Audit Report on the Inventory Controls of the Department of Correction over Its Non-Food Items at the Rikers Island Storehouses

AUDIT REPORT IN BRIEF

The Department of Correction (DOC) manages 15 inmate jails (facilities), 10 of which are on Rikers Island. DOC also operates and maintains storehouses on Rikers Island for food and non-food items that support the needs of the facilities and inmates. In Fiscal Year 2003, DOC purchased non-food items totaling $11,687,539. This audit reviewed the inventory controls of DOC at its Rikers Island non-food storehouse facilities, which are managed by Division I and the Support Services Division (SSD).

This audit was commenced at the request of the Commissioner of the Department of Correction. (The Commissioner’s letter is included in the Appendix.)

DOC has inadequate controls over its non-food inventory. Our review disclosed significant weaknesses in the recording and maintenance of the inventory managed by Division I and SSD. For example, the Fiscal Year 2004 opening inventory balance for Division I had goods worth $915,000 less than did the ending inventory balance for Fiscal Year 2003; this variance was never reconciled or investigated. In the case of SSD, we found that there was a difference of $2,481,699 in value between the inventory count results and the value that was reported to the DOC Financial Services Division; this discrepancy also impacted the accuracy of the DOC inventory that is reported in the City’s financial statements.

Division I computerized perpetual inventory records (Quickbooks) did not accurately identify inventory items; and SSD had no perpetual inventory records, but instead maintained manual records that reflected only the physical inventory count conducted at the end of each fiscal year. Further, both divisions conducted inventory counts that were deficient and did not investigate discrepancies between inventory records and inventory on hand. The storehouses of both divisions contained overstocked and obsolete inventory. In Division I, inventory had to be disposed of because of damage caused by its being stored in damaged containers or stored outdoors and exposed to the weather. Additional inventory, purchased by Division I through the Federal Surplus Program, were relinquished (disposed of), raising the question of whether it is cost effective for Division I to participate in this program. In such an environment, there is a high potential that goods may be damaged, lost, or stolen, and that such occurrences not be detected.

It appears that one of the main reasons for the existence of the weaknesses described above is that the staff assigned to the Division I and SSD storehouses have insufficient knowledge of the internal controls required to manage an efficient warehouse operation, to record and maintain accurate computerized perpetual inventory records, and to properly store and account for inventory items. To correct these weaknesses, the staff should be trained in proper record-keeping and in warehousing and inventory controls. The training should be specific and provided as often as needed. However, based on interviews with DOC officials, it appears that DOC staff do not have the expertise to address these training needs. Therefore, DOC should hire a consultant who has specialized knowledge of warehousing, inventory controls, proper inventory record-keeping, and the appropriate computer software required for specific types of inventory, and who has the ability to train staff.

We make 17 recommendations, some of which are listed below. The DOC officials should:

• Seek funding to hire an outside consultant who specializes in or is knowledgeable about warehousing, inventory controls, perpetual inventory record-keeping, and inventory-related computer software programs, and who is capable of providing training in these areas to DOC staff.
• Upgrade the Inventory Control Policy and Procedure Manual to address the use of a computerized inventory system for all non-food inventories maintained by DOC.
• Ensure that all variances in the inventory be properly investigated. Thereafter, enforce the requirement that all missing items or unexplained inventory variances be reported to the Inspector General’s office.
• Require that SSD maintain computerized perpetual inventory records for all inventory maintained by its shops.
• Assess all non-food inventory stored on Rikers Island to determine whether everything in inventory is needed and whether more items should be relinquished. Also, DOC should not purchase any additional items that are overstocked until reaching the minimum quantity needed to operate.
• Determine whether it is cost effective for Division I to continue to participate in the Federal Surplus Program, taking into consideration the cost of salaries, overtime, traveling expenses, usefulness of the types of inventory that the Federal Surplus Program offers, inventory disposal costs, and other related costs.

The matters covered in this report were discussed with DOC officials during and at the conclusion of this audit. A preliminary draft report was sent to DOC officials and discussed at an exit conference held on May 24, 2004. On June 1, 2004, we submitted a draft report to DOC officials with a request for comments. We received a written response from the Commissioner of DOC on June 17, 2004. The Commissioner agreed with the audit findings and stated that DOC plans to implement all 17 recommendations.