Annual Audit Report Fiscal Year 2005

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March 1, 2006

Mayor Bloomberg, Speaker Quinn, 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 2005. The audit bureaus issued 81 audits and special reports during the fiscal year that resulted in $6.6 million in actual revenues and savings and $36.3 million in potential revenue and savings. This annual report contains the significant findings and recommendations of the audits.

The City Charter requires that the Comptroller’s audit activities be conducted in accordance with the generally accepted government auditing standards promulgated by the Comptroller General of the United States. Compliance with those standards ensures that auditors perform their work with the utmost professional integrity and care. The standards also require my audit bureaus to undergo an external quality assurance review every three years. I am pleased to report that a review completed by the Institute of Internal Auditors in November 2004 awarded the Comptroller’s Office the highest rating for such reviews.

During the last four years, my office has helped the City to navigate its worst fiscal crisis since the 1970s. In that regard, I instructed the audit bureaus to focus their efforts on those areas of City operations that would maximize revenues and cost savings—that is, areas with the most potential risk of revenue loss, cost overruns, mismanagement, inefficiency, waste, and abuse. The audit bureaus have met this challenge with great success. The 417 audits and special reports conducted from Fiscal Year 2002 through Fiscal Year 2005 have generated $172.2 million in actual and potential revenues and savings. The following chart illustrates the actual and potential revenues and savings generated each year by the Comptroller’s auditors and the cumulative amount of these revenues and savings.

Cumulative Savings Achieved
Fiscal Years 2002 through 2005

The audits issued by my office in Fiscal Year 2005 covered a wide range of subjects, including revenue identification and collection, cost savings, program performance, asset management, internal controls, and information technology.

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

• An audit of the compliance of the New York Yankees (Yankees) with their lease agreement disclosed that they underreported their revenue by $9,070,960 and overstated deductions against revenue by $34,489,804. Consequently, the Yankees owed $3,599,575 in additional fees, which they subsequently paid the City.
• Two audits of the Department of Finance’s (DOF) Industrial and Commercial Incentive Program disclosed that there are significant weaknesses in the administration of the program. An audit of DOF’s oversight of the program found that the agency did not ensure on an annual basis that applicants remain eligible for program benefits. As a result, DOF did not suspend or adjust program benefits for properties that became ineligible for benefits. Consequently, the City did not collect taxes of $2,527,013 for the properties the auditors sampled and is at risk of forgoing taxes totaling at least $1,429,998 on these properties in future years.

Moreover, another audit found that DOF improperly granted tax abatements to owners of 128 properties. These abatements were granted even though the work on which they were predicated did not merit a tax exemption and the improvements made to these properties did not result in increases to the properties’ assessed values, as required by the program. The granting of these abatements resulted in the City’s not collecting $8,063,047 in taxes on these properties for Tax Years 1996/1997 to 2003/2004. Since the abatements granted under this program extend over a 12-year period, the City is at risk of forgoing approximately $5,717,831 in additional property taxes on the properties in future years.

• Audits of the tax classification of real property in the boroughs of Brooklyn, the Bronx, and Queens disclosed that DOF does not have adequate procedures in place to ensure the correct classification of mixed-use properties in these boroughs that are listed as Class 1 on the assessment rolls. The auditors identified 301 properties that appeared to be misclassified. DOF would have billed an additional $2,219,866 in property taxes had these properties been correctly classified.

• An audit of the Office of the Sheriff’s child support enforcement services found that the Office is ineffective in serving summonses and subpoenas for child support. Had the Office taken additional steps to find respondents, as much as $10.6 million in child support payments might have been collected and paid to custodial parents in Fiscal Year 2003.
• An audit of the Department of City Planning’s Penn Center Subdistrict fiduciary account found that $1,511,120 is available for Subdistrict improvements. Since the inception of the fiduciary account in December 2001, no improvements have been funded.
• An audit of Hyatt Equities, LLC (Hyatt Equities) revealed that it understated its net profits by $445,743, resulting in $222,871 in additional fees due the City. Hyatt Equities operates and maintains the Grand Hyatt Hotel under a lease agreement with the City. Specifically, Hyatt Equities misclassified the cost of certain tangible assets, did not provide supporting documentation for one transaction, and incorrectly calculated cash sales and deducted expenses to which it was not entitled under the lease agreement.
• An audit of the Business Integrity Commission identified $629,239 in fiduciary accounts that should be transferred to the City’s General Fund. These accounts are the Business and Employees account and the Vendor License account. In addition, the audit identified $27,502 that was due from applicants who had not paid the City the full cost of investigations .
• An audit of the compliance of Hammonds Cove Marina, Inc. (Hammonds Cove) license agreement with the City disclosed that the company’s books and records were inaccurate and incomplete and that it had inadequate internal controls over the financial operations of the marina. Hammonds Cove underreported its gross receipts to the Department of Parks and Recreation and as a consequence owes the City license fees and late charges totaling $53,465. In addition, sales tax was not always collected, or if collected, was not paid as required. As a result, Hammonds Cove owes the City $26,079 in sales tax.

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

• An audit of the citywide energy conservation efforts by the Department of Citywide Administrative Services (DCAS) found that DCAS standards and procedures do not go far enough in addressing the agency’s responsibilities in overseeing the City’s energy conservation program in conformance with Mayoral Directive No. 89-1. Moreover, DCAS has not developed effective overall strategies for managing energy conservation, and it has not established energy reduction goals for City agencies. Finally, the audit determined that four City facilities have not undertaken New York State Power Authority Energy Cost Reduction (ENCORE) programs that would realize $792,393 in electric energy cost-savings for the City over a 10-year period.
• An audit of the HIV/AIDS Services Administration of the Human Resources Administration (HRA) revealed that although most of its emergency housing facilities were maintained in a safe and sanitary condition, the agency did not comply with City Charter and Procurement Policy Board rules, Comptroller’s Directives, and other applicable regulations when it procured emergency housing services. HRA did not enter into formal contracts, ensure that payments were properly made, and did not ensure that vendors were paid for eligible individuals only. Consequently, HRA made approximately $2.2 million in questionable payments to vendors.

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

• An audit of the Environmental Control Board’s (ECB) Bronx office disclosed that it did not ensure timely case adjudications during calendar year 2004. As of October 21, 2004, there were 4,891 cases listed on the Bronx office’s Overdue Action Report. For 35 percent of these cases, the last ECB action occurred in 2003 or earlier. In fact, 27 of these cases went back to the 1996 to 1999 time period. The audit concluded that the delays in issuing hearing decisions may have resulted in lost revenue for the City.

• An audit of the Office of the Sheriff revealed weaknesses in its operating practices relating to funds obtained from the enforcement of civil judgments. The audit identified data reliability, functionality, and integration problems relating to the computerized Case Tracking System, which monitors the execution of court orders. In addition, some case files were missing, and there was limited evidence in many case files of an adequate supervisory review of the actions taken to enforce civil judgments. Further, the Sheriff’s Office did not have a consistent procedure for calculating interest charges on civil judgments.

• An audit of HRA’s implementation of fair hearing decisions on public assistance and food stamp cases revealed that its 15-day timeframe for the implementation of food stamp decisions conflicted with the State regulations, which require that the clients receive food stamps within 10 days. Also, HRA lacked written procedures to ensure that certain retroactive payments are made when recipients qualify for benefits.

Brief descriptions of audits of inventory and/or internal controls at a number of agencies identified significant deficiencies in asset management and revenue collection follow:

• An audit of the Department of Correction’s commissary operations found inadequate internal controls over commissary inventory. As a result, the December 31, 2003, quarterly inventory count at two of the commissaries showed gross discrepancies (94 percent and 89 percent) between the amounts of inventory on hand and the amounts reported in the inventory records. The audit also revealed that the commissaries frequently condemn and dispose of inventory items without proper approval and authorization.

• An audit of Bellevue Hospital Center revealed that it has inadequate controls over its inventory of non-controlled drugs and medical and surgical supplies. During Fiscal Year 2003, Bellevue Hospital spent approximately $15 million for drugs (controlled and non-controlled) and $8 million for medical and surgical supplies. The audit found that Bellevue Hospital had significant weaknesses in the issuing, recording, maintenance, and security of both types of inventories. The audit concluded that the inventory of non-controlled drugs and medical and surgical supplies is vulnerable to theft and misappropriation.

• An audit of the Fire Department’s (FDNY) billing and recording of Emergency Management Service (EMS) ambulance transport fees revealed that the department lacks adequate controls to ensure that these fees are accurately processed through its accounts receivable system. As a consequence, the FDNY cannot be assured that its accounts receivable are properly recorded, that its collection efforts are correctly allocated, and that it does not pursue accounts deemed uncollectible. The audit also identified weaknesses in the pre-billing process for ambulance transport services rendered.

All City agencies rely on information technology to help perform the tasks necessary to maintain mission-critical operations. Over the past decade, the City has spent a significant amount of taxpayer dollars on information technology. In light of these developments, I have continued to dedicate a portion of the bureaus’ resources to audits of system-development projects. Many of these audits identified computer systems that were developed with excessive cost overruns, that missed deadlines, and that simply did not meet agency needs. Brief descriptions of some of these audits follow:

• An audit of HRA’s development and implementation of its Paperless Office System (POS) found that despite following formal systems development methodologies and spending more than $47 million on system design and development, POS is not complete and does not meet HRA’s initial business and operating requirements. In addition, HRA’s disaster recovery plan is inadequate to ensure that critical agency operations can be restored in the event of a disaster, nor has POS been incorporated into such a plan. Finally, since HRA did not provide complete documentation of all POS contracts, the audit could not determine whether all POS contracts were procured in accordance with applicable City Charter provisions and Procurement Policy Board rules.

• An audit of DCAS’s development and implementation of the City Automated Personnel System (NYCAPS) disclosed that in spite of spending more than $50 million on NYCAPS development, the system was not complete. In fact, City officials estimate that it will cost another $70 million to complete NYCAPS. Moreover, if the City decides to include personnel of the Department of Education and additional enhancements in NYCAPS’s development, it would bring the total cost of developing the system to $155 million.

Since the system’s development was not finished, the audit was unable to determine whether NYCAPS as a finished product meets the overall goals stated in the system justification, whether its system design allows for future enhancements and upgrades, and whether it meets DCAS’s initial business and system requirements.

Over the past four fiscal years, the audits generated by my audit bureaus have identified $172.2 million in actual and potential revenue and savings, and have documented many instances of program inefficiency and mismanagement. Over the next four years, I will continue to deliver on my commitment as Comptroller to finding ways to maximize revenue, reduce the cost of City government, and improve the efficiency of agency operations.

Very truly yours,

William C. Thompson, Jr.