Overview
We identified some problems with the way PVTA acquired and disposed of parts for its vehicle fleet. During our audit period, First Transit Inc. was contracted to manage PVTA’s vehicle parts inventory. In our review of vehicle maintenance information in PVTA’s database, we identified three work orders that were used to remove vehicle parts from PVTA’s inventory because they were obsolete. These three work orders listed 2,521 vehicle parts with a total original cost of $118,257, constituting more than 7% of the total dollar value of PVTA’s parts inventory as of January 28, 2017. This raises concerns about whether First Transit Inc. properly managed the acquisition of vehicle parts to minimize the costs associated with obsolete inventory.
Further, according to PVTA management, when First Transit Inc. designated these parts obsolete, PVTA gave them away or sold them, but did not properly document their disposal. PVTA gave us a receipt for $1,750 for eight pallets of vehicle parts sold, but could not provide us with the details of the parts that made up the eight pallets, raising concerns about whether all 2,521 parts were properly disposed of. Because it improperly administered the inventory of its vehicle parts, PVTA faces a higher-than-acceptable risk of incurring unnecessary costs because of obsolete inventory and losing parts through theft.
Authoritative Guidance
Section XXXIII(K) of Exhibit A of PVTA’s contract with First Transit Inc. states, “Inventories shall be consistent with good business practices, and shall not contain excessive amounts of equipment and parts.”
The Commonwealth’s Operational Services Division, the state agency responsible for administering the disposal of state property, has established a formal process that state agencies must follow when transferring or disposing of surplus, damaged, or obsolete property that was purchased with state funds. The process requires agencies to make formal requests for disposal using a specific form, “OSD 25: Declaration of Surplus State Personal Property,” that lists each item’s description, age, condition, acquisition cost, and current value. The process also requires the disposal or sale of such property to be properly documented and recorded. Although PVTA is not required to follow this process, the Office of the State Auditor (OSA) believes it represents a best practice that the agency should follow.
Another best practice OSA believes PVTA should follow is Section 7(b)(1) of Chapter III of Federal Transit Administration Circular 5010.E, which states that records related to equipment that has been disposed of should be retained for three years.
Reasons for Noncompliance
PVTA did not have any written policies and procedures that detailed how its vehicle parts were to be acquired, replaced, deemed obsolete, and disposed of or how all of these processes should be documented. Further, PVTA did not have monitoring controls in place to ensure that First Transit Inc. properly administered its inventory process for vehicle parts.
Recommendations
- PVTA should establish policies and procedures regarding the administration of its vehicle parts inventory and require First Transit Inc. to adhere to them.
- PVTA should establish monitoring controls to ensure that First Transit Inc. complies with all the terms and conditions of its contract regarding the administration of vehicle parts and with PVTA’s policies and procedures in this area.
Auditee’s Response
PVTA has maintained long-standing, highly institutionalized practices and processes relative to the oversight and monitoring of inventory levels, physical accounting and the disposal of obsolete parts and supplies. This oversight has included an annual review by PVTA’s independent auditors of accounting systems, management practices, procedures and controls. Additionally, the review has also encompassed procurement practices as well as inventory procedures and controls.
The items comprising the obsolete material referenced above were associated with the RTS bus fleet which ended its service life at PVTA in 2015. PVTA was one of the first and last transit properties to operate the RTS Series transit bus model originally produced by General Motors (and later by two other manufacturers) and operated by public transit systems over a time span covering more than five decades beginning in the late 1970s. PVTA maintained and operated an RTS fleet for nearly 37 years. For that time, the RTS was the backbone of the PVTA bus fleet which, not surprisingly, comprised the largest proportion of the fleet until the fleet composition began to change at an appreciable, accelerating rate following the discontinuance of the RTS transit bus model.
During this period, even with advanced systems in place to assist with inventory levels and the management of reorder requirements, as the replenishment rate of spare parts and supplies fell and/or ended altogether during the phaseout of the RTS, the impact of elevated maintenance levels and resultant inventory levels required during the latter years of RTS operation, could not be reasonably mitigated in its entirety as the RTS proportion of the bus fleet, which had numbered nearly 200 vehicles, rapidly dwindled to a relative handful on its path to eventual elimination of the final 12 in 2015. We believe that the combined results of long life and elevated maintenance requirements as the fleet neared the end of its operating life at PVTA, led to the consequence of the relatively high level of obsolete parts and supplies associated with the demise of the RTS. It is our view, however, that the rate of obsolescence at PVTA, with its long reliance on advanced computer systems with inventory optimizing algorithms was likely to have been at the lower end of the range of potential transitional outcomes given the circumstances of this unique period.
The parts and supplies associated with the above were identified as obsolete and removed from the active inventory during a review process in accordance with a standard operating practice. All items were placed in transparent plastic bags or boxes with an identifying label applied or tagged if a container was not practical. The material was then loaded into a series of eight storage boxes and placed on pallets for storage. A manifest was generated utilizing the work order system, and expressions of interest were sought by means of a national posting. While this advertisement has been corroborated by the first-hand knowledge of members of the Contractor staff present at the time, file documentation of the advertisement was not properly retained as required and was unable to be reproduced in our subsequent review. Not a single expression of interest was received in response to the listing, as the RTS, to our knowledge, was no longer active among public transit fleets by that time; it also confirmed that the items had little if any residual material value which is typical of obsolete transit bus parts. Subsequently, an internal posting was made in January 2017 seeking offers among interested employees willing to take possession of the material and remove it from the property. Three offers were received, all representing only a nominal salvage valuation. The material was subsequently sold to the respondent with the highest offer and removed from the property in January 2017.
PVTA has formalized its policy with respect to the disposition of inventory.
Auditor’s Reply
Although PVTA asserts in its response that it “has maintained long-standing, highly institutionalized practices and processes relative to the oversight and monitoring of inventory levels, physical accounting and the disposal of obsolete parts and supplies,” we found that it did not have any written policies and procedures that detailed how its vehicle parts were to be acquired, replaced, deemed obsolete, and disposed of or how all of these processes should be documented, and it did not have monitoring controls in place to ensure that First Transit Inc. properly administered its inventory process for vehicle parts. In OSA’s opinion, if PVTA had had such controls in place, it might have been able to mitigate, to some extent, the problems we identified with how it acquired and disposed of parts for its vehicle fleet. Further, although PVTA describes in its response how the parts in question were disposed of, PVTA cannot substantiate this because it did not properly document their disposal, which raises concerns about whether all 2,521 parts were properly disposed of.
Based on its response, PVTA is taking measures to address our concerns in this area, but we again urge PVTA to fully implement our recommendations.
| Date published: | January 30, 2019 |
|---|