Audit Services

 The Strategic Policies and Priorities Committee recommends the adoption of the recommendations of the Audit Committee embodied in the following transmittal letter (April 22, 1998) from the Audit Committee:

 Recommendation:

 The Audit Committee again recommends that:

(1)the recommendation of the Toronto Transition Team in connection with the delivery of audit services be approved;

 (2)the City Auditor and the Chief Financial Officer and Treasurer be given authority to proceed with a Request for Proposal in relation to the annual attest audit for the fiscal years 1998 to 2002 inclusive;

(3)the Chief Financial Officer and Treasurer establish a staff committee, including the City Auditor, to review the proposals and make recommendations to the Audit Committee concerning the selection of external auditors; and

 (4)the Chief Administrative Officer and the City Auditor work with the Chief of Police and the General Manager of the Toronto Transit Commission to examine what opportunities there may be to consolidate audit functions.

 At its meeting held on April 21, 1998, the Audit Committee had before it a communication (April 21, 1998) from the City Clerk advising that at its meeting held on April 16, 1998, City Council:

(A)had before it Clause 10 of Report No. 4 of the Strategic Policies and Priorities Committee, headed AAudit Services@;

(B)had struck out the aforementioned Clause; and

(C)had referred the Clause back to the Audit Committee for further consideration.

 The Audit Committee recommends the adoption of its previous recommendation as set out in Clause 10 of Report No. 4 of the Strategic Policies and Priorities Committee.

 (Communication dated April 21, 1998, addressed to the Audit Committee from the City Clerk)

 City Council, at its meeting held on April 16, 1998, had before it Clause No. 10 of Report No. 4 of the Strategic Policies and Priorities Committee, headed AAudit Services@.

 Council directed that the aforementioned Clause be struck out and referred to the Audit Committee for further consideration.

 (Clause No. 10 of Report No. 4 of the Strategic Policies and Priorities Committee headed, AAudit Services@)

 The Strategic Policies and Priorities Committee recommends the adoption of the recommendation of the Audit Committee embodied in the transmittal letter (March 25, 1998) from the Audit Committee.

 The Strategic Policies and Priorities Committee reports, for the information of Council, having referred the restructuring of the Audit Department, as proposed in the joint report (February 6, 1998) from the Chief Administrative Officer, City Auditor and Chief Financial Officer and Treasurer, to the Budget Committee and the budget process, to allow City staff to meet with representatives of CUPE Local 79 to see if the cost savings can be realized with as few staff reductions as possible.

 The Strategic Policies and Priorities Committee submits the following transmittal letter (March 25, 1998) from the Audit Committee:

 Recommendations:

 The Audit Committee on March 24, 1998, recommended to the Strategic Policies and Priorities Committee, and Council, that:

(1)the following recommendations of the Toronto Transition Team in connection with the delivery of audit services be approved:

 (a)that the City should have an internal Audit function to provide ongoing audit services to the Corporation; and

(b)that the annual attest audit should be done by an external auditor hired by an Audit Committee of Council;

 (2)the City Auditor and the Chief Financial Officer and Treasurer be given authority to proceed with a Request for Proposal in relation to the annual attest audit for the fiscal years 1998 to 2002 inclusive;

 (3)the Chief Financial Officer and Treasurer establish a staff committee, including the City Auditor, to review the proposals and make recommendations to the Audit Committee concerning the selection of external auditors; and

 (4)the Chief Administrative Officer and the City Auditor work with the Chief of Police and the General Manager of the Toronto Transit Commission to examine what opportunities there may be to consolidate audit functions.

 The Audit Committee reports, for the information of the Strategic Policies and Priorities Committee, and Council, having referred the restructuring of the Audit Department, as proposed in the joint report (February 6, 1998) from the Chief Administrative Officer, City Auditor and Chief Financial Officer and Treasurer, back to the City Auditor and requested that: (a)dialogue be commenced with representatives of CUPE Local 79 as soon as possible;

(b)every effort be made to introduce a redeployment program for staff to be streamlined; and

(c)when he reports back to the Audit Committee, a proposed organization chart for the new Audit Department be included.

Background:

 On March 24, 1998, the Audit Committee had before it a joint report (February 6, 1998) from the Chief Administrative Officer, City Auditor and Chief Financial Officer and Treasurer, on the provision of audit services to the new City of Toronto.

 The Audit Committee also had before it communications from the following:

(a)Mr. Denis Casey, Acting President, CUPE Local 79; and

(b)Mr. John Woods, Auditor of the former City of Toronto.

 The following persons appeared before the Audit Committee on March 24, 1998, in connection with this matter:

-Mr. Denis Casey, Acting President, CUPE Local 79

-Ms. Ann Dembinski, Second Vice-President, CUPE Local 79

 (Joint Report dated February 6, 1998, addressed to the Audit Committee from the Chief Administrative Officer, City Auditor and Chief Financial Officer & Treasurer.)

  Recommendations:

(1)That the recommendation of the Toronto Transition Team in connection with the delivery of audit services be approved;

 (2)That the City Auditor and the Chief Financial Officer & Treasurer be given authority to proceed with a Request for Proposal in relation to the annual attest audit for the fiscal years 1998 to 2002 inclusive;

 (3)That the Chief Financial Officer & Treasurer establish a staff committee including the City Auditor, to review the proposals and make recommendations to the Audit Committee concerning the selection of external auditors; and

 (4)That the City Auditor be given authority to proceed with the restructuring of the Audit department as proposed in this report.

 Background:

 The December 1997 report of the Toronto Transition Team recommended that:

(1)the annual attest audit should be done by an external auditor hired by an Audit Committee of Council; and

 (2)the City should have an internal audit function to provide ongoing audit services to the Corporation.

 Annual attest audits required under the Municipal Act were conducted by internal staff at the former municipalities of Metropolitan Toronto and the City of Toronto. Attest audits at the former Cities of North York, Scarborough, York and Etobicoke, as well as the Borough of East York were conducted by an external auditor. Internal audit work was conducted by staff at the former Metropolitan Toronto and the former Cities of Toronto and Scarborough. In general terms, other audit related work at the former Cities and the Borough of East York were contracted out to the private sector on an as needed basis and were not a part of an ongoing audit plan or cycle.

 The recommendation of the Transition Team represents an audit arrangement which exists in all municipalities in Canada (except Montreal, the former Metropolitan Toronto and the former City of Toronto) a majority of municipalities in the U.S., as well as in major corporations in the private sector.

 In order to evaluate the appropriateness of the Transition Team=s recommendation, it is important to understand the difference between the two audit processes.

 Annual Attest Audits:

 Attest audits are designed to permit the expression of a professional opinion on a set of financial statements. The opinion states whether the operations and financial position of the municipality have been presented fairly in compliance with accounting policies generally accepted for municipalities. Under present municipal legislation, statutory attest audit requirements comprise a high level annual audit of the financial statements of the municipality and its agencies, boards and commissions. These audits are designed to give assurance that the financial statements being audited are not materially misstated and that they do not contain inaccuracies or misrepresentations of a magnitude which could significantly mislead a reader of those statements. The auditor determines what is material and this determination impacts significantly on the extent of audit work which is conducted.

 Annual attest audit requirements for the City of Toronto will involve the expression of an audit opinion on the following sets of financial statements:

Consolidated Financial Statements of the City of Toronto

City of Toronto Hydro Commission

Toronto Transit Commission

Metropolitan Toronto Coach Terminal, Inc.

TTC Insurance Company Limited

TTC Pension Fund Society

TTC Sick Benefit Association

City of Toronto Sinking Funds

City of Toronto Waterworks System

City of Toronto Library Board

Toronto District Heating Corporation

City of Toronto Parking Authority

Metropolitan Toronto Pension Fund

Metropolitan Toronto Police Benefit Fund

Metro Police Supplemental Pension Benefits Trust Funds

City of York Employees Pension and Benefit Funds

City of Toronto Pension Plan

Toronto Fire Department Superannuation and Benefit Funds

Board of Governors of Exhibition Place

Canadian National Exhibition Association

Canadian National Exhibition Association Foundation

Hummingbird Centre for the Performing Arts

City of Toronto Zoo

City of Toronto Board of Health

Metropolitan Toronto Housing Company Limited

Cityhome

City of Toronto Trust Funds

North York Performing Arts Centre Corporation

City of Toronto Historical Board

Toronto Economic Development Corporation

St. Lawrence Centre for the Arts

The Metropolitan Toronto Convention and Visitors Association

Canada=s Sports Hall of Fame

 In addition to the above, the Attest Auditor is also required to provide opinions on a significant number of provincial subsidy claims which include the following Homes for the Aged:

 Albion Lodge

Bendale Acres

Carefree Lodge

Castleview Wychwood Towers

Cummer Lodge

Fudger Home

Kipling Acres

Lakeshore Lodge

Seven Oaks

True Davidson Acres

 Under present legislation, the Attest Auditor is also required to provide audit opinions on approximately 35 Business Improvement Area financial statements. In addition, the Auditor of the former City of Toronto has also provided opinions on approximately 15 Community Centres and Arenas. Audit opinions will also be required on various miscellaneous subsidy claims relating to the Ambulance Division, as well as the Housing Companies.

 The extent of the above audit work is significant. In order to minimize attest audit costs, discussions with the Province are underway in connection with the audit requirements of the Business Improvement Areas, in order to ascertain whether or not detailed audits are required. In addition, the audit requirements relating to the Community Centres and Arenas are currently being reviewed. It is suggested therefore, that audit requirements relating to the Business Improvement Areas and the Community Centres and Arenas be excluded from the request for proposal process.

 Internal Audits:

 Due to the fact that statutory attest audits are carried out at a high level, they provide limited value to the municipality in a proactive management capacity other than assurance of the absence of material error in the reported financial results and financial position. While a management letter may be a product of such an audit, it will not reflect observations based on a systematic and reasonably detailed review of all or even all major program activities of the municipality. Where municipal programs do not have the capacity to generate material dollar value errors, they will likely receive little attention during the mandated audit. Unless specifically requested, the attest audit will not generally address areas which are not considered material, even though they may be politically sensitive. As a consequence, the attest audit provides little support to the governance process. It will not contain any significant evaluation of individual program areas or reported program results unless contracted for specifically apart from the regular audit fee.

 All major municipalities in Canada and the US have counterbalanced this deficiency by the extension of audit processes to a more detailed level. This extension is conducted by internal audit staff. The size and complexity of the City of Toronto will make it more difficult for Council to exercise good governance over activities than was the case in any one of the amalgamating municipalities. Consequently, the need for an independent evaluation of program activities reported results and internal control processes will assume even greater importance in ensuring appropriate accountability of management of the City to Council. Thus, there is a need for additional audit processes covering all major program areas within the City if Council, the Chief Administrative Officer and Senior Management is to be in an informed position to make critical decisions related to these programs and the manner in which they are carried out. Certain areas are specifically targeted for audit in a more in-depth manner than would normally occur during an attest audit. They can be targeted for a number of reasons, such as representing or reflecting: (a)Major cost Centres with potential savings;

(b)Major problem areas to the Corporation;

(c)Specific problems in process, organization or function;

(d)Part of a specific audit cycle approved by Council based upon a structured risk analysis process; and

(e)Areas where fraudulent activities is suspected.

 When properly conducted, such reviews can cause or influence departments, commissions and local boards to function more effectively, efficiently and economically. Such actions can result in tangible as well as intangible benefits. Tangible benefits are measurable in financial terms, e.g., staff savings, increased revenue and costs avoided because of audit findings. Intangible benefits cannot be fully or readily measured in financial terms, e.g., improved services to the public, strengthened internal control systems to prevent and detect irregularities, avoidance of fraud and streamlined procedures.

 Transitional Audit Requirements:

 During the first six months or so, the internal audit function will include a process related to transitional issues. The transitional requirements relate to the termination of operations of the six area municipalities and Metro and the consolidation of those activities into the new City of Toronto. Each of the seven individual municipalities presently has appointed a statutory attest auditor for the 1997 fiscal year. Each auditor is required to report on the financial results of the municipality they have been appointed to audit.

 The City Auditor is currently completing the audit of the 1997 financial statements of the former Municipality of Metropolitan Toronto including its local boards, agencies and commissions, as well as coordinating the audit process for the other six amalgamated municipalities.

 Comments:

 The outsourcing of the attest audit is standard practice at the municipal level and the private sector in both Canada and the US. The reasons for this particular method of delivery of audit services are as follows:

(1)Auditor Independence:

 The very purpose and nature of an attest audit is to obtain the independent opinion of the auditor. Independence can be defined as the state of not being influenced or controlled by others in matters of opinion or conduct; thinking or acting for oneself; not subject to another=s authority or jurisdiction; and autonomous.

 The auditors= opinion on the financial statements increases users= confidence in those financial statements. It is the independent nature of this review and report on management=s representations on their financial statements that gives rise to the increased confidence.

 The Institute of Chartered Accountants of Ontario ARules of Professional Conduct@ state that the auditor Ashall hold himself free of influence, interest, or relationship which impairs his professional judgment or objectivity@ or appears to do so to the reasonable observer. This statement reflects the two facets of independence: independence in fact, and independence in appearance. Independence in fact and appearance may best be achieved through engaging an external auditor. (2)Efficient Use of Resources:

 Attest audit opinions on all municipal financial statements are required by April 30 of the following year. This deadline is imposed by the Province of Ontario and the preparation of financial statements by that date at the latest is important. For instance, the Public Sector Accounting and Auditing Board (PSAAB) of the Canadian Institute of Chartered Accountants, in its pronouncement relating to general standards of financial statement presentation requires that financial statements must be issued on a timely basis. PSAAB further states that the usefulness of financial information diminishes as time elapses. In view of the number of financial statements requiring audit opinions by April 30, it is not possible to staff the department to a level which accomplishes this objective and at the same time, keep the same level of staff productive for the balance of the year.

(3)Outsourcing of the Attest Audit allows the Internal Audit function to focus on value added issues:

 The outsourcing of the attest audit allows the City Auditor to focus on the pursuit of more value added issues, particularly in the area of value for money projects. The pay back in this area is significantly greater than attest audit work the major focus of which relates to a high level audit of a set of financial statements. The amount of time available for this work would be reduced depending on the level of assistance provided to the external auditors and any attest type work the

 City Auditor may be asked to perform on entities such as Community Centres and Business Improvement Areas. (4)Improved Access to specialized skills and audit technology:

 The skills available to a major private sector public accounting firm will likely be of benefit to the City Auditor, particularly in relation to specialized technical knowledge. For example, if the City Auditor requires technical advice on Internet Fire walls on a particular project, this expertise would likely be available from resources within the firm of the attest auditor as opposed to having an expert on staff in a permanent basis.

 Staffing Implications:

 The 1998 budget of the Audit Department has been based on the recommendations of the Transition Team. However, it is important to note that the 1998 budget year will include work relating to the 1997 attest audit. Due to the outsourcing of the attest audit function, staffing levels will likely be reduced from 50 to 20 by June 30, 1998. Current staffing levels are as follows:

   *Includes the transfer of staff from the Internal Control Division of the Finance Department of the former Metro.

 Proposed staffing levels under the new structure will be as follows:

 City Auditor 1

EDP Manager 1

Managers 3

Project Coordinators 5

Auditors 9

Executive Secretary 1

20

 Of the staff reductions required, it is anticipated that only two individuals will qualify for early retirement. In addition, the department has one temporary employee on staff.

 In view of the change in the type of work required, the structure of the Audit Department in the new City of Toronto will likely comprise of staff with professional designations, the majority of whom are currently excluded personnel. There are a number of union staff who possess accounting designations, and as such, will qualify for positions under the new structure. In view of the department=s required access to confidential records throughout the Corporation including personnel records, as well as the issue of independence, it is anticipated that staff of the restructured department will all be excluded. This is the general practice in audit departments throughout Canada and the US.

 The proposed staff level of 20 is based on an estimate of the potential work load of the department. Benchmark comparisons have been made with other municipalities across Canada and the US, in order to determine the appropriateness of such staff levels. Specific comparisons are as follows:

  It is difficult to accurately project staff requirements particularly when viewed in relation to potential audit projects brought about by the unprecedented amalgamation of seven municipalities. This level will be constantly evaluated over the next 12 to 18 months, particularly in the context of project requirements. It should be noted that internal audit costs as a percentage of the Municipal Operating Budget will be amongst the lowest in North America at 0.03 per cent.

 Budgetary Impact of Restructuring:

 As indicated earlier, the 1998 budget of the Audit Department has been prepared on the basis of the recommendations of the Transition Team. The 1998 budget, however, includes costs relating to the completion of the 1997 audits of the amalgamating municipalities so is not representative of a normal year=s operating expenditures. In this context, the budgetary impact has been based on a projected 1999 budget. A comparison of costs between 1997 and 1999 is as follows:

 1997 Total estimated audit costs of amalgamating municipalities including

local boards, agencies and commissions$4,750,000.00

 1999 Estimated attest audit costs of the new City$1,000,000.00

Estimated attest audit costs for local boards, agencies and commissions $750,000.00

Internal audit costs $1,747,000.00

 Estimated Total Audit Costs of the new City$3,497,000.00

 Reduction in audit costs (26 percent)$1,253,000.00

 It is difficult to accurately estimate attest audit costs which are generally affected by:

(a)The complexity and size of the operations;

(b)The number of individual audit opinions that must be issued;

(c)The materiality level used in designing the audit work;

(d)The adequacy of management and procedural controls; and

(e)The assistance provided by an internal audit function.

(1)The Complexity and Size of the Operations:

 From a mandated audit standpoint, complexity relates to how many revenue, expenditure and other accounting systems and sub-systems exist within the organization. In the case of the New City, the expenditure and revenue process will have a number of major aspects which will require individual attention. These will include for example, the Police Services Board, the administration of General Welfare Assistance, the issue and control of parking tags, the collection and control of parking tag revenues, tax revenue including the collection thereof, and other fees and services charges. The magnitude of certain of the revenue items is significant. The total taxation revenue, for example, will be almost $2.7 billion. In the case of fees, service charges, investment income and miscellaneous income, the total revenue is almost $1.3 billion.

(2)The Number of Individual Audit Opinions that must be Issued:

 The extent of audit work must be designed specifically to ensure that the financial statements are not materially misstated. Consequently, when an individual audit opinion is required on any component of the organization, additional audit work over and above work on the organization as a whole has to be done, as well as specific work related to the actual production of the audit opinion. Because of the City=s size and range of programs, far more individual opinions will be required than for other governments.

 The extent of the required audit opinions at the New City of Toronto is an issue that requires resolution. This area is currently being reviewed. (3)The Materiality Level Used in Designing the Audit Work:

 One of the most significant and least understood issues relating to the audit process is the materiality level used in an audit. A definition of materiality in an audit context is as follows:

AThe magnitude of an omission or misstatement or the aggregate thereof that, in the light of surrounding circumstances, makes it probable that the judgement of a reasonable person relying on the financial statements would have been changed or influenced by such omission or misstatement or the aggregate thereof.@

 In performing audit work, auditors have to ensure that they have done sufficient work to ensure that financial statements are not materially misstated. A determination of what is material in a financial statement audit context is not an entirely straightforward process and is dependent on a number of issues such as audit risk and the size and complexity of the organization.

 The lower the materiality level used, the more audit work has to be performed. This does not mean simply extending the test processes but also involves reviewing more areas of the operation.  (4)The Adequacy of Management and Procedural Controls:

 The extent of audit work is also governed by the adequacy of management and procedural controls. An initial evaluation of such controls is important prior to a determination of the extent of audit testing. Additional audit work will be required if internal controls are weak. This will be a critical issue during the early stages of the New City particularly as new controls are introduced to the administrative processes. The City Auditor is currently conducting ongoing control reviews at various locations throughout the City.

(5)The Assistance provided by an Internal Audit Function:

 Cooperation and coordination between the external and the internal auditor are essential in order to avoid duplication and reduce the overall costs of both types of audits. Specific assistance can be provided by the internal auditor during the attest audit. The extent of the assistance provided would be mutually agreed between both parties in consultation with the audit committee. The cooperation between the two groups can be mutually beneficial provided the internal auditing function is not viewed as an extension of the attest audit and the internal auditor is not viewed as a permanent resource of the external auditor.

 Proposed Timetable:

 It is anticipated that all 1997 attest audits will be completed by June 30, 1998, and that the restructuring of the audit function will be in place by that time. The 1998 budget of the department has been compiled on this basis.

 A specific timetable relating to the proposal process is as follows:

 Council Approval of ReportApril 15

Issue of Request for ProposalApril 20

Response to Request for ProposalMay 1

Selection of Attest AuditorsMay 15

Council Approval of Attest AuditorsJune 3

 Outsourcing of the Internal Audit Function:

While the outsourcing of the financial attest audit is by far the most common method of service delivery for the majority of municipalities in Canada and the US, the outsourcing of the internal audit function to the best of our knowledge, has not occurred in any municipality in Canada. In addition, we are not aware of any significant outsourcing in the US. The US National Association of Local Government Auditors has over 250 municipalities as members which would seem to indicate that the vast majority of US major municipalities have a significant internal audit resource. However, it should also be noted that municipalities which do not have an internal audit function contract out specific audit projects on an as needed basis. This, however, is not a substitute for an effective internal audit function which includes an ongoing evaluative audit process, particularly in the case of an organization, the size and complexity of the new City of Toronto.

 Current audit staff at the new City of Toronto have significant municipal experience and a unique perspective gained through their ability to see all parts of the municipality. It is this broad integrational view that gives audit staff its uniqueness and enhances its ability to effectively add value to the organization - whether that value be in the improvement of controls or through the identification of operational risks and potential solutions. These advantages would be lost if an internal audit process was contracted out to a third party. Further, there would be significant new start up costs to bringing new employees up to speed to perform internal auditing in the municipality.

 There is also an argument that outsourcing providers will command an ever increasing premium for their services. It is possible that the outsourcing municipality will become dependent on the service of the outsourcing provider. As the dependency increases, the municipality becomes vulnerable to pricing increases as the outsourcer assumes more of a monopoly position especially if the provider gains more Ainstitutional@ knowledge about the municipality. The counter argument is that:

 (a)there are other outside providers; and

(b)long term pricing agreements can be reached.

 Nevertheless, in spite of the above, there may be instances where it makes sense to Apartner@ with an outside provider, particularly when outside expertise is required on technical issues such as EDP security for example. In actual fact, the department is currently working with an external consultant in relation to security issues pertaining to the Client Identification Benefits System in the Social Services Division of Community Services. Rather than staff the department with a wide range of technical expertise, the outsourcing of specific audit related functions may be more appropriate, and in fact, should be accepted practice.

 Proposed Contract with the Attest Auditor:

 The Municipal Act provides that the contract term relating to the hiring of an attest audit should be no longer than five years. In view of the significant up front investment required by the attest auditors in an organization as complex and as large as the City of Toronto, it is suggested that consideration be given to awarding a contract for a five-year period. This practice is not unusual in the municipal sector in regard to the awarding of audit contracts. In addition, it is likely that the annual fee for a term of five years would be less than a term of say three years.

 The Audit of the Auditor:

 A frequently asked question relating to any internal audit function is AWho audits the Auditor?@. This is a valid question as the auditor should be subjected to the same level of scrutiny/accountability as the entities audited.

 The Audit Department would be subjected to the same attest audit process as other departments at the City. However, as indicated previously, attest audits by external public accountants are conducted at a high level and depending on the scope of the audit, little specific work would be conducted on many of the smaller departments, including the Audit Department. In order to compensate for this, it is suggested that the City Auditor be subjected to a peer review process.

 The City Auditor is a member of the Canadian Municipal Comprehensive Auditors Association (CMCA) and the US based National Association of Local Government Auditors (NALGA). An important component of each organization is a formalized peer review process which encourages members to participate in an arrangement whereby different audit organizations review the operations of other member organizations. The CMCA has prepared guidelines for the Professional Practice of Municipal Internal Auditing, pertaining to independence, professional proficiency, scope of audit work, performance of audit work and management of the internal audit office. In addition, NALGA has prepared a quality control review guide and members have been organized and trained to conduct peer reviews of audit organizations.

 It is anticipated that the City of Toronto Auditor would participate in the peer review process of either the CMCA or NALGA.

 In addition, in the early 1980's, the members of the Institute of Chartered Accountants of Ontario approved the introduction of a program whereby every member practicing public accounting in Ontario would be inspected.

 The main purpose of practice inspection is to ensure that all members in the practice of public accounting maintain an appropriate level of professional standards. Primarily, the practice inspection program is intended to be educational - to help practitioners improve their professional standards, where necessary. Essentially, through a review of current accounting and audit engagement files, practice inspection identifies where a practicing member may require assistance in maintaining prescribed professional standards. The practice inspection program does not set new standards. Rather, the standards that a member is expected to maintain are those prescribed by the Canadian Institute of Chartered Accountants Handbook and the Institute of Chartered Accountants in Ontario Handbook.

 Where the City Auditor is engaged in the practice of public accounting, the City Auditor should be subject to Practice Inspections.

 Conclusions:

 The restructuring of the audit function will result in a reduction of staff from 50 to 20. Assuming the estimate of fees of $1,750,000.00 relating to the outsourcing of the attest audit is reasonable, the restructuring will also result in an annualized savings of approximately $1,253,000.00 from the audit function that existed prior to amalgamation. In addition, the new City of Toronto will have an audit resource 100 percent devoted to value added projects, a situation which did not exist in all of the individual amalgamating municipalities.

 Contact Names and Telephone Numbers:

 Jeffrey Griffiths, 392-8461

Wanda Liczyk, 392-8773

 (Communication dated March 20, 1998,

addressed to the Audit Committee from Denis Casey,

Acting President, Local 79, Canadian Union of Public Employees)

 This report proposes changes to the Audit Department. It recommends that the attest audit responsibilities be contracted out and that the rest of the audit functions be carried out by managerial staff only.

 This is a disappointing and shocking statement about the new City=s view of the value and worth of its 25,000 front-line staff. CUPE Local 79 represents unionized employees from the former Municipality of Metropolitan Toronto and the former City of Toronto. Our members have been carrying out attest and internal audits for both former Corporations for over fifty years. These employees are part of a long tradition of neutrality and independence which has ensured an open and democratic process.

 The proposed internal audit budget will be the lowest in Canada (on a percentage basis). But the new City is bigger and more complicated than ever before. We know that each former municipality has widely differing policies and procedures which must be integrated. There are necessary and unavoidable costs when undertaking such an enormous task for the first time. The budget must reflect these realities, otherwise the value -- and integrity -- of the audit process is at risk, as is our responsibility to the taxpayer.

 The new work plan for the remainder of the audit functions is disturbingly vague. It would appear that only certain areas will be audited. The extent and adequacy of management and procedural controls throughout the City are unknown. During this period of change and attempted harmonization, decisions about these important matters should be made by City staff who understand the Corporation. It makes no sense to reduce the department by sixty percent before the true extent of the work level has been determined.

 Only 20 staff will be left in the department and they will all be excluded from union membership. At a time when the Corporation is emphasizing the need to flat-line and decrease management levels, there will be no front-line workers in this department. Confidentiality is not a reason to exclude them: their integrity and respect for the confidentiality required to perform this independent function have never been in question.

 It is proposed that the new Audit Department will employ only those with professional designations, such as CA (Chartered Accountant) or CGA (Certified General Accountant). There has always been a practice that combinations of education, training and experience are considered as equivalencies. There are front-line employees who have the technical expertise and experience gained from working on the job. Some have been with local government and Audit for more than twenty years. The lack of recognition of their acquired skills is an insult to the commitment they have made to the Corporation. The introduction of credentialism is a step backwards in achieving employment equity in the City.

 Local 79 urges Audit Committee members to reject this report. The contracting out of the attest audit, exclusion of union members from the new Audit Department, and introduction of credentialism are serious issues, whose impact will have far-reaching implications on the City=s finances and labour relations. Instead, we ask you to affirm your support of union and management staff working together to provide responsible and sufficient audit services to the City.

 (Report dated March 16, 1998, addressed to the

Audit Committee from the Auditor of the former City of Toronto)

 Recommendation:

 It is recommended: (1)That City Council confirm the following responsibilities, which have been duties of the City Auditor of the City of Toronto prior to amalgamation, shall continue to be responsibilities of the City Auditor (and not responsibilities of external auditors hired to report on the Corporation=s financial statements) for 1998 and future years:

 (a)the receipt of confidential minutes of third party organizations which have agreed to provide minutes of their board meetings to the City Auditor;

 (b)the accessing and examination of the books, records and other information of third parties providing goods or services to the City, who have agreed in their contracts with the City to make such information available to the City Auditor; and

(c)the audit for compliance with the terms and conditions of licences and permits issued by the City, or persons or organizations which have received such a licence or permit.

 Background:

 In accordance with the recommendations of the Transition Team, as adopted by City Council, the City is to have both an internal audit services function headed by a City Auditor, and to have external auditors appointed by City Council to audit the annual financial statements of itself and its local boards.

 Over the past years there have been put in place by the former City of Toronto, arrangements or conditions which refer to the City Auditor, providing for that person to receive confidential information on a regular basis, or to have access to the books and records of specific persons or organizations. In addition, relating to permits and licences issued by the City as part of municipal governance, it had been found useful for the City Auditor on occasion to audit for compliance with the terms and conditions of such permits and licences.

 This report suggests it would be appropriate and useful for City Council to determine publicly how those kinds of responsibilities shall be exercised this year and in future. This is because the external auditors will be appointed in accordance with legislative provisions, set out in the Municipal Act, requiring municipalities to appoint auditors. In the absence of a clear determination by City Council that ACity Auditor@ in such agreements refers to the head of its internal audit services unit, a concerned organization might choose to deal only with the legislatively appointed external auditors. This might be onerous for such auditors, and perhaps costly and of uncertain effect for the City.

 Comments:

 Where the City has continuing interests in the plans and operations of third party organizations, such as the Toronto Arts Council or the Toronto Harbour Commission, such that the parties have made binding arrangements to provide their minutes of meetings to the City Auditor but not for publication, it would be best for this information to continue to be provided to an official within the municipal corporation having continuing high level knowledge of the City=s affairs. The information does not have to be accessed in the course of auditing the City=s financial statements, so there is no problem for external auditors if this kind of arrangement is continued with the City Auditor.

 Where it is standard practice in every consultant agreement and every grant agreement with the City to provide for the City Auditor to have access to books and records of the signators to such agreements, it would clearly be most practical and most economical to continue to understand such references are to the City Auditor and not to the external auditors. Similarly, where leases include rents based on gross receipts or other factors and provide for the City Auditor to have access to lessee=s books and records, it will be most practical and economical to continue to understand the leases referred to the City Auditor and not the external auditors.

 In the many cases where the City might like to have a third party audited for compliance with the terms and conditions of permits to hold activities on City owned property, or for compliance with terms of other licences, then again it is most practical and economical to ask the City Auditor to do such checking, rather than external auditors.

 However, there are cases where there are trust funds held by the City, which it is appropriate to audit and report on, at least once a year. Those would be attest auditors, certifying the accuracy and completeness of financial records maintained by the City itself. Here it is best and most certain to have the external auditors include such trust funds in their audits of City financial statements. No suggestion is made in this report to do otherwise.

 Because the City intends to appoint external auditors for certain purposes, and these auditors could reasonably be understood to be, when appointed, the auditor of the city, this report recommends that City Council make a clear-cut decision on three areas of responsibility, to have them continued by the head of the City=s internal audit services unit.

 Respectfully submitted for your information and consideration.

 The Strategic Policies and Priorities Committee also submits the following communication (April 6, 1998) from Mr. Denis Casey, Acting President, Canadian Union of Public Employees, Local 79:

 This report recommends that the attest audit responsibilities of the Audit Department be contracted out and that the rest of the audit functions be carried out by managerial staff only. At its meeting of March 24, 1998, the Audit Committee supported the contracting-out of the attest audit.

 This report is a disappointing and frightening signal to the 25,000 unionized employees in the new City of Toronto. At a time when the Corporation is proclaiming its goal of decreasing management levels in all areas, this department will have no front-line workers.

 CUPE Local 79 represents union employees from the former Municipality of Metropolitan Toronto and the former City of Toronto. Our members have been carrying out attest audits for both former Corporation for over 50 years. Their integrity and respect for the confidentiality required to perform this independent function have never been questioned.

 We are opposed to the contracting-out of the attest audit. We believe that its importance and value to the City are under-estimated. City staff who understand the complexities of municipal government should be carrying it out. Having experienced staff ensures compliance with municipal procedures, by-laws, City policies and federal and provincial regulations.

 The extent and adequacy of management and procedural controls throughout the City are still unknown. Presently there are seven separate systems in place. There are no uniform standards. In the former City and Metro, front-line staff carry out attest audits and document and evaluate internal controls. But the range of internal controls in five of the former municipalities is unclear. If these controls are weak then the report acknowledges that Aadditional audit work will be required@. It also confirms that even with the introduction of outside auditors, much assistance by City staff will be needed.

 Yet all the expertise of the front-line staff who carried out this valuable work in the former City of Toronto and Municipality of Metropolitan Toronto will be lost as a result of the recommendation to contract-out. Instead, unionized staff will be replaced with more highly paid managers, without the same level of familiarity and experience in field work.

 The auditing of the agencies, boards and commissions is not being included in this proposal. This work generated $1.2 million in recoveries in 1997. It is not clear will be left to carry it out in the future.

 During this period of change and attempted harmonization, Councillors should be wary of having the cheapest internal audit budget in Canada (on a percentage basis). The new City is bigger and more complicated than ever before. There are necessary and unavoidable costs when undertaking such an enormous task for the first time.

 The City has knowledgeable staff who are experienced in dealing with the complexities of municipal audits. Local 79 urges Members to reaffirm the Corporation=s commitment to the value and worth of its front-line staff. We ask you to reject the recommendation to contract-out the attest audit function.

 Mr. Denis Casey, Acting President, CUPE Local 79, appeared before the Strategic Policies and Priorities Committee on April 7, 1998, in connection with the foregoing matter:

 (City Council on April 16, 1998, had before it, during consideration of the foregoing Clause, a communication (April 15, 1998) from the Acting President, Canadian Union of Public Employees, (CUPE) Local 79, expressing concerns regarding the contracting out of audit services).

 (Communication dated May 1, 1998, from

Mr. Denis Casey, Acting President,

Canadian Union of Public Employees, Local 79)

  This report recommends that the attest audit responsibilities of the Audit Department be contracted-out and that the rest of the audit functions be carried out by managerial staff only. As directed by both the Audit and Strategic Policies and Priorities Committee, we have met with the City Auditor and would like to share our concerns with Committee members.

 The City Auditor has stated that he is not contracting-out the attest audit to save money. CUPE Local 79 believes that this is probably true. Given the extent of the work to be done and the lack of any precise figures on its cost, there is little doubt that the private firms will end up charging far more than the $1.75 million which has been budgeted.

 The City Auditor says that the key issue is the independence of the auditor. He says that bond rating agencies have raised this matter. We have stressed that these queries have had no impact the same bond agencies continue to give the City excellent ratings.

 The City Auditor says that the proposed new Municipal Act recommends that the auditor of a municipality shall not be an employee of the municipality. In our view, the recommendation does not mean that the attest audit has to be contracted-out. The auditor could hold an independent office and still have staff do the work. This is because the terms of the office guarantee independence. There are many examples. Judges are independent of the Attorney General=s Office and yet their staff working in the courts are provincial employees.

 It is important to note that the Act is still in draft form; it was not mentioned in the recent Throne Speech and many believe that it will not be passed.

 The City Auditor is reporting at a later date on the new structure of the Audit Department. It makes no sense to decide upon a structure after you have deleted thirty people=s jobs and lost their collective expertise. After contracting-out, more highly paid managers will be performing the internal audit work. At a time when the City is decreasing the number of managerial staff, there will be not front-line workers in this department.

 The remaining work of carrying out internal audits is more important than ever. The extent and adequacy of management and procedural controls throughout the City are still unknown. There are seven separate systems in place and no uniform standards. Front-line staff, with the knowledge and experience gained from working in the municipal area, should be provided the training to do this essential work.

 Union members have been carrying out audit work for over fifty years and there has never been a question of the department=s integrity or independence. CUPE Local 79 urges members of the Committee to reject recommendations to contract-out the attest audit function.