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April 25, 2017
Special Meeting
Community Meeting Room
7:00 PM
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Oral Communications
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Action Items
1.Audit of Green Purchasing Practices
2.Continuous Monitoring Audit: Payments
3.Auditor's Office Quarterly Report as of March 31, 2017
Future Meetings and Agendas
Adjournment
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MEMO
CITY OF PALO ALTO OFFICE OF THE CITY AUDITOR
April 25, 2017
The Honorable City Council
Palo Alto, California
Audit of Green Purchasing Practices
In accordance with the Fiscal Year 2016 Annual Audit Work Plan, the Office of the City Auditor has
completed the Audit of Green Purchasing Practices. The audit report presents one finding with a
total of eight recommendations. The Office of the City Auditor recommends that the Policy and
Services Committee review and recommend to the City Council acceptance of the Audit of Green
Purchasing Practices.
Respectfully submitted,
Harriet Richardson
City Auditor
ATTACHMENTS:
Attachment A: Audit of Green Purchasing Practices (PDF)
Department Head: Harriet Richardson, City Auditor
Page 2
Audit of Green Purchasing Practices
April 13, 2017
Office of the City Auditor
Harriet Richardson, City Auditor
Lisa Wehara, Performance Auditor II
Attachment A
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Attachment A
Office of the City Auditor ● 250 Hamilton Avenue, 7th Floor ● Palo Alto, CA 94301 ● 650.329.2667
Copies of the full report are available on the Office of the City Auditor website at:
[insert web link]
OFFICE OF THE CITY AUDITOR
EXECUTIVE SUMMARY:
Audit of Green Purchasing Practices
April 13, 2017
PURPOSE OF THE AUDIT
The objective of the audit was to determine whether the City of Palo Alto complies with applicable
green purchasing requirements in purchases.
REPORT HIGHLIGHTS
Finding: The City does
not always comply with
applicable requirements
in its green purchasing
policies (Page 7)
The City’s green purchasing policies and goals are not fully achieved because the
City does not have consolidated, formal written procedures to implement the
Environmentally Preferred Purchasing Policy; other procedures have not been
updated; there is a lack of a clear governance structure and a lack of awareness of
policies and procedures; and the City does not have technical tools to track green
purchases.
•Only 59 percent of Staples paper product purchases and only 19 percent of paper
product purchases from other office supply vendors met or most likely met the
recycled content requirement.
•The City purchased and distributed drinking water in plastic bottles against policy.
Staff identified this issue and took corrective action during the audit.
•The City’s janitorial contractor that services most City facilities did not always use
green products or provide reports of bulk chemicals as required by the contract,
nor did the City monitor the products to ensure they were green.
•All of the $1.0 million in computers, notebooks, and monitors that the City
purchased were Electronic Product Environmental Assessment Tool certified, and
in May 2016, received the 2016 Electronic Product Environmental Assessment
Tool Sustainable Purchasing Award, which recognizes excellence in sustainable
electronics procurement.
•Public Works has not formally documented its assessment of the suitability of
battery-electric or plug-in hybrid vehicles during its review of the fleet
replacement capital improvement plan in the annual budget process.
Key Recommendations:
•The City Manager’s Office should clearly define the department(s) responsible for
implementing green purchasing policies, determine if additional staffing and
funding is needed to implement the policies, and provide the responsible
department(s) with the authority to implement green purchasing across the City.
The responsible department(s) should then:
•Consult with the Attorney’s Office to align the Municipal Code as needed with
green purchasing policies.
Attachment A
• Write and distribute consolidated procedures to implement green purchasing
policies, including the 10 different areas in the Environmentally Preferred
Purchasing Policy, and update existing policies and procedures to reflect current
requirements, including recycled paper and procurement card guidance.
• Evaluate if the new e-procurement system and proposed enterprise resource
planning system or other specialized software can help with tracking and
reporting green purchases. As part of the planned transition of the Annual
Performance Report to the City Manager’s Office, determine what green
purchasing performance measures to track and report on, such as the number
and percentage of green products purchased and their environmental benefits.
The Sustainable Procurement Playbook for Cities provides potential criteria for
what to track.
Attachment A
TABLE OF CONTENTS
Objective ................................................................................................................................................. 1
Background ............................................................................................................................................. 1
Scope ...................................................................................................................................................... 4
Methodology .......................................................................................................................................... 5
Finding:
The City does not always comply with applicable green purchasing requirements in purchases .... 7
Recommendations ........................................................................................................................... 16
Appendix 1: Environmentally Preferred Purchasing Policy ................................................................. 18
Appendix 2: City Manager’s Response ................................................................................................. 21
ABBREVIATIONS
ASD Administrative Services Department
EPEAT Electronic Product Environmental Assessment Tool
EPP Environmentally Preferred Purchasing
P-card Procurement Card
USDN Urban Sustainability Directors Network
Attachment A
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Attachment A
Audit of Green Purchasing Practices 1
INTRODUCTION
Objective The objective of the audit was to determine whether the City of Palo
Alto (City) complies with applicable green purchasing requirements in
purchases.
Background
Triple bottom line
Sustainable, or “green” purchasing, includes environmental
stewardship, along with social responsibility and economic equity.
These are often referred to as the “triple bottom line” or the “three
pillars of sustainability.”
The City’s green purchasing efforts began in the early 1990s when the
City Council approved two policies for the procurement of recycled
products and recycled paper and paper products. The City adopted a
policy expressing support for sustainability in April 2000, and the City
Council approved a revised policy in June 2007. The City’s intent was
to be a sustainable community – “one which meets its current needs
without compromising the ability of future generations to meet their
own needs.” By adopting this policy, the City accepted its
responsibility for the triple bottom line, through its operations,
programs, and services, to:
• Enhance the quality of air, water, land and other natural resources
by minimizing human impact on local, regional and global
ecosystems through greater conservancy, reduced pollution,
increased efficiency, and protection of native vegetation, fish,
wildlife habitats and other ecosystems.
• Continuously improve the quality of life for all Palo Alto
community members without adversely affecting others.
• Maintain a healthy, thriving and well-balanced economy
comprised of a blend of large and small business, which
encourages the development of independent businesses and is
resilient to the changes common to California’s economy.
All products have environmental impacts, and among the benefits of
green products are that their environmental impacts are less than
those of similar products. However, the greenest option may be
avoiding buying a product, if possible, for example, by repairing an
item to extend its life or converting to a paperless file management
system to reduce the need for paper and ink.
Attachment A
2 Audit of Green Purchasing Practices
No direct federal or state
mandates or goals for green
purchasing
There are no direct federal or state mandates or goals for green
purchasing in local governments, except in certain cases where
specific federal or state grants may require green purchasing. Cities
may have both direct and indirect requirements related to green
procurement through permits tied to state or federal legislation.
Green purchasing initiatives can also help local governments meet
other state environmental goals.
City’s Green Purchasing
Policies
Green purchasing in Palo Alto includes areas such as goods and
services, energy and gas purchases, green building materials, and the
use of pesticides. Some of Palo Alto’s green purchasing policies are
the:
• Environmental Preferred Purchasing (EPP) Policy
• Procurement of Recycled Paper and Recycled Paper Products
Policy
• Extended Producer Responsibility Policy
• Vehicle and Equipment Use, Maintenance and Replacement Policy
• Green Information Technology Purchasing Policy
Environmentally Preferred
Purchasing Policy
The City adopted the EPP Policy, also known as the Green Purchasing
Policy, in February 2008 (see Appendix 1). Its purpose was to align
the City’s purchases and purchasing policies and procedures with the
City’s many environmental and sustainability policies and programs
to:
• Protect and conserve natural resources.
• Minimize the City’s contributions to global warming, solid waste,
local and global pollution, and toxic chemical exposures to people
and the environment.
• Promote human health and well-being.
The policy required the City Manager to convene a Sustainable
Purchasing Committee, including management-level staff from key
departments, to implement the policy by creating a plan and
procedures to address 10 different areas (see Appendix 1).
Procurement of Recycled
Paper and Recycled Paper
Products Policy
The City adopted the Procurement of Recycled Paper and Recycled
Paper Products Policy in June 2003. This policy requires the City to
purchase paper products consisting of at least 50 percent secondary
and postconsumer waste, whenever the recycled alternative meets
the City’s requirements and specifications for paper products, and
within the constraints of staff time and cost factors.
Attachment A
Audit of Green Purchasing Practices 3
Extended Producer
Responsibility Policy
Green purchasing also includes product packaging. The City’s
Extended Producer Responsibility Policy acknowledges that
producers have the greatest ability to minimize impacts and,
therefore, the most responsibility. The policy creates requirements
for manufacturers and suppliers to reduce waste and pollutant
releases in the City. It also requires City vendors of designated
products to minimize and reduce packaging and take back designated
products and packaging for reuse, recycling, or responsible disposal,
when convenient and at a nominal additional cost. This policy aligns
with the Single-use Plastics Policy discussed in the “Drinking water in
plastic bottles purchased against policy” section.
Vehicle and Equipment Use,
Maintenance and
Replacement Policy
The City revised its Vehicle and Equipment Use, Maintenance and
Replacement Policy in March 2016 and includes a section on
alternative fuel vehicles which was originally adopted in April 2015.
The City’s policy is to acquire “plug-in electric vehicles upon
replacement or for new needs when they are available, and meet
needed range, load and emergency response requirements.”1
Green Information
Technology Purchasing Policy
The Green Information Technology Purchasing Policy established
specific guidelines for purchasing Electronic Product Environmental
Assessment Tool (EPEAT) certified computer equipment and
packaging to reduce plastics. Information Technology staff were
previously unaware of this policy, but stated that it needs to be
updated, and it is unclear whether the City approved the policy (see
discussion in the “Lack of awareness of environmental and green
purchasing policies” section).
Sustainable Procurement
Playbook for Cities
The Sustainable Procurement Playbook for Cities, issued in October
2016, provides practical advice, best practices, resources, and tools
to help cities with their sustainable procurement efforts. The
playbook is a project of the Urban Sustainability Directors Network
(USDN) and was written primarily by Alicia Culver, the City’s green
purchasing consultant and the executive director of the Responsible
Purchasing Network, with input from 19 cities, including Palo Alto.2
The USDN is a peer-to-peer network of local government
professionals from over 135 cities in the United States and Canada.
1 The current terminology is “battery-electric or plug-in hybrid vehicles.” Policy terminology should be updated accordingly.
2 Alicia Culver, et al. Sustainable Procurement Playbook for Cities, Urban Sustainability Directors Network, October 2016,
available at http://usdn.org/uploads/cms/documents/rpn-usdn-sustainable-purchasing-playbook-101216_final.pdf
Attachment A
4 Audit of Green Purchasing Practices
Green Purchasing Activities
and Accomplishments
The City’s green purchasing activities and accomplishments include:
• Developed environmental performance specifications for priority
goods and services including landscaping services, landscaping
and structural pest control, computer equipment, office supplies,
lighting, custodial supplies, and single-use plastics.
• Developed green purchasing workplans beginning in October
2008; the most recent one is for 2015-2017.
• Created a flowchart to guide decision-making about when to
specify green products.
• Revised City contract terms and conditions to include vendor
responsibilities for waste reduction and pollution prevention.
• Revised processes for petty cash reimbursements to restrict City
purchases of disallowed products such as single-use plastics.
• Made recommendations to City departments regarding policies,
permits, or other goals, using the green purchasing consultant
services as needed.
• Participated in developing the USDN Sustainable Procurement
Playbook for Cities.
• Received the 2010 Green California Leadership Award.
Scope Because the City does not track green purchases, the total amount of
potential green purchases is not known. We reviewed the City’s
purchases of office supplies, cleaning supplies, and computers to
assess whether purchases complied with the City’s green purchasing
policies. For each category, we included the City’s purchases made
with procurement cards (p-cards) from July 1, 2014, through
June 30, 2016. In addition:
• We evaluated the City’s compliance rate for recycled content of
paper product purchases from its main office supply vendor,
Staples, from July 1, 2014, through June 30, 2016.
• We reviewed the cleaning supplies purchased by the City’s
janitorial service contractor from January 2016 through the
beginning of July 2016.3
• We reviewed bulk computer and monitor purchases from
purchase orders in April 2014, January 2015, and May 2015.4
We did not review vehicle purchases because Public Works had not
formally documented its assessment of the suitability of battery-
electric or plug-in hybrid vehicles during its review of the fleet
3 The most recent calendar year information available at the time of our review.
4 The most recent large purchase orders for computers and monitors at the time of our review.
Attachment A
Audit of Green Purchasing Practices 5
replacement capital improvement plan in the annual budget process
(see the discussion in the “Battery-electric or plug-in hybrid vehicles”
section).
Methodology To accomplish our audit objective, we:
• Reviewed the relevant data and policies and procedures and
interviewed Public Works, Administrative Services, and Office of
Sustainability staff.
• Obtained information from the City’s green purchasing
consultant from the Responsible Purchasing Network and the City
Attorney’s Office regarding federal and state mandates and goals
that apply to green purchasing.
• Conducted a risk assessment to identify and prioritize risks
associated with green purchasing.
• Obtained and reviewed data from the City’s main office supply
vendor, Staples, to evaluate the City’s compliance with minimum
recycled content required for paper products.
• Reviewed a sample of the City’s purchases of office supplies,
cleaning supplies, and computers to assess the extent to which
purchases are made in compliance with the City’s green
purchasing policies.
Sampling methodology We selected a statistical, stratified random sample of 87 p-card
purchases using a 95 percent confidence level and a 10 percent
confidence interval. We selected the sample items in proportion to
the total number of p-card purchases in each category: office
supplies, cleaning supplies, and computers. We also selected
statistical random samples for office supplies not purchased from
Staples and for computer purchases. However, green purchasing was
not applicable to the majority of items in these samples. We chose
these sample designs to ensure that we reviewed an appropriate
number of items from each category to support our conclusions
regarding the City’s compliance with its green purchasing policies.
Although this was a statistical sample of p-card purchases within
these categories, we did not project our conclusions to the
population of purchased items because the total population of
potential green purchases is not known.
Data reliability To assess the reliability of the data needed to answer the audit
objective, we reviewed the data for completeness, consistency, and
Attachment A
6 Audit of Green Purchasing Practices
reasonableness, and obtained an understanding of the data by
discussing with knowledgeable City and Staples staff. For the data
review, we reviewed receipts for p-card data, matched receipts to
Staples data, and compared both p-card and Staples data to the City’s
SAP enterprise resource planning system. From these efforts, we
believe the information is sufficiently reliable for this report.
Compliance with government
auditing standards
We conducted this audit of Green Purchasing Practices in accordance
with our Fiscal Year 2016 Annual Audit Work Plan and generally
accepted government auditing standards. Those standards require
that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and
conclusions based on our audit objective. We believe that the
evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objective.
We would like to thank management and staff in the Public Works and Administrative
Services Departments, and the Office of Sustainability for their time, cooperation,
and assistance during the audit process.
Attachment A
Audit of Green Purchasing Practices 7
Finding The City does not always comply with applicable requirements in its
green purchasing policies
The City’s green purchasing policies and goals are not fully achieved
because the City does not have consolidated, formal written
procedures to implement the Environmentally Preferred Purchasing
Policy; other procedures have not been updated; there is a lack of a
clear governance structure and a lack of awareness of policies and
procedures; and the City does not have technical tools to track green
purchases.
• Only 59 percent of Staples paper product purchases and only
19 percent of paper product purchases from other office supply
vendors met or most likely met the recycled content requirement.5
• The City purchased and distributed drinking water in plastic bottles
against policy. Staff identified this issue and took corrective action
during the audit.
• The City’s janitorial contractor that services most City facilities did
not always use green products or provide reports of bulk chemicals
as required by the contract, nor did the City monitor the products
to ensure they were green.
• All of the $1.0 million in computers, notebooks, and monitors that
the City purchased were EPEAT certified, and in May 2016,
received the 2016 EPEAT Sustainable Purchasing Award, which
recognizes excellence in sustainable electronics procurement.
• Public Works has not formally documented its assessment of the
suitability of battery-electric or plug-in hybrid vehicles during its
review of the fleet replacement capital improvement plan in the
annual budget process.
Paper products not always at
least 50 percent recycled as
required
From July 1, 2014, through June 30, 2016, the City purchased paper
products that were less than the required 50 percent recycled
content:
• 62,100 (59 percent) of 106,000 pounds of Staples paper product
purchases met the requirement.
• 2 (4 percent) of 53 paper product purchases from other office
supply vendors met the requirement. Another 8 (15 percent)
most likely met the requirement because, although the recycled
5 Paper products include copy machine paper, envelopes, business cards, and forms.
Attachment A
8 Audit of Green Purchasing Practices
percentage was not cited on the invoice, the merchant’s website
for those purchases states that it has an eco-friendly commitment
and uses 100 percent post-consumer waste recycled white paper
and an earth-friendly line of color paper.
• 28 (53 percent) of 53 purchases of paper product purchases from
other office supply vendors had insufficient information to
determine whether the purchases met the required recycled
content.
Our November 2012 audit, Contract Oversight: Office Supplies, also
cited the City’s noncompliance with this policy by showing that the
City had spent about $230,000 on 30 percent recycled paper instead
of buying 50 percent recycled paper, from late 2005 to mid-2012.
Some departments with high production printing needs did not use
higher recycled content paper due to concerns about performance
deficiencies, such as paper jams in the equipment and poor duplex
print quality. The equipment, rather than the paper, could have been
a factor since 100 percent recycled content paper has been used
successfully for several years by many public organizations.
The Purchasing Division in the Administrative Services Department
(ASD) advises departments on policies and procedures and best
practices when there are questions, but departments are responsible
for complying with the policy and returning any goods that do not
conform to policy.
Effect of paper purchases on
the environment
The City’s paper product purchases used about 60 tons of wood,
from about 400 trees. If all 106,000 pounds of paper products
purchased had met the 50 percent recycled content requirement,
about 130 fewer trees would have been used.
Manufacturing the paper products that the City purchased produced
greenhouse gas emissions equivalent to the emissions from about 20
cars per year. If all 106,000 pounds of paper products purchased had
met the 50 percent recycled content requirement, the greenhouse
gas emissions produced would have been reduced by an amount
equivalent to the emissions from about one car per year. If the City
had purchased all 100 percent recycled content paper, the
Attachment A
Audit of Green Purchasing Practices 9
greenhouse gas emissions produced would have been reduced by an
amount equivalent to the emissions from about three cars per year.6
Drinking water in plastic
bottles purchased against
policy
The City purchased and distributed drinking water in single-use
plastic bottles although City policy states that single-use plastic water
containers shall not be purchased, distributed, or sold after
December 31, 2009. The City adopted the Single-use Plastics Policy in
2009, recognizing that single-use plastic containers, including plastic
water bottles, can end up as litter that harms the environment and
affects global warming by using energy that creates carbon dioxide.
However, several City departments have purchased drinking water in
plastic bottles for training and other events. Staff identified this issue
and took corrective action during the audit, including updating
procedures and blocking the purchase of drinking water in plastic
bottles on the Staples website.
Cleaning supplies and paper
products not monitored to
ensure they were green
The janitorial contractor that services most City facilities used about
520 cases of 100 percent recycled fiber paper towels with 20 percent
postconsumer fibers, although the contract requires that paper
towels contain the highest postconsumer content available, but not
less than the minimum 40 percent postconsumer fibers recycled
content standard established by the United States Environmental
Protection Agency.7 Public Works staff said they did not enforce the
contract requirement because when the City selected paper towel
dispensers years ago, the only paper towels available to fit the
dispensers had no more than 20 percent postconsumer fibers. Public
Works staff has not yet evaluated the quality, performance, and cost
of the 40 percent postconsumer fiber paper towels that are now
available.
The contract also requires the contractor to use cleaning chemicals
and floor care products that meet a Green Seal environmental
certification standard and to provide periodic reports of total
products used. Green Seal-certified products reduce the use of
hazardous chemicals and natural resources while delivering the
6 We used the Environmental Paper Network Paper Calculator, Version 3.2.1, to calculate the estimated environmental
impact. For more information, visit www.papercalculator.org.
7 Recycled fiber paper towels can be made from preconsumer- or postconsumer-recycled content. Preconsumer-recycled
content is made from manufacturer waste that is repurposed into something new. Postconsumer-recycled content is
made from waste used by consumers, disposed of, and diverted from landfills, which is more environmentally friendly
than using preconsumer-recycled content.
Attachment A
10 Audit of Green Purchasing Practices
performance that consumers expect. Although most of the cleaning
chemicals and floor care products used by the contractor were
bought in bulk, the City did not require the contractor to provide
reports of these bulk products, nor did the City monitor the products
used to ensure they met the certification requirement. About 7,600
ounces (88 percent) of the nonbulk cleaning chemicals and floor-care
products that the contractor used were not Green Seal-certified
products. These products represented a small portion of the total
cleaning products that the contractor used. Although not required by
the contract, the City could increase its use of other green products,
such as Green Seal-certified soap and trash bags with recycled
content.
City staff also bought cleaning supplies and paper products that were
not green, such as floor polish, paper towels, and toilet tissue.
Although one of the EPP Policy goals is to conserve natural resources,
10 (71 percent) of 14 cleaning supply and paper product purchases,
totaling about $2,200, were not green products.
Computer purchases were
green and saved energy
All of the $1.0 million in computers, notebooks, and monitors that
the City purchased were EPEAT certified (about $850,000 Gold
certified and $150,000 Silver certified).8 EPEAT provides
environmental product ratings based on manufacturers’ information
on the ability of the products to meet required and optional criteria
that address the full product lifecycle, from design and production to
energy use and recycling. The City received an EPEAT Sustainable
Purchasing Award in 2016, which recognizes excellence in the
procurement of sustainable electronics. The Public Works
Department is also working with the Information Technology
Department to find ways to reduce plastics packaging for computer
purchases, including new specifications to address both EPEAT and
packaging for future computer purchases in accordance with the
City’s Extended Producer Responsibility Policy and the Green
Information Technology policy (see the discussion in the “Lack of
awareness of environmental and green purchasing policies” section).
Effect of EPEAT-certified
purchases
These EPEAT purchases resulted in an estimated 69,200 kilowatt
hours of first-year energy savings, which is equivalent to greenhouse
8 Gold certified products meet all required criteria and at least 75 percent of optional criteria while silver certified products
meet all required criteria and at least 50 percent of optional criteria.
Attachment A
Audit of Green Purchasing Practices 11
gas emissions from about 10 passenger vehicles driven for one year
or the energy use of about 5 homes for one year. The lifetime energy
savings of the EPEAT purchases is estimated to be 262,000 kilowatt
hours, which is equivalent to greenhouse gas emissions from about
39 passenger vehicles driven for one year or the energy use of about
19 homes for one year. 9
Battery-electric or plug-in
hybrid vehicles
The City’s policy is to acquire “plug-in electric vehicles upon
replacement or for new needs when they are available, and meet
needed range, load and emergency response requirements.” Public
Works staff developed a checklist that departments must use when
submitting a Vehicle/Equipment Request and Analysis form for
vehicles that are requested outside of the annual budget process.
However, Public Works has not formally documented its assessment
of the suitability of battery-electric or plug-in hybrid vehicles during
its vehicle review of the fleet replacement capital improvement plan
in the annual budget process. Instead, Public Works staff evaluate
vehicles based on their general knowledge of what is available, as
well as feedback after providing staff in other departments the
opportunity to test drive electric cars and motorcycles. The City has
bought two battery-electric vehicles in an effort to start greening its
fleet but has not bought more due to concerns regarding range
limitations, vehicle and battery costs, lack of maintenance and parts
support, lack of infrastructure, vehicle charging time, and employees
forgetting to charge the vehicles.
There are different perspectives on the costs of plug-in electric
vehicles compared to gas vehicles. For example, one cost comparison
showed that it is about $4,100 more expensive in total lifecycle costs
over seven years to operate a 2014 Ford Focus electric vehicle
compared to a 2014 Ford Focus gas vehicle for a vehicle driven about
13,000 kilometers (8,078 miles) per year but that the total lifecycle
costs of the electric vehicle is about $2,800 less than the gas vehicle if
the annual mileage increases to 20,000 kilometers (12,427 miles) and
the vehicle is kept for ten years.10 In contrast, a study of public fleets
in disadvantaged communities found that fleets could save nearly
9 We used the Electronics Environmental Benefits Calculator from the United States Environmental Protection Agency to
calculate the estimated environmental impact.
10 Finding the Business Case for EVs in Public Fleets, West Coast Electric Fleets, February 29, 2016, available at
http://www.westcoastelectricfleets.com/wp-content/uploads/2016/03/Full-Slide-Deck-Feb-29-Compressed.pdf.
Attachment A
12 Audit of Green Purchasing Practices
25 percent of the total cost of ownership over the life of a vehicle by
replacing certain cars with plug-in electric vehicles.11 However,
neither of these comparisons factors in the environmental costs
incurred (such as the price of carbon) by operating a gasoline-
powered vehicle or available federal and state tax credits if the
vehicle is leased.
Buying green vs. not -
examples of different costs
The comparison of cost involves more than simply looking up prices
on the internet because the actual costs of green products may vary
based on different vendors, and the City may also be able to
negotiate discounts based on a core list or market basket of green
products. The whole picture should be considered when comparing
costs. For example, if the City reduces its overall copy paper use and
has cost savings from other products in a contract, the cost savings
could offset the price difference in buying higher recycled content
copy paper. Also, conventional products generally do not include the
cost of environmental impacts.
Although the direct cost of buying green can be more expensive than
buying conventional products, this is not always the case as
demonstrated in the following examples, which show it can cost
about:
• 69 percent less for a green cleaner than for bleach. For example,
it cost $1.77 to make one gallon of disinfectant cleaner from a
concentrated product recommended by the City’s consultant. In
contrast, germicidal bleach cost $5.65 for almost one gallon.
• 5 percent more for 50 percent recycled content copy paper
(current policy) than paper without recycled content. For
example, it cost $3.80 for a ream of 50 percent recycled paper
and $3.62 for a ream of paper without recycled content.
• 12 percent more for 100 percent recycled content copy paper
(policy revision pending) than paper without recycled content. For
example, it cost $4.07 for a ream of 100 percent recycled paper
and $3.62 for a ream of paper without recycled content. Fewer
trees are used for recycled paper.
11 Electric Vehicle Suitability for Public Fleets in Disadvantaged Communities, Center for Sustainable Energy, October 2016,
available at https://cleanvehiclerebate.org/sites/default/files/attachments/EVSA-Summary-Report-2016_0.pdf.
Attachment A
Audit of Green Purchasing Practices 13
• 14 percent less for remanufactured toner cartridges than new
cartridges. For example, it cost $60.52 for a remanufactured toner
cartridge and $70.42 for a regular toner cartridge.
The City should not necessarily buy conventional products simply
because they cost less individually because, as described above, the
City may be able to negotiate discounts for green products, and
conventional products may not consider the environmental impacts.
Although it can be more expensive to buy green, the City’s policy
goals look beyond cost to protect and conserve natural resources;
minimize the City's contributions to global warming, pollution, and
toxic chemical exposures; and promote health and well-being.
The United States Environmental Protection Agency’s website
identifies several potential impacts that products can have on our
health and the environment through toxic exposures, air and water
pollution, climate change, natural resource use, waste disposal and
ecosystem damages. Buying green products helps protect our health
and the environment.
No formal written procedures
to implement EPP Policy
The City’s green purchasing policies and goals are not fully achieved
because the City does not have consolidated, formal written
procedures to implement the EPP Policy. The policy requires the City
Manager to convene a Sustainable Purchasing Committee, including
management-level staff from key departments, to implement the
policy by creating a plan and procedures addressing 10 different
areas (see Appendix 1). However, the Sustainable Purchasing
Committee, also known as the Green Purchasing Team, has not
created centrally located comprehensive, formal, written procedures
that address the 10 areas.
Other requirements in the City’s green purchasing policies also have
not been fully implemented. For example, except for purchases from
Staples, the City has not required annual vendor reports on
sustainable product purchases that track units purchased, dollars
spent, and other information.
Attachment A
14 Audit of Green Purchasing Practices
Some procedures and
Municipal Code not updated
The City’s petty cash procedures have been updated to disallow the
purchase of pesticides, single-use plastic water containers and plastic
foam products. However, other City procedures that could be
affected by the EPP Policy have not been updated to implement
green purchasing goals. For example, March 2016 revisions to the p-
card guidebook that address green purchasing policies, including pest
management and single-use plastics such as drinking water in plastic
bottles, have not been approved and distributed to City staff.
There also has not been an assessment of whether Municipal Code
amendments are necessary to implement City goals. For example,
there is a conflict between the City’s green purchasing policies and
the Municipal Code requirement to obtain goods and services at the
lowest cost possible.12
Successful sustainable procurement programs establish clear and
comprehensive procedures for employees and vendors to follow to
ensure consistent implementation of sustainable purchasing policies.
Lack of awareness of
environmental and green
purchasing policies
There is also a lack of awareness of the City’s environmental and
green purchasing policies. For example, several City departments
may have purchased drinking water in plastic bottles because they
were not aware of the policy and reasons for not buying it. In
another example, the City is working to reduce foam packaging
included with computer and monitor purchases although the policy
addressing this was adopted in 2009. In addition, Public Works staff
brought to our attention a December 2009 Green Information
Technology policy. However, Information Technology staff were
previously unaware of this policy, which needs to be updated, and it
is unclear whether the City approved the policy. Public Works staff
stated that greater and more frequent education is needed to
increase awareness of environmental and green purchasing policies.
Lack of clear governance
structure
The City’s sustainability policies and goals are not fully achieved
because there is a lack of clear governance structure. The Sustainable
Procurement Playbook for Cities says that it is a best practice when
the policy clearly delineates staff roles and responsibilities in carrying
out the goals and requirements of the jurisdiction’s sustainable
purchasing policy. It also says that a sustainable procurement policy
12 Palo Alto Municipal Code Sections 2.30.010, 2.30.400, and 2.30.440.
Attachment A
Audit of Green Purchasing Practices 15
is stronger if it assigns specific tasks to staff or departments and
includes guidance on how everyone will work together.
Three City employees are involved in green purchasing efforts: a
project manager in the Public Works Department, the chief
procurement officer in ASD, and the chief sustainability officer in the
Office of Sustainability. However, green purchasing is not part of
their core responsibilities, and they estimate their total combined
time to be about one-fourth of a full-time equivalent (0.25 FTE).
Public Works staff contribute most of the staff time to maintain
green purchasing, but the department does not have authority to
implement green purchasing across the City or immediate knowledge
or access to other departments’ processes and purchases to make
necessary and relevant operational and policy changes in other
department’s processes.
The Sustainable Purchasing Committee, also known as the Green
Purchasing Team, also has responsibilities, as described in the EPP
Policy. Its members include the three employees above, along with
other staff from the Administrative Services, Information Technology,
and Public Works Departments. The team is informally structured
and meets as needed to discuss green purchasing topics.
Inadequate technical tools to
track green purchases
Without adequate technical tools, including software to track green
purchases, the City cannot ensure that its plans, goals, and objectives
are met. Other jurisdictions have used their e-procurement systems,
accounting systems, and vendor reports to determine the amount
spent on specific products and services. Current reporting systems,
both external and internal, do not provide sufficient information to
evaluate and manage green purchasing. For example, although the
City currently receives monthly spend and environmental reports
from Staples, ASD’s Purchasing Division uses only the spend reports
to analyze the amounts spent. ASD and Public Works have suggested
to Staples that the environmental reports include more granular
information and trends for green purchases so the City can use the
reports to determine compliance with green purchasing
requirements. Purchasing Division staff indicated that they need a
means to identify or flag purchase orders with green items to report
on green purchasing activity.
Attachment A
16 Audit of Green Purchasing Practices
The Public Works Department has tried using checklists to trigger
green purchases, but stopped because the checklists usually came
too late in the process. Public Works staff said that a new and
improved enterprise resource planning (ERP) system could flag
purchasers and green purchasing stakeholders when a contract or
service is up for renewal so discussion could be prompted early in the
procurement cycle. Other jurisdictions have used their e-
procurement systems, accounting systems, and vendor reports to
determine the amount spent on specific products and services. This
indicates that an improved ERP system or specialized software could
help the City flag high priority goods and services and allow for
better tracking of items purchased.
Recommendations 1. The City Manager’s Office should clearly define the
department(s) responsible for implementing green purchasing
policies, determine if additional staffing and funding is needed to
implement the policies, and provide the responsible
department(s) with the authority to implement green purchasing
across the City.
The responsible department(s) should then:
2. Consult with the Attorney’s Office to align the Municipal Code as
needed with green purchasing policies.
3. Write and distribute consolidated procedures to implement
green purchasing policies, including the 10 different areas in the
EPP Policy and update existing policies and procedures to reflect
current requirements, including recycled paper and p-card
guidance.
4. Educate staff on green purchasing policies and procedures
through various means, which could include citywide emails, p-
card and other training, department staff meetings, and new
employee orientations.
5. Evaluate the quality, performance, and cost of 40 percent
postconsumer fiber paper towels, monitor the janitorial
contractor’s use of cleaning supplies and paper products to
ensure compliance with the green purchasing contract
requirements, and evaluate the feasibility of including other
green products such as Green Seal certified soap and green can
liners in the next janitorial contract, as appropriate.
Attachment A
Audit of Green Purchasing Practices 17
6. Evaluate if the new e-procurement system and proposed
enterprise resource planning system or other specialized
software can help with tracking and reporting green purchases.
As part of the planned transition of the Annual Performance
Report to the City Manager’s Office, determine what green
purchasing performance measures to track and report on, such
as the number and percentage of green products purchased and
their environmental benefits. The Sustainable Procurement
Playbook for Cities provides potential criteria for what to track.
7. To the extent possible, require approved vendors to provide data
on the amounts of green products and services that the City
purchases from them annually.
8. Develop and implement a process to formally document the
assessment and suitability of battery-electric and plug-in hybrid
vehicles and an evaluation of the cost effectiveness as part of the
fleet replacement capital improvement plan budget process. The
assessment should consider lifecycle costs and environmental
impacts in addition to the initial cost of the vehicle.
Attachment A
18 Audit of Green Purchasing Practices
APPENDIX 1 – City of Palo Alto Environmentally Preferred Purchasing Policy
Attachment A
Audit of Green Purchasing Practices 19
Attachment A
20 Audit of Green Purchasing Practices
Attachment A
Audit of Green Purchasing Practices 21
The City Manager has agreed to take the following actions in response to the audit recommendations in this report. The City Manager will report progress on
implementation six months after the Council accepts the audit report, and every six months thereafter until all recommendations have been implemented.
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree
and Target Date and Corrective Action
Plan
Status
Finding: The City does not always comply with applicable green purchasing requirements in purchases
1. The City Manager’s Office should clearly
define the department(s) responsible for
implementing green purchasing policies,
determine if additional staffing and funding
is needed to implement the policies, and
provide the responsible department(s) with
the authority to implement green purchasing
across the City.
The responsible department(s) should then:
ASD/CMO Concurrence: Agree
Target Date: August 1, 2017
Action Plan:
Staff will prepare a document identifying the
responsibilities, funding, and staffing needs as
suggested.
2. Consult with the Attorney’s Office to align
the Municipal Code as needed with green
purchasing policies.
ASD/Attorney Concurrence: Agree
Target Date (see related Action Plan targets
below):
a) September 15, 2017
b) September 15, 2018
Action Plan:
a) Determine which parts of municipal
code, if any, need to be revised to
reflect City policies.
b) Revise municipal code as needed.
Attachment A
22 Audit of Green Purchasing Practices
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree
and Target Date and Corrective Action
Plan
Status
3. Write and distribute consolidated
procedures to implement green purchasing
policies, including the 10 different areas in
the EPP Policy and update existing policies
and procedures to reflect current
requirements, including recycled paper and
p-card guidance.
CMO/ASD/PWD
support
Concurrence: Agree
Target Date (see related Action Plan targets
below)::
a) July 1, 2017
b) September 1, 2017
c) April 22, 2018
d) Ongoing.
Action Plan:
a) Short term (12-18 months): Identify
funding and/or staff to implement. This
could be via consultant services or
Office of Sustainability staff.
b) P-Card: Confirm proposed revisions to
P-Card guidelines, and integrate into
PCard Guidelines, training, and
approval process.
c) Revise Recycled Paper Policy and
procedures and develop an integrated
City-wide paper reduction and
recycled-content paper procurement
plan.
d) Draft/implement/revise policies and
procedures as needed.
4. Educate staff on green purchasing policies
and procedures through various means,
which could include citywide emails, p-card
and other training, department staff
meetings, and new employee orientations.
ASD Concurrence: Agree
Target Date: Ongoing as milestones in this
document are achieved.
Action Plan: Ongoing as milestones in this
document are achieved.
Attachment A
Audit of Green Purchasing Practices 23
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree
and Target Date and Corrective Action
Plan
Status
5. Evaluate the quality, performance, and cost
of 40 percent postconsumer fiber paper
towels, monitor the janitorial contractor’s
use of cleaning supplies and paper products
to ensure compliance with the green
purchasing contract requirements, and
evaluate the feasibility of including other
green products such as Green Seal certified
soap and green can liners in the next
janitorial contract, as appropriate.
PWD/Facilities Concurrence: Agree
Target Date (see related Action Plan targets
below):
a) April 22, 2018 (see 3c)
b) Ongoing
c) September 1, 2017
Action Plan:
a) Include evaluation of custodial paper
products under 3c.
b) Continue to monitor custodial
contractor’s use of Green Seal
products.
c) Analyze more environmentally
preferable options for trashcan liners.
6. Evaluate if the new e-procurement system
and proposed enterprise resource planning
system or other specialized software can
help with tracking and reporting green
purchases. As part of the planned transition
of the Annual Performance Report to the City
Manager’s Office, determine what green
purchasing performance measures to track
and report on, such as the number and
percentage of green products purchased and
their environmental benefits. The
Sustainable Procurement Playbook for Cities
provides potential criteria for what to track.
ASD/PWD support
Concurrence: Agree
Target Date (see related Action Plan targets
below)::
a) December 1, 2017
b) September 1, 2018
Action Plan:
a) Form City-wide stakeholder committee
to recommend green purchasing
performance measures for ERP system
to track number and percentage of
green products purchased. If ERP
system cannot achieve this, consider
other options.
b) Identify best indicators to track
environmental performance for select
Attachment A
24 Audit of Green Purchasing Practices
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree
and Target Date and Corrective Action
Plan
Status
contracts and services (e.g., less GHG,
waste reduction).
7.To the extent possible, require vendors to
provide data on the amounts of green
products and services that the City purchases
from them annually.
ASD/PWD support Concurrence: Agree.
Target Date (see related Action Plan targets
below):
a)September 1, 2017
b)Ongoing
Action Plan:
a)Identify selected services and goods
requiring vendor data and specify data
needed.
b)Monitor and enforce data collection.
8.Develop and implement a process to formally
document the assessment and suitability of
battery-electric and plug-in hybrid vehicles
and an evaluation of the cost effectiveness as
part of the fleet replacement capital
improvement plan budget process. The
assessment should consider lifecycle costs
and environmental impacts in addition to the
initial cost of the vehicle.
PWD/Fleet Concurrence: Agree
Target Date: Sept 30, 2017
Action Plan:
a)Establish a process to formally
document the suitability of battery
electric and plug-in hybrid vehicles
within the design and planning process
of capital replacements.
b)Conduct an evaluation of the cost
effectiveness of battery electric and
plug-in hybrid vehicles in coordination
with the budget office and the Chief
Sustainability Officer. This will include
life cycle costs and environmental
impacts.
Attachment A
Attachment A
CITY OF PALO ALTO OFFICE OF THE CITY AUDITOR
April 25, 2017
The Honorable City Council
Palo Alto, California
Continuous Monitoring Audit: Payments
In accordance with the Fiscal Year 2016 Annual Audit Work Plan, the Office of the City Auditor has
completed the Continuous Monitoring Audit: Payments. The audit report presents two findings with
a total of seven recommendations. The Office of the City Auditor recommends that the Policy and
Services Committee review and recommend to the City Council acceptance of the Continuous
Monitoring Audit: Payments.
Respectfully submitted,
Harriet Richardson
City Auditor
ATTACHMENTS:
Attachment A: Continuous Monitoring Audit: Payments (PDF)
Department Head: Harriet Richardson, City Auditor
Page 2
Continuous Monitoring Audit: Payments
April 13, 2017
Office of the City Auditor
Harriet Richardson, City Auditor
Houman Boussina, Senior Performance Auditor
Marisa Lin, FISCal Intern
Attachment A
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Attachment A
OFFICE OF THE CITY AUDITOR
EXECUTIVE SUMMARY
Continuous Monitoring Audit: Payments
April 13, 2017
PURPOSE OF THE AUDIT:
The audit objective was to determine if data analytics and continuous monitoring can help the City identify
duplicate vendor or vendor payment records.
REPORT HIGHLIGHTS
Finding 1: Implementing a
continuous monitoring
process can help the City
identify duplicate invoice
payments. The City
recovered 17 (71 percent)
of 24 confirmed duplicate
invoice payments (Page 6).
Duplicate invoice payments result in both financial loss and operational
inefficiency associated with recovery efforts. Our data analytics showed that the
City paid at least 24 duplicate invoices totaling $57,000 from July 2013 through
October 2015. City staff recovered 17 (71 percent), or $55,000 (97 percent) of
those 24 duplicate payments prior to the audit. Although City staff recovered
most of those duplicate payments, the City did not have effective procedures or
tools to prevent or identify all duplicate payments. Continuous monitoring can
help to more efficiently and predictably identify duplicate invoice payments and
minimize the potential for financial loss.
Key Recommendations to that ASD:
• Build a continuous monitoring reporting process into the new ERP system to
assist it in identifying potential duplicate invoices and seek recovery when
duplicate payments have been made.
• Update its policies and procedures to require unique invoice numbers and to
use credit memorandums or other accounting entries to correct invoice errors.
• Review the 121 potential duplicate invoice payments that were not in our
sample and seek recovery of confirmed duplicate payments.
Finding 2: Numerous
unneeded vendor records
increase the risk of
inappropriate an
erroneous payments and
payment records, as well
as incorrect tax reporting
(Page 2).
Unneeded vendor records, including duplicate or unused records that have not
been inactivated, increase the risk of erroneous or duplicate payments, incorrect
vendor payment records and tax reporting, inefficiency, and fraud. Almost 41,000
(94 percent) of the City’s 43,642 active vendor records in SAP are unused,
duplicates, inconsistent, and/or incomplete, which increases the risk of duplicate,
erroneous, and fraudulent payments, as well as incorrectly reported tax
information. Almost 36,000 (82 percent) of the 41,000 vendor records had not
been used since before 2012. The City does not currently have monitoring
procedures to identify duplicate or unused vendor records or effective
procedures to prevent their entry or inactivate them in SAP.
Key Recommendations to ASD:
• Update its policies and procedures to provide clearer guidance regarding when
to create a new vendor record, when to inactivate a vendor record, and to
provide a coding standard for consistency.
Attachment A
• Build a continuous monitoring reporting process into the new ERP system to
identify and inactivate duplicate, incomplete, or unused vendor records.
• Develop a requirement for the new ERP system to support multiple addresses,
on an exception basis, for the same vendor.
• Clean the vendor master file before merging it into the new ERP system.
Attachment A
TABLE OF CONTENTS
OBJECTIVE .................................................................................................................................................. 1
BACKGROUND ............................................................................................................................................. 1
SCOPE ....................................................................................................................................................... 2
METHODOLOGY .......................................................................................................................................... 2
FINDING 1:
Implementing a continuous monitoring process can help the City identify duplicate invoice
payments. The City recovered 17 (71 percent) of 24 confirmed duplicate invoice payments. ........ 6
Finding 1 Recommendations ............................................................................................................. 8
FINDING 2:
Numerous unneeded vendor records increase the risk of inappropriate and erroneous payments
and payment records, as well as incorrect tax reporting. ............................................................... 10
Finding 2 Recommendations ........................................................................................................... 14
APPENDIX 1: City Manager’s Response ................................................................................................... 15
ABBREVIATIONS
ASD Administrative Services Department
EDD Employment Development Department
ERP Enterprise Resource Planning
IRS Internal Revenue Service
Attachment A
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Attachment A
Continuous Monitoring Audit: Payments 1
INTRODUCTION
Objective The audit objective was to determine if data analytics and
continuous monitoring can help the City identify duplicate vendor
payments or vendor records.
Background The Administrative Services Department (ASD) is responsible for
ensuring accurate, timely, and reliable financial transactions and
reporting. ASD uses the City’s SAP Enterprise Resource Planning
(ERP) system to store and maintain vendor records and to process
payments. Exhibit 1 shows the City’s payments by invoice dollar and
count from July 2013 through October 2015.
Exhibit 1
Invoice Payments and Count – July 2013 through October 2015
RE: Invoices associated with contracts and purchase orders; excludes some wired payments (see Scope section below).
KR: Invoices not associated with a contract or purchase order, such as an employee expense reimbursement.
PV: Transactions associated with payroll, such as tax withholding payments submitted to the Internal Revenue Service
(IRS).
KA: Other, such as invoice reversals and credit memos.
Source: Palo Alto SAP system and ASD staff
$318 million (85%)
$51 million (14%)$7 million (2%)
0%20%40%60%80%100%
Invoice
Dollars
RE KR PV KA
31,514 (72%)9,364 (21%)
2,679 (6%)280 (1%)
0%20%40%60%80%100%
Invoice
Count
RE KR PV KA
Attachment A
2 Continuous Monitoring Audit: Payments
Continuous monitoring and
data analytics
Monitoring is one of five components of an effective internal control
system.1 Monitoring involves evaluating results so management can
take corrective action as necessary and in a timely manner to achieve
organizational goals and objectives. Although effective internal
controls should prevent duplicate payments, periodic monitoring
activities can help identify duplicate payments that slipped through
the prevention controls. Continuous monitoring involves
management’s proactive review of data at regular intervals, often
through an automated process, to identify errors or erroneous or
incomplete data, such as duplicate invoices and payments; missed
cost savings; and potential fraud, waste, or abuse. The results help
management identify areas where its procedures can be
strengthened. Data analysis software is often used to efficiently
access business data and to develop and automate monitoring
processes.
Scope We used data analytic and sampling methodologies to identify
duplicate vendors and vendor payments associated with invoices
paid from July 2013 through October 2015. The SAP vendor payment
data shown in Exhibit 1 exclude wire payments that the City
processes outside of the SAP purchase order and invoice payment
systems, including about $600,000 in monthly payment card
payments. We did not assess these wire payments or the detailed
payment card data for duplicate payments. Our review of vendor
records focuses only on those that the City used from January
through October 2015.
Scope limitation We could not apply data analytics to invoices that did not have an
invoice number, which was 37 (0.1 percent) of 44,000 transactions.
These 37 invoices totaled about $2.3 million (0.6 percent) of
$376 million.
Methodology To accomplish our audit objective, we:
• Interviewed ASD staff responsible for accounts payable,
1 Internal control is the system of processes that an entity’s oversight body, management, and other personnel implement
to provide reasonable assurance that the organization will achieve its operational, reporting, and compliance objectives.
The five components are control environment, risk assessment, control activities, information and communication, and
monitoring. See U.S. Government Accountability Office, “Standards for Internal Control in the Federal Government,”
Washington, D.C., 2014, p. 9, available at http://www.gao.gov/products/GAO-14-704G.
Attachment A
Continuous Monitoring Audit: Payments 3
procurement, and the City’s SAP system to gain an understanding
of the relevant data, system configurations, policies, and
procedures.
• Conducted a risk assessment to identify and prioritize accounts
payable and procurement risks that could be mitigated using
continuous monitoring and data analytics.
• Reviewed manuals, published audit reports, whitepapers, and
industry presentations on data analytics.
• Extracted SAP invoice and vendor data and used ACLTM Analytics
software to identify potential duplicate invoices, vendors, and
unreliable or inconsistent data.
• Met with ASD staff to validate the data analytics results and to
understand underlying causes for “false positives,” or normal
payments that our methodology flagged as anomalous.2
• Reviewed judgmental and random samples of invoices to
understand causes of duplicate payments and to estimate the rate
of occurrence, regardless of whether the City or the vendor later
identified or corrected the duplicate payment.
Sampling methodology We used sampling methods to determine if implementing
continuous monitoring processes for accounts payable would benefit
the City:
• We judgmentally selected and reviewed a sample of 15 duplicate
invoices, which included a variety of payment types, vendor
types, and invoice amounts that we identified through our
analytics methodology, to understand the root causes for
duplicates and false positives. Because we identified actual
duplicate payments in our judgmental sample, we subsequently
selected a statistically reliable random sample from the
potentially duplicate payments identified through our data
analytics to get a more precise estimate of the frequency of
duplicate payments.
• We used ACLTM Analytics software to identify potential duplicate
invoices and an industry-recognized methodology that searches
for invoices with the same invoice number and amount. We
2 A false positive is something that looks like it fits within the criteria used but actually does not. These payments were
flagged because they had the same invoice number and amount as a prior invoice.
Attachment A
4 Continuous Monitoring Audit: Payments
applied this methodology to accounts payable transactions that
mostly consisted of invoices but also included transactions
associated with payroll, invoice reversals, and credit memos (see
Exhibit 1). We used analytics to eliminate duplicate invoice
payments that had been refunded or blocked. Our procedures
identified 295 potential duplicate invoice payments, which does
not include the original invoice. Because there was sometimes
more than one potential duplicate invoice, we summarized the
295 invoices into 174 invoice groups (i.e., groups of invoices with
the same invoice number and amount).
• We selected 120 of the 174 invoice groups, based on a
95 percent confidence level and a targeted margin of error of
±5 percent. This means that for every 100 random samples of
such invoices, the true rate of one or more duplicate payments
will be within the margin of error 95 percent of the time. Because
this was a statistically reliable sample from the duplicate invoices
that our data analytics flagged, our conclusions can be projected
to the population of duplicate invoices flagged, but not to the
entire population of 44,000 invoices. Based on the availability of
records, we reduced our final sample size to 113 duplicate
invoice groups, which included 287 invoices and increased the
margin of error to ±7.4 percent. The increased margin of error
did not impact our meeting the audit objective.
• We also judgmentally selected and reviewed a sample of 12
vendors that the City paid using different vendor accounts to
determine if the City issued accurate tax forms. The sample
included a variety of vendor types and total payment amounts.
Because these were judgmental samples, our conclusions cannot
be projected to the total population of duplicate invoices and
duplicate vendor accounts.
Data reliability We used ACLTM Analytics software to assess the accuracy and
completeness of relevant data. We also interviewed ASD staff who
were knowledgeable about the data and brought data reliability
concerns to their attention. We have included some of these
concerns in the audit findings. Except as discussed under the Scope
Limitation section above, the data were sufficiently reliable for the
purposes of this report.
Attachment A
Continuous Monitoring Audit: Payments 5
Compliance with government
auditing standards
We conducted this audit in accordance with our Fiscal Year 2016
Annual Audit Work Plan and generally accepted government auditing
standards. Those standards require that we plan and perform the
audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
We would like to thank management and staff in the Administrative Services Department for their
time, cooperation, and assistance during the audit process.
Attachment A
6 Continuous Monitoring Audit: Payments
Finding 1 Implementing a continuous monitoring process can help the City
identify duplicate invoice payments. The City recovered 17
(71 percent) of 24 confirmed duplicate invoice payments.
Our data analytics showed that the City paid at least 24 duplicate
invoices totaling $57,000 from July 2013 through October 2015.
Although City staff recovered most of the duplicate payments prior
to the audit, the City did not have effective procedures or tools to
prevent or identify all duplicate payments. Continuous monitoring
can help to more efficiently and predictably identify duplicate invoice
payments and minimize the potential for financial loss.
The City paid 24 duplicate
invoices
Duplicate invoice payments result in both financial loss and
operational inefficiency associated with recovery efforts. Exhibit 2
shows that our data analytics identified 295 potential duplicate
payments totaling about $820,000. We confirmed that the City paid
duplicate invoices totaling $57,000 for 23 (20 percent) of the 113
invoice groups that we randomly selected and that one invoice group
included two duplicate payments, for a total of 24 duplicate
payments.
Exhibit 2
Data Analytics and Random Sample – July 2013 through October 2015
Note: The bars show the 295 potential duplicate payments, totaling $820,000, that we identified through our data
analytics. The Unrecovered, Recovered, and False Positive segments show the results of the 174 invoice groups that
we selected for our random sample.
Source: Palo Alto SAP system and ASD staff
7 (2%)17 (6%)
150 (51%)121 (41%)
0%20%40%60%80%100%
Potential
Duplicate
Payment Count
Unrecovered Recovered False Positive Not Confirmed
$1,900 (0.2%)$54,800 (7%)
$412,200 (50%)$351,500 (43%)
0%20%40%60%80%100%
Potential
Duplicate
Payment ($)
Unrecovered Recovered False Positive Not Confirmed
Attachment A
Continuous Monitoring Audit: Payments 7
City staff recovered 17 of 24
duplicate invoice payments
prior to our audit
ASD staff reported that the City had recovered 17 (71 percent) of the
24 confirmed duplicate payments, or $55,000 (97 percent) of
$57,000, prior to the audit through periodic account analysis,
contract monitoring, and vendor relationships. However, these
informal practices are not included in the City’s policies and
procedures and may not reliably and efficiently identify duplicate
invoices in SAP. Data analytics can supplement these practices to
more efficiently, timely, and predictably identify duplicate payments
and minimize the potential for financial loss.
Although there is no specific industry-established duplicate invoice
payment rate for either the number or dollar amount of duplicate
payments, one SAP analytics specialist estimates that continuous
monitoring can result in duplicate payment recoveries of up to
0.02 percent of the amount of payments.3 Based on this estimate,
continuous monitoring could help the City recover duplicate
payments totaling about $30,000 (0.02 percent) of $150 million in
average annual expenditures.
SAP configuration does not
prevent all duplicate invoices
The City’s SAP system has not been configured to prevent all
duplicate invoice payments. A more restrictive configuration could
better prevent duplicate payments and identify them if they occur.
However, SAP cannot be configured to prevent duplicate invoice
payments if a duplicate invoice has a different number (e.g., 1 and
1a), a duplicate invoice with a different date, or a different vendor
number. Finding 2 discusses duplicate vendors in the City’s master
vendor file.
Invoice error corrections not
always recorded in SAP
City staff entered credit memorandums for 3 (18 percent) of the 17
duplicate invoice payments that ASD resolved prior to the audit.
Vendors sometimes issue credit memorandums to acknowledge
invoice errors such as duplicate payments. Credit memorandums
entered in SAP correct contract payment histories and budgets,
vendor accounts, and financial statements. City departments often
identify duplicate invoice payments and may recover funds before
ASD accounting staff do, but because the City does not require the
use of credit memorandums or other corrective entries, staff might
3 Martin Riedl, CEO, The dab:Group, “Cash Recovery Data Analytics,” recorded webinar available at
http://www.highwateradvisors.com/webinar/cash-recovery-data-analytics-watch
Attachment A
8 Continuous Monitoring Audit: Payments
not correct the associated contract payment and budget history,
vendor account, and financial statement entry. City staff sometimes
collect a reimbursement check or arrange for the vendor to apply
overcharges to future invoices without a credit memorandum or
alternate corrective entries. Vendor account and purchase order
errors can result in inaccurate contract budgets, vendor tax forms,
City financial records used to track expenditures, and budgets by
category. When City staff do enter credit memorandums, they do not
always reference the erroneous or duplicate invoice. In those
instances, data analytics and manual account reviews cannot readily
identify that corrective action was already taken.
Unique invoice numbers could
prevent false positives and
increase reliability of analytic
results
Ninety (80 percent) of the 113 potentially duplicate invoice
payments that we randomly selected from our data analytics were
false positives. The City does not require vendors to use unique
invoice numbers or City departments to generate unique, sequential
invoice numbers for employee reimbursements, recurring lease
payments, and other City-generated payments.
ASD staff stated that they cannot require vendors to submit unique
invoice numbers or credit memorandums; however, other
organizations have implemented such policies.4
Recommendations We recommend that ASD:
1.1. Build a continuous monitoring reporting process into the new
ERP system to identify potential duplicate invoices based on
information such as vendor, date, invoice number, and amount,
and run the report at least monthly. ASD should review the
results, seek recovery of duplicate payments, and identify and
correct process deficiencies that allowed the duplicate
payments to be processed.
1.2. Update invoice processing policies and procedures, and
disseminate the updated policies to appropriate City staff, to
require:
4 See following examples:
https://finance.ocfo.gsa.gov/webvendors/OnlineInstructions.aspx,
http://www.unm.edu/~fssc/docs/P&APPolicies&Proc.pdf
https://www.osc.state.ny.us/agencies/guide/MyWebHelp/Content/XII/5/B.htm
https://www.progressive.com/Content/pdf/suppliers/supplier-invoice-requirements.pdf
Attachment A
Continuous Monitoring Audit: Payments 9
a. Unique invoice numbers on all documents submitted for
payment.
b. Use of credit memorandums or other accounting entries to
correct invoice errors such as duplicate invoices.
c. Referencing of the erroneous or duplicate invoice using a
unique identifier (e.g., invoice number) in credit
memorandum entries in SAP.
1.3. Review the 121 unconfirmed potential duplicate invoice
payments (see Exhibit 2), totaling about $351,500, that were not
in our sample and prioritize recovery of confirmed duplicates
with a focus on more recent and high dollar duplicates. As part
of its review, ASD should identify what caused the duplicate
payment to occur and implement process improvements to
reduce the potential for future duplicate payments.
Attachment A
10 Continuous Monitoring Audit: Payments
Finding 2 Numerous unneeded vendor records increase the risk of
inappropriate and erroneous payments and payment records, as
well as incorrect tax reporting.
Almost 41,000 (94 percent) of the City’s 43,642 active vendor
records in SAP are unused, duplicates, inconsistent, and/or
incomplete, which increases the risk of duplicate, erroneous, and
fraudulent payments, as well as incorrectly reported tax information.
The City does not currently have monitoring procedures to identify
duplicate or unused vendor records or effective procedures to
prevent their entry or inactivate them in SAP.
Many unneeded vendor
records increase risk of
erroneous payments and
payment records
From January through October 2015, the City used only 2,659
(6 percent) of the 43,642 vendors in its master vendor file and, as
shown in Exhibit 3, has not used 35,878 (82 percent) of the vendor
records since before 2012. About 27,500 (63 percent) of the vendor
records had not been used since before 2008. ASD staff stated that
most of those vendor records were probably carried over from the
City’s prior financial system into SAP.
EXHIBIT 3
Active but Unused City Vendors – Most Recent Calendar Year Paid
Source: Auditor’s Analysis of SAP Payment Data
Unneeded vendor records, including duplicate or unused records
that have not been inactivated, increase the risk of erroneous or
duplicate payments, incorrect vendor payment records and tax
reporting, inefficiency, and fraud. For example:
• The City provided an inaccurate tax form to a vendor because the
City used two separate vendor records to pay the vendor in
calendar year 2014. Consequently, the City did not report to the
35,878 (82%)5,105 2,659
0%10%20%30%40%50%60%70%80%90%100%
Vendors (#)
Last paid prior to 2012 Last paid in 2012 to 2014 Last paid in 2015
Attachment A
Continuous Monitoring Audit: Payments 11
Internal Revenue Service (IRS) $30,392 of reportable payments
for that vendor.
• SAP cannot prevent or identify duplicate payments if the City
pays a duplicate invoice using different vendor records. Duplicate
vendor records are a leading cause of duplicate payments and
one of the reasons for duplicate payments in the City (Finding 1).
• Inefficiency results when staff have to search numerous
unneeded or duplicate vendor records to pay the appropriate
vendor. Time is also wasted to update, purge, or inactivate
unneeded vendor records. To process 1099 tax forms each year,
staff manually identify and add together taxable payments for
vendors that have duplicate records because the City does not
have an automated process for doing this.
• Fraud could occur if an employee were to set up a fictitious
vendor or modify the address on an unused vendor record and
then use the record to submit false invoices. While the City has
procedures to ensure payment accuracy and staff periodically
review master vendor file changes, the risk of not identifying
fraud increases with a large, uncontrolled vendor master file.
Many duplicate vendor
records
Of the 2,952 vendors that the City paid from July 2008 through
October 2015, 433 (15 percent) had the same tax identification or
social security number as another vendor. Of the 2,659 vendors that
the City paid from January through October 2015, 22 (1 percent) had
the same tax identification or social security number as another
vendor. While best practices recommend maintaining tight control
over the vendor master file and eliminating duplicates, City
procedures sometimes require creation of duplicate vendor records:
• Staff create duplicate vendor records to process invoices for a
vendor that has a different “remit to” address than the vendor’s
purchase order. An Institute of Management Administration
guide suggests only entering the actual payment address in the
vendor master file because the headquarters’ address is
generally not needed.
• Staff previously created duplicate vendor records to reimburse
some vendors for nontaxable payments. Although the City has
stopped this inappropriate practice, it has not updated its
procedures to reflect that change.
Attachment A
12 Continuous Monitoring Audit: Payments
Incomplete vendor identifying
information
Many of the 2,659 vendors did not have complete identifying
information:
• 1,751 (66 percent) vendors did not have a phone number.
• 980 (54 percent) of 1,808 corporate and sole-proprietor vendors
did not have either a tax identification or social security number,
which would prevent the City from reporting income to the IRS
on a 1099 tax form; 4 of the 980 were flagged as having
reportable income. ASD Purchasing staff stated that they now
require an Request for Taxpayer Identification Number and
Certification (IRS Form W-9) for all vendors.
• 497 (19 percent) vendors either had only a post office box
address or no address at all. ASD Purchasing staff stated that
they now require a physical address for all vendors.
• 11 vendors did not have a vendor name, but we confirmed that
there was no payment history for any of these vendors.
Inconsistent vendor
identifying information
Many active vendors had inconsistently formatted information:
• Social security numbers were not formatted as “999-99-9999”
and tax identification numbers were not formatted as
“99-99999” for 30 (2 percent) of the 1,808 corporate and sole-
proprietor vendors with a unique identifying number that the
City paid in 2015.
• Address information was generally inconsistent throughout for
capitalization, punctuation, and abbreviations (e.g., “DRIVE” vs.
“Dr.”) because the City does not have coding standards for its
vendor master file. One City employee who enters vendor
records is aware of the California Employment Development
Department’s (EDD) coding standards, which could be used as a
basis for consistency in the City, because the City submits a list of
sole proprietors to the EDD every 21 days and receives feedback
if the address list does not meet the EDD’s standards. Data
analytics work best to identify duplicates if there is a consistent
naming convention and format.
Risk of IRS fines, inefficiency,
and duplicate payments due
to duplicate vendor records
Incomplete and inaccurate vendor records raise the risk of incurring
IRS fines for inaccurate tax forms, inefficiency associated with
potentially misrouted payments and maintenance of inconsistent
vendor records, and duplicate payments due to undetected duplicate
vendor records. Internal Revenue Code section 6723 prescribes a
Attachment A
Continuous Monitoring Audit: Payments 13
penalty of $50 per occurrence, up to $100,000 per year, for reporting
incorrect information or not reporting all required information. ASD
staff is not aware of the IRS ever having fined the City for incomplete
or inaccurate reporting of payments to vendors.
No procedures to validate the
vendor master file
The City does not have monitoring procedures to identify and correct
duplicate, incomplete, inaccurate, or unused vendor records or
procedures to ensure complete and consistent entry of vendor
information.
Continuous monitoring can
mitigate some risks
associated with incompatible
duties5
The City does not restrict SAP access to prevent accounts payable
staff from performing incompatible vendor payment tasks, such as
having separate staff enter invoices, approve invoices for payment,
and issue checks.6 This increases the risk for errors or fraudulent
activity for the City’s $150 million in annual payments. For example,
in what is known as a “fictitious-vendor scheme,” the same person
could create or modify a vendor record, enter a fraudulent invoice,
and print a check. In another scenario, an employee could
temporarily modify one of the many unused vendor records to route
payment for a fraudulent invoice to his or her own address and alter
the vendor record afterwards to hide the activity. City staff said that
they avoid performing incompatible duties and that they have an
informal procedure to periodically review changes to the vendor
master file. Continuous monitoring to validate the City’s vendor
master file and ensure that payments are restricted to authorized
and properly identified vendors is an efficient and objective way to
reduce fraud risk. Other analytic techniques not within the audit
scope, such as “Benford’s Law” digital analysis, can also assist in
identifying erroneous or fraudulent payments.7
5 “Incompatible duties” is a term used to describe multiple tasks in a process that should be performed by more than one
person to limit the potential for errors and to prevent the employee from committing fraud and being able to cover it up.
6 In practice, City staff enter invoices in SAP for their department’s purchases and authorized supervisors sign an SAP
printout of purchases that they forward to ASD staff who review supporting documentation, enter final approval in SAP,
and issue checks using SAP.
7 Benford’s Law is a proven mathematical technique that predicts the expected frequencies of digits in a list of numbers
(i.e., the number 1 is expected to be the first digit in a number 30 percent of the time, the number 2 is the first digit
18 percent of the time, the number 3 is the first digit 12 percent of the time, etc.). Deviations from the expected pattern
can be an indicator of fraud.
Attachment A
14 Continuous Monitoring Audit: Payments
Recommendations We recommend that ASD:
2.1. Update its policies and procedures to provide clear guidance
regarding:
• Information needed to create complete and accurate vendor
master records.
• Not to create a new vendor record when one already exists
for a vendor or its parent or subsidiary companies unless, on
an exception basis, there is a documented business need that
cannot be met (e.g., tracking payments and creating
payments for a vendor with multiple taxpayer identification
numbers).
• A coding standard for entering vendor information that
includes guidance on punctuation, capitalization, spacing,
abbreviation, special characters, and other potential
variables in formatting identifying information in order to
prevent duplicate records. This change should be
incorporated in the new ERP system.
2.2. Build a continuous monitoring process into the new ERP system
to:
• Review the vendor master file at least annually to identify
duplicate, incomplete, or unused vendor records (i.e., vendor
records not used during a time frame determined by ASD).
• Inactivate duplicate vendor records, enter missing identifying
information based on reliable source documents such as a
vendor-provided IRS Form W-9, and inactivate or archive
unused vendor records.
2.3. Develop a requirement for the City’s proposed new ERP system
to support multiple vendor addresses to accommodate, on an
exception basis, the need to create more than one vendor
record for a business entity.
2.4. Clean the City’s vendor master file in accordance with
recommendations 2.1 and 2.2 before merging the data into the
City’s proposed new ERP system.
Attachment A
Continuous Monitoring Audit: Payments 15
APPENDIX 1 – City Manager’s Response
TO: Harriet Richardson, City Auditor
FROM: James Keene, City Manager
DATE: April 12, 2017
PREPARER: Lalo Perez, Chief Financial Officer
SUBJECT: City Manager’s Response to the Procure to Pay Audit
The Administrative Services Department would like to thank the City Auditor and staff for their cooperation
during the procure to pay audit.
Overall, the Administrative Services Department (ASD) agrees with recommendations in the Procure to Pay
Audit and will address the points made in the recommendations. (Specific responses to the recommendations
are provided in the audit response matrix.)
ASD would like to provide additional data to provide context to the audit. The following is summary data going
back to 2011 (except as noted):
Average number of checks issued per year 10,931
Average number of invoices processed per year 18,736
Average value of PCard purchases processed per year
(since 2013)
$6,587,935
Average value of checks issued and PCard purchases
per year (since 2014)
$126,525,315
Accounts Payable consists of a team of four. The group processes a high volume of activity as presented in the
data above with a high degree of accuracy. The team works closely with all city departments to uphold the city
policy on travel reimbursements, invoice payments, business reimbursements and procurement card
transactions. This involves providing training and guidance to city staff in addition to processing payments.
The audit points to 24 confirmed duplicate payments. While it may be ideal to have zero duplicate payments,
staff believes that to be unrealistic given the extended timeframe such a review would require and the need to
process all payments within a timely turn-around. However, staff believes with a new configuration in the SAP
system there will be an enhanced ability to flag possible duplicate payments and for staff to intervene before
making a payment. Of the 24 duplicate payments, 17 were identified by staff and resolved before the audit.
When considering 24 duplicate payments against the average number of invoices processed per year, the figure
is small or 0.1 percent. The potential value of these duplicates, if confirmed, is $4,797 or 0.004 percent of the
average value of checks issued and PCard purchases per year.
Attachment A
16 Continuous Monitoring Audit: Payments
The City Manager has agreed to take the following actions in response to the audit recommendations in this report. The City Manager will report
progress on implementation six months after the Council accepts the audit report, and every six months thereafter until all recommendations have been
implemented.
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree
and Target Date and Corrective Action
Plan
Status
Finding: 1. Implementing a continuous monitoring process can help the City identify duplicate invoice payments. The City recovered 17
(71 percent) of 24 confirmed duplicate invoice payments.
1.1. Build a continuous monitoring reporting
process into the new ERP system to
identify potential duplicate invoices
based on information such as vendor,
date, invoice number, and amount, and
run the report at least monthly. ASD
should review the results, seek recovery
of duplicate payments, and identify and
correct process deficiencies that allowed
the duplicate payments to be processed.
ASD Concurrence: Agree
Target Date: TBD (date of ERP implementation)
Action Plan: ASD agrees that a continuous
monitoring reporting process should be part of the
accounts payable process. ASD and City staff
currently detects and recovers duplicate payments
through periodic account analysis, contract
monitoring and notifications from vendors. Per the
auditor’s recommendation, ASD will develop and
document an internal control process to identify
duplicates for the new ERP system.
ASD is in the process of implementing a hard stop
in the City’s SAP system if the invoice date, invoice
number, and invoice amount are the same.
Previously, only a warning was issued and it was
possible to still enter a duplicate invoice. This more
restrictive configuration should decrease the
number of duplicate payments.
It is important to note that no system can prevent
100% of duplicate payments. However strong
internal controls and entity -wide coordination can
prevent most duplicates. With technological
advances and changing requirements we have seen
an increase in duplicate invoices arriving in
Accounts Payable. Invoices come in to Accounts
Attachment A
Continuous Monitoring Audit: Payments 17
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree
and Target Date and Corrective Action
Plan
Status
Payable from multiple sources, and while
previously a best practice, requiring original
invoices is no longer practical. Invoices are now
emailed by the vendor, sent via DocuSign, by
internal departments and sometimes also sent via
U.S. mail.
1.2. Update invoice processing policies and
procedures, and disseminate the
updated policies to appropriate City staff,
to require:
a. Unique invoice numbers on all
documents submitted for payment.
b. Use of credit memorandums or
other accounting entries to correct
invoice errors such as duplicate
invoices.
c. Referencing of the erroneous or
duplicate invoice using a unique
identifier (e.g., invoice number) in
credit memorandum entries in SAP.
ASD Concurrence: Partially Agree
Target Date: 12/31/17
Action Plan:
a. ASD will request invoice numbers from
vendors, however it may not be practical
to require all vendors to provide for
unique invoice numbers on all documents
submitted for payment. Some vendors
such as phone companies do not provide
invoice numbers. To follow-up with all
vendors that do not provide an invoice
number would slow down payment and
require additional staff hours. However
ASD staff will be more proactive in
working with vendors that submit invoices
without invoice numbers. We have
created a “Master Invoice Key” to improve
consistency for non- invoice payment
requests such as employee
reimbursements, rebates and refunds,
dues, subscriptions and registration fees.
This should mitigate risk of duplicate
payments on these invoices.
b. ASD requests a credit memo from the
vendor, when possible. Not all vendors are
set up to issue credit memos and
sometimes a reimbursement check is
Attachment A
18 Continuous Monitoring Audit: Payments
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree
and Target Date and Corrective Action
Plan
Status
generated before we were aware of the
duplicate payment. Sometimes the
departments request that the vendor
apply the credit or duplicate payment
amount to future invoices without ASD
staff’s knowledge. ASD staff will include in
the disseminated policy and procedures
instructions to the departments explaining
the process when/if they detect or are
informed of a duplicate payment.
c. Credit memorandums typically have their
own unique identifier. This unique
identifier often does not have any
relationship to the invoice number on the
invoice that that was paid more than once.
ASD will add instructions in the Accounts
Payable manual to reference the duplicate
payment in the text field. However this
field was not used in the audit and
therefore would not have reduced the
false positives.
Attachment A
Continuous Monitoring Audit: Payments 19
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree
and Target Date and Corrective Action
Plan
Status
1.3. Review the 121 unconfirmed potential
duplicate invoice payments (see
Exhibit 2), totaling about $351,500, that
were not in our sample and prioritize
recovery of confirmed duplicates with a
focus on more recent and high dollar
duplicates. As part of its review, ASD
should identify what caused the
duplicate payment to occur and
implement process improvements to
reduce the potential for future duplicate
payments.
ASD Concurrence: Agree
Target Date: 06/30/17
Action Plan: The data provided by the Auditor's
office contained 132 unconfirmed potential
duplicates, totaling approximately $521K. In a
preliminary review of the data, ASD determined
that 118 of the 132 were not duplicates ($506,103);
2 were duplicate entries but they were corrected
before a payment was issued ($5,388); 3 were
duplicates that are resolved ($4,888); 1 is an
unresolved duplicate payment ($275); and 8
require further research in order to make a
determination ($4,797).
Finding: 2. Numerous unneeded vendor records increase the risk of inappropriate and erroneous payments and payment records, as
well as incorrect tax reporting.
2.1. Update its policies and procedures to
provide clear guidance regarding:
• Information needed to create
complete and accurate vendor
master records.
• Not to create a new vendor record
when one already exists for a vendor
or its parent or subsidiary companies
unless, on an exception basis, there is
a documented business need that
cannot be met (e.g., tracking
payments and creating payments for
a vendor with multiple taxpayer
identification numbers).
• A coding standard for entering
vendor information that includes
guidance on punctuation,
Concurrence: Agree
Target Date: 12/31/17
Action Plan: ASD will update policies and
procedures to provide information needed to
create complete and accurate vendor master
records. In some cases, for business needs,
duplicate vendor records are needed in the current
configuration of SAP to allow for different payment
addresses, for instance.
As part of the new ERP system City staff will clean-
up and establish new vendors for a fresh start with
the new ERP vendor database.
Attachment A
20 Continuous Monitoring Audit: Payments
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree
and Target Date and Corrective Action
Plan
Status
capitalization, spacing, abbreviation,
special characters, and other
potential variables in formatting
identifying information in order to
prevent duplicate records. This
change should be incorporated in the
new ERP system.
2.2. Build a continuous monitoring process
into the new ERP system to:
• Review the vendor master file at least
annually to identify duplicate,
incomplete, or unused vendor
records (i.e., vendor records not used
during a time frame determined by
ASD).
• Inactivate duplicate vendor records,
enter missing identifying information
based on reliable source documents
such as a vendor-provided IRS Form
W9, and inactivate or archive unused
vendor records.
ASD Concurrence: Agree
Target Date: TBD (date of ERP implementation)
Action Plan: ASD agrees that a continuous
monitoring process should be built into the new
ERP system.
When the new ERP is implemented, ASD will
prepare a plan to review the vendor master file at
least annually and inactivate unused, incomplete or
inactive vendors.
Part of the annual review of the master vendor file
will also entail identifying and deleting and delete
duplicate vendors. In addition, staff will also
update the missing vendor record using
information from sources mentioned in the
recommendation. ASD staff will also work with ERP
Team to explore other options to accommodate
different “Remit To” addresses without creating a
new vendor number.
2.3. Develop a requirement for the City’s
proposed new ERP system to support
multiple vendor addresses to
accommodate, on an exception basis,
the need to create more than one
vendor record for a business entity.
ASD Concurrence: Agree
Target Date: N/A
Action Plan: This request has already been made to
ERP Consultants in their fact finding stage and is
part of ERP requirements.
Attachment A
Continuous Monitoring Audit: Payments 21
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree
and Target Date and Corrective Action
Plan
Status
2.4. Clean the City’s vendor master file in
accordance with recommendations 2.1
and 2.2 before merging the data into the
City’s proposed new ERP system.
ASD Concurrence: Agree
Target Date: TBD with adoption of new ERP
system
Action Plan: In order to provide consistency, ASD
intends to begin from scratch with the Master
Vendor File when the City adopts a new ERP.
Attachment A
CITY OF PALO ALTO OFFICE OF THE CITY AUDITOR
April 25, 2017
The Honorable City Council
Palo Alto, California
Auditor's Office Quarterly Report as of March 31, 2017
RECOMMENDATION
The City Auditor’s Office recommends the Policy and Services Committee review and recommend to
the City Council acceptance of the Auditor’s Office Quarterly Report as of March 31, 2017.
SUMMARY OF RESULTS
In accordance with the Municipal Code, the City Auditor prepares an annual work plan and issues
quarterly reports to the City Council describing the status and progress towards completion of the
work plan. This report provides the City Council with an update on the third quarter for FY 2017.
Respectfully submitted,
Harriet Richardson
City Auditor
ATTACHMENTS:
Attachment A: Auditor's Office Quarterly Report as of March 31, 2017 (PDF)
Department Head: Harriet Richardson, City Auditor
Page 2
Quarterly Report as of March 31, 2017
Office of the City Auditor
“Promoting honest, efficient, effective, economical, and fully
Accountable and transparent city government.”
Attachment A
PAGE 2
Fiscal Year (FY) 2017 Third Quarter Update (January – March 2017)
Overview
The audit function is essential to the City of Palo Alto’s public accountability. The mission of the Office of the City Auditor,
as mandated by the City Charter and Municipal Code, is to promote honest, efficient, effective, economical, and fully
accountable and transparent city government. We conduct performance audits and reviews to provide the City Council
and City management with information and evaluations regarding how effectively and efficiently resources are used; the
adequacy of internal control systems; and compliance with policies, procedures, and regulatory requirements. Taking
appropriate action on our audit recommendations helps the City reduce risks and protect its good reputation.
Activity Highlights
•We published and presented to Council the 2016 Performance Report, National Citizen Survey™, and Citizen
Centric Report.
•We presented the Community Services Department: Fee Schedule Audit to the Policy and Services Committee
on February 14, 2017.
•Presented proposed changes to the Fraud, Waste, and Abuse Hotline protocols to the Policy and Services
Committee on February 14, 2017.
Audit and Project Work
Below is a summary of our audit and project work for the third quarter of FY 2017:
Title Objective(s) Start
Date
End
Date
Status Results/Comments
Citywide Analytic
Development
and Continuous
Monitoring:
Procure-to-Pay
Determine if data analytics and
continuous monitoring can help the
City detect duplicate vendor or vendor
payment records.
06/15 04/17 In Process The audit is in the reporting
phase. The scheduled date to
present this audit to the
Policy and Services
Committee is April 2017.
Fee Schedules
Audit
Evaluate City processes for establishing
fees to determine if the fees cover the
cost of services provided when
expected. The audit focused on
Community Services fees.
06/15 12/16 Completed The audit was presented to
the Policy and Services
Committee on February 14,
2017.
Utilities: Water
Billing Accuracy
Audit
Evaluate whether the Utilities
Department accurately billed
customers for water services.
06/15 05/17 In Process The audit is in the reporting
phase. The estimated date
for presenting the audit to
the Policy and Services
Committee is June 2017.
Citywide Analytic
Development
and Continuous
Monitoring:
Overtime
Determine if implementing a
continuous monitoring process for
overtime could improve the City’s
oversight and management of
overtime.
06/15 05/17 In Process The audit is in the reporting
phase. The scheduled date of
presentation to the Policy
and Services Committee is
June 2017.
Sustainable
Purchases
Assess purchasing practices to
determine if the City complies with
applicable green purchasing
requirements in purchases.
03/16 04/17 In Process The audit is in the reporting
phase. The estimated date
for presenting the audit to
the Policy and Services
Committee is April 2017.
Attachment A
PAGE 3
Title Objective(s) Start
Date
End
Date
Status Results/Comments
Hydromax
Crossbore
Contract
Evaluate the work performed under
this contract to determine if the City is
took an appropriate approach to this
work, including whether it received
appropriate sewer line inspection data
from this effort and allocated an
appropriate level of contractor
oversight.
09/16 06/17 In Process The audit is in the reporting
phase. The estimated date of
presentation to Policy and
Services Committee is June
2017.
ERP Nonaudit
Service
Provide advisory services to the
Department of Information Technology
regarding its planning of a new
enterprise resource planning (ERP)
system.
09/16 Ongoing During the third quarter of FY
2017, we attended 27 ERP
system requirement
validation sessions and three
strategic and tactical team
meetings, providing verbal
and written advice based on
our technical expertise and
best practice information
readily available to us. We
also issued a memo do the IT
Director that discusses what
is going well with the project
and challenges we identified.
National Citizen
Survey™
Obtain resident opinions about the
community and services provided by
the City of Palo Alto and benchmark
our results against other jurisdictions.
07/16 01/17 Completed We presented the National
Citizen Survey™ to the
Council at the annual retreat
on January 28, 2017.
Annual
Performance
Report
Provide citywide information for key
areas, including spending, staffing,
workload, and performance.
10/16 01/17 Completed We presented the Annual
Performance Report to the
Council at the annual retreat
on January 28, 2017.
Attachment A
PAGE 4
Other Monitoring and Administrative Assignments
Below is a summary of other assignments as of March 31, 2017:
Title Objective(s) Status Results/Comments
Sales and Use Tax
Allocation Reviews
1) Identify businesses that do
business in Palo Alto that may
have underreported or
misallocated their sales and use
tax and submit inquiries to the
state for review and tax
reallocation.
2) Monitor sales taxes received
from the Stanford University
Medical Center Project and notify
Stanford of any differences
between their reported taxes and
state sales tax information, in
accordance with the development
agreement.
3) Provide Quarterly Status
Updates and Sales Tax Digest
Summaries for Council review.
Ongoing 1) Total sales and use tax recoveries for the third
quarter were $2,978 from our inquiries and $852
from the vendor inquiries, for a total of $277,365
year-to-date. Due to processing delays at the State
Board of Equalization, there are 69 potential
misallocations waiting to be researched and
processed: 26 from our office and 43 from the
vendor.
2) We receive calendar-year sales tax information
for the Stanford project about six months after the
end of the calendar year. We will report the sales
tax information for this project in our June 2017
quarterly report.
3) Quarterly sales tax reports are published on the
Office of the City Auditor website at
www.cityofpaloalto.org/gov/depts/aud/reports/defaul
t.asp.
City Auditor
Advisory Roles
Provide guidance and advice to
key governance committees
within the City.
Ongoing The City Auditor serves as an advisor to the Utilities
Risk Oversight Committee, Information Security
Steering Committee, and Information Technology
Governance Review Board. We are also serving as
an advisor for the strategic and technical planning
groups for planning the new Enterprise Resource
Planning (ERP) system (see comment in the Audit
and Project Work section above).
Status of Audit Recommendations
Seventy-three recommendations were open at the beginning of the third quarter of FY 2017, and none were closed. We
did not add any additional recommendations during the third quarter of FY 2017. However, we sent notifications to each
of the departments with open audit recommendations, and the updated responses have started coming in. We have
started reviewing those and expect to report in our next quarterly report that many of the open recommendations have
been closed. Below is a summary of open audit recommendations, by audit, as of March 31, 2017:
Audit Title
Report
Date
Status
Report
Dates
Due Date of
Next Status
Report
Total
Recommendations
Implemented
During Quarter Open
Citywide Cash Handling and
Travel Expense
09/15/10 11/10/15
09/23/14
09/10/13
10/22/12
04/19/11
Past Due 11 0 2
Contract Oversight: Trenching
and Installation of Electrical
Substructure
11/05/13 12/15/15
09/23/14
Past Due 6 0 2
Attachment A
PAGE 5
Audit Title
Report
Date
Status
Report
Dates
Due Date of
Next Status
Report
Total
Recommendations
Implemented
During Quarter Open
Inventory Management 02/18/14 09/23/14 Past Due 14 0 14
Utility Meters: Procurement,
Inventory, and Retirement
03/10/15 None Past Due 15 0 15
Police Department: Palo Alto
Animal Services
04/22/15 03/22/16 Past Due 8 0 8
Parking Funds 12/15/15 None Past Due 8 0 8
Disability Rates and Workers’
Compensation
05/10/16 None 02/14/17 15 0 15
Cable Franchise and Public,
Education, and Government
(PEG) Fees
06/14/16 None 03/08/17 9 0 9
Community Services
Department: Fee Schedule
Audit
02/14/17
None
3
0
3
Fraud, Waste, and Abuse Hotline Administration
The hotline review committee, composed of the City Auditor, the City Attorney, and the City Manager, or their
designees, meets as needed to review hotline-related activities. We received and closed two hotline complaints during
the third quarter of FY 2017, one of which was related to a previous case. The chart below summarizes the status of
complaints received in each fiscal year since the hotline was implemented.
0 0 0 00
2
4
6
8
10
Q1 Q2 Q3 Q4
FY 2017 Quarter
# Implemented Recommendations
73
3
0
20
40
60
80
100
FY 2017
# Open Recommendations
From Prior Fiscal Years From Fiscal Year 2017
Attachment A
PAGE 6
Source: City of Palo Alto hotline case management system as of March 31, 2017
We sent a survey to about 60 local government audit offices that manage a hotline to seek input about how they
manage their hotlines to ensure they receive calls when fraud, waste, or abuse are suspected and how they triage and
investigate valid complaints. We received about 25 responses and compiled the results. We presented a discussion item
on this topic at the Policy & Services Committee meeting on March 28, 2017.
7
3 2
15
9
0
2
4
6
8
10
12
14
16
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Status of Complaints Received by Fiscal Year
Closed Complaints
Open Complaints
Attachment A