Attachment 1

Office of the City Auditor Quarterly Report – September 2003

Quarterly Report – September 2003

Office of the City Auditor

Introduction

This report presents summaries of projects completed during the period of mid-June through early September 2003. As always, the OCA invites comments from members of Council regarding clarity and contents of this report.

Issues and Observations

Follow-up Process

The OCA has redesigned its follow-up process to better utilize the resources of both the Administration and the OCA and to ensure that all significant audit recommendations are monitored appropriately. The previous process relied heavily on the annual Audit Work Plan process, whereas the new process is standalone. The process is now integrated into the OCA’s project closure process, resulting in improved accountability. An outline of the process follows:

·  Planned implementation due dates will be entered into an electronic tracking worksheet during project closure.

·  In situations where status updates and documentary materials have been received, the OCA will make a decision on whether further follow-up is required.

·  Three to six months following the latest planned implementation date associated with the remaining projects, a follow-up memo will be sent to the primary contact(s) to determine the implementation status.

·  If adequate supporting information is supplied in the Administration’s response, then the project follow-up will be completed. Otherwise, additional verification work will be conducted.

·  A summary of follow-up results will be presented in the OCA’s quarterly reports to Audit Committee and Council. The summary will include project titles and disposition of associated recommendations or action plans. If, in the judgement of the OCA, implementation progress has not been adequate, that opinion will be communicated to Audit Committee.

·  If additional verification work results in new recommendations or action plans, they will be entered into the electronic tracking worksheet and followed up appropriately.

The OCA believes that this revised methodology will result in more consistent reporting of follow-up results and improved accountability for implementation of recommendations and action plans.

Audit Best Practices

The OCA has been actively promoting and investigating audit best practices in a variety of forums throughout the course of this year:

·  At the annual conference for users of SAP (the City’s financial system), an OCA staff member presented a session dealing with the use of ACL (the audit data extraction and analysis tool used by the OCA in investigations and other projects) in continuous auditing applications. The OCA is currently exploring the possibility of using ACL to facilitate some continuous auditing initiatives.

·  An OCA staff member participated as an instructor in three auditing courses sponsored by the Institute for Internal Auditors (Operational Auditing, Assessing Business Risk, and Writing High-impact Audit Reports).

·  Four OCA staff members attended courses offered by the Institute of Internal Auditors to enhance their abilities to carry out effective audit projects.

·  An OCA staff member participated in the National Association of Local Government Auditors’ Annual Conference, presenting a report on the process being jointly sponsored by the OCA and Management to implement Enterprise-wide Risk Management. The staff member also attended the Peer Review Workshop that allows members to better prepare for peer review evaluations of their office and to participate on peer review teams at other organizations.

·  Two OCA staff members met with representatives from the City of Calgary to share the OCA’s experience and to assist them as they begin the process of adapting Enterprise-wide Risk Management to their environment.

These activities help ensure that staff members remain current in their knowledge of audit best practices by participating in these events and by presenting their best practice experiences for the benefit of others in the audit industry.

Included in the best practices followed by the OCA are:

·  Concise and transparent audit, investigation, and reporting processes, including the report disclosure process.

·  Involvement in the adoption, promotion, and implementation of Corporate Business Risk Planning (elsewhere known as Enterprise-wide Risk Planning or Integrated Risk Planning).

·  Preparation of the Audit Committee Training and Awareness manual.

·  Participation in the development and delivery of corporate Economic Crimes Awareness and Project Management training courses.

·  Exploration of the benefits of automated continuous auditing methodologies.

·  Participation on corporate steering committees to provide best practice information and input regarding appropriate process controls (e.g., FOIP Steering Committee, Main-Link, Corporate Business Planning Team, CLASS implementation, e-Business, Emergency Preparedness, etc.).

·  Consultation with members of City Council and management teams in development of risk-based OCA Annual Work Plans.

·  Relationships between Edmonton’s OCA, Audit Committee, City Council, and the Administration are healthy, with each group recognizing the role and mandate of the others—a situation that is not enjoyed by a number of other local government auditors across North America.

The OCA continues to pursue audit best practices to further enhance its contribution to the City.

Completed Reports

Edmonton Composter Facility Review

In 1994, the City entered into a 30-year operating agreement with TransAlta to process 180,000 tonnes per year of municipal solid waste in the composter built, owned, and operated by TransAlta. TransAlta decided to sell the composter in 2000 and return to its core business. City Council approved an expression of interest in the amount of $95 million to $105 million based on the results of a valuation of the composter’s worth and authorized the City’s negotiating team to proceed with an offer to purchase. The City acquired the composter from TransAlta at a purchase price of $97 million and assumed ownership of the facility in June 2001.

In February 2002, the Audit Committee requested that the OCA include an operational review of the composter in its 2003 Annual Work Plan and that the City Auditor provide Council with terms of reference for this project prior to commencement of work. The Terms of Reference for the Edmonton Composting Facility were presented to and accepted by Council in April 2003.

The focus of the review was to review all the financial and engineering assessments used in the valuation of the composter and in the purchase decision. Also included in the project’s scope was a review of the current financial, operating, and engineering information that pertains to its current economic condition and any new initiatives being undertaken to enhance the value of ownership. Overall, the OCA found that the purchase price for the composter was a reasonable representation of value, given the information available and the assumptions used at the time of purchase.

Upon examining actual capital outlays, expenditures, and revenues for 2002, re-forecasted results for 2003, and projections for 2004 to 2010 as provided by management, a revised Net Present Value of $92 million was calculated. Since the revised NPV is less than the $97 million purchase price it is concluded the composter is uneconomical, unless changes are made. Changes to operating conditions and product quality requirements were the major reasons for higher than anticipated operating costs. The OCA believes that the composter can become economical by taking mitigating actions to increase production, increase revenues, and to decrease expenditures.

The OCA also observed that management is currently pursuing several options to improve the value of the composter and its economics. The OCA presented six recommendations to enhance the value of ownership and the economic returns of the composter. There is potential for the composter to be the foundation for a comprehensive waste management plan that could eventually eliminate the need for a landfill and provide ongoing profits from sale of recovered and converted materials. Management has accepted the recommendations and provided action plans to implement the recommendations that are acceptable to the OCA.

Budget Process Review (2003)

The OCA’s 2003 Annual Work Plan included participation in the review of the budget process being conducted by the Corporate Services Department. This project was designed to provide assurance that the City’s budget processes are consistent with the need for effective governance. It was also designed to identify optimizations of current processes to more effectively and efficiently manage resources and to better control activities, monitor and manage financial performance, and achieve required results.

The City of Edmonton faces the same budget challenges that are confronting many North American cities. As is the case for private and public sector organizations in general, the City is challenged with enhancing its budget process to more fully address governance and accountability matters.

The City’s budgeting process was compared with a guideline that the OCA developed from a wide variety of sources. It includes 36 better practice attributes that are characteristic of effective internal budget processes in the following categories: financial management environment, building an efficient and effective budget development process, and reviewing and managing financial performance. The OCA worked with Corporate Accounting, Budgets & Reporting Section to assess whether each better practice attribute identified was in place, in progress, ongoing, or referred for action and found the following:

Budget Process Category / Completed/ Established / In Progress / Ongoing / Referred for Action / Total
Financial Management Environment / 4 / 2 / 3 / 0 / 9
Building an Efficient and Effective Budget Process / 16 / 2 / 0 / 1 / 19
Reviewing and Managing Financial Performance / 4 / 2 / 1 / 1 / 8
Total / 24 / 6 / 4 / 2 / 36

In general, the City is in good position with respect to its financial management environment with a few areas for improvement noted. The budget process design is reasonably effective and efficient. Further process automation, integration of business planning and budgeting, and stronger focus on outputs would bring the City’s process into full alignment with international better practices associated with the budget development process. Improvements in financial reporting to operational managers, requiring commentary on performance issues, implementing performance-based budgeting, and incorporating operational performance information into the existing financial performance reporting mechanisms would allow the City to even more effectively manage its budgets.

Some of the better practice attributes are not primarily the responsibility of Corporate Accounting, Budgets & Reporting Section. The Section should, however, play the role of facilitator as Senior Management Team considers adoption and implementation of these attributes. The OCA will continue to work with Corporate Accounting, Budgets & Reporting to monitor progress in the development of the 2004 budget process, and advise on other opportunities where processes may be further optimized.

General Ledger Accounting Procedures–Journal Entry Review

This project was included as a carry-forward project in the OCA’s 2003 Annual Work Plan. The majority of the fieldwork was completed in 2002.

The City of Edmonton uses SAP/R3 to maintain its General Ledger. When updates to the general ledger are required, accountants use manual and automated entries called journal vouchers. These entries are used to post original transactions to different accounts or adjust and correct previously recorded transactions.

Journal Vouchers are a vital component of all general ledger accounting systems, providing accountants the flexibility required to account for unusual, non-recurring and non-system transactions or events. This flexibility also introduces additional risks since management’s internal control systems can be circumvented using journal vouchers. Because of the manual nature of journal vouchers, accuracy and propriety risks are also increased. Proper documentation, approval, and verification of accuracy of direct general ledger postings are key controls in general ledger accounting.

The OCA’s review focused on assessing and testing the controls surrounding the completeness, accuracy, and authorization of journal entry and/or account postings to the General Ledger. For the fiscal year 2001, 22,543 journal entries containing 131,484 line items were created. The OCA observed two control weaknesses in transaction processing.

The first was that a single transaction type was being used for both automated and manual journal entries, making it more difficult for reviewers to identify and monitor the manual transactions. The second was that the related accounting procedures specifying the manner in which journal entries are to be created, authorized, and documented haven’t been updated for since major process changes were implemented. The OCA made appropriate recommendations to the Corporate Services Department. The department accepted both recommendations and has developed action plans acceptable to the OCA.

Cash-Handling Review—Planning and Development 2003

The Office of the City Auditor (OCA), in conjunction with Corporate Services’ Finance Branch, selected six cash-handling projects for review in 2003. Projects were selected based on a number of criteria including estimated revenue, volume of transactions processed, cash-handling risk, date of previous audit undertaken in the area, if any, and history of problems and control weaknesses identified.

Planning and Development, with estimated annual revenue of approximately $1.5M, was selected for review this quarter based on these criteria. The objective of the review was to assess the level of compliance with established City policies & procedures for cash handling, and to evaluate the adequacy and effectiveness of controls over cash-handling at Planning and Development.

The review was limited to the cash handling practices at the Planning and Development customer service site in the AT&T Tower. At this site customers can purchase licenses, permits, planning services, maps, development services, and pay fines for bylaw violations. The OCA reviewed the physical security and cash handling at the site and conducted several audit tests to assess the adequacy and effectiveness of cash-handling controls. Areas reviewed included: (a) cash register equipment, vaults and skimsafes; (b) controls over floats; (c) refunds, voids, cancellations and no sales; (d) reconciliation of daily sales and deposit preparation; and (e) reconciliation and analysis of Cashier system point-of-sale data with SAP data.

The controls over cash handling were operating reasonably well. The OCA presented five recommendations to the Administration to strengthen their controls over cash handling. The OCA is satisfied that Management’s implementation plans will adequately address the control recommendations.

Investigations

Three investigations were completed during the reporting period. Because of confidentiality aspects of these investigations, no reports were issued to protect the privacy of those involved. One dealt with allegations connected with a resignation, another addressed an allegation made by an unsuccessful vendor, and the third dealt with a citizen complaint.