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HomeMy WebLinkAboutAudit Agenda - 2018-12-171 KI*NER Office of the City Clerk Kitchener City Hall 200 King St.W. - 2nd Floor Kitchener ON N2G 4G7 Audit Committee Agenda Monday, December 17, 2018 2:30 p.m. - 4:00 p.m. Council Chamber Page 1 Chair - Mayor B. Vrbanovic Delegations Pursuant to Council's Procedural By-law, delegations are permitted to address the Committee for a maximum of 5 minutes. • Item 2 - Matt Betik, KPMG Discussion Items 1. Audit Committee Orientation 2. FIN -18-043 - External Audit Planning Report for Fiscal 2018 3. CAO -18-020 - 2019 Internal Audit Work Plan Status Reports 4. CAO -18-021 - Fourth Quarter Audit Status Report Dianna Saunderson Committee Administrator (5 min) (15 min) (20 min) (30 min) ** Accessible formats and communication supports are available upon request. If you require assistance to take part in a city meeting or event, please call 519-741-2345 or TTY 1-866-969-9994 ** 0 U El i 0 W 0 N MIN to 1-1 Z O Q FZ Z W rc 0 1-2 l'-� �4n • ��=3 • E • E • a U CL 0 a O U v On 0 v a CL 1-3 V 0 rl L 4= }+ 3 i Q :3CL CL C C: O 2NOW-1-4 1 I Staff Repod Financial Services Department www.kitchener.ca REPORT TO: Audit Committee DATE OF MEETING: December 17, 2018 SUBMITTED BY: Sheri Brisbane, Supervisor Financial Reporting, 519-741-2200 ext 7349 PREPARED BY: Sheri Brisbane, Supervisor Financial Reporting, 519-741-2200 ext 7349 WARD (S) INVOLVED: All DATE OF REPORT: December 4, 2018 REPORT NO.: FIN -18-043 SUBJECT: External Audit Planning Report for Fiscal 2018 RECOMMENDATION: That the Audit Planning Report for the year ending December 31, 2018 prepared by KPMG, attached as Appendix 1 to report FIN -18-043 dated November 12, 2018, be approved. BACKGROUND: Item 3 (e) in the Audit Committee Terms of Reference states that one of the responsibilities of the audit committee is to "approve external audit plans". It is important to have open communication between the external auditor and the Audit Committee to ensure that both groups are kept up to date on changes in the organization, changes in the accounting/regulatory environment and their related risks. In KPMG's proposal to serve as the External Auditor, they committed to meeting with the Audit Committee twice annually. This is the first of those meetings for the 2018 year end. A second meeting will be held once their audit is complete to present results and offer an opportunity for questions. REPORT: KPMG will present their Audit Planning Report. Please see attached document titled "The Corporation of the City of Kitchener Audit Planning Report for the year ending December 31, 2018". ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN: The recommendation of this report supports the achievement of the city's strategic vision through the delivery of core service. FINANCIAL IMPLICATIONS: None at this time. Annual audit fees are provided for within the operating budget. *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. 2-1 COMMUNITY ENGAGEMENT: INFORM — This report and its attachment have been posted to the City's website with the agenda in advance of the committee meeting. It will provide the public with information to assist them in understanding the scope of the external audit to take place in the spring of 2019. The City's Annual Financial Statements as at December 31, 2018 and for the year then ended will be the subject of this audit. The 2018 audited financial statements, once completed and approved, will be posted on the City website and notice will be provided to all residents through the Kitchener Post in accordance with Section 295 (1) of the Municipal Act, 2001. 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V 9- �• r R!• R R R 1 rt rt` z z z a J a J Q Imm cc cc W O FM a X W W CC 2-30 Staff Report KIT( HEI�.TER Finance and Corporate Services Department www.kitchenerca REPORT TO: DATE OF MEETING: SUBMITTED BY: PREPARED BY: WARD(S) INVOLVED: DATE OF REPORT: REPORT NO.: SUBJECT: RECOMMENDATION: Audit Committee December 17, 2018 Corina Tasker, Internal Auditor, 519-741-2200 ext. 7361 Corina Tasker, Internal Auditor, 519-741-2200 ext. 7361 ALL December 10, 2018 CAO -18-020 2019 Internal Audit Work Plan That the 2019 Internal Audit work plan be approved as outlined in report CAO -18- 020 dated December 10, 2018. BACKGROUND: Internal Audit Goal The Effective and Efficient City Services priority within the City's Strategic Plan (2015 - 2018) places a priority on improving the design and delivery of city services, responsible stewardship of public funds and accountability, among other things. The overarching goal of internal audit is to protect the City's assets and interests, which supports these priorities. This includes, but is not limited to, protecting the long term health of the organization, its financial and physical assets, its reputation, its ability to perform critical services and the safety and well-being of employees and citizens. Internal Audit Services In order to fulfill the above goal the internal auditor provides two types of service in accordance with the Institute of Internal Auditors definitions: 1. Assurance services — which involve the internal auditor's objective assessment of evidence to provide an independent opinion or conclusions regarding an entity, operation, function, process, system or other subject matter; and 2. Consulting services — which are advisory in nature and are generally performed at the specific request of an engagement client. When performing consulting services the internal auditor should maintain objectivity and not assume management responsibility. *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. 3-1 Internal Audit Work plan The internal audit work plan outlined in this report consists of assurance services on topics that have been independently selected by the internal auditor. This annual plan will consist of compliance and controls audits, confidential investigations, and any other required independent analysis, including comprehensive reviews of a service or division. Some of the work plan items recur annually or bi-annually such as physical inventory counts, cash counts, employee expense audits and status updates of prior audits. Other one-time work plan topics may also be included. Audit reports on each work plan item will be presented to Audit Committee as completed. Under the Audit Committee terms of reference it is the Audit Committee's responsibility to approve this annual internal audit work plan. The internal auditor, along with other professional staff across the corporation, will also provide consulting services related to process reviews, capacity analysis, organizational structure analysis, risk assessments and value for money analysis as the need arises. These services are provided in order to aid staff in continuous improvement in the design and delivery of City services. These consulting services are not included in the work plan, approved by Audit Committee, or reported to Audit Committee. Summary reports on improvement initiatives and results will be presented to Council through other means. Typically between 20-30% of the internal auditor's time is spent on assurance services, with the remaining 70-80% being spent on consulting services. REPORT: 2019 Internal Audit Work Plan Audit Committee is asked to approve the 2019 Internal Audit work plan shown below as per the Audit Committee terms of reference. Audit Topic Type of Audit Hiring Transparency and Nepotism Compliance Overtime and On-call Pay Controls Arenas Status update Cash deposits Status update Market Status update Physical Inventory Count verification Confidential Investigations As required Definitions Compliance audit - A test to determine if staff is following all rules, regulations and policies associated with the service. Controls audit - An analysis and test of control points within a process to ensure that fraudulent activity can be eliminated or mitigated. 3-2 Status update — A check-in on the status of recommendations and benefits achieved from previous audits. Count Verification — Sampling physical inventory counts to verify the accuracy of staff physical inventory counts. Confidential Investigations — investigating staff or public complaints about any alleged staff wrong -doing including, but not limited to, fraud, theft, or inappropriate behaviour. Consulting Services The internal auditor will also be working on providing advisory and facilitation services as part of the following two significant reviews which are carried over from 2018. These are not part of the internal audit work plan and do not require approval. • Utilities (Gas, Water, Stormwater, Sanitary) — organizational structure review Development Services — comprehensive review with internal audit assistance being provided for the process review component ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN: This report supports the achievement of the city's strategic vision through the delivery of core service. FINANCIAL IMPLICATIONS: There are no financial implications related to this report. COMMUNITY ENGAGEMENT: INFORM — This report has been posted to the City's website with the agenda in advance of the council / committee meeting. ACKNOWLEDGED BY: Dan Chapman, CAO 3-3 I Y DC 0 3: J a z ccW FM Z a) TMI O N 3-4 O CL N N O C: O E 4-j 0 N a--+ w N V W-0 a--+ w O V O O V O cr � Q _0 •- ca V fB C: N • ca O � � E O O U U I I 3-5 � ^L Ca � cn N V Ca � Q O 0 I 4-J O CL N N O C: O E 4-j 0 N a--+ w N V W-0 a--+ w O V O O V O cr � Q _0 •- ca V fB C: N • ca O � � E O O U U I I 3-5 4--j c •- •0 U u '— O '> • v _0 +J O > i V1 a 0 +-a-a E >_ � � vi N Q +_+ �_ cn ._ - W OO E C o Q �, oc z U _ V O > N � C: N _0 V •� O w C N V V Q }' vi i N c: ca E O c � ca O vi 4-j � V +_+ U O �0 R ,w � O cin O Q O Ln N 3-6 N C6 N L El N L C6 O ro U N 4-J U N O a—+ ca bD a-+ N N C6 N 0 U 3-7 N N N 4-J 4-J 4-J U C6 0 C6 _0 C6 _0 •� E U 0 U cn ci cn ci cn ci N C6 N L El N L C6 O ro U N 4-J U N O a—+ ca bD a-+ N N C6 N 0 U 3-7 Staff Repan CAO s Office www.kirchenerca REPORT TO: Audit Committee DATE OF MEETING: December 16, 2018 SUBMITTED BY: Corina Tasker, Internal Auditor, (519)741-2200, ext. 7361 PREPARED BY: Corina Tasker, Internal Auditor, (519)741-2200, ext. 7361 WARD (S) INVOLVED: All DATE OF REPORT: December 9, 2018 REPORT NO.: CAO -18-021 SUBJECT: 4th Quarter Audit Status Report RECOMMENDATION: No recommendation required. The following information is being provided as an update and assurance on internal audit matters, in accordance with the Audit Committee Terms of Reference. BACKGROUND: The following report provides a summary of the Internal Audit assurance services completed during the period of July to November 2018 (the 3rd quarter audit committee meeting was cancelled due to lack of content). The chart below shows the audits contained in this report. Division / Topic Scope Physical Inventory Inventory Count Verification Hiring Transparency Follow up audit and status report Consulting work is also in progress on the following reviews: • Utilities (Gas, Water, Stormwater, Sanitary) — organizational structure review • Development Services — comprehensive review with internal audit assistance being provided for the process review component *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. C=I REPORT: 1. Physical Inventory Completed - October 30, 2018 Overview Stores is a section of the Procurement division. Stores staff operate a warehouse in the Kitchener Operations Facility (KOF). It contains commonly used parts, materials, and tools that other city staff need to perform their work. Some of the inventory is stored outside in the KOF yard (e.g. large pipe, catch basins, aggregates, salt, etc.) Stores staff perform an annual inventory of all parts and materials in order to ensure that financial records match the amounts on hand. Internal audit then counts a sample of parts to provide assurance that staff counts are accurate. This is a standard audit activity. Definitions Controllable stock - stock which the Stores staff have direct control over with regards to purchases and usage. Located within the warehouse. Floor -to -sheet audit — randomly selecting parts in the warehouse, counting them, and comparing the quantity to what is in the financial system (SAP). Sheet -to -floor audit — pre -selecting parts based on unit value or total value, counting them, and comparing the quantity to what is in SAP. This includes both warehouse and outdoor inventory. Shrinkage rate — the percentage of total inventory purchases that are written -down or lost due to factors such as theft, error, fraud, or damage. Uncontrollable stock - stock which is located in the KOF yard which are not under direct supervision by the Stores division. Write-down - the quantity on hand was less than what was recorded in SAP and therefore the financial records were decreased to match the physical quantity. Usually occurs when inventory is used without updating SAP. Write-up — the quantity on hand was more than what was recorded in SAP and therefore the financial records were increased to match the physical quantity. Usually occur due to keying errors when setting up or relieving inventory, or when the wrong unit of measure was used (e.g. number of cartons counted instead of individual parts). Audit Process and Findings Standard floor -to -sheet and sheet -to -floor audits were done to confirm the physical quantity of parts on hand compared to what staff had counted. The audit covered 23% of the total value of inventory. The sheet -to -floor audits covered the top 20 unit values and top 20 total values. The floor -to -sheet audits consisted of 20 random shelf locations. Three variances, which equates to 5% of the sample, were found through this verification process which resulted in a 4-2 $4,579 write-down. This is the lowest number and value of variances found through the audit process to date. Total Adjustments In 2018 the total adjustments for the year to date (up to October 30) were $112,360 write-down which represents 1.5% of the total inventory purchases for the year to date of $7.7 million. Industry standards indicate that up to 2.5% is an acceptable shrinkage rate. The ending inventory balance was $2,561,595. The 2018 total adjustment is lower than both 2016 and 2017 for the same period (January 1 to October 30) Year 2016 2017 2018 Total write-down $223,207 $280,528 $112,360 Controllable Stock Adjustments Of the 2018 adjustments, only $1,053 write-up was from controllable stock. The magnitude of these adjustments is much lower than 2017 and all previous years. (Note that positive numbers represent write-downs and negative numbers represent write-ups.) Year 2017 2018 Controllable stock write-down (write-up) (16,981) (1,053) Uncontrollable Stock Adjustments The remaining $113,413 of write-downs is related to stock which is outside in the KOF yard which are not under direct supervision by Stores staff. It is impractical to have dedicated staff monitoring the outdoor inventory on a 24/7 basis and therefore there is a reliance on staff to inform Stores when they take inventory from the yard. The write-downs are caused by City staff having unrestricted access to take the inventory for use in their jobs without notifying Stores staff to relieve inventory in the system. Many of the variances are related to aggregates and road building supplies (e.g. asphalt, gravel, etc.). These variances are much lower than in previous years. The lower variances are due to tightened controls for outdoor materials including increased monitoring of these products (i.e. catch basins, manholes, gas pipe, etc.). With the increased monitoring, the discrepancies between stock on hand in SAP and physical stock on hand have been lowered because Stores staff have been going back to the user departments for work orders to charge the missing materials to (where materials have been used but not charged out), prior to a large year end write-down. Ensuring the products are charged to the correct work orders on a more regular basis minimizes the large sum variances at year end. 4-3 In addition staff are moving forward with a new mobile timesheet initiative which should lower the discrepancies further by facilitating digital tracking for uncontrolled stock usage by work crews. Part of this project will have Stores prepopulating the material descriptions and part numbers directly into the timesheets being filled out to ensure what is being used is accounted for. One other thing to note which has contributed to lower the cost of write-downs in the Road Building Materials category (aggregates) is that the City is now producing recycled aggregate material from scrap generated from Operations/Utilities works. The cost of recycled concrete/asphalt aggregates is much lower than the cost of virgin material so even if large write-downs of tonnage exist the value is significantly lower than that of non -recycled products. The adjustments for uncontrollable stock included the following: (Note that positive numbers represent write-downs and negative numbers represent write-ups.) Material Group 2017 2018 Manholes & catch basins $30,923 $6,258 Road building materials $88,635 $20,886 Road maintenance supplies includes salt $122,200 $42,807 Seed, sod, fertilizer $31,420 $29,782 Sign shop $6,184 $10,496 Steel, aluminum, plate ($20,032) ($195) All other categories $29,688 $3,377 Total write-downs uncontrollable stock $289,019 $113,413 Overall, the physical inventory process is in control. Adjustments to controllable stock are considered negligible. Controls have been strengthened for uncontrollable stock and adjustments are considered very small regardless. 2. Hiring Transparency and Nepotism — follow-up and status update Date of original audit: December 22, 2011 Completed: October 15, 2018 Overview: As a government entity it is important for the City of Kitchener to maintain public confidence in the integrity of the City's hiring and employment practices. In order to do this the City needs to have a fair, transparent, and legally defensible recruitment process which is followed by all hiring managers. Internal audit reviewed the process control points and related compliance in 2011 and made several recommendations for improvement. Audit Objective: All services which have undergone a service review in the past are subject to a status update, not sooner than one year following the original audit. The purpose of status updates are to hold staff accountable for addressing the audit findings and to identify any areas that have not seen significant progress. In addition, if applicable, further testing or review may also be done to test whether improvements have had the intended effect. There are three objectives in this review: 1) To provide a status update of recommendations; 2) To re -assess the transparency and fairness of the City's hiring process through testing; and 3) To re -assess compliance with the Hiring of Relatives policy. Part 1: Status of Recommendations Status Definitions: • Complete = the recommendation has been fully implemented. • In progress = implementation has begun. • Not started = No work has begun yet but will in the future. • Not required = the recommendation either does not require any action, or it is no longer relevant and no work will be done to implement it. Status Number of recommendations Number of original recommendations 12 Number of recommendations complete 6 Number of recommendations in progress 4 Number of recommendations not started 1 Number of recommendations not required 1 Significant work has been done by the Human Resources division to streamline and document a fair and transparent hiring process. Resources have been created for hiring managers such as training and online references and templates. The recommendation which has not started yet related to ensuring contracts with executive search firms state that records will be retained in accordance with the City's retention schedule. This is minor risk and will be addressed in the next request for proposal for this service. Part 2: Hiring Transparency Methodology: A report was run from PeopleSoft (HR information system) to show all of the hires within the past year (May 2017 to May 2018). There were 817 hires in total. A random sample was generated resulting in an overall 6% sample. For each of the 49 job competitions in the sample, either Human Resources or the hiring manager was contacted to obtain the hiring competition file. These files were reviewed to check for the following: • Interviews were conducted by two or more interviewers • Interview notes were kept for all interviewees • That interview notes did not contain pronouns when referring to the candidate 4-5 • That interview notes contained only factual statements and no opinions from the interviewer • Rating criteria and scores showing the relative scores among candidates The personnel file for the successful candidate was also checked for: • A fully executed hire letter (i.e. signed by both the employee and the City) • Reference checks if applicable Findings and Recommendations: While the City appears to have good intentions related to fair and transparent hiring practices, the lack of compliance with established processes across all departments has led to some weaknesses. It appears that most of the permanent full time positions are being handled fairly and that the hiring decision is being documented appropriately. The majority of these competitions had HR assistance in terms of advice and help with job postings, screening resumes, and interviews. Where there is a greater vulnerability is with the part time and temporary positions which are typically handled by the hiring manager without the assistance of HR. This is because of the volume of vacancies in these types of roles which HR is not resourced to help with, and because most of these positions are recurring vacancies which the hiring manager is familiar in hiring such as temporary labourers or summer students. One of the recommendations from the original audit was for HR to develop and deliver mandatory training to all management staff which details the recruitment process. The training for management staff was a great first step in ensuring consistency in process. However, as of July only 69% of the 173 management staff had taken this training. On further inquiry it was determined that senior management decided that this training would only be required for those management staff that participate in the hiring process. There also appears to be lack of accountability to follow the processes set out by Human Resources. There was a lack of direction to hiring managers to change their hiring processes for part time or temporary hires to achieve a fair and transparent process. Great improvement has been made with ensuring that there are fully executed offer letters for all hires. 100% of the sample had them this time compared to only 46% of the sample in the original audit. A very detailed intranet page has been created which contains the "Hiring@Kitchener" training as well as standard operating procedures for all of the hiring process steps and other resources. This is a great resource for hiring managers who need to remind themselves of specific steps. In several spots the records retention checklist is emphasized. However, as this audit has shown, not all hiring managers are aware of or following the job competition documentation requirements. For many of the sample competitions only the information for the successful candidate was kept in their individual personnel file stored within the work area. It should be stressed that 4-6 evidence to support the hiring decision should be kept in the competition file and sent to records retention in accordance with the schedule. While most jobs are now posted in HireDesk (job applicant tracking system), it was found that for some of the temporary positions there is no job posted and no job competition file. Resumes are dropped off from time to time and when a position opens up the hiring manager will sift through the pile and select a candidate to interview. If there are no red flags then the candidate is hired. Otherwise the hiring manager chooses another resume from the pile. There is room for improvement in this process as there is no evidence that the candidate was the best person for the job or that resumes were objectively screened. This opens the City up to the risk of Human Rights complaints or arbitrations if the hiring process was not fair or transparent. It is also unclear from the documentation what variations to the process are acceptable for part time and temporary positions, if any. It would be useful to show a diagram of the macro steps in all recruitment processes and note variations allowed for specific areas. In summary, Human Resources has done an excellent job in developing the training and related supporting materials. The next step in the evolution is to ensure hiring managers are aware of the process and hold them accountable for following it, especially for job competitions that do not involve HR assistance. In order to further improve the hiring processes, it is recommended for management to: • Formalize and communicate the process for part-time and temporary positions (there may be different variations depending on the needs of the work area but the principles of fairness and transparency should apply) • Create a Frequently Asked Questions document to place on the Hiring@Kitchener intranet page. It should include a high level overview of the hiring process and answers about whether all steps need to be followed for each employment type. • Update the speaking notes for the in-person training course to put an emphasis on record keeping including keeping interview notes and candidate rankings in one competition file (rather than in individual personnel files). • Continue to provide periodic process reminders to hiring managers through email, intranet posts, newsletters or other medium. (i.e. reminders to: check out the online resources, take the training, keep all notes in the job competition file, where to store the job competition files, not use pronouns, not use opinions, etc.) • Senior management should ensure all hiring managers have taken the Hiring@Kitchener training and discuss hiring practices with their staff to ensure they are using the appropriate process. C �J Part 3: Nepotism Definition of Nepotism: favouritism shown to relatives in bestowing employment or conferring privileges. Methodology In order to review the degree of compliance with the employment of relatives policy a report was run from PeopleSoft which listed all current employees, address, position, division and department. Test 1: all records were matched on address. The position and department for all employees living at the same address were then reviewed to see if there were any conflicts with the policy: • The CAO, general managers, directors and Human Resource employees may not have any relatives working anywhere at the City of Kitchener • Managers and supervisors must not work in the same department as their relatives, unless the relative is a student in which case they may not work in the same division. Test 2: all records were matched on last name. Since this does not necessarily mean that two employees with the same last name are related, staff reviewed personnel records and beneficiary information for all potential conflicts to see if familial relationships existed, and if so then whether a conflict with the policy existed. There may also be situations where family members live at different addresses and have relationships such as cousins, aunts, uncles, siblings, etc. which were not captured by this report. Findings Test 1: The address match generated 205 employees with relatives working at the city, equating to roughly 100 relationships. This is down from 411 employees and 190 relationships in 2011. Only 5 of these area conflict with the policy, which is down from 7 in 2011. Three of the conflicts had previously been documented and mitigated. One of the conflicts is new as a result of the recent corporate re -organization. A memo was sent to the general manager, director, manager and supervisor for each of the 5 conflicts for awareness purposes. They have been instructed to be aware of this conflict when considering any position changes with either of the related employees. Documentation has also been obtained for the two new conflicts which outline their awareness of the conflict and any mitigating actions that they will take to ensure that they are not placed in a position of authority over their family member. A copy of these letters are filed with this audit and within the affected employee's personnel files. Test 2: The last name match generated 919 potential employees with relatives working at the city (i.e. same last name). This list was narrowed to focus on only management or Human Resource employees and their potential relatives. This shrunk the list to 58 employees with the same last name. After a review of personnel records, no relationships were uncovered in this test group. In summary, there are a minimal number of conflicts with the hiring of relatives policy, all of which have been documented. None of the conflicts were situations where an employee reported directly to their relative. Care is taken in the recruitment process to inform applicants of the policy and ask them if they have any relatives working at the City. Internal audit will continue to check compliance with the policy periodically. ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN: This report supports the achievement of the city's strategic vision through the delivery of core service. FINANCIAL IMPLICATIONS: There are no financial implications related to this report. COMMUNITY ENGAGEMENT: INFORM — This report has been posted to the city's website with the agenda in advance of the council / committee meeting. 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