Loading...
HomeMy WebLinkAboutCOM 0109.001 2016-2018 Valerie T.Poindexter Bonnie S.Nims,CGAP Chair&Presiding Officer `l'!!o;'.., Legislative Auditor Council District 1 %' Business Address ar•.,, :'.P`�.-' 1266 Kamehameha Avenue ...................'. ' Suite A-8 Hilo,Hawaii 96720 C outtfv. of c .iiuni`t OFFICE OF THE LEGISLATIVE AUDITOR COUNTY CLERK 25 Aupuni Street Hilo, Hawaii 96720 * (808)961-8386 * Fax(808)961-8905 COUNTY OF HAWAI'I website:httpa'hawaiicounty.gov e-mail:publiclao@co.hawaii.hi.us RECEIVED Time 4:404111 By tihti Date FEE). 23, L0/7 DATE: February 23, 2017 TO: The Honorable Valerie T. Poindexter, Council Chair and Members of the Hawai'i County Council FROM: Bonnie S. Nims, CGAP, Legislative Auditor&SK) RE: Revised Audit Report Please see the attached for revisions to the Office of the Legislative Auditor's Performance Audit Report of the Inventory Management at the County of Hawai"i's Department of Public Works Highway Maintenance Division Report No. 2017-01, dated February 2, 2017. Revisions were made to the following pages: • In Brief- What we found (3`d paragraph): Seventy-[seven] eight percent of the Division's inventory we reviewed, clearly demonstrated proper recording, tagging, and safeguarding of inventory. However, our audit identified at least 179 items totaling [x80,000] approximately $175,500 that did not follow County inventory policy and procedures. • Page 18 (1st paragraph): Eight were new items totaling [$9,100] $4,677. Please contact me at 961-8386 should you have any questions. Thank you for your kind attention. cc. Harry Kim, Mayor Stewart Maeda, County Clerk Wil Okabe, Managing Director Frank J. De Marco, P.E., Public Works Director Allan G. Simeon, P.E., Public Works Deputy Director Neil Azevedo, Highway Maintenance Division Chief Collins Tomei, Finance Director Deanna Sako, Deputy Finance Director Comm: No. 1 09.lQ . 1 Ref. To: PC-- Ref. Date FEB 2 3 2017 Hawaii County is an Equal Opportunity Provider and Employer Inventory Management at County of HawaiTs Department of Public Works Highway Maintenance Division Report No. 2017-01 Inventory Management February 2, 2017 Office of the Legislative Auditor County of Hawaii In Brief Background The County's inventory management is governed by state and county legislation. Hawai"i County Charter Section 6-6.3(k) requires preparing and maintaining a perpetual inventory of county owned equipment and disposal of property no longer needed. At fiscal year-end 2015, the Department of Public Works (DPW) Highway Maintenance Division reported $27.1 million of fixed assets (including controlled assets under $1,000). The Division also reported $1.5 million of materials, tools, and supplies (MTS) inventory. Controlled assets, also known as "small and attractive", are items costing more than $250 but less than $1,000 that are inventoried because they are sensitive, portable, and prone to theft (e.g., mowers, weedeaters, portable saws, etc.). We judgmentally selected controlled assets and MTS inventory under $1,000 at the DPW Highway Maintenance baseyards for review from July 1, 2014 to December 31, 2015. Why we did this audit This performance audit was undertaken to evaluate if the Division's internal controls were adequate to reduce the risk of fraud and mishandling of County -owned equipment and to identify potential areas for improvement. The audit also assessed if inventory transactions complied with county and state laws and regulations, county policies, and industry best practices. We initiated the audit, as we believe controlled assets are inherently high-risk of being stolen or used for personal benefit. LWhat we found DPW Highway Maintenance Division's inventory management system lacks sufficient internal controls, including independent monitoring, proper recording and disposal of inventory, continuously tracking of items prone to theft, adequate safeguarding, training of employees, and written policies and procedures. Due to these internal control weaknesses, as well as errors in processing inventory, physical inventory and inventory records were inaccurate and incomplete. Seventy-eight percent of the Division's inventory we reviewed, clearly demonstrate proper recording, tagging, and safeguarding of inventory. However, our audit identified at least 179 items totaling approximately $175,500 that did not follow County inventory policy and procedures. Management has generally agreed with the comments and recommendations in this report. Their complete response to this audit can be found on page 29: Management Comment. `What we recommender The recommendations identify improvements for management to increase internal controls over inventory. Our audit report offers recommendations designed to address these issues through: • Increase monitoring by independent review; • Ensure physical inventory and records are accurate and complete by reconciliation; • Continuously track and monitor items prone to theft; • Safeguard assets by securing storerooms/warehouse/gates; • Provide training for all employees who handle inventory; and • Updating and enforcing policies and procedures. Table of Contents Introduction.................................................................................................................................1 Background................................................................................................................................. 2 AuditObjectives..........................................................................................................................7 AuditScope and Methodology.................................................................................................. 7 Commendations and Noteworthy Achievements.................................................................... 8 AuditResults...............................................................................................................................9 Internal controls over the inventory management system are inadequate causing inaccurate inventory and inventory records.....................................................................9 Independent monitoring is inadequate............................................................................11 Physical inventory and inventory records were inaccurate and incomplete .................... 13 Items considered sensitive, portable, and prone to theft are not continuously tracked... 17 Safeguarding is inadequate........................................................................................... 19 Written policies and procedures were inadequate and not consistently followed or enforced.........................................................................................................................20 Recommendations.................................................................................................................... 26 Management's Comments.......................................................................................................29 Appendix A — Audit Criteria..................................................................................................... 33 Introduction The Office of the Legislative Auditor conducted this performance audit of the County of Hawai'i's Department of Public Works Highway Maintenance Division inventory management process pursuant to Section 3-18 of the Hawai'i County Charter, which outlines the Office of the Legislative Auditor's primary duties. Performance audits typically examine the effectiveness, economy, or efficiency of a government program. They can include analyzing the services of an entire department or activity, identifying possible cost savings, identifying the outcomes achieved by a program, or comparing actual department practices against the practices called for in law or policy. Our objective in performance auditing is to improve public services provided by county government. We do this by recommending specific actions that will address the issues we raise and by providing valuable information to the public, the administration, program leadership, the Hawai'i County Council and the Mayor. A performance audit of inventory management of DPW was included in our fiscal year 2015- 2016 annual audit plan based on the results of our Countywide risk assessment. There are inherent risks associated with the implementation of an inventory management system. When internal controls are not functioning as designed, the risk related to the system increase, thereby increasing the risk exposure to the County. The potential for fraudulent or personal use and unauthorized disposals are examples of inherent risks. Inventory fraud involves the theft of inventory items and the misstatements of inventory records on a company's financial statements. Inventory consists of raw materials, unfinished and finished goods that are generally stored in warehouses. Timely fraud detection and prevention can save time and money.' Due to this potential risk, the Office of the Legislative Auditor determined that a thorough examination of inventory policies, procedures, and processes was warranted. ' Chirantan Basu, How to Detect Inventory Fraud (The Houston Chronicle) http://small business.chron.com/detect- inventory-fraud-34321. html DPW Highway Maintenance Division Inventory Management: Introduction I 1 Background What is the primary function of DPW? The Department of Public Works (DPW) is composed of six divisions: Administration, Automotive, Building, Engineering, Highway Maintenance, and Traffic. They administer regulatory and code enforcements to improve the health and safety of the public on the Big Island. There are seven DPW Highway Maintenance baseyard locations maintained by the County in the South Hilo, Hamakua, North Kohala, South Kohala, Kona, Ka`u, and Puna districts where various inventory and equipment are managed and stored. Why was DPW Highway Maintenance selected for review? We identified large quantities of small and attractive inventory items considered sensitive, portable, and prone to theft in comparison to other DPW divisions. These items are located at all seven baseyards and are at risk of being easily stolen or used for personal benefit. What does DPW Highway Maintenance do? The Highway Maintenance Division is responsible for the repair, construction, maintenance, and improvements of all County roads and bridges, flood control structures, storm drainage systems, ditches, and culverts. Some of their duties include: • dry well (and catch basin) cleaning, • roadside maintenance such as litter pickup and grass cutting in county right of way, • trash pickup and street swept in Kainaliu, Downtown Hilo, and Kailua Village, • build and repair sidewalks on county roads, • pothole repairs, • roadside and bridge maintenance, • vegetation management in ditches, culverts and within flood control systems, • removal of dead animals over 50 lbs., • road resurfacing, installing and repairing guardrails, and • semi-annual inspections of flood control systems done in accordance to the United States Army Corps of Engineers requirements. What is inventory? Inventory is commonly defined as an itemized listing of goods or property or the value of materials and goods held by an organization. Specifically, the County defines inventory as (1) a detailed list showing the quantities, descriptions, and values of property and, frequently units of measure and unit prices. (2) An asset account reflecting the cost of goods held for resale or for use in operations.2 Z "Inventory" definition. County of Hawai"i Accounting Manual Part I Glossary page 105.29. DPW Highway Maintenance Division Inventory Management: Background 12 What items does the County considers inventory? There are three distinct categories of inventory: 1) fixed assets 2) controlled assets 3) materials, tools, and supplies (MTS) Fixed assets are purchased for long-term use, depreciable, and are not likely to be converted quickly into cash (e.g., land, buildings, equipment, and improvements that add permanent value to the asset). Controlled assets, also known as "small and attractive", are items costing more than $250 but less than $1,000 that are inventoried because they are sensitive, portable, and prone to theft (e.g., mowers, weedeaters, portable saws, etc.). Materials. Tools, and Supplies are also known as "consumables" and used within 12 months or less. • Materials are items used in the repair, alteration, construction of machinery or equipment, or in the replacement of component parts of equipment. • A tool is a device or implement used for repair and maintenance of equipment. Not categorized as a controlled asset (e.g., hand sickles, cane knives, trash picker and grabber sticks, etc.). • Supplies are consumable commodities necessary to carry out the activities of county agencies. Equipment must meet the following criteria to be added to the inventory records: • Estimated useful life is greater than one year. • The item must belong to a general class of property including: o motor vehicles 0 office equipment and furnishings o educational, scientific and recreational equipment o construction and repair equipment o engineering instruments and equipment o street lighting or traffic control equipment 0 other equipment The item is capable of being permanently identified as an individual item. It cannot be consumed, show a material change, or be altered from its first use. • The item's original cost is greater than $1,000. What is an inventory management system? An inventory management system is a set of policies, procedures, and methods for accurately recording and using property. The purpose of an adequate inventory management system is to provide guidance to assist department heads, property custodians, and inventory personnel in establishing, maintaining, and enforcing internal controls and written policies and procedures. The inventory management system ensures accountability and safeguarding for County -owned or controlled property in their possession, custody, control or use. DPW Highway Maintenance Division Inventory Management: Background 13 Why should the County maintain accurate and complete inventory records? The County's risk exposure is greater when inventory and inventory records are not accurate and complete. Public monies are used to purchase County inventory. Maintaining accurate and complete inventory records demonstrates to the public the County's sense of responsibility, accountability, and the proper care and management of its assets. What is the County's inventory process? State law requires maintaining accurate and complete inventory records. Hawaii Revised Statutes (HRS) Section 103D-1208 requires designated property custodians to prepare and file with the County Council, a certified annual inventory of all County properties that must be signed under oath as to the accuracy of the inventory records. The Department of Finance Property Management Division (PMD) maintains inventory records and prepares reports. All activities related to inventory such as exchange, trade-in, sale, lease, donation, and disposal must be in accordance with the County's Inventory Procedures Manual and must receive prior authorization from the Finance Director before proceeding with any action. To add equipment to the inventory records system, the clerk responsible for inventory submits a list of new acquisitions/purchases using the County's additions worksheet. The purchase invoice is attached to this worksheet and the next sequential inventory number is assigned. This inventory number corresponds to a silver tag or label that is used to identify the equipment as County -owned. This inventory number should correspond to the additions worksheet and the numbers are unique to each baseyard/division/department. This helps ensure all inventory items are properly recorded in a systematic way and is properly identified as County -owned or controlled equipment. The overseer reviews and approves the list of additions. The clerk then submits the list of additions to the Division and Department accountant for review. The additions list and purchase invoices are then submitted to the PMD on a quarterly basis. To take equipment off the inventory records system, the overseer examines the equipment and determines the reason for the disposal (e.g., obsolete, not economical to repair, lack of replacement parts, damaged beyond repair, etc.). The clerk submits the equipment disposal form with the justification for the disposal. When equipment is lost, missing, or stolen, a police report or police report number should be attached to the equipment disposal form as instructed by a Department of Finance memo. To transfer equipment within the County, the clerk submits an equipment transfer form stating the reason for the transfer. Equipment disposals and transfer forms may be submitted year-round to PMD. DPW Highway Maintenance Division Inventory Management: Background 14 Near year-end, the annual inventory count is performed by a physical inspection of items on hand and comparing these items with the Division's inventory records to verify the accuracy of their records. Departments can submit inventory adjustments to record items not included timely into the inventory system that were discovered during the physical count. When there are discrepancies, the clerk reports it to the custodian (overseer/division chief/director) who then reports it to the Finance Director via the inventory listing, additions worksheet, or equipment disposal form. How much inventory was reported to the Hawai"i County Council as of June 30, 2015? DPW total inventory was $27.1 million, which accounts for 20 percent of fixed assets countywide. (Figure 1) DPW materials, tools, and supplies (MTS) inventory totaled $1.5 million, which accounts for 55 percent of MTS countywide. (Figure 2) Below is also a comparison of the Highway Maintenance by baseyard locations of fixed asset inventory (Figure 3) and materials, tools, and supplies inventory. (Figure 4) Countywide versus DPW Fixed Assets and Inventory County of Hawai"i Fixed Assets (including Controlled Assets) as of June 30, 2015 Dept. of Public Works $27.1 M 20% Other County Depts. $110.7 M 80% Figure 1 County of Hawai"i Materials, Tools, and Supplies as of June 30, 2015 Dept. of Public Works $1.3 M $1.5 M 45% 55% Other County Depts. Figure 2 Source: County of Hawai"i Inventory (June 30, 2015) Provided by Finance Property Management Division DPW Highway Maintenance Division Inventory Management: Background 15 Highway Maintenance fixed asset inventory by basevard County of Hawai"i Dept. of Public Works Fixed Assets (including Controlled Assets) as of June 30, 2015 Hwy Administration $15,237 Other DPW Divisions or $9,300 South Hilo Road s $596 N & S Kohala Road 0 $450 Hamakua Road 0 $443 Ka'u Road 1 $387 Kona Road R $346 Puna Road 1 $327 $0 $4,000 $8,000 Figure 3 $12,000 $16,000 Thousands Source: County of Hawaii Inventory (June 30, 2015) Provided by Finance Property Management Division Highway Maintenance materials, tools, and supplies inventory by basevard County of Hawai"i Dept. of Public Works Materials, Tools, and Supplies (MTS) as of June 30, 2015 Hwy Administration $431 Other DPW Divisions $338 N & S Kohala Road $185 Kona Road $166 Puna Road $150 South Hilo Road $114 Hamakua Road $100 Ka'u Road $48 $- $100 $200 $300 $400 $500 Thousands Figure 4 Source: County of Hawaii Inventory (June 30, 2015) Provided by Finance Property Management Division DPW Highway Maintenance Division Inventory Management: Background 16 Audit Obiectives The Office of the Legislative Auditor's Fiscal Year 2015-2016 Annual Audit Plan included a performance audit of inventory management of the Department of Public Works (DPW). The objectives of the audit were to evaluate inventory and inventory records. We also assessed the adequacy of the inventory system administration and oversight as well as internal controls to safeguard the County from fraud, waste, and abuse. Audit Scope and Methodology To accomplish our objectives, we: • Developed an understanding of the inventory policies and procedures, processes, practices, and document flows; • Corroborated information through interviews with appropriate personnel, reviewed documentation, and performed tests of documentation and controls; • Compared the County's Inventory Procedures Manual (January 1983), practices, and performance measures against best practices; • Assessed compliance with the County's Inventory Procedures, applicable inventory guidelines, laws, rules, regulations, code and charter provisions; • Analyzed inventory data from fiscal year 2013 through 2015; • Judgmentally selected inventory for evaluation using a risk-based approach focusing on items easily stolen or used for personal benefit; • Reviewed additional inventory related documentation (e.g., fixed asset detail report by fund, materials, tools, and supplies (MTS) lists, equipment additions, transfers, and disposals lists, etc.) as needed; and • Was mindful of potential fraud, waste, and abuse during the audit. During the course of the audit, we reviewed and evaluated internal control procedures and we judgmentally selected inventory (including both controlled assets and MTS) with a book value under $1,000 deemed sensitive, portable, and prone to theft at the Department of Public Works Highway Maintenance Division from July 1, 2014 to December 31, 2015. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Our conclusions on the effectiveness of these controls are detailed within this report. DPW Highway Maintenance Division Inventory Management: Objectives, Scope & Methodology 17 We thank the Department of Public Works and Department of Finance Property Management Division staff for their assistance and cooperation during this audit. Management generally agreed with the comments and recommendations in this report. Their complete response to this audit can be found on page 29: Management Comments. Commendations & Noteworthy Achievements During the audit, although problems were still noted, we found that the Ka'u Road baseyard exceled in their internal control and inventory management documentation. Inventory tested at Ka'u Road baseyard clearly demonstrated compliance with County policies and procedures and best practice. We are pleased to report that the Department of Public Works Highway Maintenance Division (Division) has taken a proactive role in strengthening certain internal controls we identified as weaknesses during the course of the audit. Inventory on hand at Ka'u Road Photo courtesy of the Office of the Legislative Auditor We sincerely appreciate the cooperation exhibited by the Division and their willingness to implement many of our recommendations. For instance, the Division has asserted they have already: • established and implemented procedures to include a proactive inventory process; • distributed the general Inventory Procedures Manual (January 1983) to all baseyards; • performed an independent inspection to verify the items existence and disposal condition before items are disposed of; • provided copies of inventory movements to the Highway Maintenance Administration for closer review to identify systematic problems; • documented authorized equipment loans within the Division; • improved safeguarding procedures after working hours and call -outs; • improved monitoring practices to include weekly preventative maintenance schedule; and • recorded inventory and resolved most discrepancies identified as a result of the audit during the subsequent FY2015-16 year-end inventory count. We will follow up at the appropriate time to determine whether and to what extent recommendations have been implemented. DPW Highway Maintenance Division Inventory Management: Commendations & Achievements 18 Audit Results Internal controls over the inventory management system are inadequate causing inaccurate inventory and inventory records. The purpose of the County's inventory management system is to maintain continuous inventory records, track County -owned or controlled equipment, materials, tools and supplies, and dispose of property not needed by any department. County policies and other documents define the inventory management system and establish the rules and guidelines employees must follow to maintain a continuous inventory system. Internal controls are broadly defined as a process to minimize risk that is implemented by management. They are designed to provide reasonable assurance on the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. Internal controls can help achieve performance measures and prevent loss of resources. An organization's internal control structure over inventory management should include the following elements: • Segregation of Duties. Duties should be segregated among employees so that errors and irregularities made by one employee are difficult to conceal. Duties that include record keeping and accounting reports should be separated from those with operations or asset custody. • Independent Review and Monitoring. Management should document their review and approval of critical tasks performed by employees. They should not review and approve their own work. Management should take prompt corrective measures when deficiencies or errors are discovered. • Evaluate Count Results. Management should assess the results of the physical count using performance measures in determining the accuracy and completeness of the physical inventory and inventory records. • Physical Safeguarding of Assets. Assets should be physically protected from loss, unauthorized use, or disposition. • Written Policies and Procedures. Policies and procedures should be approved by management, cover all aspects of operations, be sufficiently detailed, and be distributed to staff. In addition, ongoing monitoring is necessary to ensure policies, procedures, and internal controls remain effective and efficient as operations change. The Department of Finance's Accounting Manual requires each County department to establish and maintain adequate internal controls to ensure inventory is properly recorded, accounted for, DPW Highway Maintenance Division Inventory Management: Audit Results 19 and safeguarded. Our audit evaluated internal controls of the Department of Public Works Highway Maintenance Division inventory management system. We found these internal controls are generally inadequate and do not align to best practice to prevent, detect, or deter fraud, waste, and abuse. (Figure 5) As a result, errors and discrepancies may go undetected by employees performing their normal assigned inventory duties. Summary of Internal Controls by Baseyard Baseyard Segregation of Duties Independent Review and Monitoring Written Policies and Procedures Physical Safeguarding of Assets Highway Administration Yes Inadequate Inadequate Inadequate South Hilo Road Yes Inadequate Inadequate Inadequate Hamakua Road Yes Inadequate Inadequate Inadequate N. and S. Kohala Road Yes Inadequate Inadequate Inadequate Kona Road Yes Inadequate Inadequate Inadequate Ka`u Road Yes Inadequate Inadequate Inadequate Puna Road Yes Inadequate Inadequate Inadequate Figure 5 As of June 30, 2015, the Department of Public Works Highway Maintenance Division total recorded inventory was $18 million. This included a combination of fixed and controlled assets and an additional $1.5 million in materials, tools, and supplies (MTS) inventory. The Division reported 993 assets costing less than $1,000 and deemed sensitive, portable, and prone to theft. Of this amount, we identified 414 assets in our audit scope. We judgmentally selected controlled assets and MTS for our review. Of these items, 322, or 78 percent of controlled assets under $1,000, were properly recorded, tagged, accounted for, safeguarded and generally followed County policies and guidelines. Audit testing included the following risk areas where no exceptions were found: o Segregation of Duties. Adequate separation of incompatible duties exists between the record -keeper, (clerk/accountant/highway support technician) and those involved with operations (chief/overseer), users (equipment operator/laborer), and asset custody (department head) over the inventory management system. o Acquisition by Transfer. One item transferred within the County was verified and adequately safeguarded. o Herbicide reconciliation log. Prompt and proper recording of purchases, uses, and reconciliation demonstrated by adequate supervisory review, mitigated the risk that all herbicide was improperly accounted for. DPW Highway Maintenance Division Inventory Management: Audit Results 110 We commend the Highway Maintenance Division on the effectiveness of the controls that have been implemented. However, audit work did identify some other deficiencies in internal controls and non-compliance. Independent monitoring is inadequate When processing inventory additions, transfers, disposals, and adjustments, the clerk performs all the administrative functions to ensure inventory and inventory records are properly recorded in the inventory system. A physical check of items on hand should be compared to verify the accuracy of the records. (See background for more detail on what is the County's inventory process.) An independent, supervisory -level employee who does not have custody, authorization, or reconciliation responsibilities should perform preventative, detective, or monitoring activities. Because of insufficient training and lack of clear Countywide guidance, adequate independent monitoring was not performed resulting in discrepancies that went undetected and unresolved. Specifically, we observed the following: • Year-end inventory records are not Department of Public Works management should perform additional monitoring of physical inventory to ensure records are accurate and complete. adequately monitored or supervised to ensure that discrepancies are resolved timely and inventory and inventory records are accurate. Highway Maintenance administration and the various baseyards do not consistently verify the accuracy and completeness of their inventory control records (e.g., beginning balances, purchases, and adjustments, etc.) to their physical inventory on hand at year-end. Highway Maintenance administration and baseyards should consistently compare physical inventory and inventory records for accuracy and omissions at year-end or more frequently if necessary. Adequately monitoring the annual inventory count would ensure inventory and inventory records are accurate and complete. Inventory disposals are not reconciled to inventory records. Highway Maintenance administration does not consistently monitor or supervise inventory disposals to the inventory records system. The Highway Maintenance administration should consistently review all disposals timely. • Inventory usage is not independently monitored. While most Highway Maintenance employees are aware of how much inventory is required to complete a job, they do not consistently account or reconcile their inventory items used to existing inventory balances. • Inventory in/out logs are not independently monitored. The Inventory Policies and Procedures manual requires County agencies with a central storeroom to record and maintain adequate physical handling of materials, tool, and supplies inventory. Each agency must maintain internal "control cards" (in/out logs) for items moving in (purchases) DPW Highway Maintenance Division Inventory Management: Audit Results 111 and out (inventory issued to work crews) of their stockroom. In addition, these logs should show the maximum and minimum ordering points as well as the quantity to be ordered. Inventory usage is recorded on the Daily Project and Daily Labor reports, but inventory logs are not consistently maintained for items moving in and out of the baseyard. Inventory purchases and adjustments are not reconciled to what is actually in stock. Furthermore, beginning and ending balances are not reconciled. By not reconciling inventory on hand to items in use, additions, and adjustments, management may not be able to timely detect items that have been lost, missing, or stolen. This practice makes it difficult to maintain a perpetual/continuous inventory system, detect irregularities in inventory shrinkage, or hold any person accountable. Continuous monitoring and reconciliation practices could detect inventory variances and irregularities. Herbicide is the only item that had a continuous in/out log that is consistently reconciled at all baseyards. We reviewed 740.5 gallons of herbicide totaling $32,275 and determined herbicide inventory and inventory records were accurate and complete. We found no exceptions at S. Hilo, N. Kohala, S. Kohala, Puna, and Ka`u Road baseyards. Although the Hamakua and Kona Road baseyards did not report herbicide as MTS inventory in FY 2014-15, they could demonstrate they mitigated the risk of herbicide not being used for personal benefit. Both baseyards recorded all purchases, issues, transfers, performed reconciliations, and safeguarded herbicide as indicated by the supervisor and an overseer initials and date reviewed. In only the instance of herbicide, management established adequate accountability and safeguarding internal controls to ensure herbicide inventory and inventory records were accurate and complete. Monitoring is an integral component of internal controls; unmonitored controls tend to deteriorate over time. When monitoring is designed and implemented appropriately, Departments are more likely to identify and correct problems on a timely basis. Ongoing monitoring can occur in the course of daily operations including regular management and supervisory activities, e.g., comparisons, reconciliations, and other routine actions. A thorough review of the various inventory processes will help ensure the accuracy, completeness, accountability, and safeguards of inventory and inventory records. Regular review and independent monitoring by management could identify systematic problems and provide reasonable assurances for the safeguarding of assets against loss from unauthorized use or disposition while maintaining accountability of its assets. DPW Highway Maintenance Division Inventory Management: Audit Results 112 Physical inventory and inventory records were inaccurate and incomplete According to the Government Accountability Office (GAO), a best practice for inventory record accuracy goals should be set at 95 percent or higher. The responsibility for accountability and other performance expectations should be established for the overall physical count. We tested all seven DPW baseyards to assess the accuracy and completeness of DPW Highway Maintenance Division physical inventory and inventory records. We found that the controlled assets inventory accuracy rate was 78 percent as of December 31, 2015, 17 percent below the recommended best practice. Of these transactions, most items were properly recorded, tagged, and adequately safeguarded from unauthorized use, disposition, and generally followed County uepartment of Public vvorx: policies and procedures, and best practice. management should ensure However, we found that some discrepancies inventory is accurate and were not resolved timely, resulting in inaccurate complete. and incomplete inventory and inventory records. Specifically we found: • Some materials, tools, and supplies and controlled assets were not recorded in the inventory system Inventory policies and procedures consist of making a physical check of County -owned items on hand and comparing these items with the Division's inventory records to verify the accuracy of their records. We found there are at least five categories of materials, tools, and supplies (MTS) inventory based on commonly used items at all Highway Maintenance baseyards. These categories include roadside materials, office supplies, tires, consumables, and tools that should be recorded as inventory. We determined physical inventory and inventory records of some MTS inventory and controlled items were inaccurate and incomplete in the inventory system. DPW Highway Maintenance Division Inventory Management: Audit Results 113 During our site visit, we compared inventory records to physical inventory to verify the accuracy and completeness of the inventory and inventory records. We found the following exceptions at the S. Hilo, Kona, and Hamakua Road baseyards: • Highway Administration located at the S. Hilo Road baseyard did not report treated lumber totaling $140,765. • The Kona Road baseyard did not report office supplies, tires, consumable supplies, and tools in at least the last two fiscal years. Only roadside material was recorded as MTS in the inventory system. • The Hamakua Road baseyard did not report herbicide and tires as MTS in the inventory system. In addition, we found at least 79 other controlled assets (e.g., backpack blowers, office equipment, and mobile radios, etc.) (Figure 6) that were present at most baseyards and not properly or timely recorded in the inventory system. During the audit, the Division subsequently recorded only eight of these controlled assets and purchase invoices could not be reviewed for the remaining 71 items. These invoices could not be located and were not properly recorded in the inventory system. We were unable to determine acquired dates and original cost of these items since purchase invoices could not be located. It is important that staff involved in managing the County's inventory have a clear understanding of what items are considered as inventory and whether they need to record these items in the inventory system. If staff do not have a uniform understanding of what items are considered inventory, items purchased with county funds may not be recorded. Management will not be able to control or manage those items that are not recorded. Items Not Recorded as Inventory Hwy Administration 1 U M Hamakua Road 1 2 c Kona Road 5 M -0a g m South Hilo Road 8 3 a m Ka'u Road 16 ao N. & S. Kohala Road 19 x a Puna Road 28 Total 79 79 total items costing $170,000 not recorded Figure 6 Source: Auditor testing of DPW Highway Maintenance Baseyards DPW Highway Maintenance Division Inventory Management: Audit Results 114 As a result of a lack of consistent inventory training, employees did not count and record all materials, tools, and supplies by the required year-end cutoff period. Furthermore, other controlled assets (e.g., portable saws, impact drills, backpack sprayers, etc.) were also not recorded because the purchase cost was below the $250 threshold. However, the Department of Finance considers these controlled items as sensitive, portable, and theft -prone and these items should be recorded in the inventory system regardless of cost. • Some items were improperly disposed of without the required forms and not removed from the inventory records system The County's Code, Charter, and Inventory Procedures Manual all require prior authorization from the Finance Director before taking items off the County's inventory records system. Of the 414 items reviewed, we could not physically locate 24 items. These items included seven mobile radios, five chainsaws, three weedeaters, and one each of the following generator, mower, pole pruner, vacuum, digital camera, printer, calculator, backpack blower, and sprayer. We were unable to determine the replacement cost of these items, since the County's inventory system records items valued under $1,000 as fully depreciated and recorded as a value of $0.00 or $0.01. Original purchase records were outside the County's six-year records retention schedule. The Division claimed they disposed of these 24 items as they were believed to be in poor condition and not economical to repair. However, we could not verify this since the clerk did not prepare the required equipment disposal records, notify the overseer/division chief/director, or receive prior authorization from the Finance Director to dispose of county inventory as required by County law, the Inventory Procedures Manual, and the Finance Department inventory memorandums. These items were not properly removed from the inventory records. The Division should not throw away any County property without adequate justification or proper approval by the Finance Director. There is a potential for an increased perception of fraud, waste, and abuse for unauthorized disposals that are not properly documented. • Some items were not timely discovered as lost, missing, or stolen, supported by police reports, and taken off inventory records system Departments and agencies adjust their inventory records when County property items are missing or unaccounted for due to loss by fire, theft, or similar reasons. To remove property from the inventory records, County policy requires the department head to submit an equipment disposal form to the Finance Director for approval. The equipment disposal form requires the quantity, item number, description, serial number, date acquired (new or used), and cost. As part of the Department of Finance, Property Management Division processing requirements, departments are required to provide a description of the action(s) taken to locate the missing property, when the loss was discovered, and whether or not the loss was reported to the Police Department. DPW Highway Maintenance Division Inventory Management: Audit Results 115 Our audit identified 19 items which were not timely discovered or reported as lost, missing, or stolen, supported by police reports, and taken off the inventory record system timely. These included five chainsaws, four weedeaters, three mobile radios, two pole pruners, two backpack blowers, one mower, hand trolley, and generator. The Division knew most of these items were either lost or missing during the prior year-end physical inventory count but did not file a police report or remove these items off the inventory records system. Only the Puna Road baseyard filed a police report within 24 hours for two stolen items valued at $780 after the baseyard was broken into. While the custodian was made aware that inventory was stolen, they did not report the theft to the Finance Director or prepared an equipment disposal record to remove the two stolen items off the inventory system. Because of the audit, the Division subsequently filed police reports for the remaining 17 unaccounted items and removed the 19 items off the inventory record system. By reviewing inventory controls, management could demonstrate proper stewardship and accountability over its available resources and effectively safeguard inventory from unauthorized personal use and disposition. The Division should timely document the condition of items and report when items are disposed. The clerk should transmit equipment disposal requests and police reports to help the Department of Finance, Property Management Division, DPW management, and Highway administration ensure physical inventory and inventory records are accurate and complete. Highway management should consider reviewing the 24 unauthorized disposals and the remaining 17 unaccounted items to determine, based on the cost of the county property (lost or damaged), if gross negligence by an accountable person occurred and if any reimbursement to the County is applicable. County employees are stewards of County resources and must ensure all public property and equipment are treated as a public trust and not be used in a proprietary manner or for personal purposes. By not accurately recording and accounting for inventory, there is an increased risk of fraud, waste, and abuse. Management may have difficulties in controlling or managing items purchased with County funds that are not properly recorded in the inventory system. DPW Highway Maintenance Division Inventory Management: Audit Results 116 Items considered sensitive, portable, and prone to theft are not continuously tracked The County defines items that can easily go missing as sensitive, portable, and prone to theft and should be continuously tracked. However, DPW management has not yet identified these type of items. The Division should use a risk-based approach to identify items that can be easily stolen or used for personal benefit and continuously track these items. One example of high risk items that should be continuous tracked is common size tires for light trucks. These items should be consistently reconciled and have their own in/out log. Maintaining in/out logs for at -risk items would help the Division detect, deter, and prevent irregularities in inventory shrinkage and support the reconciliation process. Effective maintenance of material and supplies inventory includes: • accurate and timely recording of purchases • recording of transfers and issues (amount of inventory issued to All equipment and work crew) inventory should be • clear, complete, and accurate identification of stock items continuously tracked • proper storeroom security to prevent unauthorized personnel from gaining access to the inventory. When items prone to theft are removed from the warehouse they should be consistently recorded and continuously tracked to establish who is responsible in case items are lost, missing, or damaged. In addition, periodic physical inspections should be conducted to determine if any items are lost, missing, or damaged. When commonly used items are assigned to select personnel, they are personally accountable for these items and should use a daily Sign In/Out log to account for them. When there are discrepancies, the employee reports it to the custodian (supervisor/overseer/chief/director). The purpose of employee assignment is to: (1) identify, assign, and hold the employee accountable for inventory in his/her custody, and (2) expedite the annual physical count of inventories. Because of inadequate training and the nature and scope of work performed on a daily basis, there were some items we could not locate and account for. On average, it took audit staff an entire day at each baseyard, searching for most items because Division staff did not have reliable information to know the location and condition of their inventory. In general, staff did not know if items were in -use, on the truck, borrowed/lent-out, out -of -service, at the repair shop, which equipment operator previously used it, or the item's last physical location. Some overseers did not keep a record of their physical inventory and did not know that at least two of their controlled assets were at the repair shop. The Puna Road baseyard was the only baseyard that was able to identify the location and condition of their entire recorded inventory by providing a list of in -use equipment and a record of the one equipment at the repair shop during the audit. In addition, we found the Hamakua Road baseyard and the Ka`u Road baseyard could account for all their controlled assets listed on the inventory report. DPW Highway Maintenance Division Inventory Management: Audit Results 117 Of the 414 items reviewed, we could not locate 57 items. Eight were new items totaling $4,677. The remaining 49 items were fully depreciated and recorded at $0.00 or $0.01. Management asserted these 57 items were "in -use" however; we were unable to corroborate this information or determine if these items were adequately accounted and safeguarded. Division staff are first responders in 24 hour, seven days a week emergency call-out3 and various inventory items are constantly in "in -use" status. Other Inventory items not continuously tracked may also have been loaned to other County departments. We reviewed the Division's "Borrowing of Any County Item" procedures that provides guidance and requires staff to properly record and document when any County -owned equipment/inventory item is borrowed. We found they only use their procedure when loaning out roadside materials (i.e., traffic cones and flashing barricades) to the public and to County agencies outside DPW. We observed that the only time policies and procedures were followed and enforced, was when another agency outside DPW borrowed a vehicle. In both of these instances, the Division could demonstrate compliance with applicable internal controls and loan policies and procedures. However, the Division could not demonstrate they complied with their own internal borrowing policies and procedures. Staff explained that Highway monies purchased Highway inventory, equipment, and supplies and could be used by any Highway staff regardless of location. Staff did not use their official form to record what items were borrowed, when items were returned, its condition, if items were lost, stolen, or damaged internally between baseyard locations. Staff sometimes track inventory items by writing it down in the overseer's notebook, white board, chalkboard, or was verbally informed. This practice makes it difficult to manage inventory and inventory records or hold any person accountable for missing, lost, stolen, or damaged inventory items. It is important that staff involved in managing the County's inventory have a clear understanding of what items are considered sensitive, portable, and prone to theft, and whether they need to continuously track these items. Management will not be able to control or manage those items prone to theft that are not continuously tracked which may tend to increase the risk of fraud, waste, and abuse. Continuous tracking of items prone to theft would ensure assets are properly accounted for, adequately safeguarded, and establishes accountability for the accuracy and completeness of the inventory and inventory records. Daily equipment sign-in/out logs supported by periodic supervisor/overseer review and physical inspection of items can be conducted as evidence of continuous tracking. s "Call -Out" -An Employee who is called back to work. United Public Workers (UPW) Unit 1 Agreement July 1, 2013 - June 30, 2017. Section 33. pg. 81-82. DPW Highway Maintenance Division Inventory Management: Audit Results 118 Safeguarding is inadequate Safeguarding of assets is an integral component of internal controls used to help management achieve desired results through effective stewardship of public resources. A lack of safeguarding controls tends to deteriorate over time. When safeguarding of assets and physical controls are designed and implemented appropriately, agencies are most likely to identify and correct systematic problems on a timely basis. On-going safeguarding of assets can occur in the course of daily operations including physical controls, prevention and prompt detection, comparisons, observations, and other routine actions for safeguarding inventory. The Government Accountability Office (GAO) establishes best practice for general inventory controls. These best practices include safeguarding assets from physical deterioration, theft, loss, or mismanagement. Safeguarding of assets is a Inventory should be adequately secured and safeguarded L � key internal control and its primary objective is to ensure physical controls over assets and provide reasonable assurances as to the safeguarding of assets against loss from unauthorized use or disposition. Generally, safeguarding of assets includes: • Prevention and prompt detection of unauthorized acquisition, use, or disposition of assets • Physical controls to secure and safeguard vulnerable assets • Periodically count and compare assets to control records To achieve an adequate level of internal control over safeguarding of assets, one of the most important and effective physical control over assets is to secure the warehouse. Examples of this security include constructing a fence around the warehouse, locking the gate, and allowing only authorized personnel into the ware house/baseyard. The Division has some safeguards in place. For instance, the chief changed the locks of some storerooms and gates. Furthermore, overseers and supervisors regularly monitor various items loaded onto County -owned trucks at the beginning of the workday and returning to the baseyard at the end of the shift, immediately they will know if items are missing or damaged. While limited people have keys to gain access to locked doors, cabinets, gates, fences, and the warehouse, we observed the Division could not demonstrate adequate safeguarding such as continuous or periodic tracking of items prone to theft. Management has not established or performed any compensating controls to help mitigate this risk. As a result, it would be impossible to hold any one person accountable if equipment or inventory were missing, lost, stolen, or damaged. We also found that the Division does not have adequate safeguarding procedures after working hours and call -outs. While the Division locks their storerooms, warehouses, and main gate and has a designated key custodian, we identified at the following: • two baseyards did not lock their main gate during off -hours; • no alarm systems have been installed at six baseyards DPW Highway Maintenance Division Inventory Management: Audit Results 119 • four baseyards had inadequate perimeter fencing (e.g., disrepair and incomplete fencing); • three baseyards had inadequate window security; and • no security cameras or authorized personnel signs have been posted at any of the baseyards. Staff said they were not familiar with the Inventory Procedures Manual or knowledgeable of resolving inventory discrepancies timely. We found staff did not receive sufficient training to adequately safeguard equipment or implemented compensating controls. As a result, fraud detection is difficult and management may not timely detect and correct errors and discrepancies. Written inventory policies and procedures are inadequate and not consistently followed or enforced The County's Inventory Procedures Manual has not been updated in 17 years to reflect actual processes in inventory tasks. To ensure policies and procedures are current; the County should perform regular review and update of established policies and procedures. The Government Accountability Office (GAO) establishes best practices for achieving consistent and accurate physical counts of inventory, including the regular review, and update of established policies and procedures. The development of written policies and procedures are an effective way to maintain strong internal controls and should clearly delineate the control activities performed throughout various inventory processes. This will help in the orientation of staff responsible for managing the County's inventory, including new and temporary assigned employees; promote operational continuity in the event of staff turnover, and to ensure compliance with applicable laws and regulations. Each department and agency at the County of Hawai"i is responsible for creating and maintaining their own internal control policies and procedures using the Department of Finance's Accounting Manual as a basis for establishing an adequate system of internal controls. The Department of Public Works Highway Maintenance Policies and procedures should be clarified and on-going training provided so employees can be held accountable. Division follows the County's Inventory Procedures Manual (January 1983). In addition, the Division created their own policy and procedure on borrowing any inventory items to ensure they continuously track their entire inventory but could not demonstrate they followed or enforced written policies and procedures. The Finance Property Management Division disseminates the Inventory Procedures Manual, inventory -reporting instructions through memorandums, provides reminder emails, verbally communicates instructions, offers training sessions and assistance to departments throughout the year, and conducts physical inventory counts when a property custodian (typically the department head) leaves office. The Inventory Procedures Manual (January 1983) is available on the DPW Highway Maintenance Division Inventory Management: Audit Results 120 County's intranet. While the County establishes written policies and procedures, the manual is inadequate and outdated, and should be periodically reviewed and updated at least annually, or as needed, to reflect changes in actual processes and tasks. To maintain appropriate controls and comply with best practice, the County of Hawai"i Department of Finance established the "Inventory Procedures Manual" which provides guidance to the departments. This guidance includes responsibilities for maintaining and submitting inventory, criteria for placing equipment on inventory records, tagging, annual inventory count, disposals, transfers, inventory adjustments, maintenance of equipment, material, and supplies inventories, and legal references. Highway management did not consistently follow or enforce their policies and procedures to maintain an effective and efficient internal control system to properly account and safeguard their inventory. As a result, numerous discrepancies were not resolved timely and policies and procedures did not provide adequate guidance to Highway Maintenance staff. In addition, employees responsible for inventory management are not receiving adequate training to completely understand the risks, expectations, or the responsibilities of inventory management. Inventory policies and procedures should be reinforced with consistent training. To ensure all County policies and procedures are followed, staff responsible for inventory must review numerous memorandums. There is currently no consolidated source that includes all current and applicable inventory rules. By having to rely on numerous memorandums, an outdated and incomplete inventory procedures manual, and a lack of consistent inventory training, the risk of not detecting irregularities and resolving discrepancies timely greatly increases. Since it is the Department of Finance's intent to use the Inventory Procedures Manual as its official inventory policies and procedures, it must make this clear to staff responsible for inventory management, review and update the manual annually, and provide on- going training to County departments. DPW Highway Maintenance Division Inventory Management: Audit Results 121 Comparison of industry best practices to Department of Public Works Highway Maintenance Division's policies and procedures Figure 7 We compared Highway Maintenance inventory management policies and procedures to expected control procedures, to actual practices performed and found several deficiencies. Policies were inadequate We compared the County's written policies and procedures to industry best practices and identified several deficiencies: Establish accountability. Policies do not adequately address inventory accountability. A best practice for inventory record accuracy is 95 percent or better. Policies should require a measurable performance expectation for the overall physical count to ensure accountability for accurate and complete inventory and inventory records. Maintain segregation of duties. Policies do not require that a different person be involved in the actual physical custody of assets, processing and recording of assets, and the DPW Highway Maintenance Division Inventory Management: Audit Results 122 Were Actual Expected Practice Policies and Practice Procedures Performed? Complete? Establish accountability Inadequate Inadequate Segregation of duties Inadequate Yes Enlist knowledgeable staff Inadequate Inadequate Provide adequate supervision Inadequate Inadequate (provide instructions and training, review count sheets, ensure that all items are counted) Ensure inventory and inventory records are accurate and Inadequate Inadequate complete including: • Establish cycle/frequency counts (e.g., count monthly, quarterly, or annually and determine which items or locations to count); • Perform blind counts (e.g., counters do not know on -hand balances, have limited or no access to inventory system); • Ensure completeness of counts/execute physical counts; • Perform research (e.g., perform required research, refer discrepancies to management for investigation, complete research in timely manner); and • Evaluate count results (measure physical count to stock cards/records) Figure 7 We compared Highway Maintenance inventory management policies and procedures to expected control procedures, to actual practices performed and found several deficiencies. Policies were inadequate We compared the County's written policies and procedures to industry best practices and identified several deficiencies: Establish accountability. Policies do not adequately address inventory accountability. A best practice for inventory record accuracy is 95 percent or better. Policies should require a measurable performance expectation for the overall physical count to ensure accountability for accurate and complete inventory and inventory records. Maintain segregation of duties. Policies do not require that a different person be involved in the actual physical custody of assets, processing and recording of assets, and the DPW Highway Maintenance Division Inventory Management: Audit Results 122 approval of transactions. When segregation of duties cannot be achieved, mitigating controls such as blind counts, increased supervision, and monitoring, or two -member count teams should be considered. Enlist knowledgeable staff. Policies do not require staff to be knowledgeable about inventory items, knowledgeable about the count process, or to be well trained in various inventory processes. Enlisting knowledgeable staff could expedite the physical count and ensure inventory and inventory records are accurate and complete. • Provide adequate supervision. Policies do not address adequate supervision, instructions and training, assigning count team responsibilities, or reviewing and verifying count sheets. Providing adequate supervision could ensure that all items are properly recorded, tagged, counted, and safeguarded. • Ensure inventory and inventory records are accurate and complete including: o Performance measure. Policies do not address a measurable performance expectation to ensure accurate and complete physical inventory count and inventory records. ■ there is no guidance on when to file a police report ■ there is no guidance on what types of items the County considers sensitive, portable, and prone to theft (under $250) ■ tips on how to safeguard inventory o Establish cycle/frequency of counts. Policies do not require continuous monitoring of items deemed sensitive, portable, and prone to theft or how frequently to count these items. Establishing what to count and how frequently to count could ensure all items are properly accounted and safeguarded. o Perform blind counts. Policies require an annual physical inventory count of items on - hand. A physical count may be performed more frequently of items prone to theft, if required. Policies do not address blind counts. Inventory personnel should be performing blind counts. o Execute physical count to ensure completeness. Policies do not clearly address the physical count process from start to finish, cutoff procedures, organizing storage/warehouse items or verifying these items are in the correct location, or internal control methods for count completion. To ensure the completeness of the physical count, policies should address the count process from start to finish, cutoff procedures, pre -inventory count activities, and internal control methods to validate the accuracy and completeness of the inventory and inventory records. o Perform research. Policies require employees to make a physical check of items on - hand and comparing those records to verify the accuracy of their inventory records. When there are discrepancies, the clerk timely reports the problems to the custodian DPW Highway Maintenance Division Inventory Management: Audit Results 123 and Finance Director. To ensure inventory and inventory records are accurate and complete staff should be researching and reporting problems to management timely. o Evaluate count results. ■ Existing policies do not set a performance measure for the physical count. ■ Results of the physical count are not communicated to counters, warehouse personnel, and management to ensure accuracy or completeness. ■ Staff responsible for managing the inventory should be verifying their inventory appropriately. Policies were not consistently followed or enforced We also identified policies and procedures that were not consistently followed and enforced: • Establish accountability. The Division could not adequately demonstrate they continuously track items prone to theft. The Division's internal system is unable to hold any staff personally accountable for items that are missing, lost, or damaged since staff do not consistently use sign in/out logs. Sign in/out logs and periodic physical inspection of items at the baseyard could validate items were appropriately tracked, accounted, and adequately safeguarded. • Enlist knowledgeable staff. Most Division staff explained they were not told or trained to look for discrepancies or understood that they needed to resolve them timely. Being familiar with policies and procedures could clearly validate those responsible for managing the County's inventory understands the expectations of the assignment and their responsibilities. • Provide adequate supervision. Due to a lack of supervision, additions, disposals, and adjustments were not properly recorded in the inventory system. Administrative review of discrepancies and adjustments could validate adequate supervision. • Ensure inventory and inventory records are accurate and complete: o Execute physical count. The Division could not demonstrate the accuracy and completeness of the physical count at all Highway Maintenance locations. Reviewer's initials date, or other tick marks on the inventory listing, materials, tools, and supplies list, additions worksheet, or disposal record could clearly indicate that the physical count was performed accurately. o Ensure completeness of count. The Division could not demonstrate they reviewed their final inventory listing dated June 30, 2014 as provided by the Department of Finance. Reviewer's initials date, or other tick marks on the final inventory listing could clearly validate that they checked their inventory records for errors and omissions after the annual physical count. o Perform research. The Division could not demonstrate timely research was performed to resolve various discrepancies. Reviewer's initials, date or other tick marks on the DPW Highway Maintenance Division Inventory Management: Audit Results 124 inventory listing, additions worksheet, purchase invoices, or disposal record could clearly validate that research was performed. o Evaluate count. The Division could not demonstrate a review and evaluation of the count results had occurred. Reviewer's initials date, or other tick marks on the inventory listing could clearly validate their review. By identifying gaps in policies and procedures, management can identify where effective internal controls need to be placed, where to provide detail for new and established procedures, provide adequate training, and to clarify unclear procedures so that they are easier to follow and enforce. The Highway Maintenance Division indicated they are proactively taking the necessary actions to improve inventory management oversight. They provided a consolidated reference binder that includes the Inventory Procedures Manual, inventory memorandums (e.g., from Finance Director, DPW administration, and Highway management, etc.), their updated internal control policies and procedures, checklists, and reminders, which was distributed to all the Highway Maintenance baseyards. We have not corroborated the content of the manual, nor have we reviewed the effectiveness of the training material implemented by the Division. DPW Highway Maintenance Division Inventory Management: Audit Results 125 Audit Recommendations The County of HawaiTs Department of Public Works Highway Maintenance Division inventory management system inadequately addresses internal controls, leaving gaps in existing policy including management oversight. The audit recommends that the Department immediately address the internal control weaknesses observed through our site visits and develop proactive inventory management oversight. Furthermore, these recommendations should be considered for all divisions with inventory within the Department. The following recommendations address each of these areas. Increase Monitoring We recommend the Department of Public Works perform ongoing monitoring of their inventory management system and operating effectiveness of their internal controls to align with their normal course of operations. Ongoing monitoring includes independent reviews of: ✓ physical inventory count. ✓ reconciliation of inventory records. ✓ adjustments and discrepancies. Ensure Physical Inventory and Records are Accurate and Complete We recommend the Department of Public Works perform reconciliations, conduct periodic physical checks of items on hand, compare these items with the Division's inventory records to verify the accuracy of the records, and resolve any discrepancies to ensure inventory and inventory records are accurate and complete. Continuously Tracking and Monitoring of Items Prone to Theft We recommend that the Department of Public Works identify and continuously track sensitive, portable, and items prone to theft. This may include using "In/Out" logs and periodic physical check of items on hand DPW Highway Maintenance Division Inventory Management: Recommendations 126 Safeguarding of Assets We recommend the Department of Public Works add more security to ensure all assets are adequately safeguarded. Some examples of safekeeping and safeguarding include: Safekeeping of property: ✓ locking storerooms, warehouses, and gates ✓ affixing property identification tags ✓ maintaining documentation for authorized loans and movement of items from assigned locations ✓ establishing guidelines for property identified as excess, surplus, obsolete, beyond economical to repair, lost, or stolen Safeguarding of property: ✓ procedures for security of property during and after working hours ✓ continuous tracking of items that are sensitive, portable, and prone to theft ✓ timely investigating and reporting thefts or vandalism ✓ appointment of key custodian Provide Training We recommend the Department of Public Works, with assistance of the Finance Department, provide on-going training to all employees who are responsible for physical inventory counts and inventory records. Update and Enforce Policies and Procedures We recommend the Department of Public Works clarify and enforce internal controls in County policies and procedure to ensure consistency throughout the department and with industry best practices including but not limited to: • Clarify and implement policies regarding: ✓ performance measure for accurate and complete physical inventory count and inventory records; ✓ adequate segregation of duties to clarify that a different person be involved in the actual physical custody of assets, processing and recording of assets, and the approval of transactions. If segregation of duties cannot be achieved, mitigating controls such as blind counts, increased supervision and monitoring, or two -member count teams should be considered; DPW Highway Maintenance Division Inventory Management: Recommendations 127 ✓ requiring staff to be knowledgeable about inventory items, knowledgeable about the count process, or to be well trained in various inventory processes; ✓ adequate supervision, instructions and training, assigning count team responsibilities, or reviewing and verifying count sheets; ✓ recording and reporting all inventory activities (i.e., additions, transfers, disposals, discrepancies, and thefts, etc.); ✓ accounting, reconciling, and continuously tracking sensitive, portable, and items prone to theft (under $250) appropriately; ✓ when to file a police report; ✓ tips on how to safeguard assets from loss, unauthorized use, or disposition; ✓ procedures on how to appropriately resolve discrepancies; ✓ step by step instructions to verify the accuracy and completeness of the physical count and inventory records; and ✓ mitigating controls when not using the County' silver tags. We further recommend the Department of Finance complete an annual comprehensive review and update of the Inventory Procedures Manual (January 1983) to include various memorandums related to the County's inventory management system. DPW Highway Maintenance Division Inventory Management: Recommendations 128 Management's Comments 11arry Kim `: .4knrx �� •�Sl- :L •L �� •' Wil okabe s i(amig(xg !rntaYnr r OF KA Counter of Patuail DEPARTMENT OF PUBLIC WORKS Aupuni Center Illi Yauahr %1". Sure ' 1fi4). l la%ai'r N[i"7204-114 f 808 t W.I -X:;' 1 1- a% 181181 %1.85311 public motrk,ahas~awounk par% January 30, 2017 TO: Bonnie Nims. Legislative Auditor FROM: Frank J. De Marco. P.E. �1 Director Frank I De Marco, PX Dire vor Allan G. Simeon. P.E. IVIwo Dimsex RE: Response to Performance Audit of the Inventory Management at County of Hawai•i's Department of Public Works Highway Maintenance Division Thank you for the opportunity to provide our responses to the audit recommendations. Increase Monitoring Recommendation: We recommend the Department of Public Works perform ongoing monitoring of their inventory management system and operating effectiveness of their internal controls to align with their normal course of operations. Department Response: We are working on implementing a monitoring system utilizing various log in/out sheets for materials and supplies which will be used daily by the districts for roadwork and will be conducting physical spot checks at each baseyard. The Department is considering utilizing the FRESH Inventory Module and the Administration Division's Accountant IV has been assigned to review this possibility The Department will be hiring a new account clerk in the Division's administration office who will be tasked with supporting the Inventory monitoring and spot checking as needed Ensure Physical Inventory and Records are Accurate and Complete Recommendation: We recommend the Department of Public Works perform reconciliations, conduct periodic physical checks of items on hand, compare these items Ckwuh W haws r r, an 1 quid r)pportun^ No, Ocr and I ncplv�cr DPW Highway Maintenance Division Inventory Management: Management's Comments 129 with the Division's inventory records to verify the accuracy of the records, and resolve any discrepancies to ensure inventory and inventory records are accurate and complete. Department Response: We have developed procedures in the newly created Inventory Procedures Manual for the Highways Division for ''two member" count team periodic inventory checks. Physical checks are labor intensive and scheduling will need to consider difficulties in staffing levels and coordination and may impose a strain on Other operational tasks. The Division will be requesting an updated Fixed Asset Detail report from the Department of Finance's Property Management Division, which will be sent to the Division Chief and District Overseers to account for these assets. We will also be scheduling days for the Director and/or a designee to go to each district to personally verify the district's implementation of the new procedures. Continuously Tracking and Monitorin-Q of Items Prone to Theft Recommendation: We recommend that the Department of Public Works identify and continuously track sensitive, portable, and items prone to theft. Department Response: We have made improvements to our current procedures to include the following- • Expanded the use of daily and weekly sign in/out logs for each district and distributed to each district for use, which were used by our Highway Division during hurricane disasters.. • Updated our borrowing form, to include borrowing by anyone outside of the assigned district including other districts, other departmental divisions and other County departments. Finalized an internal list key for hand tools and ether items not on the fixed asset list to establish a more uniform tagging system. This list will help in locating items moved between districts, used by crews for jobs and possibly missing/damaged- Safeguarding of Assets Recommendation: We recommend the Department of Public Works add more security to ensure all assets are adequately safeguarded. Department Response: We are researching and analyzing the installation of security systems at all base yards and the 'building of district based "garages/warehouses" to safeguard the equipment and prevent deterioration However, due to the tight economic 4 twunO, of I iau ai i is an I yuul f pportunit% Pro%idcr and I mplmer DPW Highway Maintenance Division Inventory Management: Management's Comments 130 times currently facing our County, the financial cost of this project will need to be heavily weighed against the other financial burdens and needs of the County. Provide Training Recommendation: We recommend the Department of Public Works, with assistance of the Finance Department, provide on-going training to all employees who are responsible for physical inventory counts and inventory records. Department Response: We have initiated inventory related training and held various discussions with affected key personnel regarding changes that are being made and/or considered. These trainings will continue to include all affected personnel on an as needed basis in the future. Update and Enforce Policies and Procedures Recommendation: We recommend the Department of Public Works clarify and enforce internal controls in County policies and procedure to ensure consistency throughout the department and with industry best practices. We further recommend the Department of Finance complete an annual comprehensive review and update of the Inventory Procedures Manual (January 1983) to include various memorandums related to the County's inventory management system. Department Response: We created an Inventory Procedures Manual specifically for the Highways Division.. Copies have been distributed to designated district representatives who will be overseeing implementation of these procedures. Copies of the Finance Procedures Manual, Hawai°i Administrative Rules manual and memos issued on various topics relating to Highway Division inventory have also been distributed to each district base yard. County of Hawai' i is an E--qual Opportunity Provider and Employer. DPW Highway Maintenance Division Inventory Management: Management's Comments 131 Harry Kim QTY os!±a!4v ,Mayor �1 .,•fir+-�! County of Hawaiii Finance Department 25 Auptmi St=t, Shite 2103 + Hilo, Hawaii 96720 (808) 961-8234 • Fax (808) 961-8569 January 30, 2017 TO: bonnie Nims, Legislative Ruditor FROM: Collins Tomei, Director e-,— T Collins Tomei Director Deanna S. Sako Deputy Director RE: Response to Performance Audit of the Inventory Management at County of Hawai'i's Department of Public Works Highway Maintenance Division. Thank you for the opportunity to provide our responses to the audit recommendations. e and Enforce Policies and Procedures Recommendation: We recommend the Department of Public Works clarify and enforce internal controls in County policies and procedure to ensure consistency throughout the department and with industry best practices. We further recommend the Department of Finance complete an annual comprehensive review and update of the Inventory Procedures Manual (January 1953) to include various memorandums related to the County's inventory management system. Department of Finance Response: The Department of Finance will work on issuing an updated Inventory Procedures Manual for the County. Hawai"i County is an Equal Opportunity Employer and Provider DPW Highway Maintenance Division Inventory Management: Management's Comments 132 Appendix A: Audit Criteria The United Sates Government Accountability Office (GAO) has issued standards for internal controls ("Green Book") and, in part, describes the monitoring internal control component: Overview Finally, since internal control is a dynamic process that has to be adapted continually to the risks and changes an entity faces, monitoring of the internal control system is essential in helping internal control remain aligned with changing objectives, environment, laws, resources, and risks. Internal control monitoring assesses the quality of performance over time and promptly resolves the findings of audits and other reviews. Corrective actions are a necessary complement to control activities in order to achieve objectives. Principles 16. Management should establish and operate monitoring activities to monitor the internal control system and evaluate the results. 17. Management should remediate identified internal control deficiencies on a timely basis. Internal Control System Monitoring 16.04 Management monitors the internal control system through ongoing monitoring and separate evaluations. Ongoing monitoring is built into the entity's operations, performed continually, and responsive to change. Separate evaluations are used periodically and may provide feedback on the effectiveness of ongoing monitoring. 16.05 Management performs ongoing monitoring of the design and operating effectiveness of the internal control system as part of the normal course of operations. Ongoing monitoring includes regular management and supervisory activities, comparisons, reconciliations, and other routine actions. Ongoing monitoring may include automated tools, which can increase objectivity and efficiency by electronically compiling evaluations of controls and transactions. 16.08 Management retains responsibility for monitoring the effectiveness of internal control over the assigned processes performed by service organizations. Management uses ongoing monitoring, separate evaluations, or a combination of the two to obtain reasonable assurance of the operating effectiveness of the service organization's internal controls over the assigned process. Monitoring activities related to service organizations may include the use of work performed by external parties, such as service auditors, and reviewed by management. The Committee of Sponsoring Organizations (COSO) provides an integrated internal control framework and guidance on monitoring internal control systems, which states in part: How Does Monitoring Benefit the Governance Process? DPW Highway Maintenance Division Inventory Management: Audit Criteria 133 Unmonitored controls tend to deteriorate over time. Monitoring, as defined in the COSO Framework, is implemented to help ensure "that internal control continues to operate effectively." When monitoring is designed and implemented appropriately, organizations benefit because they are more likely to: • Identify and correct internal control problems on a timely basis, • Produce more accurate and reliable information for use in decision-making, • Prepare accurate and timely financial statements, and • Be in a position to provide periodic certifications or assertions on the effectiveness of internal control. Over time effective monitoring can lead to organizational efficiencies and reduced costs associated with public reporting on internal control because problems are identified and addressed in a proactive, rather than reactive, manner. Government Finance Officers Association (GFOA) provides best practices for documenting accounting policies and procedures: Communication is an essential component of a comprehensive framework of internal controls. One method of communication that is particularly effective for controls over accounting and financial reporting is the formal documentation of accounting policies and procedures. A well-designed and properly maintained system of documenting accounting policies and procedures enhances both accountability and consistency. The resulting documentation can also serve as a useful training tool for staff. Recommendation: Every government should document its accounting policies and procedures. Traditionally, such documentation has taken the form of an accounting policies and procedures manual. Thanks to advances in technology, even more effective methods are now also available for this purpose. An appropriate level of management to emphasize their importance and authority should promulgate accounting policies and procedures. The documentation of accounting policies and procedures should be evaluated annually and updated periodically, no less than once every three years, according to a predetermined schedule. Changes in policies and procedures that occur between these periodic reviews should be updated in the documentation promptly as they occur. A specific employee should be assigned the duty of overseeing this process. Management is responsible for ensuring that this duty is performed consistently. The documentation of accounting policies and procedures should be readily available to all employees who need it. It should delineate the authority and responsibility of all employees, especially the authority to authorize transactions and the responsibility for the safekeeping of assets and records. Likewise, the documentation of accounting DPW Highway Maintenance Division Inventory Management: Audit Criteria 134 policies and procedures should indicate which employees are to perform which procedures. Procedures should be described as they are actually intended to be performed rather than in some idealized form. Also, the documentation of accounting policies and procedures should explain the design and purpose of control related procedures to increase employee understanding of and support for controls. Hawai"i Revised Statues (HRS) Title 9. Public Property, Purchasing, and Contracting establishes the requirements of property: Section 103D-1202 Rules, The policy board shall adopt rules in accordance with chapter 91 governing: (1) The management of properties during their entire life cycle; (2) The classes of property, whether expendable or nonexpendable; (3) The action to be taken in case of lost, stolen, damaged, unserviceable, or unsuitable property... Section 103D-1208 Annual inventory reporting by county officers to council. Every officer, head of the department, agent, employee, and other person in the employ of the county, having in their custody or under their control or using property belonging to the county, each year within forty-five days following the close of the county's fiscal year, shall prepare and file with the council of the county an annual inventory return of all nonexpendable county property in the possession, custody, control, or use of the officer, head of department, agent, employee, or other person making the annual inventory return, or of the officers or departments over which the officer presides. The annual inventory return shall contain the following: A summary and list by detailed items description and carrying values of all nonexpendable county property on hand as of the close of the county's fiscal year for which the return is made; (1) A summary and list by detailed item description and carrying value of all nonexpendable county property acquired and disposed of during the year elapsed since the return made as of the preceding close of the fiscal year; and (2) A sworn statement certifying the information on the return, property listing, and carrying values provided with the return to be full, true, and correct to the best knowledge, information, and belief of the officer making the return. Hawai"i County Charter 2014, Article VI, Chapter 6, Section 6-6.3. Powers, Duties, and Functions (Department of Finance) states in part: (k) Prepare and maintain a perpetual inventory of equipment owned or controlled by the county and materials and supplies in county storerooms, and dispose of property not DPW Highway Maintenance Division Inventory Management: Audit Criteria 135 needed by any agency or executive agency of the county pursuant to policies established by ordinance. Hawai"i County Code 1983 (2016 Edition, as amended) states in part: Article 15. Code of Ethics, Section 2-83. Fair treatment. (a) Officers and employees of the County, while discharging their duties and dealing with the public, shall adhere to the following precepts: (1) All public property and equipment are to be treated as a public trust and are not to be used in a proprietary manner or for personal purposes without proper consent. Article 22. Disposal of County Equipment, Section 2-131. Director of finance; powers and duties. (a) The director of finance shall consider requests from any agency of the County which desires to dispose of any equipment, material, or supply not need by such agency. The director of finance shall determine whether such equipment, material, or supply should be disposed of, and shall determine the manner and method by which any sale, exchange, or other disposition shall be made. (b) In performing the duties set forth in subsection (a), the director may request agency involved to provide information concerning the property to be disposed. Such information may include, but is not limited to: (1) The kind of property and full description thereof; (2) Purposes for which the property is used; (3) Estimated value of the property; (4) Reasons for disposition; and (5) Offers, if any, made for the property. County of Hawai"i Accounting Manual Part I (July 7, 1999) states in part: Sections 103.10 — 103.12 Departmental Internal Control System. The objective of internal control is to provide reasonable assurances as to the safeguarding of assets against loss from unauthorized use or disposition and as to the reliability of financial reports for preparing financial statements and maintaining accountability for assets. Section 105.8 Glossary Capitalization Policy. The criteria used by a government to determine which outlays should be capitalized. Section 105.29 Glossary Inventory. (1) A detailed list showing quantities, descriptions, and values of property and, frequently, units of measure and unit prices. (2) An asset account reflecting the cost of goods held for resale or for use in operations. DPW Highway Maintenance Division Inventory Management: Audit Criteria 136 County of Hawai"i Inventory Procedures Manual (January 1983) states in part: CHAPTER I — Responsibilities For the Maintenance and Submission of Inventory General All activities related to personal property such as exchange, trade-in, sale, lease, donation, and disposal shall be in accordance with this manual and prior authorization from the Director of Finance must be obtained by any agency before proceeding with any action. 2. Department of Finance The Department of Finance shall: b. Maintain a perpetual inventory control ledger of all items of equipment; and from time to time, and when deemed necessary by the Director of Finance, shall recommend adjustments to such records or recommend changes in procedures to comply with the requirements of this manual. d. Be responsible for the review and inspection of the inventory system in each agency to insure compliance with the provisions of this manual. 3. County Agencies a. Each agency head shall be responsible for all inventory activities in the agency and for compliance with laws and the general procedures set forth herein. Agency head may delegate such responsibilities as seen fit in the agency. Each agency head or the designated representative shall be responsible for the custody of the personal property and for the maintenance of detail inventory records or personal property in custody. CHAPTER II — Personal Property Definition of Terms: a. Personal Property — for inventory purposes, personal property shall mean all physical property other than real property (land and structures). 2. Criteria for Placing Equipment on Inventory Records Equipment meeting the following criteria shall be placed on the inventory records: a. Estimate Life — the useful life of the personal property is estimated to be more than one year. b. Classification — it must belong to one of the general classes of property (listed below) which is usually considered as fixed assets. c. Accountability — it is capable of being permanently identified as an individual unit of property. It must not be consumed, show a material change, be unduly altered or materially reduced in value from its first use. d. Cost - $1,000 or more — its original cost is $1,000 or more as an individual unit. DPW Highway Maintenance Division Inventory Management: Audit Criteria 137 3. Exception to Section 2 a. Control Assets — select personal property items costing more than $250 but less than $1,000 shall be controlled as if they were capital assets because of their sensitive, portable, and theft -prone nature. Agencies shall maintain detail records of such assets that meets all the requirements set forth in section 2a, 2b, and 2c. Controlled assets are listed in a separate inventory classification. These items should not be included in the agencies list of "materials and supplies" inventory. The following are examples of controlled assets: Radios and pagers Small tools and implements (mowers, weedeaters, portable saws, etc.) CHAPTER VI — Maintenance of Equipment, Material and Supplies Inventory 1. Maintenance of Equipment Inventory a. General — The control and accountability are facilitated by: (1) A current inventory of equipment on hand. (2) Prompt and proper recording of acquisitions, transfers, and dispositions. b. (4) In addition, agencies must keep detailed supplementary cards records consisting of the description, identification, serial number, make, model number, estimated life, name of vendor, date received, purchase order or contract number, cost, repair cost, current condition, remarks, or other pertinent information, which can assist in the proper maintenance of the equipment. 2. Maintenance of Materials and Supplies Inventory b. Agencies which have a central storeroom. (1) Recording of Physical Handling of Materials and Supplies Inventories — Each agency shall maintain control cards for items moving in and out of the storeroom and stock cards showing maximum, minimum ordering points and quantity to be ordered. The following shall be taken into consideration to determine the reorder points and quantity to order: (a) Projected usage (b) Cost of carrying inventories (c) Unit cost of inventory items (d) Availability of items (e) Cost of placing and handling orders. (3) Effective management of material and supplies inventories include: (a) Accurate and timely recording of stock receipts (b) Recording of transfers and issues (c) Clear, complete, and accurate identification of stock items DPW Highway Maintenance Division Inventory Management: Audit Criteria 138 (d) Proper storeroom security to prevent unauthorized personnel for gaining access to inventory. CHAPTER VII —Annual Inventory The agency head responsible for the use and custody of the inventory items shall be responsible for taking inventory, which shall consist of making a physical check of items on hand and comparing these items with the agency's property records to verify the accuracy of the records. CHAPTER IX — Disposal of Personal Property 1. Request for Disposal — General a. The requesting agency shall submit Equipment Disposal Form to the Director of Finance for approval to dispose any personal property. Personal property may be disposed of for any of the following reasons: Obsolescence Uneconomical to repair cost Termite — infested or eaten Lack of replacement parts Items replaced is also used as a trade-in Replacement by acquisition of new personal property Damaged beyond repair b. Agencies shall remove items from their inventory at their recorded amounts regardless of the manner of disposition or the amount of the proceeds. 6. Disposal by Junk or Incineration The disposing agency shall write off, and junk personal property items which do not possess any value after receiving disposition instructions from the Department of Finance. A certificate of disposal shall be completed by any person authorized to destroy equipment. CHAPTER X — Inventory Adjustment Unaccountable Personal Property a. When a personal property item is missing or accounted for because of loss by fire, theft or similar reasons, the agency head shall submit a request (Equipment Disposal Form) to the Director of Finance for approval to delete the property from the inventory records with the following information: quantity, item number, description, serial number, date acquired (new or used), cost, action taken to locate the missing property, when the loss what discovered and whether or not the loss was reported to the Police Department. DPW Highway Maintenance Division Inventory Management: Audit Criteria 139 b. The Director of Finance shall return the approved copy to the agency for its file. 2. Unrecorded Personal Property a. If a property item which is not listed on the inventory is discovered, the agency shall take immediate steps to record the equipment. The information shall include approximate date of acquisition, description, serial number, quantity, and cost. 3. Correction of Erroneous Recordation a. When a personal property item is erroneously recorded and the inventory record requires an adjustment, the agency shall submit a request in quadruplicate (Equipment Disposal Form) to the Director of Finance for approval to adjust the agency's records with the following information: item number, description, serial number, quantity, date acquired, cost, and the reason for the adjustment. b. The Director of Finance shall return a copy of the request with a notation of the action taken to the agency for its file. CHAPTER XIII — Personal Property Assignment and Accountability to Employees Purpose The purpose of assignment is two -folds: (1) to identify, assign, and hold the employee accountable for personal property in his custody, and (2) to expedite taking of annual physical inventories. 2. Each agency shall: b. Hold these selected personnel personally accountable for the personal property items issued to them. d. Have the employee take a physical count annually or more frequently, if desired. If there are any discrepancies have the employee report such discrepancies to the custodian (Department Head) who will report the discrepancies to the Director of Finance for the reporting agency. DPW Highway Maintenance Division Inventory Management: Audit Criteria 140 "Using County Purchased Tools for Personal Use" Highway Maintenance Division Memorandum (June 26, 2015) states in part: Please inform all your district employees that tools purchased by the County of Hawai"i is to be used for official use only. Tools are NOT to be used for personal use. Tools purchased by the County of Hawai"i are not to be taken home by employees for personal use. This is a notification to all County Highways employees that effective immediately no one has permission to take County property for personal use. Please make sure all employees are informed and document with signature and date when employees are notified. "Personal Property Stored or Kept at County Baseyards" Highway Maintenance Division Memorandum (July 8, 2015) states in part: This is a notification for all employees: if anyone has personal property (this does not include items kept in your designated lockers) stored or kept at a County base yard, it needs to be removed. No one should be storing personal property at County base yards, without prior approval/permission. If you bring personal tools or equipment for work related projects and keep it at the County base yard, it is at your own risk. The County will not responsible for any damage to or theft of employee's personal property. Please inform your employees that if they have personal property at your base yard, they need to notify you and let you know when they will be removing their property. Property removed from a County base yard without authorization is considered theft and will be reported to the proper authorities. Persons responsible for keeping/storing illegal or stolen property at a County base yard will be subject to disciplinary action and prosecution by proper authorities. "Borrowing of Equipment Form" From Highway Division (District), states in part: SUBJECT: BORROWING OF ANY ITEMS FROM THE COUNTY OF HAWAI"I Borrower Agrees to the following: 1. Replace if lost or stolen at their expense 2. Replace if damaged at their expense 3. Return clean and in good condition to designated area 4. Free the County's representative and the County of Hawaii from any liability 5. Notify County for date and time of pickup and returns 6. Pickup and return on time 7. Item(s) need to be returned on time. The County may need to use them. "If I, the borrower, do not comply to any of the above conditions, I will no longer be able to borrow any item from the County Highways Division. I agree and understand the above conditions." DPW Highway Maintenance Division Inventory Management: Audit Criteria 141