September 14, 1998

To:Strategic Policies and Priorities Committee

From:Audit Committee

Subject:Management Letter - Metropolitan Toronto Housing Company Limited for the year ended December 31, 1997

Recommendation:

The Audit Committee on September 11, 1998, recommended to the Strategic Policies and Priorities Committee that the report (August 27, 1998) from the City Auditor forwarding the 1997 management letter of the Metropolitan Toronto Housing Company Limited dated May 15, 1998, and the corresponding response, be received for information and Council so advised.

The Audit Committee advises that the management letter and the response from the Board of Directors were forwarded to all Members of Council with the agenda for the Audit Committee meeting held on September 11, 1998.

Background:

The Audit Committee had before it a report (August 27, 1998) from the City Auditor forwarding a copy of the 1997 management letter for the Metropolitan Toronto Housing Company Limited.

The Audit Committee also had before it a transmittal letter (August 4, 1998) from the Corporate Secretary of the Board of Directors of the Metropolitan Toronto Housing Company Limited, forwarding the Board's response to the Management Letter.

City Clerk

Ina Robinson 392-7031

Attachment

Item 7

August 27, 1998

To:Audit Committee

From:City Auditor

Subject:Management Letter

Metropolitan Toronto Housing Company Limited

For the year ended December 31, 1997

Recommendation:

It is recommended that the management letter of the Metropolitan Toronto Housing Company Limited dated May 15, 1998, be received for information.

Background:

We are forwarding a copy of our management letter addressed to the General Manager, containing comments on systems and procedures arising from the 1997 audits of the Company.

Contact Name and Telephone Number:

Jerry Shaubel, 392-8462.

Jeffrey Griffiths

City Auditor

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May 15, 1998

Ms. Joanne Campbell

General Manager

The Metropolitan Toronto Housing

Company Limited

3rd Floor, 20 York Mills Road

North York, Ontario

M2P 2C2

Dear Ms. Campbell:

We have recently completed our audit of The Metropolitan Toronto Housing Company Limited, for the year ended December 31, 1997. During our review, we noted areas in which internal controls could be strengthened and where accounting systems and procedures could be improved.

Considering the test character of our audit, you will appreciate that reliance must be placed on adequate methods of internal control as your principal safeguard against irregularities which a test examination may not disclose. In this letter we are presenting, for your consideration, our comments and recommendations on matters related to the system of internal controls which came to our attention during the course of our audit. We are pleased to note that most of the recommendations we have made in prior years have been implemented.

This letter, by its nature, contains only our observations and recommendations on deficiencies observed during the course of our audit. It does not include our observations on the many strong features of the Housing Company's system of internal controls.

IMPACT OF DOWNSIZING/RE-ORGANIZATION

Observation:

Studies in Canada, the U.S. and the U.K. have suggested a link between corporate staff reductions and increases in both internal and external fraudulent activities. Staff reductions often result in fewer checks and balances that minimize the possibility of the occurrence of fraud. These staff reductions can also result in the inadvertent elimination of controls when positions are combined or eliminated.

To mitigate these risks, Housing Company staff performed a review of internal controls and highlighted a number of areas where controls could be improved. While such a proactive measure is appropriate, action has not yet been taken on the weaknesses identified in the review.

The impending merger of the Housing Company with Cityhome will present many new challenges to staff. The need to maintain adequate internal controls throughout the transition period and to design these controls into the permanent structure of the new organization is paramount.

Recommendations:

1. Control improvements identified by staff should be assessed and appropriate action taken as soon as possible.

2. Attention should be paid to maintaining adequate internal controls throughout the amalgamation with Cityhome and to ensuring that proper controls exist in the new organization.

SYSTEMS - YEAR 2000

Observation:

As we reported last year, the fact that many computer systems are predicted to experience significant problems when their internal clocks advance into the Year 2000 has received significant media coverage. In addition to computer software and hardware, this problem has the potential to affect electronic control modules in devices such as elevators, security, admission and parking systems.

To deal with this issue, the City of Toronto has established a Year 2000 Project Team. This team will bring and develop significant skills and expertise to the Year 2000 problem. As such, it would be beneficial for the Company to work closely with the City's Project Team to ensure all potential problem areas have been identified and to apply appropriate rigour to the process for both identifying and rectifying deficiencies.

Recommendation:

3. The Housing Company should continue to liaise with the City's Year 2000 Project Team to ensure all potential problems have been identified and that all critical items will be addressed on a timely basis.

COMMERCIAL ACCOUNTS RECEIVABLE

Observation:

Changes have been made recently to the collection policies for residential tenants in order to reduce the amount of bad debts. However, similar changes have not been applied to commercial accounts receivable. At December 31, 1997, commercial accounts outstanding in excess of 120 days totalled approximately $148,000. The Company's strategy for dealing with commercial tenants reflects the differences inherent in commercial operations. The Company believes the procedures in place are appropriate in the current business environment and that arrears will decline with the improving economy.

Recommendation:

4. Arrears for commercial tenants should be monitored closely. Should these arrears not decline in the near future, consideration should be given to reviewing commercial rent collection policies.

RENTAL INCOME AND COLLECTIBILITY

Observation:

In prior years, we recommended that the Housing Company extend the use of credit checks to Geared to Income tenants as well as Market Rate tenants. Credit reports are now requested for new tenants and have been useful in providing support for financial information provided by the prospective tenants. Although the information gained in this process is not yet being used to screen out exceptionally high risk tenants, the Company has been collecting statistics to determine the relationship between the credit history/rating and payment/arrears experiences.

Recommendation:

5. Specific policies should be developed for the use to be made of information contained in credit reports on prospective tenants. Where an applicant's credit history provides reasonable doubt as to the likelihood of the applicant meeting the terms of the lease, appropriate action should be taken.

RESERVE FUNDS

Observation:

As a result of recent changes to the operating agreements with the Ministry of Municipal Affairs and Housing and the Canada Mortgage and Housing Company, the Housing Company is no longer required to segregate funds between buildings in the Capital Reserve Fund. This change eliminates the need to track fund balances for each building and allows the Housing Company to spend money for capital repairs as it sees fit, although funds are still restricted by program. This change also eliminates the need to allocate new contributions and interest income between the buildings in a program.

The Housing Company has not taken advantage of these changes and continues to account for the funds on a building by building basis incurring additional staff time to prepare this information.

Recommendation:

6. The Housing Company should take advantage of the recent rule changes that affect the Capital Reserve Fund and begin to account for such funds on a program basis rather than on a building by building basis.

We have reviewed this report with the (Acting) Finance Manager and would be pleased to discuss it further if you wish.

Yours truly,

Jeffrey Griffiths

City Auditor

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August 4, 1998

AUDIT COMMITTEE:

The Board of Directors of The Metropolitan Toronto Housing Company Limited on July 27, 1998, had before it a communication (July 21, 1998) from the Corporate Secretary advising that the Financeand Audit Committee on July 20, 1998, had before it a report dated July 20, 1998, from the General Manager, MTHCL, advising that as part of the annual audit process, the City of Toronto Auditors provide management of the Housing Company with observations and recommendations relating to internal control or other matters that come to their attention as a result of the audit; providing the General Manager's response to the observations and recommendations; wherein it recommends that the Finance and Audit Committee receive the Auditor's Report and Management's Response on the review of internal controls and accounting procedures of the Housing Company; and that the report be submitted to the Board of Directors for information; and further advising that the Committee:

(1)received the aforementioned report from the General Manager, and directed that a copy thereof be forwarded to the Board of Directors for information; and

(2)requested the General Manager to submit a report to the next meeting of the Finance and Audit Committee on the improvements identified by Housing Company staff during their review of internal controls.

The Board of Directors of The Metropolitan Toronto Housing Company Limited received, as information, the aforementioned report from the General Manager, together with the Auditor's Report and Management's Response on the review of internal controls and accounting procedures of the Housing Company; and directed that a copy thereof be forwarded to the City of Toronto AuditCommittee for information.

Corporate Secretary

R. MacKenzie/in

Item No. M-8

Attachment

Sent to:City of Toronto Audit Committee

Chief Operating Officer, Housing Company

City Auditor, Attention: Mr. J. Shaubel

(Report dated July 20, 1998, addressed to the Housing Company's Finance and Audit Committee, from the General Manager, The Metropolitan Toronto Housing Company Limited.)

Recommendation:

It is recommended that the Finance and Audit Committee receive the Auditor's Report and Management's Response on the review of internal controls and accounting procedures of the Housing Company; and that the report be submitted to the Board of Directors for information.

Background:

As part of the annual audit process, the City of Toronto Auditors provide management of the Housing Company with observations and recommendations relating to internal control or other matters that come to their attention as a result of the audit. Observations and recommendations are reviewed with the Manager of Financial Services and other staff.

The General Manager's response to the observations and recommendations are subsequently reviewed with the City of Toronto Auditors and staff. Staff proceeded to implement adopted recommendations without delay.