Department of Transportation
Financial Audit Division

The Office of the Legislative Auditor (OLA) is a professional, nonpartisan office in the legislative branch of Minnesota State government. Its principal responsibility is to audit and evaluate the agencies and programs of state government (the State Auditor audits local governments). OLA's Financial Audit Division annually audits the state's financial statements and, on a rotating schedule, audits agencies in the executive and judicial branches of state government, three metropolitan agencies, and several "semi-state" organizations. The division also investigates allegations that state resources have been used inappropriately. The division has a staff of approximately fifty auditors, most of whom are CPAs. The division conducts audits in accordance with standards established by the American Institute of Certified Public Accountants and the Comptroller General of the United States.

Consistent with OLA's mission, the Financial Audit Division works to:
Promote Accountability, Strengthen Legislative Oversight, and
Support Good Financial Management.
Through its Program Evaluation Division, OLA conducts several evaluations each year and one best practices review.

OLA is under the direction of the Legislative Auditor, who is appointed for a six-year term by the Legislative Audit Commission (LAC). The LAC is a bipartisan commission of Representatives and Senators. It annually selects topics for the Program Evaluation Division, but is generally not involved in scheduling financial audits.

All findings, conclusions, and recommendations in reports issued by the Office of the Legislative Auditor are solely the responsibility of the office and may not reflect the views of the LAC, its individual members, or other members of the Minnesota Legislature.

This document can be made available in alternative formats, such as large print, Braille, or audio tape, by calling 651-296-1727 (voice), or the Minnesota Relay Service at 651-297-5353 or 1-800-627-3529. All OLA reports are available at our Web Site: http://www.auditor.leg.state.mn.us

If you have comments about our work, or you want to suggest an audit, investigation, evaluation, or best practices review, please contact us at 651-296-4708 or by e-mail legislative.auditor@state.mn.us
Table of Contents

Report Summary

Management Letter

Status of Prior Audit Issues

Department of Transportation Response


Audit Participation

The following staff of the Office of the Legislative Auditor prepared this report:

Claudia Gudvangen, CPA Deputy Legislative Auditor
Tom Donahue, CPA Audit Manager
Laura Peterson, CPA Auditor-in-Charge
George Deden, CPA Senior Auditor
Susan Mady Senior Auditor


Exit Conference

The findings and recommendations in this report were discussed with the following staff of the Department of Transportation at an exit conference held on March 7, 2003:

Carol Molnau Commissioner
Doug Differt Deputy Commissioner
Dick Stehr Engineering Services Division Director
Julie Skallman State Aid Engineer
Scott Peterson Office of Finance
Dick Swanson Office of Finance
Dennis Herzog Financial Reporting Supervisor
Terry Lemke Financial Planning and Analaysis
Ron Gipp Director, Office of Audit
Larry Kienitz Office of Audit

Report Summary

Key Findings and Recommendations:

As a result of audit procedures performed by our office and the Department of Transportation (MnDOT) Office of Audit, we identified various weaknesses in internal control and instances of noncompliance. For each finding, we recommended that the department establish appropriate procedures or improve its oversight to ensure compliance with federal and state regulations. Areas of concern raised include:

· MnDOT did not adequately segregate duties in its right of way division. (Finding 1, page 4)

· MnDOT did not ensure that certain transportation financial activity was accurately presented on the state's financial statements. (Finding 2, page 5)

· MnDOT did not ensure compliance with federal and state reporting requirements for the removal and disposition of hazardous building materials or bridge lead paint residue. (Finding 3, page 6)

· MnDOT did not follow or ensure compliance with certain contract permit requirements. (Finding 4, page 7)

· MnDOT should improve certain project oversight procedures. MnDOT Office of Audit repeated several issues from its previous audit and identified several new areas where departmental procedures were inadequate or ineffective. (Finding 5, page 7)


Management letters address internal control weaknesses and noncompliance issues found during our annual audit of the state's financial statements and federally funded programs. The scope of work in individual agencies is limited. During the fiscal year 2002 audit, our work at the Department of Transportation focused on state highway construction expenditures, grants for airport improvement, and grants to local governments for road construction and maintenance. We also reviewed local bridge and transit project disbursements, rail service improvement loan balances, and highway user tax transfers. Finally, we reviewed two federally funded programs administered by the department to determine whether the department complied with certain federal requirements. Our work on the federal programs was performed in conjunction with the MnDOT Office of Audit. The department's response is included in the report.

This page intentionally left blank.

Senator Ann H. Rest, Chair
Legislative Audit Commission

Members of the Legislative Audit Commission

Ms. Carol Molnau, Lieutenant Governor/Commissioner
Department of Transportation


We have preformed certain audit procedures at the Department of Transportation (MnDOT) as part of our audit of the basic financial statements of the State of Minnesota as of and for the year ended June 30, 2002. We relied, in part, on the work of the MnDOT Office of Audit to ensure the state's compliance with the requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that were applicable to the department for the year ended June 30, 2002. We emphasize that this has not been a comprehensive audit of the Department of Transportation.

Table 1 identifies the financial activities within the department that were material to the state's financial statements. We performed certain audit procedures on the department programs as part of our objective to obtain reasonable assurance about whether the State of Minnesota's financial statements for the year ended June 30, 2002, were free of material misstatements.

Table 1
Department of Transportation
Programs Material to the State's Financial Statements
Fiscal Year 2002 (in thousands)

Assets: Amount
Infrastructure $4,311,441
Right of Way 896,423
Revenue:
Trunk Highway Federal Grant Revenue 299,569
Expenditures:
Infrastructure Capital Outlay (1) 258,803
Right of Way Capital Outlay (1) 117,826
County State-Aid Highway Grants 354,875
Municipal State-Aid Street Grants 110,535

(1) The capital outlay amounts include ancillary type costs.

Source: State of Minnesota's Comprehensive Annual Financial Report and the Minnesota Accounting and Procurement System
for fiscal year 2002.

Table 2 identifies the State of Minnesota's major federal programs administered by the Department of Transportation. We performed certain audit procedures on these programs as part of our objective to obtain reasonable assurance about whether the State of Minnesota complied with federal requirements. Our work was performed in conjunction with the MnDOT Office of Audit.

Table 2
Major Federal Programs Administered by MnDOT
Fiscal Year 2002 (in thousands)

Program Name CFDA Expenditures
Highway Planning and Construction 20.205 $427,455
Airport Improvement Grants 20.106 $ 73,056

Source: Minnesota Accounting and Procurement System for fiscal year 2002.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in the Government Auditing Standards, issued by the Comptroller General of the United States.

Conclusions

Our December 6, 2002, report included an unqualified opinion on the State of Minnesota's basic financial statements included in its Comprehensive Annual Financial Report for the year ended June 30, 2002. In accordance with Government Auditing Standards, we also issued our report, dated December 6, 2002, on our consideration of the State of Minnesota's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. In March 2003, we will issue our report on compliance with requirements applicable to each major federal program and internal control over compliance in accordance with OMB Circular A-133.

As a result of our financial statement audit work and the federal compliance review performed by the MnDOT Office of Audit, we identified certain weaknesses in internal control and instances of noncompliance with federal and state regulations, which we discuss in the following findings.

1. The department did not adequately segregate duties in its right of way division.

Two employees in the department's right of way accounting division had the ability to both encumber funds and make disbursements in the state's accounting system (MAPS). In addition, these employees submitted requests to the Department of Finance to establish new vendors in MAPS. During fiscal year 2002, the department paid approximately $103 million to property owners for right of way land. By giving an employee access to both the encumbrance and disbursement functions in MAPS, the risk of errors and irregularities increases. At a minimum, the department should have an independent person verify the employees' work to ensure the propriety of payments made through the accounting system.

Recommendation

· The Department of Transportation should enhance controls in its right of way accounting division by separating duties or providing for an independent review of the employees' work.


2. The Department of Transportation did not ensure certain transportation financial activity was fairly presented on the state's financial statements.

The Department of Transportation (MnDOT) did not accurately compile certain financial information for the state's financial statements. We found the following errors:

· MnDOT did not include $23.7 million of accounts payable in the county highway and municipal street state aid funds. Generally, the Department of Finance uses data from MAPS to calculate the June 30 accounts payable. However, in the case of these state aid programs, MnDOT uses a subsystem to track the detail of financial activity. The subsystem summarizes the detail transactions and interfaces the summarized data into MAPS. The summarized data in MAPS does not contain the appropriate dates to determine the June 30 accounts payable. The department did not consider information from the subsystem when determining the June 30 accounts payable in the fund financial statements.

· MnDOT did not identify the components of the trunk highway fund "other revenues" so that the information could be properly presented in the state's financial statements. Starting in fiscal year 2002, the State of Minnesota implemented a new financial reporting model in accordance with the Governmental Accounting Standards Board (GASB) Statement 34. The new reporting model requires identification of program revenues by functional areas (such as transportation or public safety) and type of revenue (such as charges for services, operating grants, and contributions, or capital grants and contributions). The department incorrectly included $13.6 million of revenue in the other general revenues category rather than providing information so that the financial information could be classified by function and type.

· MnDOT did not accurately account for the trunk highway federal aid receivable and revenue. Many trunk highway projects are federally funded, and the U.S. Department of Transportation reimburses MnDOT for a percentage of expenditures incurred. Generally, the U.S. Department of Transportation reimburses MnDOT weekly. These federal participating projects, along with state funded projects, are accounted for in the trunk highway fund. To determine the federal aid receivable, MnDOT considered the accounts payable directly related to the trunk highway construction. However, MnDOT took into account all highway construction projects rather than only those that were federal participating. This resulted in an overstatement of the federal aid receivable. We recommended an audit adjustment that reduced the federal revenue by $14.7 million.

Recommendation

· The Department of Transportation should work with the Department of Finance to ensure the financial statements are accurate.


3. PRIOR FINDING NOT IMPLEMENTED: The department did not ensure compliance with federal and state reporting requirements for the removal and disposition of hazardous building materials or bridge lead paint residue.

The MnDOT Office of Audit found that the department did not exercise effective oversight to ensure that contractors filed the required reports or other documents related to the removal and disposition of asbestos and building removals. The Office of Audit identified various violations of reporting requirements in its review of one state project, which included two building demolitions. The audit report concluded that failure to comply with federal and state requirements exposed the department to potential fines and other penalties.

The MnDOT Office of Audit also found that testing documentation for lead paint residue continues to be a problem. The report indicated that the department did not document the Toxicity Characteristic Leaching Procedure (TCLP) test as required by the project agreement. The TCLP test is important because it indicates whether the amount of lead in the blasting residue exceeds the threshold for hazardous waste. The project also required the blasting residue to be managed as hazardous waste until after it had been tested and determined to be non-hazardous. The project proposal required the department to sample the blasting residue and have it independently tested. However, for one of the two bridges tested, the department did not document the TCLP test. For the second bridge, the contractor shipped the residue after it received TCLP test results based on its own samples, but before the TCLP results on samples submitted by the department were known. However, both test results indicated the residue was non-hazardous.

Finally, the contractor did not appropriately identify the address of the waste generation site on the shipping documents. As a result, the auditors could not verify the origin of the bridge lead paint-blasting residue.

Recommendations

· The department should ensure that project engineers provide appropriate oversight of federal and state reporting requirements for the removal and disposition of hazardous building materials.

· The department should establish appropriate procedures to ensure compliance with federal and state requirements for the removal and disposition of lead paint blasting residue.

4. PRIOR FINDING NOT IMPLEMENTED: The department did not follow or ensure compliance with certain contract permit requirements.

According to the MnDOT Office of Audit report, the department did not always ensure compliance with National Pollutant Discharge Elimination System (NPDES) permit requirements. For 8 out of 11 construction projects, the contractor did not properly document weekly inspections. In addition, for one project, the department did not file an Erosion Control Plan with the Minnesota Pollution Control Agency. Finally, for 7 out of 13 construction projects, the NPDES permits expired before the project work began, and for 5 other projects, the department did not include the permits in the project proposals.

The Minnesota Pollution Control Agency requires the NPDES permits to provide control over construction activities for project erosion and sediment control. The MnDOT Office of Audit reported concerns regarding compliance with the NPDES permit requirements in its last three Single Audit reports beginning in fiscal year 2000. Noncompliance with permit requirements could result in potential fines and penalties.

Recommendation

· The Department of Transportation should ensure compliance with NPDES permit requirements.


5. PRIOR FINDING NOT IMPLEMENTED: The department should improve certain project oversight procedures.

The MnDOT Office of Audit report identified various concerns and issues where project management oversight could be strengthened. The following issues were identified in the current MnDOT Office of Audit's report and includes both new and prior audit concerns:

· For one delegated contract process project, a district state aid engineer inappropriately signed a supplemental agreement. MnDOT Office of Audit indicated that the district state aid engineer followed procedures outlined on an outdated delegated contract process checklist. MnDOT Office of Audit recommended revising DCP project supplemental agreement approval procedures and to provide training and guidance to the districts and to city and county engineers. (Prior issue)

· Additional management attention was needed for bituminous and concrete material testing requirements. The MnDOT Office of Audit report indicated that for one project, bituminous material testing requirements were not met, and that they were unable to verify that quality assurance aggregate quality testing requirements were met. Material testing requirements for concrete pavements were not met for two state projects. In addition, MnDOT Office of Audit identified a need to reevaluate practices and requirements for bituminous aggregate quality testing. (Prior issue)

· The department did not ensure an independent appraisal of quality assurance and quality control requirements. For one state project, MnDOT personnel performed both the concrete quality control and quality assurance testing, even though the contractor is responsible for quality control testing. Since the quality assurance testing serves to validate the quality control testing, these two tests should be performed by separate entities. (Prior issue)

· MnDOT Office of Audit also included in its report the results of a joint review conducted by the Federal Highway Administration and the MDOT Office of Land Management. That review cited multiple instances of non-compliance regarding right of way appraisals and acquisitions for a state project. MnDOT Office of Audit recommended timely follow-up to ensure that the report recommendations were carried out. (New issue)

· The department did not adequately monitor the geotechnical investigation work performed by one consultant. A geotechnical investigation helps determine the extent of muck excavation needed on certain construction sites. The department considers this information when drafting the project plan and proposal. As a result of the substandard work done by the consultant, the department needed to modify the original project plan and proposal. (New issue)

· The department did not accurately list in the construction diaries the contractors and subcontractors who worked on five construction projects. As a result, the department program personnel could not ensure it reviewed all payroll documentation. Contractors must submit detailed payroll records to support compliance with the federal minimum wage regulations (Davis-Bacon). The MnDOT Office of Audit could not verify compliance with the federal requirements without detailed payroll records. (Prior issue)

· For two projects, the department did not apply contractor disincentives, deductions, and reduced pay factors on a timely basis. If certain test results do not meet the requirements per the construction plan, the department has a right to reduce the amount paid to the contractor. Payments to contractors would be more consistent if disincentives were applied in a timely manner. (New issue)

Recommendation

· The Department of Transportation should strengthen its project oversight procedures to ensure compliance with federal and state requirements.


This report is intended for the information of the Legislative Audit Commission and the management of the Department of Transportation. This restriction is not intended to limit the distribution of this report, which was released as a public document on March 20, 2003.

James R. Nobles Claudia J. Gudvangen, CPA
Legislative Auditor Deputy Legislative Auditor

End of Fieldwork: February 10, 2003

Report Signed On: March 17, 2003

Status of Prior Audit Issues
As of February 10, 2003

March 26, 2002, Legislative Audit Report 02-19 examined the department's activities and programs material to the State of Minnesota's Comprehensive Annual Financial Report and the Single Audit for the year ended June 30, 2002. The scope included the trunk highway capital outlay, county highway and municipal street state-aid grants, county and municipality bridge projects, federal county road and bridge grants, and airport improvement grants. The report contained seven findings, and one finding has been resolved. Our prior findings 1 and 2 concerning federal and state reporting requirements over the removal and disposition of hazardous building materials and lead paint residue from bridges, respectively, are combined and repeated in our current Finding 3. Prior Finding 3, regarding the use of independent appraisals of quality assurance and quality control requirements, and prior Finding 4, concerning an inappropriate signature on a supplemental agreement under a delegated contract process, are repeated in Finding 5. Prior Finding 5, ensuring compliance with certain contract permit requirements, is repeated in our current Finding 4. Finally, prior Finding 6, concerning improvement for certain project oversight procedures, is repeated as current Finding 5.


State of Minnesota Audit Follow-Up Process

The Department of Finance, on behalf of the Governor, maintains a quarterly process for following up on issues cited in financial audit reports issued by the Legislative Auditor. The process consists of an exchange of written correspondence that documents the status of audit findings. The follow-up process continues until Finance is satisfied that the issues have been resolved. It covers entities headed by gubernatorial appointees, including most state agencies, boards, commissions, and Minnesota state colleges and universities. It is not applied to audits of the University of Minnesota, any quasi-state organizations, such as the metropolitan agencies, or the State Agricultural Society, the state constitutional officers, or the judicial branch.