Follow-up Audit Report on the Inventory Controls and Purchasing Practices of the Department of Environmental Protection’s Bureau of Water and Sewer Operations

AUDIT REPORT IN BRIEF

This is a follow-up audit to determine whether the Bureau of Water and Sewer Operations (Bureau) of the New York City Department of Environmental Protection (DEP) has implemented the three recommendations made in a previous audit of the Bureau’s controls over inventory. DEP is responsible for managing the City’s water supply and wastewater treatment systems. The Bureau is primarily responsible for the operation, maintenance, and protection of the City’s drinking water and wastewater collection (sewer) systems. The Bureau currently maintains two storehouses, one primarily for capital items in Queens, and one primarily for expense items in Brooklyn. In Fiscal Year 2003, the Bureau had a year-end inventory balance of $11,652,195. There were $7,845,123 worth of items stored in the Queens pipeyard and $3,807,072 worth of items stored in the Brooklyn general storehouse.

Of the three recommendations we made in the previous audit, DEP partially implemented the recommendation to create an inventory project team and re-engineer the Bureau’s inventory system. Since DEP decided to create its own project team, the recommendation to seek funding to hire an outside consultant was no longer applicable. The remaining recommendation to achieve inventory reductions totaling $1.07 million by improving capital commodity inventory turnover rates was not implemented.

In this follow-up audit, we found that DEP has made some improvements in the Bureau’s oversight of inventory. The agency relinquished more than $5 million worth of inventory and is better managing its inventory of capital commodities (excluding accessories). However, some weaknesses remain. We supervised a count of 225 randomly selected items—94 at the Bureau’s Queens pipeyard and 131 at the Brooklyn storehouse. The count revealed that 101 items had discrepancies between the reported amount and the amount on hand. Most of these items (90) were from the Brooklyn storehouse. Inventory transactions at the Brooklyn storehouse were not entered in a timely manner, if at all, largely contributing to the discrepancies found. We also found inventory balances that were affected by incorrect unit value and significant inventory adjustments that were not adequately explained in the inventory records. We found that the Bureau does not count accessories stored at the Queens pipeyard, although it has assigned them a value equal to more than 20 percent of the inventory stored at that location. The agency does not track minimum or maximum stock levels or inventory turnover rates. As a result of timing errors in recording inventory transactions and numerous errors in the Bureau’s year-end inventory valuation, we can place only limited reliance on the year-end inventory figures reported by the Bureau.

To address the issues that still exist, we repeat the recommendation that we made in the previous report but was not fully implemented. DEP should:

• Create an inventory project team, reporting to the Commissioner or a high-level deputy commissioner, whose function would be to overhaul and redesign the Bureau’s inventory system. In re-engineering the system, this team should incorporate the inventory standards encompassed in the Department of Investigation’s "Standards for Inventory Control and Management" and in Comptroller’s Directive #1. The ultimate goal of this project would be an inventory control system that: (1) is accurate (i.e., records match on-hand balances); (2) is timely (i.e., records are adjusted to immediately reflect disbursements and receipts); (3) is useful (i.e., reorder points are defined and are realistic); (4) is encompassing (i.e., the system tracks items that are supposed to be tracked); and (5) allows for the calculation of inventory turnover rates in order to achieve cost reductions through increased turnover. If DEP does not have the management capacity necessary for an in-house inventory re-engineering project, it should seek funding to engage a consultant to address these problems.