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Fire Department Inventory Audit - Knowledge is Power
By Brenda Auner

As an auditor, when I hear the words “inventory audit,” I instantly think FIFO, LIFO, asset lists. It is usually a pretty straight-forward, kind of boring audit where we count what our client has on hand and check off boxes. So when we were asked to conduct an inventory audit at our Fire Department, the first thing that came to mind was, “Why do they even care? They have more important fires to put out.” (Pun intended.) In our favor was the fact that the Fire Chief requested that we conduct the audit. However, when we gave them our final report, they basically had the same reaction I did and turned to the usual excuses of staffing and budget constraints. But what we found and relayed to them was that when it comes down to it, having a handle on inventory could actually help them do their jobs even better. I always tell our auditees that our office is here to help!
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WHAT WE FOUND

Our Fire Department, which consists of 23 stations throughout our City, was relying on one guy to manage all aspects of their inventory…manually. That is a LOT to handle, especially for just one person. Don’t even get me started on the lack of segregation of duties there (which of course was a big part of our report message)! This one employee was responsible for taking orders from each firehouse, placing multiple orders with multiple vendors weekly—sometimes daily—receiving shipments, and delivering goods to each firehouse. By having only one person responsible for every single aspect of their inventory process, the Department categorically increased their risk of fraud, or even just simple errors, that could result in major losses. But not only was this one employee doing it all by himself, he was doing it manually. He had no system reports to review or utilize in verifying what was on hand. He had no historical data to refer to when placing orders, and no system to manage vendors, order history, or inventory counts. He didn’t even conduct periodic inventory counts.

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In one year the Department made purchases averaging about $11,500 per day and used a total of 134 different vendors. The Department processed over 2,000 invoices in 2016. Yet the 23 fire stations throughout the City still reported that they were sometimes short on goods and shared items among stations, or just went out and bought stuff they needed themselves. They also mentioned that they had to throw out about $17,000 in expired medication, proving that nobody knew what inventory they had on hand. Inventory lists, if maintained, were incomplete and inaccurate. No physical count of what was on hand was ever conducted, nor was it required by any Department policy. As mentioned before, no historical data was maintained to identify any usage trends. Station employees would fill out a requisition form, sometimes the Captain would sign it indicating approval, and then it would be passed on to the warehouse employee to either fulfill the order with what he had in stock at the warehouse, or order from a vendor.

A lack of controls obviously played a huge part in this chaos. Policies existed but were extremely outdated and no longer being followed. Not only were fire stations placing orders through their warehouse employee, but individual employees were placing orders themselves and requesting reimbursements. The policies related to those types of orders required supervisory approval prior to order placement. However, we found that approximately 91 employees made direct purchases from vendors and requested reimbursement, without the required approvals by management. Some of the goods purchased were shipped to employees’ homes, and many of the items were easily transferable to personal property, including power tools, digital cameras, and even bar stools that the Department says were ordered for a fire boat. There was really no law and order surrounding inventory at all.


CHALLENGES ENCOUNTERED

One of the major challenges we faced in conducting this audit was clearly lack of data. We went in hoping to rely on some type of system report or even an Excel spreadsheet to identify what the Department had on hand and see how it was all managed. Unfortunately, the only spreadsheets provided to us were for larger equipment and not the everyday items in use. Those lists contained minimal information, such as a brief description, and most were already included in the City’s asset management system. The smaller day-to-day items, however, were not tracked at all, as previously mentioned. We resorted to the tedious task of classifying a year's worth of invoices into different inventory category types to gain an understanding of the magnitude of purchases the Department made.

Additionally, we received conflicting information from the warehouse employee and fire station employees. According to the warehouse employee, he had to constantly make corrections to the requisition forms that the fire stations submitted. According to the fire station employees, they did not always receive the items they ordered. What we learned through multiple interviews was that there was very little communication between the warehouse and fire station employees. More importantly, the warehouse employee was making corrections to account for budget limitations. So, in the bigger picture the Department was not even budgeting correctly to ensure they had funds to purchase what was needed. But it was a Catch-22 in that nobody knew what was needed because it hadn’t been tracked. So, how can you budget for something when you don’t even know what you need or what you have?


WHAT WE RECOMMENDED

First and foremost, we recommended that the Department update their policies and procedures to distribute and delineate responsibility among multiple individuals so that one person is no longer responsible for every aspect of their inventory process. Additionally, we recommended that the policies and procedures provide structure and guidance to their employees, making it clear who is responsible for what and that every purchase needs to go through the proper channels of approval and be shipped to Department locations. We recommended that they ensure the proper forms are utilized for purchasing and contain the proper approvals, and that they discourage employee reimbursements.

We also recommended that they develop an inventory management plan. The key purpose of this plan is to include data analysis and to automate key functions. Rather than place multiple orders with multiple vendors, there should be strategic use of vendors to benefit from discounts. We asked that they consider using vendors that would deliver directly to fire stations as opposed to the warehouse to free up warehouse resources. Aware that this would be a long process, we recommended management start tracking inventory-related data in order to truly understand their needs. This includes periodic inventory counts, tracking usage across the fire stations, and communicating results of their tracking to enhance transparency and openness between the warehouse and fire stations. We recommended that once they have that plan in motion, implement an inventory management system that would integrate with accounting and purchasing to facilitate inventory tracking.

In the end, management agreed with all but one of our recommendations, arguing that resource constraints would not allow them to have more than one employee responsible for the inventory management process. It is our hope that with the recommendations we made, they will free up staff time to allow for improved segregation of duties, as well as to gain a better handle on their inventory so they can focus on their main purpose of putting out fires and saving lives.

To see a complete copy of our report, please visit http://www.cityauditorlauradoud.com/wp-content/uploads/2017/12/Fire-Department-Inventory-Management-Audit.pdf.


ABOUT THE AUTHOR

Brenda Auner has almost 10 years of experience as a performance and compliance auditor. She is currently a Senior Performance Auditor with the City of Long Beach and also serves on the ALGA Conference Committee.