RESULTS............................................................................................................10
APPENDICES.................................................................................................................18
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Executive Summary
Purpose of the Audit
Baker Tilly Advisory Group, LP (Baker Tilly), in its capacity serving as the Office of the City Auditor
(OCA) for the City of Palo Alto (the City), conducted a Grant Management Audit based on approved
Task Order 4.24 as part of the City’s FY24 Audit Plan. The objective of this audit was to:
Determine whether the City has adequate internal controls to manage the grant lifecycle efficiently
and effectively.
Report Highlights
Finding 1:
(Page 10)
There is a lack of coordinated oversight of the City’s grant management
efforts, resulting in inconsistent management across departments and
the potential for non-compliance with grant requirements
While the City has a grant policy, it is not consistently implemented and enforced by
departments applying for grants.
The OCA noted the following observations regarding grant management practices:
•For 11 out of 15 grants tested, the Grant Application Authorization Checklist
was not completed by the project manager prior to grant application as
required by the policy. This checklist ensures that management has reviewed
the appropriateness of the grant, as well as the financial obligations pertaining
to the City upon grant award. Four of the 11 grants did not have a checklist as
the City did not have to go through an application process for these awarded
grants.
•For all samples tested, copies of acceptance and/or cooperative agreements
were not provided to all the relevant sponsoring departments listed in the
policy.
Additionally, the grant policy in place was last revised in 2004 and appears to be
insufficient to govern the complete grant management process and ensure a
consistent process across departments. The City’s policy only addresses grant and
funding request applications, leaving a gap in policies and procedures for managing
activities throughout the grant lifecycle, including tracking, monitoring, and closing
activities. A more comprehensive grant policy to govern the complete grant
management process will help ensure a consistent process across departments.
To promote the coordinated oversight of grant management activities, the City
recently hired a Grant Analyst position. This position will help improve the grant
administration process by implementing a standardized tracking and monitoring
system. Additionally, the Grant Analyst can help develop more diverse grants and find
new opportunities.
Key Recommendations
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EXECUTIVE SUMMARY
The City should perform regular reviews and updates of all city policies. We
recommend that the City update the grant policy to document how departments
should manage activities throughout the grant lifecycle, including tracking, monitoring,
and closing activities.
Additionally, the City should ensure that all departments receive the appropriate
training and awareness of the updated policy. It should be determined if the policy
should be enforced for all grants received or only grants actively applied for by the
City1.
Lastly, we recommend that the City utilize the Grant Analyst position to provide
centralized oversight of grant administration and management from the application
phase to the closing of the grant.
Finding 2:
(Page 12) While the City is actively pursuing grant opportunities, there is
insufficient recordkeeping and internal reporting of active grants,
resulting in limited monitoring and visibility of grant performance
The OCA noted the following observations:
•There is not a complete, central repository of all active City grants. While the
Administrative Services Department (ASD) compiles an annual listing of grants,
only Federal grants are validated for completeness and accuracy for the Single
Audit, an annual audit designed to meet the requirements of federal grantor
agencies.
•Grants do not have formalized internal tracking and reporting, such as project
plans and timelines in place. The OCA noted the following observations
pertaining to grant tracking and monitoring of grant requirements:
- For 8 out of 15 samples tested, there did not appear to be any formalized
internal tracking and reporting, such as project plans and timelines in
place.
- For 4 out of 15 samples tested, progress and/or performance reports were
not provided within the required timeframe stated in the Grant Agreement.
There were no penalties or consequences for reports submitted after the
deadline for these grants.
•Grant milestones are not formally and consistently communicated internally by
departments, such as when a grant is awarded or closed out.
•There is a lack of reporting and visibility of the pursuit of grants as the City has
not formally tracked which grants have been applied for versus awarded.
Key Recommendations
We recommend that the City consider establishing a complete, central repository of all
City grants including such information as how many active grants there are, if they are
federal or local, and dollar amount. Additionally, the City should consider whether they
can set up a separate account, cost center, or chart string for each grant within the
1 The City receives some grants that do not require the City to formally apply for them.
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EXECUTIVE SUMMARY
financial system (SAP). This will allow the City to easily pull a complete listing of
grants.
For appropriate grants, those that are not awarded by the State on a recurring basis,
milestones should be tracked, monitored and noticed to the appropriate departments,
such as when a grant has been successfully awarded and/or closed out to enhance
recordkeeping of active grants. Lastly, the City should consider utilizing the Grant
Analyst position to enhance tracking and reporting of active grants. Formalized
tracking will help the City gauge trends and review who is pursuing grants and what
was applied for vs. rewarded.
Finding 3:
(Page 14)
The City does not consistently assess and track efforts in pursuit and
management of grant opportunities to measure its return on investment
The OCA noted the following observations:
•The City does not assess whether or not to pursue potential grant
opportunities based on the effort, time and complexity that may be required in
the application and administration of the grant.
•While Townsend Public Affairs, Inc., an external consultant providing grant
pursuit and management activities for the City, appears to have provided some
valuable services to the City, they have not provided some of the deliverables
specified in the contract. This may make it difficult for the City to assess their
performance.
•The City’s recently hired Grant Analyst indicated they will be working with
Townsend to clarify deliverables and incorporate a strategic funding plan and a
grant dashboard to improve reporting and tracking of grants.
Key Recommendations
We recommend that the City consider the merits of establishing a system for
assessing grant pursuit, application, and administration efforts and determining when
to pursue or abandon such opportunities. The City should determine if tracking staff
time spent pursuing and managing grants would be beneficial. Establishing a process
for assessing efforts would aid in the overall evaluation of grant program performance
and its return on investment. In addition, we recommend that the City continue to
explore and implement strategies to make the most effective use and reporting of the
external contract for grant application, tracking and monitoring services.
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Introduction
2 https://www.cityofpaloalto.org/files/assets/public/v/1/administrative-services/financial-reporting/annual-comprehensive-financial-reports-
acfr/current-2011-cafrs/city-of-palo-alto-acfr-single-audit-fy2024-final-unsercured.pdf
3 56% of federal award expenditures were granted by the U.S. Department of Transportation, which included the following program(s):
Airport Improvement Program, Highway Planning and Construction, and Safe Streets and Roads for All.
20% of federal award expenditures were granted by the U.S. Department of Homeland Security, which included the following program(s):
Staffing for Adequate Fire and Emergency Response (SAFER) and Disaster Grants – Public Assistance (Presidentially Declared Disasters)
15% of federal award expenditures were granted by the U.S. Department of Health and Human Services, which included the following
program(s): Congressional Directives
Objective The objective of this audit was to determine whether the City has adequate
internal controls to manage the grant lifecycle efficiently and effectively.
Background The City receives incoming grant funding from various sources to support its
services, including federal, state, and local grants. Most of the City’s grant
funding comes from federal agencies.
Macias Gini & O’Connell LLP, Certified Public Accounts (MGO) conducts a
“Single Audit” designed to meet the requirements of federal grantor agencies.
The standards governing the Single Audit require the independent auditor to
report the fair presentation of the financial statements, government internal
controls and compliance with legal requirements.
The City’s expenditures of federal grants totaled $8.2 million in FY 20242. The
Federal Grantor Agencies included the U.S. Department of Housing and Urban
Development, U.S. Department of the Interior, U.S. Department of Justice, U.S.
Department of Transportation, U.S. Department of Treasury, National
Endowment for the Humanities, U.S. Department for Health and Human
Services, and U.S. Department of Homeland Security.
Table 1: Percentage of FY 2024 Federal Award Expenditures by Federal
Grantor Agency3
Table 2: Expenditures of Federal Grants FY 2022 - 2024
Transportation
56%
Homeland Security 20%
Health and Human
Services
15%
Housing and Urban
Development
5%
Treasury
3%Humanities, Justice, Interior, &
Environmental Protection
1%
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INTRODUCTION
*Analysis conducted by OCA in November 2024
The City has decreased Federal grant expenditures since FY 2022 due to lower
expenditures of COVID 19 grants, such as the COVID-19 Coronavirus Relief
Fund which decreased approximately $8M from 2022 to 2024.
According to the Schedule of Expenditures of Federal Awards (SEFA) listings
prepared by the City for the Single Audit, the City had a portfolio of 21 Federal
grants, including 5 Federal grants with no expenses incurred/activities, and 8
State and Local Grants in FY 2022; 24 Federal grants, including 2 Federal grants
with no expenses incurred/activities, and 11 State Local, or Private grants in FY
2023; and 20 Federal grants and 20 State, Local, or Private grants in FY 2024.
The OCA determined that the City had an approximate population of 82 incoming
grant awards from FY 2022 – FY 2024 based on the Schedule of Expenditures of
Federal Awards (SEFA) listings and surveying 3 City departments with the
highest number of grants.
Scope The OCA obtained grant records from FY 2022 to FY 2024 and assessed grant
management activities and internal controls to manage the grant lifecycle across
all applicable departments.
Methodology To achieve the audit objectives, the OCA performed the following procedures:
• Interviewed the appropriate individuals to gain an understanding of the
organizational structure, processes, and controls related to grant
management.
• Analyzed policies and procedures as well as the legislative and
regulatory requirements to identify the criteria to be used for evaluation of
control design and effectiveness.
• Selected a sample of grants during the audit period, FY 2022 to FY 2024,
to assess whether grant performance standards, procurement, and
reporting complied with grant requirements, city policies, and best
practices. The OCA stratified the population into smaller groupings by
$17,754,575
$9,731,531
$8,214,153
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
2022 2023 2024
Total Federal Financial Awards
Expeditures
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INTRODUCTION
4 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 with Baker Tilly U.S, LLP for internal audit
services for October 2020 through June 2022 with an extension through June 2025. City Council appointed Kate Murdock, Audit Manager in
Baker Tilly’s Risk Advisory practice, as City Auditor in May 2024. As a result of transitions in the Audit Office and peer review delays due to
the COVID pandemic, an external peer review is targeted for 2025. It should be noted that Baker Tilly’s most recent firmwide peer review
was completed in November 2024 with a rating of “Pass”. The scope of that peer review includes projects completed under government
auditing standards. A report on the next firmwide peer review should be available later in 2024.
department. The OCA selected at least one grant from each department.
If multiple grants were sampled for a department, at least one federal and
one state or local grant was selected. The OCA tested a sample of 15
grants across departments. Please see a listing of grant selections in
Appendix A.
• Completed audit report of findings, conclusions, and recommendations
based on the supporting evidence gathered.
Compliance
Statement
This audit activity was conducted from June 2024 to December 2024 in
accordance with generally accepted government auditing standards, except for
the requirement of an external peer review4. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings, observations, and conclusions based on our
audit objectives. We believe that the evidence obtained provides a reasonable
basis for our findings, observations, and conclusions based on our audit
objectives.
Organizational
Strengths
During this audit activity, we noted the professionalism and responsiveness of
the following departments: Administrative Services, City Manager’s Office, Public
Works, Planning & Development Services, Office of Transportation, Community
Services, City of Palo Alto Utilities, Library, Police and Office of Emergency
Services. We appreciated the participation of departments in interviews,
providing grant documentation for selected samples, and responding to follow-up
requests.
The Office of the City Auditor greatly appreciates the support of the departments
involved in conducting this audit activity.
Thank you!
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Detailed Analysis
5 https://www.theiia.org/
6 https://grants.gov/learn-grants/grants-101/
Best Practices:
Grant
Management
Criteria
The Institute of Internal Auditors (IIA) 5 Supplemental Guidance Practice Guide for
Auditing Grants in the Public Sector, released in April 2018, provides supplemental
guidance for auditing grants in the public sector. This practical guide provides detailed,
step-by-step approaches, featuring processes, procedures, tools, and programs, as
well as examples of deliverables. Key public sector grant management insights are
highlighted here:
“Examples of Grant Usage in the Public Sector
•Address specific policy goals.
•Stimulate an industry or the economy.
•Support activities including research and capital projects.
•Deliver public services, such as health care and education.
•Produce goods, such as medicines; intellectual property, such as patents; and
infrastructure, such as highways, schools, homes, and hospitals.”
“A grant program follows a linear life cycle that includes creating the funding
opportunity, applying, making award decisions, and successfully implementing the
award. The specific actions along the life cycle are grouped into three phases6:
•Pre-award phase.
•Award phase.
•Post-award phase.
The above infographic was obtained from pg. 6 of IIA Supplemental Guidance Practice Guide for Auditing
Grants in the Public Sector.
“Grant administration is a broader concept that involves all administrative, financial,
and operational activities required to implement, execute, and monitor a grants
program (from phase one to phase three).”
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DETAILED ANALYSIS
Grants management has a very specific starting point, and the scope is limited to
activities in phases two and three. The management process starts when the grantee
signs an agreement with the grantor and aid in the form of funds are disbursed or
resources transferred.”
Grant Administration and Management Controls
The Practice Guide provides a Risk and Control Matrix for Grants Administration and
Management for a grantee. See full Risk & Control Matrix visual in Appendix B. Control
examples for each phase of the grant life cycle include the following:
Phase: Program Objective/Purpose
•Implement policies and procedures for application development.
•Identify eligibility limitations.
•Understand the community needs and how they can be addressed.
•Establish a process to research potential grantors to better understand their
selection process.
Phase: Identifying Sources of Grants
•Dedicate resources to research potential sources of grants.
•Implement controls that ensure potential grants match the organization’s
objectives.
Phase: Applying for Grants
•Implement a robust grant application process.
•Implement a continuous improvement process to ensure the application
process meets new regulations or operating procedures.
•Implement controls that ensure completeness/accuracy/validity of information
submitted.
•Secure regulatory approval, or at a minimum, determine if it can be obtained if
needed.
Phase: Managing Grant Resources
•Adequate/effective internal controls over expenditures.
•Implement audit trail of resources.
•Adequate segregation of duties or dual controls for approval.
•Periodic account reconciliation.
•Monitoring progress of substantive work during the life of the grant.
Phase: Accountability Reporting
•Adequate/effective internal controls to account for use of resources in
accordance with terms and conditions.
•Complete/accurate/valid/timely reporting.
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DETAILED ANALYSIS
Phase: Program Evaluation and Closing
•Completeness and accuracy of accountability reports.
•Ensuring project managers have measures in place to demonstrate that
objectives and/or performance standards were met.
•Include steps to evaluate if the program was effective in the program closing
process.
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AUDIT RESULTS
Audit Results
Finding 1:
There is a lack of
coordinated
oversight of the
City’s grant
management
efforts, resulting
in inconsistent
management
across
departments and
the potential for
non-compliance
with grant
requirements
Grant management activities are dispersed among several departments
that use grant funding for City projects and programs. These include
Administrative Services, the City Manager's Office, Public Works, Office
of Transportation, Planning & Development Services, Community
Services, Utilities, Library, Police, and Emergency Services.
Individual departments are responsible for submitting the grant
application, preparing a council resolution if required, complying with
applicable grant laws and regulations, establishing and maintaining
effective internal controls for compliance with grant requirements, and
tracking grant expenses and revenues.
While the City has a grant policy, it is not consistently followed by
departments applying for grants.
The City has a Grant and Funding Request Applications Policy that
establishes uniform procedures for grant applications and other funding
requests. This policy requires:
•Completion of a Grant Application and Authorization Checklist
prior to applying for grant funds.
•Department Head review of the Grant Application Authorization
Checklist at the time a grant funding application is made.
•When grants are funded, the sponsoring department must notify
and provide copies of the acceptance or cooperative agreement
to:
a. The City Manager
b. The Director of Administrative Services
c. The City Auditor
d. The City Attorney
The OCA tested a sample of 15 grants across 10 departments. The OCA
selected at least one grant from each department to see how grant
management is approached across the City. If multiple grants were
sampled for a department, the auditor selected at least one federal and
one state or local grant.
The grant application and acceptance process does not appear to be
consistently followed in accordance with the policy adopted by the City.
Per the policy, it is essential that grants be reviewed carefully for impact
on the City's resources and consistency with City policy and procedures.
Additionally, there appears to be a lack of regular training and awareness
of the grant application and acceptance process. When inquiring with
staff, some staff were unaware of the policy itself or unaware of the
necessary requirements to adhere to the policy.
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AUDIT RESULTS
The OCA noted the following observations pertaining to the Grant and
Funding Request Applications Policy:
•For 11 out of 15 grants tested, the Grant Application Authorization
Checklist was not completed by the project manager prior to grant
application as required by the policy. This checklist ensures that
management has reviewed the appropriateness of the grant, as
well as the financial obligations pertaining to the City upon grant
award. Four of the 11 grants did not have a checklist as the City
did not have to go through an application process for these
awarded grants.
•For all samples tested, copies of acceptance and/or cooperative
agreements were not provided to all the relevant sponsoring
departments listed in the policy.
A more comprehensive grant policy to govern the complete grant
management process will help ensure a consistent process across
departments.
The City lacks policies and/or procedures to govern activities performed
during the duration of the grant lifecycle. The City’s policy, last revised in
2004, only addresses grant and funding request applications, leaving a
gap in policies and procedures for managing activities throughout the
grant lifecycle, including tracking, monitoring, and closing activities.
Although grant requirements vary based on the grant agreement, there
should be a standardized policy establishing grant internal controls during
the grant lifecycle. The City should perform a regular review of the policy
to ensure it is still applicable and appropriate in coordinating grant
applications across departments.
The City is hiring a Grant Analyst position to provide coordinated
oversight of grant management activities.
The City recently hired a Grant Analyst. This position can help improve
the grant administration process by implementing a standardized tracking
and monitoring system. Additionally, staff stated that the Grant Analyst
can help develop more diverse grants, find new opportunities, and will be
working on compliance and training issues with departments.
Recommendation We recommend that the City update the grant policy to document how
departments should manage activities throughout the grant lifecycle,
including tracking, monitoring, and closing activities.
Additionally, the City should ensure that all departments receive training
on the updated policy and grant management procedures. It should be
determined if the policy should be enforced for all grants received or only
grants actively applied for by the City.
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AUDIT RESULTS
Lastly, we recommend that the City utilize the Grant Analyst position to
provide coordinated oversight of grant administration and management
from the application phase to the closing of the grant.
Management
Response
Responsible Department(s): ASD
Concurrence: Agree
Target Date: August 30, 2025
Action Plan:
Department staff have been able to manage and monitor their grant
activities, however with increased volume and complexity staff recognizes
that the grant policy should be updated with a more comprehensive view
of the grant lifecycle. Prior to FY 2017, complex grants awarded to the
City consisted of recurring Housing and Urban Development and
Department of Transportation grants. Staff has begun the update of the
City’s grant policy and procedures, using best practices Government
Finance Officers Association and agencies with similar grant portfolios.
The revised grant policy will include guidelines for managing activities
throughout the grant lifecycle, from pre-award to post-award and is
expected to be complete spring/summer 2025.
Staff concurs that a training plan should be developed for all departments
on the updated procedures and continual training be a focus. Staff is
targeting the first round of training to be done in spring/summer 2025 to
coincide with the release of the updated Grants Policy. Additional training
modules will be developed and conducted on an ongoing and as needed
basis. Staff expects to release a comprehensive training calendar in late
summer 2025.
The Grant Analyst position to oversee this coordination, utilizing the City’s
grant consultant as a resource, in addition to overall grant administration
and management. The Grant Analyst was hired in November 2024.
Finding 2:
While the City is
actively pursuing
grant opportunities,
there is insufficient
recordkeeping and
internal reporting of
active grants,
resulting in limited
monitoring and
visibility of grant
performance
The City completes an annual Schedule of Expenditures of Federal
Awards (SEFA) as required by the Single Audit, which is required for
non-Federal entities that expend $750,000 or more of Federal awards
during the fiscal year. ASD prepares the SEFA using data reported by
departments in the Single Audit questionnaire. Departments provide
information about State, Local, and Private grants in the Single Audit
questionnaire.
There is not a complete, central repository of all active City grants.
While ASD compiles an annual listing of grants, only Federal grants are
validated for completeness and accuracy for the Single Audit.
The OCA was unable to obtain a complete population of grants for our
testing. Upon surveying 3 City departments, the OCA identified some
State and Local grants that were not included in the City's single audit
listing. The City uses the annual Single Audit process as an opportunity
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AUDIT RESULTS
to ask departments about all grant funding received. However, it appears
that this process does not ensure a complete list of all Federal, State,
and Local grants.
Although the SEFA listing appeared to include a complete inventory of all
Federal grants, it did not have complete information such as a unique
identifier or grant number for each grant.
Due to incomplete recordkeeping, it was difficult for the OCA to obtain a
complete inventory of how many Federal, State, and Local grants have
been received by the City. As a result, the City does not have visibility
into the population of all grants.
Staff stated that it is difficult to obtain federal grant identification numbers,
but they are still able to track these grants within the ERP system.
Additionally, it was noted that recently the Federal Government changed
their numbering system from the name Catalogue of Federal Domestic
Assistance to Assistance Listing Number in June 2023. Staff stated that
they will explore assigning grants an internal tracking number that will
better enable annual and multi-year grant reconciliation.
Grants do not have formalized internal tracking and reporting, such
as project plans and timelines in place.
According to the IIA Supplemental Guidance Practice Guide for Auditing
Grants in the Public Sector, internal controls should be implemented to
effectively monitor substantive progress during the life of the grant. In
addition, effective internal controls should be in place around
accountability reporting to account for use of resources in accordance
with terms and conditions of the grant agreement and complete,
accurate, and timely reporting.
The OCA tested a sample of 15 grants to see if internal tracking and
reporting was in place and if progress and/or performance reports were
submitted timely and accurately within the deadline outlined in the grant
agreement.
The OCA noted the following observations pertaining to grant tracking
and monitoring of grant requirements:
•For 8 out of 15 samples tested, there did not appear to be any
formalized internal tracking and reporting, such as project plans
and timelines in place.
•For 4 out of 15 samples tested, progress and/or performance
reports were not provided within the required timeframe stated in
the Grant Agreement. There were no penalties or consequences
for reports submitted after the deadline for these grants.
Not all departments have adopted an internal tracking and reporting
process, resulting in limited visibility in the progress of meeting project
goals and timelines. Since program managers track grants differently and
projects/programs are monitored individually, there is no consistent,
formal tracking system in place.
Additionally, many City grants require the submission of financial and/or
performance reporting within a required deadline. The OCA noted that
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AUDIT RESULTS
some of the required reports were not submitted within the required
deadline, however, there were no penalties or consequences for reports
submitted after the deadline.
The OCA also validated that for all completed grants tested, the grant
funds were fully expended timely as all grant funds were received.
Grant milestones are not formally and consistently communicated
by departments.
Departments do not formally and consistently communicate with ASD
when grant milestones are completed such as when a grant is awarded
or closed out. There are no formal close-out procedures performed to
internally notify the City that a grant is officially closed out or to evaluate
its effectiveness during the closing process.
There is a lack of reporting and visibility of the pursuit of grants as
the City has not formally tracked which grants have been applied
for vs. awarded.
There is not a formal, complete list of grants applied for vs. awarded. The
OCA obtained a Grant Tracker document from ASD which included an
informal list of grants, awarded amount, and the award status, however, it
was indicated that this was not a precise or formal list. Staff noted that
the primary purpose of the list is to provide information to the external
auditors for the purposes of the Single Audit and is not the full list of all
grants, regardless of granting agency.
The City reports expenditure data in the annual SEFA (see Table 2-
Expenditures of Federal Grants FY 2022 - 2024 located in the
Background section of the report). However, they do not appear to track
or report the annual grant funding awarded to the City.
As a result, the City does not have visibility of its performance of pursuing
and winning grants. This leads to difficulty in reporting and monitoring
how the City is performing.
Recommendation We recommend that the City consider establishing a complete, central
repository of all City grants including such information as how many
active grants there are, if they are federal or local, and dollar amount.
Additionally, the City should consider whether they can set up a separate
account, cost center, or chart string for each grant within the financial
system (SAP). This will allow the City to easily pull a complete listing of
grants.
For appropriate grants, milestones should be tracked, monitored and
noticed to the appropriate departments, such as when a grant has been
successfully awarded and/or closed out to enhance recordkeeping of
active grants.
Lastly, the City should consider utilizing the Grant Analyst position to
enhance tracking and reporting of active grants. Formalized tracking will
help the City gauge trends and review who is pursuing grants and what
was applied for versus rewarded.
15
AUDIT RESULTS
Management
Response
Responsible Department(s): ASD
Concurrence: Agree
Target Date: March 31, 2025
Action Plan:
Staff has completed a comprehensive list and repository of all City grants
that will formalize grant tracking and be used by ASD and the grant
consultant to track and report out on grants throughout the grant life
cycle.
The City’s SEFA listing is a complete list of grants that were
communicated to ASD or of grants that received revenue during the
reporting period. The SEFA list contains known information; unique
identifiers are not assigned to all grants by the granting agency.
Staff will assess whether changes to SAP accounts, cost centers, and/or
chart strings for each grant or a grant module/software need to be made
to more effectively support grant management and tracking.
Finding 3:
The City does not
consistently assess
and track efforts in
pursuit and
management of grant
opportunities to
measure its return on
investment
Currently, the City does not assess whether or not to pursue potential
grant opportunities based on the effort, time and complexity that may be
required in the application and administration of the grant.. In addition to
internal grant pursuit efforts, the City has a contract with an external
consultant, Townsend Public Affairs, Inc. (Townsend) to provide grant
pursuit and management activities but does not appear to receive all the
tracking and monitoring deliverables noted in the contract that would help
the City to assess the value obtained from these services.
The City does not assess efforts expended in the pursuit,
application for, and administration of potential grant opportunities.
Currently, the City does not have a process for assessing the time and
effort a grant opportunity may require and criteria for determining when to
pursue vs. abandon opportunities due to lack of return on investment.
Also, the City does not appear to capture data related to these activities.
Tracking such information could help the City to determine when it is
worthwhile to pursue a grant opportunity versus when the effort and
investment may not be justified.
While Townsend appears to have provided some valuable services
to the City, they have not provided some of the deliverables
specified in the contract. This may make it difficult for the City to
assess their performance.
Townsend supports the City in identifying grant funding opportunities,
completing applications, and communicating with funding agencies.
Although Townsend holds a monthly meeting to report progress to the
City and provides a monthly memo detailing current and upcoming
16
AUDIT RESULTS
opportunities, some deliverables have not been provided that would aid
the City in monitoring grants and the contractor’s performance.
According to the Townsend contract with the City, there are several grant
application, management and tracking deliverables they are required to
provide to the City. These deliverables include a:
•Strategic Funding Plan
•Grant Matrix of Funding Programs
•Overview of application requirement for grants with project
background and details
•Monthly status reports of grants in progress, submitted and
awarded
•Monthly report detailing compliance activities and current and
upcoming state and/or federal legislative advocacy work/support.
It does not appear that these documents are currently being provided.
The City’s recently hired Grant Analyst communicated that the City will
be working with Townsend to clarify deliverables, how tasks are being
accomplished and what may need to be done moving forward. In
addition, the City's new Grant Analyst said they will be working with
Townsend on a strategic funding plan, a grant calendar and eventually a
grant writing manual and working to develop a grant dashboard to show
the status of grants in Monday.com, an online project management and
reporting system.
As of the date of this report, Townsend reports helping the City pursue a
total of approximately $14 million in grant opportunities with one grant
awarded in the amount of $5,176,812 and approximately $8 million in
grant opportunities still pending a funding decision.
Recommendation We recommend that the City consider the merits of establishing a system
for assessing grant pursuit, application, and administration efforts and
determining when to pursue or abandon such opportunities. The City
should determine if tracking staff time spent pursuing and managing
grants would be beneficial. Establishing a process for assessing efforts
would aid in the overall evaluation of grant program performance and its
return on investment.
In addition, we recommend that City continue to explore and implement
strategies to make the most effective use and reporting of the external
contract for grant application, tracking and monitoring services.
Management
Response
Responsible Department(s): ASD
Concurrence: Agree
Target Date: June 30, 2025
Action Plan:
17
AUDIT RESULTS
Staff agrees that a formal system to assess grant pursuit, application,
and administration efforts to determine when to pursue or abandon grant
opportunities would be beneficial to support grant strategic planning.
These conversations are currently informal and while the discussion
between the grant consultant and City staff is sufficient to guide decision
making of whether to pursue a grant. City staff and the grant consultant
meet monthly to assess whether available grant opportunities are worth
pursuing, from a priority aspect and staff time spent to manage the grant.
A more formal workplan with the grant consultant is under development
that includes the deliverables listed in the contract, included in these
findings.
Staff will assess whether establishing a system to track staff time for
grant management activities, including pursuing or abandoning
opportunities, is a value adding activity and will engage with its grant
consultant to strategically focus time spent. In 2024, five grants were
awarded, totaling $44.5 million.
18
Appendices
19
Appendix A: Grant Testing Selections
The OCA determined that there was a population of 82 grants from FY 2022 – FY 2024 based on the SEFA
listings and surveying 3 City departments with the highest number of grants. A sample of 15 grants was selected
for testing. The population was stratified based on City department. The auditor selected a sample of grants
from the following 10 departments: Administrative Services (ASD), the City Manager's Office (CMO), Public
Works (PWD), Office of Transportation (OOT), Planning & Development Services (PDS), Community Services
(CSD), Utilities (UTL), Library (LIB), Police (PD), and Emergency Services (OES).
Sample
# Year Grant Type Total Grant
Amount ($)
Program/Project
Name:
Name of
Grantor
Name of
Pass-
through
Entity, if
any
Auditor
determined
Department
1 FY
2023 Federal
$135,185.01
Severe Winter
Storms, Flooding,
Landslides, and
Mudslides
FEMA-4683-DR-
CA
U.S.
Department
of Homeland
Security’s
Federal
Emergency
Managemen
t Agency
California
Governor's
Office of
Emergency
Services
CalOES
ASD
2 FY
2022 Federal
$150,194.00
Institute of
Museum &
Library
Serv/Museums
for
America/museum
s Empowered-
Working
Together
IMLS
Palo Alto
Art Center
Foundation
CSD
3 FY
2024
State/Local/
Private $182,448.00
Historical
Heritage Grant
Program
(windows)
County of
Santa Clara ASD
4 FY
2023 Federal $6,000.00
California State
Library - Library
Services &
Technology Act
(LSTA)
Inspiration Grant
National
Endowment
for the
Humanities
(NEH)
California
State
Library
LIB
5 FY
2022 Federal
$3,657,685.00
Staffing for
Adequate Fire
and Emergency
Response
(SAFER)
Department
of Homeland
Security
FEMA
OES
6 FY
2022 Federal
$3,863,677.27
Section 130
Grade Crossing
Improvement
Program
Caltrans OOT
7 FY
2023 State
$92,640.00
Transportation
Development Act
Metropolitan
Transportati
on
Commission
(MTC)
OOT
20
8 FY
2024
State/Local/
Private
$5,176,812.00
BSCC Organized
Retail Theft
(ORT) Grant
Board of
State and
Community
Corrections
- California
PD
9 FY
2023 Federal
$800,000.00
PDA Planning
and Technical
Assistance Grant
U.S
Department
of Housing
and Urban
Developmen
t
MTC
(Metropolit
an
Transportat
ion
Commissio
n)
PDS
10 FY
2023 State
$310,000.00
SB2 (Housing
Element)
California
Department
of Housing
and
Community
Developmen
t
PDS
11 FY
2022 Federal
$237,396.18 CWWAPP ARPA
State
Water
Resource
Control
Board
UTL
12 FY
2023 Federal
$1,216,351.00
US EPA SF Bay
Area Water
Quality
Improvement
Fund
U.S.
Environment
al Protection
Agency
PWD
13 FY
2024 Federal
$156,841.00
Airport
Improvement
Program
U.S
Department
of
Transportati
on
PWD
14 FY
2024
State/Local/
Private
$175,000.00 EV Charges
Bay Area Air
Quality
Managemen
t District
PWD
15 FY
2023 Federal
$2,000,000.00
Consolidated
Appropriation
Act, 2022
US
Department
of Health
and Human
Services/Su
bstance
Abuse and
Mental
Health
Services
(SAMHSA)
CMO
21
Appendix B: Risk and Control Matrix for Grants Administration and
Management – Grantee7
7 https://www.theiia.org/
22
1
January 30, 2025
City of Palo Alto
Office of the City Auditor
Utility Billing Audit
Contents
Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, operate under an alternative practice structure and are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are
not licensed CPA firms.
EXECUTIVE SUMMARY .................................................................................................. 1
INTRODUCTION ............................................................................................................... 5
DETAILED ANALYSIS ..................................................................................................... 9
AUDIT RESULTS............................................................................................................ 12
APPENDICES ................................................................................................................. 21
1
Executive Summary
Purpose of the Audit
Baker Tilly Advisory Group, LP (Baker Tilly), in its capacity serving as the Office of the City Auditor (OCA) for the City of Palo Alto (the City), conducted a Utility Billing Audit based on approved Task
Order 4.26 as part of the City’s FY24 Audit Plan. The objectives of this audit were to:
1. Determine whether the internal controls over the utility billing process are adequate and working effectively to ensure billing is accurate and in compliance with the City's policies and procedures.
2. Determine whether billing adjustments are properly supported and approved.
Report Highlights
Finding 1: (Page 12) The OCA found utility bills and adjustments are accurately calculated in compliance with City policies; however, certain billing adjustments and account write-offs were not properly documented or approved per City policy.
Overall, the OCA concluded that there is a robust utility billing process in place and found that utility bills are accurate and in agreement with rates annually established by the City. The OCA noted the following positive observations:
• For all utility billing invoices tested, the OCA concluded that billing was accurate and in compliance with City policies as we found no test exceptions.
• Utility billing is appropriately reviewed for exceptions.
• The implementation of AMI meters will provide an opportunity to reduce both the frequency and magnitude of adjustments as it will enable the City of Palo Alto Utilities (CPAU) Department to have more timely access to usage data. While billing adjustments are properly billed, the OCA identified some instances in which utility billing adjustments were not properly documented or approved during the period tested.
The OCA selected a sample of adjustments from FY 2023 – FY 2024 for testing. The OCA tested all categories of adjustments, which include consumption, miscellaneous
debit/credit, water leak, and GreenWaste adjustments. Out of 60 adjustments tested, there were 10 exceptions noted. These exceptions were
primarily due to documentation and approval errors. The OCA observed the following:
• For 6 adjustments tested, there was no IC WEB (Interaction Center Webclient)
interaction record as the processor did not note the adjustment in SAP per the Processing Adjustments procedural document.
2
EXECUTIVE SUMMARY
• For 1 miscellaneous adjustment tested, a Customer Service Specialist (CSS) approved transactions above their authority level.
• For 1 miscellaneous adjustment tested, there was no Adjustment Form
submitted to verify proper approval.
• For 1 miscellaneous adjustment tested, the Invoice Cancellation Form was incorrectly filled out by the CSS to include the incorrect invoice document number.
• For 1 consumption adjustment tested, an adjustment was incorrectly entered in the Adjustment Log due to a typographical error; however, the correct amount was entered into SAP. Therefore, this did not result in a billing error to the
customer.
When proper approvals for adjustments are not obtained and documented, there is potential for inappropriate adjustments, financial losses, or fraud. As approval is currently obtained via DocuSign or manually entered in the Adjustment Log, there is
an increased possibility for improper approval due to human error.
Additionally, the OCA identified some instances when account write-offs of stale-dated checks were not properly approved during the period tested.
The OCA selected a sample of 25 account write-offs of uncollectable utility accounts during FY 2023 – FY 2024 for testing. During the period tested, collections were put on hold from March 4th, 2020 – October 2023 due to COVID-19. Therefore, the OCA
did not test the collections process.
Out of 25 account write-offs tested, there were 4 exceptions noted.
The OCA observed that for all 4 stale-dated check write-offs sampled, the support was
not attached to the Quarterly Utilities Invoice Cancellation Memorandum and Form (Quarterly Memo) for proper approval per the City Write-off Policy for Utilities Bad Debt. By omitting support for review and approval, this could lead to inaccurate
financial reporting as not all write-offs are properly reviewed.
Key Recommendations
We recommend that the City review the adjustments process to determine if there are ways to automate approvals in the billing system rather than relying on manual processes which can increase the possibility for human error. Otherwise, the City should review the current Processing Adjustments procedural document to ensure it is comprehensive and includes all necessary steps for accurately recording and
reviewing adjustments. The City should determine if an IC WEB interaction record should be submitted for all miscellaneous adjustments and ensure this process is implemented by the CPAU Department.
Additionally, if automation is not possible, the City could consider enhancing the procedural document by incorporating a checklist for both the processor and the approver of the adjustment. The approver checklist should include steps to reconcile
adjustments entered in SAP with supporting documentation. By defining these steps in a checklist, the reviewer is more likely to identify any data entry errors before approving an adjustment. The CPAU Department should provide regular training
3
EXECUTIVE SUMMARY
sessions for staff on any updated procedures and the importance of accurate data entry and review.
Lastly, we recommend that the City maintain the practice of incorporating stale-dated check support in the Quarterly Memo and integrate this procedure into training materials or official policies. This will help ensure employees consistently follow this
important step and prevent any potential oversights.
Finding 2:
(Page 16) Two internal control gaps in the utility billing process should be addressed to prevent potential errors and inefficiencies.
The OCA identified some internal control gaps in the utility billing process, specifically related to segregation of duties and timely resolution of billing adjustments.
• First, the utility billing process does not currently instruct staff on the proper
segregation of duties to ensure that the same person processing a consumption adjustment is not the same person approving the adjustment. We noted that for 3 consumption adjustments tested, the same individual
processed and approved the adjustments on the Adjustment Log. Segregating duties helps an organization reduce the risk of errors and fraud by distributing responsibilities and accountability among multiple people and/or departments.
• Second, outstanding investigations are not regularly reviewed to ensure prompt resolution of billing adjustments. Despite the CSS’s responsibility to follow up on outstanding Service Notifications (SNs), there is no regular, formal review process for these outstanding investigations. While such instances appear to be rare, we noted an example where this lack of a structured review led to a prolonged open investigation for more than 2 months (77 days) after the initial customer complaint and unresolved customer bill, causing delays in resolution. Delays in resolving billing issues can lead to inaccurate financial records and operational inefficiencies as well as customer frustration and dissatisfaction.
Key Recommendations
We recommend that the CPAU update the utility billing process to include a control to ensure proper segregation of duties between processing and approving adjustments. Without proper segregation of duties, there is a risk of potential error or fraud, as an individual can self-authorize an adjustment without adequate review.
Additionally, we recommend that the City consider implementing a regular, periodic review process for outstanding billing adjustments to prevent prolonged unresolved billing issues. The City should establish specific timeframes for reviewing outstanding adjustments and maintain thorough documentation of these reviews. This approach will enable the CPAU Department to better monitor the timeliness and effectiveness of resolving investigations and billing adjustments.
4
EXECUTIVE SUMMARY
The City should provide ongoing training and support for CSSs and Field Service Technicians to ensure they are equipped to handle billing adjustments efficiently and
effectively.
5
Introduction
1 utilities-at-a-glance-fy-2023_final.pdf
Objective The objectives of this audit were to:
1. Determine whether the internal controls over the utility billing process are adequate and working effectively to ensure billing is accurate and in compliance with the City's policies and procedures.
2. Determine whether billing adjustments are properly supported and
approved.
Background The CPAU Department provides the City with five municipal utility services:
electricity, natural gas, water, wastewater, and fiber optics. The City’s Public Works Department also provides refuse collection and processing for recycling, compost and garbage, wastewater treatment, and stormwater management
services. Palo Alto is the only city in California that owns and operates a full suite of municipal utility services, including electric, fiber optics, natural gas, water and wastewater.
These services benefit thousands of customers, including residential, commercial, and City facilities. In FY 2023, there were 30,002 electric; 20,533 water; and 23,837 natural gas customer accounts, the majority of which were residential households1. See table below for breakout by customer type (residential, commercial, or City).
Electric Water Natural Gas
City 142 345 36
Commercial 3,640 3,572 2,202
Residential 26,220 16,616 21,599
26,220
16,616 21,599
3,640
3,572
2,202
142
345 36
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Number of Customer of Accounts in FY 2023 By Utility & Customer Type
Residential Commercial City
6
INTRODUCTION
2 https://www.cityofpaloalto.org/Departments/Utilities/Customer-Service/Utilities-at-a-Glance 3 https://www.cityofpaloalto.org/files/assets/public/v/1/administrative-services/financial-reporting/annual-comprehensive-financial-reports-acfr/current-2011-cafrs/city-of-palo-alto-acfr-single-audit-fy2024-final-unsercured.pdf
See below FY 2023 financial highlights (in thousands) per utility2:
Electricity led with the highest sales revenue of $171,605 (in thousands) in FY 2023. Per the FY 2024 Annual Comprehensive Financial Report, electric operating revenue totaled $131,273, $164,556, and 178,549 in FY 2022, 2023,
and 2024 (amounts in thousands).
The average monthly residential bill totaled $451.84 in FY 2023. See chart below for a breakout by utility:
Per the FY 2024 Annual Comprehensive Financial Report3, due to the COVID-19
pandemic, the City Council aimed to provide economic relief for residential and commercial utility customers by directing staff to maintain lower rate increases over several years without compromising the safety and integrity of the utility
systems. As the City and the economy continues to transition into a steadier
$171,605
$72,474
$41,802
$20,694
$2,629
$29,542
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
Electric Natural Gas Water WastewaterFiber Optics Refuse
FY 2023 Financial Highlights (in thousands)
Sales Revenue Interest, Fees & Other Revenue
Commodity Purchase Costs Operating Costs
$103.23
$125.15 $107.99
$48.64
$50.07
$16.76
FY 2023 Average Monthly Residential Bill by Utility
Electric Gas Water Sewer Refuse Stormwater
7
INTRODUCTION
4 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 with Baker Tilly U.S, LLP for internal audit services for October 2020 through June 2022 with an extension through June 2025. City Council appointed Kate Murdock, Audit Manager in Baker Tilly’s Risk Advisory practice, as City Auditor in May 2024. As a result of transitions in the Audit Office and peer review delays due to the COVID pandemic, an external peer review is targeted for 2025. It should be noted that Baker Tilly’s most recent firmwide peer review was completed in October 2021 with a rating of “Pass”. The scope of that peer review includes projects completed under government auditing standards. A report on the next firmwide peer review should be available in 2025.
state, rates were approved to increase in FY 2024 for all utility services except electric, which decreased, and refuse, which remained flat, resulting in a $11.11,
or 3.01%, increase for the average residential bill.
As of the writing of this report, CPAU management staff reported the City has installed approximately 80% of advanced or smart electric, gas, and water
meters as part of the Advanced Metering Infrastructure (AMI) project. Staff reported that AMI implementation will likely be completed by Spring 2025. The AMI meters will empower customers to utilize energy and water more efficiently,
better enable customer adoption of distributed energy resources (DER) such as solar photovoltaics, energy storage, and electric vehicles, and enable the timely detection of water leaks. AMI will also enable Utilities to optimize operations and
improve reliability by reducing restoration time for outages.
Scope The OCA obtained utility billing records from FY 2023 to FY 2024 and assessed whether internal controls over the utility billing process and billing adjustments are working effectively and in compliance with the City's policies.
Methodology To achieve the audit objectives, the OCA performed the following procedures:
• Interviewed the appropriate individuals to gain an understanding of the
organizational structure, processes, and controls related to utility billing.
• Analyzed City policies and procedures to identify the criteria to be used
for evaluation of control design and effectiveness.
• Selected a sample of utility billing invoices, utility billing adjustments,
billing and usage exceptions, and write-offs of uncollectable accounts for testing to compare the process and controls against City policies.
• Developed Meter Reading and Utility Billing Adjustments process maps, identifying internal controls and control gaps.
• Completed audit report of findings, conclusions, and recommendations based on the supporting evidence gathered.
Compliance Statement
This audit activity was conducted from June 2024 to December 2024 in accordance with generally accepted government auditing standards, except for the requirement of an external peer review4. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings, observations, and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable
basis for our findings, observations, and conclusions based on our audit objectives.
8
INTRODUCTION
Organizational
Strengths
During this audit activity, we noted the expertise and responsiveness
demonstrated by the CPAU Department, notably the Director of Customer Service, Credit & Collections Manager, and the Customer Service Manager. We greatly appreciate staff participating in interviews and providing a substantial
amount of documentation for testing.
The OCA greatly appreciates the support of the departments involved in conducting this audit activity.
Thank you!
9
Detailed Analysis
Utility Billing
Process and
Controls
The utility billing function must accurately measure a customer’s usage and bill
customers for their electricity, water, and gas usage based on current utility rates.
The Utility Billing Memo provides a summary of the utility billing process in the City
of Palo Alto. It outlines the procedures performed for meter reading, billing and
invoicing, and processing adjustments.
Meter Reading
Meter readings for natural gas, electric, and water consumption are required within
a 27 to 33-day period. The SAP CCS system, a customer information system,
generates a daily meter read route file, which is given to 7 to 9 Meter-Readers.
They visit customer addresses to record readings using handheld or drive-by
devices. These readings are batch uploaded to the CCS system nightly.
For residents with Advanced Metering Infrastructure (AMI) meters, data is
transmitted via radio signals to pole-mounted antennas and substations, then
stored in the Head End System (HES). The data is verified, stored in the Meter
Data Management System (MDMS), and uploaded to the billing system for
processing.
If meter readings fall outside pre-programmed tolerance bands, the system
generates an exception report. CSSs perform an “Implausibles” review of these
exceptions using account history to determine if the readings are reasonable. If
accuracy is in question, a “check-read” is requested. Once validated or corrected,
the account proceeds to the next billing step. If exceptions remain, the account
cannot proceed to invoicing.
The City also accepts monthly self-readings from customers, which are subjected to
the same tests as those by Meter Readers.
Billing and Invoicing
Invoices are pre-numbered and created in the CCS system, which Customer Service and Credit Collections use to track the outstanding balance owed by customers, usage statistics, past due amounts, etc.
Billing charges that appear out-of-range must pass a “Billing Outsorts” review to ensure they are reasonable. If charges fail standard financial controls, an exception report is generated for further review by Customer Service staff. Accounts failing
validation are held from invoice processing until manually released.
Monthly customer invoices are created in the CCS system and update the Accounts
Receivable (A/R) account balance in the SAP FI-CA system nightly. This system tracks customer payments, late fees, and account adjustments.
Adjustments
10
DETAILED ANALYSIS
Adjustments are initiated from various sources, including customer disputes or exceptions flagged during the “Implausibles” or “Billing Outsorts” reviews.
Account adjustments and credits are prepared by Utilities Customer Service staff. Before processing, these are reviewed and approved by varying levels of Utilities management based on organizational level and financial limits. If the adjustments
exceed internal signing authority limits, additional reviews and approvals from external departments are required.
Financial Authorization Levels and Signing Authority:
• Customer Service Specialist – Authorized to approve billing adjustments up to $500 per transaction per account.
• Customer Service Specialist Lead – Authorized to approve billing adjustments of up to $2000 per transaction per account.
• Manager, Utilities Credit and Collection - Authorized to approve billing and
financial transactions up to $19,999 per transaction.
• Manager, Utilities Customer Service - Authorized to approve billing and financial transactions up to $19,999 per transaction.
• Assistant Director, Utilities Customer Support Services Division- Authorized to approve billing and financial transactions up to $65,000 per transaction.
• General Manager, Utilities Department –Authorized to approve billing and
financial transactions greater than $65,000. Twice per month the SAP ZCAR002 report of adjustments/credits is generated by
the billing system. Utilities Credit and Collections staff review the report to make sure that the scheduled transactions and adjustments have been processed correctly in the billing system.
See Appendices for flowcharts showing the abbreviated current processes and controls in place.
Write-off Policy for Utilities Bad Debt
A quarterly memorandum requesting approval for “Utility Invoice Cancellation” is submitted by the Utilities Credit Collection Specialist, reviewed by the Utilities Back Office, and approved by the Manager of Utilities Customer Service and the Utilities Assistant Director of Customer Support Service.
Utilities Debt Collection Guidelines.
Accounts are defined by their aging as follows:
11
DETAILED ANALYSIS
• 1 to 30 days Current – No action
• 31 to 90 days Past Due – Automated system letter generation
• 91 to 180 days Delinquent – Internal Collections while customer account is in an Active Status
• 181 days to 3 years Collection Agency - External Collections while customer account is in an Inactive Status and Accounting calculates Allowance for
Doubtful Customers and Bad Debt
• 4+ years and beyond Write-off - Cancellation of Uncollectible Utilities
Accounts Receivable and Write-off
The exceptions below are all considered automatic cancellation of uncollectible
utilities accounts receivable and write-off:
• Amounts <$25 and 91+ days
• Discharged/Uncollectible Bankruptcies and 1+ days
• Verified deceased and 1+ days
• Deemed as uncollectible by external collection agency
The thresholds below require signatures of approval before write-off occurs:
• $.01 or more Signed by Assistant Director of Customer Support Services
• $10,000 or more Signed by Director of Utilities Department and Director of Administrative Services Department
• $25,000 or more Signed by City Manager or Assistant City Manager
12
AUDIT RESULTS
Audit Results
Finding 1:
The OCA found utility bills and adjustments are accurately calculated in compliance with City policies; however, certain billing adjustments and account write-offs were not properly documented or approved per City policy.
Overall, the OCA concluded that there is a robust utility billing process in
place and found that, based on our testing, utility bills are accurately calculated. During our assessment of the City’s policies and procedures as well as testing of internal controls over the utility billing process, the OCA
concluded that the process is working as intended.
Specifically, the OCA performed testing over utility billing invoices, utility billing adjustments, billing and usage exceptions, and write-offs of uncollectable accounts to compare the process and controls against City policies.
For all utility billing invoices tested, the OCA concluded that billing was accurate and in compliance with City policies as we found no test exceptions.
On a monthly basis, utility billing invoices are generated from SAP based on
monthly usage and the City Council approved rates. These are then billed to customers.
To test the completeness and accuracy of utility billing invoices, the OCA
selected an invoice from each account class (Residential Single Family, Residential Multi Family, Commercial, Industrial, Public Facilities Non-City, City, and Residential Multi Family Master Meter) during FY 2023 – FY 2024.
This resulted in a sample size of 7 invoices. In our testing of utility billing invoices, we found no exceptions.
For all invoices tested, the utility rates billed on the customer invoice aligned with City Council approved rates and the invoice amount and usage was accurately reflected in the system-generated reports from SAP.
Utility billing is appropriately reviewed for exceptions.
Prior to customer billing of invoices, CPAU generates a daily exception report and reviews it for implausible and billing outsorts exceptions. The
exception reports flag when meter readings or billing charges fall outside pre-programmed tolerance bands and need to be reviewed to ensure they are reasonable. If exceptions are deemed reasonable during a daily review,
they are released for billing. However, if the accuracy of an exception is in question, it is investigated further and may result in an adjustment.
The OCA tested a sample of implausibles and billing outsorts exceptions
from randomly selected dates during FY 2023 – FY 2024. The OCA randomly selected 4 dates from each year that fell between FY 2023 - FY 2024. The OCA tested 1 implausible and 1 billing outsort for each date,
excluding one date from testing that did not have Outsorts or Implausibles
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AUDIT RESULTS
5 https://www.cityofpaloalto.org/files/assets/public/v/1/administrative-services/financial-reporting/annual-comprehensive-financial-reports-acfr/current-2011-cafrs/city-of-palo-alto-acfr-single-audit-fy2024-final-unsercured.pdf
Exception Report. This resulted in testing 22 samples. In our testing of
implausibles and billing outsorts exceptions, we found no exceptions.
For all implausibles and billing outsorts exceptions tested, the exception reports included appropriate amounts based on established parameters and
were properly reviewed by the CSS to evaluate whether the readings are determined to be reasonable before released for billing or resulting in an adjustment.
With the implementation of AMI Meters, the City is confident that there will be a reduction in the number and magnitude of adjustments.
With the implementation of Advanced Metering Infrastructure (AMI) Meters in
FY 2024, the CPAU Department will be able to flag high usage of meters on a daily rather than monthly basis. This will enable more timely detection of possible water leaks or meter read errors. Additionally, customers will be
able to track their own meter usage as the AMI system can share usage information with customers.
According to the FY 2024 Annual Comprehensive Financial Report5, the City has installed approximately 38,000 or 40% electric, gas, and water AMI meters. As of the writing of this report, staff reported that CPAU has installed approximately 80% of water meters. Additionally, CPAU staff indicated that AMI implementation will likely be completed by Spring 2025.
The OCA identified some instances in which utility billing adjustments
were not properly documented, supported, or approved during the period tested.
Utility billing adjustments are initiated from a few different sources: 1)
Customer calls to question or dispute billings; 2) Incorrect read identified while processing “Implausible” exceptions; 3) Miscellaneous billing adjustments submitted to CSS for addition to the account, 4) Incorrect billing
charges are identified while processing “Billing Outsorts” exceptions, and 5) annual reconciliation of the refuse service data.
Any of the above actions may result in a consumption or miscellaneous adjustment. Consumption adjustments primarily result from incorrect reads identified while processing implausibles exceptions. Miscellaneous
adjustments result from credit/debiting a customer account for billing discrepancies, a water leak credit, or from periodic emails received from GreenWaste, a waste collection service provider for the City of Palo Alto, to process refuse adjustments. See table below:
Adjustment Type Table
Adjustment Type Adjustment Cause
Consumption Implausibles Exceptions
Miscellaneous
Billing Discrepancies /
Billing Outsorts Exceptions
Water Leak Credit
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GreenWaste Adjustment
The City has a Processing Adjustments procedural document in place which describes the steps taken to process adjustments. See Appendix B: Utility Billing Adjustment Process Map for the abbreviated current processes and
controls in place for processing adjustments.
The OCA requested a population of adjustments from FY 2023 – FY 2024 to
select a sample for testing. The OCA sampled all categories of adjustments and determined that the following sample sizes were appropriate using AICPA sample size guidance: 25 consumption adjustments and 35
miscellaneous adjustments (13 miscellaneous debit/credit adjustments, 12 water leak adjustments, and 10 GreenWaste adjustments). This totaled a sample size of 60 adjustments tested for FY 2023 – FY 2024.
Out of 60 adjustments tested, there were 10 exceptions noted. These exceptions were primarily due to documentation and approval errors. The
OCA observed the following:
• For 6 adjustments tested, there was no IC WEB interaction record.
The Processing Adjustments procedural document states that the CSS goes to IC WEB to note the account for Miscellaneous Adjustments. Failure to note the adjustment in IC WEB results in
gaps in documentation used internally by the CPAU Department.
• For 1 miscellaneous adjustment tested, a CSS approved transactions above their authority level. When the CSS entered signatures in DocuSign, they accidentally placed the signature and date block in the wrong place on the Miscellaneous Adjustment Form. The
absence of proper approval from the appropriate authorization level and signing authority can result in inaccurate or unauthorized adjustments.
• For 1 miscellaneous adjustment tested, there was no Miscellaneous Adjustment or Invoice Cancellation Form submitted. The Processing
Adjustments procedural document states that the CSR (Utilities Customer Service Center Representative) will fill out an Invoice Cancellation Form if the entire invoice needs to be cancelled. Failing
to submit the Invoice Cancellation Form results in gaps in documentation and does not allow verification of proper review and approval of the invoice cancellation.
• For 1 miscellaneous adjustment tested, the Invoice Cancellation Form was incorrectly filled out by the CSS to include the incorrect
Invoice Document Number. This resulted in a data entry error on the Invoice Cancellation Form.
• For 1 consumption adjustment tested, an adjustment was incorrectly entered in the Adjustment Log, due to a typographical error, however, the correct amount was updated in SAP. Therefore, this did not result
in a billing error to the customer.
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When proper approvals for adjustments are not obtained and documented,
there is potential for inappropriate adjustments, financial losses, or fraud. As approval is currently obtained via DocuSign or manually entered in the Adjustment Log, there is an increased possibility for improper approval due
to human error.
Some account write-offs of stale-dated checks were not properly approved during the period tested.
The City collects customer payments and adjusts A/R for cash received. Accounts that are aged past 30 days are considered “past due” and may be escalated to internal collections, an external collections agency, and
eventually written off, as demonstrated in the table below:
Customer Account Aging Table
Aging Period Categorization Action Taken
1 to 30 days Current No action
31 to 90 days Past Due Automated system letter generation
91 to 180 days Delinquent Internal Collections
181 days to 3 years Collection Agency External Collections
4+ years Write-off Cancellation of A/R and Write-off
Cancellation of uncollectable utilities A/R and write-off occurs during the following exceptions:
• Aged 4+ years
• Amounts <$25 and 91+ days
• Discharged/Uncollectible Bankruptcies and 1+ days
• Verified deceased and 1+ days
• Deemed as uncollectible by external collection agency
For invoice cancellation and write-off of customer accounts, a Quarterly Utilities Invoice Cancellation Memorandum and Form (Quarterly Memo) is submitted for review and approval of cancellation of uncollectible utilities accounts receivable and write-off.
The OCA selected a sample of 25 account write-offs of uncollectable utility accounts during FY 2023 – FY 2024 for testing. During the period tested, collections were put on hold on March 4th, 2020 – October 2023 due to COVID-19. Therefore, the OCA did not test the collections process.
Out of 25 account write-offs tested, there were 4 exceptions noted.
The OCA observed that for all 4 stale-dated check write-offs sampled, the support, showing proper approval for the write-off, was not attached to the
Quarterly Memo per the City Write-off Policy for Utilities Bad Debt. By omitting support for review and approval, this could lead to inaccurate financial reporting if all write-offs are not properly reviewed.
Per discussion with the CPAU Department, these were unintentionally omitted from the reports by an employee in training. The amounts of each stale-dated check did not exceed $25. Per review of the FY 24-25 1st
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AUDIT RESULTS
Quarter Memo, the OCA observed that stale-dated check write-offs were
properly included in the attached support.
Recommendation We recommend that the City review the adjustments process to determine if there are ways to automate approvals in SAP rather than relying on manual
processes which can increase the possibility for human error. Otherwise, the City should review the current Processing Adjustments procedural document to ensure it is comprehensive and includes all necessary steps for accurately
recording and reviewing adjustments. The City should determine if an IC WEB interaction record should be submitted for all miscellaneous adjustments and ensure this process is implemented by the CPAU
Department.
Additionally, if automation is not possible, the City could consider enhancing the procedural document by incorporating a checklist for both the processor
and the approver of the adjustment. The approver checklist should include steps to reconcile adjustments entered in SAP with supporting documentation. By defining these steps in a checklist, the reviewer is more likely to identify any data entry errors before approving an adjustment. The CPAU Department should provide regular training sessions for staff on any updated procedures and the importance of accurate data entry and review.
Lastly, we recommend that the City maintain the practice of incorporating stale-dated check support in the Quarterly Memo and integrate this
procedure into training materials or official policies. This will help ensure employees consistently follow this important step and prevent any potential oversights.
Management Response
Responsible Department(s): CPAU
Concurrence: Agree
Target Date: Q4 CY 2025
Action Plan: Staff concur with the audit finding regarding the benefits of automation in mitigating human error. As the Office of the City Auditor (OCA)
acknowledges, automation is not always feasible or readily attainable. Currently, staff adhere to the established standard operating procedures outlined in the Processing Adjustments procedural document to ensure accurate processing.
To further address the finding, we will undertake the following actions:
• Automation Assessment: Staff will assess the effort and costs associated with automating the adjustment process within the current SAP environment. These specifications will be considered during the
development of the next system upgrade.
• Procedural Enhancement: Staff will revise the Processing Adjustments procedural document to incorporate a reference to an adjustment checklist. This will enhance clarity and ensure all necessary steps are followed.
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Furthermore, to ensure comprehensive clarity and consistency across all
related processes, the following areas within the procedural document will be reviewed and updated as needed: inclusion of the ICWEB interaction record with each adjustment; clarification of training requirements and documentation
expectations at each staff/approval level; all processes, including the quarterly write-off process, reflect appropriate backup and review procedure expectations in the checklist.
Targeted changes include:
• Adjustments (Misc. Adjustments, Invoice Cancellations, Green Waste
Adjustments, Water Leak Credits) are to be submitted in DocuSign for approval process, according to the Authority Level.
• Adding that an IC WEB interaction record is required for adjustments. (Misc. Adjustments, Invoice Cancellations, Green Waste Adjustments, Water Leak Credits)
• Review and update the Miscellaneous Adjustment and Invoice Cancellation forms including process for checking data in the form prior to
approving and processing. Process to include steps to verify information in SAP.
• Review and update Adjustment Log. Include steps to verify information in SAP before providing approval. Clarifying approval process, to include screenshots of the steps.
• The City’s Quarterly Write off training instructions will add the process to include the stale dated checks on the Quarterly Write-Off Memo
Finding 2:
Two internal control gaps in the utility billing process should be addressed to prevent potential errors and inefficiencies.
Through our testing and analysis of the process map, the OCA identified some internal control gaps in the billing process, specifically related to
segregation of duties and timely resolution of billing adjustments.
The CPAU Department does not enforce proper segregation of duties between processing and approving consumption adjustments.
The utility billing process does not currently instruct staff on the proper segregation of duties to ensure that the same person processing a consumption adjustment is not the same person approving the adjustment. In
the current utility billing process, the same individual can both record and self-approve adjustments.
For 3 consumption adjustments tested, the same individual processed and
approved the adjustments on the Adjustment Log.
The absence of segregation of duties between processing and approving consumption adjustments can result in inadequate review and increased risk for potential errors or fraud. The City can minimize these risks by utilizing more than one person to complete they types of tasks. Segregating duties helps an organization reduce the risk of errors and fraud by distributing responsibilities and accountability among multiple people and/or departments.
Outstanding investigations are not regularly reviewed to ensure prompt
resolution of billing adjustments.
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AUDIT RESULTS
Adjustments can originate from various sources, such as customer billing
disputes or when atypical billing and/or consumption amounts are during review via exception reports. If the accuracy of a customer bill is in question, the CSS opens a Service Notification (SN) in SAP to investigate the potential
issue. After the SN is created, a Field Service Technician conducts a further review of the meter. The CSS is responsible for monitoring the status of any outstanding SNs.
Despite the CSS’s responsibility to follow up on outstanding SNs, there is no regular, formal review process for these outstanding investigations. This lack
of a structured review can lead to prolonged open investigations and unresolved customer bills, causing delays in resolution. We noted an example where this lack of a structured review led to a prolonged open
investigation for more than 2 months (77 days) after the initial customer complaint and unresolved customer bill, causing delays in resolution. Delays in resolving billing issues can lead to inaccurate financial records and operational inefficiencies as well as customer frustration and dissatisfaction.
Recommendation We recommend that the City consider implementing a control to ensure proper segregation of duties between processing and approving adjustments. Without proper segregation of duties, there is a risk of potential error or fraud,
as an individual can self-authorize an adjustment without adequate review.
Additionally, we recommend that the City consider implementing a regular, periodic review process for outstanding billing adjustments to prevent
prolonged unresolved billing issues. The City should establish specific timeframes for reviewing outstanding adjustments and maintain thorough documentation of these reviews. This approach will enable the CPAU
Department to better monitor the timeliness and effectiveness of resolving investigations and billing adjustments.
The City should provide ongoing training and support for CSSs and Field
Service Technicians to ensure they are equipped to handle billing adjustments efficiently and effectively.
Management Response
Responsible Department(s): CPAU
Concurrence: Agree
Target Date: Q4 CY 2025
Action Plan: Staff concur that standardized processes and robust internal controls are essential for mitigating the risks of errors and fraud. As noted in
the prior response, staff are revising the Processing Adjustments procedural document to include a reference to a comprehensive adjustment checklist, ensuring all required steps are clearly delineated and consistently followed.
The Processing Adjustments procedural document and the new checklist will incorporate the following enhancements:
• Clear Approval Authorities: A review and update of approval authorities will be conducted, specifying both dollar thresholds and appropriate signing authority.
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AUDIT RESULTS
• Implausibles Documentation: The Implausibles documentation will be revised to include a documented process for managing outstanding investigations.
• Training Expectations: Consistent with the above, training expectations related to the revised procedures and controls will be clearly outlined within the documentation.
To further strengthen oversight and segregation of duties, staff will facilitate coordination between the Utilities Department and the Administrative Services Department providing an independent review of these procedure revisions to ensure their effectiveness and alignment with the City’s internal control practices.
Review and update Implausibles documentation to include a process for these outstanding investigations, which includes checkpoints for follow up.
• Review DocuSign documentation to include expectations for review
steps and timely approvals deadlines.
• Coordinate training with CSR, CSS for follow up procedures for
Service Notifications investigations.
• Project coordinator currently working on checklist and updated policies
and procedures for follow up on billing investigations.
• Completion target is resolutions within two billing cycles.
• Communicate with Meter Shops on timely resolution of field issues.
Additional Observations: 1. Formalizing and more consistently documenting adjustments may improve efficiency
The CSR/CSS manually inputs adjustments into the Adjustment Log, an excel sheet kept by the CPAU Department. When entering an adjustment in the log, the CSR/CSS notes the reasoning for the adjustment in the “Adjustment
Reason” and/or “Notes” column of the log.
Per the OCA’s observation of the adjustment documentation in the adjustment logs, we noted that there were blank rows, and a variety of adjustment
reasons and notes entered in the Adjustment Log. The adjustment notations did not follow a consistent naming convention or provide a clear and detailed reasoning for the adjustment.
The CPAU Department could enhance the adjustment documentation process by creating a bank of approved adjustment reasons (reason codes) and notes to ensure consistency throughout the process. Additionally, by formalizing notations of adjustments and the reasoning, the reviewer could better understand the adjustment justification and ensure that it was appropriate.
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AUDIT RESULTS
6 7 KPIS and Metrics That Your Utility Needs to Know - Silver Blaze Solutions 7 7 KPIs to Streamline Utility Billing
2. Formally
tracking key Utility Billing indicators could aid CPAU in monitoring
performance over time
CPAU management said they do not formally track utility billing Key
Performance Indicators (KPIs) but do monitor some indicators periodically. There are several utility billing KPIs that could help the utility track its billing function performance over time and improve its effectiveness and efficiency.
Based on our analysis of a few industry publications, use of such indicators can help management make more informed decisions, improve operations and increase customer satisfaction67. Some of these indicators include:
• Billing Error Rate – percentage of total bills that have errors
• Customer Satisfaction Score – a direct measure of satisfaction with services provided
• Collection Rate – percentage of billed amount received within a specific time frame
• Percentage of On-Time Payments – percentage of payments that were paid timely
• First Contact Resolution Rate – percentage of customer inquiries or
issues resolved during the first interaction
Tracking KPIs over time can help an organization see trends, note when performance either improves or worsens, and determine what areas may need assessment.
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Appendices
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Appendix A: Meter Reading Process Map
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Appendix B: Utility Billing Adjustment Process Map