Final Audit Report - SMC AR & Revenue Recovery
Description
SEATTLE MUNICIPAL COURT ACCOUNTS RECEIVABLE & REVENUE RECOVERY Internal Controls Review January 4, 2007 Project Team: Robin Howe, Auditor-In-Charge Claudia Gross-Shader Aurora Mendoza City Auditor: Susan Cohen City of Seattle 700 Fifth Avenue, Suite 2410 Seattle, Washington 98104-5030 Printed on Recycled Paper City of Seattle Office of City Auditor Susan Cohen, City Auditor January 4, 2007 Honorable Fred Bonner Seattle Municipal Court City of Seattle Seattle, Washington 98104 Judge Bonner: Attached is our report on Seattle Municipal Court Accounts Receivable and Revenue Recovery. The primary objective of the review was to assess the adequacy of the City’s internal controls over the processes for tracking and collecting financial obligations due to the Court. This audit project was conducted at the request of Seattle Municipal Court management as a result of our September 2005 report on Parking Fine Collection that responded to a City Council 2005-2006 budget process Statement of Legislative Intent (SLI). We appreciate the excellent cooperation and collaborative efforts of the Seattle Municipal Court management and staff during the review process. The Seattle Municipal Court’s response to our review is ...
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SEATTLE MUNICIPAL COURT ACCOUNTS RECEIVABLE & REVENUE RECOVERY Internal Controls Review January 4, 2007
Project Team: Robin Howe, Auditor-In-Charge Claudia Gross-Shader Aurora Mendoza City Auditor: Susan CohenCity of Seattle700 Fifth Avenue, Suite 2410 Seattle, Washington 98104-5030 Printed on Recycled Paper
City of Seattle Office of City Auditor Susan Cohen, City Auditor January 4, 2007 Honorable Fred Bonner Seattle Municipal Court City of Seattle Seattle, Washington 98104 Judge Bonner: Attached is our report onSeattle Municipal Court Accounts Receivable and Revenue Recovery. The primary objective of the review was to assess the adequacy of the City’s internal controls over the processes for tracking and collecting financial obligations due to the Court. This audit project was conducted at the request of Seattle Municipal Court management as a result of our September 2005 report on Parking Fine Collection that responded to a City Council 2005-2006 budget process Statement of Legislative Intent (SLI). We appreciate the excellent cooperation and collaborative efforts of the Seattle Municipal Court management and staff during the review process. The Seattle Municipal Court’s response to our review is included in the ‘Actions Planned’ section for each issue in the report. Sincerely, Susan Cohen City Auditor SC:rh Attachment
700 FIFTH AVENUE, SUITE 2410, P.O. BOX 94729, SEATTLE, WASHINGTON 98124-4729 (206) 233-3801 FAX (206) 684-0900 www.seattle.gov/audit An equal employment opportunity employer. Reasonable accommodations upon request.
CONTENTS
CHAPTER 1: INTRODUCTION AND BACKGROUND Results in Brief Background Scope and Methodology CHAPTER 2: SEATTLE MUNICIPAL COURT (SMC) ACCOUNTS RECEIVABLE & REVENUE RECOVERY INTERNAL CONTROLS REVIEW Conclusions Accounts Receivable Management 1.for a “revolving door” with the collection agency in thatSMC policies allow financial obligations placed in collections can be pulled out when citizens receive new violations and court fees. 2.The review of employee adjustments to financial obligations could be improved by looking for potential fraud and/or inappropriate adjustments. 3.high percentage of citizens who receive parking violations, trafficA infractions, and non-traffic infractions do not pay in a timely manner. Time-Payment Plans4. Time-payment policies result in inefficiencies and staff time inefficiently spent tracking and following up on citizen accounts. Policies allow citizens to take advantage of the system and delay payment and/or referral to collections. 5. Audit work performed indicates most citizens set up on time-payment arrangements do not pay on time. 6. Time-payment research functions are inefficient and not adequately supported by the Court’s Municipal Court Information System (MCIS) system. Community Service Arrangements7. Community service policies allow citizens to take advantage of the system and delay payment and/or referral to collections, and create inefficiencies for SMC staff.
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8. Audit work performed indicates that many citizens set up on community service arrangements do not meet their commitments.Revenue Recovery Performance9collect or track performance measurement data for revenue. SMC does not recovery processes due to current system limitations. 10. SMC policies create inefficiencies and staff time is wasted pursuing debts that are unlikely to be collected. Policies also allow citizens to take advantage of the system and delay payment and/or referral to collections. Information Systems11. SMC’s information system tools do not adequately support accounts receivable management or revenue recovery functions. APPENDIX Appendix 1
Memorandum on Benchmarking Municipal Court Revenue Recovery Operations
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CHAPTER 1: INTRODUCTION AND BACKGROUND The Seattle Police Department (SPD) issues citations with associated monetary fines to citizens for parking violations, traffic infractions, and non-traffic infractions. These fines are payable to the Seattle Municipal Court (SMC), which is responsible for tracking and following up on any monies owed. In 2005, SMC received about $17 million in revenues from these types of fines. SMC offers citizens the option of meeting their fine obligations through either a time-payment plan or a community service arrangement. If citizens do not challenge or question a citation during a hearing with a Magistrate, and do not select one of the payment option plans, and do not pay their financial obligation to SMC, their account will ultimately be forwarded to a collection agency. Recoveries made by the collection agency are remitted to the City. During our review, we focused on evaluating SMC’s internal controls over its accounts receivable management and revenue recovery policies, procedures, and operations. We also evaluated the effectiveness and efficiency of SMC’s accounts receivable and revenue recovery functions.This review was performed at the request of SMC Finance management as a follow-on project to our September 2005 Parking Fine Collection report, which was a procedural review of internal controls. The Court sought this review because it is embarking on a project to update and upgrade its technology infrastructure and is seeking concurrent business process improvements. RESULTS IN BRIEF Overall, Seattle Municipal Court (SMC) personnel are properly complying with SMC’s current policies and procedures related to accounts receivable management and revenue recovery functions, and SMC’s internal controls appear to be generally adequate to ensure protection of City funds and compliance with applicable law. However, SMC policies cause operational inefficiencies, result in wasted resources, and allow citizens to take advantage of the system to delay their fine payments and/or referral to collections. We found that citizen compliance with SMC’s payment terms and requirements is not adequate. SMC does not track revenue recovery performance measures, and does not have adequate information technology tools to properly support its accounts receivable management and revenue recovery functions. We found that proper controls were generally in place and functioning adequately for SMC’s accounts receivable management and revenue recovery functions. Financial obligations to SMC appear to be properly recorded and tracked. However, SMC’s policy allowing financial obligations to be recalled from collections causes problems. We found that citizen compliance with timely payment of SMC fines was not good, which resulted in late fee penalties and the eventual referral of the accounts to collections. SMC would benefit from improved management review of obligation adjustments made by the Judicial and Magistrate support units to prevent and/or detect the potential for fraudulent adjustments by SMC employees. Controls over time-payment functions are not adequate. SMC staff are generally executing time-payment functions in accordance with current SMC policies, and time-payments are properly
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documented, tracked, and followed up on. However, current policies result in operational inefficiencies, Court resources are wasted pursuing debts that will likely not be paid, and citizens can take advantage of lenient payment policies to delay payment of their fines and/or referral to collections. SMC’s time-payment policies and procedures are not effective in achieving the appropriate enforcement of community orders. Controls over community service functions need improvement. Community service arrangements are properly documented, tracked, and followed up on, and SMC staff appear to be properly executing policies and procedures. However, the current policies result in operational inefficiencies, SMC resources are expended to follow up on community service hours that have a high-default rate, and citizens can take advantage of the Court’s lenient payment policies to delay payment of their fines and/or referral to collections. SMC’s community service policies and procedures are only somewhat effective in achieving the appropriate enforcement of community orders. We were unable to satisfactorily assess or quantify the effectiveness and efficiency of SMC’s revenue recovery functions compared to those of the other large municipal courts we surveyed, due to a lack of SMC performance data. SMC is limited in its ability to collect and track revenue recovery performance data due to its current information systems and architecture. However, we did determine that SMC’s current payment policies contribute to the inefficiency of its revenue recovery operations. SMC’s information systems tools do not adequately support its revenue recovery and accounts receivable needs. BACKGROUND The Seattle Police Department (SPD) issues citations with associated monetary fines to citizens for parking violations, traffic infractions, and non-traffic infractions (i.e., infractions for anything not involving a moving vehicle, for example, urinating in public). These fines are payable to the Seattle Municipal Court (SMC), which is responsible for tracking and following up on any monies owed. Issuance of and monetary penalties associated with these types of citations/infractions are governed by Title 11 – Vehicles and Traffic – of the Seattle Municipal Code (section 11.31.120 addresses Monetary Penalties) and State RCW Chapter 46 on Motor Vehicles (section 46.63.110 addresses Monetary Penalties). Citizens may also request a hearing with a Magistrate to challenge and/or discuss the citation and the fine. In 2005, SMC received about $14.9 million in revenues from parking tickets, $1.7 million from traffic infractions, and $73,000 from non-traffic infractions. These revenues comprise almost the entire balance of the General Fund revenue category “Court Fines,” which represents about 2.5 percent of the City’s General Fund revenues. Citizens can pay their Court obligations via mail, internet, phone, or in-person at the Court or any City facility that accepts payments. Most citizens either mail in their payments or pay at the
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Court. The Treasury unit in the Department of Executive Administration (DEA) processes most of the mailed-in payments. SMC also offers two payment options for citizens who would find it difficult to pay the entire balance: 1) time-payment plans, which offer payments in installments, and 2) community service arrangements, which offer volunteering in the community in lieu of payment of monies owed. SMC is responsible for tracking and following up on any unpaid financial obligations and these functions are handled primarily by the Revenue Recovery unit. If the citizen does not request a hearing and does not pay the obligation, their account will be automatically assessed a late penalty after a certain number of days, and then ultimately be forwarded to SMC’s collection agency if the account continues to remain delinquent. Recoveries made by the collection agency are remitted daily to SMC. SCOPE AND METHODOLOGY We initiated this review of the SMC’s internal controls governing accounts receivable management and revenue recovery functions in August 2005. We conducted this project at the request of SMC Finance management, as a follow-on project to our September 21, 2005 Parking Fine Collection report, which was conducted in response to a Statement of Legislative Intent (SLI). A copy of this report is included as Appendix 1. During this current review, we focused on internal controls that affect the City’s revenues and expenses. At the request of SMC management, in addition to reviewing control procedures, we tested compliance with procedures. Specifically, we reviewed internal controls relating to the areas listed below: Accounts receivable management Time-payments Community service Revenue recovery performance Information systems It should be noted the scope of this review covered controls related to financial obligations associated with parking violations, traffic infractions, and non-traffic infractions. It did not include obligations associated with criminal charges or any other type of Court fee. At the request of SMC management, we did not review any functions performed by SMC’s new collection agency, Alliance One, because the Court is still working through the transition to this collection agency for the contract that went into effect about two years ago. SMC asked that we postpone any audit of collections until this transition effort is completed. We based our audit conclusions on interviews with City personnel, interviews and a survey of personnel from other large municipal courts, interviews with vendors, and review and analysis of procedures and policies and available documentation and electronic data. We also observed the SMC’s administrative operations and revenue recovery functions in the courthouse.
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We conducted the fieldwork for this review between September 2005 and July 2006. It should be noted that this project was suspended for about six months, from December 2005 through May 2006, while we waited for data requested from the SMC for the audit. We used sampling techniques based on a risk-based approach, which allow for a cost-effective way to review significant controls. Our review, therefore, would not necessarily disclose all significant weaknesses and irregularities. In performing audits, our office follows the Government Audit Standards, as prescribed by the Comptroller General of the United States. CHAPTER 2: SEATTLE MUNICIPAL COURT ACCOUNTS RECEIVABLE & REVENUE RECOVERY INTERNAL CONTROLS REVIEW The Office of City Auditor conducted this review to assess the condition of internal controls for the Seattle Municipal Court’s (SMC’s) accounts receivable management and revenue recovery policies, procedures, and operations. Overall, we found that internal controls appear to be generally adequate to ensure protection of City funds and compliance with applicable law, and SMC staff are properly executing the current Court policies. However, SMC policies cause operational inefficiencies, result in wasted resources, and allow citizens to take advantage of the system to delay payment and/or referral to collections. Citizen compliance with the SMC’s payment terms and requirements is low. Also, SMC does not track revenue recovery performance measures, and it does not have adequate information technology tools to properly support the accounts receivable management and revenue recovery functions. I. ACCOUNTS RECEIVABLE MANAGEMENT The Seattle Police Department (SPD) issues citations with associated monetary fines to citizens for parking violations, traffic infractions, and non-traffic infractions. These fines are payable to SMC, which is responsible for tracking and following up on any monies owed. Information on the violations, the fines, and the citizen’s payment history are maintained in the Court’s MCIS database system. In 2005, SMC received $14.9 million in revenues from parking tickets, and almost $1.8million from traffic and non-traffic infractions combined. The majority of parking tickets are issued by SPD Parking Enforcement Officers (PEO’s) using handheld machines, and information on these tickets is electronically transferred to SMC and MCIS each evening. All traffic and non-traffic infractions, and some parking violations, are manually issued by an SPD Officer or PEO. These citations are manually entered into MCIS by SMC administrative staff. Citizens can pay their Court obligations via mail, internet, phone, or in-person. Citizens can also establish time-payment plans and community service arrangements, which are discussed in depth later on. SMC is responsible for tracking and following up on any unpaid obligations. Citizens may request a hearing to challenge and/or discuss the citation and the fine. If the citizen does not request a hearing and does not pay the obligation, the account will be automatically assessed a late penalty ($25 for parking, and $52 for other infractions) after a certain number of days and SMC will notify the Washington State Department of Licensing
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(DOL) about the delinquent account. Then if there is no action taken by the citizen on the account after a certain number of days, it is forwarded by SMC to the collection agency (Alliance One). We reviewed the adequacy of internal controls over SMC’s accounts receivable management and revenue recovery functions. Specifically, we evaluated whether controls would ensure obligations owed were properly tracked and followed up on to ensure compliance with procedures and appropriate enforcement of court monetary sanctions. This included performing audit work to verify manual infractions were properly and timely entered into MCIS, late penalties were accurately applied to delinquent accounts, delinquent accounts were properly and timely turned over to the collection agency, and there was adequate management review of employee adjustments to obligation amounts. Overall, we found that proper controls were in place and functioning adequately, but we did note a few issues. SMC’s policy that allows obligations to be recalled from collections causes problems with reconciliation, collection agency efforts, and the message it sends to the citizens. Improvement is needed in the area of management review of obligation adjustments made by the Judicial and Magistrate support units. A high percentage of citizens do not make timely payments on their Court fines, which leads to late fee penalties and eventual referral to collections. Details on these issues are covered below. Conclusion 1: SMCpolicies allow for a “revolving door” with the collection agency in that financial obligations placed in collections can be pulled out when citizens receive new violations and fines. Background SMC obligations are forwarded to the collection agency, Alliance One, after they have been delinquent for a set number of days – 38 days for parking violations, and 45 days for traffic and non-traffic infractions. Before SMC forwards an account to collections, a late penalty is added to the account balance ($25 for parking tickets, $52 for other infractions), notification is sent to DOL, and the citizen is mailed a letter notifying them that their account is delinquent and will be sent to collections. The collection agency works the account and forwards any payments received to SMC. Alliance One adds their collection fees directly to the customer’s account balance; SMC does not pay a fee to Alliance for collection services. Issue, Impact, and Recommendation We observed during our audit fieldwork that SMC allows obligations to be recalled from collections; generally, this occurs when a citizen receives new violations and fines. SMC policy currently allows for a citizen’s account to be pulled out of collections and put back in a “current” status, including rolling old debts into new time-payment plans. This practice will be covered in detail later in the report. We observed that collection recalls that result in a citizen receiving a new and “refreshed” debt occur frequently. Recalls from collections also occur when citizens are disputing their account being placed in collections. In these cases, the account is recalled until it can be researched and resolved by the SMC Revenue Recovery staff. SMC’s current policy creates several problems. The large volume of accounts “revolving” in and out of collections, due to SMC’s lenient policy with its repeat offenders, increases the difficulties in reconciling the collection agency’s data with SMC’s data to determine what is in
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collections. This policy may give citizens the impression that there is always a way to avoid paying their past or current SMC obligations. Furthermore, the collection agency has expended efforts and resources on accounts that are pulled out of collections, and the collection fees assessed to the account are removed when the account is recalled to the Court – even though it is very likely that the account will end up back in collections and Alliance One will have to start over again. We recommend that SMC change its policy regarding collections recalls to prohibit recalls due to new violations and fines received, in all but the most unusual circumstances. SMC RESPONSE - ACTIONS PLANNED OR TAKEN An important consideration for the Court is for judges to maintain judicial discretion in matters pertaining to court sanctions, including financial sanctions. Within this context, management will evaluate policies from other jurisdictions and bring policy recommendations to Judges for consideration and adoption, including potentially developing different protocols between infraction (particularly parking) cases and criminal cases. The Manager of Court Compliance will coordinate these efforts with the Director of Finance and the Director of Probation. It is anticipated that options for procedural and policy changes will be presented to the judicial bench by the second quarter of 2007.Conclusion 2: The review of employee adjustments to financial obligations could be improved by looking for potential fraud and/or inappropriate adjustments. Background Customer accounts and their balances due are recorded and tracked in SMC’s MCIS database system. A large number of personnel in several SMC units can adjust customer accounts on MCIS, including adjusting the balance due. Units with these system access rights include Cashiers, Revenue Recovery, Judicial Support/Operations, and Magistrate Support/Operations. This capability is needed to make legitimate authorized account transactions and adjustments. Issue, Impact, and Recommendatio n System access rights should be limited to the principle of least privilege1for internal control purposes and there should be an appropriate level of management oversight for adjustments made to financial obligation amounts.should be adequate to prevent and/or detectControls unauthorized and potentially fraudulent adjustments made by employees, within the range of what is operationally feasible. SMC has had past problems in this area with employees adjusting obligation amounts due for their own accounts and those of their friends. Currently, controls appear to be adequate for the Cashier’s and Revenue Recovery units, but could be improved for the Magistrate Support/Operations and Judicial Support/Operations. Currently, the potential exists for an employee to reduce or waive financial obligations either as a personal favor for a customer or in return for something of value. The Cashier’s and Revenue 1The information technology control principle of least privilege requires that system access rights be granted at the minimum level for what is required for the job function and to the smallest number of employees as is operationally necessary.
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Recovery units have access to an on-line exception report that shows adjustments made only by their units. The managers of these two units review these exception reports for anything that appears to be unusual. Currently, there is no such exception report in place for the Magistrate Operations or Judicial Operations units, and no regular management review procedure that would detect a fraudulent adjustment made by these units. These units do, however, periodically review the work of each employee, which includes comparing a sampling of MCIS transactions to taped hearings of court proceedings to verify transactions were entered accurately. Review of adjustments made by the Judicial Support unit is complicated by the fact that it is normal practice for judges to order significant fine reductions, so large dollar adjustments are normal and appropriate for these staff to make. It might be difficult for management to determine which adjustments were authorized and proper and which were unauthorized even if they had a report of adjustments made by their unit. SMC is planning to implement a new control procedure in 2007 and will review annually any financial obligations the SMC employees have with the Court and any adjustments made to employee accounts. It is not operationally feasible to completely ensure that inappropriate adjustments are prevented and/or detected but any improvement in providing a systematic management reviewof financial account adjustments would be beneficial. SMC RESPONSE - ACTIONS PLANNED OR TAKEN Management is planning to implement regular reviews of employee obligations. In addition, obligation adjustment reports are being refined for Magistrate and Judicial Operations adjustments. The Managers of Finance, Judicial Operations, Magistrates and Court Technology will address this issue. This work will be completed by the end of the 4th quarter 2006. Conclusion 3: A high percentage of citizens who receive parking violations, traffic infractions, and non-traffic infractions do not pay in a timely manner.Background Citizens receive fines/fees associated with parking violations, traffic infractions, and non-traffic infractions. The violation/infraction notice states that there are a certain number of days to pay the fines to SMC, or to request a hearing, or else a late penalty ($25 for parking, and $52 for traffic and non-traffic) will be assessed, and the fine will ultimately be turned over to collections if it remains unpaid. Issue, Impact, and Recommendation During audit fieldwork, we performed tests on a non-random sample of 19 parking violations and 20 traffic and non-traffic infractions to determine whether citizens made timely payments. Our sample results were that 11 of the citizens (or 58 percent) who received parking violations did not request a hearing or pay on time, and 11 of the citizens (or 55 percent) who received traffic and non-traffic infractions did not take either of these actions in a timely manner. Consequently, late penalties were assessed to these citizens. For parking violations, 10 of those who did not pay on time had their account forwarded to collections, and the other one paid late, thereby incurring SMC’s late penalty. For the traffic and non-traffic infractions, eight of those who did not pay on time had their account forwarded to collections, and the other three paid late and incurred SMC’s late penalty. We do not have any recommendations for this situation but
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