April 26, 1999

To:Audit Committee

From:City Auditor

Subject:Follow-up of 1997 Management Letters of the Former Municipalities

Recommendations:

It is recommended that:

(1)for those recommendations, contained in the 1997 management letters of the former municipalities which have not yet been implemented, as outlined in Attachment I, the Chief Financial Officer and Treasurer:

(a)submit to the Audit Committee an action plan with specific time lines and staff responsibility for implementation; and

(b)report to the Audit Committee on the status of the implementation process prior to December 31, 1999.

Background:

At the completion of the audits of the financial statements of the former municipalities of Metro, Toronto, Scarborough, Etobicoke, York and East York for the year ended December 31, 1997, the respective auditors issued management letters outlining their observations and recommendations relating to areas in which internal controls could be strengthened and where accounting systems and procedures could be improved. In anticipation of the amalgamation, only matters of continuing concern to the new City of Toronto were included in the management letters.

As part of our 1999 Audit Workplan, we conducted a follow-up review on the status of implementation of the recommendations outlined in the management letters in order to identify those areas which still require resolution so that appropriate action can be taken on a timely basis.

Our follow-up review included discussions with staff of Finance Department and a review of relevant documents and reports.

Comments:

The status of the recommendations contained in our previous year's management letters are as follows:

MetroTorontoScarboroughEtobicokeYorkTotal

Implemented19511329

Reported separately ¹88

Not implemented212427

48531764

¹ Recommendations relating to Parking Tag Operations were reported separately to Audit Committee on March 1, 1999.

For ease of reference, those recommendations not yet implemented are outlined in chart form in Attachment I, showing the recommendation, management's response, status and recommended implementation date. Attachment II outlines in detail our follow-up commentary on each of the recommendations not yet implemented. It should be noted that the former East York and the former Etobicoke were reported on in one combined management letter. There was no management letter issued for the former North York.

Certain of the recommendations have been reported in previous years, but have not been implemented. While initial efforts have been taken to address some of the issues, no follow-up has been made to fully resolve them. We realize that certain matters, particularly those related to environmental liabilities, will require a longer term implementation period. However, other less complex areas should be addressed in 1999.

Conclusion:

As a result of amalgamation, generally, the processes of the former municipalities were continued in the new City until new policies and procedures were established. We recognize that current efforts have been focused toward the transition of operations as a result of amalgamation. We also recognize that various processes are currently the subject of review. As a consequence, certain matters have not yet been addressed until that area is scheduled for review. It is essential that previous management letter recommendations are considered when implementing new systems, policies and procedures.

It is recommended that the Chief Financial Officer and Treasurer be directed to provide an action plan with specific timeliness and responsibility for the implementation of the recommendations not yet implemented, as outlined in Attachment I, and report back on the status of implementation by December 31, 1999.

Contact Name:

Jerry Shaubel, Director of Audits, 392-8462

Jeffrey Griffiths

City Auditor

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Attachment I

FOLLOW-UP OF 1997 MANAGEMENT LETTERS

Recommendations Not Implemented

FOLLOW-UP OF 1997 MANAGEMENT LETTERS

Recommendations Not Implemented

FORMER METRO

ENVIRONMENTAL LIABILITIES

Recommendation 1:

Decisions relating to the future direction of identifying and accounting for environmental liabilities should be coordinated at the corporate level particularly as such liabilities may exist in a number of departments throughout the former Metro, as well as the former area municipalities, agencies, boards and commissions. Accounting policies for the recording, reporting and funding of environmental liabilities should be developed as soon as possible. Once identified, all liabilities should be recognized in the City's accounting records and appropriately disclosed in the annual financial statements. This process should include ensuring that the liabilities are complete and properly valued.

Management's Response:

An environmental liability survey was initiated in 1996 in an attempt to establish whether departments/local boards had a formalized environmental policy; whether an environmental audit had been performed on any of their operations; whether they were aware of any potential environmental liabilities that impacted their operations; and whether costs related to these potential liabilities could be quantified.

This work will need to proceed on a corporate basis in an attempt to quantify potential costs. At that time, an evaluation will be necessary to determine the reporting and funding requirements of these potential liabilities.

Follow-up:

No significant progress has been made on this area. Over the past several years, we have commented on the necessity to evaluate the potential liabilities for environmental damage which may be the responsibility of the City. Addressing this issue will require the use of a specialist in this field of study and implementation will probably take place in the longer term given the potential budget impact.

Recommendation 2:

Management should consider contacting the Environmental Compliance Section of the Safety Department at the Toronto Transit Commission as an information resource. The TTC has been doing some work in this area for a number of years and has identified a number of environmental liabilities. Appropriate provisions for these liabilities have been made in the financial statements of the TTC.

Management's Response:

Joint meetings have been held with the Environmental Compliance Section of the Toronto Transit Commission to assist us in developing material for an environmental survey. We believe this unit will continue to provide us with significant support in our efforts to quantify, report and fund the environmental liabilities of the City of Toronto.

Follow-up:

See Recommendation 1.

RESERVES AND RESERVE FUNDS

Recommendation 16:

A valuation should be completed by management on all outstanding liability claims to determine the amount of losses that may be the responsibility of the new City.

Management's Response:

Staff familiar with the management of insurance have been working together in the last six months, assessing the validity of all the outstanding liability claims. An estimated amount of losses has been determined and will be further reviewed by the Manager of Insurance and Risk Management by December 1998.

Follow-up:

This has not yet been implemented. Claims are currently maintained in different systems. The Manager of Insurance and Risk Management has indicated that a new system will be acquired to consolidate all claim information, at which time, a valuation of all outstanding claims will be completed.

Recommendation 17:

Management should review the adequacy of the existing Insurance Reserve Fund and other provisions of the former area municipalities. This review should recommend a funding policy to meet all obligations relating to insurance premiums and deductible provisions of external coverage as well as losses in excess of external coverage. This policy should also provide for an annual review of the level of contributions to meet the obligations, particularly when changes are made to the amount or deductible provisions of the external coverage.

Management's Response:

The adequacy of all our reserves and reserve funds has been monitored regularly in the past. The annual provision for the new City of Toronto has been reviewed and currently a policy is being worked on by staff with the intent of incorporating a funding policy to meet all obligations relating to insurance premiums and deductible provisions.

Insurance policies have been finalized for Liability and Auto Insurance Policy effective May 1, 1998 and for Property and Boiler effective June 1, 1998. Deductibles have also been standardized.

Follow-up

This will not be fully implemented until an actuarial valuation is completed. In the meantime, staff have performed an initial review of the Insurance Reserve and estimated an annual provision, generally based on the estimated liabilities and past contributions. It is anticipated that a funding policy will be developed once the actuarial valuation of all outstanding liabilities is completed.

PAYROLL RELATED ISSUES

Recommendation 23:

In consultation with the Legal Department, a formal written agreement should be consummated relating to the processing of employee benefits. The agreement should include a stipulation allowing the City to evaluate the benefit carrier's internal controls or receive independent audit reports on its internal controls relating to benefits processing.

Management's Response:

As the new City will be going to market some time this year to renegotiate all its existing benefit agreements, it is not an opportune time to enter into further agreements with Sun Life. This recommendation will be taken into consideration when the RFP is prepared for the marketing search.

The City has engaged a consultant to assist with the benefits transition. They will be meeting with Sun Life to go over the terms of the existing contract and make recommendations on future contract terms.

Follow-up:

This will be considered when the current renegotiation of new benefits agreements are finalized.

Recommendation 25:

Management should establish procedures requiring that workers' compensation advances be reconciled to the general ledger on a monthly basis by someone independent of the recording function. Any discrepancies should be investigated and the records adjusted with supervisory approval.

Management's Response:

Accounting and payroll services staff are currently in the process of reconciling the advances outstanding as per the payroll system with the general ledger.

Follow-up:

We have reported this matter in previous years and no progress has been made to address the issue. Management has advised that due to staffing constraints, this recommendation has not yet been implemented.

Recommendation 26:

Management should review the adequacy of collection efforts taken to recover old outstanding advances. Management should consult the Legal Department regarding the collection of old outstanding advances, particularly from employees who have since left the Corporation.

Management's Response:

As part of the reconciliation process, the Legal Department will be consulted as to the disposition of specific uncollectible accounts.

Follow-up:

No progress has been made on this area, as the reconciliation procedures on outstanding advances have not yet been implemented. The lack of reconciliation procedures for outstanding advances hinders the collection efforts of the outstanding amounts. As the possibility of recovery diminishes over time, priority should be given to addressing this area.

CAPITAL OPERATIONS

Recommendation 28:

Management should establish procedures requiring a reconciliation of the Debt Management System records to the general ledger on a periodic basis by someone independent of the recording function. Discrepancies should be investigated and the records adjusted with supervisory approval.

Management's Response:

Appropriate procedures in this regard are in place but were not monitored regularly. The Treasury and Financial Services Division prepares an entry to set up the debt charges payable and Accounting Division staff prepare entries to clear the account when the cheque is issued. The Accounting Division has set up only one account to capture all debt charges payable but will set up additional costing units in 1998 to facilitate the effective and timely reconciliation of the Debt Management System to the general ledger.

Follow-up:

This will be addressed during the implementation of the new accounting system. It is anticipated that the Debt Management System will be integrated with the general ledger thereby eliminating the need for additional reconciliation procedures.

Recommendation 29:

Management should review the interest capitalization policy and make appropriate adjustments to ensure that the policy provides for consistent treatment of both under financed and over financed capital projects. The Finance Department should ensure that the accounting records reflect the application of such policy.

Management's Response:

Capital projects are increasingly funded from current revenue. Since funding and expenditures will not always occur in the same year, the former policy regarding interest capitalization needs to be reviewed on a corporate basis.

Follow-up:

This has not yet been implemented. Management has indicated that the policy will be reviewed and reported in 1999.

FIXED ASSETS

Recommendation 30:

Management should explore the possibility of transferring the budget for fixed asset acquisitions from the operating budget to the capital works program. Alternatively, consideration should be given to establishing a reserve similar to the existing equipment and vehicle replacement reserves to fund fixed asset acquisitions not covered by these reserves. Annual provisions to the capital works budget or the reserve could be made through existing charges from the departmental operating budgets.

Management's Response:

The recommendation will be reviewed as part of the harmonization of budgetary and accounting policies. It is the intention of the Finance Department to review and make recommendations to Council with respect to the establishment of reserves and to provide for the replacement of capital assets.

Follow-up:

This has not yet been implemented. Management has indicated that this will be reviewed and reported in 1999.

Recommendation 31:

An inventory of fixed assets should be compiled as soon as possible with priority being given to computer equipment. Management should establish a policy regarding the purchase and control of fixed assets. This policy should include the keeping of detailed records for all fixed assets over a specified amount and a requirement for periodic physical inventory counts to ensure that adequate controls exist to safeguard the assets.

Management's Response:

Details on all fixed assets in respect of the major operating departments have been compiled and are available within the fixed asset module of the general ledger system. The accounting, funding control and reporting of the fixed assets of the amalgamated City will be reviewed as part of the rationalization and streamlining processes that will occur this fall.

Follow-up:

The former Metro maintained details of its fixed assets in the Computron system, which will be replaced in 1999. There is currently no corporate policy in place for the recording and control of fixed assets.

GENERAL ACCOUNTING

Recommendation 33:

Revenue from fines should be recorded in the accounting records on an accrual basis and not on a cash basis.

Management's Response:

See Recommendation 34.

Follow-up:

This has not yet been implemented.

Recommendation 34:

Management should review the procedures for the recording and collection of fines relating to by-law infractions other than parking. The Finance Department should coordinate the related functions of the Legal Department and the issuing departments, to ensure that adequate records are maintained and that collection efforts are effective.

Management's Response:

Measures will be instituted this fall to enhance co-ordination between the Finance, Legal and issuing departments relative to the issuance, recording and collection of fine revenue related to by-law infractions other than parking.

Follow-up:

This has not yet been implemented. Management has indicated that no progress has been made on this area due to the focus of efforts on the amalgamation issues.

Recommendation 35:

Management should establish procedures to reconcile the City's records with the records maintained by the Ministry of the Attorney General to ensure that all fines paid to the Ministry have been remitted to the Corporation. Consideration should be given to obtaining an electronic listing of fines remitted for uploading to current systems to facilitate the updating of records.

Management's Response:

See Recommendation 34.

Follow-up:

This has not been implemented.

Recommendation 36:

As part of the review process of bank reconciliations, management should ensure that reconciling items are followed up on a timely basis and adjustments are made for errors identified.

Management's Response:

Steps are being taken immediately to ensure that all reconciling items are dealt with before the next month end. Where ongoing investigations are required, the progress of the investigations will be monitored regularly.

Follow-up:

A recent review indicated that certain bank reconciliations are not up to date. In addition, certain old reconciling items remain outstanding.

TAX ISSUES

Recommendation 37:

The Tax Compliance Office of the Finance Department should determine the proper accounting treatment of various tax issues such as Ontario Retail Sales Tax and Employee Health Tax. Such information should be communicated to other boards and commissions to ensure that application is consistent throughout the Corporation.

Management's Response:

As a result of the amalgamation, a review was performed at each of the former area municipalities to determine the level of compliance with the various tax legislation. The review pointed to the need to harmonize the accounting treatment of a number of tax issues to ensure a uniform level of compliance throughout the City.

As a general rule, the Tax Compliance Unit strives to inform the local boards, agencies and commissions of legislative changes to ensure compliance with the applicable statutes. Due to the complexity of the various legislation, as well as the unique operating structure of the various boards and commissions, each entity may deliver programs in a different manner, potentially resulting in a different tax treatment for similar programs.

The Tax Compliance Unit acts as a resource to the various boards and agencies. While the Unit provides advice when solicited and/or points out possible areas of potential exposure under the various legislation, the degree of reliance on the Unit varies among the boards and agencies. Senior management at each of the entities make an independent business decision with respect to the level of compliance with the applicable tax legislation.

Follow-up:

A review of the level of tax compliance at the former municipalities was completed by the former Manager, Tax Compliance, who has since left the Corporation. Certain issues were raised which required further review. There is currently no staff at the Tax Compliance Section and management has indicated that further reviews will be performed by outside consultants. No further work has been done to address those issues identified.

FINANCIAL STATEMENTS

Recommendation 38:

To provide consistent financial reporting of the total operating costs of each local board, agency or commission, consideration should be given to preparing the financial statements of each entity that recognizes all capital and related expenditures.

Management's Response:

A review will be completed during 1998 of all reporting practices to ensure that consistent practices are used by all agencies, boards and commissions, including the charging of capital financing costs where deemed appropriate.

Follow-up:

This has not yet been implemented. Management has indicated that this needs to be dealt with at the Board level. However, we feel that the Chief Financial Officer and Treasurer should set a reporting standard which should be followed by all agencies, boards and commissions. Such a standard will make the financial information among the various corporate entities consistent, comparable and more easily understood by members of Council.

MANAGEMENT INFORMATION SYSTEMS

Recommendation 45:

Management should consider revising the system account query default to a narrower range so that, unless otherwise specified, no accounts will be queried. This would minimize the risk of unnecessary processing should an error occur in specifying the accounts queried.

Management's Response:

Finance staff have looked into this matter with staff of the IT Division of Corporate Services who advise that the system account query default, as currently existing within Computron, cannot be altered.

Follow-up:

As the Computron system will be replaced in 1999, this matter should be considered when implementing the new system.

Recommendation 46:

Management should review the account code structure and reassign account numbers for the few accounts that presently require manual manipulation. This would provide for the easier extraction of summary financial information.

Management's Response:

This matter will be addressed as part of the creation of a City-wide general ledger structure that encompasses the accounting activity of the new City.

Follow-up:

This will be considered in the implementation of the new system.

Recommendation 47:

To improve security, management should establish a policy requiring that passwords be changed periodically. Consideration should be given to using the same standards established for the Novell Network.

Management's Response:

The requirement for password changes in the financial information system is an administrative one that is not enforced by the general ledger system in place. Discussions will be held with Information Technology during the implementation of the corporate financial information system to establish methods to force password changes. A review will also be done on the availability of reports detailing unsuccessful attempts to access the system.

Follow-up:

This will be considered in the implementation of the new system.

Recommendation 48:

Management should consider installing lockout features in the system which would limit the number of unsuccessful attempts to access the system. Consideration should also be given to generating exception reports which would identify users with over a specified number of unsuccessful attempts or users who have not used the system for over a specified period. The report should be reviewed by a supervisory staff and appropriate action taken to ensure that access is restricted only to authorized users.

Management's Response:

See Recommendation 47.

Follow-up:

This will be considered in the implementation of the new system.

FORMER CITY OF SCARBOROUGH

Recommendation 1:

We recommend that the reconciliation of the Deferred Revenue - Building Permits system (BFM system) be made to the general ledger on a monthly basis.

Management's Response:

The retirement of staff in the Buildings Department has resulted in a breach of internal control in the reconciliation of deferred revenue between the BFM system and the general ledger. The Buildings Department staff have been directed to prepare a reconciliation at the end of each accounting period and submit it to the Finance Department.

Follow-up:

Differences remain between the BFM system and the general ledger. No progress has been made to investigate and resolve the differences.

Recommendation 3:

We recommend that as part of conforming the new City's accounting policies that the continued accounting for immaterial inventories and inventories which are not for resale be reviewed with the expectation that such inventories be expensed as acquired. For inventories that continue to be carried in the accounts, practices should be reviewed with the objective of ensuring that appropriate access and accounting controls are put in place.

Management's Response:

Scarborough has had problems in recent years with year-end adjustments being required to adjust the general ledger accounts to the balances indicated by the stock system or physical counts. The perpetual inventory records have been subject to periodic test counts with no material differences disclosed. Year-end cut-off has also be reviewed. There have been some instances where issue prices have been incorrectly calculated.

The new integrated Financial Information system to be implemented for the new City will eliminate any weakness that are contained in the present system. The idea of eliminating central inventory systems does have some merit and should be pursued by the new City management.

Follow-up:

The same procedures continue in 1999. Corporate policies have not yet been established.

FORMER CITY OF YORK

Recommendation 2:

We recommend that the accounts continue to identify funding sources and budget for capital expenditures on a project location basis. In order for meaningful reporting to be made on the progress and outcomes of capital projects, expenditures must also be allocated on the same basis.

Management's Response:

Where specific capital projects can be identified, budgets will be allocated for these projects and expenditures will be charged to these accounts as costs are incurred.

Follow-up:

The former City of York's records were transferred to the former North York's system, but no analysis has been made of the accounts. Management has indicated that a review of all capital projects will be undertaken in 1999 to determine the debt requirements. It is recommended that this review should include ensuring that all budget, expenditures and financing are allocated on the same basis.

Recommendation 3:

We recommend that efforts be made to reconcile all bank accounts within three weeks of the period being reconciled. Differences should be reported to the bank promptly and in writing if significant or uncleared by the following month. Procedures should include reviewing all items returned by the bank and all entries on the bank statement not supported by a returned item.

Management's Response:

Procedures have been put in place to require bank reconciliations to be completed within three weeks of month end.

Follow-up:

While York's accounts have now been consolidated with North York's accounts, the timeliness of bank reconciliations continue to be an issue. Certain bank reconciliations are not up to date.

Recommendation 6:

We recommend that balances owed to the "Children at Risk" trust fund be paid over to it on a regular basis and allowed to earn interest for the benefit of the trust fund.

Management's Response:

We concur with your recommendation. This issue will be addressed in 1998.

Follow-up:

This has not yet been implemented. Funds received from the Province have not yet been transferred to the trust fund.

Recommendation 7:

We recommend that consideration be given to separately tracking and recording each revenue stream and for provision of information about the aging of the customer accounts when a new system to manage these accounts is selected.

Management's Response:

A new water revenue system will be implemented during 1999 for the new City of Toronto and we will ensure that these issues are addressed in that new system.

Follow-up:

This will be addressed when implementing the new system.

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