August 23, 2005
SUBJECT: Adoption of FY 2005/2006 Performance Audit Work Plan and Review of FY 2004/2005 Audit Work Plan Progress
REPORT IN BRIEF
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 FY 2005/2006. The proposed plan includes completion of two audits begun in the previous fiscal year: Facilities Management and Water Supply and Distribution. The plan also includes commencement of initial performance audits of the Solid Waste Management and the SMaRT Station programs in Public Works and the Golf Course Maintenance Operations and Golf Shop Services program in the Parks and Recreation Department. The new programs are proposed for audit in FY 2005/2006 based on their scores on a risk assessment that takes into consideration a wide range of factors.
Staff also proposes to complete follow-up audits of all of the programs in the Public Safety Department and to provide consulting services and implementation assistance to various programs. The proposed Performance Audit Work Plan is Attachment A of this report.
The Internal Audit program experienced significant staff vacancies during the major part of the year that prevented the FY 2004/2005 Work Plan from being fully completed. Two audits scheduled for last year are currently in progress and will be completed in fall 2005. The Golf Course audit, which was scheduled for last year, is included in the proposed FY 2005/2006 Work Plan.
BACKGROUND
The City of Sunnyvale operates a wide-ranging Internal Audit program, including operational, financial, and performance audits. Both internal staff and outside auditors conduct audits. Because of the nature of our complex performance based budget system, and the steep learning curve associated with gaining a complete understanding of it, internal staff generally conduct the performance audits while external auditors may be called in to conduct the financial/operational audits depending upon the time and specialized knowledge required. The budget for the various audit activities includes hours for a Senior Internal Auditor and an Internal Auditor within the Financial Management and Analysis program in the Department of Finance.
FY 2004/2005 Audit Progress
On May 18, 2004, Council adopted the FY 2004/2005 Performance Audit Work Plan (RTC 04-165). This plan called for completion of three new program audits totaling 12.5% of the annual operating budget. The three new audits were scheduled to be the Water Supply and Distribution program in Public Works, and the Facilities Management and Golf Course Operations and Services programs in Parks and Recreation. The plan also proposed to finalize the audit of the Development Services program in Community Development which was initiated in FY 2003/2004.
During the year, both of the positions in the Internal Audit unit were vacant for a substantial period of time, resulting in a delay in completing a portion of the planned audits in the approved Performance Audit Work Plan. The Development Services audit was finalized by a contract Internal Auditor and presented to Council in June 2005. Work on the Facilities Management and the Water Supply and Distribution audits is underway. The Facilities Management audit is substantially complete and currently undergoing peer review before being forwarded to the Parks and Recreation Department for comment. Staff will be bringing this audit to Council in the fall. The audit of the Water Supply and Distribution program is in progress and is also expected to be completed this fall.
The audit of the Golf Course Operations and Services program, which was originally scheduled in FY 2004/2005 will be conducted as part of the FY 2005/2006 Performance Audit Work Plan, if approved by Council.
Cumulative Performance Audit Progress
In FY 2002/2003, audit staff initiated performance audits of the following programs: Neighborhood Parks and Open Space Management, Fire Services, Police Services, Animal Control, and Emergency Preparedness. In FY 2003/2004, audit staff initiated the Development Services program audit while finishing several audits from the previous year. In FY 2004/2005, audit staff finished the Development Services audit and commenced audits of the Facilities Management and Water Supply and Distribution programs. The Facilities and Water programs will be completed and presented to Council in the fall of this year. Attachment B contains a table that indicates progress since FY 2003/2004 and projected progress through the end of FY 2005/2006. As of the end of FY 2004/2005, 26.6% of the City’s operating budget has been audited, and by the end of FY 2005/2006 we expect to have completed audits of 57% of total operations.
In addition to the full performance audits mentioned above, seven “mini audits” were performed in FY 2000/2001 as part of the preparation of the operating budget for the next two-year cycle. These audits were necessary to address problems with existing program structures that were identified during the course of the budget process. The programs that underwent a mini-audit included four programs in Public Works and three in the Library. The programs were: Transportation Operations; Roadside and Median Right-of-Way Services; Public Works Support Services; Wastewater Management; Library Collection Management; Library Programs and Management, and Library Learning Environment. Results from these reviews were incorporated into the operating budget for FY 2001/2002.
FY 2005/2006 Performance Audit Work Plan
In 2003, Council adopted a Performance Audit Charter that directs staff to develop a Performance Audit Work Plan each year for Council’s consideration and approval. The proposed Work Plan is based on a formalized Performance Audit Risk Assessment, which is included herein as Attachment C. This report presents the proposed Work Plan for FY 2005/2006 in fulfillment of Council’s direction.
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 which has been utilized in the development of the proposed Performance Audit Work Plan for FY 2005/2006.
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.”
DISCUSSION
The performance measure for the Performance Audit activity, as approved by Council, states that over the course of an eight-year period, performance audits will be conducted of programs comprising 100% of the operating budget. This equates to an average of 12.5% of the budget per year. However, since some program budgets are larger than others, some years will have planned audits that encompass more of the budget than others, while other years will have more programs but fewer dollars. The size of a program budget does not always significantly affect the resources required to audit the program, and the resources are often determined by issues that might arise in the course of the analysis. The method for selecting which programs to review in a given year was approved by Council in December 2003.
Selection of Programs to Undergo Initial Performance Audit in FY 2005/2006
In accordance with the Work Plan Development and Approval Process, audit staff first selected those programs that were eligible to undergo a performance audit during FY 2005/2006. Staff then assessed each of the eligible programs on the basis of a performance audit risk assessment matrix. This assessment takes into account a number of factors, including the size of the program, the program’s sensitivity and complexity, any known or suspected issues, and the amount of time since the program’s most recent audit. After assigning a numerical score to each program, staff ranked the programs on the basis of assessed risk, from below average to above average. The Performance Audit Risk Assessment matrix and a list of programs sorted by their relative score on the risk assessment are appended to this report as Attachment C.
Based on the risk assessment process identified above, staff is proposing that the Performance Audit Work Plan for FY 2005/2006 include initial audits of the Golf Course Maintenance Operations and Golf Shop Services program in Parks and Recreation and the Solid Waste and the SMaRT Station programs in Public Works. The recommended Performance Audit Work Plan is Attachment A of this report. When these audits are completed, a total of 57% of the operating budget will have undergone performance audits in the three years ending FY 2005/2006. This compares favorably to the target of 37.5% over these three years.
Selection of Programs to Undergo Follow-up Performance Audits and Consulting Services
As part of the Council’s recent reviews of the Police Services and Fire Services performance audits, Council expressed the desire to have a follow-up audit conducted on each of the newly restructured Public Safety programs to ensure that all major audit findings were addressed. Therefore, the FY 2005/2006 audit plan includes follow-up audits for these programs.
As audits are completed on the Development Services, Water Supply and Distribution and Facilities Management programs, we anticipate possible requests for assistance from audit staff by departments that have been audited and are implementing the audit recommendations.
FISCAL IMPACT
The funds to carry out the proposed Audit Plan are included in the adopted FY 2005/2006 Budget. Unless Council directs an increase in the scope of the Audit Plan, no additional funds are necessary.
CONCLUSION
Each year staff proposes for Council’s consideration a Performance Audit Work Plan. For FY 2005/2006 staff is proposing completion of two audits begun in FY 2004/2005: Facilities Management and Water Supply and Distribution. The Work Plan also proposes commencement of performance audits of the Golf Course Maintenance Operations and Golf Shop Services program in Parks and Recreation and the Solid Waste Management and SMaRT Station programs in Public Works. Staff also is proposing to conduct follow-up audits of all programs in the Public Safety Department. The recommended Work Plan is based on a process approved by Council in 2003 which includes a performance audit risk assessment matrix. Council can choose to approve or modify the Work Plan as desired.
PUBLIC CONTACT
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.
ALTERNATIVES
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.
RECOMMENDATION
Staff recommends alternative #1, adoption of the proposed Work Plan.
Prepared by:
Mary J. Bradley
Director of Finance
Approved by:
Amy Chan
City Manager
Attachments (pdf)
A. Proposed Performance Audit Plan FY 2005/2006
B. Cumulative Performance Audits Table
C. Performance Audit Risk Assessment Rating Scale and Programs Sorted by Risk Score