Weak controls for the Detroit water department’s use of corporate credit cards resulted in employees misusing public funds for hotel stays, gift cards, bluetooth speakers and other prohibited items, according to a newly-released audit by the Office of Inspector General. 

The OIG flagged an increased risk of fraud, abuse and wasteful spending in the Detroit Water and Sewerage Department after an audit of credit card purchases by senior department staffers. The audit report, released last month, examines $346,000 in corporate credit card purchases between July 2019 and June 2021. The review found DWSD failed to prevent purchases of banned items, keep timely expense reports, digital receipts or take any action to discipline employees who violated its purchasing policy.  

Detroit Deputy Inspector General Kamau Marable said the audit did not reveal illegal activity, but stressed water department employees were poorly trained on prohibited purchases and the mismanagement of expense reports, he said, meant there was “no accountability” to prevent improper purchases.

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“The City Charter very clearly states that if we find circumstances of illegality or criminal acts, we have to refer it to a prosecuting agency,” Marable added. “No referral was made. We didn’t find anything that we thought was criminal.”

DWSD provided the OIG with 135 credit card statements detailing 551 transactions that totalled $346,239. Twelve prohibited purchases were recorded in the audit: four purchases for furniture or equipment, four others for personal travel expenses and four more were gifts for employees, including bluetooth speakers, gift cards and DWSD-branded clothing.

The gifts, DWSD said, were part of a program launched in 2020 to reward employee performance. Workers received various items branded with DWSD’s logo. The department is now reviewing alternative ways to recognize employees based on the OIG’s recommendations. 

In another example, the audit notes that a DWSD employee paid for a Saturday night hotel room stay with a corporate credit card and did not reimburse DWSD until two years later. The cost and identity of the staffer were not disclosed in the audit.

The OIG also identified other “questionable purchases,” including 55 food or beverages purchases. Under the DWSD policy, food is an allowable expense during travel and training, however the OIG found “some purchases initiated by cardholders with the cards are not for public purpose and therefore questionable.”

“For example, some DWSD cardholders are using the credit cards for food purchases during business meetings, which may be considered a personal expenditure according to the guidance from the state of Michigan,” the report states. 

Other purchases that the audit deemed questionable were 26 local purchases that included the state sales tax (DWSD is tax exempt and should not pay sales tax), three for hotel stays with excessive room rates and one floral arrangement.

The audit also referenced an expensive hotel stay where a DWSD employee visited San Francisco from Sept. 15 to Sept. 19, 2019. The average nightly rate was $447, which “could be viewed as excessive” when compared to the federal per diem rate of $299.

The audit was spurred by a separate 2021 OIG investigation into the water department’s procurement policies that Marable said revealed “concerning information about (DWSD) credit cards.” That, in turn, prompted investigators to look back at two prior years of credit card statements, he said. 

The original investigation, which was not publicly released, but is briefly described in a quarterly report, concluded DWSD’s general counsel violated procurement and credit card policies. But the violations, it notes, did “not rise to the level of abuse of authority.”

Bryan Peckinpaugh, a spokesman for DWSD said the complaint regarding general counsel that led to the 2021 investigation “was found to be unsubstantiated” and the file was then closed. 

“Executive officers of DWSD, which there are six, are assigned corporate credit cards, and they make purchases for the entire department,” he said. 

Following the 2021 investigation, the OIG recommended that DWSD revise its procurement policy to reduce the potential or appearance of procurement abuses.

The OIG’s new audit report recommended a number of solutions to prevent fraud and abuse of DWSD credit cards. This includes properly enforcing existing policies, revising policies on reporting credit card statements, improving guidance on acceptable purchases and storing records online.

DWSD officials agreed to the changes in a July letter signed by Director Gary Brown and Chief Financial Officer Istakur Rahman. The pair acknowledged problems with receipts and expense reports and committed to better train cardholders, review policies and ensure travel is approved before hotel purchases are made. 

“Going forward, we will strictly enforce compliance with the policy,” the letter from Brown and Rahman reads. “Any cardholder found not to be in compliance with the policy will be met with disciplinary action … this will include deactivation of card and may lead to termination.”

Brown and Rahman said “strict enforcement” of purchasing policies started in July 2021, which coincided with the OIG investigation. Marable described DWSD as “cooperative” during the audit, saying leaders in the department carefully digested the findings and agreed to make corrections as suggested. 

DWSD provided training to employees and plans to submit its policy changes to the Board of Water Commissioners for approval “in the coming months,” Peckinpaugh said.

State law requires public funds to be spent only for public purposes. DWSD allows six senior managers to use a corporate credit card for merchandise, travel and other expenses related to its business, but department policy prevents credit cards from being used on personal expenditures, cash advances, entertainment and other private uses prohibited by the Michigan Credit Card Transactions Act. 

The audit notes incomplete expense reports can represent a violation of law if payments are made before expense reports are reviewed and approved. The law regulates credit card use by local units of government. 

Employees who use a corporate credit card for official travel are required to pay out of their own pocket for any additional personal time. DWSD acknowledged two unrelated instances where two employees, on separate occasions, stayed an additional night using the corporate credit card and later reimbursed DWSD.

DWSD did not provide OIG investigators with a list of employees who received gifts wrongfully purchased with corporate credit cards as part of its initiative to increase morale, the audit notes.

The OIG determined the lack of documentation suggests DWSD “does not have an effective control at preventing the misappropriation of gifts.” The audit doesn’t include details on the gifts and how much they cost.

The OIG also concluded that the DWSD credit card policy lacks clarity on what kinds of purchases aren’t allowed. For example, the policy doesn’t define furniture or equipment. 

Another problem outlined in the report deals with documenting purchases and proving what was bought. 

DWSD provided 116 expense reports completed between July 2019 and June 2021. Only one was fully completed and filed on time, the OIG audit found. The OIG determined 107 expense reports covering 456 transactions were missing approval signatures and 98 reports were not filed in a timely manner. 

“The Finance Department did not consistently enforce the expense report requirements of the DWSD Corporate Credit Card Policy to ensure the expense reports were complete, timely and properly supported,” the OIG audit states.

Some expenses were filed months later than required. The OIG noted that DSWD policy lists conflicting dates for when expense reports are due, which could cause confusion and lead to reporting delays. 

The audit found 85 transactions did not include supporting documentation to confirm the items purchased, while 13 transactions included hotel reservations, but not a detailed receipt for the hotel stays. Seven transactions included receipt totals that didn’t match what was charged on the credit card statement. Some cardholders also made purchases that should have been subject to a competitive bidding process under DWSD’s procurement policy, according to the audit.

Overall, the OIG found 17% of purchases didn’t have supporting documentation and 9% of transactions without supporting documents didn’t include sufficient detail of the purchases.

“The absence of adequate supporting documentation for purchases, and the lack of disciplinary action when cardholders failed to comply with the policy, results in a greater risk that fraudulent, abusive or wasteful purchases will go undetected,” the OIG audit states. “It is important to note that without detailed supporting documentation, there is no way to ensure the purchases were for legitimate DWSD business.”