Attachment 1

Office of the City Auditor Quarterly Report – November 2004

Quarterly Report – November 2004

Office of the City Auditor

1.Introduction

This report provides an overview of the activities of the Office of the City Auditor (OCA) during the period of mid-August through mid-October 2004. For this period, the OCA isreporting on six audit projects and twoshort-term projects that provided assistance to others.

2.Issues and Observations

2.1Audit Committee Awareness

Since this is the first Audit Committee meeting following the 2004 election, this section of the report is intended to provide members of Council and Audit Committee with a basic outline of theroles and responsibilities of audit committees.The OCA will offer an in-depth seminar on the roles and responsibilities of audit committees to members of Council early in 2005.

Audit committees, as integral parts of corporate boards of directors, are playing increasingly important roles in the corporate governance process. The following points present some characteristics of effective audit committee members:

  • They recognize the significance of the audit committee’s responsibilities.
  • They are strongly committed to the success of the organization.
  • They are independent.
  • They have a reasonable degree of financial literacy.

The current structure of the City’s Audit Committee ensures that at least the first three of the four above characteristics are satisfied.

The City’s Audit Committee members are individuals with significant responsibilities in their communities in addition to their roles as Councillors. The committee membership rotation system used at the City of Edmonton ensures that Audit Committee members do not take on the extra work of the Audit Committee for their entire term of office. In addition, Audit Committee members use the services of the City Auditor to obtain information about financial issuesas required.

Differences between Private and Government Audit Committees

Governments have unique operating characteristics that differentiate them from other organizations. While publicly traded companies tend to focus on earnings reports, governments are focused on preparing and complying with their budgets and effectively offering programs and services to their constituencies. Effective government audit committees understand the unique characteristics of government and they understand how their organization is positioned in the current economic and political environment.

Every audit committee is charged with three fundamental responsibilities:

  • Overseeing the process related to the organization’s financial risks and internal control environment,
  • Overseeing financial reporting and monitoring, and
  • Overseeing internal and external audit processes.

City Council (including the Audit Committee), management, and audit need to work together to ensure that the City’s financial reporting, organizational functions, and monitoring are effective. Since the Audit Committee serves as an extension of City Council’s oversight function, it provides the highest leveloversight of the reporting and monitoring processes.

Distinctions between Internal and External Auditors

The primary distinction between internal and external auditors is the type of work they do. External auditors focus primarily on providing an opinion on the fairness of the financial statements, reasonable assurance about whether the financial statements are free of material misstatement, and schedules and standard reports that assist the client in meeting other legislative and contract requirements. They also provide tax advice, and communicate emerging accounting and tax requirements and recommendations. External auditors do not typically provide assessments of the effectiveness or completeness of an organization’s overall systems of internal control.As required by the Municipal Government Act, the City hires an external auditor to provide an audit opinion on the consolidated financial statements and municipal information returns.

Internal auditors, as agents of boards of directors (in the City’s case, City Council), focus primarily on systems of internal controls, the effectiveness and efficiency of operations, fraud and ethics investigations, cash handling audits, governance reviews, risk management, and proactive involvement in systems development (both technology and process). Internal auditors are responsible for evaluating and commenting on whether management’s objectives have been met, including the effectiveness and completeness of management’s systems of internal control. The City Auditor provides this service to City Council.

Working together, external and internal auditors provide organizations with the ability to more accurately assess their overall financial and operational positions. Internal and external auditors both focus on providing value-added services to their clients.

Independence

One of the results of recent events in accounting and auditing practices is the increasing emphasis on auditor independence. Without a high degree of independence (both real and perceived), audit reports will not be viewed as valid independent assessments of the effectiveness, efficiency, and economy of City operations. The consequence would be a decreased level of stakeholder confidence in the organization as a whole.

Independenceof the City’s internal and external audit functions is achieved primarily through organizational status (independence from management control) and adherence by audit personnel to the professional standard of objectivity.

  • Organizational Status: The City Auditor and the External Auditor have direct responsibility to City Council through the Audit Committee and rely on the City Manager for administrative support and cooperation during performance of audit projects. This direct reporting relationship to Audit Committee and Council ensures the independence of the internal and external audit functions and appropriate consideration of audit findings and recommendations. The City Auditor also relies on the City Manager for provision of administrative support services (accounting, personnel, information technology, etc.) to the Office of the City Auditor.
  • Objectivity: Audit personnel are not responsible for developing or implementing procedures, preparing records, or engaging in any activity that they would normally review and appraise and which could reasonably be construed as compromising their independence. In particular, audit personnel are not used as auxiliary line accounting or finance staff.

The OCA looks forward to continuing to work with Audit Committee and Council to help identify means of strengthening the City of Edmonton’s organizational performance as it seeks to better serve the citizens.

2.2Institute of Internal Auditors – Western Regional Conference

The Edmonton chapter of the Institute of Internal Auditors hosted a Western Regional Conference from August 29 to September 1, 2004 at the Westin Hotel.This conference was designed to share leading practices in the Professional Practice of Internal Audit with Internal Auditors from around the world.The conference featured expert speakers from across North America and attracted 243delegatesfrom across Canada, the United States, and as far away as Saudi Arabia.

Members of the OCA played a significant role in both the planning and delivery of the Conference.ToddHorbasenko is the President of the IIA Edmonton chapter and also participated in the planning of the conference in the role of Conference Publicity Chair.DavidWiun shared the evolution of the OCA as a member of a panel discussing the challenges facing internal audit.RosemarieChinchilla presented a session titled “Audit Implementation of Risk Assessments” based on the OCA’s experiences. Several other members of the OCA participated in conference preparation in a variety of roles.

Overall the conference was a resounding success and significantly contributed to the Professional Practice of Internal Audit in Edmonton.

3.Completed Reports

3.1Business Objective Review

In September 2004, the OCA completed the fieldwork on the Business Objective Review. During the Business Objective Review project, the OCA conducted a high level review of all Branch operations within the Administration to assess the degree to which business objectives are being achieved.

Branch operations were assessed against three criteria: risk management, performance measurement, and strategic alignment with corporate goals. This assessment facilitated sequencing of Branches for comprehensive audits. This sequencing is incorporated into the Long Term Comprehensive Audit Plan which also considered recent audit projects and organizational reviews.

Development of a comprehensive audit methodologyhas begunand will be applied to identified branches as sequenced in the Long Term ComprehensiveAudit Plan. The Long Term Comprehensive Audit Plan is reviewed annually to ensure that it remains relevant and that the higher priority branches are audited first.

3.2Information and Related Technology Assessment

The OCA, in its agent of change role, facilitated a Control Self-Assessment (CSA) of the City’s information and related technology processes.The assessment was based on the management model recommended by the Information Systems Audit and Control Association (ISACA), which outlines an international set of generally accepted Control Objectives for Information and Related Technology (COBIT).

Selected participants from the Information Technology Branch (ITB), Corporate Services Department undertook the preliminary assessment of each of the 34 high-level control objectives.The OCA planned, organized and facilitated two half-day sessions to validate the assessment results, and rate the maturity of the processes using the COBIT Maturity Model and anonymous voting technology.These sessions were attended by members of the Information Technology Management Team and the IT Business Partners, who provided input from a user perspective.

The self-assessment of information and related technology processes provided ITB with a snapshot of how their processes measure up in relation to international standards.Overall, processes exist at varying maturity levels for the 34 standards assessed.ITB’s goal was to rate themselves against ideal standards, so even where reasonable processes were in place or initiatives were in progress, action plans were developed as part of their continuous improvement process.Implementation dates for the action plans range from July 2004 to January 2006 depending on ITB’s priorities and resource availability.Both the action plans and the implementation dates are acceptable to the OCA.Positive feedback was received from participants both on the process used as well as the results achieved during this project.

3.3Edmonton Police Service Overtime Review

As part of the Edmonton Police Commission’s renewed efforts to improve accountability and fiscal effectiveness with the Edmonton Police Service (EPS), the Commission requested that the OCA conduct a review of overtime usage within EPS. The EPS Overtime Review was included in the OCA’s 2004 Audit Work Plan.

The objective of the review was to examine the EPS’s policies and management controls to determine whether or not they facilitate efficient, effective, and economical use of overtime. The OCA focussed on assessing the EPS’s overtime management through reviews of its policies, information reports, budgeting practices, and monitoring of overtime utilization.

Overtime management is a complex issue. It is influenced by many factors, including management controls, scheduling, staffing levels, and organizational objectives. EPS’s overtime expenditures currently represent 3.1 percent of the its personnel expenditures. Overtime is commonly incurred as a result of shift extensions, call-outs, special operations, and planned activities (e.g., Canada Day, Checkstops), as well as back-filling for vacancies, vacations and illnesses. From 1999 to 2003, total EPS overtime expenditures increased by 126 percent, from $1.8 million to $4.08 million.

The scope of the review focussed on the Patrol Services Bureau and the Investigative Services Bureau, which together accounted for 87 percent of the overtime expenditures in 2003. The review concentrated on overtime that was incurred as a result of operational decisions, not as a result of members attending court while off-duty. The EPS has experienced a continued reduction in court-time expenditures, with the expectation of further savings resulting from recent initiatives. The exclusion of court time from this review does not preclude it from being reviewed at a future date.

The OCA examined the historical overtime expenditures by division from 1999 to 2003, the related variance explanations, and the adequacy of the budget preparation process. The OCA then analyzed the 2003 overtime payroll data for patterns of use by rank, organizational unit, individual sworn members, days of week, and time of year.

To determine current overtime management practices, the OCA interviewed EPS managers and supervisors and reviewed the procedures in place. Next, the OCA assessed the adequacy of the policies, procedures, and available information reports.The OCA also assessed the EPS’s use of planned overtime to augment staffing at West Edmonton Mall and Whyte Avenue on weekends to control drinking-related activity.

The OCA also evaluated the appropriate use of and compensation for overtime by reviewing 670 overtime claims that were submitted in 2003. Of these, 543 overtime claims involved high overtime users from various units and 127 were randomly chosen from members in the Patrol Services and Investigative Services bureaus. From this sample, the OCA reviewed the supporting documentation (e.g., case files, duty sheets, and surveillance reports) for 132 overtime claims to confirm their validity.

The review led to 11 recommendations concerning various facets of overtime management, including formation of comprehensive policies, better information reporting, improved budgeting and enhanced monitoring of compliance to the overtime claims procedures currently in place. The OCA did not detect any instances of fraud in the sample of overtime claims reviewed.

The EPS has provided adequate action plans to address all of the OCA’s recommendations and anticipates that the action plans can all be implemented by December 31, 2005. The OCA believes that once the EPS improves its policies, information and monitoring, the EPS will be in a much better position to satisfy itself and others that it is using this resource efficiently, effectively and economically.

3.4Edmonton Economic Development Corporation

The OCA conducteda comprehensive audit of Edmonton Economic Development Corporation (EEDC) in 1999. In 2002, the OCA reviewed the status ofrecommendations that originated in the 1999 audit anddetermined that18 recommendations had not yet been fully implemented. In addition,two additional recommendations resulted from the 2002 follow-up.In July 2002, EEDC engaged PriceWaterhouseCoopers to review these recommendations and to assist EEDC management in developing action plans for implementation in 2003. EEDC implemented and provided staff trainingon the recommended changes and action plans in 2003 and early 2004.

In 2004, OCA completed an assessment of all 20 recommendations that dealt with purchasing; hosting and travel expenditure controls and procedures identified from previous audits and found that all recommendations had been adequately addressed by EEDC.

3.5Greater Edmonton Foundation Audit

The OCA undertook an audit of the Greater Edmonton Foundation (GEF) upon the request of City Council and with the cooperation of GEF based upon a mutually agreed upon Terms of Reference developed in March 2004. The audit objectives were to evaluate the effectiveness of GEF’s governance model and the effectiveness and efficiency of GEF’s service provision in fulfilling its mandate of providing lodge accommodations for low-income seniors.

The OCA found that the governance arrangements under which the GEF operates are not clear. The manner in which the Housing Act, Regulations, Lodge Exemptions Order, and Ministerial Order have been applied has resulted in a dual reporting relationship for GEF. This has created ambiguity regarding which party (the City or the Province) is the “functional authority” to whom they are accountable. This lack of clarity regarding “functional authority” contributes to poor communication and misunderstanding between GEF and the City. Conflicting signals from the Province and the City regarding GEF’s finances and service provision to seniors also impairs the development of effective long-term strategic planning.

GEF’s organizational structure and work groups suit the specific needs in servicing low-income seniors and are based on the knowledge and experience of GEF’s management. GEF’s organization is relatively flat with integrated work groups, but has limited flexibility due to a limited ability to cross-train team members to perform auxiliary functions.

The three newest lodges (Rosslyn, McQueen, and Ottewell) were located and designed in accordance with sound architectural principles and were constructed at somewhat over optimal size. The older lodges are sub-optimal in size and represent an opportunity for further consolidation in the future as they reach the end of their physical life.

GEF’s operations were compared in detail with three other Edmonton-area senior citizen housing providers. Operator A is a for-profit operator that has three lodges totalling 285 units. Operator B is a private non-profit operator that provides 145 units in one lodge. Operator C operates 259 units in six lodges. These operators were selected for detailed comparison because they operate in the same local industry.

The OCA found that GEF is reasonably efficient and effective in providing accommodation for low-income seniors. GEF effectively meets the needs of seniors and provides a high quality-of-environment which results in a high quality-of-life, while keeping costs near or below those of the other three housing operators mentioned above. However, potential savings of about $1.5 million annually have been identified in overhead, building maintenance, and building operations expenses. Pursuit of these cost savings and elimination of at least some of the identified “unique costs” would move GEF’s per diem operating costs closer to the Provincial average.