Internal Audit Report 2013-14 Kiest Warehouse Asset Security Procedures Review Current Kiest Warehouse Asset Security procedures and processes should be improved to address the following concerns: 1. Internal control weaknesses were identified in the areas of: a. Physical Controls in safeguarding assets b. Supervising and monitoring of surplus assets c. Reconciliation of warehouse surplus assets delivery documentation to discarded assets documentation 2. Procedures with regards to Kiest Warehouse Asset Security are not completely documented in the Service Center Standard Operating Procedures Manual. 3. Vendor has not complied with agreement in regards of collecting and remittance of sale proceeds in a timely manner.

December 19, 2013

Internal Audit Services

Dallas ISD Board of Trustees Lew Blackburn Eric Cowan Nancy Bingham Elizabeth Jones

December 19, 2013 Members of the Board of Trustees

Mike Morath

Members of the Audit Committee

Dan Micciche Carla Ranger Bernadette Nutall

Ladies and Gentlemen: In accordance with the revised FY 2013-14 Audit Plan, we have completed the limited scope examination of the Kiest Warehouse Asset Security Process. We reviewed the following areas: 

Service Center Standard Operation Procedures Manual



Dallas ISD Human Capital Management Employee Handbook

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Fixed Assets Disposal Supporting Documentation



Oracle Revenue Report



Vendor Agreement Documentation

Internal Audit identified internal control deficiencies in the Kiest Warehouse Asset Security process. In addition there is an opportunity to update the procedures manual to include more adequate procedures pertaining to Kiest Warehouse Asset Security. Our findings and recommendations were discussed with management. We have included the responses from management addressing our findings and recommendations. We would like to thank management for their cooperation and courtesy extended to our staff during the conduct of this audit. Sincerely, Michael Singleton, CPA Chief Internal Auditor

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Table of Contents

EXECUTIVE SUMMARY ..................................................................................................................................... 4 BACKGROUND ...................................................................................................................................................... 4

OBJECTIVES, SCOPE AND METHODOLOGY............................................................. 5 CONCLUSION ......................................................................................................... 5 & 6 RESULTS ................................................................................................................. 7 & 8 EXHIBIT 1-FINDINGS AND RECOMMENDATIONS ............................................... 7 & 8 MANAGEMENT’S RESPONSE................................................................................. 9-12 REPORT DISTRIBUTION ............................................................................................ 13

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EXECUTIVE SUMMARY Background The Kiest Warehouse is located at 3616 E. Kiest and warehouses large inventory items, such as furniture and items that are purchased in bulk. This facility is also used for the collection and redistribution of used furniture and equipment and is the site used to sell surplus equipment. As of November 2013 the value of inventory at Kiest Warehouse was approximately $1.1 million. Kiest Warehouse is managed by the Service Center Director. The Service Center provides logistical support to the District schools and departments in the area of delivery, pick up, warehousing, textbooks, and central receiving of capital items. The warehouse is staff by one supervisor, one lead person, and three technicians. Items that are generated from a move or relocation, that are to be stored or made surplus, are taken to the Kiest warehouse for appropriate disposition. The surplus items include the following:     

Recycle Salvage: Items that go back to schools or departments Discard Items: Items that are damaged beyond use are disposed of by taking them to a local landfill Public Auction Items: Items are placed in the warehouse to be auctioned off by Lone Star Auctioneers Electronic Assets: Items are kept in the warehouse until vendor takes them to be sold or disposed Scrap Metal and Tin: Scrap is taken to Atlas Scrap Yard to be weighed and sold

The proceeds of these transactions are taken to the Service Center Office where they are processed and deposited in the Service Center account. Prior to October 2013 sales were deposited to object code 5749 (Other Revenue from Local Sources). Currently object code 7912 (Sale of Real & Personal Property) is used for these sales and deposited in the general fund. Kiest Warehouse property theft incident On September 2013 a Dallas ISD criminal offense report was filed by Dallas ISD Police concerning Dallas ISD property that was inappropriately removed from the Kiest Warehouse. The suspect was an employee of Dallas ISD who worked at the warehouse. The employee was arrested and processed. This led Internal Audit to conduct an audit to identify the weaknesses in security that contributed to the occurrence. Summary of Key Audit Findings Based on our limited scope examination and evaluation of the Kiest Warehouse Asset Security process, we concluded that controls need strengthening in each of the areas reviewed. The following summarizes our findings: 1. Internal control weaknesses were identified in the areas of: a. Physical controls in safeguarding assets b. Supervising and monitoring of surplus assets c. Reconciliation of warehouse surplus assets delivery documentation to discarded assets documentation 4

2. Procedures with regards to Kiest Warehouse Asset Security are not completely documented in the Service Center Standard Operating Procedures Manual. 3. Vendor has not complied with agreement in regards to the collection and remittance of sale proceeds in a timely manner. Summary of recommendations 1. Management should strengthen preventive physical controls at Kiest warehouse to ensure assets are secure by establishing : a. Surveillance cameras at the warehouse for monitoring purposes b. Security alarm upgrade on property c. Procedures for changing alarm code when an employee leaves department or at a minimum of at least once a year d. Login sheets for all visitors to sign in e. Asset Security and Ethics Training 2. Management should strengthen controls by establishing a reconciliation process of Kiest warehouse surplus assets delivery documentation to discarded assets documentation. There should be monitoring of the surplus items from delivery at the warehouse to the sale; there should be evidence of items delivered to warehouse reconciled to items sold. 3. Management should update procedures with regards to Kiest Warehouse Asset Security in the Service Center Standard Operating Procedures Manual. Objective, Scope and Methodology In accordance with the FY 2013-14 Audit Plan, we have completed our limited scope examination of the Kiest Warehouse Asset Security Process. We reviewed the following areas: 

Service Center Standard Operation Procedures Manual



Dallas ISD Human Capital Management Employee Handbook



Fixed Assets Disposal Supporting Documentation



Oracle Revenue Report



Vendor Agreement Documentation

The purpose of this limited scope audit was to determine if effective controls are in place to ensure that Kiest Warehouse Assets are secure. We reviewed the Kiest Warehouse Asset Security process and supporting documentation from its entry point to its disposal. CONCLUSION Internal Audit identified internal control deficiencies in the Kiest Warehouse Asset Security process. By strengthening controls, management can reduce the risk of inappropriate removal of district property from the warehouse. In addition there is an opportunity to update the procedures manual to include more

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adequate procedures pertaining to Asset Security. In our opinion, risks remain high and the possibility of theft still exists, due to the lack of physical security and deficient paper trail.

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Exhibit 1 FINDINGS AND RECOMMENDATIONS FINDINGS Internal control weaknesses were identified in the safeguarding of assets 1. Kiest Warehouse management is not in compliance with Service Center Operating Policies and Procedures Manual in regards to asset security: 

There are no surveillance cameras on the premises



The outside alarm system has been inoperable

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The inside alarm system code is not updated

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Security guards do not monitor the warehouse effectively

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The fence around the property is ineffective and can be breached

According to the Service Center Operating Policies and Procedures Manual for Asset Security 

During non-work hours, the Kiest Warehouse should be monitored by electronic alarms and guards

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Guards are to lock all doors and set the alarms, secure all gates, and make hourly tours

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Building and parking lot should be equipped with some form of electronic detection and monitoring equipment

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This equipment should be armed each night by the guard and turned off as required

RECOMMENDATIONS 1.1 Management should strengthen physical controls at Kiest Warehouse to ensure assets are secure by establishing : A. Surveillance cameras at the warehouse for monitoring purposes B. Security alarm upgrade on property C. Procedures for changing alarm code when an employee leaves department or at a minimum of at least once a year D. Login sheets for all visitors to sign in E. Asset Security and Ethics Training

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2. Internal control weaknesses were identified in supervising and monitoring of electronic waste. Electronic waste (e-waste) refers to the disposal of obsolete electronic components and materials. E-waste materials may be valuable and recyclable, such as reusable laptops, and computer related equipment. A. Auditor observed flatbed with boxes of surplus graphing calculators outside the locked gate. Management could not provide documentation of those items. B. All e-waste items are not verified by warehouse personnel when picked up by the disposal company; only the skids are counted, not the individual items. Dallas ISD receives a list from vendor of the items on the skids when items are sold. C. There is no evidence that ongoing surplus asset inventory reconciliations are performed as assets are moved. Auditor reviewed a sample of Disposal Forms and traced electronic items on forms to vendor report, Customer Asset Report Count. Only 12 electronic items of 66 were traceable to the report (19%). D. Documentation does not provide traceability to all items picked up by vendor. RECOMMENDATIONS 2.1 Monitoring procedures should be developed and documented for surplus items that are picked up by vendor; there should be monitoring of the surplus items from delivery at the warehouse to the sale; there should be evidence of items delivered to warehouse reconciled to items sold by vendor; for example items should be tracked to a sale receipt on a regular basis and signed off by management. 3. Disposal Company has not complied with agreement in regards to the collection and remittance of sale proceeds in a timely manner. A. Vendor agreement states that the disposal company shall remit to Dallas ISD all sale proceeds collected during each calendar month less its agent’s fee no later than the 19th day of the following calendar month. On July 23, 2013 vendor picked up 18 skids of used miscellaneous electronics and as of December 4, 2013, the Dallas ISD Treasury Department had no documentation of deposits. RECOMMENDATIONS 3.1 Service Center Management should develop an efficient process to ensure the Disposal Company complies with agreement terms.

MANAGEMENT’S RESPONSE 8

FINDINGS Internal control weaknesses were identified in safeguarding assets 1. Kiest Warehouse management is not in compliance with Service Center Operating Policies and Procedures Manual in regards to asset security:  There are no surveillance cameras on the premises  The outside alarm system has been inoperable  The inside alarm system code is not updated  Security guards do not monitor the warehouse effectively  The fence around the property is ineffective and can be breached According to the Service Center Operating Policies and Procedures Manual for Asset Security    

During non-work hours, the Kiest Warehouse should be monitored by electronic alarms and guards This equipment should be armed each night by the guard and turned off as required They are to lock all doors and set the alarms, secure all gates, and make hourly tours Building and parking lot should be equipped with some form of electronic detection and monitoring equipment

RECOMMENDATIONS 1.1 Management should strengthen physical controls at Kiest Warehouse to ensure assets are secure by establishing : A. Surveillance cameras at the warehouse for monitoring purposes B. Security alarm upgrade on property C. Procedures for changing alarm code when an employee leaves department or at a minimum of at least once a year D. Login sheets for all visitors to sign in E. Asset Security and Ethics Training Description of corrective action: 1. Internal control weaknesses in safeguarding assets. a. Requested a quote to install and purchase cameras for the electronic e-waste and auction bays at Kiest Warehouse and Service Center I locations. Monitoring devices are being wired to the Service Center Security guards at Service Center at Ervay. This will provide continuous monitoring of the electronic waste and other items at the Kiest warehouse location. b. Security Alarm upgrade on property – new code provided. The security alarm systems for Kiest warehouse external alarms along the outside parameter are operable and turn on when personnel leave the facility. The alarms are connected to central control directly. The internal alarm system to the building is currently operable and has always been connected to central operations and responded to by the police. Procedures are in place for setting alarms and who monitors. c. Procedures for changing alarm code when employee leaves department or at a minimum of at least once a year. Update Service Center Standard Operating procedure to state “all alarm codes will be changed each year on last day of school, unless individual in departments leave. Upon individual leaving department the alarm code will change immediately.” d. Log in sheets for all visitors to sign in. – Kiest warehouse and other warehouses are being instructed to establish a sign in log for all personnel entering the facilities. 9

e. Asset security and Ethics Training – Each individual within the Service Center Organization is provided Ethics training each year. The Service Center training will be updated to include Asset Security and operational guidelines to insure procedures are implemented and followed. Timeline for implementation: 1. a. Request for quote placed December, 2013 to establish tight controls in Service Center I dock, route room, adding Kiest warehouse to current proposal. Upon delivery will mount items and begin surveillance of these critical areas. Identification of specific staff member(s) responsible for implementing corrective action(s) Curtis Smith, Coordinator, Service Center I responsible for the placing of cameras by vendors and security guards monitoring Avis Young responsible for overall operations of Bulk warehouses Arthur Harris responsible for placement of cameras at Kiest warehouse inoperable locations 2. Internal control weaknesses were identified in supervising and monitoring of electronic waste. Electronic waste (e-waste) refers to the disposal of obsolete electronic components and materials. Ewaste materials may be valuable and recyclable, such as reusable laptops, and computer related equipment. A. Auditor observed flatbed with boxes of surplus graphing calculators outside the locked gate. Management could not provide documentation of those items. B. All e-waste items are not verified by warehouse personnel when picked up by the disposal company; only the skids are counted, not the individual items. Dallas ISD receives a list from vendor of the items on the skids when items are sold. C. There is no evidence that ongoing surplus asset inventory reconciliations are performed as assets are moved. Auditor reviewed a sample of Disposal Forms and traced electronic items on forms to vendor report, Customer Asset Report Count. Only 12 electronic items of 66 were traceable to the report (19%). D. Documentation does not provide traceability to all items picked up by vendor. RECOMMENDATIONS 2.1 Monitoring procedures should be developed and documented for surplus items that are picked up by vendor; there should be monitoring of the surplus items from delivery at the warehouse to the sale; there should be evidence of items delivered to warehouse reconciled to items sold by vendor; for example items should be tracked to a sale receipt on a regular basis and signed off by management. Description of corrective action: 2. Internal control weaknesses in supervising and monitoring electronic waste. a. There is monitoring of all Electronic Waste items at Kiest. In order for an item to be sent to Kiest, an Equipment Removal Request (ERR) must be submitted by organization requesting to turn in the item. The request is approved by supervisor and provided a control number by Capital Assets giving 10

permission to remove the item from a school or organization. The Equipment Removal Request is an inventory listing of all items to be picked up. The Motor Pool uses the request to check each item to be removed from the organization. The Motor Pool delivers the E-waste items to the E-waste areas at Kiest Warehouse. Warehouse personnel use the inventory ERR to check in each item and makes a disposition for each, i.e., auction, disposal company waste, return to school for use, and/or trash. Upon disposition being made, items are verified and placed in bay for vendor to remove on skids. Before vendor receives skids there have been at least four (4) checks of items from inventory listing ERR. b. E-waste items are identified four times prior to vendor pickup. Capital Assets at the school, Motor Pool pickup and Kiest, vendor sends final report to district Kiest and items are reconciled against ERR to ensure correct disposition of items and proper costing. This is done prior to vendor making final disposition of items. c. Disposal Company does not receive all of the Electronic Waste items. Only items that are sent for Ewaste disposal. The inventory for vendor would not have these items. The items that are disposed of trash, returned to schools for further use (shop classes) auction items, refurb items. d. Document will not provide traceability to all items because vendor does not pick up all Electronic wastes. Each individual equipment removal request must be check in order to establish correct disposition. Monitoring procedures are established and documented for surplus items picked up by vendor. There is an established equipment removal request procedure established from the user to final disposition on each electronic waste item processed at Kiest warehouse. This monitoring procedure goes through to the final disposition of the items whether it is sale, destruction, return to school, auction, refurbish. Auditor’s Notes: Fixed Assets Transfer & Disposal Forms were used to identify specific tagged e-waste that was to be disposed of by the disposal company. Vendor report did not contain these items. This supports an internal control breakdown that could lead to theft. Timeline for implementation: Current procedure is in effect. Identification of specific staff member(s) responsible for implementing corrective action(s) Arthur Harris, Kiest Warehouse, Supervisor Jimmy Laza, Jr., Kiest Warehouse, Lead person – responsible for E-waste operations. Avis Young, Bulk warehouses, Manager

3. Disposal Company has not complied with agreement in regards to the collection and remittance of sale proceeds in a timely manner. 11

A. Vendor agreement states that the disposal company shall remit to Dallas ISD all sale proceeds collected, during each calendar month less its agent’s fee no later than the 19th day of the following calendar month. On July 23, 2013 vendor picked up 18 skids of used miscellaneous electronics and as of December 4, 2013, the Dallas ISD Treasury Department had no documentation of deposits. RECOMMENDATIONS 3.1 Service Center Management should develop an efficient process to ensure Disposal Company complies with agreement terms. Description of corrective action: Procedures are in place to track individual items from user to final disposition on all items considered as Ewaste. Timeline for implementation: Current operations in effect Current the disposal company took over contract effective June 27, 2013. Shiny Queen Contract stopped, December 2012. Six month gap in two contracts Current vendor has brought the accounts current and is operating in full compliance with the established contract. All jobs up to date Check received – December 11, 2013. Identification of specific staff member(s) responsible for implementing corrective action(s) Avis Young, Service Center, Manager – bulk warehouses responsible for operations from Kiest to final disposition on each job

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REPORT DISTRIBUTION

NAME

TITLE

Audit Committee

Board of Trustees

Mike Miles

Superintendent of Schools

Wanda Paul

Chief Operations Officer

James Robinson

Director of Service Center

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