BEVRLYRLY STAFF REPORT Meeting Date: June 20, 2017 To: From: Subject: Honorable Mayor & City Council Mahdi Aluzri, City Manager Request by Councilmember Wunderlich to Explore Establishing an Independent Internal Auditor Office Attachments: 1. Perspectives on the Internal Auditor Function for Public Agencies 2. FY 2016-17 General Auditor Business Plan INTRODUCTION During the City Council priorities setting session on April 20, 2017, Councilmember Bob Wunderlich requested that the City explore adding an independent internal auditor positon. This position would report to the City Council directly and be responsible for examining best management practices for all City programs. In general, City Council was open to exploring the addition of an independent auditor office. Staff is bringing this item to City Council for further review, discussion, and direction. DISCUSSION Independent Internal Auditor The General Accountability Office (GAO) has published professional standards for conducting government audits. These government auditing standards include detailed quality control guidelines for financial and performance audits and for ensuring the independence and objectivity of the audit function. The Institute of Internal Auditors (IIA) publishes Standards for the Professional Practice of Internal Auditing for use in all types of organizations where internal auditors are found. In general, an independent internal auditor provides information to the City Manager, City Council, or Board of Directors to assist with the decision-making process. They conduct performance audits, financial audits, and special investigations. Additionally, they independently assess and report on City operations and services while providing objective and technically correct information. Metropolitan Water District The Office of the General Auditor at the Metropolitan Water District (MWD) provides independent, objective assurance and consulting services to the MWD Board in accordance with the Institute of Internal Auditors mandatory standards and guidance.
The General Auditor reports directly to Metropolitan s Board of Directors and the Audit and Ethics Committee. The Audit Department helps MWD accomplish its objectives by using a proactive, systematic approach to evaluate the adequacy and effectiveness of MWD s risk management, control and governance processes. Audit staff assess whether these processes adequately: Identify, manage and monitor risks; Ensure significant financial, managerial and operating information is accurate, reliable and timely; Ascertain that employees actions comply with policies, standards, procedures, laws and regulations; Provide for the economical and efficient acquisition, use and protection of resources; Foster quality and continuous improvement; Facilitate the achievement of programs, plans and objectives; and Recognize and address significant legislative or regulatory issues. Councilmember Wunderlich has invited Gerald C. Riss, the General Auditor for the Metropolitan Water District (MWD), to speak to the City Council regarding the role of the Independent Auditor s Office within MWD and to answer any questions. FISCAL IMPACT Unknown at this time. RECOMMENDATION Staff recommends that the City Council review the information provided at this meeting and provide direction. Should the City Council decide to further consider and assess this request, staff will return with more details about the City s current audit program. Staff will also provide an assessment of resource considerations to support the creation of an independent internal auditor program at that time. Mahdi Aluzri, City Manager Approved By! AA Page2of2
Attachment 1
Office of the Chief Financial Officer VIA EMAIL June 14, 2017 Mayor Lili Bosse Vice Mayor Julian A. Gold M.D. Councilmember John A. Mirisch Councilmember Lester Friedman Councilmember Robert Wunderlich City of Beverly Hills 455 North Rexford Drive Beverly Hills, VA 90210 Re: Perspectives on the internal auditor function for public agencies Councilmember Robert Wunderlich asked me to share some of my perspectives on the value of an internal auditor function for a public agency. I have over 30 years of experience serving in the CFO role at four different public agencies. I thought it might be helpful to provide you with a brief description of each so you have some idea how other cities and special districts have implemented an internal audit function. City of Richmond, VA City had an internal auditor position appointed by the City Council, and the internal auditor reported to an audit committee made up of two council members and one outside member who was an audit professional from the community. The internal auditor staff included four professional staff and one administrative person. The scope of audits covered all internal control functions as well as operational audits. City of Oakland, CA The City had an elected City Auditor with a staff of five auditors and one administrative person. The City Auditor reported the results of all audits to the City Council. The scope of audits covered all internal control functions as well as operational audits. 700 N. Alameda Street, Los Angeles, California 90012 Mailing Address: Box 54153, Los Angeles, California 90054-0153 Telephone (213) 217-6000
East Bay Municipal Utility District The District had an audit supervisor that reported to the Director of Finance which was the position I held at the District. To ensure a degree of independence, the audit supervisor also reported independently to the Finance Committee of the District. The audit staff consisted of the audit supervisor and a staff auditor. The scope of audits covered all internal control functions as well as operational audits. Metropolitan Water District The District has a General Auditor appointed by the Board, and this position reports to an Audit Committee that is made up of Board members. The General Auditor has a staff of 12 and the scope of audits covers all internal control functions as well as operational audits. As noted above, in all cases the audit function focused on internal controls first and operational audits second. In most cases, the significant internal control functions were audited at least every three years and included accounts payable, payroll, treasury, procurement, information technology, etc. In addition, operational audits were done, often at the request of the City Manager or General Manager and the City Council or Board members. As the CFO I am responsible for all the financial controls and overseeing the receipt, disbursement and investment of millions of dollars throughout the year. Having an independent, in depth audit of these areas on a regular basis is very helpful in ensuring the internal controls that are in place are functioning effectively. Also, the operational audits have often improved processes and eliminated waste throughout the organization. In closing, I have found the internal audit function an asset throughout my career and feel certain that the City of Beverly Hills would have a similar experience should it choose to implement an internal audit function. Sincerely, Gary Breaux Assistant General Manager/Chief Financial Officer 700 N. Alameda Street, Los Angeles, California 90012 Mailing Address: Box 54153, Los Angeles, California 90054-0153 Telephone (213) 217-6000
Attachment 2
Office of the General Auditor 2016/17 BUSINESS PLAN Page 1 of 30
Audit Department 2016/17 Business Plan Mission Statement Objectives Audit Universe Risk Ranking Proposed Audits Office of the General Auditor Page 2 of 30
Audit Mission Statement Office of the General Auditor Page 3 of 30
Audit Department Mission Statement Internal Auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. The Institute of Internal Auditors (IIA) International Standards for the Professional Practice of Internal Auditing and the profession s Page 4 Code of 30of Ethics
Office of the General Auditor Organization Chart B e l i a B o r r e g o E x e c u tiv e A s s is ta n t G e n e r a l A u d i t o r J o h n T o n s i c k D e p u ty G e n e r a l A u d i t o r O p e n S t a f f A u d i t o r C h r i s G u t i e r r e z U n i t M a n a g e r D a n n e l l e M i m i- P h a n U n i t M a n a g e r A r t u r o C a s t r o P r i n c i p a l A u d i t o r S h e r m a n H u n g P r i n c i p a l A u d i t o r L i n a T a n S r D e p u t y A u d i t o r L e o R o l d a n P r i n c i p a l A u d i t o r N e e n a M e h ta D e p u t y A u d i t o r F a v i o l a S a n c h e z D e p u t y A u d i t o r Page 5 of 30
Audit Department 2016/17 Strategic Objectives Provide risk perspective and auditing advice/counsel in operational and financial activities. Publish risk-focused reports with audit opinions and internal control recommendations. To Board and Management Page 6 of 30
Audit Department 2016/17 Strategic Objectives Improve completion time for audits and evaluate audit responses for adequacy and timeliness. Emphasize test work of significant projects. Add value and improve operations Page 7 of 30
Office of the General Auditor Audit Department 2016/17 Personnel Based Objectives Identify training for audit staff to enhance risk assessment techniques and broaden knowledge of Metropolitan operations. Identify group dynamics & team building training for staff. Encourage professional certifications and reinforce core competencies by supporting continuing education. Promote diversity and foster a broad range of perspectives. Staff development Page 8 of 30
Office of the General Auditor Audit Department 2016/17 Operational Objectives Efficiently manage the department s budget for maximum effectiveness of stated budgetary objectives. Uphold the mission, roles, and responsibilities of the Audit Department. Accountability Page 9 of 30
Audit Universe and Risk Ranking Office of the General Auditor Page 10 of 30
GPS for Auditors Where do we go? What Audits do we schedule? Goals Plans Strategies Page 11 of 30
Balancing act: Risk versus Controls Page 12 of 30
Board & Management Collaboration Simultaneous edits on one single document creates the Audit Universe. Designed to get cooperation from all constituents and gain affirmation of the results. Auditor It s about team work, and co-authoring will get you there. Navigate Annual Audit Plan Page 13 of 30
Determine Audit Universe Source: Board of Directors Management External Auditor Prior Audits Audit Staff Gather Input Potential Audits Navigate Annual Audit Plan Page 14 of 30
Assess Likelihood and Impact of Inherent Risk Financial Political Legal/ Operational Auditor Regulatory Judgment Risk rating scale = 1 (low risk) through 5 (high risk) Materiality Reputation Highly Regulated Large Investment Time Since Last Audit Transaction Volume Social Media New Legislation Key Systems Audit Results Liquidity Newspaper Test Litigation Complexity Interviews Accounting Changes Agency Impact Potential Impact Disaster Impact Employee Turnover Navigate Annual Audit Plan Systematic Approach gives guidance for all risk levels (High Medium Low) Page 15 of 30
Page 16 of 30 Audit Universe
Financial Political Legal / Operational Auditor Regulatory Judgment Inherent Risk PCCP Program Oxidation Retrofit Turf & Device Rebates High Property Leases Facilities Maintenance Medium Stores Inventory IT Help Desk Services Employee RideShare Low Navigate Annual Audit Plan Page 17 of 30
So, what does all of this analysis mean? What are we going to audit? Page 18 of 30
WSO WRM, Engineering Board of Directors & Management Requests CFO HR, BTG RP&M External Auditor Assistance Page 19 of 30
Proposed Audits for 2016/17 Office of the General Auditor Page 20 of 30
Business Plan 2016/17» Proposed Audits come from each Department and Group.» Included are small, medium and large audits. Also, simple and complex exams. Moreover, audits of on-going CIP projects are planned.» Allowance for requests by the Board and Management have been made in the plan. Page 21 of 30
Water System Operations Repair and Replacement Urgent Repairs Energy Management Treatment Plant Business Services Facilities Maintenance Chemical Management Water Quality Compliance Reporting Security and Emergency Management WSO Storage Programs Water Resource Management WRM Programs Conservation Credits Device Rebates Water Management Fund LRP Programs Page 22 of 30 Engineering Services Oxidation Retrofit Program Prestressed Concrete Cylinder Pipeline Program Engineering Consulting Agreements Major Construction Projects/ Repair & Replaement Union Station Improvements
Chief Financial Officer Bond Comfort Letters Assist External Auditors Employee and Director Expense Reports Controls Over Financial Reporting Oracle Financial System Business Continuity Program Audit Business Plan 2016/17 Business Technology Quarterly Consulting Contracts Reporting Accounts Payable Imaging P-Card Testing SCADA Cyber Security Purchasing Materials & non professional Services 2-Way Radio System IT Disaster Plan BYOD Issues Page 23 of 30
Audit Business Plan 2016/17 Ethics, General Counsel, and External Affairs Assist in Internal and External Fraud Investigations External Affairs Consulting Agreements Social Media & Privacy Real Property Property Leases and Revenue Human Resources Employee Separations Temporary Employees Employee Benefits Page 24 of 30
Board of Directors Perform Board Requests Colorado River Water Users Association General Manager Perform Management Requests Inspection Trips Audit Business Plan 2016/17 Page 25 of 30
Audit Department Resource Allocation Audit Area Budgeted Hours % of Total Finance/Operational/Compliance 9,000 69% Information Technology 1,300 10% Assist External Auditors (Contractual) 800 6% Board/Committee Meetings and Support 500 4% Board and Management Initiatives 400 3% Special Reviews 400 3% Comfort Letters 400 3% Follow-up Reviews 200 2% Total 13,000 100% Page 26 of 30
Professional Accountability Office of the General Auditor Page 27 of 30
Quality Assurance and Improvement Program An evaluation of conformance with the Definition of Internal Auditing and the International Standards for the Professional Practices of Internal Auditing and whether internal auditors apply the Code of Ethics. Assess the efficiency and effectiveness of the internal audit and identifies opportunities for improvement. Integrity Page 28 of 30
Board Support, Endorsement and Approval Mission and Objectives Business Plan Approach & Methodology Proposed Business Plan Support Endorse Approve Page 29 of 30
BUSINESS Questions? PLAN 2016/17 Page 30 of 30