INTERNAL AUDIT REPORT

ERATIONAL AUDIT

DELEGATION OF AUTHORITY

ANUARY 2019 – JULY 2020

SSUE DATE: NOVEMBER 18, 2020

REPORT NO. 2020-15

INTERNAL AUDIT

Agenda Item No.: 10a_attach_2

Meeting Date: January 24, 2023

Delegation of Authority

TABLE OF CONTENTS

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

Background ............................................................................................................................................................. 4

Audit Scope and Methodology ............................................................................................................................... 5

Schedule of Findings and Recommendations ....................................................................................................... 6

Appendix A: Risk Ratings ....................................................................................................................................... 9

Delegation of Authority

Executive Summary

Internal Audit (IA) completed the Delegation of Authority audit for the period January 2019 through July

2020. The audit was performed to evaluate internal controls to assure monetary and contractual

delegation compliance with rules, policies, and dollar limitations governing redelegations by the

Executive Director to staff.

The Port of Seattle’s (Port) Delegations of Authority schedule EX-2A specifies limits of authority for

conducting day-to-day business transactions. Limits are established based on the individual’s business

needs and are typically commensurate with the individual’s title/position in the company.

In general, we concluded that Port management’s internal controls are operating effectively. We

did not identify any issues that warranted reporting.

This audit employed a unique approach. While we conducted the audit using protocols consistent with

Internal Audit Standards, we partnered with the Strategic Initiatives Department so that any

recommendations resulting from the audit could then be implemented, leveraging the knowledge and

insight gained from the audit experience. We also invited Mr. John Okamoto to participate in weekly

status meetings and considered his subject matter knowledge and expertise.

Delegation limits are generally established by balancing risk and efficiency. Transactions that represent

significant financial risk typically receive governing body approval, while delegating to management

those of lesser value, to execute unilaterally. Due to the scale of the capital program at the Port, and the

burden placed on various teams, w

e believe the Port has an opportunity to re-evaluate the $300,000

limit from the Port Commission to the Executive Director. This is reflected as an efficiency opportunity

and is discussed in more detail on page six and seven.

1) In March 2010, the Port’s Delegation of Authority limit was established at $300,000. The limit requires

Port Commission approval for expenditures that exceed $300,000. Re-evaluating the limit using a

risk-based approach could result in increasing the limit, thereby allowing the Commission to maintain

a more strategic focus while providing greater autonomy for the Executive Director and staff to carry

out day-to-day business.

We extend our appreciation to Port management and staff for their assistance and cooperation during

this audit.

Glenn Fernandes, CPA

Director, Internal Audit

Responsible Management Team

Dave Soike, Chief Operating Officer

Nora Huey, Director, Central Procurement Office

An efficiency opportunity is where controls are functioning as intended; however, a modification would make the process more efficient.

Delegation of Authority

Background

The Port’s Delegation of Responsibility and Authority to the Executive Director (ED), as amended June

13, 2017, incorporated Commission Resolutions 3605, 3628, and 3704, and established general

redelegations from the Commission to the ED. Policy EX-2 captures the ED’s administrative, monetary,

and contractual redelegations of his authority to Port staff. The Policy specifies the responsibilities of the

Central Procurement Office (CPO), Executive Leadership Team Members, Delegates, Directors, and

Managers. Similarly, Policy EX-2A redelegates non-monetary authority from the ED to Port staff.

The Delegations of Authority Schedule EX-2A specifies the limits of authority to Port staff for conducting

day-to-day business transactions. Limits are established based on the individual’s business needs and

are typically commensurate with the individual’s title/position in the company. The 43-page schedule is

organized by business unit (Aviation, Legal, Maritime, etc.) and lists the role and action that a

title/position is authorized to take.

Delegation limits are generally established by balancing risk and efficiency. Transactions that represent

significant financial risk typically receive governing body approval, while delegating to management

those of lesser value to execute unilaterally.

Delegation structures should not only require governing body approval for transactions that meet a

certain financial threshold. For example, publicly traded companies require board approval to

repurchase stock or issue a dividend. Board approval is also required for a merger or acquisition.

Government Agencies are no different. For example, government oversight boards may want to review

and approve business-critical transactions that impact the agencies’ mission. For example, the Port

Commission may want to approve efforts that promote social responsibility or impact environmental

sustainability although they may not exceed the delegated limit.

Traditionally, the governing body (board of directors, commission, council, etc.) establishes policy and

allows management to carry out the governing body’s mission and policy directives. The governing body

then evaluates the Chief Executive Officer (CEO) or ED’s performance against those measures.

This audit employed a unique approach. John Okamoto, under the direction of the Port’s Chief Operating

Officer, Dave Soike, provided outside expertise and perspective. Mr. Okamoto serves on the Executive

Review Panel and provides recommendations, to the ED and the Commission, related to the

International Arrivals Facility. Mr. Okamoto has unique expertise and knowledge in policy oversight and

large-scale capital project development, both as a management consultant and through his experience

serving as a senior executive in the public sector at the Port of Seattle, Washington State Department

of Transportation, and the City of Seattle.

Larry Ehl, Executive Chief of Staff and Director of Strategic Initiatives and Mandela Thomas, Process

Improvement Manager, participated in status update meetings where audit results were reviewed. Mr.

Thomas will help management implement recommendations after the audit concludes.

Delegation of Authority

Audit Scope and Methodology

We conducted the engagement in accordance with Generally Accepted Government Auditing Standards

and the International Standards for the Professional Practice of Internal Auditing. Those standards

require that we plan and conduct an engagement to obtain sufficient, appropriate evidence to provide a

reasonable basis for our findings and conclusions based on our engagement objectives. We believe that

the evidence obtained provides a reasonable basis for our findings and conclusions based on our

engagement objectives.

The period audited was January 1, 2019 through July 31, 2020 and included the following procedures:

Policy and Procedure Review

• Reviewed foundational documents, including the Port’s Delegation of Responsibility and

Authority to the Executive Director, as amended June 13, 2017, Policies EX-2 and EX-2A, and

Schedule EX-2A.

• Reviewed CPO’s policy/schedule communication, training, and monitoring processes.

Data Analysis

• Analyzed major construction contract and service agreement data. Used this data to determine

the number of items requiring Commission approval and measured the percentage of spend

within financial groupings (refer to Table 2 on page six).

Management Interviews

• Conducted interviews with management and staff from various departments to gain anecdotal

evidence of the time and resources required to compile material and to present to the

Commission seeking authorization.

• Gauged staff’s general understanding of the delegation schedules, monitoring and ratification

processes, and training opportunities.

• Elicited feedback, using open-ended questions, to identify opportunities that may improve the

limits and delegation process.

Benchmarking

• Obtained delegation limits/schedules for comparison from several Government Agencies in

Washington State.

• Obtained best practice information from various sources, including the California multi-city

agencies Capital Improvement Plan (CIP) benchmarking report.

Substantive Tests

• Selected six major construction contracts, four service agreements, and three purchase orders

exceeding $300,000 and determined whether commission approval was granted, and if the

contracts/agreements, related amendments, service directives, or change orders (if any), were

authorized within the limits reflected in the schedule.

• Reviewed the ratification log and supporting documentation to determine whether the

responsible executive member was aware, provided justification, and took corrective action.

Delegation of Authority

Schedule of Findings and Recommendations

In March 2010, the Port’s Delegation of Authority limit was established at $300,000. The limit

requires Port Commission approval for expenditures that exceed $300,000. Re-evaluating the

limit using a risk-based approach could result in increasing the limit, thereby allowing the

Commission to maintain a more strategic focus while providing greater autonomy for the

Executive Director and staff to carry out day-to-day business.

Prior to entering into an agreement, Commission approval is required for contracts that exceed

$300,000. Table 1 reflects contracts that were executed over the 19-month period ending July 31, 2020.

Commission approval was required for 74 contracts and represent 98 percent of the overall spend.

Table 1:

Major Construction / Service Agreements

# of contracts

Amount

% of Spend

> $300,000

$598,831,699

98%

< $300,000

136

$10,063,130

210

$608,894,829

100%

Table 2 reflects the number of contracts and the percent of spend within financial ranges. If Commission

delegated authority increased from $300,000 to $1,000,000, Commission approval would still be

required for 95 percent of the overall spend.

Table 2:

Major Construction / Service Agreements

Contracts

Amount

% of Spend

>$10,000,000

$418,496,152

69%

$5,000,001 - $10,000,000

$73,677,331

12%

$3,000,001 - $5,000,000

$63,031,110

10%

$1,000,001 - $3,000,000

$25,113,715

$300,001 - $1,000,000

$18,513,391 3%

$0 - $300,000

136

$10,063,130

210

$608,894,829

100%

We also performed limited benchmarking with other Government Agencies in Washington State. This

information is not intended to illustrate why the Port’s limits should be increased. Rather, it provides a

reference point for comparison that may be useful when evaluating current delegated limits.

Agency

Governing Body

Delegate

Amount Delegated

King County

9-member council

King County Executive

No limit

City of Seattle

9-member council

City Mayor

No limit

Sound Transit

18-member board

Chief Executive Officer

$5,000,000/$2,000,000

Northwest Seaport Alliance

10-member commission

Chief Executive Officer

$300,000

Port of Seattle

5-member commission

Executive Director

$300,000

Port of Tacoma

5-member commission

Executive Director

$300,000

*Council approves a budget (King County – biennially; City of Seattle – annually). Management is not required to obtain Council approval if the

contract amount is within the Agency’s adopted appropriation authority.

** Sound Transit’s delegations limits are dependent on type of contract.

1) Efficiency Opportunity

Delegation of Authority

King County has a biennial budget that is approved by the 9-member council. Part of the budget process

includes approval of the CIP, which details out the major capital projects for the year and the related

spend. The City of Seattle has a similar process, whereby its budget and CIP approval is the key

authorization mechanism from the governing body. The Port also has an annual budget and CIP that is

approved by the governing body. However, the Port has an additional control, by which, prior to any

contract over $300,000 being executed, approval of the Commission is needed. Memos and PowerPoint

Presentations are prepared for this, and the average Memo is revised 30 times with various touchpoints

within the Port and approximately 15 hours is spent on each iteration of the Memos

In September of 2018, Sound Transit passed resolution R2018-40 to ensure that the Board’s time was

optimized on key issues facing the agency. This resolution delegated up to $50 million to the Standing

Board Committees for contracts, agreements, and real property agreements. It also delegated, up to $5

million to the CEO for the approval of competitively procured construction contracts and architectural

and engineering services contracts, and up to $2 million to the CEO for the approval of competitively

procured materials, technology, and other services contracts.

Internal Audit also conducted interviews with several business leaders at the Port. During these

interviews, we asked for feedback on the time and resources used to prepare materials for Commission

authorization. We commonly heard that an inordinate amount of time is spent gathering information,

revising material, and preparing for Commission presentations.

Recommendations:

Based on our discussions with management, review of data, and benchmarking with other organizations,

we recommend that management work with the Commission to identify if the current process and

thresholds can be modified to maintain or increase transparency and governance, while alleviating part

of the burden on staff. Sound Transit held an open public meeting in 2018, as part of a board workshop,

prior to making substantial changes to their delegation of authority. Where possible, the Port should also

consider leveraging standing committees to achieve efficiencies and increase transparency.

Internal Audit also advocates applying a risk-based approach, to determine items that require full

commission attention. Risk factors not only include financial exposure that the Commission is willing to

delegate to management, but should also include non-financial factors, such as social, environmental,

reputational or regulatory elements.

If limits are raised, we also recommend frequent (monthly) and robust reporting to the Commission and

the public. This approach would allow for a “passive approval” while preserving Commission oversight

and transparency. Raising the limit could also result in management spending more effort on “value

added” activity and simultaneously allowing the Commission more time to maintain their strategic focus.

Management Response/Action Plan:

We concur that this audit found that the Port’s Delegation of Authority controls were operating correctly

and that no concerns were found. An opportunity for greater efficiency was noted and we agree that

efficiencies could be gained with a risk and lean based approach to raise the overall, and/or selected

aspects, of the delegation limit to the Executive Director (ED). The impact of delegations spans many

employees across operations, capital, and corporate functions, and ranges through staff levels, to

management and executives, and all the way to the Commission. Increasing delegation limits may speed

staff work, and ultimately may free up Commission’s time for other important and strategic work.

September 27, 2017 Aviation Program Management Group Study of 26 Commission Memos. Unaudited directional Information.

Delegation of Authority

The management staff’s fully detailed response and recommendations cannot be identified within ten

days, as research and data analyses are necessary to determine if current thresholds can be raised

along with providing added transparency and governance control. The intention of any added

transparency controls would to be alert the Commission and ED of situations where relative significant

risk would not otherwise be raised. For example, adjusted existing or new procedures may alert the

Commission and ED to important scope changes in construction, professional service contracts, or

significant purchases of goods.

Determining an optimum balance of delegations and transparency involves many processes and internal

controls that reach to a large portion of the Port’s workforce across the wide number of departments

involved. The audit looked at capital, consultant contracts, and purchase of goods and services. Just

capital work itself involves a large segment of the Port’s workforce, so the potential for internal staff

efficiency gain may be significant.

Our objectives will be efficiency for processes and those involved, along with public transparency for the

Commission and ED, while considering higher delegation levels in various instances.

The initial focus areas for our research and analyses will include:

1) Establishing a port-wide team across relevant departments and business units.

2) Identifying and resolving gaps between existing and benchmarked transparency procedures and

controls and what may be needed with higher delegations, in addition to seeking input from the

Commission and ED.

3) Considering necessary ‘checks and balances’ of controls for increased delegations.

4) Evaluating delegation level options, considering risks, and test for balance against transparency

and efficiency needs; updating and interacting with the Commission and ED regarding

recommendations.

The broad team will help ensure any recommendations work within the level of ongoing operational,

capital, consulting, purchasing, equity, environmental, technology, and all other work of the Port.

We recognize that with the COVID-19 pandemic, and its uncertainty, has placed added burden on

employees. The workload of Port employees has shifted to having to balance the needs of home and

work throughout long days. However, staff are resilient and flexible, and will want to get this right to gain

efficiencies. With those factors in mind, staff will report progress back to the Commission and ED by

the end of Q1, 2021.

DUE DATE: 3/31/2021

Delegation of Authority

Appendix A: Risk Ratings

Findings identified during the audit are assigned a risk rating, as outlined in the table below. Only one

of the criteria needs to be met for a finding to be rated High, Medium, or Low. Findings rated Low will be

evaluated and may or may not be reflected in the final report.

Rating

Financial

Stewardship

Internal

Controls

Compliance Public

Commission/

Management

High Significant

Missing or not

followed

Non-compliance

with Laws, Port

Policies,

Contracts

High probability

for external audit

issues and / or

negative public

perception

Requires

immediate

attention

Medium Moderate

Partial controls

Not functioning

effectively

Partial

compliance with

Laws, Port

Policies

Contracts

Potential for

external audit

issues and / or

negative public

perception

Requires

attention

Low Minimal

Functioning as

intended but

could be

enhanced to

improve

efficiency

Mostly complies

with Laws, Port

Policies,

Contracts

Low probability

for external audit

issues and/or

negative public

perception

Does not

require

immediate

attention