As Palo Alto heads into what promises to be a challenging budget season, a new review from the Office of the City Auditor has found that the city may have spent about $800,000 on duplicate invoices between 2013 and 2015.
While much of the money had been subsequently recovered, the audit faults the city for lacking effective procedures to identify duplicate payments and recommends that the Administrative Services Department remove from its database thousands of vendors that are no longer used or that had provided erroneous information.
The audit relied on sampling and data analytics to determine the number of potential duplicate payments between July 2013 and 2015. After identifying several duplicate samples, the auditors used random sampling to get a more precise estimate of how frequent these are.
The data-analytics methods pointed to 295 potential duplicate payments during that period. The review also confirmed that the city paid duplicate invoices, totaling $57,000, for 23 of the 133 invoice groups that the audit had randomly selected. One of these groups also included two duplicate payments, raising the overall number to 24.
The audit found that nearly 94 percent of the city's 43,642 active vendor records 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 to inactivate them in SAP (the city's enterprise software)," the audit states.
The bulk of these records, nearly 36,000, had not been used since before 2012. Furthermore, a large percentage of vendor records contained erroneous or incomplete information. Two-thirds did not have a phone number, according to the audit, and more than half of the city's roughly 1,800 corporate and sole-proprietor vendors did not provide either a tax identification or a Social Security number. In many other cases, these numbers were inconsistently formatted (the Social Security number, for example, did not follow the 999-99-9999 format) and had irregular address information.
While the monetary loss from these deficiencies appears to be minimal because of the city's ability to recover the funds, the audit notes that 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."
"Duplicate invoice payments result in both financial loss and operational inefficiency associated with recovery efforts," the report states.
The audit recommends that the city implement a "continuous monitoring process" to identify duplicate invoice payments in the new Enterprise Resources Planning (ERP) system; that it updates its invoice-processing policies to require unique invoice numbers and credit memorandums to correct invoice errors. And given the high number of unused vendors, the audit also recommends that the city conduct annual reviews of its vendor master file and update its policies to provide clear guidance about the information vendors are required to provide.
In a response memo to City Auditor Harriet Richardson, the city's Chief Financial Officer Lalo Perez noted that of the 24 duplicate payments that the auditor flagged, 17 were identified by staff and resolved before the audit. He also noted that the potential value of the duplicates, if confirmed, is about $4,977, or 0.004 percent of the average value of checks issued and charge card purchases per year.
Yet Perez also concurred with most of the report's recommendations and wrote in a response to the audit that the department will "update policies and procedures to provide information needed to create complete and accurate vendor master records."
The Administrative Services Department, he wrote, currently detects and recovers duplicate payments through "periodic accounts analysis, contract monitoring and notifications from vendors." Based on the auditor's recommendations, the department will develop and document an "internal control process" to identify duplicates for the new ERP system.
"While it may be ideal to have zero duplicate payments, staff believes that to be unrealistic given the extended time frame such a review would require and the need to process all payments within a timely turn-around," Perez wrote. "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."
The report on duplicate payments is one of two audits that Richardson released this week. The second audit looked specifically at Palo Alto's record on "green purchasing." Just like the audit on duplicate payments, it found plenty of room for improvement.
Most of the transgressions that the auditor had identified — a list that includes drinking water out of plastic bottles, loading printers with non-recycled paper and using a paper towel with insufficient post-consumer fiber — probably wouldn't be deemed sins against Mother Earth in other communities. But in Palo Alto, these actions run afoul of the Green Purchasing Policy that the city adopted in 2008, according to the audit.
While the policy doesn't prescribe which office products should be bought, it commits the city to incorporating its "environmental, economic and social stewardship criteria into its purchases of products and services." It called on the city manager and managers from key departments to create a plan that identifies eco-friendly products, considers amendments to the Municipal Code to implement green goals and engages all city staff to "identify sustainable products and services that are not purchased centrally."
But in reviewing the city's purchasing policies, Richardson's office discovered a lack of awareness throughout City Hall about the city's green-purchasing policies. Several departments, for example, "may have purchased drinking water in plastic bottles because they were not aware of the policy and reasons for not buying it." This despite a 2009 policy prohibiting purchase, distribution and sale of single-use plastic water containers.
The audit noted that several departments had purchased water in plastic bottles "for training and other events." After the audit flagged the issue, staff blocked the purchase of drinking water in plastic bottles on the Staples website.
Another area in which the city's ideals clash with its actions is paper purchases. The city has had a policy since 2003 of buying paper products consisting of at least 50 percent "secondary and post-consumer waste," provided it meets the city's requirements. Yet between July 1, 2014 and June 30, 2016, only 62,100 pounds — or 59 percent — of the city's paper product purchases from Staples had met this requirement. Furthermore, only about 19 percent of the paper purchases from other office-supply vendors met (or most likely met) this requirement, the audit found.
In addition, the audit found that the janitorial contract that applies to most 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."
In his response, City Manager James Keene agreed with the report's findings and laid out a range of actions staff plans to take to address the auditor's recommendations for better compliance with green-purchase policies. These include forming a stakeholder committee to recommend green-purchasing performance measurements, educating staff on green-purchasing policies on an ongoing basis and consulting with the City Attorney's Office to consider possible revisions to the Municipal Code.