HomeMy WebLinkAboutStaff Report 3658
CITY OF PALO ALTO OFFICE OF THE CITY AUDITOR
April 1, 2013
The Honorable City Council
Palo Alto, California
Policy and Services Committee Recommendation to Accept the
Auditor's Office Quarterly Report as of December 31, 2012 and
Revised Workplan
The Office of the City Auditor recommends acceptance of the Auditor’s Office Quarterly Report
as of December 31, 2012 and Revised Workplan. At its meeting on February 12, 2013, the Policy
and Services Committee approved and unanimously recommended the City Council accept the
report. The Policy and Services Committee minutes are included in this packet.
Recommended Action: Accept the Auditor’s Office Quarterly Report as of December 31, 2013
and Revised Workplan.
Respectfully submitted,
Jim Pelletier
City Auditor
ATTACHMENTS:
Attachment A: Auditor's Office Quarterly Report as of December 31, 2012 and Revised
Workplan (PDF)
Attachment B: Policy and Services Committee Meeting Minutes Excerpt (February 12, 2013)
(PDF)
Department Head: Jim Pelletier, City Auditor
Page 2
CITY OF PALO ALTO OFFICE OF THE CITY AUDITOR
February 12, 2013
The Honorable City Council
Attention: Policy & Services Committee
Palo Alto, California
Auditor's Office Quarterly Report as of December 31, 2012 and
Revised Workplan
RECOMMENDATION
The Office of the City Auditor recommends the Policy and Services Committee review and
recommend to the City Council acceptance of the Auditor’s Office Quarterly Report as of
December 31, 2012 and Revised Workplan.
SUMMARY OF RESULTS
In accordance with the Municipal Code, the City Auditor prepares an annual work plan
and issues quarterly reports to the City Council describing the status and progress
towards completion of the work plan. This report provides the City Council with an
update on the second quarter for FY 2013.
Respectfully submitted,
Jim Pelletier
City Auditor
ATTACHMENTS:
Attachment A: Quarterly Report as of December 31, 2012 and Revised Workplan (PDF)
Department Head: Jim Pelletier, City Auditor
Attachment A
Page 2
Attachment A
“Promoting honest, efficient, effective, and fully accountable city government."
Attachment A
1
CONTENTS
INTRODUCTION ................................................................................................................................................................... 2
OVERVIEW OF THE OFFICE OF THE CITY AUDITOR (OCA)...................................................................................................................... 2
OCA’S CORE PRODUCTS & SERVICES ............................................................................................................................................... 2
PROFESSIONAL STANDARDS ............................................................................................................................................................ 3
SECOND QUARTER FY 2013 UPDATE .................................................................................................................................... 4
OVERVIEW .................................................................................................................................................................................. 4
AUDITS ....................................................................................................................................................................................... 4
OTHER MONITORING AND ADMINISTRATIVE ASSIGNMENTS .................................................................................................................. 6
FRAUD, WASTE, AND ABUSE HOTLINE ADMINISTRATION ..................................................................................................................... 6
REVISED FISCAL YEAR 2013 WORK PLAN.............................................................................................................................. 7
Attachment A
2
INTRODUCTION
Overview of the Office of the City Auditor (OCA)
The OCA conducts performance audits of City departments, programs, and services. Performance audits provide
the City Council, City management, and the public with independent and objective information regarding the
economy, efficiency, and effectiveness of City programs and activities. Our goal is to help the City achieve its
strategic, operational, reporting, and compliance objectives using a systematic, disciplined approach to
evaluating and recommending improvements to the effectiveness of the City’s risk management, control, and
governance processes. Through our audit activities, the OCA supports the key governance roles of Oversight,
Insight, and Foresight as described below:
Oversight Insight Foresight
OCA provides oversight of City
management on behalf of the
City Council and the residents of
Palo Alto by evaluating whether
departments have established
efficient and effective means of
doing what they are required to
do, spending funds for intended
purposes, and complying with
applicable laws and regulations.
OCA provides insight to assist City
management by assessing the
adequacy of internal controls;
sharing best practices and
benchmark information; and
looking across departments to
help management identify
opportunities to borrow, adapt,
or re-engineer good practices.
OCA helps City management look
forward by identifying trends and
bringing attention to emerging
challenges before they become
crises. These issues often
represent long-term risks that can
sometimes receive low priority
for attention where scarce
resources drive more short-term
focus on urgent concerns.
OCA’s Core Products & Services
Audits – OCA’s core product addressing performance (efficiency and effectiveness), compliance, and
information technology matters that provide management with value-added recommendations focused on
mitigating risks and improving internal control. Audits are designed to support the achievement of the City’s
strategic, operational, reporting, and compliance objectives and the City Council’s priorities.
Service Efforts and Accomplishments (SEA) and Citizen Centric Report (CCR) – The SEA is an annual report that
provides data about the costs, quality, quantity, and timeliness of City services. The report includes a variety of
comparisons to other cities and the results of a citizen survey. The goal is to provide the residents of Palo Alto,
the City Council, City Staff, and other stakeholders with information on past performance to strengthen public
accountability, improve government efficiency and effectiveness, and support future decision making.
Prepared in coordination with the annual SEA report, the CCR is intended to be a brief, easy to read document
that provides a quick snapshot of the City’s progress over the year. Based on guidance from the Association of
Government Accountants, the report is a method to foster innovative means of communication between the
City and the public.
Administration of the Fraud, Waste, and Abuse Hotline (Hotline) – The Hotline provides an anonymous
mechanism for employees to report fraud, waste, and/or abuse of City resources. The OCA is responsible for
partnering with an outside vendor to administer the Hotline and ensure that all calls are reviewed and acted
upon by the Hotline Review Committee. The OCA may, as necessary, investigate certain cases. Additionally, the
OCA will provide quarterly reporting of Hotline activity to the City Council.
Attachment A
3
Special Advisory Memorandums (SAMs) – Utilized for time critical engagements including limited assessments,
reviews, or evaluations as requested by management or the Council. These services do not typically conform to
the rigorous audit standards required for Audits, but allow for important information to be provided to
management in a quick, flexible manner and can be focused on singular issues.
Comprehensive Annual Financial Report (CAFR) and Single Audit Report – Each year, the OCA contracts with an
independent, certified public accountant to perform both the City’s annual financial audit as well as the annual
Single Audit.
Sales and Use Tax Monitoring – The OCA conducts sales and use tax monitoring internally and contracts with an
external vendor for quarterly sales and use tax recovery and information services. The purpose of this
monitoring is to identify misallocations of local sales and use tax generated by companies doing business in Palo
Alto. In addition, the external vendor prepares quarterly sales and use tax summary reports that are provided to
the City Council as informational items.
Professional Standards
The OCA must adhere to a set of professional standards in conducting its work. The Palo Alto Municipal Code
requires the OCA to adhere to Government Auditing Standards issued by the U.S. Government Accountability
Office. These standards require that we plan and perform our audits to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on the objectives of each audit. The OCA’s
compliance with these standards is reviewed every three years by auditors from peer organizations.
Attachment A
4
FY 2013 Second Quarter Update
Overview
The audit function is essential to the City of Palo Alto’s public accountability. The Office of the City Auditor’s
independence and accountability, mandated by the City Charter and Municipal Code, means the public, the
Council, and City staff can rely on us for objective information and practical advice. We thoroughly review and
analyze City performance to give you the information you need about complex and difficult issues. Taking action
on our audit recommendations will help the City to reduce risks and protect its good reputation.
Audits
Below is a summary of our Audit work for the second quarter of FY 2013 (as of December 31, 2012):
Title Objective(s) Start
Date
End
Date
Status Results/Comments
Service Efforts &
Accomplishments
/ Citizen Centric
Report
To provide consistent,
reliable information on
the performance of City
services to assist users in
assessing whether the
City is achieving its goals
and objectives in an
efficient and effective
manner and to assist the
City in meeting its
responsibilities to be
publicly accountable in
the stewardship over
public resources.
7/2012 2/2013 In Process These reports provide
comprehensive and historical data
and analysis that is not available in
any other single report in the City.
The SEA and CCR are available
online or in hardcopy from the
OCA. This year’s report has been
redesigned from the ground up
with additional focus on
performance management.
Contract
Administration
Audit (Audit of
Contract
Oversight)
To assess whether
internal controls are
effective and adequate
to ensure that City
contracts are
administered in
accordance with
Municipal Code and
relevant policies and
procedures. The audit
focused on the City’s
contract with OfficeMax.
1/2012 11/2012 Complete Internal controls within the
Purchasing and Contract
Administration Division
(Purchasing) of the Administrative
Services Department (ASD) require
improvement to ensure that
contracts are administered in
accordance with the Municipal
Code and relevant policies and
procedures. In regard to the City’s
contract with OfficeMax, the
City could have saved between
$196,484 and $389,426 if the
contract had been appropriately
administered to ensure the City
was receiving reasonably expected
discounts at authorized prices.
Attachment A
5
Title Objective(s) Start
Date
End
Date
Status Results/Comments
Utilities Reserves
Audit
To determine the
appropriateness and
adequacy of utilities
reserves, reserve policies,
reserve guidelines, and
their usage.
1/2012 12/2012 Complete Based on our assessment of
Utilities Reserves, we found that
the City generally maintains
adequate reserves within the utility
funds. We also found that reserves
are generally used appropriately in
accordance with established policy.
However, we found that by
establishing a more comprehensive
reserve policy, with effective
supporting procedures, the City
Council and the Utilities
Department could benefit from
having clear criteria to
communicate, manage, and
monitor utility reserves.
Additionally, improvements to the
consistency and completeness of
reporting reserve balances could
better support the City Council’s
operating budget, capital budget,
and reserves processes.
Human Resources
Employee Benefits
Administration
To determine whether
the Human Resources
Department has
adequate controls over
employee benefits to
ensure that health
premiums and
administrative fees are
calculated and paid
accurately for eligible
active and retired
employees in accordance
with applicable labor
agreements, laws, and
regulations.
6/2012 12/2012 Complete Internal controls over health
benefits administration within HRD
require improvement to ensure
that health premiums,
administrative fees, and retiree
reimbursements are calculated and
paid accurately for eligible active
and retired employees in
accordance with applicable labor
agreements, laws, and regulations.
Attachment A
6
Other Monitoring and Administrative Assignments
Below is a summary of Other Assignments for the second quarter of FY 2013 (as of December 31, 2012):
Title Objective(s) Status Results/Comments
Sales and Use Tax
Allocation Reviews
The OCA conducts sales and use
tax monitoring in-house and
also contracts with an outside
vendor.
Ongoing The OCA continues to submit
inquiries to the State Board of
Equalization. As of the end of the
second quarter, the City received
$65,739 in total Sales and Use Tax
Recoveries. Also, due to processing
lags at the State Board of
Equalization, there are 48 potential
misallocations waiting to be
researched and processed (26 from
OCA and 22 from the vendor).
Total Sales and Use Tax Recoveries:
FY 2013 ($11,078 from OCA
inquiries and $54,661 from vendor
inquiries).
Quarterly Reporting Each quarter, the OCA prepares
Quarterly Status Updates and
Sales Tax Digest Summaries for
Council review.
Ongoing N/A
Fraud, Waste, and Abuse Hotline Administration
On August 16, 2012, we launched the City’s Fraud, Waste, and Abuse Hotline. Below is a summary of Hotline
Activity for the second quarter of FY 2013 (as of December 31, 2012):
Category Quarter Number Action Taken
Inquiry Q1 1 No Action Required
Improper Receipt of Gifts,
Favors, or Money
Q2 1 Unsubstantiated – closed
Substance Abuse Q2 1 Unsubstantiated – referred for
further action
Attachment A
Revised Fiscal Year 2013 Work Plan
The following is the revised FY 2013 Work Plan
Audit Department Preliminary Scope* Status Estimated
Hours*
Actual/
Revised Hours
Council
Committee
FY 12
Performance
Report (SEA)
All To provide consistent, reliable information on the performance of City services to:
assist users in assessing whether the City is achieving its goals and objectives in an
efficient and effective manner and assist the City in meeting its responsibilities to be
publicly accountable in the stewardship over public resources.
In Process 1,560 1,138 City Council
Contract
Administration
Audit
ASD Carryover from FY 2012. To assess whether internal controls are effective and
adequate to ensure that City contracts are administered in accordance with Municipal
Code and relevant policies and procedures. The audit focused on the City’s contract
with OfficeMax.
Complete
N/A
FY 12
Carryover
277 Policy &
Services
Utilities
Reserves Audit
Utilities Carryover from FY 2012. To determine the appropriateness and adequacy of utilities
reserves, reserve policies, reserve guidelines, and their usage.
Complete N/A
FY 12
Carryover
522 Finance
Human
Resources
Benefits
Administration
Human
Resources and
ASD-Payroll
Carryover from FY 2012. To determine whether the Human Resources Department has
adequate controls over employee benefits to ensure that health premiums and
administrative fees are calculated and paid accurately for eligible active and retired
employees in accordance with applicable labor agreements, laws, and regulations.
Complete 400 756 Policy &
Services
Development
Permit Process
Development
Center
This audit will seek to identify opportunities to improve the efficiency and
effectiveness of the Development Permit Process.
Postponed
(Replacement
Audit TBD)**
600 800 Policy &
Services
Inventory
Management –
Utilities (formerly
Utilities Asset
Management)
Utilities Specific concerns regarding the effective and efficient safeguarding of certain assets
were identified during the Risk Assessment process. This audit will follow up on those
concerns and assess the adequacy of controls over Utilities assets including compliance
with relevant policies and the Municipal Code.
Not Started 320 800 Finance
Construction
Process
Public Works The audit will assess the effectiveness and efficiency of the City’s construction
management practices including compliance with applicable policies, regulations, and
key contract terms. This audit will be limited to the bidding and change order
processes within the overall construction management framework.
Consider in
FY14
560 800 Policy &
Services
Wastewater
Treatment Fund
Public Works The Regional Water Quality Control Plant provides services to Mountain View, Los
Altos, Los Altos Hills, Stanford, and East Palo Alto. This audit will assess whether the
cost-sharing agreements and allocation of charges to partner agencies have been
properly implemented and maintained.
Consider in
FY14
600 600 Finance
Utility Users Tax
Revenues
(Tentative,
Outsourced)
Utilities
Utilizing a utility tax expert, this audit will determine whether the City is receiving all of
the Utility Users Tax revenues that it is entitled to receive. This audit is marked as
tentative as follow up research will be performed to ensure the City’s exposure to
missed UUT funds remains high before OCA requests additional funding from the City
Council to outsource the audit.
Consider in
FY14
40 40 Finance
P-card/Payroll
Analytic
Development
ASD The OCA will begin development of data analytics that can be used to continuously
audit certain high risk processes. As time allows, we will begin to identify and develop
analytics for the P-card and/or Payroll processes.
Consider in
FY14
40 40 N/A
*Preliminary scope and/or planned hours may change based upon the preliminary survey of the audit.
**As proposed by the Policy and Services Committee.
Attachment A
POLICY AND SERVICES COMMITTEE
DRAFT EXCERPT
Page 1 of 4
Regular Meeting
February 12, 2013
2. Auditor's Office Quarterly Report as of December 31, 2012 and
Revised Workplan.
James Pelletier, City Auditor, provided a quarterly update for the Office of
the City of Auditor. The Service Efforts and Accomplishments Report was
finished; however, as of December 31, 2012, it was in process. In addition,
the Contract Administration Audit, the Utilities Reserve Audit, and the
Human Resources Employee Benefits Audit were now complete. Staff would
continue to review sales and use tax allocations to ensure the City captured
all sales tax due. The City Auditor's Office recovered approximately $65,000
in total sales tax. As of December 31, 2012, the Fraud, Waste, and Abuse
Hotline received three calls. One was an inquiry and Staff answered it.
Working with the Human Resources Department, he determined the
remaining two calls to be unsubstantiated.
Council Member Klein asked for clarification of "unsubstantiated, referred for
further action."
Mr. Pelletier explained he found the specific allegation of the call to be
unsubstantiated; however, the Human Resources Department saw an
opportunity to clarify some policies and took action. He was working on a
call in the current quarter. With respect to the work plan, he proposed
increasing the number of hours allotted to audits.
Chair Kniss inquired whether a monetary amount was applied to the audits.
Mr. Pelletier answered no. Performance audits reviewed the efficiency and
effectiveness of operations.
Chair Kniss asked if audits analyzed the use of funds.
Mr. Pelletier reported that was dependent on the audit. Finding potential
savings opportunities or additional revenue opportunities was not always the
goal of an audit. The goal of an audit was to review the underlying controls
within the process to ensure the City adequately mitigated any risks
Attachment B
DRAFT EXCERPT
Page 2 of 4
Policy and Services Committee Regular Meeting
Draft Excerpt 02/12/13
associated with that process. By mitigating risks, the chance of the City
losing money or being inefficient was reduced. The focus was on fixing the
process more than identifying dollars.
Council Member Price inquired whether Mr. Pelletier anticipated performing
the Development Permit Process Audit in Fiscal Year (FY) 2014.
Mr. Pelletier explained items marked as "not started" would be started in the
current quarter. Other audits planned for the current year would be part of
the following year's plan.
Council Member Price clarified that audits marked FY 2014 would be
considered the following year.
Mr. Pelletier replied yes.
James Keene, City Manager, reported the Development Permit Process Audit
appeared on a former auditor's proposed work plan about the same time the
blueprint process began. He recommended this particular audit be deferred
and reconsidered when the process was closer to completion.
Chair Kniss agreed to defer the audit.
Council Member Klein also agreed.
Mr. Pelletier suggested possibly performing the Development Permit Process
Audit once the project was complete. At that point, he could revise the
number of hours needed to perform the audit. The audits performed thus
far required more time than he initially anticipated.
Chair Kniss inquired whether Staff needed a Motion to defer the
Development Permit Process.
Mr. Pelletier indicated the Committee could instruct him to identify a
different audit to include in the plan.
Council Member Klein instructed the City Auditor to do so.
Mr. Pelletier suggested the Committee choose an audit to replace the
Development Permit Process Audit or allow him to choose one.
Attachment B
DRAFT EXCERPT
Page 3 of 4
Policy and Services Committee Regular Meeting
Draft Excerpt 02/12/13
Chair Kniss felt it appropriate for Mr. Pelletier to choose the replacement
audit.
Council Member Price noted the work plan could be discussed again at the
mid-year Council discussion or sooner if needed.
Council Member Klein inquired whether the City had a mechanism to collect
sales tax from online retailers.
Mr. Pelletier reported Staff worked with an outside vendor in that area. The
vendor monitored online retailers and would continue to monitor them.
Council Member Klein recalled another sales tax issue regarding the dispute
between United Airlines and San Francisco International Airport, and asked if
another company was avoiding paying sales tax.
Mr. Pelletier was not familiar with that case, but would follow up.
Council Member Price requested Council Member Klein expound on the
dispute.
Council Member Klein explained United Airlines treated jet fuel purchases as
being made in a jurisdiction other than San Francisco to take advantage of
tax forgiveness. San Francisco disputed United Airlines' ability to do that.
Mr. Pelletier reported that was similar to the tactics being used by some
online retailers. Staff would monitor the situation.
Council Member Klein guessed a high proportion of Palo Alto citizens were
buying goods from online retailers.
Mr. Pelletier reported another factor was the share of funds Palo Alto
received from county taxes. If the county did not receive their fair share,
then Palo Alto would not receive their fair share.
Council Member Klein suggested Staff pay close attention to that.
Mr. Pelletier indicated the City's vendor was following the issue.
Council Member Price inquired whether the vendor was working with other
cities to share insights on the issue.
Attachment B
DRAFT EXCERPT
Page 4 of 4
Policy and Services Committee Regular Meeting
Draft Excerpt 02/12/13
Mr. Pelletier responded yes. The vendor had clients throughout the state
and provided good insights.
Council Member Klein suggested placing an item on the Council Agenda with
regard to lobbying successes and efforts.
Mr. Keene agreed.
Sheila Tucker, Assistant to the City Manager, noted the Staff Report would
be on the Consent Calendar.
Council Member Klein did not believe anyone would see the Staff Report on
the Consent Calendar.
Ms. Tucker reported Staff discussed adding a page to the City Manager's web
page for legislative information. In addition, Van Scoyoc Associates would
return for a Council meeting soon.
Mr. Keene inquired whether the City Manager and the Mayor retained the
ability to remove an item from the Consent Calendar and place it on the
Agenda as an Action Item.
Council Member Klein replied yes.
MOTION: Council Member Price moved, seconded by Council Member Klein
to recommend City Council acceptance of the Auditor’s Office Quarterly
Report as of December 31, 2012 and Revised Workplan, to include deferring
the Development Center Process for one year.
MOTION PASSED: 3-0 Holman absent
Attachment B