MSD's Corrective Action Update Dated 7/15/2012

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MSD's Corrective Action Update Dated 7/15/2012

Chart 1 July 15, 2012150140State Audit RecommendationsActual & Projected Recommendations Complete138150Number Recom mmendations Complete130120110100908070605040302060 Day State Audit Response 02‐14‐1256 564025 276875991231002/14/12 3/15/12 4/15/12 5/15/12 6/15/12 7/15/12 8/15/12 9/15/12 10/15/12 11/15/12 12/15/122012 TimelineActual: GreenProjected: Light Green


Chart 2 July 15, 2012Percent Work Complete100%90%80%70%60%50%40%30%52%63%State Audit RecommendationsActual & Projected Work Complete60 Day State Audit Response 02‐14‐1270%75% 76%79%82%88%94%98%100%20%10%0%2/14/12 3/15/12 4/15/12 5/15/12 6/15/12 7/15/12 8/15/12 9/15/12 10/15/12 11/15/12 12/15/122012 TimelineActual: GreenProjected: Light Green


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONS1: We recommend the Board provide in their annual orientation trainingfor new and returning Board members a clear understanding of MSD’sorganizational structure and operations, their responsibilities as Boardmembers, as well as their legal and fiduciary roles, and the purpose of theboard on which they serve. In addition, the orientation should addressethical requirements of Board members and staff and any significantpolicy changes adopted by MSD during the previous year.2: We also recommend that the orientation be facilitated by aknowledgeable independent party, who can participate in and oversee theorientation training.3: We recommend that the Budget Committee perform a regular reviewof budget to actual expenditures to monitor costs in each account andreport to the Board.4: The name and number of budget categories should providetransparency and sufficient detail to allow Committee members toaccurately identify the types of expenses attributed to each category.5: This review should be documented in the Board and Budget Committeemeeting minutes.6: Periodically, the Budget Committee should receive and review a listingof expenditures with sufficient detail to question transactions asnecessary.REPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 1: Governance policies for the MSD Board did not address several critical responsibilities necessary for proper and effective oversight.7: We recommend the Board develop a whistleblower reporting policy bycreating and documenting an independent process whereby employeesand/or volunteers have the option to directly make the Board aware ofconcerns involving matters that specifically need Board oversight.8: We recommend the Board establish methods that allow for concernsto be reported directly to their attention by all staff, including anonymousconcerns, and any complaints against executive staff.9: The Board should further develop a process by which concerns arebrought to the attention of the Board and ensure a process exists toanalyze, investigate and resolve issues brought to its attention. Theinternal audit function could be used to ensure that concerns brought tothe Board are independently investigated and findings reported directly tothe Board.26 X 70%26 X 70%27 100%27 X 50%27 100%27 X 90%27 100%27 100%27 100%RECOMMENDATION STATUS/COMMENTSStaff is preparing a comprehensive, annual Board member orientation fornew and returning Board members that will cover MSD’s organizationalstructure and operations, Board member responsibilities, their legal andfiduciary roles, the purpose of the Board, ethical requirements of Boardmembers and staff, and significant policy changes adopted by MSD duringthe previous year. Board orientation training will be scheduled for allmembers of the MSD Board once vacant positions have been filled.MSD is working with an independent party (Center for Non Profit Excellence)that can facilitate MSD Board orientation training. Orientation will beconducted when vacant Board positions are filled.Mid‐year financial reports (12‐31‐11 unaudited) were reviewed by theBudget Committee on January 30, 2012, and year‐to‐date financial reports asof 01‐31‐12 were reviewed on March 09, 2012. Finance Department is in theprocess of developing standard financial reports that will be provided to theBoard on a monthly basis. The reports will include a Year‐to‐Date Summaryof expenses by category and comparison to budget. MSD launched the"OpenMSD" transparency website on March 15 which includes a sortabledatabase on all expenditure transactions. The transactions will be updatedon a regular basis. Review of the financial reports by the Budget Committeeand Board will be documented in meeting minutes.Staff worked with the ethics hotline provider, Ethics Point, on a full servicehotline reporting system which was implemented on May 15, 2012.Separate ethics policies for MSD Board and Officials and MSD employeeswere adopted by the Board on January 23, 2012 and March 26, 2012,respectively. Each policy includes provisions for whistleblower protection.Internal procedures to govern the receipt, analysis, investigation, andresolution of concerns and/or complaints reported through the ethicshotline were approved by the Audit Committee on March 16, 2012, andapproved by the Board on March 26, 2012.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 3 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONS10: We recommend the Board adopt a policy to review and approve thesalary and bonus incentives of the executive staff on an annual basis toensure that the compensation paid is equitable to the responsibilities andduties of each position.11: We further recommend the Board annually review MSD’s personneland compensation policy, including the range of increases, by which salaryincreases and bonus payments are made to all staff.12: The salaries should be reviewed specifically by the Board to ascertainappropriate use of funds given the mission of MSD, and such reviewshould be documented in the minutes.REPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETE27 X 80%27 X 80%27 100%13: These actions should be documented in the meeting minutes. 27 100%14: We recommend the Board, or a designated committee of the Board,pre‐approve executive staff travel, including estimated costs.15: The Board meeting minutes should document the review conductedby the Board.16: We also recommend the Board require a report of the actual travelexpenses of executive staff, with Board approval, prior to expensereimbursement.17: The expense reports should sufficiently detail the expenses associatedwith meals, lodging, transportation, and entertainment of each trip, aswell as the business purpose of each expense item.27 X 60%27 X 60%27 X 60%27 X 60%RECOMMENDATION STATUS/COMMENTSThe Personnel Committee of the Board met on January 23, 2012 andreviewed the compensation of Senior Management. The Committeeprovided direction to the Human Resource Director to retain a professionalHR consultant to review MSD compensation practices for management andemployees and report back to the Personnel Committee. Compensationadjustments for Executive Director and senior management will bepresented to the Personnel Committee and Board for approval. ACompensation Policy will be developed to review and approve the ExecutiveDirector and Senior Management compensation.The Personnel Committee will annually review and approve the budgetedsalary increase for non‐union employees and approve the range of salaryincreases for employees based upon annual performance. This procedurewill be documented in the Compensation Policy.A meeting of the MSD Board Personnel Committee was held on June 21,2012 wherein staff presented performance appraisal ratings and proposedperformance pay adjustments for division directors based on the 2012 nonunionperformance pay matrix. The MSD Board authorized the ExecutiveDirector to award performance pay to six division directors and two interimdirectors at the June 25, 2012 MSD Board meeting.A Travel Policy is being drafted to govern the travel of all employees. TheTravel Policy will be approved by the Board Policy Committee, and includeprovisions to establish an annual travel budget for the Executive Directorand Senior Management and reporting of all travel expenses to the BoardPersonnel or Audit Committee. The approval of the travel budget for theExecutive Director and Senior Management will be documented in themeeting minutes. Currently, all employee travel is reviewed by the ExecutiveTeam, with the Executive Director approving all travel in advance andreporting of all travel expenses and a travel summary report uponcompletion.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 4 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 2: Certain policies were not documented or sufficient to ensure accountability.18: We recommend MSD strengthen their purchasing card procedure bymaking it a formal policy.30 X 80%19: We recommend the policy include information requiring a businesspurpose be documented and address how MSD or the Board will handle 30 X 80%expenses that are considered improper or disallowed expenses.20: We also recommend the Board review purchasing card expendituresof the Executive Director.30 X 80%21: We further recommend MSD include a procedure concerningreimbursement by an employee when a purchasing card is used for 30 X 80%personal use in a formal policy.22: A timeframe when staff is required to reimburse MSD for anypersonal expenditure that may have been incurred should also beincluded in the policy. Currently, MSD does not use credit cards andtherefore has no policy, but if credit cards ever become the preferred30 X 80%method of payment of goods, then we recommend a strong credit cardpolicy should be developed.23: We recommend policies be implemented to ensure that the Board ora designated committee of the Board review and approve all executivestaff reimbursements and supporting documentation to ensure thereimbursements are for reasonable and necessary expenditures. Such30 X 80%reviews and approvals also will help ensure that duplicate payments arenot made.24: We recommend MSD adopt written policies for the backup ofelectronic financial information.30 X 70%25: Moreover, policies should include a process to report any lost ormissing financial information or records.30 X 70%26: We recommend MSD adopt and implement property and inventorycontrol policies and procedures to identify and account for all furniture,equipment, or other items valued over a certain specified dollar amount,30 X 50%with the specific dollar amount included in policy.27: Such policies and procedures should include recording of thefollowing minimum information for each property item: Name ofindividual in receipt of furniture/equipment; Description of 30‐31 X 50%furniture/equipment; Vendor name; Model and serial numbers;Acquisition date; and, Acquisition cost.RECOMMENDATION STATUS/COMMENTSA Procurement Card Policy will be developed to govern the approval and useof procurement cards. Procedures will include documentation of businesspurpose for purchases, supervisory/management approval, an annual reviewof the purchasing levels for employees, and procedures for disallowedexpenses and method and time for employee reimbursement to MSD. Anannual audit will be conducted by the Internal Auditor of the procurementcard expenses and reported to the Audit Committee. Annually, the InternalAuditor will provide to the Audit Committee a summary of expenses by theExecutive Director, including procurement card purchases, travel expensesand reimbursements. Currently MSD does not issue credit cards toemployees and has no plan to do so.Policy and procedures for the backup of electronic financial information andthe reporting of lost or missing financial records will be incorporated into aDisaster Recovery Policy and Procedure.A Property and Inventory Control Policy will be developed to identify andaccount for all furniture, equipment, and other items valued over a specifieddollar amount. The procedures will include item description, vendor,model/serial number, acquisition date and cost where available. The Policywill include provisions for inventory control, disposal and reporting. ThePolicy will be communicated to employees and included in the MSD PolicyManual.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 5 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONS28: We further recommend such inventory policies and proceduresinclude an annual, or periodic, physical inventory of all fixed assets.29: Dispositions of property should also be reflected in inventoryaccounting.30: The property inventory and control policy should be made availableto all employees who have responsibility for property assets and shouldinclude sufficient detail to ensure accurate and appropriate accounting forproperty inventory.31: MSD should include its inventory and property control policies in itsPolicy Manual.REPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETE31 X 50%31 X 50%31 X 50%31 X 50%RECOMMENDATION STATUS/COMMENTSA Property and Inventory Control Policy will be developed to identify andaccount for all furniture, equipment, and other items valued over a specifieddollar amount. The procedures will include item description, vendor,model/serial number, acquisition date and cost where available. The Policywill include provisions for inventory control, disposal and reporting. ThePolicy will be communicated to employees and included in the MSD PolicyManual.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 6 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 3: MSD lacked management oversight and enforcement of established policies.32: We recommend the MSD Board discuss with its executivemanagement the need for proper oversight and governance of itsoperations. Although it is not the Board’s responsibility to oversee day‐todaybusiness operations of the organization, the MSD Board is responsible35 X 30%to ensure strong leadership is in place and is working within theboundaries the Board has established.33: We recommend the MSD Board require supervisory personnel to bere‐trained on key organizational policies.35 X 30%34: The trainings should occur in‐house at MSD facilities and could beconducted by MSD’s own Human Resource Department staff or its Legal 35 X 30%Department staff.35: Employee attendance for the training should be required anddocumented.35 X 30%36: Upon completion of training, MSD personnel should be required tosign an affidavit stating that they have been trained and understand theirresponsibilities as an MSD employee to abide by the policies andprocedures of the organization. The statement should further35 X 30%acknowledge that the employee understands the consequences of notfollowing the different policies.37: We further recommend MSD hold its personnel accountable to thepolicies. If a violation of policy occurs, such as an employee notsubmitting a reimbursement request in a timely manner the employee36 X 30%should understand that a reimbursement will not be made.38: We recommend all levels of MSD management consistently followand enforce adopted policies.36 X 30%39: We recommend the Board evaluate the current MSD EducationAssistance Program to ensure it is structured to provide the best benefitto the organization and the ratepayers.36 100%RECOMMENDATION STATUS/COMMENTSMSD staff is currently reviewing policies to identify weaknesses in internalcontrols. As policies are developed or updated they will be appropriatelycommunicated to employees and added to the intranet web site thatincludes all policies. Employee sessions will be conducted, includingdocumentation of attendance. The Employee Code of Conduct will berevised to include provisions to assure management and employees are heldaccountable in accordance with policies.A presentation of MSD’s current Education Assistance Program was made tothe Personnel Committee on March 12, 2012. Proposed changes to theprogram and the application process were approved by the MSD Board onApril 09, 2012.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 7 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 4: MSD ethics policies for Board members, appointed executive staff members, and employees were not sufficient to address conflicts.40: To remain independent in their decision‐making regarding entitiesdoing business with MSD, or seeking to do business with MSD, Boardmembers, executive staff, and other employees should avoid anysituations that are actual conflicts between their private interests andtheir duties on behalf of MSD, or that have the potential to present 39 100%conflicts. Neither should they accept gifts and gratuities that compromisethe impartiality of their decision‐making on behalf of MSD, or that givethe appearance that MSD actions are based on personal benefit, favors, orrelationships, rather than objective decision‐making.41: We recommend the Board establish a comprehensive code of ethics,Procedures on March 16, 2012.applicable to Board members, appointed executive staff members, and allemployees. MSD may want to consider having someone skilled in 40 100%establishing ethical standards for public employees and board membersassist in the drafting of such policy standards.42: Upon adoption by the Board, the code of ethics should beincorporated into the two Policies and Benefits Manuals for employees(unit and non‐unit), as well as any manual given to Board members duringorientation.40 100%43: We recommend MSD provide initial training for Board members,appointed executive staff and employees on the code of ethics, as well asa review annually.44: In developing a comprehensive code of ethics applicable to Boardmembers, as well as appointed staff and employees, the following areasof conduct should be considered for inclusion: General standards ofconduct; Contracting, subcontracting, having an agreement, or doingbusiness with MSD; Use of official position to obtain financial benefit,privilege or advantage for self or others; Involvement in matters where anownership interest exists; Use of confidential information; Use of MSDproperty, time, equipment; Solicitation; Acceptance of gifts and gratuities;Employment of relatives; Transactions with subordinates; Outsideemployment; Service on Boards and Commissions; Honoraria;Investment/ Stock ownership; Representation; Post‐employment; Politicalactivity; and, Financial disclosure.40 X 80%40 100%RECOMMENDATION STATUS/COMMENTSMSD adopted an Ethics Policy governing the MSD Board, Executive Director,Chief Engineer, and Senior Management staff effective January 23, 2012.Pursuant to this policy, the Policy Committee approved a Financial DisclosureStatement on March 16, 2012. The Policy Committee also approved anEmployee Ethics Policy. Pursuant to section 11 (B) and 11 (H) of the EthicsPolicy for the MSD Board and Senior Management, the Audit Committeeapproved the Ethics Hotline Procedures and Ethics Policy Violation HearingThe Financial Disclosure Statement,Employee Ethics Policy, Ethics Hotline Procedures, and Ethics Policy ViolationHearing Procedures were approved by the MSD Board on March 26, 2012.The ethics policies and associated procedures and forms will be incorporatedinto employee policy manuals.An ethics training program has been developed for the Board, SeniorManagement and employees. Ethics training will be included in Boardmember orientation (once vacant Board positions are filled by the Mayor),and employee sessions will commence on June 26, 2012 and are scheduledfor completion on August 29, 2012.The Board adopted a comprehensive MSD Board and Senior ManagementEthics Policy on January 23, 2012 including these provisions. The FinancialDisclosure Form, Employee Ethics Policy, Ethics Hotline Procedures, andEthics Policy Violation Hearing Procedures were approved by the MSD Boardon March 26, 2012. See response to Finding 4, Recommendation 40.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 8 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONS45: In establishing a financial disclosure policy, we recommend the MSDBoard members, as well as all executive team members, annually file withan appropriate committee of the Board, and by a specified date, astatement detailing financial interests held. Required information shouldbe prescribed by an appropriate committee of the Board.REPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETE40 100%RECOMMENDATION STATUS/COMMENTS46: The Board should consider including the following disclosures on theprescribed form: Name, business and home addresses, telephonenumber and e‐mail address of the filer; Title of position or office wherebyfiling is required; Any other occupation of the filer or filer’s spouse;Businesses in which the filer or filer’s spouse hold a specified percentageof interest. The policy should numerically state the percentage of businessownership required to be reported; Sources of income to the filer, filer’sspouse, or filer’s immediate family members exceeding a specific amount(dollar amount should be specified in the policy); Real property owned bythe filer, the filer’s spouse, or the filer’s immediate family, and itslocation; Creditor’s of the filer, the filer’s spouse, or the filer’s immediatefamily who are owed more than a specified amount. The policy shouldspecify the dollar amount required to be reported; and, Sources of giftsover a specified amount, which should be stated in the policy, to the filer,the filer’s spouse, or the filer’s immediate family, except for gifts fromfamily members.47: The policy should further require an affirmative statement by the filerthat he or she has no interest that would cause a conflict with his or herofficial duties.48: Sanction for noncompliance with the filing requirements also shouldbe detailed in the policy.49: To ensure compliance with the code of ethics adopted, MSD shoulddevelop and implement policies, procedures, and responsibilitiesregarding reporting, investigation, and resolution of allegations of ethicalmisconduct as detailed in the recommendations of Finding 1 regarding awhistleblower policy.40‐41 100%41 100%41 100%41 100%The Board adopted a comprehensive MSD Board and Senior ManagementEthics Policy on January 23, 2012 including these provisions. The FinancialDisclosure Form, Employee Ethics Policy, Ethics Hotline Procedures, andEthics Policy Violation Hearing Procedures were approved by the MSD Boardon March 26, 2012. See response to Finding 4, Recommendation 40.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 9 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 5: Several conflicts of interest existed that gave the appearance of improprieties by certain MSD Board and staff members.RECOMMENDATION STATUS/COMMENTS50: We recommend the MSD Board, within its comprehensive code of ethics,provide standards of conduct for conflicts of interest that prohibit Board members,appointed executive staff, and employees from the following: Having a primarycontract, subcontract, or agreement with MSD, either directly, by a family member,or through a business which is at least five percent owned; Representing a person ofbusiness privately before MSD; Using his or her position to obtain a financial gain, abenefit, or an advantage for oneself, a family member, or others; Using confidentialinformation acquired during his or her tenure to further his or her own economicinterest or that of another person; Holding outside employment with, or acceptingcompensation from, any person or business with which he or she has involvement aspart of his or her official position for MSD; and, Involvement in discussions anddecisions pertaining to:‐ Persons or businesses from which he or she has accepted gifts or gratuities over aspecified amount;‐ Matters involving businesses in which he or she has a direct or indirect financialinterest of over five percent;‐ A former employer or previously owned company within the last 12 months;‐ Persons or businesses with which they have a partnership or financial ownership ofover five percent;‐ Persons or businesses with which he or she competes privately;‐ Matters involving family members, or businesses owned by or employing familymembers; and,‐ Any other matter that presents a conflict between a personal interest and a duty toMSD and the citizens of Louisville and Jefferson County.46 100%The Board adopted a comprehensive MSD Board and Senior ManagementEthics Policy on January 23, 2012 including these provisions. The FinancialDisclosure Form, Employee Ethics Policy, Ethics Hotline Procedures, andEthics Policy Violation Hearing Procedures were approved by the MSD Boardon March 26, 2012. See response to Finding 4, Recommendation 40.51: Board members, appointed executive staff, and other employees whoabstain from involvement in discussions and decisions as recommendedabove should not be present during such discussions, and such abstentionshould be documented in writing and placed in the employee’s personnelfile or recorded in the minutes of a Board meeting.46 100%52: To ensure compliance with the conflict of interest policies adopted, MSDshould develop and implement policies, procedures and responsibilities found inFinding 1 regarding reporting and resolution of complaints. Finally, we reiterateMSD’s Policy and Benefits Manuals that state: “As public servants, employeesmust display a high standard of ethical behavior that ensures the public thatemployees do not use their positions to provide special privileges to themselves,to other individuals or organizations.”46 100%The Board adopted a comprehensive MSD Board and Senior Management EthicsPolicy on January 23, 2012 including these provisions. The Financial DisclosureForm, Employee Ethics Policy, Ethics Hotline Procedures, and Ethics Policy ViolationHearing Procedures were approved by the MSD Board on March 26, 2012. Seeresponse to Finding 4, Recommendation 40.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 10 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETERECOMMENDATION STATUS/COMMENTSFinding 6: MSD's primary legal services contract has been with the same attorney's firm since 1984 while never being competitively negotiated or advertised.53: We recommend that MSD designate this contract as an applicableprofessional services contract that should be periodically advertised and 48 100%competitively negotiated to ensure MSD’s best interests are met.54: Due to the multiple types of legal services that can be assigned to thisFirm and attorney, the contract should be separated based on the type of 48 100%legal services needed.55: An analysis should be performed to determine the need for outsidelegal services.48 100%56: Based on the results of the analysis, a separate request for proposalsshould be developed for advertising each type of service and anevaluation committee should be created to evaluate the responses usingspecific criteria.48 100%57: The evaluation committee should consist of staff members that areinformed and knowledgeable regarding the services needed by MSD.58: We recommend the Board consider whether Board Legal Counselshould be independent of all other legal services.48 100%48 100%Effective January 9, 2012, MSD’s primary legal services contract wasdesignated by the MSD Board as a professional services contract that shouldbe periodically advertised and competitively negotiated, and staff wasauthorized to draft a Request for Qualifications (RFQ) to procure legalservices. The RFQ separates legal services into multiple practice areas forpurposes of procuring qualified attorneys under separate contracts for eacharea, (including the areas of special board and bond counsel). This RFQ wasadvertised on April 27, 2012, and responses were due by May 14, 2012. Theprocurement evaluation team will evaluate the statements of qualificationsand make recommendations concerning the procurement. The Boarddirected the Legal Director to ensure that Board Legal Counsel would remainseparate from all other legal services in order to assure independent adviceto the Board where appropriate. The Board also directed the Legal Directorto review the internal legal staff resources, consider the need for additionalstaff and the ability to perform legal services in‐house to minimize legalexpenses.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 11 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 7: Board Legal Counsel given approval authority in MSD Board Process.59: We recommend the MSD Board rescind the 1984 resolution thatrequires a review and approval of all matters by the Board Legal Counsel 50 100%prior to presentation to the Board.60: Secondary reviews by Board Legal Counsel of issues or documentspresented to the Board should be performed only upon request by theBoard, Executive Director, or Legal Director and only for the specific50 100%incidence of the request.61: We recommend the Board not make a blanket request of the BoardLegal Counsel to review all documents or issues of a certain type.50 100%RECOMMENDATION STATUS/COMMENTSEffective January 9, 2012, the MSD Board rescinded the 1984 resolution thatrequires Board Legal Counsel approval and oversight of Board matters thataddresses each of these recommendations.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 12 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSFinding 8: Legal services contract lacks centralized oversight.62: MSD should ensure that the internal Legal Director is responsible forlegal contract compliance and reviewing all invoices associated with legalservice contracts.63: The MSD Legal Director should regularly report on legal serviceexpenditures and any related issues to the Board.64: Final approval authority for Board Legal Counsel services shouldremain with the Board to ensure an independent counsel, but all otherlegal services may have final approval by the Legal Director. Due todepartmental budgetary oversight, other MSD authorities may still needto retain final payment approval.65: MSD should also develop a formal procedure for vendors to protest adenial of certain expenses and request in writing an additional review ofthose expenses by a secondary authority. For legal service contracts, sucha secondary review may be conducted by the Executive Director, theBoard, or a designated Board committee.66: The final decision of the secondary review should be documented inwriting with an explanation as to the final decision.67: Individual Board members should refrain from attempting toinfluence the management process of MSD in a unilateral manner.68: Requests for changes to management should be made during Boardmeetings or meetings of Board committees and have the support of amajority of the members.REPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETE52 100%52 100%52 100%52 100%52 100%52 100%52 100%RECOMMENDATION STATUS/COMMENTSAs documented in the response to Finding 6, Recommendations 53‐58, MSDissued an RFQ for legal services on April 27, 2012. Issues regarding invoicing,expenditures, approval and reporting of legal expenses were defined as partof the RFQ and contract documents. Staff has drafted a new templatecontract for use with all legal services providers pursuant to which all legalservices except for services provided by Special Board Counsel, will beprovided under the direct supervision of the MSD Legal Director who willalso have responsibility for monitoring and overseeing all legal services, toinclude defining the experience requirements for billing at partner orassociate rates, the number of attorneys assigned to work on a particularmatter, approving monthly billings and expense reimbursements, not‐toexceedamounts for each case, settlement procedures, and provisions toprevent conflict of interest situations. Staff will present and recommend tothe Board proposed legal services contracts for approval following theprocurement team’s review and evaluation of statement of qualificationsfrom and preliminary selection of qualified attorneys/firms.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 13 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 9: MSD's legal services contract terms are not well defined and are silent as to settlement procedures and conflict of interest disclosures.RECOMMENDATION STATUS/COMMENTS69: We recommend that MSD amend its contract for legal services to ensurethat MSD adequately controls the costs and responsibilities of the outside legalfirm. Revisions should address the following areas: Specifically, define theexperience requirements for billing at the partner or associate rates. Thecontract should require a justification if the partner rate is used by more thanone attorney on the case. For optimal monitoring by MSD, the contract shouldrequire a written determination for each assigned case as to the expectednumber of attorney partners, associates, and paralegals, etc. This determinationshould also include a not‐to‐exceed amount to be paid to the Firm for theassigned case. The Firm must obtain written prior approval to exceed themaximum amount specified. Separate the types of legal work into individualcontracts to improve monitoring efforts. Designate the MSD Legal Director toassign contracted legal work as needed. Require prior approval of any costsother than for time spent on a case by a Firm attorney from the Legal Director.This includes any costs related to travel, meals, expert witnesses, mock juries,and other costs incurred not related to the Firm’s time costs. Include a term thatspecifies the settlement process that should be followed by the Firm. Include aterm that requires the Firm to disclose any actual or potential conflict of interestbetween MSD and any of the Firm’s other clients.54 100%Concurrent with the issuance of a RFQ for legal services, as explained ingreater detail in response to recommendations under Finding 6, staff alsodrafted a new template contract for use with all legal services providerspursuant to which all legal services, except for services provided by SpecialBoard Counsel, will be provided under the direct supervision of the MSDLegal Director/Legal Counsel who will also have responsibility for monitoringand overseeing all legal services, to include defining, among other things,settlement procedures, and provisions to prevent conflict of interestsituations. Staff will present and recommend to the Board proposed legalservices contracts for approval following the procurement team’s review andevaluation of statement of qualifications from and preliminary selection ofqualified attorneys/firms.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 14 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONS70: We recommend the MSD Board formally adopt a policy to select bondcounsel and a financial advisor through a competitive selection process usingeither a RFP or RFQ. This competitive process should assist in determining thosemost qualified to perform the services, while also provide an opportunity tocontrol the costs of issuing bonds.REPORTPAGEACTION INPROGRESSFinding 10: MSD spent $2.1 million for co‐bond counsel services with no documented justification.71: If co‐bond counsel is desired, justification for co‐bond counsel should beprovided to the Board for its review and approval.72: The RFP or RFQ should state the services desired, the length of theengagement, the evaluation method, the selection process, and a cost proposalto provide services.73: If co‐bond counsel is being engaged the RFP, RFQ, or engagement lettershould specify the roles and responsibilities and tasks assigned to each firm tominimize potential duplication of work and costs.74: MSD should ensure proper oversight of legal counsel to ensure work isprogressing and coordinated as required by the RFP, RFQ, or engagement letter.PERECENTACTIONCOMPLETE61 X 90%61 100%61 X 90%61 100%61 100%RECOMMENDATION STATUS/COMMENTSMSD advertised an RFQ for legal services on April 27, 2012 that includedservices for Bond Counsel (see Response to Finding 6, Recommendations 53‐58). An RFQ for Financial Advisor is being developed and is planned foradvertisement on July 27, 2012. MSD has amended the contract with itsexisting Financial Advisor for services on a month‐by‐month basis until a newFinancial Advisor is selected and approved by the MSD Board. Staff plans tomake a recommendation to the MSD Board on Financial Advisor services onSeptember 24, 2012.MSD advertised an RFQ for legal services on April 27, 2012 that includedservices for bond counsel (see Response to Finding 6, Recommendations 53‐58). MSD has contracted bond counsel services on a month‐by‐month basisuntil a bond counsel has been selected and approved by the MSD Board.Staff plans to make a recommendation to the MSD Board for legal serviceson August 27, 2012. In addition to RFQ and RFP procurement processes,bond counsel work is being coordinated through the MSD Legal Division withoversight of the MSD Board.An RFQ for Financial Advisor is being developed and is planned foradvertisement on July 27, 2012. Refer to the response provided in Finding10, Recommendation 70.MSD advertised an RFQ for legal services on April 27, 2012 that includedservices for bond counsel. Refer to the response provided in Finding 10,Recommendation 71.75: We further recommend the MSD Board be fully apprised of the RFP, RFQ,and engagement letter for procuring services, the method used to select bondcounsel and financial advisor, the tasks to be performed by counsel and financialadvisor, their fees and other bond issue costs.62 X 90%An RFQ for Financial Advisor is being developed and is planned foradvertisement on July 27, 2012. Refer to the response provided in Finding10, Recommendation 70.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 15 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 11: The lack of a policy development process results in duplication of work and potentially unnecessary legal fees.76: MSD should develop a policy or process by which policies are to beinitiated and developed and subsequently brought before the Board. Thisshould include who has the authority to initiate policy development and 63 X 40%who has the authority to authorize the expense of Board Legal Counsel toassist in the process.77: When making an initial request for a new or revised policy, use ofinternal staff should be considered first, when possible, to ensure themost cost effective methods of policy development are used.63 X 80%78: A determination for the need of outside legal expertise should bemade in consultation with the internal legal staff.63 X 80%RECOMMENDATION STATUS/COMMENTSStaff will prepare and present to the MSD Board Policy Committee, forrecommendation to the full Board, a resolution pursuant to which the Boarddesignates certain MSD policies as policies to be drafted, revised, modifiedand monitored by MSD staff as directed and approved by the MSD Board.The resolution, which will be presented to the Board Policy Committee, willalso serve to designate those policies to be periodically reviewed by theBoard. Staff will use internal resources where appropriate to develop policiesand only use external resources where appropriate. Staff will benchmarkwith other local and state agencies as well as the Institute for InternalAuditors and other professional organizations to assist in developing bestpractices for policies.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 16 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 12: The Louisville Green Corporation bylaws specify by name the President and the special legal counsel.RECOMMENDATION STATUS/COMMENTS79: We recommend the Louisville Green Board amend its bylaws toremove specific names of individuals. The Louisville Green bylaws shouldbe free of any redundant or unnecessary terms that may complicate thegovernance of this corporation.80: Further, we recommend the Louisville Green Board select a legalcounsel through a transparent, competitive process as similarlyrecommended in Finding 6.64 X 50%64 X 50%The first reading of the Louisville Green Corporation bylaws to remove thespecific names of individuals occurred on June 25, 2012 at the LouisvilleGreen Corporation Board meeting. MSD advertised an RFQ for legal serviceson April 27, 2012 which included services for special Board counsel (seeResponse to Finding 6, Recommendations 53‐58). Another Louisville GreenCorporation Board meeting will be held to finalize the bylaws and review arecommendation for legal counsel.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 17 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 13: MSD Board provides inadequate investment oversight and lacks sufficient information.81: MSD should, at a minimum, follow current Investment Policy andprovide the Board with detailed semi‐annual reports as to the holdings ofthe investment program, investment activities, risk levels of the program,69 X 90%and program strategies.82: However, we recommend the policies be updated and investmentreports be provided to the Board, or to a Board investment committee as 69 X 90%recommended in Finding 16, on a monthly basis.83: Board members should request such information if not provided bystaff.69 X 90%84: MSD should follow the requirements of the current Investment Policyand annually solicit Request for Proposals for investment services thatcontain all required details of the investment management firm and theservices being provided.69 X 90%85: In the interests of transparency, MSD should not enter into aproprietary investment program that does not disclose all details of theprogram to the Board members.69 X 90%RECOMMENDATION STATUS/COMMENTSStaff is providing the MSD Board with quarterly reports that include allinvestments by category and amount, and any change in market value ofthose investments and investment earnings. MSD's current InvestmentPolicy is being reviewed for any necessary updates, including reportingrequirements to MSD Board.Following MSD's Procurement Regulations for professional services, RFP's forInvestment Management Services will be issued for annual contracts, withthe option to renew annually up to four additional years.At the direction of the Board, all investments in the Yield EnhancementProgram have been withdrawn and invested in government backedsecurities. A new investment policy is being drafted for review and approvalby the Board. All details of MSD investment programs will be disclosed to theBudget Committee and MSD Board.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 18 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSFinding 14: MSD Financial advisor has conflict of interest.86: MSD should undergo an open procurement process on a periodicbasis for an experienced financial advisor to provide advice andconsultation related to the investment portfolio of MSD.87: This contract should be separate from other financial services such asthe issuance of bonds, which may be negotiated on a per transactionbasis.88: The contract should require the financial advisor to be free ofconflicts with any investment firm doing business with MSD.89: All fees for an investment consultant and advisement contract shouldbe a single fee based upon the amount of funds to be invested and thetype of investments that are expected by MSD.REPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETE73 X 80%73 X 80%73 X 80%73 X 80%RECOMMENDATION STATUS/COMMENTSA Financial Advisor will be retained to advise on MSD's debt portfolio.Independent from the Financial Advisor, MSD plans to secure the services ofan Investment Manager through the RFP or RFQ procurement process toprovide advice and consultation related to the investment portfolio of MSD.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 19 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETERECOMMENDATION STATUS/COMMENTSFinding 15: MSD does not have financial staff or Board members with background or specific experience in the types of investments and other related financial activities undertaken at MSD.90: We recommend that MSD ensure that the finance staff include aperson or persons with strong financial and investment knowledge andexperience to enable investment and financial strategies to be based onthe knowledge and understanding of such activities by MSD staff and notsolely on the advice of third party advisors.75 100%The Budget and Finance Director position has been filled by Mr. Chad Collier,who is experienced in investments and financial strategies. MSD executed aone‐year employment contract with Mr. Collier on May 10, 2012.91: We further recommend that MSD Board membership include at leastone professional who is particularly knowledgeable in investment andfinancial management activities commensurate with the types of activitiesin which MSD may engage.92: In addition, we recommend the MSD Board create an investmentcommittee whose members are responsible for the oversight ofinvestment activity and programs.93: The committee should include, at a minimum, one professional who isparticularly knowledgeable in investment and financial managementactivities.94: We recommend the investment committee receive detailed reportingof MSD’s investment portfolio, all investment activities, programs, trends,and strategies.95: The investment committee should have a thorough understanding ofexisting investment policy, and propose additional policies as deemednecessary.96: The committee should question staff and financial advisors regardinginvestment activity and programs to evaluate compliance with investmentpolicies.75 100%75 X 50%75 X 50%76 X 50%76 X 50%76 X 50%Daniel Arbough and Cyndi Caudill took the Oath of Office as MSD Boardmembers on April 23, 2012. These individuals are knowledgeable ininvestment and financial management activities. Mr. Arbough is theTreasurer for LG&E and KU Energy, and Ms. Caudill is a CPA and VicePresident at Harding, Shymanski & Co.It is expected that the MSD Board will delegate the duties of an InvestmentCommittee to a Finance Committee. The Finance Committee will merge theduties of the existing Budget Committee and the proposed InvestmentCommittee. Duties relating to investments will include oversight ofinvestment activity and financial management programs; reviewing detailedreporting of MSD's investment portfolio, all investment activities, trends,and strategies; and questioning staff and financial advisors regardinginvestment activity and programs to evaluate compliance with investmentpolicies. The roles and responsibilities of the Finance Committee will bedocumented in a Finance Committee Charter and approved by the MSDBoard.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 20 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 16: MSD has insufficient policies regarding investment and other financial activity.97: We recommend that MSD undertake a comprehensive review of itsInvestment Policy to strengthen Board oversight and to determine whatchanges are needed to ensure this policy fully addresses the actual77 X 40%investment activities conducted by MSD.98: In addition, these policies should address the use and monitoring ofexternal financial advisors and provide detailed guidelines related to theiruse.77 X 40%99: Further, we recommend MSD develop policies related to interest rateswaps that include the following: Objectives for the use of interest rateswaps; Conditions for the use of interest rate swaps; Guidelines as to theterms and conditions of any MSD swap agreement; Criteria related to theuse of interest rate swap counterparties; Evaluation and management ofinterest rate swap risks; and, Terminating interest rate swaps.77 X 40%RECOMMENDATION STATUS/COMMENTSMSD's current Investment Policy is being reviewed for any necessaryupdates, including reporting requirements to MSD Board, and guidelines forthe use of derivative instruments such as swap agreements.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 21 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONS100: We recommend the MSD Audit Committee develop and approveprocedures for the internal audit function.101: The adopted procedures should state the process for the InternalAuditor to follow in initiating an audit, including the process for the AuditCommittee to be informed of and approve or authorize any audit requestsnot already on the annual audit plan made by management or otherparties.102: The adopted procedures should also state the acceptable timeperiod for the Internal Auditor to allow management to respond to a draftaudit report.103: The adopted procedures should specify that the Auditor is to informthe Audit Committee if management fails to respond to the draft reportwithin the specified time period and the process to follow to release anaudit report when management fails to respond.REPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 17: MSD lacks a formal process for initiating, performing, reporting and distribution of its internal audits.104: The procedures should require the Internal Auditor to inform theCommittee when a draft audit is completed for the Audit Committee toreview and approve the draft report prior to forwarding the report tomanagement for response.105: Finally, procedures should require the Audit Committee, afterreviewing and approving internal audit reports, to ensure internal auditreports are presented to the full MSD Board for ratification.78 100%78 100%78 100%78 100%78 100%78 100%RECOMMENDATION STATUS/COMMENTSUpdates to the Audit Committee and Internal Audit Charters were adoptedby the MSD Board on February 13, 2012. These updates include proceduresfor initiating internal audits, approval of audit requests by the AuditCommittee, responses to audit findings by management, and approval ofinternal audit reports by the MSD Board. Also included were statements ofresponsibility for the Audit Committee to assist in performing the annualevaluation of the Internal Auditor, approve and recommend to the MSDBoard an annual budget for the Internal Auditor, review and approval of theannual work plan for internal audit, and to hold at least four meetingsannually, on a quarterly basis, to receive routine status updates from theInternal Auditor. The adopted Internal Audit Charter states that the InternalAuditor reports functionally to the Audit Committee and administratively tothe Executive Director. The MSD organizational chart was immediatelyrevised to reflect the reporting structure of the Internal Auditor.MSD Internal Audit obtained further guidance from the State Auditor's Officeregarding procedures for communicating preliminary draft audit reports tothe Board Audit Committee prior to management review. Revisions to theAudit Committee and Internal Audit Charters were approved by the MSDBoard on April 23, 2012.This recommendation has been incorporated into the Audit Committee andInternal Audit Charters adopted by the MSD Board on February 13, 2012.Refer to the response provided in Finding 17, Recommendation 100.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 22 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETERECOMMENDATION STATUS/COMMENTSFinding 18: Oversight of MSD internal audit function primarily performed by executive management; MSD Audit Committee is not sufficiently engaged with Internal Audit.106: We recommend the MSD Audit Committee perform the annualevaluation of the Internal Auditor.81 100%107: We recommend the MSD Audit Committee approve and recommendto the full Board an annual budget for the Internal Auditor based on theapproved internal audit work plan.81 100%108: The Internal Auditor should request directly to the Audit Committeethe amount of funds estimated as necessary to conduct those audits.81 100%109: Once approved by the Audit Committee, the annual budget for theInternal Auditor should be ratified by the full Board to be included in theMSD budget by the Finance Director.110: We also recommend the MSD Board revise the Audit CommitteeCharter to include within the Committee’s responsibilities theperformance of the annual evaluation of the Internal Auditor and thebudgeting for the expenses of the Internal Auditor.111: We recommend the MSD Board revise the organizational chart ofMSD to include a direct reporting line from the Internal Auditor to theAudit Committee of the Board.112: We recommend the MSD Audit Committee consistently approve theannual MSD internal audit work plan as required under the Internal AuditCharter.113: Further, the Board should revise the Audit Committee Charterlanguage to agree with the language in the Internal Audit Charter as thecurrent Committee Charter only states the Committee is responsible forreviewing the work plan.114: Additionally, we recommend the MSD Internal Auditor provide routinestatus updates on audits to the Audit Committee. This will foster continuedcommunication between the Internal Auditor and Audit Committee members. Itwill allow the Internal Auditor to discuss any problems that may be encounteringon an audit with the Committee in a more timely manner and will allow theCommittee an opportunity to discuss any concerns they may have with thethoroughness of a particular audit or regarding other areas of the organizationthat they may wish to ask her to investigate.81 100%81 100%81 100%81 100%81 100%82 100%These recommendations have been incorporated into the Audit Committeeand Internal Audit Charters adopted by the MSD Board on February 13,2012. Refer to the response provided in Finding 17, Recommendation 100.115: Finally, we recommend the MSD Audit Committee consider holdingquarterly meetings to ensure continued direct communication with the InternalAuditor.82 100%Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 23 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONS116: We recommend that MSD review its various methods of providingcompensation to executives and other staff and ensure that itscompensation structure and programs are fair and equitable to executivesand staff and is in the best interests of the public it serves. Expensesincurred by a public entity should be scrutinized due to the public natureof the business.REPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 19: MSD provided compensation benefits that could be considered excessive for a public entity.86 X 80%RECOMMENDATION STATUS/COMMENTSOn March 12, 2012 the Board approved to 1) Eliminate the 6‐monthperformance pay policy for employees hired on or after 03/03/12; 2)Approve a 2.3% adjustment of the non‐union salary structures effective03/03/12 but no cost of living pay increase; 3) Budget for an overall averageof 3% for non‐union performance increases that will be effective 03/03/12;4) Authorize the Executive Director to retain Mercer to conduct meritmodeling to determine the allocation of the 3% average non‐unionperformance pay increase for 2012 and 5) Authorize the Executive Directorto issue a RFP for a FY 2013 comprehensive non‐union compensation review.Staff expects to advertise the RFP by the end of July 2012.117: Alternative measures should be evaluated to reduce staffing and acost‐benefit analysis of any retirement buyout considered by MSD so thatthe Board is aware of the potential costs involved and the goals thatshould be achieved by additional compensation costs.118: In addition, the policy providing six‐month and annual salaryincreases and bonuses to new employees should be reconsidered becausethis policy could provide an excessive increase in compensation to anemployee that has not been with MSD a complete year.119: Furthermore, all forms of compensation, including performancesalary increases and bonuses, should be considered if MSD wants tocontrol or freeze its payroll budget.86 100%86 100%86 X 80%In the future, if MSD plans to provide its employees with incentivecompensation for any reason, a cost‐benefit analysis will be performed andcommunicated to the MSD Board for approval.Refer to the response provided in Finding 19, Recommendation 116.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 24 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 20: MSD did not comply with procurement guidelines when procuring certain professional services.120: We recommend MSD implement procedures to ensure compliancewith all procurement policies, particularly those pertaining to professionalservices. Employees responsible for procurement should be sufficientlytrained on those policies.91 X 30%121: Further, we recommend MSD adopt the provisions in the ModelProcurement Code in KRS 45A.740, 45A.745, and 45A.750 pertaining tothe procurement of architectural and engineering services.122: We recommend: Procurement Method Determination Forms becompleted in a timely manner in accordance with procurement policiesand used to document the method by which the agency intends toprocure a service. It is a checkpoint to ensure the agency is utilizing thecorrect procurement method and should not be overlooked or completedafter the contract is signed or services are provided; MSD centrallymaintain all procurement records; and, MSD only approve payments thathave a signed Purchase Order.123: We recommend that MSD’s policy of allowing the Board to waiveany or all requirements related to the procurement of professionalservices be repealed.91 X 90%92 X 30%92 X 0%RECOMMENDATION STATUS/COMMENTSRefer to the response provided in Finding 3, Recommendation 32. Specialprovisions will be provided for procurement of professional services andtraining will be provided to employees in the procurement department.MSD has adopted the local public agency provisions of the Kentucky ModelProcurement Code (KRS 45A.345 through KRS 45A.460), and staff believesthat the foregoing provisions allow for procedures similar to thoseauthorized under KRS 45A.740, KRS 45A.745, and KRS 45A.750 and thereforeenable MSD to award a contract for architectural or engineering relatedservices to the best firm qualified to perform the required work on the basisof demonstrated competence and qualification for the type of professionalservices required and at fair and reasonable prices.Refer to the response provided in Finding 3, Recommendation 32. Inaddition, staff will evaluate a central procurement process for engineering,construction and goods and services to improve the controls,documentation, records and payments to contractors and vendors.MSD staff is currently reviewing Procurement Regulations to determine theappropriateness of the Board's authority regarding procurement ofprofessional services.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 25 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSFinding 21: Employee usage of MSD computer appears to violate policy.124: We recommend MSD provide an updated training to its staffregarding MSD policies, including its Electronic Communications MediaPolicy.125: MSD should require staff to sign‐in for the training and maintain thesign‐in sheets in accordance with its record retention policy.126: We further recommend MSD require its personnel to periodicallysign an acknowledgment to be placed in the employee’s personnel file,when its Electronic Communications Media Policy is updated.REPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETE93 X 40%93 X 40%93 X 40%RECOMMENDATION STATUS/COMMENTSMSD's current Electronic Communications Policy will be reviewed, updatedand communicated to MSD staff routinely and appropriate training will beprovided.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 26 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 22: MSD had no formal records retention policies or records retention training for its employees.127: To ensure MSD retention schedules and related systems andprocesses are being effectively carried out, we recommend MSD formallyadopt records retention policies to be included in the Policies and Benefitsmanuals for employees. Such policies should detail employee 94 X 30%responsibilities over retaining required books, papers, maps, photographs,discs, software, e‐mails, databases, and other electronically generatedrecords.128: We further recommend an archival policy and system be drafted andadopted specifically regarding proper e‐mail retainage. Policies should 94 X 30%also include training requirements.129: We recommend that all employees be formally trained on all recordsretention requirements, including the proper retention of e‐mail 94 X 30%communications.130: Upon employment, all new employees should be trained on recordsretention responsibilities to assure proper retainage of records. MSD alsomay want to consider having employees sign an acknowledgement thatthey have read and understand the records management policies.94 X 30%RECOMMENDATION STATUS/COMMENTSMSD has created a Records Retention Policy team to develop a recordretention policy. The policy will detail employee responsibilities overretaining required books, papers, maps, photographs, discs, software, e‐mails, databases, and other electronically generated records. All currentemployees and new hires will be trained of records retention requirements,including proper e‐mail retention. A comprehensive policy is needed and willtake up to 10 months to develop and implement. Plan is to complete byDecember 15, 2012.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 27 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 23: MSD accounting system coding errors led to misclassified expenditures and failure to issue 1099 forms to its contractors.131: We recommend MSD Finance Department be more diligent inensuring expenditures are coded to the proper projects and cost 96 X 70%categories.132: Further, because the MSD Finance Department personnel partiallyrely on the department managers and directors to assist them inidentifying the appropriate codes to use when entering the expendituresinto the accounting system, we recommend the MSD Finance Department 96 X 70%review expenditure cost center and classification information provided bythose approving the expenditure and question the information that doesnot appear reasonable or appropriate.133: We recommend the MSD Finance Department require all necessaryfinancial forms, including W‐9s, prior to entering the vendor into the MSD 96 X 70%accounting system.134: Finally, we recommend MSD develop a policy that addressesfinancial processing activity involving the reporting of W‐9 information.96 X 70%135: The policy should be presented to the MSD Board Policy Committeefor approval prior to implementation.96 X 70%136: The policy should then be posted and distributed to all requiredpersonnel to ensure complete institutional knowledge of the newlycreated and adopted policy.96 X 70%RECOMMENDATION STATUS/COMMENTSInternal controls over coding of accounting documents are being reviewed toidentify areas that need to be strengthened. Finance departmentprocedures will be updated as appropriate, and Finance staff will be trainedon the updated procedures.A policy is being drafted for the processing and reporting of W‐9information. This policy will include a requirement for all necessary financialforms to be received by Finance prior to entering a new vendor in thefinancial system, and it will cover the processing and reporting of W‐9activity. This policy will be presented to the MSD Board Policy Committeefor approval, and then communicated to the appropriate employees.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 28 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 24: MSD has not reviewed the computer‐based overhead process used to allocate departmental cost to capital projects.137: We recommend MSD review the allocation process on a regularbasis and ensure that the process is fundamentally sound and complieswith the commonly accepted accounting basis for capitalized project cost.138: We also recommend that MSD review the allocation processannually and document that the process has been reviewed and approvedby the appropriate administrative and executive staff.97 X 90%97 X 90%RECOMMENDATION STATUS/COMMENTSMSD's overhead allocation calculation is currently being reviewed forcompliance with accounting standards and any necessary adjustments.Going forward, this allocation will be reviewed and approved annually by theappropriate administrative and executive staff.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 29 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONS139: We recommend MSD refrain from spending funds for activities anditems that do not provide a clear benefit to its ratepayers or help fulfillMSD’s mission.140: We recommend MSD management carefully evaluate eachdiscretionary expenditure to ensure funds are efficiently and effectivelyused in keeping with its mission.141: We recommend MSD consider seeking reimbursement of theamount it contributed to the private tribute from the MSD employee whoauthorized the payment with obtaining the appropriate approval from theExecutive Director.142: We recommend that the MSD Board closely scrutinize itsexpenditures for contributions and donations.143: If a contribution or donation is being considered, it should have aclear and documented connection to MSD’s mission or must be needed tomeet a requirement of its EPA Consent Decree.144: Further, we recommend all contributions and donations underconsideration by MSD be presented to the full Board for approval toensure Board awareness and management accountability MSD.145: We recommend MSD no longer use public funds for Holiday partiesand celebrations.146: We recommend MSD closely scrutinize travel and conferences,particularly of out‐of‐state travel.147: We recommend MSD management also closely scrutinize thenumber of employees allowed to attend a single conference or meeting.Further, the MSD Board should approve out‐of‐state travel after beingprovided with estimated travel costs. Subsequent to the travel, the actualtravel expenses should be reported to the Board.REPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETEFinding 25: MSD made questionable expenditures for parties, donations, travel, training, and other items.102 100%102 100%102 100%103 100%103 100%103 100%103 100%103 100%103 X 80%RECOMMENDATION STATUS/COMMENTSAs of January 5, 2012, MSD's Interim Executive Director has applied a freezeto all discretionary spending, including travel; meals and food; dues, fees,licenses, and subscriptions; donations, contributions, and sponsorships; andovertime. All exceptions to this freeze are reviewed on a case‐by‐case basisby Senior Management. For FY 2013, funds have not been budgeted forevents such as holiday parties or celebrations. A policy to governcontributions, sponsorships, and donations is being drafted and is expectedto be finalized in October 2012.As of November 29, 2011, full reimbursement was received for the amountcontributed to the private tribute.A spending freeze has been applied to all discretionary spending. Refer tothe response provided in Finding 25, Recommendation 139.MSD Travel Policy will include updated procedures for out‐of‐state travel,specifically the number of employees allowed to attend a single conference,MSD Board approval, and reporting of travel expenses.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 30 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETERECOMMENDATION STATUS/COMMENTSFinding 26: MSD uses Internal Revenue Service's (IRS) commuting valuation rule to calculate the taxable value of assigned vehicles regardless of the employee's compensation levels.148: We recommend that MSD comply with IRS guidelines to ensure thatthe personal benefit of an assigned vehicle is valued appropriately for taxpurposes. The MSD policies should be amended to reflect how controlledemployees will be determined and the method that will be used tocalculate the taxable benefit of assigned vehicles.104 X 90%Controlled employees have been identified and are required to log businessand personal vehicle usage effective July 1, 2012. Procedures are currentlybeing developed to reflect how controlled employees will be determined,the methods used to calculate taxable benefits and log vehicle activity. TheMSD Vehicle Usage Policy will also be updated to reflect MSD's processingand enforcement of the IRS guidelines. The Vehicle Usage Policy will bepresented to the Policy Committee and the MSD Board for approval.Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 31 of 32


July 15, 2012Working DraftSTATE AUDIT RECOMMENDATIONS FOR THE METROPOLITAN SEWER DISTRICTThe State audit report presented 27 findings and 150 recommendations to strengthen MSD's controls and management oversight. This spreadsheet reflects the status of the 150 recommendations.RECOMMENDATIONSREPORTPAGEACTION INPROGRESSPERECENTACTIONCOMPLETERECOMMENDATION STATUS/COMMENTSFinding 27: The MSD Board allowed a corporation under its authority to administratively dissolve before conveying the corporation's property to MSD.149: We recommend the MSD Legal Director take the necessary actionsto address the situation regarding the dissolved corporation and itsrelated property.105 X 90%150: We also recommend the MSD Board and its Executive Managementevaluate its processes to ensure tasks undertaken by employees arereasonably aligned with their job responsibilities. While it is notinappropriate for the former Executive Director to have filed annualreports on behalf of the Corporation, it is more reasonable and allows forbetter continuity for the MSD Legal Department to perform that function.105 X 90%An Application for Reinstatement of P‐B Corporation has been filed with theKentucky Secretary of State along with an application to have MSD’s LegalDirector designated as the registered agent of the Corporation in place ofMSD’s former Executive Director. MSD’s Legal Director will be responsiblefor ensuring the reinstatement process is completed and will prepare andpresent all necessary paperwork to transfer the Corporation’s assets to MSDupon reinstatement so the Corporation’s existence is no longer necessaryand the Corporation can be appropriately and finally dissolved pursuant toand as required by state law.79% Overall Percentage of Corrective Actions Complete as of July 15, 2012Green: 100% CompleteYellow: Projected 100% Complete by August 15, 2012 Page 32 of 32

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