financial operations audit response: lawa

8/22/2019 Financial Operations Audit Response: LAWA

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Financial Operations Audit Response

Los Angeles World AirportsBoard of Airport Commissioners

July 9, 2013


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Audit of LAWAs Financial Operations

Scope:

Commissioned by the City Controller, the primary objectiveof the audit was to assess the effectiveness and efficiency ofLAWAs financial operations, and identify opportunities forimprovement. Specific audit objectives included identifyingLAWAs significant/core financial activities and assessing:

- The Departments fiscal organizational structure, policiesand procedures over these financial activities

- Skills of personnel- Financial information systems

- Fiscal processes- Budgeting and management controls- LAWAs overall system of internal controls


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Audit of LAWAs Financial Operations

Summary of Results:

Overall, the report found that:

- Financial policies and procedures were comparable to othergovernment enterprises and were generally up-to-date andwell communicated

- Key functions were addressed and reporting relationshipswere reasonable

- Personnel were qualified and demonstrated understanding oftheir responsibilities

- Information technology is in a transitional state as new

systems have recently been implemented, are currentlybeing implemented or are planned in the near future

- Internal controls related to fiscal processes, budgeting andmanagement were designed appropriately to safeguardassets and promote adherence to BOAC and managementapproved policies and procedures


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Key Findings

The audit report included the following key findings and

recommendations:- Strengthen organizational structure, reporting relationships

and communication

- Develop an enterprise risk management program

- Introduce performance based budget considerations

- Improve revenue audit procedures and interest/penaltyprocesses

- Increase training of designated contract administrators andcontract managers throughout the procurement process

- Develop new processes for inventory management

- Improve clarity of capital program reporting and increasegeneral financial reporting to management and the BOAC

- Revise debt policies

- Expand IT business continuity, change management andsoftware selection processes

- Improve controls and redundancies around rates and charges


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Auditor Recommendations

1. LAWAs Executive Management should establish the position

of Chief Financial Officer with a reporting relationship directlyto the Chief Executive Officer (CEO). The skills associated with aCFO for a large complex organization such as LAWA shouldinclude experience with organizational leadership, business riskmanagement, performance management, strategic planning,debt financing, integration of current technology into finance-

related functions, and the ability to understand and explaincomplex financial issues, strategies, and opportunities inaddition to comprehensive interim and annual historical reportsof financial position and results of operations.

Partially Agree. LAWA has already established the CFO positionand will determine the reporting relationship concurrent withpermanent appointment which will require coordination withCity Personnel Department.


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2. LAWA should identify critical positions such as the Executive

Director, Chief Operating Officer, Director of AirportDevelopment and Director of Capital Development and Budget,and supplement their positions with additional qualified supportpersonnel. LAWA, in conjunction with appropriate City officials,should evaluate the position classifications in relation to theCivil Service System and develop new or revised position

classifications as appropriate. These new position classificationswill be beneficial in selecting personnel who can ultimately betrained and mentored to assume the role of the C-levelexecutives if needed. In addition, LAWA should require alldivisions/departments to implement staff cross training,

document key processes, and support all significant decisionsby appropriate documentation.

Agree. LAWA has and will continue to work with the CityPersonnel Department to address LAWAs challenge in

developing and retaining leadership talent to meet our needs.


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3. LAWA should provide the Internal Audit Division a more

independent organizational placement, equip the function withmore senior leadership, and provide greater access toinformation and a more prominent role in monitoring LAWAsoverall compliance with approved policies, legal requirements,management directives and the internal control framework.While staffing reductions may be balanced by allowing the

Division to outsource audits, it is essential that Internal Auditemploy and retain personnel who are competent to perform ameaningful risk assessment, monitor the status of prior auditdeficiencies and recommendations, direct and evaluate thework of external contracted auditors and perform short-term

investigations when the need arises.

Partially Agree: The Internal Audit Division will continue toreport to the Audit Committee and will seek additional qualifiedpersonnel. Future internal reporting relationships will be

established based on the qualifications of personnel. Staff willdevelop a plan to fully utilize its pool of external auditors.


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4. LAWA should endeavor to consolidate, codify, communicate

and publish on its intranet all significant policies andprocedures. These should be updated routinely as new additionsand revisions occur. Management should also develop methodsto disseminate organizational goals, strategies and plansthroughout the organization at a level of detail appropriate forthe subject matter. Methods may include a formal process of

communicating and linking the organizations goals, objectivesand strategies to those of each division and each employeewithin the division, as well as expanded use of the LAWAintranet, meetings, and training sessions.

Agree: LAWA will develop a central clearing house for BOACapproved and LAWA-wide policies on the Departments intranetand will improve access to division policies on each divisionsinternal site. LAWA has already undertaken significant efforts toimprove communication with all levels of LAWA staff, includingregular departmental staff meetings for division level managers,


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5. To enhance the risk identification and management processes,

and consistent with best practices, LAWA should work todevelop and implement an overall organization-wide EnterpriseRisk Management (ERM) process. The ERM should provide astructured and continuous process for identifying, assessing,responding to and reporting on opportunities and threats thataffect the achievement of LAWAs objectives. The ERM should

also incorporate an integrated approach to informationtechnology risk management that provides for the identification,measurement, monitoring and controlling of technology-relatedrisks throughout LAWA, and that will be treated as an essentialmanagement function of the organization.

Agree. LAWA agrees that organization-wide risk identificationand management is critical to operating the airport. Althoughthese efforts are currently undertaken and are coordinated atthe executive level, staff will implement process for formalizing

identification, documentation and review of major enterprise


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6. LAWA should prepare for the implementation of performance

budgeting by acquiring or developing the tools to identify,analyze and report the costs of key activities. LAWA shouldcoordinate the performance based budgeting process with theestablishment of goals and objectives for divisions and theorganization.

Agree: LAWA continues to monitor budget performance at theairports operating division level and will identify andbenchmark operating and capital costs against other airports.LAWA will monitor the Citys progress in implementing a

performance based budgeting system and will tailor a similarprogram within the constraints of our current financial systems.Once fully implemented, LAWA will also use the facilitiesmanagement system to improve its process for monitoring andforecasting recurring costs of facilities maintenance.


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7. LAWA should consider the following actions:

a) Consider incorporating the responsibility for audits of self-reported revenues into the Internal Audit Division.

Disagree: Self reporting audits are part of LAWAs day-to-dayoperations and not related to the scope of an internal auditfunction.

b) Expand documentation to include explanations as to whydeviations from LAWA policy appeared reasonable to theauditor. A coverage target should be established, so thatmanagement can gain a level of comfort that a reasonable

range (5% or 10%) of total self-reported revenues is beingreviewed. Any decisions to negotiate audit results or foregoexpanded tests of apparent system deficiencies should requirethe documented review of top management.

Agree. LAWA will develop coverage targets for contracts

based on magnitude of self-reported revenues and a processfor documenting decisions to negotiate audit findings or


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Recommendation 7 continued

c) Consider engaging an external consultant specializing in thisarea to conduct one or more audits as a co-sourcingopportunity, in order to evaluate their approach andmethodology and, if deemed beneficial, incorporate lessonslearned into future LAWA audits. LAWA can then utilize bestpractices to develop a revised program for LAWAs revenuecompliance audit activities. Development of a coverageminimum should be established as a goal for the department.

Agree: LAWA has already engaged external auditors to assessrisk and assist in audits of vendors.


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8. LAWA should take the following actions:

a) Revise policies and procedures to incorporate a consistentapproach to calculating penalties and interest pursuant tocontractual agreements. In addition, a consistent policyshould be communicated and enforced regarding thewaiver of interest and penalties.

Agree: LAWAs contracts currently contain several differentpenalty and interest clauses, many on different benchmarkrates or time periods. Staff will develop a plan for managingthe variety of penalties within existing contracts anddocumenting management decisions to waive such interest or

penalties by the end of the year. Further, staff will identifyand implement a consistent method for monitoring andcalculating penalties that will be included in all futureagreements.


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Recommendation 8 continued

b) Ensure that any write offs or forgiveness of amounts arereviewed and approved by someone independent of thecontract monitoring and negotiation function. Further, LAWAshould perform consistent calculations of these penalties andinterest amounts.

Agree: Future waivers of penalties or interest will bedocumented and approved at the senior management level.


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9. LAWA management should further develop, clarify,

communicate and integrate into the initial project phases theroles of Designated Contract Administrators (DCAs) andProject/Contract Managers in order to optimize divisionaladministrative expertise and ensure adherence to LAWAProcurement Policies and Procedures. Also, DCA training onLAWA Procurement Policies and Procedures should be extended

to any and all project cost managers.

Agree: Staff has implemented increased training programs toaddress these recommendations and will release a memo in thenext month further clarifying roles and responsibilities forpersonnel responsible for procurement and management ofcontracts.


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10. LAWA should ensure that inventory counts are conducted

periodically at the division level and ultimately every two years asan organization. A department (Internal Audit, FinancialAccounting or Procurement) should be assigned the responsibilityof collecting the information regarding interim asset counts,reconciling the counts to the general ledger and verifying thecount results.

Agree: Staff will develop and implement policies to identify,verify and monitor the various fixed asset inventories.Inventory of newly constructed or acquired plant assets(buildings and major equipment) will be tracked through the

facilities management system once it is fully implemented.


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11. LAWA should investigate the feasibility of integrating the

PROLOG and SAP systems. If this is not realistic, the LAWAFinancial Services Division should obtain copies of the PROLOGreports and related reconciliations on a timely basis and ensurethat costs and liabilities are recorded in the SAP general ledgersystem when incurred. Further, management should inform usersof the PROLOG reports of the potential misstatement of costs in

order to more accurately evaluate project costs.

Disagree: PROLOG and SAP are separate systems withdifferent functions that are reconciled at project closeout. Staffwill improve the disclosure on existing reports to bettercharacterize the project management nature of the informationpresented.


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12. LAWA should create a process and timeline for the expansion

of its debt management policy. The Finance and Budget Divisionshould also review its use of external consultants and ensure thattheir methodologies and conclusions are appropriately monitored,understood and validated by qualified internal personnel.

Agree: Staff will update LAWAs existing debt policy to addressaudit concerns and responsibility for oversight and review ofmethodologies and conclusions presented by consultants.


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13. LAWA finance personnel should provide complete financial

reporting packages to management, the BOAC and the AuditCommittee on a monthly basis. These should include informationwith respect to sources and uses of cash and budgetarycomparisons to demonstrate compliance with approved budgets,and should be published on the LAWA web site as a demonstrationof transparency and full disclosure in financial reporting.

Partially Agree: Financial reporting is limited by thecapabilities of LAWAs financial systems. Within theseconstraints, staff will develop and present quarterly reports tothe BOAC and Management balancing the frequency and

quality of information with the risks and liabilities of disclosingunaudited information that may be used by investors.


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14. IT Security management at LAWA should address the noted

opportunities for improvement in the areas of:a. operational plans for IT security systems

b. disaster recovery testing

c. daily offsite storage of tape data backup media.

d. change management framework

e. version management controlsf. close out and documentation of completed changes within theChange Management System

g. documentation of data flow diagrams outlining how SAPinterfaces with other applications and databases.

h. use of a formal software selection methodologyi. implementation of a Project Quality Management System.

Agree: Staff has either already implemented solutions to thenoted areas or is planning to address them to the extent

feasible.


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15. LAWA management should assign the Deputy Executive

Director, Comptroller responsibility for understanding themethodology utilized to identify costs and re-calculating theuser rates and charges assessed to recover them.

Disagree: Work is duplicative and unnecessary. Charges are

reviewed by LAWA staff, LAWA consultants, Airline reps andAirline consultants. Recalculating the same charges twiceinternally, given their complexity, isnt feasible or advisable.


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16. LAWA management should assign to the Deputy Executive

Director, Comptroller responsibility for ensuring that allexpenditures are analyzed for indications of recurring paymentswhich may be due to financial commitments. Evidence ofcommitments in the form of leases, contracts and purchase ordersshould be reviewed and agreed to the related encumbrancerecorded in the accounting records.

Disagree: This issue should be addressed at the division levelwhere expenses are incurred and invoices are processed. Staffwill increase training to improve division level of attention toencumbering funds for expenses that are or will be incurred.

financial operations audit response: lawa

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