1997 Management Letter - The Hummingbird Centre for

the Performing Arts

 The Strategic Policies and Priorities Committee submits, for the information of Council, the following transmittal letter (July 8, 1998) from the Audit Committee and reports having received same:

 Recommendation:

 That the report (June 25, 1998) from the City Auditor attaching the management letter of the Hummingbird Centre for the Performing Arts, together with the communication (June 16, 1998) from General Manager and Chief Executive Officer of the Centre in response, be received and forwarded to Council for information.

 Background:

 On July 7, 1998, the Audit Committee had before it a report (June 25, 1998) from the City Auditor attaching the management letter of the Hummingbird Centre for the Performing Arts, together with the response (June 16, 1998) from the General Manager and Chief Executive Officer of the Centre.

 The Audit Committee advises that it received the aforementioned report and communication and directed that copies be forwarded to your Committee and City Council for information.

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 (Report dated June 25, 1998, addressed to the

Audit Committee, from the City Auditor)

 Recommendation:

 It is recommended that the 1997 management letter and the corresponding response relating to the audits of the accounts of the Hummingbird Centre for the Performing Arts, be received for information.

 Comments:

 I have completed the 1997 audits of the accounts of the Hummingbird Centre for the Performing Arts, for the year ended December 31, 1997. As a bi-product of my audit, the attached management letter was issued to the General Manager and CEO. A response from the General Manager and CEO has been received.

 Conclusion:

 I have reviewed the response to the management letter prepared by the Centre. The responses are appropriate and will be followed up as part of our future audit work.

 Contact Name and Telephone No.:

 Jerry Shaubel, 392-8462.

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 (Communication dated March 6, 1998, addressed to

Ms. Elizabeth Bradley, General Manager and CEO,

the Hummingbird Centre for the

Performing Arts, from the City Auditor)

 We have completed the audit of the financial statements of The Hummingbird Centre for the Performing Arts for the year ended December 31, 1997. The primary purpose of our audit is to express an opinion on the financial position of the organization as at that date and the results of its operations for the year then ended.

 This letter contains our observations and recommendations relating to matters that came to our attention during the normal course of our examination and, as a result, may not include matters which a more extensive or comprehensive examination might disclose. These observations and recommendations are presented for your consideration.

 Observation:

 The year 2000 computer issues have received significant media coverage over the past year or so. In our previous year's management letter, we recommended that the Centre implement a coordinated work plan to ensure that any hardware and software issues related to this problem are addressed on a timely basis. Management's response indicated that the computer consultant supporting the Centre's systems has assured management of a timely solution to this problem.

 While it appears that there is adequate time to address this issue, many computer system professionals recommend that this issue be dealt with as soon as possible. Certain publications in Canada for example have indicated that organizations which began year 2000 system conversions as early as six years ago are encountering obstacles. Revenue Canada, for instance, began upgrading its system nine years ago and has set a January 1, 1999 deadline to give its information technology officials a full year to work out any last minute problems.

 The year 2000 issue has an impact far beyond critical business and financial systems. It will affect potentially any computer processor at the Centre, including micro-processors, whose processing of information is somewhat dependent on dates. Examples of systems that could be potentially affected at the Centre would include:

 (i)Telephone systems

(ii)Elevators

(iii)Security systems

(iv)Lighting systems

(v)Maintenance schedule on operational equipment such as heating and air conditioning

(vi)Cash register systems

 Recommendations:

 (1)Consideration should be given to establishing a year 2000 project team with overall responsibility for ensuring all potential year 2000 problems are identified and addressed. A year 2000 conversion plan should be developed as soon as possible. It may be appropriate to contact staff at the City of Toronto, who have recently established a specific year 2000 project team to address this issue. The work being done by this team may be of use to the Centre.

(2)Management should establish purchasing policies requiring that any new software is certified as "year 2000 compliant".

 Observation:

 The Board of Directors of the Centre, at its meeting held on February 25, 1998, established five sub-committees and appointed members to each. However, there appears to be no specific, written mandate which outlines the responsibilities of each of the sub-committees.

 Recommendation:

 (3)The Board should formalize the mandate outlining the responsibilities of each of its sub-committees.

 Observation:

 The Associate Manager, Developing and Community Programs, is in charge of promotion and administration relating to Inner Circle memberships. She maintains the database of members and applies the payments received directly by her in the form of cheques and credit card payments to member's accounts. Having one individual perform these functions represents a weakness in the system. Such a weakness could be minimized by having an independent reconciliation of members renewing in a given period to monies collected in that same period and performing an independent review to assess reasonableness of collections. Neither of these compensating control procedures are in place.

 Recommendation:

 (4)A periodic reconciliation of current Inner Circle members to fees collected should be done by supervisory personnel and evidence of this reconciliation should be maintained. Explanations for discrepancies should be obtained and documented.

 Observation:

 During the summer vacation period, a temporary employee working in the accounts payables area made a number of duplicate payments to suppliers in error. One supplier notified the Centre of a duplicate payment which resulted in a review of all invoices paid during this period and the necessary corrections being done.

 In cases where the duplicate payments were made, the missing copies of back-up documents indicating receipt of goods were obtained from the suppliers and these copies, with the cheque, were reviewed and approved for payment by the appropriate staff.

 Recommendation:

(5)In cases where an invoice submitted for approval and payment is supported by documents which are not originals, this fact should be highlighted for the department heads and other signatories attention. When reviewing these invoices and supporting documents, the department heads should take special care to ensure that payment is not being made twice.

 Observation:

 Cheques received in the mail are logged in a journal and restrictively endorsed by the Assistant to the Manager, Finance and Personnel. The cheques are then handed over to the Accounts Receivable clerk for recording and depositing. The journal records are agreed to cheques deposited by the same Accounts Receivable clerk.

 Recommendation:

 (6)In order to improve internal control, the reconciliation of the log of cheques received to deposits made should be done by an individual other than the Accounts Receivable clerk.

 Observation:

 The Centre has, through its development activities, sought opportunities for corporate and individual partners to participate in the funding of operations and capital projects of the Centre. Management formulated and issued a policy relating to the recognition of these funds termed as "sponsorship revenue" effective January 1, 1996. The policy lacks a definition of a sponsorship. Problems relating to timing of revenue recognition for example could be encountered when the sponsor receives a benefit in kind that spans a limited number of years in return for the "sponsorship". Although the current policy was discussed with the Auditor, transactions during 1997 indicate that some clarification is required.

 Recommendation:

 (7)Management should review the sponsorship revenue policy. A definition of sponsorship revenue should be contained within the policy.

 We have discussed the contents of this letter with Mr. Roy Reeves, Manager, Finance and Personnel, and would be pleased to discuss it further with you if you so wish.

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 (Communication dated June 16, 1998, addressed to

the Audit Committee, from Ms. Elizabeth Bradley,

General Manager and CEO, the Hummingbird

Centre for the Performing Arts, in response to the

Auditor's 1997 Management Letter)

 Attached for your information is my response to the auditor's 1997 management letter of The Hummingbird Centre for the Performing Arts.

 Contact Name and Telephone Number:

 Roy Reeves, 393-7455

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 (Communication dated May 1, 1998, referred to above,

addressed to the Board of Directors of the

Hummingbird Centre for the Performing Arts,

from Mr. Roy W. Reeves, Senior Manager, Finance and Personnel

for the Hummingbird Centre for the Performing Arts)

 This memorandum is management's response to the recommendations presented in the letter to the General Manager & CEO of March 6, 1998.

 Recommendation (1):

 Consideration should be given to establishing a year 2000 project team with overall responsibility for ensuring all potential year 2000 problems are identified and addressed. A year 2000 conversion plan should be developed as soon as possible. It may be appropriate to contact staff at the City of Toronto, who have recently established a specific year 2000 project team to address this issue. The work being done by this team may be of use to the Centre.

 Management's Response:

 Management had identified this as a potential problem with the core accounting system over one year ago. Management provided to the Board last year a written warranty from the computer systems service provider that a year 2000 compliant upgrade to this software would be purchased and installed in 1998. This application is being tested for installation at the present time.

 Management appreciates the observation that any computer processor may be affected and the list of possible systems of exposure.

 Management appreciates the gravity of the concern and has asked department heads to provide from all relevant suppliers written warranties of their systems being year 2000 compliant.

 If the department heads identify a system with deficiencies in relation to compliance this system will be reviewed for upgrade or replacement as part of the 1999 special item improvements.

 Recommendation (2):

 Management should establish purchasing policies requiring that any new software is certified as "year 2000 compliant".

 Management's Response:

 Management agrees with this recommendation.

 The purchasing policy of the Centre is being brought forward to the Board for approval with the addition of the suggested clause.

 Recommendation (3):

 The Board should formalize the mandate outlining the responsibilities of each of its sub-committees.

 Management's Response:

 Management agrees with this recommendation.

 Recommendation (4):

 A periodic reconciliation of current Inner Circle members to fees collected should be done by supervisory personnel and evidence of this reconciliation should be maintained. Explanations for discrepancies should be obtained and documented.

 Management's Response:

 Management agrees with this recommendation.

 This recommendation highlights the sort of difficulty the Centre encounters because so many activities are handled primarily only by one staff person. The software supporting this loyalty program is dated and efforts are underway to update and/or upgrade this software. Preliminary demonstrations of currently available software running on a Windows95 platform indicate an easy capability to provide monthly membership renewal report reconcilable by accounting to the deposits banked. Management is hopeful that this transition will be started this year.

 Recommendation (5):

 In cases where an invoice submitted for approval and payment is supported by documents which are not originals, this fact should be highlighted for the department heads and other signatories attention. When reviewing these invoices and supporting documents, the department heads should take special care to ensure that payment is not being made twice.

 Management's Response:

 Management does not agree with this recommendation.

 The circumstances which gave rise to the duplicate payment occurred during an extended vacation of the accounts payable clerk. It is a normal policy of the accounts payable clerk to never pay copies of invoices but only the original. In circumstances in which this is impossible, the accounts payable clerk will always check the supplier file that an original invoice has not been previously paid.

 In the circumstances observed by the auditor, the duplicate supplier invoice number was incorrectly input into the accounting system by the clerk which would normally have flagged a duplicate and the clerk did not follow the procedure of verifying in the supplier file that an original invoice had been previously paid.

 Management believes this was an exceptional and isolated occurrence. Sufficient internal controls in the payment of invoice process currently exist sufficient to prevent duplicate payments.

 Recommendation (6):

 In order to improve internal control, the reconciliation of the log of cheques received to deposits made should be done by an individual other than the Accounts Receivable clerk.

 Management's Response:

 Management agrees with this recommendation.

 The resolution of this potential conflict has been resolved with the establishment of the organizations comprehensive Pay for Performance compensation system for all salaried employees of the Centre, the assignment of the reporting for this clerk to the Senior Manager, Finance & Personnel, the removal of the cost of this employee from the Food & Beverage department budget for fiscal 1998, and the assignment of alternative accounting duties to the Food & Beverage Clerk in accordance with the departments needs and in compliance with good internal control practice (including the above noted recommendation by the auditor).

 Recommendation (7):

 Management should review the sponsorship revenue policy. A definition of sponsorship revenue should be contained within the policy.

 Management's Response:

 Management directed a significant effort in fiscal 1996 to develop and recommend a policy for the appropriate recognition of revenue and expenses resulting from the new sources of revenue the Centre had developed under the initiatives of the General Manager & CEO.

 In this process due consideration was given to the CICA Guidelines for Non-For-Profit entities and the maintenance of the Centre's status as a registered charitable organization.

 On review of the transactions in 1997, the auditor has raised two concerns.

(1)The policy developed by management and approved by the Board does not specify in a definition those revenues to be considered as "Sponsorship" and thereby to be subject to the revenue and expense recognition rules of the policy.

 (2)The policy directs that "sponsorship" revenues will be recognized, in general, when either received or receivable. The recognition of receivables (business arrangements other than solely philanthropic sponsorship revenues -- gifts that are tax receiptable) were embraced by this policy.

 Management's recognition of revenues and related expenses for certain transactions in 1998 was questioned by the auditor as to their appropriateness for compliance with generally accepted accounting principles.

 While management believes this recognition complies with the policy approved by the Board, a potential conflict with the Sponsorship Policy and GAAP appears to exist.

 Management recommends that the resolution of this issue be assigned to the Finance Sub-Committee for consideration.