February 4/04 Report
1:30 pm

Councillors in attendance:
DiIanni
Collins
Kelly In - 1:50
Ferguson
Jackson

Also present:
Councillors Braden, Horwath, Mitchell, Whitehead, and McHattie
CATCH members - Judy and Carol
Staff - Rinaldo, Robertson, others

A. Approved minutes

B. Approved a delegation request by Darlyne MIlls re presentation of info on Hamilton Business Improvement areas. They will do a PowerPoint summary of BIA initiatives.

C. PRESENTATION - 2003 External Audit Plan by Grant Thornton Chartered Accountants (Fay Booker and 2 others)

There were 4 recommendations:

1. That Grant Thornton be appointed as External Auditors
   for the third year of their five year term.
2. That the 2003 Audit Fees in the amount of $145,650,
   plus applicable taxes, be approved.
3. That the audit fees be reviewed annually to reflect
   changes in the scope of the audit work.
4. That the External Audit Plan Communication be
   approved.

Grant Thornton prepared two reports on the 2002 Audit. There were 6 areas where recommendations were made (details in agenda). Their findings were presented to the Audit Subcommittee on August 15, 2003 and were approved by Council on September 10, 2003. Quote from agenda:

"Many of the audit findings contained in the 2002 Audit Management Letters are potential audit risks and, if they are not rectified, could result in monetary loss to the City. Additional audit fees could be incurred if the proper review and analysis of the books of account and accounting estimates are not implemented efficiently and effectively as recommended in management's responses".

Two items of note on p. 10 of the agenda under AUDIT EFFICIENCY AND COSTS
Because the city's accounting staff did not provide the necessary working papers and account analysis on time, the audit was delayed from April, until May, June and then finally July. Also there was a question about whether management provided support as to whether issues regarding purchasing policies and possible double payments were significant.

In their Audit Plan Grant Thornton noted that the following matters were impacting on their assessment for 2003:

• Significant current and projected operating deficits accompanied by a deteriorating financial position
• Information provided to Council by management, through the Committee, is insufficient or untimely to provide for effective financial oversight (ie 2002 Financial Statements presented on Aug. 15, 2003)
• Increased pressure to eet expectations of analysts and creditors with respect to maintaining the City of Hamilton's bond rating and financing projected future deficits
• Material balances are based on subjective judgements or extimates, accompanied by previously identified weaknesses in management's determination of these amounts
• Several significant audit differences identified during prior audits
• Increased public accountability and media scrutiny
• Identified weaknesses in controls and processes
• Lack of sufficient processes for assessing and monitoring key financial risk areas
• Identified weaknesses in the oversight of the control environment and financial reporting
• Turnover of senior management and personnel

These factors contribute towards a high audit risk assessment, and in order to achieve an acceptable level of audit risk they must increase the nature, extent and timing of their procedures. ($$$ ?)

Discussion focussed on why there has been a delay in responding to the second letter of recommendation sent by GT., the delineation between internal and external auditing and the need to be more diligent, efficient and responsible. During this time there was obvious tension between the councillors and the city staff. (more about that following). I won't try to cover everything said, but have these in my notes in case anyone needs them.

Robertson - need more regular dialogue with external auditors, but for $ reasons, no need for them always to be there ( auditor - "once a quarter year would be standard)
Robertson - Internal auditor (Ann Pekret) would make presentations to the committee on an ongoing basis
Collins - if there is a problem with service, would we go through this committee to get an outside audit? (street sweepers, for
example)
Jackson - When are we going to move on providing more efficient audits within?
DiIanni - External auditor would provide core basic functions, very general advice, but how to deal with gaps?. He is proposing an enhanced internal audit system, bumped up with resources.
Robertson - options will be presented at next S and B meeting..business plans need to drive the agenda..external auditors could give their perspective...processes can be improved
Jackson - If we find inefficiencies, it will send out a strong message to the public
Kelly - concerns...how can we make it better?...do we have the financial wherewithall to address?
Rinaldo - very challenging because of cutbacks...staffing pressures...we'll try....some of it' s backlog...not caught up yet
Kelly - External auditor's reports create concern with the public...need to develop proactive approach...need to head some things off
* Horvath and Jackson confab at this point
Merulla - Who does the internal auditor report to?
Robertson - Used to report to Auditing Comm., but now to S P and B Comm
Rinaldo - City manager provides comments on internal audit
Merulla - Mayor, who do you see the auditor reporting to?
DiIanni - directly to council...Toronto has this
M - The internal audit should come to committee directly without massaging by council or CMT
Robertson - No decision by auditor has ever been vetted
Internal Auditor - There is an area for comment "Management Action Plan"
M - I have questions about the hierarchy...are things happening behind closed doors?
Aud - Every recommendation has come forward
Collins - When will we respond to the August '03 letter
Robertson - We'll draft a response next agenda
Collins - Who sets the agenda?...If I want to verify info, what's the protocol for my interaction with the auditor?
Robertson - We need to get coordination out in the open...internal auditor will have proposed work programme...previous system not efficient
Collins - wants '03 internal audit reports for his info
Mitchell - feels the same...How do I get auditor's info on a particular issue?...councillors should have say in work plan...isssues go
back to the 90's...how come waiting to '04 to be brought forward?..."several significant audit differences"?...what are they? what's been done about it?
DiIanni -= what does it mean?
Ext Aud - Balance from '02 should be different from what internal audit says
Rinaldo - 3 key items...big issue, reconciliation of social services grant, provision for tax arrears on brownfields and liability on closed landfill sites
Horvath - We went through this with the Financial Dept. carefully...there' s frustration, a sense that things aren't being looked over the way they should be...excuses given when info not forthcoming...concerns about a culture that we need to fix...need analysis of Fleet and Facilities dept.
DiIanni - Fleet audit going on
Mitchell - Are we going to get a report on the 19 problems from '02 and how corrected?
Collins moved, all in favour
Rinaldo - Financial statement ready by April
Collins - all info requested re purchasing policies and double payments not made available...allegation by internal auditor that proper procedure not followed
Int Aud - GT to do review..we need to strengthen purchasing policies
Mitchell - $2m shortfall?
Rinaldo - money set aside as cushion...trying to be conservative (re social service grants)...wasn't sure we didn't owe money to the province
Ext Aud - funds accrued to city prior to almagamation not reconciled
Horvath - we need to set realistic timelines and meet deadlines
Collins - Did we balance books for 2001?
Rinaldo - money not reconciled sat as deferred revenues...same for 2000

The committee went "in camera" to discuss double payments issue. Ferguson declared a conflict of interest.

*Added notes, with the help of Judy
- rather than checking the clerk's notes, Merulla asked Chinta Puxley, then Carol (ha!) if we had sound bite on Rinaldo's comments
CMT's input with internal auditor and the fact that they go to the manager and then on to council. Apparently Judy heard Joe R.
say something about "if facts wrong", the CMT responds to the auditor (Implication - that this happens before council sees the
report)
-Collins asked for copies of '03 Audit reports .. no visible sign of anyone noting this for action, although DiIanni said YES