Annual Audit Report Fiscal Year 2004

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March 1, 2005

Mayor Bloomberg, Speaker Miller, and Members of the City Council:

I am pleased to transmit the New York City Comptroller's Charter-mandated report on audit operations for Fiscal Year 2004. The audit bureaus issued 101 audits and special reports during the fiscal year. This annual report contains the major findings and recommendations of audits issued by my audit bureaus over that period.

Audits completed in Fiscal Year 2004 resulted in $20.6 million in actual revenue and savings and $20.3 million in potential revenue and savings. Moreover, audits concluded over the past three fiscal years have generated $129.5 million in actual and potential revenue and savings, the highest amount over a three-year period in the last nine fiscal years. These results represent a 233 percent increase in actual revenue and savings and a 36 percent increase in potential revenue and savings over the amounts achieved during the 1999-2001 fiscal years. The following chart illustrates the actual and potential revenue and savings generated by the audit bureaus during Fiscal Years 1996-1998, Fiscal Years 1999-2001 and Fiscal Years 2002-2004.

Chart 1

Actual and Potential Revenue and Savings

To ensure the most efficient use of available resources, I have instructed my audit bureaus to concentrate on audits of City operations that show the most dramatic potential for risk of revenue loss, cost overruns, and mismanagement. The result has been a greater amount of revenue and savings generated per audit. Of the 336 audits and special reports completed by my auditors during Fiscal Years 2002, 2003 and 2004, the average actual and potential revenue and savings per audit has increased dramatically when compared to the Fiscal Year 1996-1998 and 1999-2001 periods, as shown in the following chart.

Chart 2

Actual and Potential Revenue and Savings

Per Audit ($ in thousands)

In Fiscal Year 2004, my audits covered a myriad of topics, including revenue identification and collection, cost savings, program performance, asset management, internal controls, and information technology. Synopses of the most prominent audits in some of these areas are included below.

My audit bureaus issued many significant audits during the fiscal year. I am particularly proud of my audit of the procurement process of the Department of Education (DOE) in the award of a vending machine license to the Snapple Beverage Group (Snapple). The audit disclosed that the process was fundamentally flawed. The agreement provided Snapple an exclusive vending machine opportunity for about 1,200 City schools and guaranteed that Snapple would pay a minimum of $40.2 million to DOE between September 1, 2003 , and August 31, 2008 . The auditors discovered that during the process there were minimal solicitation efforts, an inadequate request for proposals package, and a defective bid evaluation and selection process. The audit also disclosed that Octagon, the agent authorized to handle the marketing of the vending machine opportunity, stands to realize exorbitant compensation for its services.

Brief descriptions of audits that generated the most actual and potential revenue and savings follow:

•  An audit of the Department of Transportation identified $18,063,487 in the City's share of real property transfer and mortgage recording tax receipts in a fiduciary account--"Urban Account Payments to Franchised Private Bus Operators"--that should have been transferred to the City's General Fund.

•  An a udit of the Department of Parks and Recreation (Parks) revealed that Parks does not effectively monitor its concessionaires to ensure that they comply with the capital improvement provisions of their concession agreements. In that regard, Parks has inadequate internal controls over capital improvements required to be completed by concessionaires. The audit found that: improvements totaling nearly $10 million were not completed at 37 of the 58 concessions inspected by the auditors; the City lost at least $290,000 in concessionaire fees that had the improvements been made would have enabled concession operations to generate revenue; and 10 of the 37 concessionaires who had not completed their capital improvements claimed that Parks had authorized them to modify or cancel the improvements specified in their agreements. However, neither the concessionaires nor Parks could provide evidence of requests or approvals for such changes.

•  An audit of the Department of Consumer Affairs identified $2.1 million in excess moneys the Department allowed to accumulate in the Home Improvement Contractors Fund account that could be used to satisfy contractor fines due the City.

•  An audit of the compliance of Viacom Outdoor with its franchise agreement with the City disclosed that it did not ensure that all bus-stop shelter advertising contracts were sequentially numbered to guarantee proper tracking and accountability. Consequently, the auditors were unable to determine whether all of Viacom's bus-stop shelter advertising contracts were accounted for in its books and records; all appropriate revenue was reported; and all fees were paid to the City. Based on the available records, the auditors determined that Viacom underreported gross revenue and took questionable deductions, which resulted in as much as $1,195,789 in additional franchise fees and interest owed the City.

•  An audit of the Taxi and Limousine Commission (TLC) found that TLC allowed $97.3 million in fines to remain uncollected. Based on these findings, t he auditors estimated that TLC could collect at least $3.89 million of the outstanding fines if it made the collection of unpaid fines a priority and implemented rigorous collection efforts.

•  An audit of Lutheran Social Services of Metropolitan New York for its foster care programs under contract with the Administration for Children's Services (ACS) disclosed that it owes the City approximately $897,737, because advances from the City exceeded allowable program costs.

•  An a udit of the payments of commercial rent taxes by Economic Development Corporation (EDC) concessionaires found that concessionaires and subtenants of concessionaires owe the City $268,392 in Commercial Rent Tax ( CRT), interest, and penalties. The audit also disclosed that h ad EDC effectively coordinated with the Department of Finance in identifying concessionaires who are required to pay CRT, it is likely that the CRT due from these entities would have been collected.

•  Audits of two foster care providers - Miracle Makers, Inc. and Sheltering Arms Children's Service - under contract with the Administration for Children's Services (ACS) disclosed that they owe the City approximately $464,250 because advances from the City exceeded allowable program costs.

•  An audit of the New York City Fire Department found that, based on a review of the 800 uniformed positions in the 10 largest administrative units in the Department, the City could save approximately $1.7 million annually by civilianizing 47 positions currently held by uniformed employees.

Brief descriptions of audits that disclosed the most significant service delivery issues follow:

•  An audit of the Department of Homeless Services (DHS) disclosed that it did not comply with the City Charter and Procurement Policy Board Rules when entering into informal agreements with operators of conditional housing facilities. The auditors visited six hotels and 17 apartment buildings in which homeless families reside. The hotels, as well as 10 of the apartment buildings inspected, generally were in satisfactory condition. However, the remaining seven apartment buildings, all operated by Gin Realty, had conditions that may pose a threat to the health and safety of the occupants placed there by DHS. Specifically, 30 of 41 apartments visited in these seven buildings had unsafe and unsanitary conditions, which included roach infestation, peeling paint, leaking faucets, water damage and mold on ceilings and walls, missing or broken tiles, and holes in walls and ceilings.

•  An audit of the Department of Education's (DOE) school safety plans for 10 elementary schools revealed that the 2003 and 2004 school safety plans reviewed did not meet DOE deadlines for completion and approval, and the 2003 school safety plans for the 10 schools did not meet many of the DOE deadlines. Moreover, since the schools were unable to access the online system to update their 2003 plans until November 21, 2003 , the 2004 school safety plans for the 10 schools had not been submitted to DOE Regional Safety Administrators for initial review, as required.

•  An audit of the effectiveness of the Complaint Inspection Program for food establishments by the Department of Health and Mental Hygiene disclosed that the Program is ineffective in following up on complaints against food establishments. Specifically, the audit noted that 40 percent of the complaints sampled received no follow-up by inspectors; that the time it took to conduct inspections of the complaints ranged from the same day to 344 days later; and that 44 percent of the food-borne illness complaints were never forwarded to the Office of Environmental Investigations, as required.

•  An audit of the Workforce Investment Act (WIA) Program administered by the Department of Small Business Services (DSBS) disclosed that the DSBS has not ensured that the City has been allocated all of the Federal WIA funds to which it was entitled for its adult and dislocated worker job training and placement programs. (During Fiscal Year 2003, the City received approximately $96 million in Federal WIA funds.) In addition, prior to the audit New York City was the only one of 33 local workforce investment areas in the State lacking a certification for its one-stop career center system. The audit noted that the lack of such a certification had limited the ability of local organizations and businesses, as well as of DSBS, to qualify for various grants.

•  An audit of the administration of the r esident e mployment program by the New York City Housing Authority ( NYCHA ) disclosed that NYCHA generally does not have effective controls to ensure that the program is operating as intended. Accordingly, NYCHA management has not developed formal procedures for the program and has not coordinated the efforts of Resident Employment Services ( RES ) and the administering departments in monitoring contractor compliance with program requirements. Consequently, contractors did not submit REP hiring summaries documenting that the required number of NYCHA residents were hired. Additionally, based on the hiring summaries reviewed, the auditors discovered that only 74 percent of individuals identified as resident hires were in fact legal NYCHA residents.

Audits of internal controls and inventory management at a number of agencies identified significant deficiencies in expense justification, documentation, and asset management, as follows:

•  An audit of the internal controls of the Police Department (NYPD) over handgun licensing disclosed that the Licensing Division was operating without written policies and procedures. As a result , some tasks may not have been properly communicated and consistently followed by Division Personnel and therefore there was no assurance that new personnel would have adequate guidance in carrying out their assigned tasks. In addition, the controls over the cancellation of licenses were inadequate and inconsistent. The audit also noted that 160 individuals on the Social Security Administration deceased list had active handgun licenses, according to NYPD's Automated License Processing System.

•  An audit of the Economic Development Corporation (EDC) for "Other General Expenses" disclosed instances in which EDC did not: maintain appropriate documentation to support expenses; justify that the expenses were business-related; follow its guidelines for awarding sole source contracts; obtain bids for procurements; and ensure that all payments to consultants were documented. Specifically, the auditors questioned 38 percent of the expenses reviewed because EDC was unable to provide documentation showing that the items or services paid for were reasonable, justified, and supported with adequate documentation. These questionable expenses included: purchases on behalf of the Mayor's Office and the Office of Management and Budget, which were for purchases of: three Chevy Tahoes and related accessories; 100 engraved "keys to the City"; an alarm for the Mayor's Office; hotel accommodations; meals in New York City for an official of the Office of Management and Budget; and two parties for Corporation personnel.

•  An audit of the controls over the processing and collection of permit f ees by the Department of Environmental Protection (DEP) disclosed that controls over the processing of permit applications and the collection of permit fees at the Bureaus of Customer Service and Water and Sewer were inadequate, ineffective, and, in some cases, nonexistent. The audit revealed that c ontrols over permits issued and fees collected were so deficient that the auditors were unable to determine with reasonable assurance the actual amount of revenue that should have been collected for Fiscal Year 2003.

•  Audits of the inventory controls of the Department of Correction (DOC) over its food and non-food items at the Rikers Island storehouses disclosed that the Department had inadequate controls over its inventory. The audit also noted that DOC failed to establish adequate oversight and procedures for managing its inventories. The audit disclosed that personnel at the storehouses had insufficient knowledge of the internal controls required to: manage an efficient warehouse operation; record and maintain accurate computerized perpetual inventory records; and properly store and account for inventory items. Examples of ineffective controls over inventory are the overstocking of items such as 4,935 cases of bay leaves, which would take approximately 20 years to deplete; and 1,392 cases of diapers, when no more than 15 babies are allowed to live on Rikers Island at the same time.

•  Two follow-up audits of the Human Resources Administration (HRA) computer inventory revealed that HRA's inventory procedures still have major deficiencies and that HRA did not implement seven of the nine prior report recommendations, including that it account for approximately $2.5 million in missing computer equipment.

Given the significant reliance of City agencies on computer systems and the increasing amount of taxpayer dollars spent on information technology, I have continued to dedicate a portion of the bureaus' resources to audits of system-development projects. Many of these audits identified cost overruns, missed deadlines, and systems that simply did not meet agency needs. Brief descriptions of two such audits follow:

•  An audit of the development and implementation of the Omniform system by the New York City Police Department (NYPD) disclosed that NYPD did not resolve certain issues critical to system operations that it identified when developing the system in 2001. In addition, NYPD did not have acceptance certificates for each deliverable in its files, even though it approved the final project. Further, certain system users surveyed by the auditors indicated that they would like to see changes made to the system. Also, NYPD did not hire a quality-assurance consultant when developing the system and it had no formal disaster recovery plan to enable the timely resumption of agency operations in the event of a disaster, as required by Comptroller's Directive #18.

•  An audit of the development and implementation of the Department of Investigation (DOI) Livescan Fingerprint system disclosed that DOI could not demonstrate that the Cardscan subsystem is operational , even though it stated that it had implemented all of the four system components included in the original contract. Moreover, DOI did not have an independent quality-assurance test of the system, nor did it follow a system-development life-cycle methodology . Also, the audit disclosed that the disaster recovery plan was not complete.

In closing, I am proud of the success of the audit bureaus over the past three years, where my audits identified $129.6 million in actual and potential revenue and savings, and documented many instances of program inefficiency and mismanagement. In that regard, I will continue to deliver on my commitment to finding ways to enhance revenue, uncover waste and abuse, and improve agency operations.

Very truly yours,

William C. Thompson, Jr.