00:00:00:00 - 00:00:50:04 Chairman Vaughn Good afternoon. It is 2 p.m., and I call to order the March 26th, 2025 meeting of the Texas Transportation Commission Audit Subcommittee. Note for the record that the public notice of this meeting, containing all items on the agenda, was filed with Secretary of State at 4:43 p.m. on March 18th, 2025, at least seven days prior to the meeting, in accordance with Government Code 551.044. At this time, I would like to ask that before we begin today's meeting, we place all cell phones and other communication devices in silent or off mode. All speakers should turn them on and say the name and title for speaking. Thank you. With that, I will now turn the meeting over to our Chief Audit and Compliance Officer, Parsons Townsend. 00:00:50:05 - 00:01:01:00 Chief Townsend Thank you, Chairman Vaughn. At this time, I ask for everyone's full attention to the screen as we show the Greer building safety video describing emergency exits and other emergency procedures. 00:02:22:00 - 00:02:24:00 Chief Townsend With the safety briefing completed, I'll turn the meeting back to you, Chairman Vaughn. 00:02:24:01 - 00:02:29:00 Chairman Vaughn Thank you. Now we will open with comments from my fellow commissioner, Commissioner Meade? 00:02:29:01 - 00:02:31:00 Commissioner Meade Thank you, but I've got no comments. 00:02:31:01 - 00:02:49:00 Chairman Vaughn No comments. I do not as well. So we will proceed. We'll now consider the approval of the minutes from the December 16th, 2024 Quarterly Audit subcommittee meeting. Draft minutes have been provided. Do I have a motion to approve the minutes as presented? 00:02:49:01 - 00:02:51:00 Commissioner Meade I move to approve. 00:02:51:01 - 00:02:53:00 Chairman Vaughn Second. All in favor, say aye. 00:02:53:01 - 00:02:53:07 Commissioner Meade and Chairman Vaughn Aye. 00:02:51:06 - 00:02:59:01 Chairman Vaughn Motion carries. Now I will turn the meeting back over to Chief Townsend. 00:02:59:02 - 00:03:56:00 Chief Townsend All right. Thank you. Moving to agenda item three, I will present the summary of updates to global internal audit standards and the Audit and Compliance Charter. The Institute of Internal Audit, also known as. The IIA, has recently updated their professional standards for internal audit practices, which are now called the Global Internal Audit Standards. The IIA is an international professional association with more than 260,000 members, established in 1941, and is the leader in standards certification, education, research and guidance for the world for internal audit practices. State agency internal audit functions are required by Texas Government Code 2102, The Texas Internal Auditing Act, to follow these professional standards. The new global standards went into effect January 9th, 2025, and currently our internal audit and advisory service functions follow these standards. These standards help internal audit functions achieve the principles and fulfill the purpose of internal audit. 00:03:56:01 - 00:04:35:10 Chief Townsend As identified in the Texas internal audit, Texas' ability to create, protect, and sustain value by providing the Texas Transportation Commission and TXDOT's Executive Director with independent, risk-based and objective assurance, advice, insights, and foresight. Next slide please. The new standards are organized into five domains with 15 principles, 52 standards, and a new requirement called topical requirements and newly established essential conditions, which help govern the internal audit function and importantly, the relationship between the Commission, the Chief Audit and Compliance Officer and the Executive Director. 00:04:35:11 - 00:05:55:00 Chief Townsend Previously, the standards were presented as multiple elements within a larger framework and a set of non-mandatory elements known as implementation guidance. So this kind of streamlines how that was formally presented and updates it for our world today. The 15 principles are broad descriptions of related groups of requirements within each domain. While the 52 standards include mandatory practices for internal auditing, considerations for implementation, examples of conformance with the standards. The new topical requirements outline specific activities that the internal audit function has to follow with specific subject matter. So as an example, the, currently there's only one topical requirement required by the standards and it's called cybersecurity. So if we were to do an engagement involving cybersecurity we would have to follow the specific procedures outlined in the topical requirement, or document our rationale for not following those activities. The topical requirements do provide us flexibility in how we can implement them. As an example, we can put it on our annual risk assessment and apply it to our entire audit plan as a whole for the year, versus applying the procedures to each individual audit that we conduct. Our plan is to apply it to the audit plan as a whole, to show conformance with those standards. And then the essential conditions again dictate how we'll operate. Going to the next slide. 00:05:55:01 - 00:07:04:00 Chief Townsend So we had performed a gap analysis to identify what actions we need to take with these new standards. We identified 44 actions covering 25 of the 52 standards that needed to be taken to ensure conformance with these new standards. Presented on the screen is a summary breakdown of those actions. This includes changes to the Audit and Compliance Charter, the Texas Transportation Audit Subcommittee Charter, which that will be presented at future dates and meetings for approval. Examples of some of the actions that we took, with our standard operating procedures include requirements to report any such violations of legal or regulatory issues. Declaring impairments to independence to all appropriate parties. Updating job descriptions for auditors, exercise of due professional care, confirming to the Executive Director and to the Commission as a whole, our organizational independence and updating quarterly reports as examples. Most of these conditions for the Chief Audit and Compliance Officer to carry out involved essential conditions, which I'll go into detail in another slide. Next slide please. 00:07:04:01 - 00:08:04:00 Chief Townsend So domain three is governing the internal audit function which encompasses standard 6.1 through 8.4. This is where those essential conditions live in the new standards. Again these essential conditions cover key areas... are we authorized by the Commission? Are we positioned independently in the organization? You know, are we overseen by the Commission to carry out the internal audit and compliance function? These new essential conditions have been activities that TXDOT's internal audit and compliance function have been carrying out for multiple years. We have had strong support from Marc and his team and previous Executive Directors, from that, the internal audit function and strong support from the Commission and the Audit Subcommittee. TxDOT's internal audit program is one of the more mature in the state, is provides guidance and help to other internal audit functions, not only within the state of Texas, but also nationwide as a member of AASHTO. So I'd like to take Craig and your team for the work that y'all do in helping us get there. 00:08:04:01 - 00:10:41:00 Chief Townsend Thank you. All right. Next slide please. So here on the next slide is just examples of what those essential conditions that the subcommittee is expected to carry out. Again as I've described, these are items that we already do by approval of our audit and compliance charter, these carry out a large checks the box. Which include appropriate authority, role and responsibilities of the function, and the Chief Audit and Compliance Officer's appropriate organizational independence, access to data, information, personnel, to the Commissioners, to the Chairman, to Marc. Also, it's to outline how we interact with each other, to share any concerns about risk, operational strategies, so that the internal audit function can provide value to both the Commission and to the Executive Director. I'll go to the next slide to specifically identify. These are new elements to those essential conditions that the Commission or the Audit Subcommittee will have to approve for us. One of the new changes of the standards is a focus of not just conformance with how audit work is performed and documenting the audit work, it's also with the performance of the audit function itself. So we'll have performance measures that will be approved by the Commission or the Audit Subcommittee with input from the Executive Director and how we would operate. Those will be updated annually to ensure that we are meeting that purpose and that mandate for the internal audit function. Also, formal approval of the audit and compliance strategy and how in future years, we plan to keep growing and continuous improvement in those functions and again, external quality assessments. So with the changes of the new standards and potentially with the new changes to the Texas Internal Auditing Act, we would switch our internal audit peer review from three years to five years. Currently, under state law, we are required to follow red book and yellow book, which is generally accepted government auditing standards, which puts us what we call an orange shop, where we get reviewed every three years. But the change allows us greater efficiency and having to do it every five years. Compliance division's external audit function will still be on a three year rotation. So but with that, with those plans and those performance metrics and the strategy, we would bring it to the Audit Subcommittee for formal approval. But we'll have those discussions before those documents are provided. So with that, that's a brief summary of what those new standard updates look like. Essential conditions. I've had conversations with Marc about senior management's role in these and I believe we're on the same page with and concerns again, a lot of these activities, about 98% of them we've been doing for a very long time. So any questions or anything else I can provide? 00:10:41:01 - 00:10:44:00 Chairman Vaughn No questions from me, I think. 00:10:44:01 - 00:10:52:00 Chief Townsend So at this time we will move to agenda item for the Compliance Division update. Cheryl Durkop, Division Director will go through items A and B. 00:10:52:01 - 00:13:01:00 Director Durkop Good afternoon Chairman Vaugh, Commissioner Meade. The compliance division is to presenting a summary of investigations for the second quarter fiscal year 25, as well as the results of an advisory service report on the right of way utility audit process. The summary of investigations includes compliance and EEO investigations. Overall, for the quarter, we received 194 allegations through the TxDOT Watch Hotline or direct contact with the compliance or HR employee. We continue to see an increase in reporting from TxDOT employees as well as the general public, which we definitely see is a positive trend. We initiated 41 investigations in Q2 and substantiated 29 of the 36 investigations that we closed, resulting in a substantiation rate of 81%. During the second quarter, we continue to see multiple cases of substantiated vehicle misuse. We did substantiate four cases this quarter that included vehicle misuse, resulting in the resignation or termination of four TxDOT employees. Also significant, this quarter, we conducted multiple investigations for falsification of medical provider documentation, which included falsification of FMLA documentation and falsification of doctor's notes. We also completed an investigation of illegal dumping in the Fort Worth District. The investigation section, placed cameras and the TxDOT material staging areas and monitored them for several weeks. We did identifying members of the public and third party entities were illegally dumping either household trash, roadway debris, etc. We were able to capture images of both vehicle license plates and individuals unloading materials from their vehicles, and the information was turned over to the Wise County Sheriff's Office and TCEQ for further investigation. Any questions concerning the summary investigations? 00:13:01:01 - 00:13:13:00 Chairman Vaughn What is our role or do we follow up on... or submit something to local enforcement? We follow up on that? 00:13:13:01 - 00:13:24:00 Director Durkop Yes, we do. And in this with the illegal dumping, we are actually part of the South Central Texas Regional Environmental Task Force, along with TCEQ and local law enforcement agencies. 00:13:24:01 - 00:13:26:00 Chairman Vaughn Thank you. 00:13:26:01 - 00:15:19:00 Director Durkop Yes. Okay. What you're seeing here is the results of investigations that were closed during the quarter, organized by allegation category. Workplace harassment does continue to be the most common allegation investigated. Followed by misuse of state resources. Our misuse of state resources, this quarter did include multiple cases of vehicle misuse, as well as misuse of state time and state equipment. We did have several third party investigations and included lapse in insurance, the illegal dumping case, and an inappropriate communications with the homeowner by a Right of Way appraiser. Are there questions about the okay, great quarterly, allegation categories. All right. Next we have, is substantiated allegations by category of the past 18 months. What you're seeing here, each bar reflects six month and two quarters. In general, a data paints a similar picture to what we see in the quarterly data. Workplace harassment is consistently the most common substantiated allegation, and it has increased over the last two quarters. So bearing in mind that the best case scenario is, of course, zero allegations, TxDOT does have over 12,000 employees. We are currently working to establish benchmarks for TxDOT, as well as for comparison to other institutions. Yes. I can't tell you that our substantiation rates for the workplace harassment investigations are inline with what we see, on a national and local level, with the information we have. 00:15:19:01 - 00:15:34:00 Chairman Vaughn Well, we've talked about all of these, violations in the past, but but I know y'all working on that. You focused on it. 00:15:34:01 - 00:16:41:01 Executive Director Williams So, yeah, it's something that we're, you know, I don't I don't want us to be at all complacent about it, but I, you know, the thing that we've been talking to with, Parsons and Cheryl on this is understanding our ability to benchmark ourselves against other entities. And it sounds like we feel like we're not any worse than other entities, which, again, I don't I don't want to be complacent, feel like, hey, that's where we need to be. We certainly want to hold ourselves to the highest standards. But, you know, if we if we're kind of reflecting the national average in this area, you know, we we at least have an understanding of where we stand. And. Yeah, for what I've seen about it, you know, in fact, you know, if you look at some of the national statistics that, you know, which would suggest that, you know, on average it's about one per 100 employees, you know, over the course of a year. and our rates are better. 00:16:41:02 - 00:16:41:05 Chairman Vaughn Good. 00:16:41:06 - 00:16:47:09 Director Durkop Yeah. We're at 0.05 per 100 employees. 00:16:47:10 - 00:16:55:13 Chairman Vaughn Okay. Very good. 00:16:55:15 - 00:18:35:00 Director Durkop External audit recently completed an advisory service review on the right of way utilities audit process. Several opportunities were identified to help improve efficiency and to reduce the current audit backlog within the right of way utility audit process. We did look at the entire audit process with a focus on right of way's audits of the final billing packet to release the initial 10% retainage. Opportunities were identified to help reduce duplicated efforts within the audit process, through better record management and training. As of September 2024, the audit backlog contains 246 unpaid billing packets, with an estimated $25.6 million in retainage. Of these 44 billing packets fall below $150,000, totaling $443,000 in unpaid retainage. The right of way management is considering a non-audit threshold for determining when a final audit is necessary, to release the final retain. Keeping in mind high risk areas such as Buy America. Right of way has developed an implementation plan to evaluate and streamline the current audit process and compliance will be performing a follow up with them in six months to a year, to see and assess the progress they've made on creating, increasing efficiencies of their process. Are there any questions on the right of way utility audit? 00:18:35:01 - 00:18:35:03 Chairman Vaughn No, Thank you. 00:18:35:04 - 00:18:47:00 Chief Townsend Thank you, Cheryl. At this time we will move to agenda item five, the internal audit division update. Craig Otto, division director will go through items A and B. 00:18:47:01 - 00:20:46:00 Director Otto Thank you, Parsons. Good afternoon. We'll start off with the management action plan follow ups status. One thing I'd like to, I guess open up and stress. There's nothing new in regards to audits that are on this. There have been a couple changes. In particular, priority one, I did have in addition, last time we spoke about this, there were none in there, but the utility accounts payments engagement, was not able to be, reduced in regards to risk or closed. So there was a three pilot district, project that was put out there and we, went out and looked at it and we had it was roughly about 45% of some of the meters still had not yet been confirmed in most of the pilots. But what's, good about the process is that this is going to continue now across the rest of the 22 districts. So Carl Johnson is going to work with the districts to make sure that he can get out there and start implementing this pilot process. And we will, as we get later into the fiscal year, continue to be evaluating how that progress is going. I think it's always important to get that independent, objective point of view to help Carl and and Marc and his team, understand kind of the progress is being made. Again, we've we've talked about this in the past. It's a it's a, process that's going to take some time. And it has been confirmed, with other DOTs as well as other states. So, you know, happy to report that there's not necessarily any new audits on here. But again, do want to call that one change. And in regards partly to maps, the orange are we saw a reduction in three. Those were all closed. Which is good news. It's not necessarily they reduced the risk, but they were actually closed. So again, looking forward to continuing to work with with our business partners. I believe the number that I had, just to give you all some perspective, there's there's 21 past new MAPs, and we've written hundreds, with the business. And again, that it would incorporate the greens and yellows as well. So what you're seeing here just, you know, the, the reds and oranges, just to give some perspective on that, are there any questions relates to the management action plan follow-up? 00:20:46:01 - 00:20:49:12 Chairman Vaughn I have no questions. Go ahead. 00:20:49:13 - 00:23:48:00 Director Otto And we have one audit that you'd like to discuss next. Regards to district local letting. This was a audit that made our plan, and when we discussed this with Marc, Marc asked us to move it up. Just to kind of gain some perspective on the increase in regards to the threshold of $300,000 that was moved to $1 million. I was happy to see that we were able to get people actually out participating in these local outings. Our teams are actually embedded within these districts a little different than the state wide letting process that we often see, early in the month. These can be spread throughout the month. So I had team members from my team, embedded in there, and we followed through with the districts and actually observed the process. And what we basically did is identified areas in three primary themes. As you can see on the slide, preletting, big opening and post letting. And we did see, areas, definitely that, you know, needed some improvement. A lot of it surrounding to is, you know, just the knowledge, these things are frequently done. Some could just be one project. You could have multiple projects on various different days. But one of the things that we saw was there was kind of a consistency in some of the gaps and working with the maintenance division, who really provides the oversight to this process. They are looking, and currently will be, incorporating as part of the management action plan, more of a hands on process, especially as it relates to the paper bids. Again, the electronic process is oftentimes better controlled, because of of the how the process works. But in some cases where we did see, some paper bids come in, there are definitely things that we want to make sure that we continue to look at and shore up in regards to security, those, of course, making sure they're, they're being accounted for, across the board, again, helps provide, you know, the transparency and genuineness of the process, which is which, of course, so, so important to the districts. We did see, based on the increased threshold from the $300,000 to $1 million in about four months that, this over this period of time and from when that threshold took place, here in the in the districts, there were an additional 169 projects. So, you know, as that threshold increases, you are going to see an increased, amount on these. And we've gotten an excellent cooperation, both from the districts and the maintenance division in regards to spearheading corrective actions, relatively quickly. And we appreciate, you know, Carl, Jessica, Marc's, you know, cooperation in regards to helping us put perspective on this. There is potential, of course, with to stop going across the street that, you know, the threshold may increase again. So I think we're getting out in front of it. And, you know, hopes that in the near term, these changes will be made. And, you know, we could potentially entertain that ability to to move forward with the higher threshold. Are there any any questions as relates to the district local lighting audit? Again it is a priority two and we'll keep you apprized of that the management action. 00:23:48:01 - 00:24:01:00 Chairman Vaughn That's what I was going to ask is when could we expect an update on this? Because it sounds a little concerning. I know it's something that theoretically should be fairly quickly modified. 00:24:01:01 - Director Otto In the next few months, I believe there is a management plan in April and June 2025. So I would expect as we get towards the end of this fiscal year, we will be out in the field again providing everyone with an update on that, including Marc. 00:24:14:07 - 00:25:00:00 Executive Director Williams So I made it clear to the districts, you know, they these are not the results I would want us to see. And so, if districts are going to be able to maintain their ability to do local lettings, then they have to correct this. If they do not, then that particular district or whichever districts, don't, I fully expect that they will address these. But any of those that do not, their lettings will need to be handled in Austin until they demonstrate the ability to, to manage this. So this was, you know, not the results I was expecting to see. And so I've made that clear in my communications with the, with the district teams. 00:25:00:01 - 00:25:02:00 Chairman Vaughn So you've talked all districts? 00:25:02:01 - 00:25:09:00 Executive Director Williams I've spoken to Lance and Carl and they have followed up with the districts. 00:25:09:01 - 00:25:09:05 Chairman Vaughn "We" have...[laughter] 00:25:09:06 - 00:25:20:00 Director Otto We have, yes, the I mean, we have that with each of the individual districts, the 17. That's what my team will do as well to help support administration. Well, so. 00:25:20:01 - 00:25:20:05 Chairman Vaughn. Thank you. 00:25:20:06 - 00:25:28:00 Chief Townsend Thank you, Craig. With all the agenda items completed, I turn the meeting back to you, Chairman Vaughn. 00:25:28:01 - 00:25:50:00 Chairman Vaughn At this time we will recess to executive session in accordance with Government Code Section 551.071 and 551.074. For the record, the time is 2:25 p.m. 00:25:53:01 - 00:26:12:05 Chairman Vaughn We will now reconvene open session. For the record, the time is 2:44 p.m.. The final item on the agenda today is your approval of the annual compensation of the Chief Audit and Compliance Officer, by Minute Order. Do I have a motion to approve the minute order? 00:26:12:16 - 00:26:14:00 Commissioner Meade I make a motion to approve. 00:26:14:01 - 00:26:22:00 Chairman Vaughn Second. The Minutes Order is approved as presented. This concludes the agenda for today. Are there any other comments? 00:26:22:01 - 00:26:22:05 Commissioner Meade No comments from me. 00:26:22:06 - 00:26:36:00 Chairman Vaughn We plan to conduct the next Texas Transportation Commission Audit Subcommittee meeting on May 20th, 2025. If there is no other comments, may I have a motion to adjourn? 00:26:36:01 - 00:26:37:00 Commissioner Meade I motion to adjourn. 00:26:37:01 - 00:26:40:00 Chairman Vaughn I second the motion. All in favor, say aye. 00:26:40:01 - 00:26:42:00 Commissioner Meade and Chairman Vaughn Aye. 00:26:42:01 - 00:26:49:00 Please note for the record, the time is 2:45 p.m.. This meeting stands adjourned.