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Home My WebLink AboutFIN-09-079 - 2008 Annual Financial Report, Presentation & KPMG report ) cfb KITCHENER Financial Services REPORT TO: DATE OF MEETING: SUBMITTED BY: PREPARED BY: WARD(S) INVOLVED: DATE OF REPORT: REPORT NO.: SUBJECT: Mayor Carl Zehr, Chair, and Members of the Audit Committee June 29, 2009 Dan Chapman, General Manager of Financial Services and City Treasurer Roger LeBrun, Manager of Financial Planning All June 25, 2009 FIN-09-079 2008 ANNUAL FINANCIAL REPORT RECOMMENDATION: THAT the 2008 Annual Financial Report of the City of Kitchener be received. REPORT: Staff is pleased to submit the 2008 Annual Financial Report of the City of Kitchener. A presentation of financial statement highlights and key financial indicators will be given at the Audit Committee meeting on June 29. Representatives of the City's external auditors will also be in attendance to discuss the audit findings report. FINANCIAL IMPLICATIONS: None. COMMUNICATIONS: Summary financial information will be provided to all residents through "Your Kitchener" publication in accordance with Section 295 (1) of the Municipal Act, 2001. ATTACHMENTS: · 2008 Annual Financial Report · Audit Committee Presentation · Audit Findings Report to Audit Committee (KPMG) · Independence Letter (KPMG) ACKNOWLEDGED BY: Dan Chapman, General Manager of Financial Services and City Treasurer ANNUAL FINANCIAL REPORT DECEMBER 31, 2008 {'.. ~ . : : :.~...:- .. - : . .. ""'^:..... .. . . -=- -:;..... :. . '"'!:. ~ ,,' J: .. ~.. ; I: : j :'"..: ~ ;;: {' ... 1 · General Overview · Key Financial Indicators · New Reporting Standards · Audit Findings Report · Questions 2 2008 (2007) Gas 360/0 (36%) Taxes 300/0 (30%) Grants 10/0 (1%) Other 130/0 (13%) User Fees 200/0 (20%) 3 User Fees 320/0 (32%) 2008 (2007) {'.. ~ . : : :.~...:- .. - : . .. ""'^:..... .. . . -=- -:;..... :. . '"'!:. ~ ,,' J: .. ~.. ; I: : j :'"..: ~ ;;: {' ... :;:: ;~~ted Revenue ( Other 200/0 (20%) Grants 10/0 (1%) Taxes 470/0 (47%) 4 .:~~ated Cu rrent {'.. ~ . : : :.~...:- .. - : . .. ""'^:..... .. . . -=- -:;..... :. . '"'!:. ~ ,,' J: .. ~.. ; I: : j :'"..: ~ ;;: {' ... Other 40/0 (4%) General Government 1 00/0 (10%) Protection to Persons 140/0 (13%) Gasworks 390/0 (41%) Transpor- tation 80/0 (7%) Environ- mental 50/0 (5%) 2008 (2007) 5 :.I:-dated Capital Other 140/0 (17%) Planning & Development 10/0 (3%) Gasworks 70/0 (19%) Recreation Culture 180/0 (17%) 2008 (2007) General Government 300/0 (10%) Transpor- tation 120/0 (15%) {'.. ~ . : : :.~...:- .. - : . .. ""'^:..... .. . . -=- -:;..... :. . '"'!:. ~ ,,' J: .. ~.. ; I: : j :'"..: ~ ;;: {' ... 6 ($ thousands) 2008 2007 Assets Cash and investments 71 ,029 81 ,608 Taxes receivable 17 ,832 16,335 Accounts receivable 42,479 43,895 Inventory for resale 20,403 12, 765 Equity in Kitchener Power Corp. 169,820 157,053 Other 13,656 12,382 Liabi I ities AlP and accrued liabilities 82,632 56,653 Def. rev. - obligatory reserve funds 8, 129 13, 706 Municipal debt 63,512 56,403 Employee future benefits 21 , 159 19,713 7 · Surplus Balances · Unexpended Capital Balance · Reserves and Discretionary Reserve Funds · Debt Per Capita · Taxes Receivable 8 2008 2007 Gasworks Golf Courses Waterworks Sewer Surcharge Belmont and KDBA (5,463) (731 ) (1 ,016) (5,718) 58 {12~870} (8, 735) (533) (785) (2,566) 30 {12~589} 9 tn c: o 72 68 64 60 56 52 48 44 40 36 32 28 24 20 16 12 8 4 o .- - - .- :E ~ ::. :;;:- nded Capital {'.. ~ . : : :.~...:- .. - : . .. ""'^:..... .. . . -=- -:;..... :. . '"'!:. ~ ,,' J: .. ~.. ; I: : j :'"..: ~ ;;: {' ... 10 2003 2004 2005 2006 2007 2008 ::\~ Discretionary {'.. ~ . : : :.~...:- .. - : . .. ""'^:..... .. . . -=- -:;..... :. . '"'!:. ~ ,,' J: .. ~.. ; I: : j :'"..: ~ ;;: {' ... 2008 2007 For acquisition of equipment For working capital For sick leave For capital works For tax stabilization For Centre in the Square Inc. For other purposes 8, 730 o 3,859 9,495 3,938 2,440 4~692 33 ~ 154 9,323 4, 705 3,434 13,048 4,745 2,401 3~963 41 ~619 1 1 and Reserve · Compare Kitchener to southern Ontario lower-tier non-rural municipalities in Regional structures · 2007 benchmark data Reserves and discretionary reserve funds per household $390 $999 12 $ 280 260 240 220 200 180 160 140 120 100 80 60 40 20 o 2003 2004 2005 2006 2007 2008 Tax Supported - General Non-Tax Supported Tax Supported - EDIF 13 · Compare Kitchener to southern Ontario lower-tier non-rural municipalities in Regional structures · 2007 benchmark data Total debt burden per household Total debt burden per household, excluding EDIF $748 $633 $276 $633 · Province considers $400 to $1 ,000 per household to be a "moderate" load 14 Arrears 9 8 7 6 5 4 3 2 1 o 2003 2004 2008 2005 2006 2007 15 : .~ Arrears {'.. ~ . : : :.~...:- .. - : . .. ""'^:..... .. . . -=- -:;..... :. . '"'!:. ~ ,,' J: .. ~.. ; I: : j :'"..: ~ ;;: {' ... · Compare Kitchener to southern Ontario lower-tier non-rural municipalities in Regional structures · 2007 benchmark data Total taxes receivable as a 0/0 of total taxes levied 6. 70/0 7 . 00/0 · Province considers amounts less than 1 00/0 to be low 16 :.;;::- Reporting {'.. ~ . : : :.~...:- .. - : . .. ""'^:..... .. . . -=- -:;..... :. . '"'!:. ~ ,,' J: .. ~.. ; I: : j :'"..: ~ ;;: {' ... · PS 2700 Segmented Disclosures - Effective for 2008 fiscal year - Requires disclosure of disaggregated financial information by functional segment in the consolidated financial statements - Provides relevant information for accountability and decision-making purposes, while ensuring consistency with the summary statements - This requirement is disclosed in Note 16 of the financial statements (pg. 2-22) 17 :.;;::- Reporting · PS 3150 Tangible Capital Assets - Effective for 2009 fiscal year - Requires reporting of capital assets at cost less accumulated amortization and amortization expense - Contrasts to the current practice of recording all capital expenditures in year of acquisition - Most significantly, the standard will require a comprehensive inventory and valuation of all capital assets owned by the City 18 :.;;::- Reporting · PS 3150 Tangible Capital Assets - Understanding the costs associated with infrastructure enable a government to: · Assess overall spending priorities · Establish infrastructure spending priorities · Determine the sufficiency of tax and user fee rates · Assess accountability for the resources provided · Make judgments about performance · Assess financial sustainability, flexibility and vulnerability · Make cost comparisons 19 :.;;::- Reporting · PS 3150 Tangible Capital Assets - Progress to date: · Integrated solution as part of Program Delta underway (SAP and RIV A) · Asset Accounting Team established · Asset Accounting Policies adopted by Council (transition and ongoing) · Data collection and testing underway 20 {'.. ~ . : : :.~...:- .. - : . .. ""'^:..... .. . . -=- -:;..... :. . '"'!:. ~ ,,' J: .. ~.. ; I: : j :'"..: ~ ;;: {' ... Audit Findings Report 21 {'.. ~ . : : :.~...:- .. - : . .. ""'^:..... .. . . -=- -:;..... :. . '"'!:. ~ ,,' J: .. ~.. ; I: : j :'"..: ~ ;;: {' ... Questions? 22 Contents To pies for discussion ..................................................................................................................... 1 Aud it status...................................................................................................................................... 3 Sig n ificant matters.......................................................................................................................... 4 Investing in Ontario Act Grant....................................................................................................... 4 Accounting Information System Change....................................................................................... 5 Gasworks Inventory Adjustments .................................................................................................. 6 Federal Gas Tax revenue.............................................................................................................. 8 Tangible Capital Assets, CICA PS 3150, PSG 7...........................................................................9 Segmented Disclosures, CICA PS 2700..................................................................................... 10 Misstatements................................................................................................................................ 11 Other matters................................................................................................................................. 12 Matters pertaining to the financial statement audit...................................................................... 12 Designated public documents..................................................................................................... 14 Append ices .................................................................................................................................... 15 Appendix 1 - Independence letter ............................................................................................... 15 Append ix 2 - Glossary................................................................................................................. 1 7 Appendix 3 - KPMG's Audit Committee resources ..................................................................... 18 This Audit Findings Report (the "Report") for the year ended December 31,2008 provides an overview of the results of our audit. This Report is confidential and intended solely for the use of the audit subcommittee in carrying out and discharging its responsibilities, and should not be used for any other purposes. No responsibility for loss or damages, if any, to any third party is accepted as this Report has not been prepared for, and is not intended for, any other purposes. This Report is a by-product of the audit and is therefore a derivative communication and should not be distributed to others outside the City without our prior written consent. KPMG LLP, Chartered Accountants, Licensed Public Accountants Topics for discussion Auditors initiating discussion with the audit committee We have issued this Report to assist you in your review of the Entity's financial statements. The matters that we raise within this Report arise from the audit and are matters that we believe need to be brought to your attention. We propose to highlight the following topics at the upcoming audit committee meeting. We welcome your questions and look forward to discussing our findings with you at this meeting. Audit committee input Raise potential concerns, questions and requests Audit status Review and discuss Significant matters Review and discuss Misstatements Review and discuss Designated public documents Review and discuss .. Topics for discussion (continued) Audit Committee input/matters to be raised with the auditors This Report may not include all matters of interest to you. Please let us know of other areas you would like to discuss with us. Audit committee members should use this section to note any areas of potential concern that should be raised and discussed at the audit findings meeting. .. 2 Audit status Audit Status: Substantially complete We have not yet completed our audit of the City's financial statements as the following procedures remain to be performed: Completing our discussions with the audit committee Receiving final legal inquiry letters Obtaining the Committee's approval of the financial statements. Until we complete our remaining procedures and the Committee approves these financial statements, it is possible that additional procedures or adjustments to the financial statements may be necessary. We will only be in a position to release our audit report when our audit is complete. .. 3 Significant matters Investing in Ontario Act Grant During the year, the City received approximately $9.8M in a grant from the Ontario government under the Investing in Ontario Act program. The grant is restricted only in that it must be spent on the City's capital priorities. The City has also deferred other grants to 2009 (Roads and Bridges Grant - $1.5M; King Street Streetscape Grant - $3.2M) Actions taken by Management We understand that it has budgeted to spend the funds on several projects in 2009, as part of the 2009 capital budget. Management recorded the grant as deferred revenue, which is included in accounts payable and accrued liabilities on the statement of financial position, in 2008 as the amounts had not been spent by December 31,2008. Effects on the audit Management and KPMG considered whether or not the grant received during 2008 should be recorded as revenue in the year or deferred to 2009. Under PSAB, grants received for restricted purposes are required to be deferred until such time as the funds are expended (such as required for the Federal Gas Tax Revenues) However, the funds received under the program do not specify which types of capital activities, nor the time frame for which the expenditures are required. As a result, there is no clear answer as to whether the grant is "restricted" for the purposes of PSAB and as such, the required accounting treatment is not definitive. This requires management to record the grant in a way that most closely represents the nature of the grant. The treatment of these grants throughout the province has been inconsistent (i.e., some municipalities have recognized the revenue immediately whereas others have deferred the revenue to 2009). .. 4 Significant matters (continued) Accounting Information System Change During the year, the City converted its legacy accounting information system (FAMIS) to SAP. The effective conversion date was December 1,2008. Actions taken by Management As the conversion date occurred prior to year end, the City used two different systems during the year. To facilitate the preparation of the year end accounts, management imported the December 2008 accounting data back into F AMIS from SAP. Management performed reconciliations of the data from SAP to F AMIS to ensure that the proper integrity was maintained. Effects on the audit KPMG Information Risk Management resources were involved in the audit this year to assess the risks and perform specified procedures on the data conversion. Our resources participated in several interviews with City staff to understand and assess the processes utilized by City staff to ensure proper data conversion. We also reviewed the reconciliations of data between SAP and FAMIS. .. 5 Significant matters (continued) Gasworks Inventory Adjustments During the year, management identified two issues in connection with the accounting for inventory of the Gasworks Enterprise. The issue was identified by City staff during the year end reconciliation process which indicated that the amounts of gas inventory recorded in the City's perpetual inventory system were higher than those reported by Union Gas, the operator of the storage facility. Issue #1 - Fuel Gas Consumption Management had identified that it was not recording in its perpetual records the reductions in natural gas due to fuel gas consumption. This has been a reoccurring and accumulating issue since 2001. Fuel gas consumption is the actual gas used by Union Gas to move gas supplies in and out of storage, and to deliver gas to the City. The actual fuel gas consumed annually is approximately 2.5 million to 3.0 million cubic meters, representing approximately 1 % of total gas volume transacted each year. As the fuel gas is used in the delivery of gas to customers, the adjustment of $4.4 million was recorded to the beginning inventory for 2007 of the Delivery Division of the Gasworks Enterprise. Issue #2 - Unbilled Revenue Adjustment Management had identified that it had not properly accounted for year end adjustments to inventory for gas delivered but not billed. It was further identified that the originating adjustment issue occurred in 2001 and has been carried forward since that time. As the unbilled gas is part of the supply of gas to customers, the adjustment of $3.1 million was recorded to the beginning inventory for 2007 of the Supply Division of the Gasworks Enterprise. Actions taken by Management Upon discovery of the issues, City Management undertook a thorough investigation to identify the issues and determine the cause of the issues. As the adjustments relate to prior periods, Management has appropriately recorded the adjustments in the prior periods and has restated the comparative financial statements. Furthermore, Management has increased the monitoring and reconciliation procedures of the Gasworks inventory to ensure issues in the future are identified and resolved. .. 6 Effects on the audit KPMG deployed significant additional audit resources to assist City staff in identifying, verifying, and quantifying the issues. We have also assisted City staff in the appropriate accounting treatment. We have increased our audit procedures over year end reconciliations. We have included in our audit of the 2008 Gasworks file an additional reviewer with experience in municipal gas utility operations. .. 7 Significant matters (continued) Federal Gas Tax revenue During the year, the City received approximately $3.1 million in funds from the Federal Gas Tax Revenue program as administered by the Association of Municipalities of Ontario ("AMO"). Actions taken by Management At December 31, 2008, all received amounts have been spent and included in revenue. Under the terms and conditions of the new Federal Gas Tax agreement with AMO the City must provide AMO with an auditors' reports as to its compliance with certain sections of the relative funding agreements for the funding received and related expenditures. Effects on the audit KPMG has examined the evidence supporting the City's compliance with the pertinent sections of their funding agreement for the year-ending December 31, 2008 and has issued an unqualified auditors' report to AMO. .. 8 Significant matters (continued) Tangible Capital Assets, CICA PS 3150, PSG 7 Canadian municipalities will be required to present information about the entire stock of their tangible capital assets and amortization in the financial statements to demonstrate stewardship and the cost of using those assets to deliver programs and provide services. This section applies to municipalities for fiscal years beginning on or after January 1, 2009. Transitional provisions Public Sector Accounting Guideline 7 - Tangible Capital Assets of Local Governments provides that local governments should commence disclosing information about their tangible capital assets in their December 31, 2008 financial statements. Actions taken by Management In 2008, the City of Kitchener has worked towards compliance with the reporting requirements. The City has constituted an internal project team, supported by independent consultants, to manage the project to adopt these standards. Work has also begun on establishing policies relating to Tangible Capital Asset reporting, including asset classifications, useful life and depreciation methods. In order to address the requirements, the City is also implementing SAP for financial management and RIV A for asset inventory management. Audit implications The opening balances of tangible capital assets (i.e., at January 1, 2009) are subject to audit and will be audited under a separate one-time audit engagement. This is expected to be performed in late 2009. .. 9 Significant matters (continued) Segmented Disclosures, CICA PS 2700 The City is required to present information that separates out key financial information into segments in order to provide relevant information for accountability and decision-making purposes, while ensuring that the information is consistent with the consolidated financial statements. This section applies to municipalities for their 2008 fiscal years. The objectives of disclosing information about segments are to: o help users of the financial statements identify the resources allocated to support the major activities of the government; o help users of the financial statements make more informed judgments about the government reporting entity and about its major activities; o help users of financial statements better understand the manner in which the organizations in government are organized and how the government discharges its accountability obligations; o enhance the transparency of financial reporting; and o help users of the financial statements better understand the performance of the segments and the government reporting entity. Actions taken by Management Management has presented the required information in the notes to the financial statements. .. 10 Misstatements Misstatements Management is responsible for the financial statements and, accordingly, evaluates uncorrected misstatements to determine whether individually, and in the aggregate, these misstatements, in their judgement, are material to the financial statements. Audit Differences We have reviewed the summary of audit differences noted during our examination with management. It is management's representation that these differences are not material to the financial statements and we have concurred with this view. .. 11 Other matters Matters pertaining to the financial statement audit Significant unusual transactions Other than as discussed previously in this document, we did not identify, in the course of our financial statement audit, any significant unusual transactions. Accounting policies, Management describes their critical accounting policies and key judgments and estimates estimates that are subject to uncertainty in the notes to the financial statements. We identified, in the course of our financial statement audit, no material changes in selection or application of accounting policies. Related party transactions We did not identify, in the course of our financial statement audit, any related party transactions outside the normal course of business that involve significant judgments made by management concerning measurement and disclosure. Material weaknesses in internal control over financial reporting We did not identify, in the course of our financial statement audit, any material weaknesses in the design, implementation or operating effectiveness of internal control over financial reporting, including anti- fraud controls. Illegal and fraudulent activities Our audit has not been designed to determine the adequacy of internal control over financial reporting for management purposes. We did not identify, during our financial statement audit, any illegal acts or possibly illegal acts or any: matters that pose questions regarding the honesty and integrity of management fraud or suspected fraud involving management fraud or suspected fraud involving employees who have significant roles in internal control over financial reporting fraud or suspected fraud (whether caused by management or other employees) that results, or may result, in a non-trivial misstatement of the financial statements matters that may cause future financial statements to be materially misstated Auditors' independence Our independence letter dated June 22, 2009, in the Appendix, indicates that we have not performed any professional services for the entity or identified any relationships that, in our professional judgment, may reasonably be thought to bear on our independence. We have, since the date of this letter, provided no additional .. 12 professional services nor identified other relationships that, in our professional judgment, may reasonably be thought to bear on our independence. Accordingly, we confirm that, since the date of this letter, we remain independent. Dealings with Management Consultation with other Accountants Major issues discussed with Management that influence our audit appointment Audit Differences We received the full cooperation of Management and employees of the Association and, to our knowledge, had complete access to the accounting records and other documents that we needed in order to carry out our audit. We had no disagreements with Management, and we have resolved all auditing, accounting and presentation issues to our satisfaction. Weare not aware of any consultations by Management with other accountants regarding accounting or auditing matters. We did not engage in discussion with Management about any major issues in connection with our appointment as auditors. We report that no other misstatements were identified during the financial statement audit. .. 13 Other matters (continued) Designated public documents As at the date of this Report, we have performed the procedures required by professional standards on the designated public documents and resolved all matters. Definition Designated public documents include: glossy annual report other public documents when auditors have been engaged to read or perform services with respect to that document (e.g., preliminary prospectus, press releases, etc.) Professional standards Professional standards require auditors to: determine whether the financial statements and the audit report have been accurately reproduced, including comparing the financial statements and the audit report ultimately posted on the Entity's Web site to the original read the designated public document and assess whether any of the information appears to be inconsistent with the financial statements or the auditor's knowledge obtained in the course of the audit be satisfied that translated financial statements and the audit report include the same information and, in all material respects, carry the same meaning as the original version discuss with Management any information that appears to be inconsistent or a material misstatement of fact or a misrepresentation that auditors may become aware of upon reading the designated public document report any unresolved matters to the audit committee. Professional standards do not require auditors to perform any other procedures. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. @ 2008 KPMG LLP, a Canadian limited liability partnership and a member firm ofthe KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All ri ghts reserved. .. 14 Appendices Appendix 1 - Independence letter PRIV ATE & CONFIDENTIAL Members of the Audit Committee Corporation of the City of Kitchener June 22, 2009 Dear Members of the Audit Committee: We have been engaged to express an opinion on the financial statements of the Corporation of the City of Kitchener (the "City") as at and for the year ended December 31,2009. Professional standards require that we communicate at least annually with you regarding all relationships between the City (and its related entities) and us that, in our professional judgment, may reasonably be thought to bear on our independence. A related entity is defined as: (a) in the case of a client that is a reporting issuer, an entity that has control over a client, or over which the client has control, or that is under common control with a client, including the client's parent company and any subsidiaries. (b) in the case of a client that is not a reporting issuer, an entity over which the client has control, or that has control over the client provided the client is material to such entity, and an entity that is under common control with the client provided such entity and the client are both material to the controlling entity. (c) an entity over which a client has significant influence, unless the entity is not material to the client. (d) an entity that has significant influence over a client, unless the client is not material to the entity. In determining which relationships to report, these standards require us to consider relevant rules and related interpretations prescribed by the Institute of Chartered Accountants of Ontario and applicable legislation, covering such matters as: a) provision of services in addition to the audit engagement b) other relationships such as: · holding a financial interest, either directly or indirectly, in a client · holding a position, either directly or indirectly, that gives the right or responsibility to exert significant influence over the financial or accounting policies of a client · personal or business relationships of immediate family, close relatives, partners or retired partners, either directly or indirectly, with a client · economic dependence on a client. .. 15 We have been primarily involved in the audit of the financial statements of the Corporation of the City of Kitchener, The Kitchener Public Library Board, The Corporation of the City of Kitchener Trust Funds, the Centre in the Square Inc., Kitchener Downtown Business Association, and the Belmont Business Improvement Area. We have also provided audit services related to the Federal Gas Tax Funds the City of Kitchener Gasworks Enterprise. In addition to the above noted audit services, during fiscal 2008, we have also provided Advisory Services comprising of Risk Assessment Services for the City's CMF Project and SAP Implementation. OTHER RELATIONSHIPS Weare not aware of any relationships between the City (and its related entities) and us that, in our professional judgment, may reasonably be thought to bear on our independence that has occurred from January 1, 2008 to June 22, 2009. CONFIRMATION OF INDEPENDENCE Professional standards require that we confirm our independence to you in the context of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario. Accordingly, we hereby confirm that, we are independent with respect to the City (and its related entities) within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario as of June 22, 2009. OTHER MATTERS This letter is confidential and intended solely for use by those with oversight responsibility for the financial reporting process in carrying out and discharging its responsibilities and should not be used for any other purposes. No responsibility for loss or damages, if any, to any third party is accepted as this letter has not been prepared for, and is not intended for, any other purpose. This letter should not be distributed to others outside the entity without our prior written consent. We look forward to discussing with you the matters addressed in this letter as well as other matters that may be of interest to you. We will be prepared to answer any questions you may have regarding our independence as well as other matters. Yours very truly, i/f'1,,6 L~P ------- Chartered Accountants, Licensed Public Accountants .. 16 Appendix 2 - Glossary Audit differences are proposed adjustments of misstatements in the financial statements that, in the auditor's professional judgement, may have not been detected except through the audit procedures performed. Any misstatement identified by Management during the audit and subsequently corrected is not considered an audit difference. Income Statement Method (Rollover Method) is a method of quantifying misstatements. This method considers the impact of misstatements primarily from the income statement perspective. Misstatements are quantified as the amount by which the income statement is misstated. This method considers the reversing or correcting effect of prior year misstatements but ignores the accumulation of immaterial misstatements in the balance sheet over multiple periods. Material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual financial statements will not be prevented or detected. Misstatements generally consist of differences between the amount, classification, or presentation of a reported financial statement element, account, or item and the amount, classification, or presentation that would have been reported under the financial reporting framework. .. 17 Appendix 3 - KPMG's Audit Committee resources General Audit Committee Update, Issue 2008-02, Audit Committee Institute Shaping the Canadian Audit Committee Agenda (2006 edition), Audit Committee Institute Canadian Survey of Audit Committee Members - 2008, Audit Committee Institute (12/2008) Our System of Audit Quality Controls, KPMG (2006) Accountability e-Lert - periodic electronic newsletter. Subscribe at www.kpmg.ca/accountability Governance of Tax - Discussion paper, KPMG (2008) Focus on Financial Reporting, KPMG (12/2008) Audit Committee Institute - Audit Committee Roundtables held each spring and fall Audit Committee Institute Web site - www.komg.ca/auditcommittee .. 18 Contents To pies for discussion ..................................................................................................................... 1 Aud it status...................................................................................................................................... 3 Sig n ificant matters.......................................................................................................................... 4 Investing in Ontario Act Grant....................................................................................................... 4 Accounting Information System Change....................................................................................... 5 Gasworks Inventory Adjustments .................................................................................................. 6 Federal Gas Tax revenue.............................................................................................................. 8 Tangible Capital Assets, CICA PS 3150, PSG 7...........................................................................9 Segmented Disclosures, CICA PS 2700..................................................................................... 10 Misstatements................................................................................................................................ 11 Other matters................................................................................................................................. 12 Matters pertaining to the financial statement audit...................................................................... 12 Designated public documents..................................................................................................... 14 Append ices .................................................................................................................................... 15 Appendix 1 - Independence letter ............................................................................................... 15 Append ix 2 - Glossary................................................................................................................. 1 7 Appendix 3 - KPMG's Audit Committee resources ..................................................................... 18 This Audit Findings Report (the "Report") for the year ended December 31,2008 provides an overview of the results of our audit. This Report is confidential and intended solely for the use of the audit subcommittee in carrying out and discharging its responsibilities, and should not be used for any other purposes. No responsibility for loss or damages, if any, to any third party is accepted as this Report has not been prepared for, and is not intended for, any other purposes. This Report is a by-product of the audit and is therefore a derivative communication and should not be distributed to others outside the City without our prior written consent. KPMG LLP, Chartered Accountants, Licensed Public Accountants Topics for discussion Auditors initiating discussion with the audit committee We have issued this Report to assist you in your review of the Entity's financial statements. The matters that we raise within this Report arise from the audit and are matters that we believe need to be brought to your attention. We propose to highlight the following topics at the upcoming audit committee meeting. We welcome your questions and look forward to discussing our findings with you at this meeting. Audit committee input Raise potential concerns, questions and requests Audit status Review and discuss Significant matters Review and discuss Misstatements Review and discuss Designated public documents Review and discuss .. Topics for discussion (continued) Audit Committee input/matters to be raised with the auditors This Report may not include all matters of interest to you. Please let us know of other areas you would like to discuss with us. Audit committee members should use this section to note any areas of potential concern that should be raised and discussed at the audit findings meeting. .. 2 Audit status Audit Status: Substantially complete We have not yet completed our audit of the City's financial statements as the following procedures remain to be performed: Completing our discussions with the audit committee Receiving final legal inquiry letters Obtaining the Committee's approval of the financial statements. Until we complete our remaining procedures and the Committee approves these financial statements, it is possible that additional procedures or adjustments to the financial statements may be necessary. We will only be in a position to release our audit report when our audit is complete. .. 3 Significant matters Investing in Ontario Act Grant During the year, the City received approximately $9.8M in a grant from the Ontario government under the Investing in Ontario Act program. The grant is restricted only in that it must be spent on the City's capital priorities. The City has also deferred other grants to 2009 (Roads and Bridges Grant - $1.5M; King Street Streetscape Grant - $3.2M) Actions taken by Management We understand that it has budgeted to spend the funds on several projects in 2009, as part of the 2009 capital budget. Management recorded the grant as deferred revenue, which is included in accounts payable and accrued liabilities on the statement of financial position, in 2008 as the amounts had not been spent by December 31,2008. Effects on the audit Management and KPMG considered whether or not the grant received during 2008 should be recorded as revenue in the year or deferred to 2009. Under PSAB, grants received for restricted purposes are required to be deferred until such time as the funds are expended (such as required for the Federal Gas Tax Revenues) However, the funds received under the program do not specify which types of capital activities, nor the time frame for which the expenditures are required. As a result, there is no clear answer as to whether the grant is "restricted" for the purposes of PSAB and as such, the required accounting treatment is not definitive. This requires management to record the grant in a way that most closely represents the nature of the grant. The treatment of these grants throughout the province has been inconsistent (i.e., some municipalities have recognized the revenue immediately whereas others have deferred the revenue to 2009). .. 4 Significant matters (continued) Accounting Information System Change During the year, the City converted its legacy accounting information system (FAMIS) to SAP. The effective conversion date was December 1,2008. Actions taken by Management As the conversion date occurred prior to year end, the City used two different systems during the year. To facilitate the preparation of the year end accounts, management imported the December 2008 accounting data back into F AMIS from SAP. Management performed reconciliations of the data from SAP to F AMIS to ensure that the proper integrity was maintained. Effects on the audit KPMG Information Risk Management resources were involved in the audit this year to assess the risks and perform specified procedures on the data conversion. Our resources participated in several interviews with City staff to understand and assess the processes utilized by City staff to ensure proper data conversion. We also reviewed the reconciliations of data between SAP and FAMIS. .. 5 Significant matters (continued) Gasworks Inventory Adjustments During the year, management identified two issues in connection with the accounting for inventory of the Gasworks Enterprise. The issue was identified by City staff during the year end reconciliation process which indicated that the amounts of gas inventory recorded in the City's perpetual inventory system were higher than those reported by Union Gas, the operator of the storage facility. Issue #1 - Fuel Gas Consumption Management had identified that it was not recording in its perpetual records the reductions in natural gas due to fuel gas consumption. This has been a reoccurring and accumulating issue since 2001. Fuel gas consumption is the actual gas used by Union Gas to move gas supplies in and out of storage, and to deliver gas to the City. The actual fuel gas consumed annually is approximately 2.5 million to 3.0 million cubic meters, representing approximately 1 % of total gas volume transacted each year. As the fuel gas is used in the delivery of gas to customers, the adjustment of $4.4 million was recorded to the beginning inventory for 2007 of the Delivery Division of the Gasworks Enterprise. Issue #2 - Unbilled Revenue Adjustment Management had identified that it had not properly accounted for year end adjustments to inventory for gas delivered but not billed. It was further identified that the originating adjustment issue occurred in 2001 and has been carried forward since that time. As the unbilled gas is part of the supply of gas to customers, the adjustment of $3.1 million was recorded to the beginning inventory for 2007 of the Supply Division of the Gasworks Enterprise. Actions taken by Management Upon discovery of the issues, City Management undertook a thorough investigation to identify the issues and determine the cause of the issues. As the adjustments relate to prior periods, Management has appropriately recorded the adjustments in the prior periods and has restated the comparative financial statements. Furthermore, Management has increased the monitoring and reconciliation procedures of the Gasworks inventory to ensure issues in the future are identified and resolved. .. 6 Effects on the audit KPMG deployed significant additional audit resources to assist City staff in identifying, verifying, and quantifying the issues. We have also assisted City staff in the appropriate accounting treatment. We have increased our audit procedures over year end reconciliations. We have included in our audit of the 2008 Gasworks file an additional reviewer with experience in municipal gas utility operations. .. 7 Significant matters (continued) Federal Gas Tax revenue During the year, the City received approximately $3.1 million in funds from the Federal Gas Tax Revenue program as administered by the Association of Municipalities of Ontario ("AMO"). Actions taken by Management At December 31, 2008, all received amounts have been spent and included in revenue. Under the terms and conditions of the new Federal Gas Tax agreement with AMO the City must provide AMO with an auditors' reports as to its compliance with certain sections of the relative funding agreements for the funding received and related expenditures. Effects on the audit KPMG has examined the evidence supporting the City's compliance with the pertinent sections of their funding agreement for the year-ending December 31, 2008 and has issued an unqualified auditors' report to AMO. .. 8 Significant matters (continued) Tangible Capital Assets, CICA PS 3150, PSG 7 Canadian municipalities will be required to present information about the entire stock of their tangible capital assets and amortization in the financial statements to demonstrate stewardship and the cost of using those assets to deliver programs and provide services. This section applies to municipalities for fiscal years beginning on or after January 1, 2009. Transitional provisions Public Sector Accounting Guideline 7 - Tangible Capital Assets of Local Governments provides that local governments should commence disclosing information about their tangible capital assets in their December 31, 2008 financial statements. Actions taken by Management In 2008, the City of Kitchener has worked towards compliance with the reporting requirements. The City has constituted an internal project team, supported by independent consultants, to manage the project to adopt these standards. Work has also begun on establishing policies relating to Tangible Capital Asset reporting, including asset classifications, useful life and depreciation methods. In order to address the requirements, the City is also implementing SAP for financial management and RIV A for asset inventory management. Audit implications The opening balances of tangible capital assets (i.e., at January 1, 2009) are subject to audit and will be audited under a separate one-time audit engagement. This is expected to be performed in late 2009. .. 9 Significant matters (continued) Segmented Disclosures, CICA PS 2700 The City is required to present information that separates out key financial information into segments in order to provide relevant information for accountability and decision-making purposes, while ensuring that the information is consistent with the consolidated financial statements. This section applies to municipalities for their 2008 fiscal years. The objectives of disclosing information about segments are to: o help users of the financial statements identify the resources allocated to support the major activities of the government; o help users of the financial statements make more informed judgments about the government reporting entity and about its major activities; o help users of financial statements better understand the manner in which the organizations in government are organized and how the government discharges its accountability obligations; o enhance the transparency of financial reporting; and o help users of the financial statements better understand the performance of the segments and the government reporting entity. Actions taken by Management Management has presented the required information in the notes to the financial statements. .. 10 Misstatements Misstatements Management is responsible for the financial statements and, accordingly, evaluates uncorrected misstatements to determine whether individually, and in the aggregate, these misstatements, in their judgement, are material to the financial statements. Audit Differences We have reviewed the summary of audit differences noted during our examination with management. It is management's representation that these differences are not material to the financial statements and we have concurred with this view. .. 11 Other matters Matters pertaining to the financial statement audit Significant unusual transactions Other than as discussed previously in this document, we did not identify, in the course of our financial statement audit, any significant unusual transactions. Accounting policies, Management describes their critical accounting policies and key judgments and estimates estimates that are subject to uncertainty in the notes to the financial statements. We identified, in the course of our financial statement audit, no material changes in selection or application of accounting policies. Related party transactions We did not identify, in the course of our financial statement audit, any related party transactions outside the normal course of business that involve significant judgments made by management concerning measurement and disclosure. Material weaknesses in internal control over financial reporting We did not identify, in the course of our financial statement audit, any material weaknesses in the design, implementation or operating effectiveness of internal control over financial reporting, including anti- fraud controls. Illegal and fraudulent activities Our audit has not been designed to determine the adequacy of internal control over financial reporting for management purposes. We did not identify, during our financial statement audit, any illegal acts or possibly illegal acts or any: matters that pose questions regarding the honesty and integrity of management fraud or suspected fraud involving management fraud or suspected fraud involving employees who have significant roles in internal control over financial reporting fraud or suspected fraud (whether caused by management or other employees) that results, or may result, in a non-trivial misstatement of the financial statements matters that may cause future financial statements to be materially misstated Auditors' independence Our independence letter dated June 22, 2009, in the Appendix, indicates that we have not performed any professional services for the entity or identified any relationships that, in our professional judgment, may reasonably be thought to bear on our independence. We have, since the date of this letter, provided no additional .. 12 professional services nor identified other relationships that, in our professional judgment, may reasonably be thought to bear on our independence. Accordingly, we confirm that, since the date of this letter, we remain independent. Dealings with Management Consultation with other Accountants Major issues discussed with Management that influence our audit appointment Audit Differences We received the full cooperation of Management and employees of the Association and, to our knowledge, had complete access to the accounting records and other documents that we needed in order to carry out our audit. We had no disagreements with Management, and we have resolved all auditing, accounting and presentation issues to our satisfaction. Weare not aware of any consultations by Management with other accountants regarding accounting or auditing matters. We did not engage in discussion with Management about any major issues in connection with our appointment as auditors. We report that no other misstatements were identified during the financial statement audit. .. 13 Other matters (continued) Designated public documents As at the date of this Report, we have performed the procedures required by professional standards on the designated public documents and resolved all matters. Definition Designated public documents include: glossy annual report other public documents when auditors have been engaged to read or perform services with respect to that document (e.g., preliminary prospectus, press releases, etc.) Professional standards Professional standards require auditors to: determine whether the financial statements and the audit report have been accurately reproduced, including comparing the financial statements and the audit report ultimately posted on the Entity's Web site to the original read the designated public document and assess whether any of the information appears to be inconsistent with the financial statements or the auditor's knowledge obtained in the course of the audit be satisfied that translated financial statements and the audit report include the same information and, in all material respects, carry the same meaning as the original version discuss with Management any information that appears to be inconsistent or a material misstatement of fact or a misrepresentation that auditors may become aware of upon reading the designated public document report any unresolved matters to the audit committee. Professional standards do not require auditors to perform any other procedures. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. @ 2008 KPMG LLP, a Canadian limited liability partnership and a member firm ofthe KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All ri ghts reserved. .. 14 Appendices Appendix 1 - Independence letter PRIV ATE & CONFIDENTIAL Members of the Audit Committee Corporation of the City of Kitchener June 22, 2009 Dear Members of the Audit Committee: We have been engaged to express an opinion on the financial statements of the Corporation of the City of Kitchener (the "City") as at and for the year ended December 31,2009. Professional standards require that we communicate at least annually with you regarding all relationships between the City (and its related entities) and us that, in our professional judgment, may reasonably be thought to bear on our independence. A related entity is defined as: (a) in the case of a client that is a reporting issuer, an entity that has control over a client, or over which the client has control, or that is under common control with a client, including the client's parent company and any subsidiaries. (b) in the case of a client that is not a reporting issuer, an entity over which the client has control, or that has control over the client provided the client is material to such entity, and an entity that is under common control with the client provided such entity and the client are both material to the controlling entity. (c) an entity over which a client has significant influence, unless the entity is not material to the client. (d) an entity that has significant influence over a client, unless the client is not material to the entity. In determining which relationships to report, these standards require us to consider relevant rules and related interpretations prescribed by the Institute of Chartered Accountants of Ontario and applicable legislation, covering such matters as: a) provision of services in addition to the audit engagement b) other relationships such as: · holding a financial interest, either directly or indirectly, in a client · holding a position, either directly or indirectly, that gives the right or responsibility to exert significant influence over the financial or accounting policies of a client · personal or business relationships of immediate family, close relatives, partners or retired partners, either directly or indirectly, with a client · economic dependence on a client. .. 15 We have been primarily involved in the audit of the financial statements of the Corporation of the City of Kitchener, The Kitchener Public Library Board, The Corporation of the City of Kitchener Trust Funds, the Centre in the Square Inc., Kitchener Downtown Business Association, and the Belmont Business Improvement Area. We have also provided audit services related to the Federal Gas Tax Funds the City of Kitchener Gasworks Enterprise. In addition to the above noted audit services, during fiscal 2008, we have also provided Advisory Services comprising of Risk Assessment Services for the City's CMF Project and SAP Implementation. OTHER RELATIONSHIPS Weare not aware of any relationships between the City (and its related entities) and us that, in our professional judgment, may reasonably be thought to bear on our independence that has occurred from January 1, 2008 to June 22, 2009. CONFIRMATION OF INDEPENDENCE Professional standards require that we confirm our independence to you in the context of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario. Accordingly, we hereby confirm that, we are independent with respect to the City (and its related entities) within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario as of June 22, 2009. OTHER MATTERS This letter is confidential and intended solely for use by those with oversight responsibility for the financial reporting process in carrying out and discharging its responsibilities and should not be used for any other purposes. No responsibility for loss or damages, if any, to any third party is accepted as this letter has not been prepared for, and is not intended for, any other purpose. This letter should not be distributed to others outside the entity without our prior written consent. We look forward to discussing with you the matters addressed in this letter as well as other matters that may be of interest to you. We will be prepared to answer any questions you may have regarding our independence as well as other matters. Yours very truly, i/f'1,,6 L~P ------- Chartered Accountants, Licensed Public Accountants .. 16 Appendix 2 - Glossary Audit differences are proposed adjustments of misstatements in the financial statements that, in the auditor's professional judgement, may have not been detected except through the audit procedures performed. Any misstatement identified by Management during the audit and subsequently corrected is not considered an audit difference. Income Statement Method (Rollover Method) is a method of quantifying misstatements. This method considers the impact of misstatements primarily from the income statement perspective. Misstatements are quantified as the amount by which the income statement is misstated. This method considers the reversing or correcting effect of prior year misstatements but ignores the accumulation of immaterial misstatements in the balance sheet over multiple periods. Material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual financial statements will not be prevented or detected. Misstatements generally consist of differences between the amount, classification, or presentation of a reported financial statement element, account, or item and the amount, classification, or presentation that would have been reported under the financial reporting framework. .. 17 Appendix 3 - KPMG's Audit Committee resources General Audit Committee Update, Issue 2008-02, Audit Committee Institute Shaping the Canadian Audit Committee Agenda (2006 edition), Audit Committee Institute Canadian Survey of Audit Committee Members - 2008, Audit Committee Institute (12/2008) Our System of Audit Quality Controls, KPMG (2006) Accountability e-Lert - periodic electronic newsletter. Subscribe at www.kpmg.ca/accountability Governance of Tax - Discussion paper, KPMG (2008) Focus on Financial Reporting, KPMG (12/2008) Audit Committee Institute - Audit Committee Roundtables held each spring and fall Audit Committee Institute Web site - www.komg.ca/auditcommittee .. 18