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ADOPT THE FISCAL YEAR 2017-18 INTERNAL AUDIT PROGRAM
recommended action
RECOMMENDATION
The Council Audit Committee recommends that the Council adopt a motion to approve the Fiscal Year 2017-18 Internal Audit Program. It is also recommended that the motion authorize the City Manager to execute a one-year extension to the contract with Moss Adams, LLC (Moss Adams) to provide Internal Audit Services.
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SUMMARY
In early 2013, the City of Stockton contracted with Moss Adams to complete a risk assessment and internal control review. The recommendations from this work were translated into a multi-year Internal Audit Plan designed to strengthen internal controls and processes for the City, as well as make improvements to priority programs and initiatives of the City Council. The Internal Audit Plan was completed during the 2015-16 fiscal year.
As part of its ongoing internal audit responsibilities, at the end of each fiscal year Moss Adams identifies projects for consideration by the Council Audit Committee and adoption by the City Council to establish an internal audit plan for the upcoming fiscal year. This staff report covers recommendations for the Fiscal Year 2017-18 Internal Audit Plan.
The Fiscal Year 2017-18 Internal Audit Plan was presented to the Council Audit Committee, reviewed with City Management, and is recommended for Council adoption. This one-year plan maintains focus on improvements to citywide policies, processes and controls, while implementing performance management, supporting the enterprise resource planning software project, and conducting a performance review. The proposed plan also provides for continued general internal audit services, controls testing, and audit findings validation.
DISCUSSION
Background
Stemming from the City Council Strategic Initiatives adopted in 2011 designed to attain fiscal sustainability and address a multitude of audit findings, the City Council made a determination in 2012 to solicit Internal Audit Services by contract. The successful firm, Moss Adams, was selected to provide audit services as a pilot project while also conducting a risk assessment and internal control review. This comprehensive assessment was a core task in the restructuring effort of the City’s finances. In summary, the risk assessment gauged the City’s overall risk as being “high.” The risk assessment also identified mitigating actions to provide the City with a path to strengthen performance delivery and reduce risk. The internal control review also found that the condition of internal controls within the City’s accounting and reporting functions has significant opportunities for improvement. The internal control review outlined the work that would be required to strengthen its control processes and procedures. The recommendations included in the internal control review provided a road map for carrying out this work.
In September 2013, the City Council approved a contract with Moss Adams to complete an Internal Audit Plan that would begin implementation of the most critical improvements recommended by the assessment. The City Manager and Moss Adams as the City Auditor brought forward the initial Internal Audit Plan, which included 24 projects covering two primary types of activities: 1) internal controls improvement and 2) performance improvement. The Plan organized the work based on priority, timing and workload capacity. The initial Internal Audit Plan was completed during the 2015-16 fiscal year.
In August 2016, the City Council approved the Fiscal Year 2016-17 Internal Audit Plan, which consisted of eight different activities. Similar to the internal audit activities of the previous years, this plan also addressed a variety of operational facets of the City, including policies, procedures, controls, and performance.
Over the past three and a half years, regular progress updates have been provided at monthly Council Audit Committee meetings. Project reports and recommendations from Moss Adams have also been provided to the City Council as informational items in regular City Council agenda packets. The most recent update on the Internal Audit Plan was presented to the full City Council at your February 7, 2017 meeting, when Moss Adams provided an updated risk assessment.
Internal Audit activities are funded from the $421,000 annual budget for Internal Audit Services.
Present Situation
As part of the Fiscal Year 2016-17 Internal Audit Plan, Moss Adams performed a variety of activities. Examples included helping the City to update 22 administrative directives and develop 23 community performance indicators. In addition, Moss Adams conducted a Workforce Diversity Study and delivered internal controls testing reports focused on cash handling, monthly close and reconciliation, grants management, and payroll and timekeeping. These efforts have addressed findings and issues identified in recent external financial audits and assessments from outside entities. Also, Moss Adams continued to track and validate findings and administer the City’s Ethics Hotline. It is worth noting that $120,000 for placeholder projects was returned to General Fund balance from funds budgeted for Fiscal Year 2016-17 internal audit activities.
The Fiscal Year 2017-18 Internal Audit Plan maintains focus on improvements to citywide policies, processes and controls, while implementing performance management, supporting the enterprise resource planning software project, and conducting a performance review. The proposed plan also provides for continued general internal audit services, controls testing, audit findings validation, and Ethics Hotline administration
The Fiscal Year 2017-18 Internal Audit Plan was presented to the Council Audit Committee, reviewed with City Management, and is recommended for Council adoption. At their June 19 meeting, the Council Audit Committee adopted a motion to approve the Fiscal Year 2017-18 Internal Audit Program with a recommended budget of $315,000. It is worth noting that this budget amount reflects a $60,000 reduction to the Internal Audit Plan proposed by Moss Adams, which totaled $375,000. To achieve an Audit Plan consistent with the direction of the Audit Committee, the $60,000 funding difference reflects a reduction in effort related to three of the proposed internal audit projects, including the Procurement Diversity Study ($10,000), Policy Development Project Management ($10,000), and ERP Preparation Support ($40,000).
In addition to the Council Audit Committee recommendation to approve the Fiscal Year 2017-18 Internal Audit Program, staff recommends that Council authorize the City Manager to execute a one-year extension to the current contract with Moss Adams. The current contract approved by Council has an initial term of three years with two potential one-year extensions. The intent of the contract was to complete the initial Internal Audit Plan and then begin a cycle of annual audit programs based on Council priorities and continued risk assessment. To perform the audit program for this fiscal year, staff recommends that a second one-year extension to the Moss Adams contract be executed. Given their expertise, performance, and knowledge of the City, it is in the interest of the City to extend the Moss Adams contract to complete the audit program for this fiscal year.
FINANCIAL SUMMARY
There are sufficient funds in the 010-1901-510 Internal Audit Services account for Moss Adams to carry out the Fiscal Year 2017-18 Internal Audit Program. The intent is for the annual Internal Audit Program to be the funding plan each year for these budgeted dollars.
Attachment A - Fiscal Year 2017-18 Internal Audit Program