20080107McCormick rebuttal.pdf

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IDAHO PUBLIC
UTILITiES COMMISSlû.,
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPAN FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC SERVICE
TO ELECTRIC CUSTOMERS IN THE STATE
OF IDAHO.
CASE NO. IPC-E-07-8
IDAHO POWER COMPAN
DIRECT REBUTTAL TESTIMONY
OF
JEFF M. McCORMICK
,. ~
1 Q.Would you please state your name, address and
2 present occupation?
3 A.My name is Jeff McCormick. My business
4 address is 1221 West idaho Street, Boise, idaho.i am
5 employed by idaho Power Company as the Director of Audi t
6 Services.
7 Q.What is your educational background?
8 A.i graduated from California State Uni versi ty i
9 Hayward in 1992 with a Bachelor of Science degree in
10 Business Administration with an emphasis in Accounting.
11 Q.Would you please describe your business
12 experience?
13 A.i was employed with Coopers & Lybrand (now
14 PricewaterhouseCoopers) as an auditor from 1992 until 1995.
15 The primary responsibilities of my role as a Senior Auditor
16 included: budgeting, planning and administering audit
17 engagements on a diverse range of assignments; examining
18 financial statements for conformity with Generally Accepted
19 Accounting Principles; and evaluating internal controls.
20 From 1995 through 2000 i served in a number of finance roles
21 at pizza Hut, Inc. My experience there included internal
22 audit where i was the auditor for the Northwest Division.
23 In this role i ensured that financial controls were in place
24 and operating effectively at the restaurants and performed
25 training for division management on controls improvement.
McCORMICK, DI REB 1
idaho Power Company
~
1 My other roles at Pizza Hut, Inc. included Senior Division
2 Consultant, in which I analyzed period financial results and
3 resolved accounting issues for three of the company's
4 divisions, and Manager of Financial Reporting and
5 Consolidations, in which I was responsible for consolidating
6 and reporting the company's financial results to internal
7 management and to Pizza Hut Inc.' s parent company. I was
8 employed with DFS Group Limited, a travel retail company,
9 from 2000 to 2002 as the Manager of Corporate Reporting. In
10 this role, I analyzed internal financial reports for
11 significant variances to budget, prepared and reviewed
12 financial statements and was responsible for ensuring
13 complete and accurate reporting to DFS Group Limited's
14 parent company. From 2003 through April of 2007, I was
15 employed with Thoratec Corporation, a medical devices
16 company. In my role as Corporate Controller, I was
17 responsible for the overall accuracy of the company's
18 internal and external financial reporting, including
19 preparation and review of all financial filings with the
20 Securities and Exchange Commission. In addition, I was
21 responsible for managing the company's Sarbanes-Oxley
22 compliance program and ensuring that appropriate controls
23 were in place and operating effectively. In June of this
24 year, I joined idaho Power as the Director of Audit
25 Services. i am currently licensed as a CPA in the state of
McCORMICK, DI REB 2
Idaho Power Company
I'
1 California.
2 Q.What are your duties as the Director of Audit
3 Services?
4 A.I am responsible for" leading and developing
5 the internal audit function of Idaho Power to provide
6 ongoing assessments of the company's system of internal
7 control over operations, compliance and financial business
8 processes.
9 Q.Did you oversee Idaho Power's Audit Services'
10 review of the purchasing card expenses discussed in Staff
11 witness Vaughn's prefiled direct testimony?
12 A.Yes.
13 Q.What are purchasing cards and how are they
14 utilized at Idaho Power?
15 A.Idaho Power has a OneCard Solution Purchasing
16 Card (P-Card) program implemented for Company employees to
17 use for purchases. This program was implemented to replace a
18 variety of processes including petty cash, local check
19 writing, cash advances by check, expense accounts, open
20 vendor accounts, and certain purchase orders. The intent of
21 the P-Card is to allow the Company to better manage high
22 volume, low-dollar transactions and to improve cash flow
23 management by simplifying payments, reducing paperwork,
24 reducing processing expense, reducing multiple checks, and
25 providing a centralized listing of all expenses.
McCORMICK, DI REB 3
Idaho Power Company
f' ~
1 Q.How do P-Cards add value to Idaho Power's
2 operations?
3 A.P-Cards are commonly used by businesses to
4 cost-effectively administer and manage the purchase and
5 reimbursement of business related expenses. P-Cards allow
6 employees to make emergency purchases in the field and fund
7 business related travel expenses. Also, the use of P-Cards
8 for low dollar purchases allows the Company to avoid
9 creating individual purchase orders, receipts and invoice
10 payments for small items and facilitates tracking these
11 expenditures for budgetary and audit purposes.
12 Q.Staff witness Vaughn's testimony identifies
13 several areas of concern regarding P-Card use. Staff
14 recommends a disallowance based on those concerns. Can you
15 put the proposed disallowance into context?
16 A.Idaho Power's proposed 2007 test year
17 included total operating and maintenance expenses of $554.8
18 million. The total P-Card expenditures made during the
19 Staff's review period were $10.3 million dollars. Based on
20 a small sample of the $10.3 million, approximately $34,000
21 of non-mileage related expenses were questioned by the
22 Staff. These questioned expenses were extrapolated to
23 create a disallowance of nearly a $700,000. The remaining
24 P-Card disallowance of approximately $179,000 relates to a
25 disallowance of 50% of mileage reimbursements included in
McCORMICK, DI REB 4
Idaho Power Company
I'
1 O&M.
2 Q.What was Audit Services' involvement in the
3 Staff's P-Card expense review?
4 A.During the Staff audit conducted in
5 conjunction with this rate case, Staff raised several
6 concerns regarding propriety of expenses and compliance with
7 the Company's Policy. In response, Audit Services conducted
8 a review to address the specific concerns identified by the
9 IPUC Staff. Of the total $34,212.42 identified by Staff as
10 questionable expenses, Audit Services researched 81% of the
11 expenditures and reviewed the results in detail with Staff.
12 Q.What did Audit Services conclude on
13 completion of the review?
14 A.Audit Services concluded that all of the
15 expenses reviewed were in compliance with the Company's P-
16 Card expense policy and that there was no indication of
17 fraud for the expenses reviewed. Audit Services did note a
18 variance in documentation requirements between the P-Card
19 User Guide and the P-Card Policy which resulted in
20 additional review steps.
21 Q.How does Idaho Power minimize the potential
22 that exists for employees to misuse Company assets?
23 A.idaho Power has established an internal
24 control structure to promote a culture of honesty and
25 ethics. This control environment includes:
McCORMICK, DI REB 5
Idaho Power Company
"
1 Tone at the Top- Directors, Officers, and Management
2 have established a culture with a strong value system
3 founded on integrity. This is evidenced through consistent
4 and frequent messaging, the corporate mission statement,
5 corporate leadership ini tiati ves and training programs, and
6 actions of management.
7 Code of Business Conduct and Ethics (Code) - Each
8 employee of Idaho Power is accountable to adhere to the
9 Code. This is evidenced by the statement of acknowledgement
10 that each employee signs stating that they will comply with
11 the Code. The Code not only outlines legal requirements and
12 guiding principles but also sets forth the Company's
13 commitment to an ethical way of doing business. A Manager
14 of Corporate Compliance oversees the Code and is a resource
15 to employees.
16 Ethics Line- Several avenues exist for communicating
1 7 perceived ethical violations without retaliation. Suspected
18 violations may be reported anonymously through a third party
19 hotline, a website or internal resources. The third party
20 tools allow for direct reporting to the Board of Directors.
21 All received reports are promptly investigated and acted
22 upon.
23 Hiring and Promoting Appropriate Emloyees- Idaho
24 Power has established various proactive hiring and promotion
25 procedures to hire and promote qualified employees. These
McCORMICK, DI REB 6
Idaho Power Company
1 procedures include the use of detailed position
2 descriptions, targeted selection interview standards,
3 background investigations, drug testing and the
4 incorporation of regular performance reviews.
5 Sarbanes-Oxley (SOX) Comliance Program- As part of
6 the SOX Compliance Program, fraud risk is considered in
7 developing the key controls. These controls are evaluated
8 and tested as part of the SOX compliance program.
9 Anual Business Planning- Management performs an
10 annual business planning process each 4th quarter. In this
11 process, fraud risk factors to the Company are identified
12 and catalogued considering industry research,
13 brainstorming/focus group/ interviews, existing event
14 inventories, and process flow analysis. Results are
15 evaluated for identified fraud risk factors and presented to
16 senior management as part of the annual business planning.
17 Fraud Risk Assessment- The SOX Proj ect Manager
18 compiles a fraud risk assessment as part of the SOX
19 compliance program which is reviewed in detail with the Vice
20 President, Audit and Compliance and the Vice President,
21 Chief Risk Officer.
22 Q.How does Idaho Power's internal control
23 structure specifically limit the potential for employees to
24 misuse P-Cards?
25 A.Several monitoring controls have been
McCORMICK, DI REB 7
idaho Power Company
1 established to deter or detect errors specific to the
2 Purchasing Card Expense Process. A Manager must approve the
3 P-Card charges for their employee. Cost Center Managers
4 review cost center charges; which would include P-Card
5 expenses. Accounts Payable (AP) Team Members review P-Card
6 expenses to ensure receipts are provided and that they are
7 appropriate to support the expense. AP Team Members are
8 empowered to escalate any expenses to the AP Team Leader for
9 further review. Finally, the AP Team Leader, Finance Team
10 Leader, Vice President/Treasurer and Senior Vice President,
11 Administration/Chief Financial Officer all review and sign
12 off on the monthly P-Card reconciliation.
13 Q.What concerns, if any, do you have about the
14 auditing methodology used by Staff?
15 A.i would like to preface my remarks by saying
16 that I agree with Staff's decision to use a sample testing
17 method to examine the Company's P-Card expendi tures .
18 However, I do have a concern with the sampling methodology
19 used by Staff. Auditing Standards promulgated by the
20 International Standards for the Professional Practice of
21 Internal Auditing, Practice Advisory 2100-10: Audit Sampling
22 provides guidance on sampling methodology. For selection of
23 items, common sampling methods include Random Sample (a
24 statistical sample that ensures that all combinations of
25 sampling units in the population have an equal chance of
McCORMICK, DI REB 8
idaho Power Company
1 selection), Haphazard Sample (nonstatistical where items are
2 selected without following any structured technique, however
3 avoiding any conscious bias or predictability), and
4 Judgmental Sample (nonstatistical where items are selected
5 by bias and unlikely to be representative of the
6 population). All are accepted sampling methodologies.
7 However, if an auditor wishes to extrapolate findings to the
8 entire population they should select sample items in such a
9 way that a sample is expected to be representative of the
10 entire population. For a sample to be representative of the
11 population, all items in the population should have an equal
12 or known probability of being selected. Through discussions
13 with Staff, they indicated that they selected months and
14 employees where they expected to see issues, indicating a
15 judgmental sampling method was used.
16 Q.How does the sample size and related sampling
17 risk used by Staff impact the conclusions of the audit?
18 A.Auditing Standards promulgated by the AICPA,
19 specifically US Auditing Standards (AU) Section 350A,
20 provides guidance on sampling methodology and sample size.
21 The guidance addresses "sampling risk" which is the risk
22 that "auditors conclusions may be different from the
23 conclusions he/she would reach if the test were applied in
24 the same way to all items in the account balance or class."
25 As stated in the guidance, "sampling risk varies inversely
McCORMICK, DI REB 9
idaho Power Company
1 with sample size; the smaller the sample size, the greater
2 the sampling risk". Due to the high sampling risk combined
3 with the factors outlined in Staff's testimony and the
4 detail provided in Staff's work papèrs it does not appear
5 reasonable to utilize a 1.42% sample of P-Card envelopes to
6 conclude on the characteristics of the population.
7 Q.Can confidence be placed on the results of
8 Staff's audit of P-Cards?
9 A.No. The audit test was not designed in a
10 manner that would justify reliance on the results.The
11 1.42% of P-Card envelopes judgmentally selected for audit by
12 Staff is not a representative sample of the population. In
13 addition, too small of sample size can result in inaccurate
14 or invalid conclusions about the population. Judgmental
15 sampling methods have a high probability of producing a
16 biased conclusion. Based on the sampling methodology to
17 audit P-Card use, little confidence can be placed in the
18 conclusions reached by Staff.
19 Q.What additional concerns, if any, do you have
20 about the methodology used by Staff?
21 A. I have three addi tional concerns which
22 include: (1) Audit Standards provide guidance that the
23 Auditor should evaluate any possible findings detected in
24 the sample to determine whether they are actually findings
25 and, if appropriate, the nature and cause of the findings.
McCORMICK, DI REB 10
Idaho Power Company
1 Through the research done by Audit Services of the Staff's
2 findings, it is apparent that the expense justification in
3 the PassPort system was not reviewed, resulting in invalid
4 conclusions. As the evaluation of findings was incomplete,
5 the sample should not have been used as a basis for
6 extrapolation across the population, (2) this extrapolation
7 was not normalized for one time expenditures that occurred
8 in the sample population. This resulted in one time
9 expenses, such as $6,857 for an all employee breakfast,
10 $2,495 for a Conference for Corporate Involvement in
11 Corporate Citizenship and $714 for newspaper subscriptions,
12 . being counted multiple times as if they were recurring
13 monthly expenses, and (3) even if a valid sampling
14 methodology had been used, expenditures moved below the line
15 were not weighted by the relative dollar value of the
16 population examined. Specifically, Staff reviewed 100
17 envelopes representing $140,455 of P-Card expenditures and
18 calculated a disallowance percentage of 5.38%. Staff
19 reviewed an additional 51 envelopes representing $66,131 in
20 P-Card expenditures and calculated a disallowance percentage
2l of 15.68%. Staff Exhibit No. 102 (Line 10) shows these
22 items as equally weighted for an average percentage of
23 10.53%. The best practice, however, would be to weight the
24 percentage by the dollar amounts examined. As the $140,455
25 sample represents 68% of the total dollars reviewed, it
McCORMICK, DI REB 11
Idaho Power Company
1 should be more heavily weighted as more confidence can be
2 placed on the findings for the larger sample reviewed.
3 Q.What concerns, if any, do you have about Ms.
4 Vaughn's findings and expense exclusions?
5 A.In certain cases, conclusions drawn about the
6 propriety of expenses do not appear to be properly
7 supported. For example, Staff witness Vaughn's testimony
8 states that uP-Card statements are sent to each employee and
9 reconciled in a "packet" envelope that includes receipts
10 justifying the business nature of each expenditure." This is
11 not entirely accurate as the receipts are a support for the
12 expense, however business purpose and expense justification
13 are explained on-line in the PassPort system and Staff did
14 not review these explanations. As a result, several expense
15 items were noted as "f indings" and appear to be
16 misclassified in Staff work papers. Examples include a
17 $69.99 car wash to prepare a truck for transfer to another
18 department in lieu of purchasing a new truck, $2,022
19 classified as bottled water that was actually a per-diem
20 reimbursement for expenses incurred during construction
21 field work, and business meals classified as parties.
22 Q.What percentage of idaho Power's non-mileage
23 reimbursement related P-Card use has been called into
24 question?
25 A.Less than one-half of one percent, or
McCORMICK, DI REB 12
Idaho Power Company
1 $34,212, of the $9,701,479 in non-mileage reimbursement
2 related P-Card expenditures made during July 2006 through
3 June 2007 (as identified on Staff Exhibit No. 102). This
4 $34,212 is the basis for an extrapolated amount of nearly
5 $700,000 in O&M expenses moved below the line by Staff.
6 Q.In her testimony Ms. Vaughn is critical of a
7 number of specific business practices to which i will ask
8 you to explain. First, when does Idaho Power reimburse
9 employees for at home internet access?
10 A.At home internet access may be reimbursed for
11 employees who are on-call, such as Information Technology
12 help desk and system generation and transmission dispatch
13 personnel so that they can access the Company's systems from
14 home. This allows for much quicker responsiveness and fewer
15 after-hours trips to the office. The employee's Manager is
16 responsible and accountable for determining the
17 appropriateness and approving the expense.
18 Q.How does Idaho Power utilize newspaper
19 subscriptions?
20 A.Idaho Power utilizes local newspaper
21 subscriptions to stay abreast of new businesses, legal
22 notices, and legal publications of local ordinances and laws
23 that may impact the utility business or idaho Power
24 customers.
25 Q.When does Idaho Power reimburse employees for
McCORMICK, DI REB 13
Idaho Power Company
1 in-area meals?
2 A.Idaho Power will pay for meals that are
3 related to legitimate business purposes, for example meals
4 during critical functions such as firefighting, storm
5 damage, infrastructure maintenance, etc., regardless of
6 where they occur.
7 Q.How does Idaho Power reimburse employees for
8 expenses away from headquarters?
9 A.Due to the diverse nature of the work
10 requirements and varying locations that Idaho Power
11 employees are required to travel to the Company allows, by
12 policy, three expense reimbursement options for expenses
13 away from headquarters. Option 1 is Company reimbursement of
14 actual meal and lodging expense, option 2 is that the
15 Company will pay actual lodging expense plus a per diem of
16 $39 for meals, or, option 3 is that the Company will pay a
17 per diem of $70 a night for lodging and $39 a day for meals.
18 Q.How does Idaho Power monitor reimbursement of
19 employee vehicle mileage incurred on Company business?
20 A.Idaho Power reimburses employees for private
21 vehicle mileage incurred on Company business. The employee
22 must complete the "2007 Cash Advance Worksheet- Private
23 Veh~cle Mileage" form documenting the trip purpose, dates
24 and miles traveled. The employee is reimbursed using the IRS
25 mileage rate which includes fuel, maintenance, depreciation
McCORMICK, DI REB 14
Idaho Power Company
1 and other expenses.
2 Q.Are cash draws used for reimbursement of
3 mileage?
4 A.Yes, the employee can take a cash draw for
5 mileage reimbursement to allow for timely reimbursement for
6 expenses, simplifying payment and reducing check processing
7 fees. All cash draws must be properly supported, support
8 must be provided within the same period the cash draw
9 occurred and the expense must be approved by the employee's
10 Manager. If these requirements are not met the employee will
11 receive a deduction from their paycheck and Senior
12 Management will be notified through a monthly report.
13 Q.Did Audit Services note any items that were
14 deducted from the employee's paycheck during the review of
15 the IPUC P-Card concerns?
16 A.Yes, Audit Services noted three items in the
17 Staf f ' s sample totaling $237.42 where the employee's
18 supervisor determined that the expenses lacked proper
19 support and were subsequently deducted from the employee's
20 pay.
21 Q.Were these unreimbursed items extrapolated
22 appropriately in Staff's Exhibit No. 102, P-Card and
23 Personal Vehicle Mileage Moved Below the Line?
24 A.No. These items were not paid by idaho
25 Power. However, it appears S taf f as sumed they were and
McCORMICK, DI REB 15
Idaho Power Company
1 extrapolated these expenses as part of the $879,887.02 of
2 expenditures moved below the line.
3 Q.What are your concerns, if any, regarding the
4 methodology used by Staff witness Vaughn to disallow 50% of
5 the personal vehicle mileage?
6 A.There does not appear to be evidence that 50%
7 of the mileage is not a legitimate business expense. In
8 response to the Company's requests for specific details of
9 items reviewed by Staff in order to arrive at the 50%
10 disallowance of mileage reimbursements, only five items were
11 produced, three of which included mileage details. The
12 total mileage questioned in the three detailed instances was
13 3,114 miles, representing reimbursements of approximately
14 $1,386. The Company also requested detail supporting
15 testimony that mileage submitted for reimbursement was
16 inappropriately rounded up. In response, Staff witness
17 Vaughn noted that she had identified that more than 20% of
18 the mileage claims she examined were for mileage that ended
19 in "5" or "0", however, no specific details were provided
20 for the Company's review. I noted that of the three items
21 where Staff provided us with mileage details, none of them
22 ended in "5" or "0". Furthermore, as "0" and "5" represent
23 two, or 20%, of the 10 possible digits that mileage requests
24 can end in, the 20% cited does not seem unreasonabl e . It
25 appears that process concerns such as timeliness of
McCORMICK, DI REB 16
Idaho Power Company
1 reimbursement and perceived rounding issues were
2 extrapolated to the entire population. Additionally, Staff
3 used the same sample population and methodology discussed
4 earlier to examine mileage, which I 'believe was too small.
5 The disallowance of 50% appears arbitrary and is not
6 supported given the limited data examined by the Staff.
7 Q. Does the Company have adequate documentation to
8 support mileage reimbursement claims?
9 A.Yes. As noted earlier, the Company requires
10 that an employee complete the "2007 Cash Advance Worksheet -
11 Private Vehicle Mileage" form which details the trip
12 purpose, dates and number of miles traveled. I have seen
13 similar documentation requirements at Companies I have
14 worked at previously. Additionally, I have confirmed that
15 this documentation is compliant with the applicable
16 provisions of the Internal Revenue Code and associated
17 Treasury Regulations. I have also confirmed that the
18 Internal Revenue Service has not taken exception to the
19 Company's employee expense reimbursements, including
20 business mileage, during their examinations.
21 Q. Can you please summarize the results of Audit
22 Services' review of Staff's P-Card examination?
23 A. I would like to reiterate that our follow-up
24 research on items identified by the Staff as questionable
25 resulted in no indications of fraud and that all items
McCORMICK, DI REB 17
idaho Power Company
1 researched were in compliance with the Company's policy or
2 guidelines on P-Card usage. Addi tionally,I believe that
3 both the manner in which items were selected as well as the
4 extremely small number of items selected by Staff for their
5 examination, in combination with incomplete follow-up of
6 items identified by the them as questionable, do not provide
7 a reasonable basis for conclusions.
8 Q.In your opinion do the P-Card expenditures of
9 approximately $34,000 questioned by Staff represent
10 legitimate business expenses?
11 A.Based on my experience at other employers,
12 ,the expenses identified by Staff are commonly considered
13 legitimate business expenses.
14 Q.Staff witness Vaughn notes in her testimony
15 that, due to time constraints and the fact that
16 documentation is part electronic and part paper copy, the
17 scope of the Staff's P-Card audit was limited and suggests
18 that a more extensive audit of the Company's P-Card
19 expenditures should be conducted by Staff. Do you have an
20 opinion on her suggestion?
21 A.It is my understanding that the Staff can
22 audi t the Company's books and records when it deems
23 appropriate to do so. If the Staff desires to initiate a
24 single issue audit of the Company's P-Card expenditures the
25 Company would cooperate fully as it did in this case.
McCORMICK, DI REB 18
Idaho Power Company
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1 Without the time pressure of a pending rate case, I would
2 expect that such an audit would include larger sample
3 populations and take into consideration all of the relevant
4 supporting documentation as well as the Company's control
5 environment, procedures and policies.
6 Q.Does this conclude your direct rebuttal
7 testimony in this proceeding?
8 A.Yes, it does.
McCORMICK, DI REB 19
Idaho Power Company