Oct 20/04 Report
1:45 - 2:26 pm

Attendance:

Members: DiIanni (Chair), Collins, Ferguson, Kelly, Merulla and Jackson.

Non-Members: Braden, Mitchell, Pearson, Whitehead.

Press: Spectator

8.1 Audit Report 2004-03 Ontario Works Payments and Review of the Controls in the Service Delivery Model Technology
http://www.city.hamilton.on.ca/Clerk/
agendas-minutes-reports/Strategic-Planning-Budgets/
2004/Oct20/CM04028%20-%20OW%20-SDMT%20
Controls%20-%202004-03.pdf

Presented by Ann Pekaruk - Staff Internal Auditor. The text of her short overview is unavailable - for details on the report see above link.

Additional comments by Joe Rinaldo (Manager - Finance) ".the Provincial Auditor also identified some significant weakness, and that's why many municipalities are having difficulty with that. And my understanding is that the Province is actively trying to correct some of those issues - some weaknesses that are in that system that we are required to use, and I just wanted to make sure that Council was aware of that as well.

There was no discussion on this item. Motion to receive the report Merulla/Kelly CARRIED.

8.2 Audit Report 2004-04 Procurement Card Review
http://www.city.hamilton.on.ca/Clerk/agendas-minutes-reports/
Strategic-Planning-Budgets/2004/Oct20/
CM04029%20-%20Procurement%20Card%20Review%20-%202004-04.pdf
(Appendix B of this report is Private and Confidential - it is listed at item 13.1)

Presented by Ann Pekaruk : ".Annual review of procurement card usage.covering 2003 transactions. Due to the sensitivity I guess, and the exposure of this topic in 2003, we actually expanded the scope to include a more extensive sample of transactions. Among the more prevalent observations: insufficient, and in some cases no supporting documentation; over 10% of the card holders were not using the cards, at all, over a 9 month period; there was a potential to realize volume savings and discounts through tendering and negotiating with vendors, that just because of the volume of 'p-card' transactions you might be able to negotiate better terms with suppliers; and there was many instances of inappropriate account usage, which basically would result in inaccurate tracking of expenditures by class".

Discussion:

Collins: ".I noted in the report that it mentioned savings through volume purchases.number 7 - 'Three vendors accounted for a total of $310,000 of P-card purchases throughout the organization.' I noticed doing my own research that photos - processing of film, lamination services - Fortino's Dundurn seemed to get a number of purchases through that, and I thought that the number of transactions and dollar amounts were quite significant. So, can I get some understanding of what areas did we recognize through the audit where we might find some savings through bulk purchases, or securing a vendor through an RFP, rather than allowing staff to just go out and choose a place on their own". Pekaruk : "I have the three suppliers, I just don't know if it's a type of 'in camera' item.?" Collins : "Just services". Pekaruk : "Just services? Most likely things like building supplies, safety equipment.." Collins : ".I thought the former system - or we may be still using it - it's an open system where an employee can walk in and put these items on an account.is that correct do we still undertake that system for certain services or products?" Rinaldo : "Yes we do.look at expanding it for these types of services as well, so Rick (?) and the purchasing staff are going to look at calling for. proposal developing an open order for some of those types of uses - so they're not put on the P-cards, they're put on an open order". Collins : "And how many services or purchases in the review did we find that we might be able to take advantage of? Is it just the two areas mentioned.or could we expand it to photo services.as I mentioned?" Staff (Rick?): "Ann did a limited review and she identified three large ones. We've developed a report out of the US bank system, which does all the VISA card payments for us, and that report summarizes by vendor the amount that's expensed against (each one). And that report is generated twice a year, and is to be reviewed by buyers to look at all incidents where.there's dollar values with a vendor that would lead us to believe that we should have a formal competitive process to engage a vendor for that goods or services, and to identify issues where a non-corporate vendor is being used where a corporate vendor has been appointed. That report has just been generated again this week, and it's gone out to the buyers, I believe it was yesterday, for review for the first nine months of this year - I believe it was the first time that we've generated that report in a year or so". Collins : "And how quickly is the turnaround on that in regards to trying to determine where an RFP is warranted?" Staff: "There are 7 buyers looking at it.to be finished by the end of next week and identifying potentials, and we will be adding those to our list of RFPs and tenders to be issued in 2005".

Collins : "Great. My other question is surrounding the number of cards and some of the problems - it's in the body of the report - some of the accounting issues that might arise, or some of the checks and balances that we have in our own policy, to guard against some of the issues that have been raised in the internal audit. Ann noted in her verbal presentation that there were almost 10% of those who had cards that weren't using them, and I noticed in the report that there are instances where employees had left and there maybe wasn't as quick a response to cancel the card or the service in a certain time frame. And so understanding that we've run into those issues and . we're going to come forward with a report to reduce the number, do we have some idea of what that magic number is compared to the number of cards we have out there?" Staff : ".When Ann started her review we had 475 cards out there - we're down to 418. One of the controls that's been put in place is when a card comes up for renewal, the card is not renewed if.no transactions have been completed on that card in the last period of time. So as such, we've cancelled 50 or so odd cards as a result of that, in this past year". Collins : "And then how often do we go through that review.? Is that an annual exercise?" Rinaldo : "Yah. We plan on doing an annual exercise. The other thing that Rick and staff plan on doing is to do an annual email to all card users to remind them what the rules are. As Ann indicated most of them have provided receipts - unfortunately they don't provide an explanation. And I had actually done my own sample analysis of P-cards, given the sensitivity of the issue, and I found the receipts were there but they didn't give the explanation. But when I pursued it further they were legitimate expenditures.. So we're going to remind everybody that they've got to provide explanation, that they've got to use the control account for the charges and then don't do the distribution. We asked the staff to follow up with the various staff members that have the P-cards. Unfortunately if we don't have it, we can't do the distribution of it.so. Most departments use sort of a clearing account in their operating budget to do that and then they distribute it later, and some of them are not following up, so we're going to remind everyone.follow the rules.so no one can say that they don't know what the rules are".

Collins : "Ok. I was very pleased to see the issue related to inventory, and I noticed that there were a number of - for example you list small tools.. What kind of inventory controls are in place and how are we tracking those purchases that were made before the internal review took place? Can I get some explanation on that?" Staff (Rick): ".If it's item 4, the traffic inventory? (Collins: yes) I can tell you what we're doing as we go forward. Unfortunately I don't have all that background to tell you about the past so maybe Ann can help us there. That area now has a fill out requisition form now for looking at all the purchases that were made on P-cards within that section of the division. And then we have a whole stock keeping.so if it's something that we need on a regular basis then we should have it stocked on our shelves on a regular basis. That is the inventory check that we're going through now. What is in our stock keeping shop and what do we need if we having to run out all the time, so we can take advantage of some of the competitive pricing". Collins : "So, are we going back one, two, three years to track purchases in that one area where we might have raised a flag in regard to - understanding that we have all the receipts - I guess the issue is now 'where is it in our inventory', understanding that we're dealing with hundreds of thousands of dollars". Staff: "That's.I couldn't tell you what year we're going back to but we're going back over time to get a trend analysis completed". Collins : "Thank you".

Ferguson : ".To Joe, is there a cost to carrying non-used cards? Is there an annual fee? Staff (not Joe Rinaldo): ".There's no fee, and the bank pays us a rebate based on purchases". Ferguson : "Do you know what percentage that is, based on the rebate?" Staff: "I don't know that number off the top of my head. It's in the neighbourhood of one and half, two percent. I could get that back to you". Ferguson : ".Because they charge the merchants two, tow and half percent. Are you picking up reluctance by some suppliers not to allow accounts - they want stuff on some kind of card? Staff : "There are some suppliers that are reluctant to accept P-cards, some suppliers that prefer the P-cards. So it's not a trend one way or the other". Ferguson : "Ok. In terms of process, if there's an entry for a P-card that doesn't . have proper documentation, what's the process in terms of charging back the holder of the card the amount?" Rinaldo : "Basically what the analyst will do when they receive that they will ask the individual for the receipt - they will follow up and try to get the receipt from the individual. Obviously, in the cases I looked at, there was one receipt for $13 that I - quite honestly I didn't get excited about a $13 - but if it had been a significant amount I would have pursued it and insisted that they provide a receipt, and if they don't I would insist that they reimburse the City". Ferguson : "What time do you allow for that - 60 days, or?" Rinaldo : "Normally when we get the P-card statements, the financial analyst who will look at that will require the receipt within the 30 day period - will follow-up in that 30 day period". Ferguson : "So 60 days after that purchase? That's safe enough?" Rinaldo : "It'll vary. We do it from the monthly statement". He explains it again. Ferguson : ".Thanks".

Jackson : "Did the former City and Region have P-cards as well.?" Rinaldo: "Yes they did". Jackson : He asks if cards were to be used for purchases between $500 and $5000, would the distribution of the cards be "weighted" in the departments where they're doing more of this kind of purchasing? Rinaldo : Yes. He sites examples of Public Works and Housing having more than Social Services, due to the "nature of the work". Jackson : He wants to know if the staffers' "position level" is relevant to having a P-card. Staff: He indicates that it depends on the department. Many workers "in the field" have them, especially in Public Works, where many of the cards are allocated. Jackson : He asks for clarification. Staff gives examples - staff in Economic Development has them "because they do a lot of traveling". He offers to provide an exact break down, as was provided last year. Jackson declines. He asks Ann if she's satisfied that of the 418 cards allocated, if all are "defensible". Ann Pekaruk explains that due to annual review and the system of asking cardholders who've not used their cards for a year to justify having one, the numbers will go down, and that'll continue to weed out the ones that are unnecessary.

Merulla : He questions the use of an American company for this card system. "Is there not a comparable Canadian company?" He also wants to suggest that the City use a "credit" or "points" card system. Rinaldo : "We're actually getting a rebate". He says they're using the Royal Bank's VISA - "I know the name is deceiving". He says most transactions are local. Merulla: "I've heard that it was an American company". Staff explains that the Royal Bank uses an American firm for it's accounting "end". Rinaldo confirms that the bank is using its American "arm" for this. Merulla continues about the rebate system, wondering if 2% is "maximizing" enough. Rinaldo explains that a few years ago they did a survey of what was available and the rate they choose was the best offered. Merulla : "What is our actual bottom line in regards to purchases using P-cards, on an annual basis?" Rinaldo : "About 2.5 million dollars a year". Merulla: "And the actual rebate component, where is that shown in the budget?" Rinaldo: "If I told you it went to the Commissioner of Finance's budget, would that satisfy you? Just kidding. It gets applied corporately I believe - help me out here". Staff: "I believe it is in the accounts payable budget, . as is the banking fee that's charged for the reports that are generated out of the P-card system. There's a cost for some fees - a minimal cost, about $6,000 in fees there". Rinaldo : ".The bank charges for services like . cheques.so it helps to reduce the cost of banking services - that we apply corporately". Merulla : "So how much is it over and above that? It mitigates the cost.but doesn't eliminate the cost?" Rinaldo : "No. Banking services, if I recall on the last.were in the $400,000 . when you look at all the transaction fees that's what it usually costs us". Merulla: " And we're getting $400 thousand a year in rebates then.?" Rinaldo : "Oh, we're not getting anywhere near that. 1% on that is 20 - 30 thousand dollars, is what we're getting on a rebate - about $50,000, somewhere in that area". Merulla says "OK" and thanks him.

8.3 Audit Report - Salt Inventory Adjustment - $2 million.
http://www.city.hamilton.on.ca/Clerk/agendas-minutes-reports/
Strategic-Planning-Budgets/2004/Oct20/CM04030%20-
%202003%20Salt%20Inventory%20Adjustment%20-%202004-07.pdf

You can also find more information about this in a report of a June 23rd meeting where the findings of the external auditor (Grant Thornton) were presented and discussed: http://environmenthamilton.org/CATCH/strategic/strat_040623.htm

It is interesting to note that although Councillor Merulla has been asking repeatedly for this report since the discrepancy was first noted in June, he is out of the room for most of the discussion on this item and when attending, does not ask any questions. When I asked him about this later I learned that he has " an independent auditor reviewing the issue".

Background info from the report:

'The opening 2003 (i.e. December 31, 2002 ending inventory) quantities and dollar values for salt were reviewed. It was evident that District 5 had recorded 28,000 tonnes of salt whereas maximum capacity (as determined by an independent third party) was 3,150 tonnes. Assuming that the salt inventory was at capacity, the discrepancy noted would account for at least 24,850 tonnes valued at $1.304 million dollars. As it is unlikely that all three storage units making up District 5 could have been at full capacity at the time of the physical count, the discrepancy could amount to more.

A similar exercise was undertaken for the sand/salt (pickle). However, due to the time constraints, independent capacity verification was not carried out and Internal Audit accepted capacities as stated by staff. District 4 indicated 1,000 tonnes and District 5 indicated 10,400 tonnes of pickle whereas capacity was 500 and 2,450 tonnes respectively, amounting to over-capacity of 8,450 tonnes values at approximately $194,000. An amount of at least $1.498 million dollars can be attributed to estimation of inventory above maximum capacity. Further review of inventory tonnage of salt and pickle, as per the physical inventories of 2001, 2002 and 2003, appears to indicate that these over-estimates originated in 2001 and simply carried year to year until discovered in 2003.'

(Internal Auditor) Pekaruk : (tape missed some of the beginning of this presentation) ".is in the range of about 4000. So there was a significant overestimation. This is a timing difference; it doesn't really represent a financial loss to the organization. It basically underestimated that winter control, and this was in 2001. I went back to try to determine when these amounts were originally reported, and it looks like most of it was in 2001. So we would have under-expensed our winter control and overestimated the value of the inventory due to the physical. The second contributor - minor though - purchases in our People Soft (computer software), which basically what we paid for in tons doesn't agree with purchases in the MMS (maintenance management system). The MMS is what the department uses for costing out all of its activities. And the third one relates to usage. The only source we have for usage is the MMS, which is based on activity sheets, filled out by staff. We found that there was significant differences in what was reported and what, in the end, we figured was actually used". She outlines the recommendations made to the department, mostly covering stricter inventory measures, which are also outlined in the report. She refers to these sorts of problems as "little quirky things that happen"

Ferguson : "Well, do we do an actual physical inventory, corporate wide?" Pekaruk : "Yes we do. Now a lot of times when they fill out the physical inventory sheets - and this is where the discrepancy came - they would put a figure down. We have at no point - like a dome, filled with salt, I know you can't accurately measure it - but now knowing the actual capacities, you could look at it and say yes, it looks like it's half full. If the capacity is 3000 tonnes then there's probably 1500. The other thing is salt - and this things is difficult to measure - but we actually do count all inventory that is countable". Ferguson : "Salt would be particularly difficult, because it would depend on the moisture content. You could put 1000 tonnes in a bin and take out 1200 tonnes because it's wetter. How do you do an inventory on that?" Staff: " It's very difficult to do a physical on that, but as a go forward from this, what we put in place was a measure of all the capacities - that's one aspect. And then with each and every dome we've got a practical capacity. So we try to account for weather. Another thing.is periodic spot checks on deliveries. .A truck arrives.utilize the weigh stations we have at the transfer stations and send them for a check.." Ferguson : "How many domes don't have scales?" Staff: ".None of our works yards have got scales. There is the comments in the recommendations that installation be considered at all yards. What we're doing is . taking advantage of . weigh stations at transfer stations and landfill sites". Ferguson : "OK. But even, weight.could be.because of moisture content.." Rinaldo : "It's important to understand how we do the inventory. It's an estimate. It's not an absolute, and you know, there's going to be variances. All we're trying to do is to ensure that the variances are within a reasonable tolerance, as opposed to, in that situation where we, obviously it didn't, we were pretty far out. .Public Works has ensured that the way they approach inventory is more consistent from one yard to the next. What we found as we did this review is that there are inconsistent ways of doing it, and so we're trying to do it more systematically.. No doubt about it, it's going to be an estimate, because you can't physically count salt. . " Ferguson : "Two questions. Would it be better to use cubic meters as opposed to weight? And the second thing is when we buy salt do we just accept the 'tear sheets' (?)" Staff: ".We have just accepted the 'tear sheets' in the past. It's part of the go forward now is doing the periodic spot checks on the deliveries. So when the trucks are coming in we'll pick two or three from the stream and send them over to the weigh scale to verify their 'tear sheets' from where they departed from. That'll give us a continual check and monitor system.. I'll let Ray speak on.cubic meters vs. tonnage, but it's really how we buy.." Ferguson : "Cubic meters wouldn't fluctuate depending on moisture content". Staff: ".We're buying it in tonnes.I don't know the ability of the producer to go back and give us the volume of the salt - I don't think they provide it that way.." Staff (Ray): ".I have to agree. I think it's all about how we're able to purchase the material. I don't think the vendors are set up at this point to deliver it in that measurement". Ferguson : "Do you buy it 'X' dollars per tonne based on moisture content.?" Staff (Ray): ".I believe that they have an estimated variance for shrinkage based on moisture and based on the average humidity throughout the Southern Ontario climate, and whatever climate they're selling to. And it's adjusted to the price. If we keep salt for the entire season obviously we're going to experience a considerable change in weight but if we're using the material on a regular basis I don't think that the shrinkage factor is going to be an issue". Ferguson : ".it would gain weight today, because of the moisture in the air". Staff : "Yah. The other issue is that as long as our facilities are closed, as 90% of them are now for salt, it also plays a role in how much moisture is getting in or getting out". Ferguson : "Alright. Thanks".

Jackson : ".Ask Ray to comment on the recommendations on the practical side of things.are you satisfied.." Staff (Ray) : "Yes I am. Actually we've set up a committee to review all of our handling, storage and application of all our bulk materials, and based on the recommendations that come out of that committee we're going to review that and implement them prior to this season".

Collins: ".The issue related to the private sector access to our salt. How do we monitor that in terms of what's used, unused, and returned ultimately to our yard? And does that situation exist anywhere else in the organization where we are - a contractor might have access to either supplies or materials? Staff (Ray?): "Sorry Councillor Collins, I didn't hear all of your question. But any contractors that are picking up materials from our yards are . supervised, if we allow that. And in the.areas where IMOS (specific contractor:
http://www.roadauthority.com/database/Company.asp?comp=5)
.they have to document all the material used, and we've taken a couple of extra steps with them. We've put logos on all of their trucks, and they can't be removed, so we can identify any of their vehicles on any roadway wherever we see them on any roadway. And we have the AVL (automated vehicle locator) planned to go into their vehicles which will record all the kilograms used or loaded or dumped off". Collins: "So we have direct supervision when the trucks are loaded with materials, is that correct? For instance with salt?" Staff (Ray): He sighs. "Are you referring to in house equipment?" Collins: "Well, if IMOS is undertaking a job for us they're using their own trucks or our trucks, or a combination of the two?" Staff (Ray): They're using their own trucks, and they're loading their own trucks, but they have to record the tonnages that they use and it's checked on a daily basis because we keep track of the inventory in their facilities". Collins: "That process is monitored by City staff, ( Ray : "correct") even if it's a night shift and there's a snow storm and we're calling people out at, lets say, an odd time of the day, we would always have supervision in that instance?" Staff (Ray): "They have to submit their material logs on a daily basis and they're reviewed with the supervisor in that area". Collins: "Thank you".

DiIanni (without stepping down from the Chair): ".Surely there are other communities that have similar issues as us? Do we know what they do to track their inventory - have we looked at a 'best practice' sort of analysis and maybe employed some of the strategies as well? Staff : "Through you Mr. Mayor (!), this gives us an opportunity to look around - who's doing what, and what can we learn? So that's - that's part of what Ray's already put in place". He outlines the details of what they've changed and says they're sharing with "our counterparts" and "learning from their successes".

Whitehead: "I'm just trying to put this in perspective on a financial.. So how much do we spend on pickle, sand, salt annually?" (period of silence) Staff : "Bear with us we're just doing the count over here" DiIanni : "Did you have a question, or?" Whitehead: "Well, the next question is what's the actual tonnage we use annually?" Staff: "From what I can see.about $1/2 million dollars annually on the mix, and $4.5 million on the salt for on average 85 thousand tonnes". Whitehead: He wants to know what the variance "represents in dollars". Staff: "I would have to look at the previous audit reports or the previous inventories. I couldn't be exact, I'd only be guessing. DiIanni: "This report, remember, is the audit on salt inventory and just that.. I'm sure at some point when we get into our budgets we'll have a fuller presentation, because this is a budget line, right Ray?" Staff (Ray): "Yes we can".

Meeting adjourned at 2:26 without mention of the final item on the agenda:

Private and Confidential item 13.1 Audit Report Procurement Card Review - Appendix B (being an addendum to item 8.2).