September 14, 1998

To:Strategic Policies and Priorities Committee

From:Audit Committee

Subject:1997 Over-expenditure - Information Technology Services Division - Former City of Toronto

Recommendation:

The Audit Committee on September 11, 1998, recommended to the Strategic Policies and Priorities Committee and City Council the adoption of the report (June 23, 1998) from the City Auditor.

Background:

The Audit Committee had before it a report (June 23, 1998) from the City Auditor respecting the 1997 over-expenditure - Information Technology Services Division for the former City of Toronto.

The Audit Committee also had before it the following reports from the Commissioner of Corporate Services:

-(June 26, 1998) responding to the 1997 over-expenditure report in the former City of Toronto's Information Technology Services Division; and

-(August 19, 1998) providing more information to the Audit Committee on this matter.

City Clerk

Ina Robinson 392-7031

Attachments

Item 3 June 23, 1998

To:Audit Committee

From:City Auditor

Subject:1997 Over-expenditure - Information Technology Services Division

Former City of Toronto

Recommendation:

It is recommended that:

(a)In view of the budget implications, the Commissioner of Corporate Services report the 1997 over-expenditures in the Information Technology Services Division (ITSD) of the former City of Toronto and the action taken to date, to the Budget Committee, for information;

(b)the Executive Director, Information Technology perform a review of the agreement with the outside provider of data processing services at the former City of Toronto, to confirm the nature of services provided, the cost of all charges and the budget implications on the division's 1998 and future budgets;

(c)the 1998 budget of the Information Technology Division be monitored to determine the potential impact of unbudgeted commitments on the division, and appropriate action taken; and

(d)the Chief Financial Officer and Treasurer finalize the necessary budget control processes, including the provision of effective management reports, to assist departments in monitoring expenditures against budget.

Background:

Early in 1998, the Commissioner of Corporate Services requested that the City Auditor investigate an apparent over-expenditure in both the capital and 1997 operating accounts of the Information Technology Services Division, former City of Toronto. In addition, the Commissioner advised and kept the Chief Administrative Officer apprised of the situation, and requested the Chief Financial Officer and Treasurer for her assistance in resolving the apparent over-expenditures in an appropriate manner.

Discussion:

The objectives of this review were to:

(a)confirm the over-expenditure in both the operating and capital accounts of ITSD as at December 31, 1997;

(b)determine, if possible, the cause(s) of the over-expenditure; and

(c)implement the necessary budgetary controls and purchase/payment procedures, to prevent a recurrence.

The review included interviews with various Information Technology, Corporate Services, Finance and Budget staff of the former City of Toronto, as well as a review of relevant transactions, management reports and related documentation. The findings of the review, including the actions taken to date, are outlined below.

(i)Operating Budget Over expenditure

The over-expenditure in ITSD's operating budget for 1997 was $1.27 million. In addition, during our review, we identified a further $562,000 in 1997 expenses which had not been accounted for, increasing the division's operating deficit for 1997 to just over $1.8 million.

The overspending on the operating budget was mainly due to unrealized savings anticipated from the former City of Toronto's outsourcing of data center operations in 1997. It would appear that senior ITSD staff believed the overspending problem would correct itself by the year end, following the cancellation of certain software licenses and maintenance contracts that had been encumbered for the entire year. While several licenses and contracts were eliminated, other costs related to the outsourcing more than negated any savings. It does not appear that these additional costs were factored into any variance reporting exercise. In addition, the hiring of 11 additional staff late in 1997 and the payment of lieu time to IT staff at the end of the year, despite variance reports projecting an over expenditure, made an already significant deficit, worse.

The overspending of $1.8 million in ITSD's 1997 operating accounts has been covered by under-expenditures in other operating accounts in the former City of Toronto. Nonetheless, the over-expenditure should be reported to the City's Budget Committee for information.

(ii)Capital Over-expenditure

The Information Technology Strategy and Plan (ITSP) initiative at the former City of Toronto consisted of 4 separate projects: Corporate Infrastructure; Financial Information Systems (FIS); Electronic Office; and Geographic Information Systems (GIS). ITSD was responsible for the Corporate Infrastructure and Electronic Office projects.

Capital funding for the Corporate Infrastructure project, approved in 1995 and 1996, totaled $7.44 million. An additional $3.85 million was approved in 1997 in a corporate "at large" operating account for the ITSP initiative, of which approximately $3.3 million was available for the Capital Infrastructure project.

Our review indicated that the capital over-expenditure in the Corporate Infrastructure project was just over $2.6 million. The over-expenditure was due to the continued purchase of computer and related equipment by the division during the year, despite variance reports in March and July of 1997, indicating that the project was overspent.

The over-expenditure in the capital account has been financed from the 1997 surplus in the former City of Toronto's current operations. The over-expenditure should however, be reported to the Budget Committee for information.

(iii)Other Factors

The following factors contributed to the oversight in identifying both the capital and operating over-expenditures in the Division:

(a)The lack of formal financial control procedures with respect to the purchase/payment process, and more importantly expenditure control, within the Division;

(b)Management reports not being available for several months following the mid year conversion to the new Banner Accounting system, making it difficult to properly monitor expenditures against budget;

(c)Funds for computer and related equipment purchases being provided in both the Capital Infrastructure project account and an "at large" operating account, complicating the monitoring of expenditures against budget;

(d)The disabling of the "funds availability" check on the new system; and

(e)The lack of reliable information from and proper analysis by Administration staff in the Division.

(iv)1998 Budget

During our review we identified additional commitments not provided for in the former City of Toronto ITSD's 1998 budget request. These additional commitments are estimated at $1.4 million. The magnitude of these unbudgeted items could put significant pressure on the consolidated Information Technology Division's 1998 budget, and could result in the division being overspent at year end. Immediate action is therefore required to control the magnitude of the potential over-expenditure in 1998, and minimize the impact on the division as a whole.

(v)Outsourcing of Data Processing Services

The transfer of the City's data processing operations to an outside provider occurred in July, 1997. The agreement with this provider extends to the year 2000. The City's usage charges are higher than original projections. In addition, a delay in the conversion to the provider's net shared environment, resulted in a surcharge being applied by the provider for the first 6 months of 1998. Consequently, the 1998 expenditure for these services will be significantly greater than budget. A review of the service contract is therefore required to confirm the nature of the services provided, the cost of all charges and the implications on the division's 1998 and future budgets.

(vi)Action Taken

Appropriate purchase and payment procedures have been implemented by Audit Division staff for the division, including an interim delegation of financial signing authority schedule. Section managers are accountable for their respective budgets and monthly variance reports will be forwarded to them for their review and explanation of variances and any action required. A consolidated monthly variance report for the Division is prepared by the Administration Section and forwarded to the Acting IT Director for his review and approval. A list of licenses and service contracts has been compiled to determine the dollar value of commitments and confirm whether sufficient funds are available to cover these commitments.

As of June 15, 1998, the move to the data processing services provider's net shared environment was completed. As a result, the surcharge, estimated at $150,000 per month, will no longer apply.

(vii)Accountability for Over-expenditures

While the factors identified in section (iii) of this report may have contributed to the over- expenditure situation, senior management is ultimately accountable for the over-expenditures in both the operating and capital accounts. Staff of the former City of Toronto Budget office advised that they attended various meetings with senior ITSD and Corporate Services staff during July and August of 1997, at which budget issues including IT over-expenditures in both capital and operating accounts, were discussed. Budget staff were of the understanding that no further equipment purchases would be made in 1997 and that all spending in this regard would be deferred to 1998. They also advised senior staff that the savings expected from the outsourcing of the City's data processing operations were not materializing and as a result recommended that vacancies in the division not be filled. In spite of the advice from Budget staff and variance reports indicating an over-expenditure, computer purchases continued to be made, additional staff hired and lieu time paid to IT staff.

It should also be noted that based on discussions with Budget and Finance staff, there appeared to be a lack of clarity with respect to the role and reporting responsibilities (Budget Office or Financial Reporting Unit) of budget variances in the former City of Toronto. Staff also indicated that the philosophy regarding the analysis changed to a more consultative approach, wherein departments were accountable for their spending as well as for analyzing and explaining any variances. We agree that the accountability for budgets rest with departments/divisions, and that it is divisional management's responsibility to operate within their approved budget. However, Finance still has an important role in terms of ensuring the financial interests and position of the Corporation are protected. To this end, Finance is responsible for ensuring proper control procedures exists to detect significant variances and other financial issues, reporting these issues to senior management and/or Council on a timely basis, and ensuring that the necessary action is taken.

(viii)Conclusion

The over-expenditures that occurred in the former City of Toronto clearly demonstrates the need for effective budget control processes to monitor expenditures/commitments against budget so that unanticipated over-expenditures, in both the operating and capital accounts, can be prevented.

With the amalgamation to the new City and commitments being made and accounted for in 7 different systems, each with a different account structure, effective budgetary control is difficult. Commissioners and senior managers must be given the assurance that appropriate processes will be implemented to assist them in monitoring spending against the budgets they are ultimately accountable for. It is our understanding that Finance staff are in the process of developing budget control and related processes, and will communicate these to appropriate City staff as soon as possible.

Contact Name and Telephone Number:

Tony Veneziano, 392-8353.

Jeffrey Griffiths

City Auditor

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