An internal audit found that the City of Pasadena’s public safety departments had significant issues in their handling of petty cash and purchasing cards, but no illegal activity.
The audit was recommended by auditor KPMG in 2014 to enforce “corrective actions to strengthen the City’s oversight of cash disbursements” and aimed to ensure that the cash handling programs had adequate internal controls and effective procedures. The audit found three high-risk issues, weak internal controls in cash-handling in the fire department, noncompliant petty cash handling, and inconsistent petty cash policy.
Weak Internal Controls
The audit found that in the fire department, employees stored checks in their desks, which led to checks not being processed for over a week, which violated policy of depositing funds 24 hours after reception. In at least one case, the inefficiency in check processing led to a check deposit a year after the check was written. The employees said that they did not receive formal training on cash-handling policy and defaulted to the department’s historical process, opening up an avenue for mishandling.
The fire department also had “conflicting user roles and responsibilities that have inadequate segregation of duties,” according to the audit, which create “opportunities for fraud, errors, and misuse.” The same employees handling cash and checks were also generating invoices, and access-levels were overly accessible.
The Fire Department has corrected most of these risks before the investigation was completed, according to the audit. Changes in practice include the fire department no longer receiving cash and checks, with all invoices paid to a P.O. box processed by Municipal Services and changing access permissions that created conflicts in the segregation of duties.
Policy Noncompliance
In the police department, petty cash expenditures were found to be noncompliant and some petty cash accounts were not routinely used. The department has the largest purchasing card amount and the largest amount of suspensions.
“The department had 14 instances of purchasing card suspensions for not adhering to the city’s policies and procedures governing purchasing card use, which included failure to complete the monthly reallocation process in a timely manner and purchasing prohibited items,” according to the audit. Prohibited items purchased included personal gas refills on the way to work training and a toll violation fine.
The cards have spending limits and restricts at prohibited businesses such as liquor stores and adult-oriented businesses, but some purchases made on cards appeared personal, such as new dress shoes to replace a pair damaged at work.
The audit said that “although the current petty cash policy does not explicitly prohibit these types of items, they did not provide enough documentation to demonstrate appropriateness for department business needs, which could be perceived as misuse or abuse of petty cash funds.”
The audit recommended a retraining of petty cash custodians and enforcement to make sure supporting documentation shows a legitimate use of petty cash in purchases.
Inconsistent Petty Cash Policy
The audit found that the petty cash policy of the finance department is dated to 2002, and that several areas of the policy were “outdated and in conflict with other existing policies that govern how funds are to be expended,” which may lead to misuse of city funds.
The petty cash policy has a list of prohibited items that itself notes is not exhaustive, and relies on good judgement of employees and officials, which leads to inconsistency. The purchasing card policy has areas that conflict with the petty cash policy, where some prohibited items on the purchasing card policy are reimbursable per the petty cash policy.
The audit also found that the treasury has not conducted a formal audit of petty cash handling since 2013. The 2013 report found “a general lack of oversight to ensure departments adhere to established cash control policies and procedures and there was no process in place to encourage or enforce compliance with policy,” which have not been ameliorated since the report.
The audit recommends electronically uploading supporting documents as well as regular reviews and surprise counts of petty cash, and reconciling conflicting policy and ensure consistent enforcement.
The city has begun to take steps to remedy the problems with the recommendations of the audit. “In order to ensure that city policies and procedures are being followed, it is vitally important that we undertake regular audits,” Steve Mermell, city manager, told Pasadena Now. “As city manager, such analysis is invaluable and helps me ensure accountability. The specific findings of this particular audit highlight a number of areas of risk which have been addressed.” 
Stephanie Liu is assistant editor at Internal Audit 360°