HomeMy WebLinkAbout2021-03-16; City Council; ; Results of the City’s Credit Card Program Audit and of the Transient Occupancy Tax Agreed-Upon Procedures Performed for a Selection of HotelsMeeting Date: March 16, 2021
To: Mayor and City Council
From: Scott Chadwick, City Manager
Staff Contact: Brigid Drury, Senior Accountant
brigid.drury@carlsbadca.gov, 760-602-2429
Laura Rocha, Deputy City Manager, Administrative Services
laura.rocha@carlsbadca.gov, 760-602-2415
Subject: Results of the City’s Credit Card Program Audit and of the Transient
Occupancy Tax Agreed-Upon Procedures Performed for a Selection of
Hotels
District: All
Recommended Action
1.Receive a presentation on the results of an internal audit of the city’s credit card
program and of the agreed-upon procedures performed to assess compliance with the
city’s transient occupancy tax ordinance.
2.Consider adopting a resolution to assess interest for deficiencies identified as part of the
TOT review as of the date the external firm finalized each hotel’s results, instead of the
date the deficiency is paid, to ensure hotels are not charged interest for a period in
which they had not yet been invoiced.
Executive Summary/Discussion
The City Council approved the Internal Audit Plan for fiscal year 2020-21, which included an
audit of the city’s credit card program and its transient occupancy taxes. The reports included
as exhibits 2 and 3, detail these results and the presentation will present a summary of the
findings and recommendations.
The audit of the city’s credit card program approved by the City Council was intended to assess
compliance with the city’s policies and procedures and to review credit card transactions. The
report on this audit, Exhibit 2, explains the audit’s objectives, methodology and findings and
conclusions. At the end of the report, and in response to the conclusions of the audit, the
internal auditor recommended several corrective actions to the city’s Finance Department.
The agreed-upon procedures performed to assess compliance with the city’s transient
occupancy tax ordinance also included the engagement of an outside firm to determine
whether a selection of 12 hotel operators in the city properly reported and remitted transient
occupancy tax, known as TOT, in compliance with Carlsbad Municipal Code Chapter 3.12 for
March 16, 2021 Item #7 Page 1 of 31
calendar years 2017-2019. The summary report on these procedures, Exhibit 3, also explains
that objectives and methodology and details the results. Although this was not a full audit and
therefore limited in scope, the results identified any transient occupancy taxes owed to the city
for the selected hotels.
This review uncovered deficiencies in some hotels’ returns or remittances or both. Carlsbad
Municipal Code Section 3.12.080(E) states that in addition to the imposed penalties, hotel
operators who fail to remit taxes must pay interest from the date on which the remittance first
became delinquent until paid. The COVID-19 pandemic resulted in delays in the auditing and
reporting process. It was also determined the best process would be to present the results to
the City Council before invoicing hotel operators. To prevent hotel operators from being subject
to undue penalties and interest pending the City Council’s receipt and approval of this transient
occupancy tax report, the internal auditor is recommending the City Council pass a resolution
to assess interest under Carlsbad Municipal Code Section 3.12.080(E) as of the completion date
of each hotel operator’s transient occupancy tax review.
Fiscal Analysis
The presentation on the credit card program audit results is an informational item with no
direct fiscal impact.
If the City Council adopts the resolution as described in the attached report, the initial interest
and penalties assessed will be calculated as of the date the external firm completed each hotel
operator’s report on agreed-upon procedures, resulting in the city receiving an additional
$36,651 related to the transient occupancy tax and $1,036 related to the Carlsbad Tourism and
Business Improvement District. The total TOT revenue owed to the city’s General Fund,
including penalties and interest, is $88,875. The city also owes $557 for Tourism and Business
Improvement District overpayments to hotel operators.
Next Steps
The Finance Department will invoice hotel operators as appropriate based on the results of the
agreed-upon procedures transient occupancy tax engagement and any additional direction
provided by the City Council.
Environmental Evaluation (CEQA)
This action does not constitute a “project” within the meaning of the California Environmental
Quality Act under California Public Resources Code Section 21065 in that it has no potential to
cause either a direct physical change in the environment or a reasonably foreseeable indirect
physical change in the environment. Therefore, it does not require environmental review.
Public Notification and Outreach
Public notice of this item was posted in keeping with the Ralph M. Brown Act and it was
available for public viewing and review at least 72 hours before the scheduled meeting date
Exhibits
1. City Council resolution
2. Report 2020-03, Results of Transient Occupancy Tax Agreed-Upon Procedures for a Selection
of Hotels for Calendar Years 2017-2019
3. Report 2021-01, Audit of the City’s Credit Card Program
March 16, 2021 Item #7 Page 2 of 31
RESOLUTION NO. 2021-057
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD,
CALIFORNIA, APPROVING THE TRANSIENT OCCUPANCY REVIEW REPORT
AND ESTABLISHING INVOICING AND INTEREST ASSESSMENT DATES UNDER
CARLSBAD MUNICIPAL CODE SECTIONS 3.12.080(C) AND 3.12.080(E)
WHEREAS, Carlsbad Municipal Code Chapter 3.12—Transient Occupancy Tax generally requires
hotel operators to collect a 10% tax on non-exempt transient occupancies, remit the tax to the city
each month, and file a transient occupancy tax return each quarter; and
WHEREAS, the City Council included a transient occupancy tax review in its 2020-2021 internal
audit plan; and
WHEREAS, as a result of the transient occupancy tax review, some hotel operators were found
to be deficient in their returns or remittances or both; and
WHEREAS, when a deficiency is determined following an audit, Carlsbad Municipal Code Section
3.12.080(C) requires the tax administrator to immediately invoice hotel operators for the net deficiency
plus a penalty of 10% of the net deficiency and, if the hotel operators do not pay the deficient amount
and penalties within 14 days of the invoice date, the hotel operators are subject to an additional
penalty of 1% of the net deficiency per day, not to exceed 10%; and
WHEREAS, Carlsbad Municipal Code Section 3.12.080(E) requires that, in addition to the
imposed penalties, hotel operators who fail to remit taxes must pay interest at the rate of one and one-
half percent per month, or fraction of a month, on the amount of the tax, exclusive of penalties, from
the date on which the remittance first became delinquent until paid; and
WHEREAS, to prevent hotel operators from being subject to undue penalties and interest
pending the City Council's receipt and approval of the transient occupancy tax review report, the City
Council desires the tax administrator to invoice hotel operators for any net audit deficiencies and
penalties under Carlsbad Municipal Code Section 3.12.080(C) as of the date the City Council's approves
the transient occupancy review report and to assess interest under Carlsbad Municipal Code Section
3.12.080(E) as of the completion date of each hotel operator's transient occupancy tax review.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as
follows:
1.The above recitations are true and correct.
2.The transient occupancy review report is approved.
March 16, 2021 Item #7 Page 3 of 31
3.The tax administrator is directed to invoice hotel operators for any net audit deficiencies
and penalties under Carlsbad Municipal Code Section 3.12.080(C) as of the date of this
resolution and to assess interest under Carlsbad Municipal Code Section 3.12.080(E) as
of the completion date of each hotel operator's transient occupancy tax review.
4.Hotel operators who do not pay the invoices and interest assessments within the time
periods specified in Carlsbad Municipal Code Chapter 3.12 will be subject to any
additional penalties, interest, and remedies provided for in the chapter.
PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of
Carlsbad on the 16th day of March, 2021, by the following vote, to wit:
AYES: Hall, Blackburn, Acosta, Bhat-Patel, Schumacher.
NAYS: None.
ABSENT: None.
MATT HALL, Mayor
Pr\Acy-v-\
BARBARA ENGLESON, City Clerk
(SEAL)
March 16, 2021 Item #7 Page 4 of 31
Internal Auditor
Brigid Drury, CPA
Report 2020-03
Results of Transient
Occupancy Tax Agreed-Upon
Procedures
REPORT
February 2021
Exhibit 2
March 16, 2021 Item #7 Page 5 of 31
1 Results of Transient Occupancy Tax Agreed-Upon Procedures
INTRODUCTION
Objective, scope and methodology
Transient occupancy taxes, known as TOT, comprise a significant portion of the revenues in the city’s
governmental funds. Because of this, it is important for the city to ensure hotels are complying with
the Carlsbad Municipal Code chapter regarding transient occupancy taxes and remitting TOT
appropriately.
The objective of this engagement was to determine if a selection of hotels in the City of Carlsbad
properly reported and remitted TOT and assessments for the Carlsbad Tourism Business
Improvement District, known as CTBID, and the Carlsbad Golf Lodging Business Improvement District,
known as CGLBID, in compliance with the municipal code for calendar years 2017 through 2019.
To fulfill this objective, the city worked with the firm CliftonLarsonAllen, LLP, formerly called White
Nelson Diehl Evans, LLP, to perform a set of agreed-upon procedures for a selection of 12 hotels
located in the city, as outlined in the appendix. This report summarizes the results of those
procedures. Although this is not a full audit and therefore limited in scope – that is, it does not
include a risk assessment or an opinion, etc. – the agreed-upon procedures determined transient
occupancy taxes owed to the city by the selected hotels. Had an audit been performed, other matters
might have come to the internal auditor’s attention and would have been reported.
Over the next few years, the city’s internal auditor plans to continue working with an external firm to
perform these agreed-upon procedures for the remaining hotels in the city. For this year’s
engagement, the internal auditor selected hotels to represent a variety of large and small properties.
The scope of this review excludes short-term vacation rentals for several reasons. First, TOT revenue
from hotels comprises the vast majority of total TOT revenue received by the city. The city also has
agreements with several third-party platforms that collect and remit these payments to the city on
behalf of vacation rental owners. And the city’s code enforcement division uses software to help
identify short-term rentals not remitting TOT.
Background
California Revenue & Taxation Code Sections 7280-7283.51 set forth the state’s regulations for
transient occupancy taxes, and Chapter 3.12 of the Carlsbad Municipal Code sets forth the city’s
regulations on its TOT. This tax applies to any person who occupies a hotel for a period of 30 days or
less and is not exempt based upon 10 percent of the rent charged by the hotel operator. Typical
exemptions for paying TOT are for federal or state employees when staying on official business. TOT
revenue is allocated to the city’s General Fund.
The city also collects assessments to support its tourism and golf lodging business improvement
districts. The regulations governing these districts are set forth, respectively in Carlsbad Municipal
Code Chapters 3.37 and 3.38. Proceeds from the CTBID assessment are used to administer marketing
and visitor programs to promote the City of Carlsbad as a tourism visitor destination and to fund
projects, programs and activities, including appropriate administrative charges, that benefit hotels
within the boundaries of the district. Funds collected for the CGLBID are used to promote golf-related
tourism within the district, as well as marketing-related capital improvements such as golf-related
signage, golf-related equipment and to pay for related administrative costs.
March 16, 2021 Item #7 Page 6 of 31
2 Results of Transient Occupancy Tax Agreed-Upon Procedures
Hotels are also required to report and remit these assessments according to the following:
For the CTBID, effective Nov. 1, 2020 all hotel businesses in the City of Carlsbad must pay
two percent of gross revenues. For the review period, prior to this increase, the assessment
was based upon a flat fee of one dollar per occupied room per night for all transient
occupancies.
For the CGLBID, hotels in the city that have elected to be part of the district for the fiscal
year pay a flat fee of two dollars per occupied room per night for all transient occupancies.
Six hotels participated in the CGLBID as of 2019-20 fiscal year end.
Hotel operators collect and remit taxes to the city on a monthly basis. The city’s Finance Department
is responsible for the collection and administration of TOT and assessments. Table 1 summarizes total
TOT and assessment revenue received by the city in fiscal years 2017-18 through 2019-20.
Table 1: Revenue received from transient occupancy taxes and assessments from the tourism and
golf lodging business improvement districts for fiscal years 2017-18 through 2019-20
Fiscal year TOT CTBID CGLBID
2017-18 $24,233,536 $1,246,944 $681,703
2018-19 26,320,645 1,333,001 719,740
2019-20 18,898,325 1,086,188 534,241
Total $69,452,506 $3,666,133 $1,935,684
Source: City of Carlsbad comprehensive annual financial reports for fiscal years 2017-18 through 2019-20 and
the districts’ annual reports.
SUMMARY OF RESULTS
Results of agreed-upon procedures
The procedures performed for the selection of 12 hotels for calendar years 2017 through 2019
identified additional revenue owed to the city and associated penalties and interest. The results are
presented in Tables 2 and 3 on the following page. Hotel names are omitted from the tables. Of the
12 hotels selected, only two participated in the CGLBID and neither owed additional assessments as a
result of this engagement.1
1 Of the 12 hotels included in this engagement, the two properties that are members of the Carlsbad Golf
Lodging Business Improvement District collectively paid $809,812 in CGLBID assessments to the city for calendar
years 2017 through 2019.
•10 percent of the rent revenue for all transient occupancies
TOT
•2 percent of rent revenue for all transient occupancies
CTBID
•A flat fee of two dollars per occupied room per night for all transient occupancies
CGLBID
March 16, 2021 Item #7 Page 7 of 31
3 Results of Transient Occupancy Tax Agreed-Upon Procedures
In general, the hotel operators owed additional TOT to the city for a few reasons:
Underreported transient rent for income from extra fees and charges
Overreported tax-exempt rent because the hotel could not provide adequate or accurate
supporting documentation
Variances found when reviewing the mathematical accuracy and timeliness of tax forms
Table 2: TOT underpaid or overpaid by hotel for calendar years 2017 through 2019
Hotel
TOT collected for
calendar year
2017-19
TOT underpaid
(overpaid)
by hotel
Penalties and
interest
Total due to city
(owed by city)
1 $1,199,340 $4,176 $2,266 $6,442
2 129,771 2,489 1,707 4,197
3 268,320 1,382 1,043 2,426
4 1,212,638 (48) (48)
5 1,363,375 4,246 2,747 6,992
6 1,105,377 2,337 919 3,255
7 947,770
8 1,198,875 244 8,059* 8,302
9 1,810,852 (315) (315)
10 10,753,916 19,572 9,941 29,513
11 155,259 3,454 1,117 4,571
12 1,210,206 15,273 8,266 23,539
Total $21,355,699 $52,809 $36,651 $88,875
Table 3: CTBID overpaid or underpaid by hotel for calendar years 2017 through 2019
Hotel CTBID collected
for CY 2017-19
CTBID underpaid
(overpaid) by
hotel
Penalties and
interest
Total due to city
(owed by city)
1 $36,689
2 6,563 $288 $29 $317
3 24,651
4 88,960 189 97 286
5 36,953
6 71,220
7 43,280
8 89,445 732* 732
9 125,836 (641) (641)
10 399,224 (1,827) (1,827)
11 22,492 455 178 633
12 71,184 (57) (57)
Total $1,016,497 $(1,593) $1,036 $(557)
*This hotel underpaid TOT by a small amount and did not owe additional assessments for CTBID. The penalties
and interest are assessed because the hotel made several late payments.
Source: Selected hotels’ tax returns for calendar years 2017 to 2019, agreed-upon procedures reports provided
by firm and city internal auditor’s calculations.
March 16, 2021 Item #7 Page 8 of 31
4 Results of Transient Occupancy Tax Agreed-Upon Procedures
When a deficiency is determined after an audit, the Carlsbad Municipal Code Section 3.12.080(C)
requires the tax administrator to immediately invoice hotel operators for the:
Net deficiency
A penalty of 10% of the net deficiency
If the hotel operators do not pay the deficient amount and penalties within 14 days of the invoice
date, they are subject to an additional penalty of one percent of the net deficiency per day, not to
exceed 10% of the net deficiency.
Carlsbad Municipal Code Section 3.12.080(E) states that in addition to the imposed penalties, hotel
operators who fail to remit taxes must pay interest at the rate of one and one-half percent per month
or fraction of a month, on the amount of the tax, exclusive of penalties, from the date on which the
remittance first became delinquent until paid.
Given the unique economic challenges COVID-19 has placed on the hospitality industry, the internal
auditor — in discussions with city leadership — determined it was best to first brief the City Council
and offer an opportunity for feedback before providing the results to the Finance Department to
invoice hotel operators. Additionally, the COVID-19 pandemic resulted in delays in the auditing and
reporting process. To prevent hotel operators from being subject to undue penalties and interest
pending the City Council’s receipt and approval of this transient occupancy tax review report, the
internal auditor is recommending the City Council pass a resolution advising the tax administrator to
invoice hotel operators for any net audit deficiencies and penalties under Carlsbad Municipal Code
Section 3.12.080(C) as of the date the City Council approves the transient occupancy review report
and to assess interest under Carlsbad Municipal Code Section 3.12.080(E) as of the completion date
of each hotel operator’s transient occupancy tax review.
Hotel operators who do not pay the invoices and interest assessments within the appropriate time
frame will still be subject to any additional penalties, interest and remedies provided for in the
municipal code.
Therefore, based on the results of this engagement, and the City Council’s response to this
recommendation and any other feedback provided, the Finance Department should immediately
invoice and refund or credit hotel operators as appropriate.
Recommendation #1: To ensure that hotels are not charged interest for a period in which they were
not yet invoiced for audit deficiencies, the City Council should consider passing a resolution to assess
interest for deficiencies identified as part of this engagement as of each hotel’s final report date
instead of the date paid.
Staff will present this recommendation to the City Council at an upcoming public meeting and request
the City Council’s guidance.
Recommendation #2: To collect the TOT and assessment revenue owed to the city, the Finance
Department should immediately work with hotel operators to invoice and refund or credit hotel
operators as appropriate, following any additional guidance provided by the City Council.
Management’s Response: City staff will work with and invoice hotel operators in accordance with the
results of the TOT audit and any additional guidance provided by the City Council.
March 16, 2021 Item #7 Page 9 of 31
5 Results of Transient Occupancy Tax Agreed-Upon Procedures
How the city communicates its TOT guidance
There is an opportunity for the city to make improvements in how it communicates its TOT guidance
to hotels. The results of the agreed-upon procedures in the engagement indicated that hotel
operators may be unclear about the taxability of certain extra fees and charges. The Carlsbad
Municipal Code contains a definition of what is considered “rent” and therefore taxable. Additionally,
a memo in the Finance Department’s records further elaborates that all fees or charges that are
suggested as mandatory for the privilege of occupancy should be considered taxable for TOT and the
CTBID assessment, such as resort fees, no-show fees, attrition fees, cancellation charges, late check-
out fees, cleaning fees, extra person charges, pet-in-room fees, rollaway bed charges, etc.
However, approximately half of the hotels reviewed owed additional TOT for certain miscellaneous
revenue excluded from taxable rent. In fact, several hotel operators requested a copy of the Finance
Department memo about extra fees and charges for clarification on the taxability of this
miscellaneous revenue. The absence of clear guidance about the taxability of certain extra fees and
charges may result in hotels inadvertently excluding income from the calculation of TOT and
ultimately, less TOT revenue for the city. Therefore, the Finance Department should update the city’s
website to explain that separate charges levied for items or services which are part of such
accommodations are considered rent and therefore taxable.
Although an update to the city’s website can provide additional clarity in the short-term, the city
should consider performing a comprehensive review of Chapter 3.12 of the Carlsbad Municipal Code
that addresses TOT. This update could further clarify the definition of taxable rent. Additionally, it
could address how interest is assessed when deficiencies are identified as part of an audit, as
discussed earlier. Historical documents indicate that the city has used the final report date as the
date for calculating interest in past TOT reviews, rather than the date the remittance was paid.
Therefore, the city should consider updating the relevant section of the municipal code when it
performs a comprehensive review to align with the city’s practices.
Recommendation #3: To ensure the city receives all revenue owed to it for mandatory charges and
extra fees considered taxable for the transient occupancy tax, the Finance Department should clarify
this information for hotels. In the short-term, the Finance Department could update the transient
occupancy tax page on the city’s website clarifying this information. Long term, the Finance
Department could work with Carlsbad Municipal Code and City Council Policy Update Subcommittee
to clarify this information in the city’s municipal code.
Management’s Response: The Finance Department has added clarifying information on the city’s
transient occupancy tax webpage clarifying which charges and fees are considered taxable for the
transient occupancy tax. The Finance Department will review the Carlsbad Municipal Code and
consider recommending clarifying language to the Carlsbad Municipal Code and City Council Policy
Update Subcommittee.
TOT payments by credit card
The city pays a fee to process all credit card payments, including those by hotels that choose to pay
TOT via credit card. Hotels are also able to remit TOT payments online with a credit card or check, or
by mailing or delivering a check, money order, or cash. The city does not currently charge an
administrative fee to anyone making online payments to the city by credit card, including TOT
payments, although it has the authority to do so.
A representative from the Finance Department stated that the city regularly receives TOT payments
by credit card for three hotels and a number of short-term vacation rental properties. The internal
auditor reviewed bank records to estimate how much the city is paying to process credit card
payments for TOT. Generally, cashiers at the Faraday Center are the city staff
March 16, 2021 Item #7 Page 10 of 31
6 Results of Transient Occupancy Tax Agreed-Upon Procedures
who are responsible for processing TOT payments. According to the bank data, the city paid an
average effective fee of 2.35% of gross credit card payments processed at the Faraday Center in
calendar year 2020. One of the hotels in the city that regularly pays TOT by credit card paid
approximately $326,000 in TOT to the city in calendar year 2019. Using the most recent average
effective fee of 2.35%, the city would have paid approximately $7,665 for one hotel to pay one year’s
worth of TOT via credit card.2
Additionally, during November 2020, the city launched a payment portal to support online credit card
and electronic check payments for several types of payments, including TOT. It’s possible that, given
the financial effect of COVID-19 on the economy and the ease of the new system supporting paying
by credit card, more hotels will use the online portal to pay TOT by credit card. This may ultimately
result in the city paying higher credit card fees for TOT payments than in prior years.
One option for the city to consider is charging an administrative fee to cover costs of the
administration of processing credit card payments. This could apply to credit card payments for a
variety of city programs, not just for TOT. Additionally, there are other considerations such as the
potential savings from reducing other payment methods, fraud risks, personnel resources, etc.,
making this a much larger topic for discussion.
Recommendation #4: Based on feedback from the City Council, the Finance Department should
consider options for potentially implementing an administrative fee for credit card transactions and
present it to the City Council for its consideration.
Management’s Response: If directed by the City Council, staff will return to the City Council to
discuss options for potentially implementing an administrative fee for credit card transactions.
2 This calculation uses the hotel’s payment records for calendar year 2019 because 2020 payments are not
reflective of an average year due to the pandemic’s effects on TOT.
March 16, 2021 Item #7 Page 11 of 31
Summary Report on Transient Occupancy Tax Agreed-upon Procedures
Transient
Occupancy Tax
Agreed-Upon
Procedures
APPENDIX
March 16, 2021 Item #7 Page 12 of 31
Summary Report on Transient Occupancy Tax Agreed-upon Procedures
Appendix: Schedule of procedures to be performed
The list below comprises the procedures that the firm now known as CliftonLarsonAllen applied as
agreed upon by the City of Carlsbad.
1. We will review the City Municipal Code Title 3 Chapter 3.12 Transient Occupancy Tax and
resolution related to the transient occupancy tax, as well as review the City Municipal Code
Title 3 Chapter 3.37 Carlsbad Tourism Business Improvement District and Chapter 3.38
Carlsbad Golf Lodging Business Improvement District.
2. We will verify the mathematical accuracy and timeliness of the monthly transient occupancy
reports filed with the City for the calendar years 2017, 2018, and 2019.
3. We will trace the transient rent receipts reported on the transient occupancy tax returns
prepared by the Hotel to the transient rent receipts recorded in their accounting records and
verify that these were in accordance with the City’s ordinance.
4. We will select a sample of rental transactions during the review period and for each
transaction selected, we will verify tax computations and trace the amounts of rental
revenues and transient occupancy tax collected to the books and records of the Hotel.
5. We will trace the total number of days each unit/hotel room is occupied on the transient
occupancy tax returns prepared by the Hotel to the total number of days each unit/hotel is
occupied in their records and verify that these are in accordance with the City’s ordinance.
6. We will review the internal control procedures of the Hotel to determine the following:
a. How “transient rent receipts” were accounted for and reported to the City.
b. What procedures were in place to identify transient and non-transient guests?
c. How exemptions, including complimentary rooms, were documented and reported
to the City.
7. We will review the supporting documentation, on a sample basis, for exemptions claimed on
the transient occupancy tax returns.
8. We will perform additional procedures that the City considers necessary to verify the
reasonableness of reported revenues of the Hotel operator.
9. We will inquire how the Hotel handles reservations and payments done online through a
third party such as Expedia.com and how the transient occupancy tax was collected and
reported to the City for these transactions.
March 16, 2021 Item #7 Page 13 of 31
Audit of the City’s Credit
Card Program
February 2021
Internal Auditor
Brigid Drury, CPA
Report 2021-01
REPORT
Exhibit 3
March 16, 2021 Item #7 Page 14 of 31
2 Audit of the City’s Credit Card Program
TAB LE OF CONTENTS
INTRODUCTION
Scope & objectives .......................................................................................................................3
Methodology ................................................................................................................................3
Summary of conclusions ..............................................................................................................3
Background ..................................................................................................................................3
CITYWIDE CREDIT CARD SPENDING
Trends in citywide credit card spending ......................................................................................6
CREDIT CARD TRANSACTION TESTING
Review of selected transactions ...................................................................................................10
Additional data analysis ...............................................................................................................13
ADDITIONAL CREDIT CARD GUIDANCE
Meals, refreshments and employee recognition .........................................................................14
Travel ............................................................................................................................................14
Closure of cardholder accounts ...................................................................................................15
Amazon purchases shipped to non-city addresses ......................................................................15
SUMMARY OF RECOMMENDATIONS
Summary of recommendations and management’s response ....................................................17
March 16, 2021 Item #7 Page 15 of 31
3 Audit of the City Credit Card Program
INTRODUCTION
Scope & Objectives
The audit period covered credit card statement cycles ending during fiscal years 2018-19 and 2019-
20. The objectives were to:
Determine whether the city’s credit card policies and procedures function as management
intended and comply with applicable state laws
Assess individual and departmental transaction, purchasing and issuance compliance
Methodology
• Interviewed city staff
• Researched state laws, regulations, guidelines and city policies governing the city’s credit
card program
• Analyzed city personnel and employment data
• Reviewed monthly credit card statement packets completed by cardholders
• Reviewed CAL-Card purchase program information and data from US Bank
• Analyzed credit card transaction and cardholder data from the city’s accounting system and
US Bank
Summary of Conclusions
This audit revealed several areas where the Finance Department should clarify and add language in
its city credit card-related policies. A number of credit card purchases and the supporting statements
and documentation did not comply with city credit card policies, including late credit card statement
reviews and missing documentation, indicating a need for the Finance Department to track policy
violations and revoke credit card privileges when appropriate. Several types of credit card purchases
that related to meals, refreshments and employee appreciation were technically compliant with
existing policies, but suggest a need for city leadership to consider issuing additional citywide
guidance. Cardholders purchased a number of city business related flights cancelled due to COVID-
19; as such, departments need to inventory and track these nonrefundable funds. The audit’s review
of a random selection of 100 transactions and additional data analysis did not identify any specific
instances of fraud or abuse.
Background
The city participates in the CAL-Card program, a VISA purchase card program provided by a State of
California-leveraged procurement agreement offered to State and Local Government agencies. The
city must follow all related procurement laws, regulations and policies related to the use of this card.
Additional applicable city policies and procedures include the city’s:
• Credit Card User’s Guide
• Purchasing Policies and Procedures Manual
• Travel Guidelines & Procedures
• Council Policy No. 2 - Travel Policy
Employees may use city-issued credit cards to purchase supplies, services and equipment in the
normal course of their job functions. Cards are issued in the name of the cardholder and billed to the
city. Before being issued a credit card, an employee must sign a cardholder agreement, which
indicates the maximum dollar amounts per transaction and a maximum total for all purchases made
with your credit card within a given month. A single credit card transaction cannot exceed $2,500 and
the monthly statement period limit is $5,000 total. Under certain circumstances, an employee may
obtain a supervisor’s and Finance Department approval for a one-time increase to these limits.
March 16, 2021 Item #7 Page 16 of 31
4 Audit of the City Credit Card Program
Cardholders must also sign a form acknowledging receipt of the physical credit card. These
documents are kept on file with the Finance Department.
The cardholder is required to review and attest to the accuracy of each month’s statement and
forward it, with all receipts and logs of purchases, to the approving official, within five working days
of receiving it. It is the approving official’s responsibility to ensure that all cardholders’ statements
have been forwarded to him or her for review and processing. The approving official is required to
verify items were purchased in accordance with the city’s policies and to forward all completed
statements to the Finance Department by the tenth day of the following month. Each department
will designate approving officials by submitting the appropriate form, signed by a department head,
to the Finance Department.
Figure 1: Monthly credit card procedures at the close of each billing cycle
Source: Interviews with city staff, credit card user’s guide and Finance Department records.
The number of cardholders per department varies. As of 2019-20 fiscal year end, the city had 246
active credit cards. Table 1, below, illustrates the number of cardholders per department and other
relevant spending information. Cardholders within departments may charge credit card purchases to
other departments, depending on the nature of the purchases. Therefore, not all credit card spending
charged to a department is necessarily made by cardholders within that department.
Finance files statement packets for storage
Finance Department staff retain credit card statement packets from all cardholders.
Finance uploads data to accounting system
Finance Department staff use completed summary of purchase logs from statement packets to enter account and purchase information into a database to upload into the city's accounting system.
Finance receives packets
Finance Department staff verify receipt of completed and signed statement packets from all cardholders
citywide.
Approving officials review statement packets
Approving officials review documentation from cardholders for compliance with city policies. They sign the statements and forward documentation to the Finance Department by the 10th of the month.
City pays credit card bill
The Finance Department pays the monthly bill for all citywide credit cardholders near the beginning of the next
month, after the cycle closes on the 22nd.
Statement period ends
After the close of the billing cycle on the 22nd, cardholders review and sign statements, compile receipts, complete summary of purchases logs, and forward documentation to approving officials.
March 16, 2021 Item #7 Page 17 of 31
5 Audit of the City Credit Card Program
Table 1: Number of cardholders and credit card spending by department for fiscal year 2019-20
Department
Credit card
spending
charged to
department
% of spending
compared to
department’s
adopted
operating
expenses budget
Number of
cardholders
Full-time
employees
Total
monthly
credit limit
Parks &
Recreation $324,732 2% 40 53 $210,000
Facilities & Fleet 315,956 3% 15 30 120,000
Police 302,596 3% 40 181 210,000
Fire 197,905 4% 43 97 220,000
Utilities 129,631 0.2% 23 56 115,000
Library &
Cultural Arts 120,636 2% 21 50 105,000
Policy/leadership
group* 109,589 4% 17 34 101,000
Information
Technology 107,926 2% 6 37 30,000
Human
Resources 86,245 1% 11 18 57,500
Transportation 75,960 1% 9 41 45,000
Community
Development 58,241 0.4% 5 51 25,000
Public Works
Administration 36,954 2% 8 23 40,000
Finance 32,327 1% 3 31 15,000
Housing &
Neighborhood
Services
27,647 4% 3 13 13,000
Environmental
Management 9,263 0.4% 2 12 15,000
Capital projects 8,383 #
Total $1,943,991 246 727 $1,321,500
*The Policy/leadership group consists of the Offices of the City Council, City Treasurer and City Manager; the Office of the City
Attorney; and Communications & Engagement.
# There are no specifically identifiable credit cardholders for capital projects related credit card charges. Different departments
charge to capital projects depending on the circumstances.
Note: Not all credit card charges are related to each department’s maintenance and operations budget. For example, the
Police Department may make credit card purchases related to a grant program, which is budgeted for separately than in its
maintenance and operations budget. Further, not all credit card spending charged to a department is made by that
department’s cardholders. For example, a cardholder and employee within the Information Technology Department may
purchase an IT-related item on behalf of another department, and charge that expense to that department in the city’s
accounting system.
Source: City personnel records, the city’s accounting system and the US Bank system.
March 16, 2021 Item #7 Page 18 of 31
6 Audit of the City Credit Card Program
CITYWIDE CREDIT CARD SPENDING
Trends in citywide credit card spending
City credit card spending can be broken down by merchant category codes which are used by credit
card companies to classify merchants and businesses by the type of goods or services provided. Table
2 below shows spending on city credit cards in the top 20 merchant category codes for transactions in
fiscal year 2019-20. Amazon purchases comprised 99% of the total dollar value of credit card
transactions in the book stores category.1
There are a wide variety of reasons employees make purchases with vendors from the merchant
category codes listed below. For example, employees on work-related travel may make hotel, airline
and food purchases. The Fleet and Facilities Department may make purchases at home supply stores
such as Lowe’s to maintain city facilities.
Table 2: Top 20 merchant codes based on transactions for fiscal year 2019-20
Merchant code description Card transactions Total dollar value
Book stores 2,415 $224,200
Home supply warehouse stores 865 97,940
Business services (not elsewhere classified) 261 83,367
Eating places and restaurants 1,021 76,411
Organizations, charitable & social service 255 66,034
Computers computer equipment, software 102 61,902
Hotels (not elsewhere classified) 158 58,937
Membership organizations (not elsewhere classified) 222 54,753
Industrial supplies (not elsewhere classified) 139 44,133
Schools and educational supplies (not elsewhere classified) 156 39,892
Miscellaneous and specialty retail stores 128 38,303
Southwest Airlines 158 35,304
Fast food restaurants 418 33,659
Durable goods (not elsewhere classified) 45 30,368
Hyatt hotels 61 29,040
Grocery stores, supermarkets 523 28,547
Automotive parts & accessories stores 139 26,527
Auto and truck dealers–sales, service, repairs, parts, leasing 42 23,306
Direct marketing - continuity, subscription merchants 153 23,171
Marriott 51 22,553
Total credit card transactions for the 25 merchant codes 7,312 1,098,347
Total FY 2019-20 credit card transactions 11,744 $1,943,991
Source: US Bank credit card transaction data for transactions occurring in fiscal year 2019-20
1 This dollar figure does not indicate the total city spending at Amazon because the city’s Amazon Business
account allows employee accountholders without city credit cards to also purchase items at Amazon using an
invoice.
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7 Audit of the City Credit Card Program
The city’s accounting system also allows city expenditures to be broken down by “object,” or
spending category, which indicates the reason for each credit card transaction. Table 3, below, shows
the top fifteen spending categories for purchases made by city credit cards in fiscal year 2019-20,
including a comparison with the prior fiscal year.
Table 3: Comparison of the top fifteen spending categories for purchases made by credit card in
fiscal year 2019-20 to 2018-19
Spending category 2019-20 2018-19 $ Change % Change
Misc. supplies $470,702 $581,070 ($110,368) -19%
Training, training-
related travel 294,090 363,618 (69,528) -19%
Conference, meeting
travel 194,914 284,305 (89,391) -31%
Dues and
subscriptions 80,683 76,526 4,157 5%
Misc. meals, miles 78,609 88,381 (9,772) -11%
Building maintenance 74,549 74,402 147 0%
Misc. outside services 64,822 44,007 20,815 47%
Misc. computer
hardware 61,191 72,099 (10,908) -15%
Vehicle maintenance 58,607 32,535 26,072 80%
Office supplies 49,638 51,639 (2,001) -4%
Safety equipment 45,814 26,029 19,785 76%
Parts - vehicles 42,379 32,695 9,684 30%
Parts - equipment 28,193 28,312 (119) 0%
Small tools 26,135 22,603 3,532 16%
Office furniture &
equipment 25,925 39,219 (13,294) -34%
Remaining categories
combined 347,741 379,670 (31,930) -8%
Total $1,943,991 $2,197,111 ($253,120) -12%
Source: The city’s accounting system
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8 Audit of the City Credit Card Program
As shown in Table 3 on the previous page, citywide credit card sending decreased from fiscal year
2018-19 to 2019-20, largely in the categories of miscellaneous supplies and training and conference
travel. This is reasonable given the COVID-19 health emergency and its effect on reducing in-person
services for a period of time and limiting training and conference travel. Similarly, it explains why
other categories like safety equipment spending increased from fiscal year 2018-19 to 2019-20.
Although vehicle maintenance spending by credit card increased by a large percentage, the related
budgets for this item did not change significantly. Therefore, this increase is reasonable and suggests
the city is utilizing credit cards more for vehicle maintenance-related purchases, rather than relying
on other purchasing mechanisms. Miscellaneous outside services also experienced a notable
increase. Facilities maintenance incurred the largest portion of the increase in miscellaneous outside
services. A representative from the Fleet & Facilities Department explained this was due to the lobby
remodel at City Hall and COVID-19 related expenses.
There was a significant spike in credit card spending in June 2019, immediately before a policy change
went into effect that eliminated contingency funding for all departments citywide – as illustrated in
Figure 2, below. Prior to the budget year 2019-20, all departments had a contingency fund that
allowed for a certain percentage of the budget each year to be automatically carried forward to the
budget for the next fiscal year. The city manager eliminated this practice, effective July 2019. Based
on conversations with several individuals, it is possible this change was a contributing reason for the
spike in credit card spending in June 2019.
Figure 2: Total citywide credit card spending per monthly statement period for fiscal years 2018-19
and 2019-20
Source: Data from the city’s accounting system and US Bank system, which handles the city’s credit card
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
18-19 19-20
March 16, 2021 Item #7 Page 21 of 31
9 Audit of the City Credit Card Program
Additional analysis of the five departments with the highest credit card spending in fiscal year 2018-
19 revealed that the police and fire departments increased credit card spending the most in June
2019, as shown in Table 4 below.
Table 4: Spending by month for the five departments with the highest credit card spending in fiscal
year 2018-19
Source: City personnel data and the city’s accounting system
The Police and Fire departments’ purchases in June 2019 were appropriate and in support of
department programs, but confirm that the increase was at least in part due to the policy change. A
representative from the Police Department stated the increase in credit card expenditures from June
2019 was in response to the city’s policy change on the elimination of automatic carryforwards the
previous year. In June 2019, the police department had residual funds from the operating budget and
identified supplies the department would need in the near future, such as batteries, evidence kits,
office supplies, uniform accessories, safety gear and minor miscellaneous investigative tools. The
department also took that opportunity to pay for upcoming dues and subscriptions, as well as
outstanding ones from the same year.
Similarly, a representative from the Fire Department confirmed that, based on the discontinuing of
contingency funds, personnel used credit cards to replenish and replace supplies prior to fiscal year-
end including a fire hose, flashlights, headsets and microphones, chainsaw, wildland tools, automated
external defibrillator (AED) battery and carrying case, radio harnesses, code books and public
education and shelter supplies. The representative also stated that credit card spending increased
due to two new programs: the North Zone Technical Rescue Team Program and the new year-round
lifeguard program along North Beach. Additionally, the representative stated, the department
postpones supply and equipment purchases to the end of the fiscal year when feasible to ensure
there is available funding in the budget for day-to-day operations. This is because of timing issues
with mutual aid expenses and reimbursements.
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
PARKS & RECREATION POLICE FIRE FLEET & FACILITIES LIBRARY & CULTURAL ARTS
March 16, 2021 Item #7 Page 22 of 31
10 Audit of the City Credit Card Program
CREDIT CARD TRANSACTION TESTING
Review of selected transactions
The city’s cardholders conducted over 23,500 purchase transactions in fiscal years 2018-19 and 2019-
20 combined. The internal auditor selected a random sample of 100 transactions from credit card
statement cycles that ended during the audit period and performed an extensive review of these
transactions with an emphasis on whether:
• The transaction was allowable according to existing city policies
• The documentation for each transaction was adequate (i.e., contained itemized receipts,
additional travel forms if necessary, etc.)
• The appropriate approving official reviewed the corresponding credit card statement for the
selected transaction
• The corresponding credit card statement for each transaction was reviewed and submitted
to the Finance Department in a timely manner
The testing of these 100 transactions resulted in the following:
• 99% of transactions were allowable according to existing city policies
• 98% of transactions contained supporting documentation as required by city policies
• 83% of selected transactions’ corresponding credit card statements were reviewed and
signed by a designated approving official
• 76% of selected transactions’ corresponding credit card statements were reviewed and
submitted to the Finance Department in a timely manner
Allowability
One of the 100 randomly-selected transactions involved a purchase of gift cards, which is expressly
prohibited in the credit card user’s guide. In July 2018, a Library & Cultural Arts employee purchased
25 ten-dollar Trader Joe’s gift cards for a total of $250 as part of the department’s employee
appreciation program. Records indicate that a manager in the Finance Department promptly
contacted a representative in the Library & Cultural Arts Department to discuss this policy violation.
Two months later, the same employee purchased an additional $700 worth of gift cards from Amazon
and Trader Joes for the department’s employee appreciation program. Again, a manager in the
Finance Department promptly contacted the representative in the Library & Cultural Arts Department
to discuss this violation. According to the Director of the Library & Cultural Arts Department, the
department’s management did not immediately notify some cardholders in the department of this
policy, which resulted in the additional gift card purchases. A manager in the Finance Department
explained the city prohibits gift cards purchases because such cards can be easily misplaced, lost, or
stolen. The library director confirmed that the department stopped purchasing gift cards as part of its
employee recognition awards after this instance. Instead, it now provides employee recognition
awards in the form of various small items, several of which are City of Carlsbad-branded
merchandise.
This example also highlights the need for Finance to provide additional guidance to departments as to
when to report additional taxable income for gifts or awards. The Internal Revenue Service states
cash or cash equivalent items provided by the employer are never excludable from income. Gift
certificates that are redeemable for general merchandise or have a cash equivalent value are not de
minimis benefits and are taxable. The analyst stated the department purchased 230 gift cards during
fiscal year 2017-18 using city credit cards for a total of $2,335. The analyst also said staff did not
report information regarding gift cards gifted to employees to the Finance Department as taxable
income for employees who received them. The Finance Department should provide guidance to
ensure that city departments give and report employee appreciation gifts in compliance with the
Internal Revenue Code in the future.
March 16, 2021 Item #7 Page 23 of 31
11 Audit of the City Credit Card Program
Documentation
Nearly all the transactions reviewed contained adequate documentation, including itemized receipts
and supplemental forms when necessary. The credit card user’s guide requires that an employee
submit a travel form for any purchases made relating to conferences and training-related travel.
However, two travel-related credit card transactions did not have corresponding travel forms. In one
of the instances, a representative from the department stated the department was under the
impression that a travel log was not needed when the employee used a city credit card and provided
all supporting information and no additional money was owed to or from the employee.
The city credit card user’s guide states the use of the city credit card for payment of business travel,
meals and entertainment does not preclude the use of the travel log, the travel log will still need to
be filled out and approved in accordance with the city’s Travel Policy. Given that these are policy
exceptions — not indicative of patterns of fraud or misuse — the Finance Department could consider
highlighting these aspects of city policy to cardholders, managers, and approving officials. One way to
do this would be to invite credit card approving officials to the Finance Department’s annual training
and include this content.
Additionally, one of the transactions’ supporting documentation revealed that an employee received
reimbursement for a travel-related meal cost that the employee purchased using a city credit card.
This occurred because the employee included the receipt as support of a credit card transaction in
the monthly statement packet, but also used the same receipt to request reimbursement in a travel
log submitted during the same time period. According to the employee, this was an oversight
because the restaurant provided two receipt copies and the receipt didn’t include a card number to
help identify that the employee made the purchase with a city-issued credit card. Upon learning of
the oversight, the employee promptly reimbursed the city.
It is possible employees could request reimbursement for larger travel-related purchases made using
a city credit card, such as for lodging. Therefore, the city should try to reduce the likelihood of this
incident happening again by requiring cardholders to provide a copy of the relevant city-issued credit
card charges from the US Bank system or the monthly credit card statement associated with the time
period of travel with their travel logs. This way, credit card approving officials could promptly review
and identify this type of incident.
Approvals
Although all corresponding credit card statements for the transactions tested contained an approval
signature, 17 of the 100 signatures were from staff who were not designated as authorized credit
card approving officials. The Finance Department maintains forms for individuals authorized by their
department heads to approve credit card statements. Seventeen of the selected transactions’
associated credit card statements were signed by individuals that had no form on file. The
department maintains two lists of approving officials: one for credit card statement and another for
those responsible for reviewing items like accounts payable and petty cash. Based on multiple
conversations, it appears city staff may have been unaware of the existence of two separate lists of
approving officials. In addition, the Finance Department staff receiving departments’ signed
statement packets did not have access to the correct list of approving officials, so that they could tell
who was and who was not designated as an approving official. To avoid confusion in the future, the
Finance Department should consolidate these lists and clarify guidance in the appropriate city
policies. During this process, departments should immediately provide any necessary authorization
forms to the Finance Department.
Nearly a fourth of the credit card statements reviewed were not submitted to the Finance
Department for processing within a timely manner. For each credit card statement period, the credit
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12 Audit of the City Credit Card Program
card user’s guide requires that a cardholder prepare a statement for approval by the fifth of the
following month and ensure the statement is approved and submitted to the Finance Department for
processing by the tenth of the following month. Twenty-four statements were approved after the
tenth of the following month and therefore were not submitted by the deadline.2 This is in part due
to cardholders being late in providing credit card statements and supporting documentation to their
approving officials for review and approval. The city’s finance director noted that the longer
cardholders wait to review and provide statement and support to approvers, the more stale
information becomes to help the approver. Additionally, cardholders’ delayed reporting negatively
affects the accounting and financial reporting and closing processes. The delays often result in the
accounts payable team falling behind in processing and then in reporting the associated expenses. As
a result, the accounts payable team is forced to perform additional work tracking down and
requesting information.
Although certain long-term plans to upgrade the city’s accounting system could help remedy this
issue, the Finance Department should consider changes to improve this in the short term. The city’s
procedure for processing, reviewing and inputting individual user credit card statements into the
city’s accounting system relies heavily on time-consuming data entry and extensive hard copy
documentation. In the long term, the Finance Director stated, the city is contemplating a credit card
module in the city’s accounting system that could streamline the review and approval process,
thereby promoting timely reviews and submissions.
In the short term, the Finance Department should update the credit card user’s guide to address
penalties for repeatedly late submissions. The current language calls for revocation of cardholder
privileges for certain repeated policy violations but does not address late reviews and submission to
the Finance Department. The credit card user’s guide also states the Finance Department maintains
an ongoing record of unauthorized credit card use, but records show the department has not tracked
noncompliance with city credit card policy or unauthorized credit card use on an ongoing basis since
2016. Instead, the city maintains a file that documents cardholders’ current status, which does not
allow the city to track past events. Therefore, the Finance Department should begin to formally track
late submissions, along with other policy violations, in order to revoke privileges when appropriate.
Recommendation #1: The Finance Department should communicate guidance citywide about the
taxability of employee appreciation related items and gifts to ensure that city departments give and
report them in compliance with the Internal Revenue Code.
Recommendation #2: To train all credit card approving officials on all relevant city policies—including
the areas mentioned in this report—when reviewing credit card statements, the Finance Department
should make sure to include credit card approving officials in the annual training it currently
conducts.
Recommendation #3: To prevent employees from receiving reimbursement for purchases made
using a city credit card, the Finance Department should require employees to attach any associated
travel forms during the time period to the credit card statement packet before forwarding to
approving officials for review.
2 This does not affect the city’s ability to pay the monthly credit card bill for all cardholders citywide. The Finance
Department strives to pay the total U.S. Bank credit card bill for all cardholders before the tenth of the following
month — before the submission deadline — because part of the city’s quarterly rebate from U.S. Bank is based
on prompt payment. Based on data published online, the city’s rebate rate is adequate in comparison to other
entities participating in the CAL-Card program and generally reflects prompt payment.
March 16, 2021 Item #7 Page 25 of 31
13 Audit of the City Credit Card Program
Recommendation #4: To ensure credit card statements are appropriately reviewed at the individual
department level, the Finance Department should consolidate its list of approving officials, ensure
updated documentation is on file for all approving officials, and ensure city staff are aware of this list.
Recommendation #5: To monitor cardholders and revoke privileges when appropriate, the Finance
Department should immediately begin to track instances of noncompliance with policy on an ongoing
basis.
Additional data analysis
The internal auditor judgmentally selected additional transactions during the audit period for further
review and analysis, including:
All single transactions above the standard purchasing limit of $2,500 for a total of 19
transactions
A selection of transactions that were just under and over the standard purchasing limit of
$2,500 and those that appeared to be potentially split to avoid exceeding the maximum
threshold for a total of 16 transactions
A selection of transactions from potentially questionable merchant category codes (i.e.,
florists, bakeries, gift and novelty shops, professional services, etc.) for a total of 48
transactions3
High dollar transactions
These 19 high dollar transactions above the standard purchasing limit of $2,500 transactions were
allowable, had adequate documentation and were reviewed by designated approving officials.
Additionally, all except one of the transactions’ corresponding credit card statements were approved
and submitted on a timely basis. Records indicate the Finance Department first obtained approval
from the cardholders’ department directors for them to exceed the standard purchasing limit.
Potentially split transactions
Based on the review of 10 identified transactions or groups of transactions that appeared to be
potentially split in order to avoid the $2,500 maximum single purchase threshold, two were
confirmed to be split. For one of these instances, records indicate that the Finance Department
promptly notified the cardholder and explained how this type of purchase is noncompliant and would
have needed prior approval from the Finance Department to exceed the purchasing threshold. The
purchase itself was for business purposes and this singular instance did not indicate a more
widespread issue. Because both individuals appeared unaware of this policy, the Finance Department
should include this topic in its annual training with approving officials.
Transactions from certain merchant category codes
The internal auditor identified 228 purchases that could be considered more high risk based on the
associated merchant category code. The internal auditor reviewed the supporting documentation for
a selection of 49 of these transactions. In general, all of the purchases were compliant with city
policies. However, cardholders made a series of purchases from florists during the audit period.
Whether floral purchases are a permitted or prohibited use of public funds depends on whether the
purchases are authorized and whether they provide a public benefit. Courts liberally construe the
concept of public benefit and will generally uphold the city’s determination an expenditure provides a
public benefit as long as the decision is reasonable and not arbitrary.
3 Certain high-risk and cash-related merchant category codes are already excluded from the CAL-Card Program
and restricted by U.S. Bank for all CAL-Cards. Therefore, this review focused on other merchant category codes
that could also be more high-risk in nature.
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14 Audit of the City Credit Card Program
In general, cardholders sent flowers to funerals for former employees or volunteers, condolences and
get well soon wishes to current employees and current employees’ family members. Most notably,
the Fire Department made 19 floral purchases by credit card during the audit period for a total of
nearly $1,450. A representative from the Fire Department explained it has been a longstanding
practice to purchase flowers to express compassion for those close to the department, and that the
department was never instructed to discontinue floral purchases. The representative also said the
department does not purchase any similar items for employees or volunteers that could be
considered prohibited based on the information provided above. In response to this audit, the
department will discontinue flower purchases. If city leadership wanted to discontinue these types of
credit card purchases, it could consider prohibiting them in its citywide policy.
ADDITIONAL CREDIT CARD GUIDANCE
Meals, refreshments and employee recognition
A number of credit card transactions reviewed as part of this audit were for meals, refreshments or
decorations for meetings, recruiting events, employee appreciation events, celebrations and training,
for which there is no related city policy or guidance. Although the credit card and travel policies
provide some general guidance, they do not dictate the appropriateness of certain food purchases.
According to the deputy city manager of administrative services, the former chief operations officer
provided verbal guidance to all deputy city managers in the spring of 2019 that the city will only
purchase food for “all-hands” meetings involving attendees from across an entire branch or
department. However, the review of transactions involved several food purchases for which there is
no associated guidance:
Donuts for a monthly meeting of division heads
Several purchases of refreshments and meals for those involved in interviews or other
recruitment-related events
Pizza for staff in appreciation of completing a project
Decorations and trophies or awards for a departmental employee appreciation event
Lunch for those attending a City Council briefing over the lunch hour
Current data is not readily available to provide total dollar values for these types of purchases during
the audit period. The frequency of these purchases in the randomly-selected sample for review in the
previous section suggests the city might consider creating additional guidance in this area. Without it,
it is more difficult to gauge the appropriateness of these purchases or reprimand a cardholder.
According to a Human Resources manager, the department’s long-term goal is to create a policy for
reward and recognition, which could potentially add guidance for some of the examples listed above.
If city leadership determines it is in the best interest of the city to provide additional guidance, it
should provide direction to the finance and human resource departments to do so.
Travel
The city’s travel guidelines and procedures address the appropriateness of hotel rates while on city
business but does not set dollar value maximums. Annually, the federal and state government publish
maximum allowable room rates for travel within each geographical region and require a written
justification if actual room rates exceed those maximums. Although the city sets maximum meal
reimbursement rates for business travel, it does not do so for hotel rooms. Instead, the city’s travel
guidelines and procedures presents questions to help employees assess whether a room rate is
considered reasonable (i.e., Was the hotel a “standard chain” hotel or a “luxury” hotel?). To ensure
that the city has a hotel room rate standard for what it deems reasonable for business travel, it
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15 Audit of the City Credit Card Program
should consider adopting either the state or federal government’s annual rates and requiring
employees to submit written justification when rates must exceed these established maximums.
In addition, during the review of transactions, it became clear the Finance Department should work
with other departments to inventory and track existing travel funds for cancelled flights purchased
with city credit cards. For example, a cardholder within the Parks & Recreation department
purchased Southwest flights for a total of four employees to attend a conference in New York. The
employee purchased the tickets in February 2020 for flights in May 2020 that were subsequently
cancelled due to COVID-19. According to the Parks & Recreation employee, the tickets were
nonrefundable and travel funds for the cancelled flights are available until late 2021. Citywide,
cardholders completed 41 transactions with Southwest Airlines for a total of nearly $9,230 between
February and June 2020. Unless the city tracks this information, employees could use unused travel
funds for personal travel in the future. Therefore, the Finance Department should work with city
departments to ensure departments are tracking unused travel funds or requesting credits for
refundable flight purchases.
Closure of cardholder accounts
Cardholder accounts were not promptly closed for five employees when they left employment with
the city. Two employees who left the city had open accounts at the time of this review, several
months later. There was a substantial delay from when three other employees left the city to when
the Finance Department closed their credit card accounts. Failing to promptly close these
cardholders’ accounts increases the risk that former employees may make additional purchases after
they are no longer employed with the city. According to the credit card user’s guide, it is the
approving official’s responsibility when a cardholder leaves to collect the credit card and provide
notice of termination to Finance. Therefore, the Finance Department should include this in its annual
training to approving officials as a reminder. Additionally, to promote prompt closure of accounts, the
manager in Finance overseeing the credit card program should cross-check the automatic departure
emails with the list of cardholders on a monthly basis and cancel any accounts as necessary.
Amazon purchases shipped to non-city addresses
A review of all Amazon purchases made using the city’s Amazon Business Prime account during the
audit period revealed purchases were shipped to over 25 non-city affiliated addresses. Near the
beginning of the audit period, the city consolidated all existing city Amazon accounts into one master
account from which all city Amazon purchases would be made. This was done to provide easy access
to products, quick shipping and better reporting and tracking of purchasing trends. A number of
employees used city credit cards to make business purchases and shipped them to non-city affiliated
addresses. One of these cardholders explained that a number of the purchases were shipped to home
addresses because of the COVID-19 related stay-at-home order. Another cardholder explained that
USPS doesn’t deliver packages to one of the city’s facilities, making it easier to ship to a home address
rather than travel repeatedly to the post office.
Although not specifically prohibited, a representative from the Finance Department explained that
business purchases should only be shipped to business addresses. Allowing shipments to home
addresses increases the risk that city property is lost because it is never delivered or never returned
to city facilities. Because this is one of the elements approving officials can check for when reviewing
monthly statement credit card packets, the Finance Department can include this in training attended
annually by approving officials, as noted in a previous recommendation. Currently, the Finance
Department is in the process of determining if it can prohibit shipments to non-city addresses on the
Amazon Business account.
Additionally, this review revealed that a number of employees used the city’s Amazon Business
account to make personal purchases using non-city issued credit cards. Although the city did not pay
March 16, 2021 Item #7 Page 28 of 31
16 Audit of the City Credit Card Program
for these personal purchases, a fact sheet posted on the city’s intranet states that no personal
purchases are allowed using the city’s Amazon Business account. Allowing personal purchases on the
city’s Amazon Business account limits the city’s ability to track purchasing patterns. According to a
Finance Department representative, the department is currently looking into way to use the
reporting mechanisms in the Amazon Business account to help identify these types of instances in the
future. Using these reports, the Finance Department can track instances of noncompliance in a
tracking sheet and discipline appropriately, as noted in a previous recommendation.
Recommendation #6: To ensure that lodging purchases made during city business-related travel are
appropriate, the Finance Department should update its travel guidelines and procedures to adopt
either the state or the federal government’s annual lodging rates by geographic location and require
employees to submit written justification when rates must exceed these established maximums.
Recommendation #7: To assist the city in keeping track of employee flight purchases made using city
funds, the Finance Department should inventory and track unused travel funds so they are used for
city travel-related purposes in the future.
Recommendation #8: To promote prompt closure of accounts when a cardholder leaves employment
with the city, the manager in Finance overseeing the credit card program should cross-check the
automatic departure emails with the list of cardholders on a monthly basis and cancel any accounts
as necessary.
March 16, 2021 Item #7 Page 29 of 31
17 Audit of the City Credit Card Program
SUMMARY OF RECOMMENDATIONS
Recommendation #1: The Finance Department should communicate guidance citywide about the
taxability of employee appreciation related items and gifts to ensure that city departments give and
report them in compliance with the Internal Revenue Code.
Management’s Response: The Finance Department will send an annual citywide email reminding all
employees and managers of the Internal Revenue Code, with specific examples to ensure compliance,
and setup a process whereby departments report any renumeration to employees.
Recommendation #2: To train all credit card approving officials on all relevant city policies —
including those related to required documentation — when reviewing credit card statements, the
Finance Department should make sure to include credit card approving officials in its annual training.
Management’s Response: The Finance Department will include all approving officials in the required
annual training and specifically include material on reviewing credit card statements.
Recommendation #3: To prevent employees from receiving reimbursement for purchases made
using a city credit card, the Finance Department should require employees to attach any associated
travel forms during the time period to the credit card statement packet before forwarding to
approving officials for review.
Management’s Response: While this isn’t a common occurrence, the Finance Department plans to
review the travel policy and reimbursement request submission processes to ensure duplicative
reimbursements aren’t requested.
Recommendation #4: To ensure credit card statements are appropriately reviewed at the individual
department level, the Finance Department should ensure departments immediately submit updated
forms from approving officials and provide this list to the employee in the Finance Department who
verifies an appropriate approving signature exists when receiving credit card statements.
Management’s Response: The city currently identifies two types of approving officials: the credit
card approving official who is authorized to approve city expenses procured on a city credit card
(credit card user’s guide) and the approving official for all city business expenses (Administrative
Order No. 85 - Cash Funds Policy). Going forward, the Finance Department will only recognize
approving officials as those that have been approved in accordance with the city’s Cash Handling
Policy.
Recommendation #5: To monitor cardholders and revoke privileges when appropriate, the Finance
Department should immediately begin to track instances of noncompliance with policy on a historical
and ongoing basis.
Management’s Response: The procurement officer will setup a process to formally track all future
instances of noncompliance with the city’s credit card user’s guide.
Recommendation #6: To ensure that lodging purchases made during city business-related travel are
appropriate, the Finance Department should update its travel guidelines and procedures to adopt
either the state or the federal government’s annual lodging rates by geographic location, and require
employees to submit written justification when rates must exceed these established maximums.
March 16, 2021 Item #7 Page 30 of 31
18 Audit of the City Credit Card Program
Management’s Response: The Finance Department will update the travel guidelines and procedures
to include a maximum reimbursement based on the Federal Travel Regulations, which may be
overridden with appropriate justification and approval.
Recommendation #7: For the city to keep track of employee flight purchases made using city funds,
the Finance Department should inventory and track unused travel funds so they are used for city
travel-related purposes in the future.
Management’s Response: The Finance Department will review the city’s travel guidelines and
procedures and travel reimbursement form (travel log) and explore the feasibility of tracking unused
travel credits reimbursed to employees, and explore the possibility of using a travel agency or require
only fully reimbursable travel purchases for future travel. The Finance Department recognizes that
many travel plans were canceled due to COVID-19 and are exploring how to request reimbursement
from all employees who received and used a credit due to the cancellation for personal use.
Recommendation #8: To promote prompt closure of accounts, the manager in Finance overseeing
the credit card program should cross-check the automatic departure emails with the list of
cardholders on a monthly basis and cancel any accounts as necessary.
Management’s Response: In addition to closing credit card accounts as supervisors notify the Finance
Department, the procurement officer will ensure prompt closure of city credit card accounts by
reviewing a monthly termination report.
March 16, 2021 Item #7 Page 31 of 31