title
ADOPT THE FISCAL YEAR 2018-19 INTERNAL AUDIT PROGRAM
recommended action
RECOMMENDATION
The Council Audit Committee recommends that by motion action the City Council adopt the Fiscal Year (FY) 2018-19 Internal Audit Program.
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Summary
The Internal Audit function of the City is designed to provide objective analysis, evaluation, and recommendations for improvements to City systems and activities. This is accomplished through an annual Internal Audit Plan that tests internal controls, evaluates processes and completes projects to improve operations. This function is distinct from the annual review of City financial statements conducted by external financial auditors.
In early 2013, the City of Stockton contracted with Moss Adams to complete a risk assessment and internal control review. The recommendations resulting from this work were translated into an initial 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.
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 2018-19 Internal Audit Plan.
FY 2018-19 Internal Audit Plan was presented to the Council Audit Committee on June 4, 2018. The Council Audit Committee adopted a motion to recommend to Council approval of the Fiscal Year 2018-19 Internal Audit Program with a recommended budget of $325,000, which includes $275,000 in General Fund projects and $50,000 in MUD Enterprise Fund projects (Attachment A). This one-year plan maintains focus on improvements to citywide policies, processes and controls, while implementing performance management, updating the risk assessment, 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 decided in 2012 to solicit Internal Audit Services by contract. There is a growing trend for municipalities to contract for internal audit services. This is similar to the historical practice of contracting for external financial audit services, however, the nature of internal audit services is distinct and typically provided by different audit firms. The successful firm in 2012, 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. Annual internal audit programs have been executed each year subsequent year.
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 Internal Audit activities was presented to the full City Council at your May 15, 2018 meeting.
Staff communicated to City Council in the June 5, 2018 staff report presenting the FY 2018-19 Annual Budget, that the Moss Adams five-year contract for providing Internal Audit Services expires mid-fiscal year. In the June 5 staff report, staff recommended that the Moss Adams contract be extended through June 30, 2019 to allow completion of the Fiscal Year 2018-19 Internal Audit Plan without interruption. The work of Moss Adams has been outstanding. 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. During FY 2018-19, staff will conduct a Request for Qualifications for a new contract period for Internal Audit Services. Through approval of Resolution 2018-06-05-1501-01 at the June 5, 2018 City Council meeting, Council authorized the City Manager to execute an extension of the existing contract with Moss Adams, LLC.
Internal Audit activities are funded from the $421,000 annual budget for Internal Audit Services.
Present Situation
FY 2018-19 Internal Audit Plan maintains focus on improvements to citywide policies, processes and controls, while implementing performance management, updating the risk assessment, 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 FY 2018-19 Internal Audit Plan was presented to the Council Audit Committee, reviewed with City Management, and is recommended for Council adoption. At their June 4, 2018 meeting, the Council Audit Committee adopted a motion to approve the Fiscal Year 2018-19 Internal Audit Program with a recommended budget of $325,000, which includes $275,000 in General Fund projects and $50,000 in MUD Enterprise Fund projects.
FINANCIAL SUMMARY
The proposed budget of $325,000 for Moss Adams to carry out the FY 2018-19 Internal Audit Program is within the budget allocation for Internal Audit Services. There are sufficient funds in the 010-1901-510 account for these purposes. The intent is for the annual Internal Audit Program to be the funding plan each year for these budgeted dollars.
Attachment A - Fiscal Year 2018-19 Internal Audit Program