May 18, 2004

SUBJECT: Adoption of FY 2004/2005 Performance Audit Work Plan

In keeping with the Performance Audit Charter as adopted by Council in 2003, staff presents for Council’s consideration a proposed Performance Audit Work Plan for the coming fiscal year. The proposed plan envisions commencement of initial performance audits of three programs: Water Supply and Distribution, Facilities Management and Golf Course Maintenance Operations and Golf Shop Services, as well as continuation of the audit of Development Services already underway.

The new programs are proposed for audit in FY 2004/2005 based on their scores on a risk assessment that takes into consideration a wide range of factors. Staff also proposes to commence three follow-up audits, and to provide consulting services and implementation assistance to two programs.

The proposed plan is Attachment A of this report.

In 2003, Council adopted the process depicted in Attachment B of this report by which staff would develop a Performance Audit Work Plan each year for Council’s consideration. This report presents the proposed plan in fulfillment of Council’s direction.

Status of Existing Audit Reports

The audit reports for the Animal Control and Emergency Preparedness programs are included in the May 18 Council packet. The Police Services program report and the Neighborhood Parks and Open Space Management program report have been completed and both have been issued to the departments. When the departments have prepared their responses, the reports will be issued to the City Manager’s Office. A preliminary draft of the Fire Services program audit report will be distributed to reviewers for feedback this month. The audit of the Development Services program is underway.

EXISTING POLICY

The City’s policy regarding Performance Audits was established by the Performance Audit Charter as adopted by Council in December, 2003. This document authorized a Work Plan Development and Approval Process (Attachment B of this report.)

In addition, Fiscal Sub-Element Policy 7.1D.2 contains the following action statements:

7.1D.2a: "Conduct periodic financial, operational, and management audits to assure that adequate internal controls exist and that management practices are in compliance with Federal, State and City rules and regulations."

7.1D.2b: "Maintain an internal audit program as a management tool."

Selection of Programs to Undergo Initial Performance Audits

Staff’s goal is to audit every program during the course of eight years. In any given year, however, only a few programs can be audited. The method for selecting which programs to review in a given year was approved by Council in December, 2003, and is Attachment B (Work Plan Development and Approval Process.) In accordance with this process, audit staff first selected those programs that were eligible to undergo a performance audit in July, 2004. To be deemed eligible for an initial audit, a program must have been:

• On the outcome management system;
• Not newly created, restructured or eliminated as of July 1, 2004;
• Not recently audited

For instance, none of the Department of Employment Development programs are eligible because they are not yet on outcome management. None of the Department of Public Safety programs are eligible for initial audit because they are new beginning in July and because most of the DPS functions have recently been audited.

Staff determined that 38 programs are eligible for an initial performance audit beginning in July. Staff then assessed each of the 38 programs on the basis of their relative risk of having material audit findings. This assessment assigned a numerical rating to each program on the basis of the following factors:

• The size of the program, in terms of dollars and the number of measures;
• The program’s sensitivity/visibility and complexity;
• Known or suspected issues, including turnover
• The severity of any previous audit findings;
• The amount of time since the program’s most recent audit and its most recent restructure;
• Whether the program provides important fiscal control functions

After assigning a numerical score to each program, staff averaged all of the scores. Then staff ranked the programs on the basis of whether their scores were comparatively low, below average, average, above average, or high.

For instance, the Public Works Support Services program has a budget of less than $500,000. It has only two activities that capture work hours, and four relatively simple measures. A review in FY 2001/2002 turned up no problems, and audit staff is unaware of any concerns that have developed. Although it provides important internal services, it is virtually invisible to the public, and has little potential for reckoning with sensitive issues. For all these reasons, the program scored low on the risk assessment.

Conversely, Golf Course Maintenance Operations and Golf Shop Services has a budget of nearly $3 million, along with an extensive array of relatively complex activities and varied program measures across many locations. The program takes in cash and provides highly visible services, frequently involving direct contact with significant segments of the public. With the exception of its cash-handling operations, its functions have not undergone an audit in the recent past. The combination of these factors caused this program to score well above average on the risk assessment compared to the other 38 programs.

A list of programs sorted by their relative score on the FY 2004/2005 risk assessment is appended to this report as Attachment C.

As shown on the sorted list, the three programs that staff proposes to undergo initial performance audits in FY 2004/2005 were among the highest scoring programs of the eligible 38. Because the two highest scoring programs happened to be in the Department of Parks and Recreation, which currently has another program undergoing a performance audit, staff proposes to select a program from the Department of Public Works that also scored well above average.

By this methodology, Water Supply and Distribution, Facilities Management and Golf Course Maintenance Operations and Golf Shop Services are proposed to undergo initial performance audits in FY 2004/2005. The proposed plan is Attachment A of this report.

Selection of Programs to Undergo Follow-up Performance Audits

Police Services, Community Safety Services and Fire Services were selected for follow-up performance audits because they have implemented restructures that should have addressed recent audit findings.

Selection of Programs for Provision of Consulting Services

As audits are completed on Development Services and Neighborhood Parks and Open Space Management, staff anticipates possible requests for implementation assistance.

The funds to carry out the proposed Audit Plan are included in the proposed FY 2004/2005 budget. Unless Council directs an increase in the scope of the Audit Plan, no additional funds are necessary.

Public contact was made through posting of the Council agenda on the city's official notice bulletin board, posting of the agenda and report on the city's web page, publication of the Council agenda in the San Jose Mercury News, and the availability of the report in the Library and the City Clerk's Office.

1. Adopt the Work Plan as proposed, as shown in Attachment A.

2. Adopt the Work Plan as shown in Attachment A, with Council amendments.

Staff recommends alternative #1, adoption of the proposed Work Plan.

Prepared by:

Cheryl Solov
Management Analyst

Reviewed by:

Mary J. Bradley
Director of Finance

Approved by:


Amy Chan
City Manager

1. Proposed Performance Audit Plan FY 2004/2005 (.pdf Format)
2. Work Plan Development and Approval Process (.pdf Format)
3. FY 2004/2005 Performance-Audit Eligible Programs by Assessed Risk (.pdf Format)