Denton city employees have used their city-issued credit cards mostly by the book, but the city’s rules are too soft to cover questionable spending on work-related meals, gifts and other items, an internal audit found.

The audit gave the city’s credit card program high marks but found scattered instances of sloppy receipt retention, unnecessary sales tax payments and purchases outside city-approved vendor contracts.

“We’re at a very high level of compliance, but we did find a few hiccups,” Deputy Mayor Pro Tem Joe Mulroy said.

In response to the audit, officials have ordered an independent review of employees’ credit card spending as part of a larger analysis of the city’s financial controls.

“I feel like we have a pretty good handle on how the cards are used,” Assistant City Manager Jon Fortune said. “It’s just kind of nice to have someone come in from the outside to point out things you might not see.”

Last October, the Denton Record-Chron­icle detailed 2 1/2 years of credit card spending by employees of Denton Municipal Electric, the city-run electric utility.

Critics viewed some of the reported spending totals — such as nearly $9,000 on coffee and $5,440 on doughnuts — as excessive. But officials said all spending was work-related and didn’t violate city policy.

Since then, officials have asked Arlington-based auditing and consulting company Webb Watch Corp. to review Denton’s spending policies, Fortune said.

“We’re trying to gather as much data as we can to see if there’s any policy issues we want to address,” Fortune said. “The P-card seems to be a good place to start.”

How P-cards work

Denton started its procurement card, or P-card, program in 1999 to give workers a quick and convenient way to buy low-dollar, work-related items.

In fiscal year 2006, the city had nearly 350 cardholders, and their P-card purchases totaled more than $1.7 million, officials said.

Most cardholders have a $500 single-purchase limit and a $2,500 monthly limit, although some higher-level staff can spend far more.

Cardholders are supposed to keep all receipts and complete a detailed electronic transaction log, which they print out, sign and submit for review to their immediate supervisor, who must approve it.

The purchasing office then reviews transaction logs and asks for additional information on any suspicious charges.

Unless the employee is forced to reimburse the city for an ineligible purchase, the bill is paid out of the appropriate line in the city budget.

Internal review

Denton internal auditor Andrea Gage performed a limited review of the P-card program earlier this year before leaving Denton for a private-sector job in McKinney. Last fall, the City Council’s audit and finance committee directed Gage to inspect the P-card program quarterly and report back the findings.

On Tuesday, committee chairman Mulroy and Mayor Perry McNeill, a committee member, reviewed the resulting report.

Between January and February, Gage inspected 44 monthly transaction logs totaling more than $64,000 in spending. Overall, she praised the P-card program.

Internal controls “are working effectively to limit the occurrence of abusive and/or inappropriate use of the purchasing cards (p-cards) by employees,” Gage said in the report. “Although some issues were noted, it was clear that Purchasing personnel consistently confronted or inquired of p-card holders, regarding these and other questionable types of transactions.”

More guidelines sought

But some work-related purchases that might be viewed as unnecessary or excessive fell outside the audit’s scope because they didn’t violate city policy, Gage said.

Examples include charges for meals, coffee, awards, holiday decorations, retirement parties and cellphones and related accessories.

Although purchasing officials routinely flag such expenses to make sure they’re legitimate, the city still needs concrete guidelines on what purchases are considered reasonable, according to the audit report.

McNeill said he’d support the development of such rules.

“Many times a retirement party is warranted, but you need to have some guidelines on when you can do that and when you can’t,” he said.

Skirting the rules

The audit turned up limited instances of employees skirting P-card policies, including one worker who approved his own transaction log instead of sending it to his supervisor.

The auditor also uncovered cases of cardholders:

failing to offer detailed descriptions on their transaction logs, meaning the exact nature of some purchases couldn’t be determined,

neglecting to keep their receipts or complete a “lost receipt report” as required,

buying $157.45 worth of office supplies outside of the city’s office-supply vendor, and

being charged sales tax on expenditures totaling $2,116.69, even though city purchases are exempt from sales taxes.

The audit report did not include employee names.

Tom Shaw, purchasing agent for the city of Denton, said those cited in the report for violations had to undergo an additional hour of training on P-card policies. Employees who repeatedly break the rules can lose their cards — or even their jobs, he said.

Gage recommended several procedural changes to improve the P-card program.

Most dealt with recordkeeping, and nearly all of them have been made, Shaw said.

Shaw said he agreed with the auditor’s findings but still believed in the program.

“There may have been some holes in our system as it developed, but every time we find an issue, we stop up the hole,” he said. “I think it’s a very solid system, I really do. It beats the heck out of petty cash.”

One expert’s view

Dr. Mary Curtis, a University of North Texas associate professor who specializes in accounting and auditing, said she didn’t see any major red flags in the city’s audit report. She reviewed the report at the Record-Chronicle’s request.

Still, Curtis said the lack of rules on questionable purchases troubled her.

“They’re spending my money on coffee products and awards and flowers and holiday decorations and retirement parties,” said Curtis, a Denton resident. “At UNT, that comes out of our own pocket or out of money that we raise from contributions. We would never be allowed to spend state [taxpayer] money on things like this.”

The city should establish a policy on such purchases and make employees read and sign it each year, Curtis said. Without a policy, employees will disagree widely over what represents a reasonable expense, she said.

Overall, though, city employees seem to be following the rules, she said.

“I don’t think there are major problems with this system at all,” Curtis said. “They’ve been given a lot of leeway, but they seem to not be taking advantage of it.”

LOWELL BROWN can be reached at 940-566-6882. His e-mail address is lmbrown@dentonrc.com .

The city of Denton conducted an internal audit of its employees’ use of city-issued credit cards and related policies. Between January and February, an auditor inspected 44 monthly transaction logs totaling more than $64,000 in spending.

* The audit report, discussed last week to a City Council committee, was mostly positive but did turn up scattered problems, including:

* Six transaction logs “did not clearly convey the type and nature” of purchases, including one labeled as “breakfast for meeting” without the proper documentation of the meeting’s attendees and purpose.

* One employee approved his own transaction log, instead of submitting it to his supervisor for approval.

* Two employees bought $157.45 in office supplies outside the city’s office-supply contract with Corporate Express, even though the items “appeared to be available” through Corporate Express.

* One cardholder couldn’t find three receipts totaling $206.96 for the month under review.

* Two employees couldn’t produce receipts for purchases totaling $44.86 and failed to complete a lost receipt report as required when turning in their transaction logs.

* One worker lost the receipt for a $77 purchase and didn’t file a lost receipt report. Officials later discovered the charge shouldn’t have been assessed because the vendor never delivered the product.

* One cardholder lost the receipt for a $46.97 purchase and didn’t file a lost receipt report. As part of the audit, the vendor faxed a copy of the receipt to the employee, but “the items purchased did not reflect the items the employee described” on the transaction log.

* Four employees were charged for sales tax on $2,116.69 in spending, even though city purchases are exempt from sales tax payments. City officials said they would apply to the state for reimbursement.

SOURCE: City of Denton