Financial Operations Audit Response

Los Angeles World Airports Board of Airport Commissioners July 9, 2013

Audit of LAWAs Financial Operations

Scope:
Commissioned by the City Controller, the primary objective of the audit was to assess the effectiveness and efficiency of LAWAs financial operations, and identify opportunities for improvement. Specific audit objectives included identifying LAWAs significant/core financial activities and assessing:
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The Departments fiscal organizational structure, policies and 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:
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Financial policies and procedures were comparable to other government enterprises and were generally up-to-date and well communicated Key functions were addressed and reporting relationships were reasonable Personnel were qualified and demonstrated understanding of their responsibilities Information technology is in a transitional state as new systems have recently been implemented, are currently being implemented or are planned in the near future Internal controls related to fiscal processes, budgeting and management were designed appropriately to safeguard assets and promote adherence to BOAC and management approved policies and procedures
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Key Findings
The audit report included the following key findings and recommendations:
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Strengthen organizational structure, reporting relationships and communication Develop an enterprise risk management program Introduce performance based budget considerations Improve revenue audit procedures and interest/penalty processes Increase training of designated contract administrators and contract managers throughout the procurement process Develop new processes for inventory management Improve clarity of capital program reporting and increase general financial reporting to management and the BOAC Revise debt policies Expand IT business continuity, change management and software selection processes 4 and charges Improve controls and redundancies around rates

Auditor Recommendations
1. LAWAs Executive Management should establish the position of Chief Financial Officer with a reporting relationship directly to the Chief Executive Officer (CEO). The skills associated with a CFO for a large complex organization such as LAWA should include experience with organizational leadership, business risk management, performance management, strategic planning, debt financing, integration of current technology into financerelated functions, and the ability to understand and explain complex financial issues, strategies, and opportunities in addition to comprehensive interim and annual historical reports of financial position and results of operations.

Partially Agree. LAWA has already established the CFO position and will determine the reporting relationship concurrent with permanent appointment which will require coordination with City Personnel Department.
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Auditor Recommendations
2. LAWA should identify critical positions such as the Executive Director, Chief Operating Officer, Director of Airport Development and Director of Capital Development and Budget, and supplement their positions with additional qualified support personnel. LAWA, in conjunction with appropriate City officials, should evaluate the position classifications in relation to the Civil Service System and develop new or revised position classifications as appropriate. These new position classifications will be beneficial in selecting personnel who can ultimately be trained and mentored to assume the role of the C-level executives if needed. In addition, LAWA should require all divisions/departments to implement staff cross training, document key processes, and support all significant decisions by appropriate documentation.

Agree. LAWA has and will continue to work with the City Personnel Department to address LAWAs challenge in 6 our needs. developing and retaining leadership talent to meet

Auditor Recommendations
3. LAWA should provide the Internal Audit Division a more independent organizational placement, equip the function with more senior leadership, and provide greater access to information and a more prominent role in monitoring LAWAs overall 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 Audit employ and retain personnel who are competent to perform a meaningful risk assessment, monitor the status of prior audit deficiencies and recommendations, direct and evaluate the work of external contracted auditors and perform short-term investigations when the need arises. Partially Agree: The Internal Audit Division will continue to report to the Audit Committee and will seek additional qualified personnel. Future internal reporting relationships will be established based on the qualifications of personnel. Staff will 7 develop a plan to fully utilize its pool of external auditors.

Auditor Recommendations
4. LAWA should endeavor to consolidate, codify, communicate and publish on its intranet all significant policies and procedures. These should be updated routinely as new additions and revisions occur. Management should also develop methods to disseminate organizational goals, strategies and plans throughout the organization at a level of detail appropriate for the subject matter. Methods may include a formal process of communicating and linking the organizations goals, objectives and strategies to those of each division and each employee within the division, as well as expanded use of the LAWA intranet, meetings, and training sessions.

Agree: LAWA will develop a central clearing house for BOAC approved and LAWA-wide policies on the Departments intranet and will improve access to division policies on each divisions internal site. LAWA has already undertaken significant efforts to improve communication with all levels of LAWA staff, including regular departmental staff meetings for division 8 level managers,

Auditor Recommendations
5. To enhance the risk identification and management processes, and consistent with best practices, LAWA should work to develop and implement an overall organization-wide Enterprise Risk Management (ERM) process. The ERM should provide a structured and continuous process for identifying, assessing, responding to and reporting on opportunities and threats that affect the achievement of LAWAs objectives. The ERM should also incorporate an integrated approach to information technology risk management that provides for the identification, measurement, monitoring and controlling of technology-related risks throughout LAWA, and that will be treated as an essential management function of the organization.

Agree. LAWA agrees that organization-wide risk identification and management is critical to operating the airport. Although these efforts are currently undertaken and are coordinated at the executive level, staff will implement process for formalizing 9 enterprise identification, documentation and review of major

Auditor Recommendations
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 should coordinate the performance based budgeting process with the establishment of goals and objectives for divisions and the organization.

Agree: LAWA continues to monitor budget performance at the airports operating division level and will identify and benchmark operating and capital costs against other airports. LAWA will monitor the Citys progress in implementing a performance based budgeting system and will tailor a similar program within the constraints of our current financial systems. Once fully implemented, LAWA will also use the facilities management system to improve its process for monitoring and forecasting recurring costs of facilities maintenance.
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Auditor Recommendations
7. LAWA should consider the following actions: a) Consider incorporating the responsibility for audits of selfreported revenues into the Internal Audit Division. Disagree: Self reporting audits are part of LAWAs day-to-day operations and not related to the scope of an internal audit function. b) Expand documentation to include explanations as to why deviations from LAWA policy appeared reasonable to the auditor. A coverage target should be established, so that management can gain a level of comfort that a reasonable range (5% or 10%) of total self-reported revenues is being reviewed. Any decisions to negotiate audit results or forego expanded tests of apparent system deficiencies should require the documented review of top management. Agree. LAWA will develop coverage targets for contracts based on magnitude of self-reported revenues 11 and a process for documenting decisions to negotiate audit findings or

Auditor Recommendations
Recommendation 7 continued c) Consider engaging an external consultant specializing in this area to conduct one or more audits as a co-sourcing opportunity, in order to evaluate their approach and methodology and, if deemed beneficial, incorporate lessons learned into future LAWA audits. LAWA can then utilize best practices to develop a revised program for LAWAs revenue compliance audit activities. Development of a coverage minimum should be established as a goal for the department. Agree: LAWA has already engaged external auditors to assess risk and assist in audits of vendors.

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Auditor Recommendations 8. LAWA should take the following actions: a) Revise policies and procedures to incorporate a consistent approach to calculating penalties and interest pursuant to contractual agreements. In addition, a consistent policy should be communicated and enforced regarding the waiver of interest and penalties.
Agree: LAWAs contracts currently contain several different penalty and interest clauses, many on different benchmark rates or time periods. Staff will develop a plan for managing the variety of penalties within existing contracts and documenting management decisions to waive such interest or penalties by the end of the year. Further, staff will identify and implement a consistent method for monitoring and calculating penalties that will be included in all future agreements.
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Auditor Recommendations
Recommendation 8 continued b) Ensure that any write offs or forgiveness of amounts are reviewed and approved by someone independent of the contract monitoring and negotiation function. Further, LAWA should perform consistent calculations of these penalties and interest amounts. Agree: Future waivers of penalties or interest will be documented and approved at the senior management level.

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Auditor Recommendations
9. LAWA management should further develop, clarify, communicate and integrate into the initial project phases the roles of Designated Contract Administrators (DCAs) and Project/Contract Managers in order to optimize divisional administrative expertise and ensure adherence to LAWA Procurement Policies and Procedures. Also, DCA training on LAWA Procurement Policies and Procedures should be extended to any and all project cost managers. Agree: Staff has implemented increased training programs to address these recommendations and will release a memo in the next month further clarifying roles and responsibilities for personnel responsible for procurement and management of contracts.

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Auditor Recommendations
10. LAWA should ensure that inventory counts are conducted periodically at the division level and ultimately every two years as an organization. A department (Internal Audit, Financial Accounting or Procurement) should be assigned the responsibility of collecting the information regarding interim asset counts, reconciling the counts to the general ledger and verifying the count 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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Auditor Recommendations
11. LAWA should investigate the feasibility of integrating the PROLOG and SAP systems. If this is not realistic, the LAWA Financial Services Division should obtain copies of the PROLOG reports and related reconciliations on a timely basis and ensure that costs and liabilities are recorded in the SAP general ledger system when incurred. Further, management should inform users of the PROLOG reports of the potential misstatement of costs in order to more accurately evaluate project costs. Disagree: PROLOG and SAP are separate systems with different functions that are reconciled at project closeout. Staff will improve the disclosure on existing reports to better characterize the project management nature of the information presented.

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Auditor Recommendations
12. LAWA should create a process and timeline for the expansion of its debt management policy. The Finance and Budget Division should also review its use of external consultants and ensure that their methodologies and conclusions are appropriately monitored, understood and validated by qualified internal personnel. Agree: Staff will update LAWAs existing debt policy to address audit concerns and responsibility for oversight and review of methodologies and conclusions presented by consultants.

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Auditor Recommendations
13. LAWA finance personnel should provide complete financial reporting packages to management, the BOAC and the Audit Committee on a monthly basis. These should include information with respect to sources and uses of cash and budgetary comparisons to demonstrate compliance with approved budgets, and should be published on the LAWA web site as a demonstration of transparency and full disclosure in financial reporting. Partially Agree: Financial reporting is limited by the capabilities of LAWAs financial systems. Within these constraints, staff will develop and present quarterly reports to the BOAC and Management balancing the frequency and quality of information with the risks and liabilities of disclosing unaudited information that may be used by investors.

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Auditor Recommendations
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 controls f. close out and documentation of completed changes within the Change Management System g. documentation of data flow diagrams outlining how SAP interfaces with other applications and databases. h. use of a formal software selection methodology i. implementation of a Project Quality Management System. Agree: Staff has either already implemented solutions to the noted areas or is planning to address them to the extent feasible. 20

Auditor Recommendations
15. LAWA management should assign the Deputy Executive Director, Comptroller responsibility for understanding the methodology utilized to identify costs and re-calculating the user rates and charges assessed to recover them. Disagree: Work is duplicative and unnecessary. Charges are reviewed by LAWA staff, LAWA consultants, Airline reps and Airline consultants. Recalculating the same charges twice internally, given their complexity, isnt feasible or advisable.

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Auditor Recommendations
16. LAWA management should assign to the Deputy Executive Director, Comptroller responsibility for ensuring that all expenditures are analyzed for indications of recurring payments which may be due to financial commitments. Evidence of commitments in the form of leases, contracts and purchase orders should be reviewed and agreed to the related encumbrance recorded in the accounting records. Disagree: This issue should be addressed at the division level where expenses are incurred and invoices are processed. Staff will increase training to improve division level of attention to encumbering funds for expenses that are or will be incurred.

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