June 20, 2006

SUBJECT:      Adoption of FY 2006/2007 Performance Audit Work Plan

REPORT IN BRIEF

The Performance Audit Charter adopted by Council in December 2003 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 risk assessment tool and the Charter directive to review all programs over an eight year period (or 12.5% of the budget annually).  This report presents the proposed work plan for FY 2006/2007 in fulfillment of Council’s direction.

The current FY 2005/2006 Performance Audit Work Plan is on schedule and will complete all initial audits by June 2006.  With the completion of the FY 2005/2006 Work Plan, a total of ­­­12 programs comprising 59.2% of the City’s overall operating budget will have been audited (an average of 14.8% of the budget reviewed annually). 

The proposed FY 2006/2007 Work Plan presented with this report (Attachment A) proposes five initial audits comprising 10.7% of City’s overall operating budget.  The programs were initially identified through use of a Performance Audit Risk Assessment.  The scales used in the risk assessment are found in Attachment B.  In addition, other factors are taken into account in scheduling program performance audits.  These include the workload of the program to be audited, the extent to which the program is reviewed by outside agencies or has undertaken other recent internal audit reviews, the workload capacity of audit staff, and whether programs share management systems within a department that may increase audit efficiency.

When completed, the FY 2006/2007 work plan will bring the five year cumulative audit total to 17 audits of programs comprising 69.9% of the City’s operating budget (an average of 14% of the budget reviewed annually).

EXISTING POLICY

The City’s policy regarding Performance Audits was established by the Performance Audit Charter adopted by Council on December 18, 2003 (RTC 03-447). 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 2006/2007.

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.”

The performance measure for the Performance Audit activity, as approved by Council, states “at least 3 programs, or a number of programs or Service Delivery Plans representing not less than 12.5% of the budget amount for all programs, shall undergo performance auditing each year” to fulfill the Performance Audit Charter directive to audit all programs over an eight year period.  However, the size of a program’s budget is not necessarily related to the number of measures within the program, the data complexity, or issues that might arise during the course of the analysis.  It is these factors, not size of budget, which dictate the amount of resources needed to complete each performance audit.  For this reason, some annual audit plans may review programs with more budget than the mandated 12.5% while other years may review less.  Audit staff is tracking the annual average of budget reviewed (currently at 14.8%) to ensure the eight year target to review all programs is met.

DISCUSSION

Audit Selection

In accordance with the Work Plan Development and Approval Process outlined in the Performance Audit Charter, audit staff reviews the programs eligible for auditing with a Performance Audit Risk Assessment matrix.  This assessment takes into account a number of factors, including the size and complexity of the program, the program’s visibility to the public, management control factors, and whether an audit has been requested by City management or Council.  After assigning a numerical score to each program, staff ranked the programs on the basis of assessed risk from highest to lowest on the table in Attachment A.  Staff then developed the proposed audit plan based on both risk score and audit efficiency factors. The efficiency factors considered include the workload of the department to be audited, the extent to which the program is reviewed by other outside agencies or has undertaken other recent internal audit reviews, and the workload capacity of audit staff.  Also, in some cases, it is more efficient for the audit work plan to include programs lower on the risk assessment scale with higher scoring programs in the same department because the department has integrated management systems.

FY 2006/2007 Performance Audit Work Plan

Based on the risk assessment and the audit efficiency factors mentioned above, staff proposes that the Performance Audit Work Plan for FY 2006/2007 include initial audits of the following programs:

       w Wastewater Management                            w Library Collection Management

       w Library Programs & Services                         w Library Learning Environment

       w Utility Billing, Collection, and

          Revenue Management

Current Work Plan Status (FY 2005/2006)

During FY 2005/2006, the following performance audits were released for Council and public review:  1) Facilities Management on December 13, 2005; 2) Water Supply & Distribution on January 10, 2006; and 3) Solid Waste and SMaRT Station on May 9, 2006.  A draft of the Golf Course Maintenance Operations and Golf Shop Services audit has been completed and is currently in the internal review process with anticipated release for Council and public review in early July. 

In addition to completing the initial audit plan, audit staff provided substantial audit implementation assistance to the Development Services Program.  Also, review of the reporting systems in the various Public Safety programs audited in FY 2004/2005 was started in mid-February and should be completed by the end of the fiscal year. 

Cumulative Performance Audit Progress

The Performance Audit Progress Report in Attachment C shows that by the end of this fiscal year the Audit Program will have completed 12 initial audits, comprising 59.2% of the City’s overall operating budget, since FY 2000/2001.   The proposed FY 2006/2007 audit plan will bring the five year total to 17 programs comprising 69.9% of the operating budget (an average of 14% of the budget reviewed annually).  

Effect of Budget Restructure

As Council is aware, all the City’s programs have been restructured for FY 2006/2007.  The restructure has increased the number of programs from 73 to 89, and has resulted in significant changes in the grouping of services for many programs.  Due to this major restructure, elements of the programs (such as budget and number of measures) will be considerably different next year.  As a result, the Performance Audit Work Plan for FY 2007/2008 will also need to be adjusted. 

FISCAL IMPACT

The funds to carry out the proposed Audit Plan are included in the adopted FY 2006/2007 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 2006/2007 staff is proposing completion of five new audits: Wastewater Management, Library Collection Management, Library Programs and Services, Library Learning Environment, and Utility Billing Collection and Revenue Management.  The recommended Work Plan is based on a process approved by Council in 2003 which includes a Work Plan Development and Approval Process. 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 modifications.

RECOMMENDATION

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

Prepared by:

Sue English

Sr. Internal Auditor

Reviewed by:

Mary J. Bradley

Director of Finance

Approved by:

Amy Chan

City Manager

Attachments

A. Performance Audit Risk Assessment and Initial Audit Work Plan (.pdf format)

B. Performance Audit Risk Assessment Rating Scales (.pdf format)

C. Performance Audit Progress Report (.pdf format)