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9 Performance Audit Fuel Cards DEPARTMENT OF GENERAL SERVICES FUEL CARD AUDIT REPORT EXECUTIVE SUMMARY The Auditing Division has completed a performance audit of the Voyager Fuel Card Program administered by the Department of General Services. This performance audit was designed to assess the controls in place to govern and control the use of fuel cards issued to City employees. A universal fuel credit card program was established by the Department of General Services and fully implemented in June, 1998 and provides an alternative source of fuel for City vehicles and departments impacted by the closure of City fuel sites. The closing of City fuel sites was due to a mandate by the Environmental Protection Agency to upgrade underground storage tanks and facilities. Under this mandate, fuel tanks not meeting government standards had to be taken out of service by December 22, The Petroleum Products Group (PPG) in the Materials Management Services Division of the Department of General Services is in charge of administering this credit card program. Prior to the implementation of this universal fuel card program, the Department used several credit card companies to provide fuel cards for city employees as needed. The closing of city fuel tanks caused fuel cards to increase from about 350 cards to over 2,000 cards in a short period of time. The fuel card company chosen by the Department of General Services to meet the City s fuel needs was Voyager Fleet Services Inc. (Voyager). The City's contract with Voyager is based on the State of California Contract No. DGS-OFA- 97FC which allows California State political subdivisions to utilize the above referenced California State contract. Voyager allows fuel credit card holders to purchase gasoline products at selected business establishments throughout the state and provides an alternative fuel source for City vehicles during the restructuring of City fuel sites. The expected benefits included continuance of providing vital City services with no disruptions during the fuel tank consolidation and restructuring. In an emergency, the card may be used to purchase vehicle related items such as tires or batteries. We found the Department of General Services is providing some level of review and has good management structure, however, they need to improve management controls. The City could benefit if General Services used their authority to remove cards from departments or restrict use to certain sites

10 Performance Audit Fuel Cards There are policies and procedures in place that could reduce the possibility of fraud or abuse of fuel cards. However, adherence to these policies and procedures could be improved. Per our sample an average of 4.3% of the Voyager fuel card costs were coded as miscellaneous. This equates to over $30,000 in miscellaneous expenses from January 1999 to May Questionable costs included over $1,000 in fraudulent charges for multiple purchases on a card that was reportedly stolen. The cardholder department organizations and General Services are not working together to establish controls over the use of the cards and follow-up to resolve many miscellaneous and questioned costs. Fuel card usage should decrease as more remodeled City fuel sites open. During this audit we have seen this trend. Although it was not in the original scope of our audit, our analysis has shown that as of May 2000 the overall number of gallons of fuel purchased by the four departments with the greatest fuel consumption has decreased slightly (see Attachment A). CONCLUSIONS AND OBSERVATIONS Although the program has good components of internal control in place, we found control activities over the use of fuel cards need to be improved. Our findings included: The Department of General Services does not have accurate data on some fuel cards The Department of General Services and other user departments did not monitor activity of fuel cards in a timely manner The Department of General Services did not discontinue service from a gas station that repeatedly miscoded purchases User departments did not establish effective internal controls to decrease the possibility of abuse or misuse of City fuel cards The users of City fuel cards did not, in many cases, attempt to use City fuel tanks before going to commercial fuel stations The Petroleum Products Group does not use an enforcement process when user departments do not respond to questionable or inappropriate expenses brought to their attention - 2 -

11 Performance Audit Fuel Cards RECOMMENDATIONS We recommend the Department of General Services: 1) Report to the Mayor, Council, and the Controller when departments do not respond to requests for information or ensure improper purchases are reimbursed to the City. 2) Review cardholder statements and provide them to the departments each month. 3) Update records to reflect changes in cardholder status as soon as they are reported. 4) Update Usage Guidelines to include the following: a) Failure to adhere to the above conditions can result in the fuel card holder being responsible for payment of the purchase, revocation of the use of the fuel card at the discretion of General Services, and/or other disciplinary action. b) A requirement for departments and organizations to inform the Petroleum Products Group when employee changes are made that require an employee to surrender his or her card. 5) Send a letter to gas stations which continue to miscode purchases to notify them to use the correct procedures or the City will no longer authorize employees to use the gas station. We recommend the Mayor and City Council: 1) Hold Department heads responsible for ensuring fuel cardholders reimburse the City for any personal or unallowable use of fuel cards and are held accountable for misuse of cards. 2) Require City departments to inform the Petroleum Products Group when staff members with fuel cards leave the department, organization, or City service

12 Performance Audit Fuel Cards We recommend the Department of General Services work with user departments to: 1) Encourage cardholders to use City fuel tanks unless it would impact public safety or if an analysis shows it is more cost effective to use a fuel card. 2) Require employees to read all Usage Guidelines and sign a form indicating that they have read and understand and agree with the conditions for using the Voyager fuel card. 3) Ensure user departments do not patronize gas stations that continue to inappropriately miscode purchases. 4) Establish clear guidelines and authority for control over the use of fuel cards. OBJECTIVES OF THE AUDIT The objective of the audit was to review the City of Los Angeles Voyager Fuel Purchase Card Program. This performance audit was conducted to determine if: 1) There are adequate controls in place that govern efficient and effective use of fuel cards including the procedures used in determining who is issued a fuel card and the level of compliance with City policies and procedures 2) Proper controls are in place to restrict use of fuel cards to City vehicles 3) City fuel sites are used by City departments instead of commercial fuel sites when available, and to determine the cost differentiation when fuel is obtained at a commercial site versus City fuel sites 4) Fuel card purchases have been made properly and comply with City policies and procedures and if the most cost-effective fuel is used once City fuel tanks are replaced An additional audit objective was included in the project proposal which is: To determine if the complete upgrade, automation and removal of appropriate underground storage tanks, as outlined in the revised fuel site consolidation program, (fuel tank replacement program), are on schedule and within budget to allow minimum usage of fuel cards. This objective was examined briefly during - 4 -

13 Performance Audit Fuel Cards this audit; however, we have determined that an extensive investigation will be necessary and will require a separate project to fully explore this topic. This may be the subject of a separate audit. AUDIT TECHNIQUES AND METHODOLOGY Auditors used a number of data sources during the audit, including interviews, reviews of documentation and testing of transactions. Auditors conducted interviews with the following City representatives: The Director of the Department of General Services Materials Management Group The Petroleum Products Administrator of the Materials Management Group in the Department of General Services The Director of the Citywide Fleet Reengineering Division of the Department of General Services Representatives of three Council Districts Staff at five City departments Auditors reviewed and analyzed the following documents or data: The Product Purchase Summaries to determine the total gallons of fuel and amount of money spent in each department The monthly invoice reports to determine timeliness of payments to the vendor and to generate a trend analysis on card usage Vehicle reports to determine the amounts of payments made for fuel Fuel usage data provided by the Petroleum Products Administrator Vendor card usage guidelines - 5 -

14 Performance Audit Fuel Cards Auditors: Examined the card application process and the process of card distribution and retrieval to and from employees. Sampled miscellaneous transactions from invoices and tested them to determine if they were for business use. Reviewed miscellaneous and other questionable transactions. Conducted a test to verify the accuracy of the list of cardholders from randomly selected user departments against the list provided from the Department of General Services. We performed audit fieldwork from May 2, 2000 to October 24, The audit period covered was expanded to January 1999 to June 2000 to allow auditors to look at expenditures through June 2000 to develop overall trends. The audit was conducted in accordance with generally accepted Government Auditing Standards

15 Performance Audit Fuel Cards BACKGROUND General Information The City of Los Angeles and all underground fuel storage tank owners were under a mandate by the Federal Government to either close or bring up to Environmental Protection Agency (EPA) standards all underground fuel storage tanks and facilities by December 22, 1998 (Council File ). Non-compliant fuel sites were to be removed from service after this date or the City would be assessed penalties on a daily basis. In an effort to meet this deadline, a tank consolidation plan was developed to comply with EPA regulations, which required all underground storage tanks to be doubled-walled or taken out of service. The underground fuel tank program included removal/replacement of all single walled storage tanks, reduction of the number of tanks throughout the City, construction of centralized fueling facilities and use of credit cards so City vehicles can be refueled at private stations during restructuring. Prior to the implementation of this universal fuel card program, the Department used several credit card companies to provide fuel cards for city employees as needed. The closing of city fuel tanks caused fuel cards to increase from about 350 cards to over 2,000 cards in a short period of time. Of particular concern was the productivity of City departments that may be hampered due to the need to drive further in order to re-fuel City vehicles. A universal fuel credit card program was initiated by the Department of General Services and provided an alternative source of fuel for City vehicles and departments impacted by the closure of many of the fueling sites. The Petroleum Products Group (PPG) in the Materials Management Services Division of the Department of General Services is in charge of administering this credit card program. The department reported that they researched the various universal fuel credit card programs in existence that can be used at most commercial fuel stations in the State and found that Chevron and Voyager Fleet Services Inc. were the only two programs that afforded similar controls, reports, and automatic reduction of the federal excise tax. However, Chevron was discontinuing their program. The fuel card company chosen to meet the City s needs by General Services was Voyager Fleet Services Inc. (Voyager). The City's contract with Voyager was based on the State of California Contract No. DGS-OFA-97FC which allows California State political subdivisions to utilize the above referenced California State contract. Voyager allows fuel credit card holders to purchase gasoline products at selected business establishments throughout the state. The Voyager Fuel Card program was considered in full implementation by June 1, One of the goals was to provide an alternative fuel source for City vehicles during the restructuring of City fuel sites. The expected benefits included continuance of - 7 -

16 Performance Audit Fuel Cards providing vital City services with no disruptions during the fuel tank consolidation and restructuring. Voyager Fleet Services, Inc. has Electronic Point of Sale (EPOS) compatibility with at least 6,000 business establishments in California. There are over 7,100 locations that participate and honor the fuel credit cards issued by Voyager. This allows City employees to procure gasoline products at the following business establishments: Amoco, Ashland, British Petroleum (BP), Chevron, Citgo, Clark, Exxon, Exxon Aviation, Gulf, Marathon, Mobil, Phillips 66, Phillips 66 Aviation, Rich Oil, Shell, Sunoco, Superamerica, Texaco, Texaco Aviation, Conoco, Getty and Wilco. In an emergency, the card may be used to purchase vehicle related items such as a battery, tire, tube, fan belt, antifreeze/coolant, gas tank cap, brake fluid, engine lubricating oil, transmission oil, wiper blades, radiator, spark plugs, etc. Controls on the use of fuel cards include a limit of $1,000 worth of transactions per card per month and a limit of three transactions per day for most departments. Subsequent sales after a card has reached its transaction limit will be reported to General Services on an exception report 1 provided by Voyager monthly to enhance control parameters on purchase and daily transaction limits. These reports are examined by General Services and these transactions are questioned. In accordance with their contract, for quality control, Voyager was to provide the following services: Ensure the quality of the card sent to the City; Ensure the delivery of the cards and reports is consistent with the terms and conditions of the contract; Ensure that authorization and processing system integrity is maintained at all times with adequate backup in the event of primary system interruption; Ensure that transactions are posted accurately and in accordance with the terms and conditions of the contract; Ensure that the information captured for reports in accordance with the contract is complete, accurate, timely and secure. Mission of the Department Of General Services and The Materials Management Services Division The mission of the Department of General Services is to have a competent and motivated work force in order to provide City leadership in 1 Exception reports list exceptions to clearly identify questionable purchases or potential misuse of credit cards based on a predetermined level of variance. For most departments the limit is three transactions per week or $1,000 per month

17 Performance Audit Fuel Cards managing facilities, equipment, supplies, security, communications, maintenance, and other support services for City departments in a safe, reliable and efficient manner. To meet the mission of General Services, the Materials Management Services Division (MMSD) must efficiently and expeditiously provide supplies, fuel, office equipment repair, salvage services and administrative and system support to the City. Thus enabling General Services to be responsive to the needs of all City departments. The Petroleum Products Group (PPG) of the MMSD of General Services is responsible for the administration of the Voyager Fuel Credit Card Program. This group has a total of four positions. The group is made up of the Petroleum Products Administrator (Management Analyst II), one Senior Clerk Typist and two Clerk Typists. The Petroleum Products Administrator s (PPA) duties include: Issuance of new cards Review of card activity Management of lost/stolen/destroyed cards Coordination of vendor related duties Receipt and cancellation of cards upon change or separation of employment Receiving and investigating fraud complaints Acting as the liaison between Voyager and the fuel card user departments The PPG assumed responsibility for the Voyager fuel cards June 1, They are responsible for monitoring an average of 1,800 transactions per month. Prior to the Voyager Fuel Card program, the City had approximately 300 fuel cards issued from a variety of fuel companies. On May 9, 2000, the PPA reported the number of cards issued was 958. A total of 382 unissued cards are on hand for various departments for temporary or emergency use. The Voyager cards are available to all City Council controlled departments with the exception of the Fire and Police Departments and the proprietary Departments, namely, the Harbor Department, the Department of Airports, and the Department of Water and Power. Distribution and Retrieval of Fuel Cards The Voyager card has built-in controls to monitor and report purchases. The information automatically captured includes the date, time, card number, fuel type, quantity of fuel dispensed, price and encoded vehicle information, if applicable. Each Voyager card bears the City s name, the card number and the code number of the user Department on the front. The back of the card has the standard magnetic strip and a space for the cardholder s signature. Cardholders - 9 -

18 Performance Audit Fuel Cards are asked not to sign the cards in the usage guidelines since the cards are not assigned to an individual and many people use the cards. However, according to the PPA most employees sign the back of the cards. At the May 9, 2000 interview, the PPA reported the total number of cards issued was 958 based on his computer records. However, per the list of cards issued as of May 9, 2000, provided by the PPA, there were 943 cardholders. The number of cards issued per department or organization is listed in Attachment B. The MMSD stated that the reason there may be a discrepancy with data reported on the May 9, 2000 list of cards issued is because the Departments database is dynamic and is updated daily. The MMSD stated this difference might be due to a timing issue. For lost or stolen cards, the PPA informs Voyager and requests the card(s) be deactivated and replacement cards sent, when necessary. A department head or the appropriate level of management may propose personnel be assigned a card by requesting it in writing. When the PPG receives requests for fuel cards, they determine if an appropriate level of management has authorized the request. The Director of the Materials Management Services Group then approves or disapproves the issuance of the fuel card. The PPG notifies Voyager in writing as to the authorized departments that may be furnished with City fuel cards. For each authorized department, a dedicated account was set up. The PPG provides Voyager with the following information with respect to each department: 1. Department name 2. Contact name and telephone number 3. Billing address 4. Approximate number of required credit cards When a fuel card is issued, the card is given directly to the cardholder who either goes to the PPG office to claim the card or has it delivered by a representative of the PPG. An authorized representative of the requesting department must fill out a Commercial Fuel Card Request Form (Attachment C) prior to the release of the card. In addition, some form of identification must be shown for verification. These cards are not sent in the interoffice mail or the U.S. Postal service when being distributed to cardholders. When the cards are distributed, instructions and guidelines, Usage Guidelines for Commercial Fuel Cards, (Attachment D) for their use are provided to the cardholder together with a list of authorized gasoline stations. The guidelines provided by the PPG state the restrictions on the use of fuel cards. In addition, each department is expected to establish their own procedures to ensure the use of the Voyager card is limited to legitimate fuel and vehicle parts purchases that are made exclusively for City vehicles. The MMSD is

19 Performance Audit Fuel Cards unable to determine the specific buying patterns that are unique to each department to reduce incidents of fraud and abuse. This is the responsibility of each of the user departments. We have determined the trend in fuel card usage should decrease as more remodeled City fuel sites open. During this audit we have seen this trend. Although it is beyond the scope of our audit, our analysis has shown that as of May 2000 the overall number of gallons of fuel purchased by the four departments with the greatest fuel consumption has decreased slightly. (See Attachment A.) The cost of fuel at City pumps is, on average, usually between $.20 and $.30 less per gallon than the fuel purchased with Voyager fuel cards at commercial gas stations. Billing Cycle and Invoice Processing The following reports are provided to the PPG from the Voyager Company on a monthly basis: 1) Invoice This contains the transaction date and time; vendor identification; transaction location/description; transaction identification or receipt number; the message code which indicates if the transaction is an electronic or manual sale at the pump; product code which indicates if the item was unleaded, super-unleaded, diesel, oil, labor or other miscellaneous items; quantity purchased; transaction amount; and exempted taxes. 2) Product Purchase Summaries This report provides a summary of all products purchased per department. Each product type is clearly identified by name, such as battery, oil, tire, diesel, etc. 3) Tax Exemption Report This is a summary of the tax descriptions, tax type, tax rate, gallons used in calculation, amount used in calculation and exemption amount broken down per department. 4) Vehicle Report The report provides itemized purchases for each commuter pool vehicle that a card is issued to. (Other cards are issued to an individual and not a vehicle.) This report can also show the purchase date and time, vendor identification, location number, transaction identification, card identification, driver name, odometer, product, units or gallons, cost per unit/gallon, transaction amount, cost per mile, miles per gallon and exceptions. In our review we found the spaces for the vehicle

20 Performance Audit Fuel Cards description, license tag, odometer readings, miles driven, manufacturer s vehicle identification number, drivers name, cost per mile and miles per gallon did not contain any information. These reports are analyzed and monitored by the Director of the MMSD and the PPA. All invoices are reviewed and questionable purchases are brought to the attention of user departments in the form of a memorandum (Attachment E). Departments are expected to provide an explanation for discrepancies or repay the City for unauthorized expenses. If departments do not respond, no additional follow up is made. Voyager s average billing cycle is 31 days. Closing dates vary from the 24 th to the 26 th of each month. These reports and statements are mailed by the first of each month. Upon receipt of the invoice, a sub-purchase order is prepared by the PPG. The original invoice and sub purchase order are sent to the accounting department for payment processing. A copy of the invoice with supporting statements and a duplicate of the sub-purchase order is kept on file at General Services. Voyager does not charge late fees and does not provide discounts for early payment

21 Performance Audit Fuel Cards FINDING: CONTROL ACTIVITIES OVER THE USE OF FUEL CARDS NEED TO BE IMPROVED We found the Department of General Services is providing some level of review and has good management structure, however, management controls over the fuel card program needs to be improved. The City could benefit if General Services had used their authority to remove cards from departments or restrict use to certain sites. There are policies and procedures made available to General Services by Voyager that would restrict fuel card usage and cause any purchases that are over the limit to be declined. The PPG does not have this system in place. However, they have opted to have an exception report provided to them to show when a department or organization exceeds their credit limit. General Services felt that this would better serve city employees because they would still be able to obtain fuel to do their job. Even with this exception report, adherence to these policies and procedures are weak because departments are not notified in many cases until two months from the date the questionable expense was made. The cardholder departments and General Services are not working together to establish controls over the use of the cards and follow-up to resolve questioned costs. One questionable cost included over $1,000 in fraudulent charges for multiple purchases on a card that was reportedly stolen. This may have been avoided if tighter controls existed over the use of fuel cards. The Fuel Card Program Does Not Have Adequate Or Effective Internal Controls Internal controls 2 are put in place to keep an organization on course toward goals and achievement of its mission and to minimize surprises along the way. They enable management to deal with rapidly changing economic and competitive environments, shifting customer demands and priorities, and restructuring for future growth. Internal control consists of the five interrelated components listed below. Auditors found General Services and other departments have weaknesses in three of these components; control activities, information and communication, and monitoring. 2 Internal Control Integrated Framework, Committee of Sponsoring Organizations of the Treadway Commission,

22 Performance Audit Fuel Cards 1. Control Environment Control environment factors include the integrity, ethical values and competence of the entity s people; management s philosophy and operating style; the way management assigns authority and responsibility, and organizes and develops its people; and the attention and direction provided by the governing board. 2. Risk Assessment Risk assessment is the identification and analysis of relevant risks to achievement of the objectives, which forms a basis for determining how the risks should be managed. 3. Control Activities Control activities are the policies and procedures that help ensure management directives are carried out. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliation, reviews of operating performance, security of assets and segregation of duties. 4. Information and Communication Pertinent information must be identified, captured and communicated in a form and timeframe that enables people to carry out their responsibilities. Information systems produce reports, containing operational, financial and compliance-related information that make it possible to evaluate and control the program. 5. Monitoring Internal control systems need to be monitored a process that assesses the quality of the system s performance over time. This is accomplished through ongoing monitoring activities, separate evaluations or a combination of the two. On-going monitoring occurs in the course of operations. It includes regular management and supervisory activities, and other action personnel take in performing their duties. Internal control deficiencies should be reported upstream, with serious matters reported to top management and the governing board. All five components must be present and functioning effectively to conclude that internal control over operations is effective. Everyone in an organization has responsibility for internal control. Internal Control Weaknesses Although the program has good components of internal control in place, we found control activities over the use of fuel cards need to be improved

23 Performance Audit Fuel Cards Our findings included: The Department of General Services did not have accurate data on some fuel cards The Department of General Services and other user departments did not monitor activity of fuel cards In a timely manner The Department of General Services did not discontinue service from a gas station that repeatedly miscoded purchases User departments did not establish effective internal controls to decrease the possibility of abuse or misuse of City fuel cards The users of City fuel cards did not, in many cases, attempt to use City fuel tanks before going to commercial fuel stations The Petroleum Products Group does not use an enforcement process when user departments do not respond to questionable or inappropriate expenses brought to their attention The Department of General Services Did Not Have Accurate Data on Some Fuel Cards Standard business practices dictate that accurate records must be kept on the distribution of fuel cards issued to City departments to control activities and provide pertinent information to user departments. In addition, the card activity cannot be appropriately monitored if accurate records are not kept on the existing fuel cards. While conducting cursory checks of records in six departments, auditors found General Services records did not match departmental records in two cases. The PPA stated their records are not accurate because cardholder departments and other organizations do not inform them when changes are made by employees that affect the card usage. However, a review of the records in our own office showed PPA records were not updated to reflect changes that were submitted to the PPA. The PPG provided a list of cardholders that we were told was current as of May 9, This list showed a card issued to the Office of the Controller, which per a memo provided by the Controllers Management Services Division, was turned in to the PPA on January 25, The PPA signed a memo acknowledging the receipt of the card, however, as of May 9, 2000, their records were not updated to reflect this change

24 Performance Audit Fuel Cards Although standard business practices dictate that departments should update cardholder status changes with the MMSD, the Usage Guidelines do not require departments to update this information. Careful records need to be kept to track fuel card expenditures to avoid fraud. This can be a difficult task if General Services does not have accurate records. The Department of General Services and Other User Departments Did Not Monitor Activity of Fuel Cards In A Timely Manner The PPG provides a list of Usage Guidelines for Commercial Fuel Cards to each employee who receives a fuel card. Guideline Number Seven states: Every month a Voyager Fuel Card transaction report will be mailed to all card users supervisors for review and verification. If any transaction is found not to be related to City business, the employee will be required to reimburse the City for such services. This guideline has not been followed by the PPG. Two out of six departments interviewed stated they receive transaction reports periodically when a questionable expense has been found by the PPG. The PPG disagrees and reported they send transaction reports every other month to all departments involved. Other departments reported they receive the transaction reports every other month. Therefore the majority of time, the transaction reports are received by the user departments long after the transactions and payments have been made to Voyager. The PPG does not know the specific buying patterns of all of the user departments. The management of the cardholders in each department should be allowed to review the transaction reports every month. The management of each department is more qualified to determine which expenses are abnormal or questionable. Receiving transaction reports on a monthly basis will help departmental management facilitate the reviews of their employees buying patterns. For example, auditors noted some department managers found additional questionable expenditures on the transaction reports sent by the PPG when the PPG only noted certain questionable or miscellaneous expenses. Department managers are better able to analyze the amount/gallons, frequency, time of day, location, as well as type of fuel (propane or high octane for high altitude vehicles), purchased by specific employees. Careful records need to be kept to track usage of fuel card expenditures. This can be a difficult task if the PPG

25 Performance Audit Fuel Cards does not send appropriate transaction records to the departments on a monthly basis. Departments that had repeated questionable purchases entered as "miscellaneous" and "food" spent resources to conduct time-consuming investigations of transactions which occurred months before. This not only involves the employee who used the Voyager card and his/her immediate supervisor, but the Administrative Services Division and Accounting Division as well. In the case of the Department of Transportation (DOT), the department stated that in nearly all these situations, "miscellaneous" purchases were made for special equipment that ran exclusively on propane. At the time of the audit, receipts were being forwarded directly to the PPG instead of the Administrative Services Division. The PPG has been satisfied with this procedure. Voyager should be notified promptly about cards that need to be deactivated and/or are due to be replaced. In a memoranda dated February 10, 1999, a card issued to Commuter Services reportedly ceased to work and the department requested a replacement card. The card was allegedly sent back to the PPG by interoffice mail. The PPA did not cancel the card or issue a replacement card because the defective card was reportedly never received. The Voyager March 24, 1999 invoice showed 32 purchases on the same card for a total of $ and six purchases on the April 26, 1999 invoice for a total of $ The Materials Management Services Division Director sent a memo on May 13, 1999 asking for an explanation for the high volume of charges and the large dollar amount associated with the charges. An investigation ensued. The PPA reported this incident to the Los Angeles Police Department on June 3, Departments must notify the PPA immediately about defective or lost cards that are to be cancelled. This incident could have been avoided if the Department had followed up and the PPA had notified Voyager in a more timely manner that the card was to be replaced so it would have been deactivated promptly. The PPG needs to send transaction reports to each user department on a monthly basis regardless of whether they find questionable expenditures or not. This will involve the various departments and contribute to the effectiveness of the control environment since they can compare the recent buying patterns with past trends. To achieve the objective of decreasing possible card misuse or abuse, each department should take responsibility for the safekeeping and monitoring of their fuel card activity. Also, each department must clearly communicate that employees found violating the rules are subject to appropriate disciplinary action

26 Performance Audit Fuel Cards The Department of General Services Did Not Discontinue Service From a Gas Station that Repeatedly Miscoded Purchases Voyager invoices the City for the purchases made on the fuel cards less any fuel tax exemptions. The City of Los Angeles is exempt from the payment of federal excise tax on fuel purchases; therefore, Voyager processes exemptions for federal excise tax on gasoline (unleaded) purchases only. This exemption does not apply to diesel fuel purchases. A gas station located in Los Angeles has consistently recorded about 60% of City related transactions as "miscellaneous" which makes it difficult for anyone to determine the actual purchase. These entries do not specify the types of petroleum product purchased and the quantities entered are usually ".01" regardless of the amount. This condition has existed since July 1998 and nothing has been done to stop these practices. It was noted that this gas station has properly coded some diesel and super unleaded and unleaded fuel purchases, therefore, the station has the ability to code all purchases correctly. Without monthly statements, department managers are unable to monitor the buying habits of the people or departments who made "miscellaneous" purchases from this station in a timely manner. This opens the possibility for unauthorized purchases to be made. In addition, improperly coded miscellaneous transactions that are actually fuel purchases do not enable the City to receive exemptions for fuel taxes. According to the PPA, it would be difficult for the City to go out to each of the locations that have been inaccurately ringing up "miscellaneous" entries. He stated that no telephone numbers are listed on the statements and only the addresses are given; therefore he cannot call these gas stations and request that they use the correct transaction code. The PPA also explained that this is most likely attributed to the gas station attendant not ringing up the correct transaction code. This makes it difficult to make the proper determination of the accurate number of gallons and the type of petroleum product(s) purchased. The Director of the MMSD stated that it is the responsibility of each department s management to decide which specific stations should be used. There may be underlying issues such as convenience, cost effectiveness, and hours of operation, that override ensuring that stations correctly code purchases. The total amount of charges coded as miscellaneous for the period January 1, 1999 to June 2000 was approximately $30,000. Of this amount, based on our sample, auditors estimate $18,000 were probably acceptable purchases such as the purchase of propane or gasoline. For the remaining $12,000, no evidence was presented to determine if the charges were acceptable

27 Performance Audit Fuel Cards User Departments Did Not Establish Effective Internal Controls to Decrease the Possibility of Abuse or Misuse of City Fuel Cards It is each department s responsibility to monitor and ensure compliance with the fuel purchase rules. Each department is better suited to perform monitoring due to the fact that they are more familiar with buying patterns of their specific employees. Each department is more familiar with specifics such as the times of day their employees work, and vehicles mileage and the locations where employees should be at certain times of the day, etc. Many departments felt it is the job of General Services to monitor fuel card activity. General Services, on the other hand, feels it is the job of each department to monitor fuel card usage. There has been no clear-cut distinction as to who is responsible for what as it relates to fuel cards. Sound business practices dictate that responsibilities for both General Services and each department should be specifically stated. A lack of such guidelines increases the possibility that fraudulent activity may occur. The Users of City Fuel Cards Did Not, In Many Cases, Attempt to Use City Fuel Tanks Before Going to Commercial Fuel Stations The implementation of the fuel tank automation was scheduled to be completed in July Many of the City s fuel tanks are operational now, however, many cardholders opted to go to commercial gas stations rather than the City fuel sites when they were available. Because of the close proximity of some commercial fuel stations and cardholders personal preference, certain cardholders chose to use commercial stations instead of the City fuel tanks. The cost differentiation on average is $.20 to $.30 more per gallon at commercial fuel stations. General Services reported that $136,720, $198,524 and $373,205 was paid for commercial fuel purchases with various credit cards administered by their department in FY , FY and FY , respectively. This amount jumped to $444,923 for the 11-month period from July 1999 to May Auditors estimated the City spent between $92,830 and $139,250 more to obtain fuel at commercial fuel stations instead of City fuel pumps for the period January 1999 to May These figures were derived by using the $.20 to $.30 more per gallon cost for fuel at commercial fuel stations multiplied by the 464,196 gallons of gas used during that period. Discerning how much it cost per month because fuel tanks are shut down versus employees using commercial pumps when fuel tanks are available is difficult because fuel tanks came on line at different times and each City

28 Performance Audit Fuel Cards employee may or may not have easy access to City fuel sites. Auditors estimated the City might be overpaying as much as $10,000 per month because City employees use commercial fueling instead of City fuel pumps. General Services should encourage cardholders to use the most efficient method of purchasing fuel considering the location of the nearest city fuel tank verses the time that might be saved by using an authorized Voyager fuel station. Employees should be reminded that the Voyager card program was initiated to provide an alternative source of fuel for departments impacted by the closure of many of the cities fueling sites. User departments and General Services should modify the Usage Guidelines for Commercial Fuel Cards which state that, All City employees are reminded that they should make every effort to obtain fuel at City facilities prior to requesting a commercial fuel card. This statement should be modified to include that once fuel cards are obtained every effort should still be made to use City fuel sites. In addition, General Services and user departments should enforce this rule. Auditors noted in some cases it may be more cost efficient for employees to use commercial fueling because of special needs or if it may impact public safety. Each department should perform an analysis to determine which employee would benefit by using a fuel card. The Petroleum Products Group Does Not Use An Enforcement Process When User Departments Do Not Respond to Questionable or Inappropriate Expenses Brought to Their Attention The City of Los Angeles Code of Ethics Section XI states, Persons in the public service shall perform their duties earnestly, economically and efficiently. While reviewing a sample of fuel card invoice reports we noted $1,000 in questionable or unallowable charges, none of which were reimbursed by the fuel cardholder. Two miscellaneous charges for $ each and another for $81.95 were made on the same card. No explanations for these charges were provided to General Services when requested. One transaction for $ on 3/4/99 and two for $7.50 each dated 3/19/99 and 4/2/99 were made by an Assistant General Manager to reportedly have a City vehicle cleaned. A transaction occurred in February 1999, which was coded as a food purchase for $

29 Performance Audit Fuel Cards An unexplained charge for $70.14 was made and coded as "Accessories". Other miscellaneous charges were made that ranged from $5.50 to $10.00 and it was determined that they were reportedly made for car washes - an unallowable expense. City vehicles can be cleaned and washed at City Hall East - only the fuel pumps were affected by the fuel tank program. Multiple charges of $50.00 were made in September and October of 1999 on one card. During our testing it was also determined that a significant number of transactions per month were for the purchase of Premium and Super unleaded fuel, a purchase that was explicitly prohibited by Fuel Usage Guidelines unless it was determined to be necessary for the specific vehicle in use. In most cases, this was not deemed to be necessary for the specific type of vehicle used. We noted that in several instances the PPG notified user departments that abuses had taken place and requested management have employees reimburse the city for personal expenses. No reimbursements were made. The staff at the PPG also repeatedly notified supervisors of fuel card holders in several departments and Council Districts that only regular unleaded fuel can be used, however many of the departments and Council Districts ignored these memoranda. A PPG representative stated it is still a problem. Although the PPG also repeatedly reminded many departments that the cards are not to be used for car washes, these memoranda also seemed to be ignored. The PPA stated that he received only one check from an employee in June 2000, after the commencement of this audit, for reimbursement of unallowable expenses. The PPA stated he has only received one reimbursement for personal use of the fuel cards because General Services has no enforcement power over any department and they are unable to enforce rules on other departments. The PPA stated that it is solely the department s responsibility to monitor and ensure compliance with fuel card rules. As such, General Services has taken no responsibility for enforcing repayment of improper charges. During our review of the transactions, we identified the need for the City to enforce policies and procedures regarding the purchase of food and other miscellaneous items. The departments need to establish additional performance measures to ensure continued success of the fuel card program and the efficient use of City resources. Planning can be improved to ensure the achievement of the operation objectives of the fuel card program. Internal control guidelines and

30 Performance Audit Fuel Cards administrative policies and procedures recognize the usefulness of performance measures by stating that performance indicators that relate different sets of operations or financial data to one another should be periodically analyzed to determine the success of programs. A standard Internal Control Policy should provide that the City shall have an adequate system of internal control to provide reasonable assurance that funds are safeguarded against waste, fraud and abuse. Through our tests we have identified isolated cases where invoices were paid for personal expenses such as food. RECOMMENDATIONS We recommend the Department of General Services: 1) Report to the Mayor, Council, and the Controller when departments do not respond to requests for information or ensure improper purchases are reimbursed to the City. 2) Review cardholder statements and provide them to the departments each month. 3) Update records to reflect changes in cardholder status as soon as they are reported. 4) Update Usage Guidelines to include the following: a) Failure to adhere to the above conditions can result in the fuel card holder being responsible for payment of the purchase, revocation of the use of the fuel card at the discretion of General Services, and/or other disciplinary action. b) A requirement for departments and organizations to inform the Petroleum Products Group when employee changes are made that require an employee to surrender his or her card. 5) Send a letter to gas stations which continue to miscode purchases to notify them to use the correct procedures or the City will no longer authorize employees to use the gas station

31 Performance Audit Fuel Cards We recommend the Mayor and City Council: 1) Hold Department heads responsible for ensuring fuel cardholders reimburse the City for any personal or unallowable use of fuel cards and are held accountable for misuse of cards. 2) Require City departments to inform the Petroleum Products Group when staff members with fuel cards leave the department, organization, or City service. We recommend the Department of General Services work with user departments to: 1) Encourage cardholders to use City fuel tanks unless it would impact public safety or if an analysis shows it is more cost effective to use a fuel card. 2) Require employees to read all Usage Guidelines and sign a form indicating that they have read and understand and agree with the conditions for using the Voyager fuel card. 3) Ensure user departments do not patronize gas stations that continue to inappropriately miscode purchases. 4) Establish clear guidelines and authority for control over the use of fuel cards

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34 ATTACHMENT B Number of Card Holders by Department Department 1 Office of the Mayor 11 2 Office of the Controller 3 3 Temporary-City Clerk/Elections 2 & 7 4 Department of Aging 1 5 Department of Transportation Office of the Chief Administrative Officer 3 7 Office of the Chief Legislative Analyst 5 8 Department of Animal Regulation 17 9 Personnel Department/Commuter Services 10 Department of Building and Safety 1 11 Information Technology Agency City Attorney Community Development Department 5 14 Department of Recreation and Parks Department of General Services Council District Offices # Library 1 18 Community Redevelopment Agency 7 19 No. of Cardholders 2 & 11 Board of Public Works 5 Bureau of Street Maintenance* 13 Bureau of Street Services* 69 Bureau of Contract Administration 4 Bureau of Engineering 7 Bureau of Sanitation 12 Bureau of Street Lighting 9 20 Environmental Affairs 4 21 City Zoo 5 22 Temporary-Human Relations 1 23 Temporary-Status of Women 1 24 Temporary-Disability 1 25 Temporary-Neighborhood 2 Empowerment 26 Temporary-Cultural Affairs 1 Total 943 Source of Data: Per the Petroleum Products Group list of Cardholders dated May 9, * Although these Bureaus are now one organization, this is the list that was provided to the Controller. ATTACHMENT B

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