2017-01 Performance Audit Report: Inventory Management at County of Hawai'i's Department of Public Works Highway Maintenace Division

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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. !i Am 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. Vr What weecommendis 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.