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APPROVE A CONTRACT AMENDMENT FOR INTERNAL AUDIT SERVICES
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RECOMMENDATION
It is recommended that the Council Audit Committee adopt a motion:
1. Approving an amendment to extend the Professional Services Contract for Internal Audit Services with Moss Adams, LLC (Moss) for a term of two years, plus two additional one-year options to extend;
2. Forward the item to the full Council for approval.
Authorize the City Manager to take necessary action to carry out the intent and purpose of this motion.
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Summary
In the fall of 2012, following the retirement of the long-time City Auditor, the City Council decided to pursue internal audit services by contract. The City issued a Request for Proposals (RFP) to conduct a risk assessment and internal control review and to provide the services of the City Auditor. In early 2013, Moss Adams was selected through the RFP process as the firm to carry out the initial projects, create an aggressive Internal Audit Plan and provide internal audit services. The initial Internal Audit Plan was completed during Fiscal Year 2015-16. As part of its ongoing internal audit responsibilities, at the end of each subsequent fiscal year Moss Adams identified new 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.
In 2019, Moss Adams was once again selected to provide Internal Auditing Services following a competitive RFP process. Moss continues to work with the Council Audit Committee, the City Council, and staff to create and implement annual audit plans. The current agreement is set to expire on June 18, 2024.
Staff is recommending that the agreement be extended to provide continuity of services to the City and allow time to complete long term projects currently in process. Moss Adams has received the highest ranking through each competitive process conducted by the City since its implementation of a contracted internal auditor in 2012 and has continued to support growth and improvement in the City.
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. 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.
The term of the initial 5-year contract with Moss Adams expired in spring of 2018. The City Council authorized two additional one-year contract extensions to allow Moss Adams to complete their proposed annual audit plans and align the contract term with the fiscal year cycle. The extended contract term with Moss Adams expired June 30, 2019.
On February 28, 2019, the City advertised an RFP for internal audit services. Staff had identified more than 10 audit firms to include in the RFP solicitation notice. On March 21, 2019, two qualifying proposals were received from the following firms:
• Moss Adams, LLP
• Lance, Soll & Lunghard, LLP
Given the number of respondents, staff followed up with other firms to determine why they did not submit proposals. The firms surveyed did not submit because of the comprehensive scope of services for our contract. While many firms conduct internal audits, most have not taken on the role of City Auditor and provided full internal audit services to a municipality. While the City only received two proposals, staff conducted an initial review to confirm the process was competitive and would produce the best possible candidates.
A committee evaluated the proposals based on each firm’s qualifications and experience as City Auditors, framework and approach to conducting internal audits, strategic partnership strength and fit, accessibility of key personnel assigned to perform services, and ability to provide all services requested. Both candidates participated in an interview with the evaluation committee to further examine their qualifications, approach and strategic fit with the City.
Moss Adams received the highest ranking, based on the noted criteria for their written proposals and for their performance in the interview. Moss Adams provided high quality materials and references. Moss Adams offers much broader experience in carrying out the specific role of City Auditor for a number of other California cities. Moss Adams also offered a deep resource pool of experienced auditors in a variety of specific areas of expertise relevant to anticipated performance and control audits planned for the City, having conducted more audits specific to City operations than the other candidate. In addition, Moss Adams values an approach of finding solutions to issues identified in the City and improving operations that represents a strategic fit with the City to continue shoring up our internal control, policy and process environment in a productive way.
While Moss Adams has continued to provide the most competitive proposals in the RFP process, it is worth noting that the City has also experienced similar high-quality work during the previous contract terms over the years. Moss Adams has been a critical strategic partner in improving the core controls, policies, processes and operations of the City. Moss Adams has a level of expertise and professionalism that outpaces competitors, a level of expertise that would be difficult for the City to provide in-house. The firm is clearly well versed in best practices in the field and follows the most current auditing and accounting standards. Their work also demonstrates their valuable experience accumulated from audits conducted for hundreds of other local governments. Moss Adams has delivered projects on budget without exception and has worked to deliver projects in a timely manner while accommodating the challenging workloads of City staff as we have transitioned out of bankruptcy and worked to recover from the COVID crisis and subsequent staffing shortages.
In addition, Moss Adams has also faithfully carried out the core services of the City Audit function. Moss has developed a positive working relationship with the Council Audit Committee and City staff. The firm has reinforced the clear reporting relationship to the Council Audit Committee while working collaboratively with City staff. They have aptly responded to the complaints that have been submitted to the ethics, fraud and waste hotline. They have produced regular status reports for the Council Audit Committee and City Council. Staff has called, and continues to call, upon Moss Adams in a consultative role related to other external audits, existing internal control and process improvement projects and other strategic planning efforts. They have developed and implemented plans to bolster the fraud, waste and abuse program, and continue to provide the type of work that was necessary to create a more robust internal audit program.
Over the past twelve years, a variety of projects have been completed, prioritizing ongoing internal control reviews and multiple operational facets of the City, including policies, procedures, controls, and performance. 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 and biannual reports have been presented during City Council meetings.
Present Situation
As part of its ongoing internal audit responsibilities, at the end of each subsequent fiscal year Moss Adams, in partnership with Councilmembers and staff, identifies new 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. Moss is currently engaged in long-term projects that would not easily be transferred to a new auditing firm. For example:
• Measure A - Moss Adams has been engaged in the recent renewal of Measure A and are currently working on drafting guidelines regarding the use of Measure A funds. Once guidelines have been adopted, the City would ask that Moss would provide assistance and oversight during the City’s implementation phase.
• ERP Financial Management - The City is continuing to implement modules related to its enterprise wide financial management system, Tyler MUNIS. Moss Adams has provided guidance all along the way, most recently through the Internal Controls Review. The City would ask that Moss continue to work alongside the City as we prepare to transition to a bi-weekly payroll schedule in October, and begin implementation for the utility billing module in 2025.
• Charter Review - Moss has assisted the City in the first round of review of the Charter, specific to Sections XI and XI-A, which resulted in revised language currently being considered for the November 2024 ballot. The Council has asked that the City also work towards identifying additional Charter revisions that could be considered for the 2026 ballot item. Moss has already begun this work with staff, and because of their history with the City, have a keen awareness and knowledge of how some of our existing Charter language creates roadblocks and pain points for operations.
Lastly, with the amount of certain and potential turnover in City leadership coming throughout the next 8 to 10 months, it is important to support continuity of business operations and services to community as best we can. Onboarding an additional new charter office/officer during this dynamic time could potentially expose the city to unnecessary risk.
Findings
Pursuant to Stockton Municipal Code section 3.68.070, Council may approve findings which support an exception to the competitive bidding process.
The proposed findings include:
1. Provide critical continuity of services to the City. With the current list of projects in progress, it would be both cost prohibitive and operationally damaging to stop and try to start again with a new contractor.
2. The City does not have, and would not be able to provide, the level of staffing and professional experience that Moss Adams brings to the City.
3. Office of the City Auditor is required by Charter Articles IV and XIV.
Staff recommends Council Audit Committee approve a motion to amend the contract with Moss Adams to provide Internal Audit Services. Given their expertise, performance, approach and existing knowledge of the City, this contract extension represents a strategic partnership that will allow the City to continue moving forward with the progress we have made with our internal audit function.
The recommended motion will approve forwarding the item to the full City Council for approval. The proposed contract extension for Moss Adams will authorize them to provide the functions of the City Auditor and to develop and carry annual internal audit plans.
FINANCIAL SUMMARY
In FY 2011-12 the City established, and Council approved, a baseline annual budget of $421,000 for Internal Audit Services. This baseline has not changed since. Funds continued to be approved through the annual budget process.