INTERNAL AUDIT OF FIXED ASSETS MA AGEMENT

AS OF JANUARY 31, 2013

AT THE

TEXAS ALCOHOLIC BEVERAGE COMMISSION

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MONDAY N. RUFUS, P.C.

Certified Public Accountants & Consultants

Member: American Institute of Certified Public Accountants

Commission Members

Texas Alcoholic Beverage Commission

Austin, Texas

We have evaluated the controls implemented by the Texas Alcoholic Beverage Commission

(Commission) regarding Fixed Assets Management as of January 31, 2013. The results of our

evaluation disclosed that the Commission has procedures and controls in place for the fixed asset

processes. We noted some opportunities for enhancing the controls in place. The report that

accompanies this letter summarizes our comments and recommendations.

We have already discussed this report with various Commission personnel, and we will be pleased

to discuss it in further detail at your convenience.

January 31, 2013

Austin, Texas

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TABLE OF CONTENTS

Executive Summary ……………………………………………………………. .3

Internal Audit Results…………………………………………………………….3

Observations……………………..……………………….…………….…………5

Appendices

1. Objective, Scope, and Methodology……………………9

2. Agency Information…………………………………... 11

3. Report Distribution …………………………………... 13

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Executive Summary

I. Background Information

In 1935, the Legislature created the Texas Alcoholic Beverage Commission (formerly the Texas

Liquor Control Board).

The Texas Alcoholic Beverage Commission (Commission) is the state agency that regulates all

phases of the alcoholic beverage industry in Texas. The duties of the Commission include

regulating sales, taxation, importation, manufacturing, transporting, and advertising of alcoholic

beverages.

The Commission collects in excess of $200 million annually in taxes and fees, which aids in the

financing of the state’s public schools, local governments, research, human services, and other areas

in which state government provides services to all Texans.

The General Services Section of the Commission’s Business Services Division is responsible for

real and personal property management which includes all fixed assets.

The Property Manager who reports to the Director of Business Services Division is the custodian of

all property in the possession of the Commission and is responsible for maintaining the required

records for the property. The Property Manager is also responsible for updating the Texas

Comptroller of Public Accounts (State Comptroller) State Property Accounting (SPA) system

records.

The Commission is considered a Reporting Status agency with its own property system set up to

comply with the State Comptroller’s SPA reporting requirements. State agencies which use the

Comptroller’s SPA system as their property system are considered to have an Internal Status.

The State of Texas Government Code, Subchapter A, General Provisions, Section 403.271 through

.278, provides the statutory requirements for the Commission to account for State property. These

requirements designate the State Comptroller as the administrator of the property accounting system

and maintain centralized records based on information supplied by State agencies and the Uniform

Statewide Accounting System (USAS). The State Comptroller has developed the State Property

Accounting (SPA) Process User’s Guide based on the above statutory reference to provide guidance

to state agencies concerning the care for State property.

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Executive Summary

I. Background Information (Continued)

The SPA guidelines require property with a single unit acquisition cost of $5,000 or more to be

entered into the SPA system as a “Capitalized” item. In addition, the guidelines require some items

that cost $500 to $4,999 to be entered into the SPA system as “Controlled” items. The Commission

accounts for acquired property in two inventory system files called CERTIFIED Inventory and

MOBILE Inventory. The CERTIFIED Inventory is used to comply with the State Comptroller’s

SPA guidelines to report the “Capitalized” and “Controlled” items, with all firearms included in the

controlled category regardless of cost. The MOBILE Inventory is used to account for all property

under the possession and responsibility of the Commission. Property in the MOBILE Inventory

includes:

1. Capitalized property

2. Controlled property (including firearms)

3. Tracked property – inventory designated by the Commission for control purposes.

a. Leased and federal properties have special identification numbers that begin with

an alpha character and are tracked as controlled or capitalized assets.

b. Property not required to have a tag number will be assigned a property tag with

the TABC on it with no inventory number.

c. Personal property belonging to an employee with an estimated value of $50 or

more is labeled “Personal Property of Employee Name” .

As of November 14, 2012 the total historical costs of the Commission’s inventory property was

$16,145,242.52 comprised of:

Capitalized Property $10,655,342.44

Controlled Property 1,639,622.68

Total CERTIFIED Inventory Property $12,294,965.12

(Reported to State Comptroller)

Tracked Property – Designated by Commission 3,850,277.40

Total MOBILE Inventory Property $16,145,242.52

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Summary of Internal Audit Results

The Commission has written policies and procedures to receive, tag, track, and dispose of property.

There are also written policies and procedures to address stolen and missing property. Each fiscal

year the Commission takes an annual physical inventory for property listed as “Capitalized” and

“Controlled” as per the Texas Comptroller of Public Accounts State Property Accounting (SPA)

Process User’s Guide – FF N. 005. This property is certified by the Commission and reported to the

Texas Comptroller of Public Accounts in accordance with Government Code Subchapter L.

Property Accounting. Required year- end property certification and fiscal balance forms are being

timely submitted to the Texas Comptroller of Public Accounts (SPA) for as required.

During our audit engagement we noticed forty-five (45) fixed asset items with a cost value of

$65,797.42 that had been traded in or disposed at the beginning of fiscal year 2009 were still

included in the Commission’s MOBILE Inventory as of November 14, 2012. One of the fixed asset

items described as a Telephone – Other Equipment-Cell-/Portable listed on the inventory at

$9,788.92 had also been included in the CERTIFIED Inventory reported to the State Comptroller

for fiscal year 2012.

Summary of Management’s Response

The agency concurs with the Summary of Internal Audit Results and has corrected the information

in the Mobile Assets System to accurately reflect the trade in of these assets. It was determined that

during the conversion of data from one system to another, these assets were inappropriately

classified. During the inventory process the responsible party marked the assets as “not found”.

The property manager requested documentation for the disposition of these assets, but did not

receive it. During this audit process the appropriate documentation was received and the assets

were disposed of properly. Of the CERTIFIED inventory, this asset represents 0.08% of the total

CERTIFIED inventory submitted by the agency to the Texas Comptroller of Public Accounts State

Property Accounting (SPA). In the future if complete information is not received, the property

manager will follow up with the responsible party within 60 days.

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Objectives, Observations, Recommendations, and Management’s Response

The primary objectives of the internal audit were:

1. Reliability and Integrity of Information

2. Compliance with Policies, Procedures, Laws, and Regulations

3. Efficiency and Effectiveness of Operating Procedures

4. Safeguarding of Assets

RESULTS AND RECOMMENDATIONS

Internal Audit Objective 1: Reliability and Integrity of Information

Personnel conducting the annual physical inventory are knowledgeable of property activity and

reporting processes.

The Commission uses the State Comptroller’s State Property Accounting manual list for

classification of purchased fixed asset property.

All property items tested by the internal auditors were traced to the proper designated employee

assigned the property.

Internal Audit Objective 2: Compliance with Policies and Procedures, Laws, and Regulations

The Commission is a Reporting Status agency which has its own property accounting system to

comply with the State Comptroller’s Office reporting requirements and Government Code,

Subchapter L. Property Accounting §403.271.

The Commission has written policies and procedures for all fixed asset property in its possession.

Proper documentation has been submitted to the State Comptroller’s Office with the names of the

Agency Head and designated Property Manager and Alternate Property Manager responsible for

conducting the annual physical property inventory and maintaining the records in compliance with

Government Code, Subchapter L. Property Accounting §403.273 and §403.274.

The Certification of Physical Inventory Conducted by Agency form was timely submitted

(September 20, 2012) to the State Comptroller’s Office regarding the Commission’s certification of

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the required annual physical inventory taken for fiscal year 2012 in accordance with Texas

Government Code , Subchapter L. Property Accounting §403.273.

The Commission reconciles the fixed asset property fiscal balances with the State Comptroller’s

SPA system records on a quarterly basis as required for Reporting Status agencies. The required

Certification (Reconciliation) of SPA Fiscal Balances form was also timely submitted by November

1 of 2012 to the Comptroller of Public Accounts.

All required documentation for stolen fixed asset items tested was properly processed in compliance

with Texas Government Code , Subchapter L. Property Accounting §403.275.

Finding 1:

Adjust and Update the Commission’s

Inventory System at the End of the

Physical Inventory for Any Property

Changes or Adjustments

During our testing of inventory property we noticed

forty-five (45) fixed asset items with a cost value of

$65,797.42 that had been traded in or disposed during

fiscal year 2009 were still being included in the

records of the MOBILE Inventory as of November 14,

2012. One of the fixed asset items was also included

in the CERTIFIED Inventory which had been certified

and sent to the State Comptroller’s Office at the end

of the fiscal year.

The fixed asset items consisted of the following:

MOBILE Inventory:

LAN/WAN SWITCHING – Hubs, Switches, Routers

43 $54,571.50

OTHER OFFICE FURN(Includes modular furn./couches) 1 1,437.00

TELEPHONE – OTHER EQUIPMENT –CELL / PORTABLE 1 9,788.92 (a)

Totals 45 $65,797.42

CERTIFIED Inventory:

TELEPHONE – OTHER EQUIPMENT –CELL / PORTABLE 1 9,788.92 (a)

Texas Government Code, Annotated Section 403.273 (f)(g) requires each state agency to conduct an

annual physical inventory of all personal property and certify the accountability of the inventory to

the Comptroller on an annual (fiscal) basis. At all times, the property records of a state agency must

TABC Inventory Reports and Report Categories

CERTIFIED INVENTORY:

Certified by Commission and reported annually

to Texas Comptroller of Public Accounts (SPA)

“Capitalized Property” - $5,000 or more

“Controlled Property” - $500 to $4999

(Includes all firearms regardless of cost)

MOBILE INVENTORY:

Inventory used by TABC to account for all

property-

“Capitalized Property” - $5,000 or more

“Controlled Property” - $500 to $4999

(Includes all firearms regardless of cost)

“Tracked Property” – inventory designated By

Commission for control purposes.

- Leased and Federal properties

- Property with TABC tag but no number

- Personal Property of Employee - $50 or

more

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accurately reflect the property possessed by the agency. The Commission’s property manual

requires the Property Manager to adjust and update the inventory system at the end of the annual

physical inventory for any discrepancies noted.

Recommendation:

The Commission should comply with Texas Government Code and follow the State Comptroller’s

State Property Accounting procedures to submit the proper documentation or forms to eliminate the

45 fixed asset items totaling $65,797.42 in order for the Commission records to properly reflect the

property inventory totals for the MOBILE and CERTIFIED inventories.

Management’s Response:

Management concurs with the finding and these records have already been deleted to reflect the

trade in of the assets.

Internal Audit Objective 3: Efficiency and Effectiveness of Operating Procedures

The Commission has written capital equipment, controlled, and other property processing

procedures in place.

Each division/department director and management supervisors are responsible for the safekeeping

of property assigned to his/her division or department.

TABC divisions have designated property officers who are responsible for the inventorying of

property assigned to staff and management personnel within each division.

Internal Audit Objective 4: Safeguarding of Assets

The Commission has adequate controls and procedures in place to provide reasonable assurance that

the property accountability, procedures, and processes are effectively established to adhere to and

comply with the SPA Process User’s Guide and Government Code, Subchapter L. Property

Accounting. Each division/department director is responsible for the safekeeping of property

assigned to his/her division/department with each employee being responsible for any property

assigned directly to them.

Procedures are in place where a fixed asset item will always be accounted for by being assigned to a

staff member, property manager, or property manager designee at all times during employee

transfers, changes in employee assignments, or when an employee leaves the agency.

There is adequate segregation of duties among Commission personnel during the annual physical

inventory of fixed asset property. The annual inventory was conducted by several designated

personnel at the Commission’s various statewide locations with management personnel reviewing

and signing off on property inventoried in their division/department. Statewide inventories were

sent to the Austin headquarters where the Property Manager reconciled and certified the inventory

property and sent it to the State Comptroller’s Office by the required due date of September 20,

2012.

All fixed assets tested were tagged or marked as property owned by the Commission.

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Appendix 1

Objective, Scope, and Methodology

Objective

The primary objective of the audit was to evaluate the following:

Reliability and Integrity of Information

Compliance with Policies, Procedures, Laws, and Regulations

Efficiency and Effectiveness of operations or program.

Safeguarding of Assets

Scope

The audit scope of the internal audit work included reviewing the effectiveness of the

Commission’s inventory processes in the safeguarding, accountability, and reporting of

Commission property in compliance with Texas Government Code, Subchapter L., Property

Accounting requirements.

Methodology

Our procedures included collecting information and documentation; performing selected tests and

other procedures; analyzing and evaluating the results of the tests; reviewing operating policies and

procedures, laws and regulations, conducting interviews with the appropriate staff of the

Commission, testing for compliance with policies, procedures and laws, and review of other

pertinent reports and documentation.

Information collected and reviewed included the following:

The Commission’s state property policies and procedures for the Austin headquarters and

divisions.

Annual physical inventory reports and supporting documentation for the Commission’s

regions and headquarters.

Commission’s MOBILE Inventory and CERTIFIED Inventory reports as of 11/14/2012

Texas Comptroller of Public Accounts State Property Accounting (SPA) User’s Guide

Texas Government Code, Subchapter L., Property Accounting (§403).

General Appropriation Act (FY 2012-2013)

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Objective, Scope, and Methodology (continued)

Commission’s Appropriated Budget (FY 2012-2013) and Capital Budget riders

State Auditor’s Reports

TABC agency website

Procedures and tests conducted included the following:

Interviewed Commission management, property manager, and staff to obtain an

understanding of the agency’s property accountability and reporting functions, activities,

and controls in place.

Gaining an understanding of the Commission’s control structure related to property activity

processing, handling, and reporting.

Testing internal controls over inventory property processing, handling, and reporting

process.

Tracing fixed asset property from purchase, to employee assignment, to reporting to the

Comptroller of Public Accounts State Property Accounting records.

Tested for compliance with the Commission’s property procedures manual, the Texas

Government Code, and the State Comptroller’ SPA reporting requirements.

Tested for timely annual submittal of required property inventory certificates and forms to

the State Comptroller’s Office.

Other pertinent reports and documents

Other Information

Our internal audit was conducted in accordance with generally accepted government auditing

standards and conforms with The International Standards for the Professional Practice of Internal

Auditing.

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Appendix 2

Agency Information

In 1935, the Legislature created the Texas Alcoholic Beverage Commission (formerly the Texas

Liquor Control Board).

The Texas Alcoholic Beverage Commission (TABC) is the state agency that regulates all phases of

the alcoholic beverage industry in Texas. The duties of the Commission include regulating sales,

taxation, importation, manufacturing, transporting, and advertising of alcoholic beverages.

The TABC collects in excess of $200 million annually in taxes and fees, which aids in the financing

of the state’s public schools, local governments, research, human services, and other areas in which

state government provides services to all Texans.

The Alcoholic Beverage Code, which was enacted to protect against involvement of the criminal

element in alcoholic beverage trafficking authorizes the Texas Alcoholic Beverage Commission to:

Grant, refuse, suspend, or cancel permits and licenses in all phases of the alcoholic beverage

industry;

Supervise, inspect, and regulate the manufacturing, importation, exportation, transportation,

sale, storage, distribution, and possession of alcoholic beverages;

Assess and collect fees and taxes;

Investigate for violations of the Alcoholic Beverage Code and assist in the prosecution of

violators;

Seize illicit beverages;

Adopt standards of quality and approve labels and size of containers for all alcoholic

beverages sold in Texas;

Pass rules to assist the agency in all of the above.

The Governor, with the advice and consent of the Senate, appoints three public members of the

Commission for staggered six-year terms.

The Commissioners appoint an Administrator who supervises the Commission’s activities. The

Commission’s operating budget is prepared and approved by the Commission on an annual basis,

whereas the State legislative appropriation request is determined every two years. Both the budget

and appropriations are reviewed and approved by the State Legislature.

The Commission is divided into the following divisions: Executive; Field Operations –

Enforcement, Compliance, Special Operations, and Ports of Entry; Business Services; Human

Resources; Information Resources; Legal Services/General Counsel; Licensing; Office of

Professional Responsibility; Tax and Marketing; and Education and Prevention. The Executive

Division, which is headed by the Administrator, provides oversight of the Assistant Administrator,

General Counsel, Chief of Field Operations, Director of the Office of Professional Responsibility,

and the Director of Communications and Government Relations. The other divisions report directly

to the Assistant Administrator.

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The Commission generates revenue from alcoholic beverage license and permit fees, alcohol

beverages taxes, cigarette taxes, airline beverage tax, and revenue collected on audits. This revenue

is deposited into the General Revenue Fund.

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Appendix 3

Report Distribution

As required by Gov’t Code 2102.0091, copies of this report should be filed with the following:

Governor’s Office of Budget and Planning

Attn: Mike Meyers

P.O. Box 12428

Austin, Texas 78711

Phone: (512) 463-1778

Legislative Budget Board

Attn: Ed Osner

P.O. Box 12666

Austin, Texas 78711

Phone: (512) 463-1200

State Auditor’s Office

Attn: Internal Audit Coordinator

P.O. Box 12067

Austin, Texas 78711

Phone: (512) 936-9500

Sunset Advisory Commission

Attn: Ken Levine

P.O. Box 13066

Austin, Texas 78711

Phone: (512) 463-1300

Texas Alcoholic Beverage Commission Jose Cuevas, Jr., Presiding Officer

Steven M. Weinberg, MD, JD

Melinda S. Fredricks

Texas Alcoholic Beverage Commission Management

Sherry Cook, Administrator