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

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Introduction The Office of the Legislative Auditor conducted this performance audit of the County of HawaiTs Department of Public Works Highway Maintenance Division inventory management process pursuant to Section 3-18 of the Hawaii 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. 1 Chirantan Basu, How to Detect Inventory Fraud (The Houston Chronicle) http://smallbusiness.chron.com/detect- inventory-fraud-34321.html DPW Highway Maintenance Division Inventory Management: Introduction 11