1.       ERNST & YOUNG LLP 2005 management letter AND 2006 AUDIT PLAN

Lettre de recommandations de 2005 ET PLAN DE VÉRIFICATION DE 2006 de Ernst & Young LLP

 

 

 

Committee Recommendation

 

That Council receive the attached reports from Ernst & Young LLP for information.

 

 

Recommandation du cOMITé

 

Que le Conseil municipal prenne connaissance des rapports de Ernst & Young LLP ci-joints.

 

 

 

 

 

Documentation

 

1.      Chief Corporate Services Officer's report dated 30 November 2006 (ACS2007-CRS-FIN-0001).

 

2.      Extract of Draft Minute, 6 February 2007.


Report to/Rapport au :

 

Corporate Services and Economic Development Committee

Comité des services organisationnels et du développement économique

 

and Council / et au Conseil

 

30 November 2006 / le 30 novembre 2006

 

Submitted by/Soumis par : Greg Geddes, Chief Corporate Services Officer /

Chef des Services généraux

Corporate Services / Services généraux

 

Contact Person/Personne ressource : Wayne Martin, Manager, Accounting and Financial Reporting/Gestionnaire, Vérification et rapports

Financial Services/Services financiers

(613) 580-2424 x25183, Wayne.Martin@ottawa.ca

 

City Wide

Ref N° :  ACS2007-CRS-FIN-0001

 

 

SUBJECT:

ERNST & YOUNG LLP 2005 management letter

AND 2006 AUDIT PLAN

 

 

OBJET :

Lettre de recommandations de 2005 ET PLAN DE VÉRIFICATION DE 2006 de Ernst & Young LLP

 

 

REPORT RECOMMENDATION

 

That the Corporate Services and Economic Development Committee and Council receive the attached reports from Ernst & Young LLP for information.

 

RECOMMANDATION DU RAPPORT

 

Que le Comité des services organisationnels et du développement économique ainsi que le Conseil municipal prennent connaissance des rapports de Ernst & Young LLP ci-joints.

 

BACKGROUND

 

On November 13, 2001, Ernst & Young LLP was appointed as the external auditors of the City of Ottawa for the five year term ending December 31, 2005.  On September 13, 2006, Ernst & Young LLP was re-appointed for another five year term ending December 31, 2010.  As part of the 2005 audit, Ernst & Young LLP is providing its Management letter identifying areas where financial management and internal controls can be strengthened.  The attached memorandum of observations and recommendations from Ernst & Young LLP includes responses from City Management.

 

In addition, as part of the 2006 audit, Ernst & Young LLP is also providing a planning memo for the information of Corporate Services and Economic Development Committee and Council that outlines the scope and key issues affecting the audit.

 

 

CONSULTATION

 

No public consultation was required.

 

 

FINANCIAL IMPLICATIONS

 

Fees are fixed as part of a five-year contract.

 

 

SUPPORTING DOCUMENTATION

 

Attachment 1 - Ernst & Young LLP 2005 Management Letter

 

Attachment 2 - Ernst & Young LLP 2006 Audit Plan

 

 

DISPOSITION

 

Management will take appropriate action as described.



Corporate Services and Economic               Comité des services organisationnels

Development Committee et du développement économique

Report 2      rapport 2

 

Extract of draft Minutes 3

6 february 2007

 

Extrait de l’ébauche du procès-verbal 3 – 6 février 2007

 

 

ERNST & YOUNG LLP 2005 management
letter AND 2006 AUDIT PLAN

Lettre de recommandations de 2005 ET PLAN
DE VÉRIFICATION DE 2006 de Ernst & Young LLP

ACS2007-CRS-FIN-0001            city-wide / À l’Échelle de la ville

 

Mr. K. Kirkpatrick, City Manager, Ms. M. Simulik, Director of Financial Services, and Ms. D. Monaghan, Partner with Ernst & Young, responded to Committee members’ questions on this item.  The following summarizes the information provided.

 

Ms. Simulik noted that, in the Long Range Financial Plan (LRFP), staff had identified unfunded liabilities as a concern and suggested that the City needed to start finding ways to fund them.  She explained that the unfunded liabilities related to employee benefits and she noted that this year, the City’s external auditors had identified them in their management letter because they had increased beyond the rate of inflation.  At the time of amalgamation, there was already $213 million in unfunded liabilities on the books.  She explained that municipalities are allowed to have unfunded liabilities because these represent employee benefits, which employees earn today but don’t cash-out until they retire, leave their employment, draw Workplace Safety and Insurance board (WSIB) benefits or take vacation pay.  They are put on the books as unfunded liability and the offset is future revenues.  Municipalities have been required to put these on their books since the year 2000.  Before that, municipalities dealt with them strictly on a cash basis and operating budgets were adjusted accordingly year after year.  Ms. Simulik referenced the 5 elements included in the figure; the OC Transpo pension plan, unfunded vacation, WSIB, post-retirement and post-employment.  She indicated the City already had strategies in place to deal with the first 2, which would be eliminated within the next 7 years and that staff would be developing strategy proposals, for Council’s consideration, to deal with the last 3. 

 

With respect to vacation carry-over, Ms. Simulik explained that under the various collective agreements, employees were allocated a certain amount of vacation time, a portion of which they were allowed to carry over if they were unable to take their vacation during the year in which it was earned.  As a rule, employees were allowed to carry over one year’s worth of vacation.  She explained that during the first few years, vacation banks increased significantly because people did not have the time to take vacation due to amalgamation-related work.  Since 2005, the City Manager has directed that the time between the Council meetings of early July and late August be considered a “down time” in the corporation and that employees be encouraged to take their vacation during that 4-week window.  Ms. Simulik maintained it was up to managers to monitor their employees’ carry-over.  However, she noted that in some cases, staff came into amalgamation with significant overtime banks and unless the City dedicates some money towards them, these banks would not quickly be eliminated.  In closing, Ms. Simulik indicated that of the $270 million identified in the report as unfunded liability, $17 million related to vacation carry-over.  She explained that for the past 2 years, the City had been funding employee vacation time.

 

Ms. Simulik indicated the Firefighters’ collective agreement was the only one that still allowed sick leave banking and carry-over.  Otherwise, under every collective agreement at the City, new employees are no longer allowed to bank sick leave to cash-out when they leave the corporation.  As a result, pre-1979 employees have the most sick leave accumulated; numbers will decrease as they retire. 

 

Speaking to the management comment that one should not have employees doing the counts who have access to perpetual records, Ms. Simulik advised that in order to address this, staff had identified the need for a dedicated staff person who would become the supervisor of the stores audit as part of their responsibilities and only that person would have access to the count and the recount information.  She submitted it could not be done without adding a position because the same people who have to do the count are also the ones who have access to the perpetual records.  She indicated this would be coming forward as part of the budget for Council’s consideration. 

 

In regards to access to inventory, as referenced on page 8 of the agenda, Ms. Simulik explained that currently there was only 1 storekeeper.  Therefore in order to ensure that non-stores personnel did not have access to the area or that they were escorted by stores personnel while in the area, there was a need to augment the number of staff in that store.  She advised that would also be coming forward for Council’s consideration as part of the budget. 

 

Responding to questions on whether or not other major municipalities across Canada were in the same boat with respect to unfunded liabilities, Ms. Simulik suspected that they were, although she could not confirm this.  She indicated she could obtain information with respect to any that may be setting aside funds for such liabilities and provide same at a later date.  Mr. Kirkpatrick added he believed the vast majority of municipalities would be in the same boat.  He re-iterated earlier comments with respect to the changes in reporting requirements and explained this discussion demonstrated the purpose of those changes; to illuminate the situation and cause policy discussions about the extent to which governments are actually in debt.  He also re-iterated that some of the unfunded liabilities were already being addressed through new policies and staff would be coming forward with recommendations for Council’s consideration on strategies to resolve the others.  He reminded members that at amalgamation, some municipalities had come into the new City with funded employee benefits and some had brought forward unfunded liabilities.  The Council of the time dealt with that as a policy issue in 2001. 

 

In terms of the demographics and the projected demands on these funds over the next 10 years due to employee retirements, Mr. Kirkpatrick suggested that, as with the rest of society, the City would experience a bulge in retirements over the coming years.  In that light, he felt this was a timely discussion and more importantly, it was a good time to bring recommendations to Council with respect to a strategy to address the issue.  However, he submitted unfunded liabilities with respect to vested employee benefits were no different than deferred capital maintenance. 

 

Responding to questions with respect to the OC Transpo fleet maintenance, Mr. Kirkpatrick suggested that this issue would form a large part of the upcoming budget discussions.  However, because of gas tax revenue, he believed the Transit fleet would be the healthiest in terms of overall infrastructure maintenance and lifecycle.  In closing, he advised that Council would be receiving, as part of the Auditor General’s 2006 Audit Report, the results of his audit of fleet management.  

 

Speaking to the last paragraph in the letter from Ernst & Young with respect to the study not being designed to determine whether or not the City’s system of internal controls was adequate, and a motion introduced by Councillor Wilkinson to request that this form part of future audits, Mr. Kirkpatrick explained the scope of the external audit was for an external auditor to be able to express an opinion on the validity of the financial statements.  He submitted that looking at the City’s internal control systems to determine whether or not they were adequate was the primary function of the City’s Auditor General.  Therefore, he submitted that the motion was not necessary and at a minimum, he suggested Committee hear from the Auditor General before approving the motion. 

 

Ms. D. Monaghan concurred with the explanation provided by the City Manager with respect to the scope of the external audit, and advised that reviewing internal controls would be a much different and much larger exercise. 

 

In light of this, Councillor Wilkinson said she wished to refer her motion to the Auditor General rather than having Committee vote on it.  A discussion ensued with respect to the appropriateness of referring matters to the Auditor General in light of his workplan and his function.  In light of this, Mayor O’Brien proposed that the motion be referred to Council’s Audit Working Group.  The Committee concurred. 

 

Moved by Councillor M. Wilkinson

 

That Ernst & Young be asked to remove the sentence “This study was not designed to determine whether the City of Ottawa’s system of internal controls is adequate for management’s purpose” from future audits and include such information in future audits.

 

REFERRED to the Audit Working Group

 

Committee then voted on the report recommendation.

 

That the Corporate Services and Economic Development Committee and Council receive the attached reports from Ernst & Young LLP for information.

 

            RECEIVED