Audit of Timeliness of Payments to Vendors And The Implementation of the PeopleSoft Accounts Payable System January 14, 2011

Report #2011-01

MISSION STATEMENT The School Board of Palm Beach County is committed to excellence in education and preparation of all our students with the knowledge, skills, and ethics required for responsible citizenship and productive employment.

Arthur C. Johnson, Ph.D. * Superintendent of Schools School Board Members

Audit Committee Members

Frank Barbieri, Jr., Esq. * Debra Robinson, M.D., Vice Chair Marcia Andrews Monroe Benaim, M.D. Karen Brill Jennifer Prior Brown, Esq. * Chuck Shaw

Cindy Adair, CPA, Chair Richard Roberts, CPA, Vice Chair Gregory S. Daniel Max Davis Carrie Hill Noah Silver, CPA David Talley Bruce Harris, Esq. * Robert Dow *

* Representatives

Audit of Timeliness of Payments to Vendors and The Implementation of the PeopleSoft Accounts Payable System Table of Contents Page

PURPOSE AND AUTHORITY

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SCOPE AND METHODOLOGY

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BACKGROUND

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CONCLUSIONS A. Timeliness of Payments 1. Timeliness of Payments to Vendors Improved

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2. 99% of Sampled Invoices Paid in Less Than30 Days

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3. Other Exceptions

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4. Certain Payments Not Tied to a Purchase Order

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B. Integrity of Accounts Payable System 5. Accounts Payable Database Integrity and Consistency

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6. Employees Paid as Outside Vendors

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APPENDIX A. Management‟s Response – Division of Financial Management B. Management‟s Response – Purchasing Department

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THE SCHOOL DISTRICT OF PALM BEACH COUNTY, FLORIDA

LUNG CHIU, CPA DISTRICT AUDITOR

ARTHUR C. JOHNSON, Ph.D. SUPERINTENDENT

OFFICE OF THE DISTRICT AUDITOR 3318 FOREST HILL BLVD., C-306 WEST PALM BEACH, FL 33406 (561) 434-7335

FAX: (561) 434-8652

MEMORANDUM TO:

Honorable Chair and Members of the School Board Arthur C. Johnson, Ph.D., Superintendent of Schools Chair and Members of Audit Committee

FROM:

Lung Chiu, CPA, District Auditor

DATE:

January 14, 2011

SUBJECT:

Audit of Timeliness of Payments to Vendors and The Implementation of the PeopleSoft Accounts Payable System

PURPOSE AND AUTHORITY In accordance with the District’s Audit Plan, we have audited the Timeliness of Payments to Vendors and the Implementation of the PeopleSoft Accounts Payable System for the School District. The primary objectives of this audit were to (1) determine the timeliness of payments after products/services have been received during Fiscal Year 2009 and (2) assess the integrity of accounts payable information and data stored and processed by the new PeopleSoft system during Fiscal Years 2007, 2008, and 2009.

SCOPE AND METHODOLOGY This audit was conducted in accordance with Government Auditing Standards, by Ellen Steinhoff, CISA, and assisted by Stephanie Steeves, CIA, during May through September 2009, and additional follow-up field work during November 2010. To determine the timeliness of payments during Fiscal Year 2009, we reviewed 2,621 (0.8% of total) sample invoices and supporting documentation totaling $33,757,317 (7.29 % of total) along with 646 check payments totaling $33,765,009 (4.49%). To assess the validity, reliability, and integrity of accounts payable information processed by the PeopleSoft system, we extracted all paid invoices, vendors, and Purchase Orders from PeopleSoft for Fiscal Years 2007, 2008, and 2009, and all District employee addresses from the system. We also used the Audit Command Language (ACL) software to analyze and test the accounts payable information and data.

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We interviewed Accounting, Purchasing, and other personnel. We also reviewed related Florida Statutes, School Board Policies, and procedural manuals, specifically, 

School Board Policies and Purchasing Manual;

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Florida Prompt Payment Act (Florida Statute Chapter 218); and



Code Ethics for Public Officers and Employees (Florida Statute Chapter 112 Part III).

Audit conclusions were brought to the attention of staff during the audit field work so that necessary corrective actions could be implemented immediately. The draft report was sent to the Departments of Accounting and Purchasing for review and comments. Their responses are included in the Appendix. We appreciation the courtesy and cooperation extended to us by Accounts Payable and Purchasing staff during this audit. The final draft report was presented to the Audit Committee at its January 14, 2011, meeting.

BACKGROUND Accounts Payable Process The Accounting Department‟s Accounts Payable Section is responsible for receiving and processing invoices from vendors for payment. The following diagram summarizes the key processes for Accounts Payable.

Invoice

Voucher Paid (Check)

Budget Check

Enter Voucher

Yes No

3 Way Match if PO: Yes Exception until cleared

Voucher PO

Matched

Receipt Received?

Source: Based on review of existing procedures.

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No

Accounts Payable Internal Controls Vendors. To ensure proper segregation of duties, the Purchasing Department is responsible for creating vendor IDs for all vendors in the PeopleSoft system: 

External vendors are those who provide goods (e.g. paper, computers) or services (e.g. consulting engineering) to the District.



Internal vendors are those who request Miscellaneous/Direct Pays, including reimbursements for employees mileage and travel, membership dues under $1,000, teacher certification, stipends, etc.; and Contracted Individual Transportation (CIT) reimbursements to parents/guardians for driving their children to schools.

Invoices and Vouchers. Accounts Payable staff enters the invoice information into the PeopleSoft system. The system automatically generates a corresponding voucher number which is used for payments tracking throughout the process. Accounts Payable writes this voucher number on supporting documentation. Receipts of Goods or Services. Before an invoice is paid, the receipt of goods or services must be entered into the system by the person who orders the goods. Checks. Voucher/check numbers are automatically generated by the PeopleSoft system; and the checks are mailed to the vendors‟ addresses maintained by the PeopleSoft system. During Fiscal Years 2007, 2008, and 2009, the system processed an average of 44,629 checks, averaging $826,901,395 in payment per year.

Fiscal Year 2007 2008 2009 Total Average Per Year

Checks Paid Count Amount 40,180 $833,509,711 48,927 $895,860,969 44,780 $751,333,506 133,887 $2,480,704,186 44,629 $826,901,395

Source: PeopleSoft Financial System

Purchase Orders. Most purchases in excess of $1,000 require the issuance of a Purchase Order (PO). When a PO is used for a District purchase, a three-way-match is conducted among the PO, voucher, and receipt in PeopleSoft system prior to payment. Unused Purchase Orders. Purchasing recently implemented an automatic procedure to notify staff of any POs created more than 45 days earlier that do not have associated invoices. These unused POs are closed, unless there is logical reason, such as the PO is for capital project. This control procedure helps ensure fiscal accountability for expenditures. 3

CONCLUSIONS A. TIMELINESS OF PAYMENTS 1.

Timeliness of Payments to Vendors Improved

Prompt Payment Act. Florida Statute 218.70, Florida Prompt Payment Act (FPPA), requires that non-construction services payment be made within 45 days after the receipt of goods or services; and construction services payment be made within 25 business days under the same rule. As required by the Statute, late payment can result in an interest payment of 1% per month. Although, Accounting indicated that the District has never been requested by vendors to pay the interest due to late payments, delay in processing payments could risk the District‟s reputation and vendors may decide not to do business with the District if the District consistently paying the vendors late. Timeliness of Payments Improved. To determine the timeliness of payments to vendors during Fiscal Years 2007, 2008, and 2009, we examined the invoice date and payment date for all invoices paid during the three fiscal years. As indicated in the following chart, the average time for payment has decreased from 35 days in Fiscal Year 2007, to 31 days in Fiscal Year 2008, and 26 days in Fiscal Year 2009. Timeliness of Payments to Vendors– Average Days

Average Days Paid 50

35

31

Average Days Paid

26

0

FY07

FY08

FY09

Source: PeopleSoft Financial System and Audit Calculation of Prompt Payments

Management’s Response: Timeliness of payments to vendors improved from an average of thirty-five (35) days in FY07 to an average of twenty-six (26) days in FY09. The Accounting Department was able to accomplish this by reorganizing the accounts payable team. Accounts Payable was broken out into an input team and a resolution team. Receiving of goods is decentralized and by creating a dedicated resolution team to follow-up with schools and departments, it has helped to reduce the average number of days to pay vendors. (Please see page 10.)

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2. 99% of Sampled Invoices Paid in Less Than 30 Days Sampling of Prompt Payments. We sampled and examined vendor payments to determine the timeliness of payment after products/services were received. Of the 2,621 sample invoices we reviewed, only 28 (1%) of them were paid in excess of 30 days after the receipt of goods/services. Delays ranged from 34 days to 168 days. According to Accounts Payable, the majority of these 28 invoices were paid beyond 30 days because the receipt of goods/services was not entered into the system by the users within 30 days. Invoices were usually paid the day after the voucher was matched with the PeopleSoft‟s receipt.

Date August 5, 2008 October 21, 2008 January 14, 2009 February 2, 2009 February 3, 2009 February 9, 2009 February 10, 2009 Total

Invoices Sampled Number Dollar Amount 344 $9,468,981.91 1,130 $9,013,419.96 600 $10,971,509.58 199 $2,722,637.08 155 $986,854.11 13 $11,076.57 180 $582,838.71 2,621 $33,757,317.92

Checks Sampled Number Dollar Amount 119 $9,468,981.91 154 $9,013,419.96 137 $10,971,509.58 124 $2,722,637.08 82 $986,854.11 3 $14,603.57 27 $587,003.38 646 $33,765,009.59

Compensating Control to Ensure Prompt Payment. Accounts Payable staff manually stamps the date on the invoices received from vendors. A „date entered‟ is automatically generated when Accounts Payable enters the invoice information into the system, usually no more than one business day from receipt. This date becomes the basis for prompt payment calculations. However, no payment can be made until the person who placed the order has receipted the goods/services into the PeopleSoft system and the vouchers are agreed to the Purchase Order, if applicable. The system will verify that fund is available before a voucher can be posted to the general ledger. Goods/Services Not “Receipted” Timely. Even without a „date entered‟, which is the basis for the prompt payment calculation, the Accounting Department expects to pay all vendors within 30 days after receipt of invoices since the District‟s payment terms are Net-30 for most vendors. The system automatically calculates Net-30 based on the invoice date. However, no payment can be made until the voucher passes the three-way match and fund is available for payment. The Accounting Department formed a staffing function to monitor any invoices that were input by Accounts Payable, but are not yet “receipted” by schools or departments. During 2009, this team noted the primary reason for payment delays was due to user departments‟ not “receipting” the goods or services into the PeopleSoft system in a timely manner. Management’s Response: The Accounting Department will continue to ensure that vendors are being paid in accordance with prompt requirements. Prompt payment does not begin until the date the order is properly filled or the service is performed in accordance with contract terms. To my knowledge, the District has not paid a prompt payment penalty. (Please see page 10.)

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3.

Other Exceptions

While examining 2,621 sample invoices for timeliness of payments, we noted that 233 (9%) invoices had a total of 245 instances of exceptions. Invoices with errors were presented to Accounts Payable for review and necessary actions. Type of Exception Transactions Not Supported by Original Invoices Invoice Date in PeopleSoft Did not Match Date on Invoice No Accounts Payable Date/Time Stamped on Invoice Accounts Payable Date Stamp Not Legible Date Stamped in Accounts Payable on More Than One Date Total

Number of Exceptions 71 67 62 14 31 245

Management’s Response: Accounting will continue to reinforce that all original invoices must be sent directly to the Accounting Department. In addition to the invoice date, the system automatically enters the date entered. Invoices are input within one business day of receipt. The date entered is the date used to track prompt payment in addition to the date the items are actually received or services are performed. (Please see page 10.) 4. Certain Payments Not Tied To a Purchase Order As required by Purchasing Manual, Chapter 3, “Purchasing Requirements and Thresholds”, Section 3-1 B, A purchase for services, supplies, and equipment for any item or group of similar items over $1,000 but less than $3,000 does not require a quote, but a requisition must be sent to Purchasing to evaluate and create a purchase order. Purchases must not be split to avoid meeting this threshold. During Fiscal Year 2009, $496,725,651 (or 66%) of the total $751,333,506 payments was paid through a Purchase Order (PO). Payments without a PO are normally for employee travel reimbursement, utilities, insurance, school food program, P-card purchases, miscellaneous direct pay, and items ordered from the warehouse, which were originally created from a PO. To determine if POs were used in a three-way match in PeopleSoft, we reviewed the Accounts Payable database. We noted that some purchases were made without a PO. Sixteen vouchers totaling $47,042 for three non-construction vendors did not have supporting PO during Fiscal Year 2009. As required by District purchasing guidelines, these purchases should have a PO. Amount Paid During Fiscal Year 2009 $18,292 $15,450 $13,300 $47,042

Description FotoZoomer PC Printstation Gasoline In-House Training Expenses Total Source: PeopleSoft Financial System

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Management’s Response: We have put additional controls to ensure that payment does not occur without a purchase order or specific approval from the Purchasing Department for activity of this type. (Please see page 12.)

B. INTEGRITY OF ACCOUNTS PAYABLE SYSTEM This audit also assessed the integrity of accounts payable information and data stored and processed by the new PeopleSoft software system.

5. Accounts Payable Database Integrity and Consistency No Duplicate Vendor Numbers. As of June 30, 2009, there were 38,284 vendors on record with the PeopleSoft system, of which 31,872 (or 83%) were internal vendor District employees, and 6,412 (17%) were external vendors. Employee vendor IDs are prefixed with an “E” and normally are for reimbursement for travel, training seminar expenses, etc. To determine if PeopleSoft‟s access controls were functioning as intended, we reviewed the adequacy of controls for creating both vendors and invoices. Our testing of the entire vendor file revealed no exceptions for duplicate vendor numbers, payment amounts, and paid invoice numbers for non-employee vendors. As part of the testing, several minor exceptions were noted for employee vendor records, and they were subsequently cleared with Enterprise Resource Planning Security. No Duplicate Payments. The audit revealed that 182 (or 3%) of the 6,412 vendor records had the same address of another vendor, but with different vendor IDs. Eighty-two of these vendors were active external vendors. Our testing found no duplicate payments to vendors with multiple vendor IDs. Vendor Master File Needs Review and Cleanup. Currently, the School District does not have a process for the periodic review and cleanup of the vendor master file. A periodic review of the vendor master file would enable timely identification of unauthorized vendors and potential duplicate payments. Accuracy for the vendor file is an important part of Accounts Payable. We recommend that the vendor file be periodically reviewed in order to identify and remove any duplicate and inactive vendor records. Management’s Response: While no duplicate payments were found, Purchasing will periodically review the vendor file in order to identify and remove any duplicate or inactive vendor records. (Please see page 12.)

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6. Employees Paid as Outside Vendors We cross-checked sample vendor records with employee records to determine if vendor names and addresses in the PeopleSoft Finance System match any employee names and addresses in the PeopleSoft Human Resources System. We noted that, during Fiscal Years 2007 through 2009, six employees were also paid a total of $70,793 through the Accounts Payable system as outside vendors. These $70,793 payments were consultant fees for services governed by separate School District Consultant Agreements. Moreover, our review of the vendor address and employee address files found that three employees used a school‟s address as their home address on PeopleSoft employee record. None of these employees were School Police or related to School Police, which allows the use of schools as their home address. This issue was referred to Human Resources for follow up. Management’s Response: The Legal Department has advised that it is appropriate for employees to be consultants as long as they do not consult at their same school, (their entity), or be in conflict with School Board Policy 3.02, Code of Ethics. Therefore, if an employee is being paid as an outside consultant, it would be appropriate to have a separate vendor number. This process will continue to be monitored and additional care will be given to checking when the name and addresses in our vendor set up match an employee name or address to ensure appropriateness of the vendor set up information. (Please see page 12.)

– End of Report –

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Appendix A

Management’s Response Division of Financial Management

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Appendix A

Management’s Response Division of Financial Management

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Appendix B

Management’s Response Purchasing Department

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Appendix B

Management’s Response Purchasing Department

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