TABLE OF CONTENTS

REPORTS OF THE STANDING COMMITTEES

AND OTHER COMMITTEES

 As Considered by

The Council of the City of Toronto

on February 2, 3 and 4, 1999

AUDIT COMMITTEE

REPORT No. 1

1Auditor General's Office

City of Toronto

REPORT No. 1

OF THE AUDIT COMMITTEE

(from its meeting on December 1, 1998,

submitted by Councillor Doug Mahood, Chair)

As Considered by

The Council of the City of Toronto

on February 2, 3 and 4, 1999

  1

Auditor General's Office

(City Council on February 2, 3 and 4, 1999, adopted this Clause, without amendment.)

City Council on December 16 and 17, 1998, deferred consideration of this Clause to the next regular meeting of City Council to be held on February 2, 3 and 4, 1999.

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(Clause No. 1 of Report No. 2 of The Audit Committee)

The Audit Committee recommends that:

(1)City Council continue with the present City Audit structure which includes a direct reporting relationship through the Audit Committee to Council and not establish a separate Auditor General's office; and

(2)the matter be reviewed in December, 1999.

The Audit Committee submits the following report (November 5, 1998) from the City Auditor:

Recommendation:

It is recommended that City Council continue with the present City Audit structure which includes a direct reporting relationship through the Audit Committee to Council and not establish a separate Auditor General's office.

Background:

The Strategic Policies and Priorities Committee received the following transmittal letter from the Audit Committee:

That City Council adopt, in principle, the establishment of an Auditor General's office and:

(1)request the Chief Administrative Officer and the City Auditor to prepare a report on the timing and establishment of an Auditor General's office; and

(2)include the Agencies, Boards and Commissions under the purview of such office.

City Council struck out and referred this Clause back to the Audit Committee, "for further consideration, in conjunction with a report from the City Auditor regarding the City of Ottawa model."

Comments:

City of Ottawa Audit Model:

Prior to the restructuring of the City of Ottawa's audit function in 1997, Ottawa's Audit Department reported directly to the Chief Administrative Officer. The audit process at that time was designed to serve both City Council's governance needs for audit assurance and the need of corporate management to identify opportunities for improvement based on objective assessments. The Department had the mandate to advise both City Council and Senior Management on the efficiency, economy and effectiveness of management policies, practices and controls. The scope of the work encompassed all aspects of the City's operations, including financial, administrative, operational and organizational. The objectives of the Department were twofold:

(a)first, to provide assurance to City Council on the adequacy of controls, managements compliance with regulation and policy and the reliability and adequacy of information; and

(b)to provide Senior Management with recommendations for improvement.

City Council at that time were concerned about the limitations on the independence of the audit function in that:

(a)the Chief Administrative Officer and the Committee of Department Heads could exercise administrative control over the Audit Department (e.g., budget guidelines, staffing of positions, etc);

(b)the Chief Administrative Officer could direct that particular audits be included in the Audit work plan. These specific audits would not necessarily relate to priority issues identified by the City Auditor; and

(c)the City Auditor, as a Department Head, participated in Corporate decision making. These decisions might subsequently be subject to audit. Similarly, Audit Department staff participated in, or led, various Corporate initiatives.

In addressing these concerns Council determined that the organizational independence of the audit function could be enhanced by:

(a)direct presentation for approval of the audit budget to the Audit Committee;

(b)authority with the City Auditor to staff within the approved budget and complement;

(c)discretion to do audit work requested by the CAO resting with the City Auditor and the Audit Committee;

(d)performance evaluation of City Auditor undertaken by the Audit Committee;

(e)the City Auditor no longer participating on the Committee of Department Heads; and

(f)Audit staff not participating in the leadership of Corporate initiatives.

In considering the above, the City of Ottawa considered two options for a more independent audit structure. These options were the establishment of an:

(a)Office of the City Auditor; and

(b)Office of the City Auditor General.

Office of the City Auditor:

The first option envisaged an Office of the City Auditor reporting directly to the Audit Committee and through to Council. Its mandate would be similar to the previous mandate of the City Auditor, i.e. providing service to both Council and to senior management.

Other details in relation to this option were as follows:

(a)the City Auditor has no reporting relationship to the Chief Administrative Officer;

(b)the City Auditor reports directly through the Audit Committee to City Council;

(c)the budget for the Office of the City Auditor is presented directly to the Audit Committee by the City Auditor and recommended to City Council by the Audit Committee;

(d)the Audit Committee and City Council approve the work plan of the City Auditor and the Audit Committee monitors the performance of the work plan;

(e)the City Auditor is not a member of the Committee of Department Heads and does not become involved in significant Corporate decision-making; and

(f)The Office of the City Auditor does not participate in Corporate initiatives outside its mandate.

Under this model, the Office of the City Auditor still has both internal audit and legislative audit elements. The City Auditor includes in his work plan audits designed to assist management in maintaining a cost-effective control regime as well as audits on the accountability of the administration to City Council. Any audits requested by management are conducted at the discretion of the City Auditor.

Office of the City Auditor General:

The second option envisaged an Office of the City Auditor General. This Office would focus solely on auditing the administration for Council and would be required to distance itself completely from Management. It would not provide internal audit services to management and would not involve itself in any management initiatives.

The City of Ottawa adopted the Office of the City Auditor model. The City Auditor now reports directly to Council through the Audit Committee. It did consider, and rejected, adopting an Auditor General model for the audit function. Rather, the City took certain measures to increase the independence of the audit function while at the same time allowing it to serve management by including in its work plan, audits designed to assist management in maintaining a cost-effective control regime.

The cost of implementing an Auditor General model is the loss of auditor expertise and perspective on Corporate initiatives and, exclusion of the City Auditor from the management decision making group. The introduction of an Auditor General model will likely result in management's perception of the position as adversarial rather than advisory. Council must weigh the benefits of increased auditor independence against the costs of losing the expertise of the Auditor and his staff in Corporate decision making and on Corporate initiatives.

City of Toronto Audit Model:

The City of Toronto audit function parallels that of the restructured City of Ottawa audit function as well as a number of other municipalities in Canada and the United States.

City Council on July 29, 1998 approved a change in the Council Procedural By-law to provide that:

(1)the Audit Committee report directly to Council; and

(2)the City Auditor report to Council through the Audit Committee.

The by-law was amended to recognize the importance of the independence from management of the City Auditor. Prior to the amendment of the by-law the City Auditor reported to the Commissioner of Corporate Services. When the issue of the establishment of an Auditor Generals office was first raised at the Audit Committee, one of the major concerns related to the independence of the audit function. With the change in the Council procedural by-law this has now been addressed. In addition, the mandate of the Department was extended to include the Boards, Agencies and Commissions.

If Council were to adopt a completely independent Auditor General model immediate consequences in relation to the establishment of the Office would be as follows:

(a)The Auditor General would be required to terminate involvement in all corporate initiatives including:

(i)Year 2000 project

(ii)Client Identification Benefit System at the Social Services Division

(iii)SAP accounting system implementation

(iv)Police Services Board - Audit Advisory Committee

(v)Various accounting conversion processes

(vi)Assistance to the external auditor. This would have an adverse budgetary impact of somewhere in the range of $100,000.00

(b)The Department would not be available to provide advice or assistance to management in relation to areas of concern. Assistance in relation to audit matters such as the investigation of fraud, etc. would have to be provided from external sources and not by the Office of the Auditor General.

During the amalgamation transition process it is important that the City Auditor and his staff be available as a resource to management on a wide range of issues. Many of these issues involve day to day operating matters and over the past number of months have included such diverse issues as:

(a)preparation of request for proposal for external audit services;

(b)evaluation of responses to the request for proposal for external audit services;

(c)participation in the preparation of various Corporate policies and procedures;

(d)advice provided in relation budget variance reporting process;

(e)advice in connection with the analysis of financial statements from outside service providers;

(f)participation in the interview process for certain senior staff positions;

(g)training to staff in relation to budgetary controls;

(h)investigation in certain issues of management concerns;

(i)identification of issues relating to financial reporting; and

(j)participation in a Committee exploring the use of Corporate purchase cards.

The Chief Administrative Officer, as well as senior management requires an independent resource to address audit and financial related concerns on an ongoing basis. Because of its broad overview of the corporate picture, Audit Departments are generally called upon to provide advice and consultation on a wide range of issues, including accounting and procedural concerns, as well as broad operating and policy issues. It is important that this resource continue to be available to the senior corporate management staff. Adopting the Auditor General reporting model would compromise the benefits management receives from its audit function. Assisting management in resolving problems, as well as providing assistance in implementing change is one of the benefits of the current audit arrangements.

The Appendix to this report provides a brief description of the audit model used in various other cities. The degree of independence and reporting relationships in each city varies. At the most independent end of the range, particularly in the United States, is the elected auditor who reports directly to Council. The other end of the continuum has an audit function with appointed auditors who report to either a CAO or Board of Commissioners. Many of the auditors for large U.S. cities are elected and report to Council. By contrast there are no elected auditors in Canada and a number report directly to management while others report directly to Council.

Conclusion:

The general framework in which the City carries out its business is far different then that of the Federal or Provincial governments. The City government is an open one. All significant decisions in respect to staffing, awarding of contracts, purchasing of goods and services and other matters are either made by Council or within fairly restrictive guidelines laid down by Council. At the Federal and Provincial levels most of these decisions are made within the confines of Departments or Ministries or in private within the Cabinet structure.

In this context an independent Auditor General function is of significant importance. It is also important to understand that at both the Federal and Provincial levels individual ministries have their own internal audit functions to provide audit services to management. In the City of Toronto environment the City Auditor, while maintaining his independence, is able to provide assistance to management at his discretion.

In the audit context the issue of independence is of vital importance. This independence is embodied in the recent changes to the Council procedural by-law. The current structure at the same time provides the City Auditor with flexibility to assist management in issues of concern. For those Canadian municipalities with the same reporting structure as the City of Toronto, the ability to assist and work with management has been recognized as an effective component in the administrative control structure.

Contact Name and Telephone No.:

Jeff Griffiths, 392-8461.

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Appendix

Local Government Auditors Roles and Responsibilities

Canada:

City Auditors Who Report to Management:

City of Edmonton:

The title of the Auditor of the City of Edmonton is in fact, "Auditor General". However, his role and responsibilities are not that of a traditional Auditor General. The Auditor General in Edmonton reports to the City Manager and assists both the City Manager and City Council, in providing assurance to City Council that operations are managed with due regard to economy, efficiency and effectiveness.

City of Calgary:

The City maintains a Management Audit Department which assists management in the effective discharge of their responsibilities, by providing them with analysis, appraisals, recommendations and pertinent comments concerning the activities reviewed. The Management Audit Department reports to a Board of Commissioners.

Regional Municipality of Ottawa-Carleton:

The Internal Audit Department reports to the Chief Administrative Officer. Reports are provided to the Chief Administrative Officer. A summary report is provided for the information of Regional Council at the conclusion of each major project.

City Auditors Who Report to Council:

City of Ottawa:

The City Auditor reports directly to Council through an Audit Committee.

City of Regina:

The City of Regina through a by-law has appointed a City Auditor General who reports directly to Council. The City Auditor General is responsible for all internal audit functions of the City. The by-law provides for the City Auditor General to respond to audit requests from the City Manager.

City of Saskatoon:

The City maintains an audit function which reports directly to Council through the Audit Committee. The purpose of the Department is to assist the Administration and City Council in the effective discharge of their responsibilities.

City of Winnipeg:

The appointment of the City Auditor is governed by the City of Winnipeg Act. The City Auditor reports directly to Council and conducts work in accordance with a Work Plan approved by the Audit Committee. The City Auditor has the authority to comply with audit requests from the Board of Commissioners or Department Heads.

City of Montreal:

The City Auditor reports directly to Council through an Audit Committee.

United States:

Each of the following Cities has an independent audit function.

New York City:

New York has an elected Comptroller whose office includes Bureaus of both Financial and Management Audit. Audit reports are sent to City Council, the mayor and the Audit Committee.

City of Los Angeles:

The audit function is the responsibility of an elected Controller. The position reports directly to Council.

City of Detroit:

The City Auditor reports directly to Council. The Office performs audits of each City agency at least once every two years and performs special projects and other work as requested by Council, as initiated internally, or as required by City Code.

City of Seattle:

The City Auditor is appointed by Council. The Auditor has complete authority over the work to be undertaken and performs reviews in response to specific concerns or requests from the Mayor or City council members. If resources are available, the Auditor responds to specific requests from department heads as well as independently initiating reviews to fulfill the Department's mission.

City of San Jose:

The City Auditor is appointed by City Council and conducts and reports on audits as assigned by Council. The structure is similar to that of the City of Seattle.

City of Philadelphia:

An elected City Controller heads the Auditing Department which has broad authority and responsibility for protecting the public's interest in the handling of the City's money. The City Controller is the sole auditing agency of Philadelphia City Government as well as the auditor for the School District of Philadelphia.

The Controller is independently elected and, as an independent elected official, reports directly to the citizenry, not to City Council. The office does, however, respond to requests by both Council and the Administration, but must audit the Council and the agencies of the Administration every year.

City of Tampa:

The Auditor is appointed by, and reports directly to the Mayor. Audits are performed based on a risk assessment and audit time is made available for special assignments requested City Council.

Other Jurisdictions:

United Kingdom:

In 1982 the Government brought local authority auditing in England and Wales under the control of a single, independent body, the Audit Commission. Under the Local Government Act 1992, the Commission was given additional responsibilities in respect of the production of annual comparative indicators of local authority performance.

The Audit Commission aims to be a driving force in the improvement of public services by promoting proper stewardship of public finances and by helping local authorities to deliver economic, efficient and effective public services. The Commission has four main functions:

(a)appoint auditors to all local government and National Health Services bodies in England and Wales;

(b)to set standards for those auditors through the Code of Audit Practice;

(c)to carry out national studies designed to promote economy, efficiency and effectiveness in the provision of local authority and National Health Services; and

(d)to define comparative indicators of local authority performance that are published annually.

The Commission also is responsible for an organization called "District Audit", which it appoints to carry out many of the audits for which the Commission is responsible. District Audit operates as an arms-length agency.

Operating independently of government, the Commission is self-financing; its income derives largely from fees charged to local authority and National Health Services bodies for audit work and it receives no government subsidy.

Individual local authorities may have their own internal audit function established to assist elected officials and management in the effective discharge of their responsibilities.

New Zealand:

New Zealand has a central Audit Office responsible for conducting the attest audits of all public sector organizations, including local government authorities. The Office issues opinions on the financial statements of the local governments and also reports to the management of each authority any areas of potential improvement identified in the course of the audit. In addition to the work performed by the New Zealand Audit Office, the City of Wellington, as well as other major cities in New Zealand, has an internal audit function that is included in it's Corporate Office. This office reports to senior management.

     Respectfully submitted,

DOUG MAHOOD

Chair

Toronto, December 1, 1998

 (Report No. 1 of The Audit Committee was adopted, without amendment, by City Council on February 2, 3 and 4, 1999.)