One Gateway Plaza ® Lo• ••••'~ eo""'' Met r 0 Motropol"'" T .... , ........ Authority Los Angeles, CA 90012-2952 213 .922.2000 Tel metro. net FINANCE, BUDGET AND AUDIT COMMITTEE

APRIL 15, 2015

SUBJECT: MANAGEMENT AUDIT SERVICES FY 2015 SECOND QUARTER REPORT

ACTION: RECEIVE AND FILE

RECOMMENDATION

Receive and file the second quarter report of Management Audit Services (Management Audit) for the period ending December 31, 2014.

ISSUE

At its January 2005 meeting , the Board designated the Executive Management and Audit Committee (EMAC) as their audit committee. The EMAC requested a quarterly report from Management Audit on its audit activities. In July 2011, the audit responsibilities were transferred to the Finance, Budget and Audit Committee. This report fulfills the requirement for the second quarter of FY 2015.

DISCUSSION

Management Audit provides audit support to the Chief Executive Officer (CEO) and his executive management. The audits we perform are categorized as either internal or external. Internal audits evaluate the processes and controls within the agency. External audits analyze contractors, cities or non-profit organizations that we conduct business with or disperse funds to.

There are four groups in Management Audit: Performance Audit, Contract Audit, Financial and Compliance Audit and Audit Support and Research Services. Performance Audit is primarily responsible for all audits for Operations, Finance and Administration , Engineering and Construction, Information Technology, Communications and Executive Office. Contract and Financial and Compliance Audit are responsible for all audits in Planning and Development and Vendor/Contract Management. All of these units provide assurance to the public that internal processes are efficiently, economically, effectively, ethically, and equitably performed by conducting audits of program effectiveness and results, economy and efficiency, internal controls, and compliance.

11

Audit Support and Research Services is responsible for administration, financial management, budget coordination, and audit follow-up and resolution tracking .

The summary of Management Audit activity for the quarter ending December 31, 2014 is as follows:

Internal Audits: two internal audits were completed; 17 internal audits were in process.

External Audits: fourteen contract audits with a total value of $14.7 million and six grant audits with a total value of $76 million were completed; 15 contract audits and 39 grant audits were in process.

Audit Follow-up and Resolution: eight recommendations were added and 14 recommendations were closed during the second quarter. At the end of the quarter, there were 54 open audit recommendations.

Management Audit's FY 2015 second quarter report is included as Attachment A.

NEXT STEPS

Management Audit will provide the FY 2015 third quarter summary of audit activity to the Board at the May 2015 Finance, Budget and Audit Committee meeting .

ATTACHMENT

A. Management Audit Services Quarterly Report to the Board for the period ending December 31, 2014

Prepared by: Ruthe Holden, Chief Auditor (213) 922-1031

Management Audit Services FY 2015 Second Quarter Report 2

_fi?the Holden Chief Auditor

Arthur T. Leahy Chief Executive Officer

Management Audit Services FY 2015 Second Quarter Report 3

Attachment A

Los Angeles County Metropolitan Transportation Authority

Second Quarter FY2015

Metro Management Audit Services FY 2015 Second Quarter Report

TABLE OF CONTENTS

EXECUTIVE SUMMARY Summary of Audit Activity

EXTERNAL AUDITS Contract Audit Financial and Compliance Audit

INTERNAL AUDITS

Attachment A

1

3 3

Performance Audit of Metrolink's Use of TAP Funds 4 Performance Audit on Efficiency and Effectiveness of ATMS Utilization 4

OTHER AUDITS Other Audits 5

AUDIT SUPPORT SERVICES Audit Follow-Up and Resolution

SUMMARY TABLES Appendix A- Contract Audits Completed Appendix B- Financial and Compliance Audits Completed Appendix C- Internal Audits in Process

Management Audit Services FY 2015 Second Quarter Report

6

7 9 10

Attachment A

EXECUTIVE SUMMARY

Summary of Audit Activity

During the second quarter of FY 2015, 22 projects were completed . These include:

Internal Audits • Performance Audit of Metrolink's Use of TAP Funds; • Performance Audit on Efficiency and Effectiveness of ATMS Utilization

Contract Audits • 5 Independent Auditor's Reports on Agreed-Upon Procedures for the Rate Proposal for

Metro Rail Capital Projects Construction Management Consultant; • 3 Independent Auditor's Reports on Agreed-Upon Procedures for the Cost Proposal for

1-710 Soundwall Feasibility Plan, Specifications and Estimates Package I-III; • 2 Independent Auditor's Reports on Agreed-Upon Procedures for the Cost Proposal for

P301 0 New Light Rail Vehicles; • Independent Auditor's Report on Agreed-Upon Procedures for the Cost Proposal for the

550 CNG Bus Buy; • Independent Auditor's Report on Agreed-Upon Procedures for the Cost Proposal for

Metro's Pilot Business Solution Center for the Crenshaw/LAX Transit Corridor Project; • Independent Auditor's Report on Agreed-Upon Procedures for the Cost Proposal for the

Gateway Cities Transportation Strategic Plan Phase II; and • Independent Auditor's Report on Agreed-Upon Procedures for the Cost Proposal for the

Metro's Pilot Business Interruption Fund Administration .

Financial and Compliance Audits • Independent Auditor's Report on Agreed-Upon Procedures of the Close-out Review of

City of Los Angeles' Automated Traffic Surveillance and Control I Adoptive Traffic Control System Coliseum - Florence Project;

• Independent Auditor's Report on Agreed-Upon Procedures of the Close-out Review of City of Los Angeles' North Hollywood Automated Traffic Surveillance and Control Project;

• Independent Auditor's Report on Agreed-Upon Procedures of the Close-out Review of City of Redondo Beach's PCH/Catalina Ave. Intersection Improvements Project;

• Independent Auditor's Report on Agreed-Upon Procedures of the Close-out Review of Los Angeles County's Carson Street Signal Synchronization Project;

• Independent Auditor's Report on Agreed-Upon Procedures of the Close-out Review of Los Angeles County's South Bay Forum Project, Phase Ill Signal Synchronization Improvements; and

• Independent Auditor's Report on Agreed-Upon Procedures of the Close-out Review of Caltrans' Route 30 Freeway Gap Closure Project.

The completed external audits are discussed on page 3. Discussions of the internal audits begin on page 4.

Management Audit Services FY 2015 Second Quarter Report

Attachment A

EXECUTIVE SUMMARY

Seventy-one projects were in process as of December 31, 2014; these include 17 internal audits, 15 contract audits , and 39 financial and compliance audits .

The following chart identifies the functional areas where Management Audit focused audit staff time and efforts during second quarter FY 2015:

37%

Audit follow-up :

Vendor /Contract

Management

12%

Communications

1% Engineering & Construction

15%

Finance & Administration

Operations 27%

4%

Information

Technology

4%

• Eight recommendations were added and 14 recommendations were closed during the second quarter. At the end of the quarter, there were 54 open audit recommendations.

Management Audit Services FY 2015 Second Quarter Report 2

Attachment A

EXTERNAL AUDITS

Contract Audit

Contract Audit provides support to the Vendor/Contract Management Department for a wide range of large-dollar procurements and projects. This support is provided throughout the procurement cycle in the form of pre-award , interim, change order, and closeout audits, as well as assistance with contract negotiations.

During second quarter FY 2015, fourteen audits were completed , reviewing a net value of $14.7 million. Auditors questioned $1 .3 million or 9% of the proposed costs . The fourteen audits supported procurements in the following areas:

~ 5 Contract Management Support for Metro Rail Capital Projects procurements; ~ 3 1-710 Soundwall Feasibility Plan , Specifications and Estimates Package

procurements; ~ 2 P301 0 New Light Rail Vehicles procurements; ~ 550 CNG Bus Buy procurement; ~ Gateway Cities Transportation Strategic Plan Phase II procurement; ~ Metro's Pilot Business Solution Center for the Crenshaw/LAX Transit Corridor

Project procurement; and ~ Metro's Pilot Business Interruption Fund Administration procurement.

Fifteen contract audits were in process as of December 31 , 2014.

Details on Contract Audits completed during second quarter FY 2015 are in Appendix A.

Financial and Compliance Audit

Financial and Compliance Audit conducts audits for Planning and Development's Call-for-Projects program, Engineering and Construction's highway projects, federally funded transportation programs, and various other transportation related projects, including CaiTrans projects. The purpose of the audits is to ensure that grantees spend funds in accordance with the terms of the grants and federal cost principles.

Financial and Compliance Audit completed six audits during second quarter FY 2015. We reviewed $76 million of funds and identified $42.7 million or 56% of unused funds that may be reprogrammed by Planning and Development for other projects. Thirty-nine grant audits were in process as of December 31 , 2014.

Details on Grant Audits completed during second quarter FY 2015 are in Appendix B.

Management Audit Services FY 2015 Second Quarter Report 3

Attachment A

INTERNAL AUDITS

For the second quarter of FY 2015, two internal audits were completed . Seventeen internal audits were in process as of December 31 , 2014. The internal audits in process are listed in Appendix C.

The following internal audits were issued in the second quarter FY 2015. The completed reports are listed in order of the magnitude of risks that their findings represent to the agency.

Performance Audit of Metro/ink's Use of TAP Funds

Two federal grants totaling $8.5 million were awarded to integrate Southern California Regional Rail Authority (Metrolink) ticket vending machines with MTA's Universal Fare SystemrrAP. The audit objective was to validate that costs claimed for these two Congestion Mitigation and Air Quality Improvement Program grants were allowable, adequately supported and charged in accordance with policies, applicable laws and regulations, grant terms and conditions and internal accounting controls were adequate for contract purposes.

We found that grant objectives are not being achieved in a timely manner and terms and conditions are not being enforced . Costs invoiced by the contractor were not supported by sufficient documentation; and some costs appear to be not allowable to this grant.

Performance Audit on Efficiency and Effectiveness of A TMS Utilization

The audit objective was to evaluate the efficiency and effectiveness of ATMS utilization.

We found that Bus Operations Control , Vehicle Operations and Bus Division Management are utilizing ATMS in an effective manner. Bus Operations Control and Vehicle Operations utilize ATMS in real time to monitor system performance and assist in incident management activities. Bus Operations Divisions primarily util izes ATMS reports to investigate alleged operator rule violations.

Management Audit Services FY 2015 Second Quarter Report 4

Attachment A

OTHER AUDITS

Other Audits

Other audits completed during Second Quarter FY15 by external CPA firms include:

Proposition A and C Special Revenue Funds Audit- Issued December 2014 The MTA Reform and Accountability Act of 1998 requires the completion of an independent audit to determine compliance by the Los Angeles County Metropolitan Transportation Authority with the provisions of Propositions A and C. BCA Watson Rice LLP (BCA) completed the Independent Auditor's Report on Schedule of Revenues and Expenditures for Proposition A and Proposition C Special Revenue Funds, which fulfills the requirement for the year ended June 30, 2014. The auditors found that MTA complied , in all material respects, with the requirements applicable to the Proposition A and Proposition C revenues and expenditures. As required by law, BCA presented their audit report to the Independent Citizens Advisory and Oversight Committee on January 8, 2015.

Measure R Special Revenue Fund Audit- Issued November 2014 The voter approved Measure R Ordinance mandates that an annual audit be conducted after the end of the fiscal year to ensure that the MTA complies with the terms of the Ordinance related to the receipt and expenditure of sales tax revenues during the fiscal year. BCA completed the Independent Auditor's Report on Schedule of Revenues and Expenditures for Measure R Special Revenue Fund , which fulfills the requ irement for the year ended June 30, 2014. The auditors found that MTA complied , in all material respects, with the requirements applicable to the Measure R revenues and expenditures. As required by law, BCA presented their audit report to the MeasureR Oversight Committee on February 9, 2015.

Measure R Compliance Audit of the Cities and County- Issued December 2014 The voter approved Measure R Ordinance mandates that an annual audit be conducted after the end of the fiscal year to determine compliance with the provisions of the Ordinance related to the net revenues allocated to the Local Return Subfund during the fiscal year. For efficiency and effectiveness, we contracted with two firms (Simpson & Simpson and Vasquez & Company, LLP) to conduct the audits of MeasureR sales tax revenues used by the 87 cities as well as the County of Los Angeles . The auditors found that the cities and county generally complied with the requirements applicable to the Measure R Local Return Guidelines. However, the auditors did find a 4% rate of non-compliance, which the MTA will follow-up for corrective action. As required by law, Simpson & Simpson and Vasquez presented their audit report to the Measure R Oversight Committee on February 8, 2015.

Management Audit Services FY 2015 Second Quarter Report 5

Attachment A

AUDIT SUPPORT SERVICES

Audit Follow-Up and Resolution

During the second quarter, eight new audit recommendations were added to the outstanding audit recommendations list and 14 recommendations were completed and closed . At the end of this quarter, there were 54 outstanding audit recommendations. The table below summarizes the second quarter activity.

Summary of MAS and External Audit Recommendations As of December 31, 2014

Closed or Closed or Closed or Executive Area Completed Completed Completed Late Extended

in Oct. in Nov. in Dec.

Engineering and Construction

Executive Office 8 3

Finance and Administration 1 1

Information Technology 1

Operations 2

Planning and Development

Vendor/Contract 1 1

Management

Totals 9 5 0 0 4

Management Aud it Services FY 2015 Second Quarter Report

Not Yet Total Due/Under Open

Review Recom.

4 4

0

1

3 3

9 11

31 31

3 4

50 54

6

Attachment A

Appendix A Contract Audit FY 2015 -Audits Completed During Second Quarter

Date Requirement Area Audit Number & Type Contractor

Completed

Vendor/Contract 15-ADM-A01- Attestation Agreed-Del Richardson & Associates Contractual 10/2014

Management upon Procedures

Engineering & 15-HWY-A02- Attestation Agreed-Parsons Transportation Group's Contractual 10/2014

Construction upon Procedures

Engineering & 15-HWY-A01 -Attestation Agreed-TranSystems Corporation Contractual 10/2014

Construction upon Procedures

Planning & 15-PLN-AO? -Attestation Agreed-Cambridge Systematics, Inc. Contractual 11/2014

Development upon Procedures

15-0PS-A03 -Attestation Agreed-Kinkisharyo International LLC Contractual 11/2014 Operations

upon Procedures

Engineering & 15-HWY-A03- Attestation Agreed-CH2M Hill Inc. Contractual 11/2014

Construction upon Procedures

14-0PS-A11 -Attestation Agreed-Kinkisharyo International LLC Contractual 11/2014 Operations

upon Procedures

15-0PS-A01 -Attestation Agreed-New Flyer of America, Inc. Contractual 12/2014 Operations

upon Procedures

Engineering & 15-CON-A01A- Attestation Agreed-JL Patterson & Associates, Inc. Contractual 12/2014

Construction upon Procedures

Management Audit Services FY 2015 Second Quarter Report 7

Attachment A

Appendix A Contract Audit FY 2015 -Audits Completed During Second Quarter

Area Audit Number & Type Contractor Requirement Date

Completed

Engineering & 15-CON-A01 B- Attestation Agreed-MARRS Services Inc. Contractual 12/2014

Construction upon Procedures

Engineering & 15-CON-A01 C -Attestation Agreed- Kal Krishnan Construction Services Contractual 12/2014

Construction upon Procedures Inc.

Engineering & 15-CON-A01 D- Attestation Agreed-URS Corporation Contractual 12/2014

Construction upon Procedures

Engineering & 15-CON-A01 E- Attestation Agreed-Safework, Inc. Contractual 12/2014

Construction upon Procedures

Vendor/Contract 15-ADM-A02 -Attestation Agreed- Pacific Coast Regional Small Contractual 12/2014

Management upon Procedures Business Development Corporation

Management Audit Services FY 2015 Second Quarter Report 8

Attachment A

Appendix 8 Grant Audit FY 2015 -Audits Completed During Second Quarter

Area Audit Number & Type Grantee Requirement Date

Completed I I

Planning & 14-PLN-A20- Closeout City of Los Angeles Contractual 10/2014

i

Development

Planning & 14-PLN-A32- Closeout City of Los Angeles Contractual 10/2014

Development

Planning & 14-PLN-A30 - Closeout City of Redondo Beach Contractual 10/2014

Development

Planning & 14-PLN-A29 - Closeout County of Los Angeles Contractual 10/2014

Development .

Planning & 14-PLN-A 19 - Closeout County of Los Angeles Contractual 11/2014

Development

Engineering & 12-PLN-A 13 - Closeout Caltrans Contractual 11/2014

Construction

Management Audit Services FY 2015 Second Quarter Report 9

Attachment A

Appendix C Internal Audit FY 2015 - Progress Toward Completing Audit Plan

Estimated Area Audit Number & Title Description Risk Date of

Completion

Information Evaluate efficiency and effectiveness of

Technology 14-ADM-P01 -Mobile Devices mobile device security and controls for High 3/2015

[personal usage.

Operations 13-0PS-P02 - Non-Revenue Evaluate efficiency and effectiveness of

High 4/2015 Vehicle Usage (Agencywide) bus division non-revenue vehicle usage. 14-0PS-P03 Performance Audit of To evaluate efficiency and effectiveness

Operations Operations Training and of Operations training and qualification High 4/2015 Qualifications System systems.

Operations 13-0PS-P04 - Operations KPI Audit Evaluate the accuracy and completeness

High 5/2015 of Operations KPis.

Finance & Verify that Chart of Accounts adequately

Administration 1 O-ACC-F04 - Chart of Accounts reflect the current business process and High 5/2015

reporting needs.

Planning & 14-EDD-P01 -Real Estate Property Evaluate accuracy and completeness of tracking real estate properties in Real High 5/2015

Development Management Follow-up Property ManaQement System.

Vendor I Contract 13-CEO-P01 - Cost Estimating Assess efficiency and effectiveness and timeliness of Procurement's cost High 5/2015

Management Process estimating process.

Operations 13-0PS-P06 - Contracted Bus Evaluate the efficiency and effectiveness

High 6/2015 Services of contracted bus services contracts.

Finance & 1 O-ACC-F01 -Accounts Receivable

Validate adequacy of current policies and High 6/2015

Administration procedures.

12-0PS-P01 -Rail Overhead and Evaluate the efficiency and effectiveness

Operations Maintenance

of the Rail Overhaul and Refurbishment High 6/2015 Program.

Management Audit Services FY 2015 Second Quarter Report 10

Attachment A

Appendix C Internal Audit FY 2015 - Progress Toward Completing Audit Plan

Estimated Area Audit Number & Title Description Risk Date of

Completion

Operations 12-ROP-001 -Wayside System Evaluate effectiveness of maintenance of

High 612015 the Rail signaling systems. Assess efficiency and effectiveness and

Vendor I Contract 13-ADM-P01 - RFP Process

timeliness of Procurement's RFP High 612015

Management processes.

Evaluate the adequacy of internal controls Vendor I Contract 13-ADM-002 - Automated Storage over the Automated Storage and Retrieval

High 712015 Management and Retrieval System Phase I & II System (ASRS) Manager Computer

System. Assess the system implementation process to acquire, design, test and

Vendor I Contract 12-ADM-101 -Contract Information implement the Contract Information High 712015

Management Management System Management System that meets specific functionalities required by the MTA business processes. Evaluate the efficiency and effectiveness

Engineering & 14-TPD-P01 -Construction Change of the construction change order process High 912015

Construction Order Process including effectiveness of estimating I process.

Engineering & Verify if management's corrective actions

12-CON-P03 -Audit Follow-up from the prior audit were implemented High 612016 Construction

and resulting in improvements.

Engineering & 1 O-CPC-K02 - Third Party Utility Assess the adequacy and effectiveness of High 612016

Construction Relocatio11__ Ag_ree!Jlent Efficiency the Third Party Utility Relocation. ------ ---- --

Management Audit Services FY 2015 Second Quarter Report 11