REGULAR AGENDA: NEW BUSINESS  11.

COMMITTEE MEMORANDUM

HISTORY:

On May 2, 2018, the Audit Committee members held a discussion concerning the increasing number of auditable areas, the current auditor staff size, the amount of City agreements/contracts that have not been audited in the past seven (7) years, the corresponding amounts collected and/or saved and the severity of the findings when these City agreements/contracts are audited.  As a result, the following motion was passed unanimously:  “Given the emphasis on the elimination of fraud, waste, and abuse; in addition to the creation of the Inspector General Function; and, after careful review of the risk assessment matrix, and current workload in the Internal Audit Department {Office of Internal Audit} causes immediate concern, the Audit Committee strongly recommends that a minimum of one additional position be added to Internal Audit function to focus on contract compliance which should be revenue neutral to the City.”

ANALYSIS:

Going into this fiscal year, the Office of Internal Audit’s listing of auditable areas was last updated during the 2010/11 fiscal year.  At that time, there were a total of 172 auditable areas to be audited by two (2) internal auditors (excluding the Director and Assistant Director).  Consequently, audits were assigned based on available resources, the last time that the department/division was audited and the auditable areas’ corresponding identified risk assessment with an emphasis on high and medium risk audits. 

With increasing regularity, City departments have been requesting unplanned audits of areas that were not included on the 2010/11 listing, especially over the past three (3) years.  Their omission is concerning because unscheduled auditable areas could mean that fraud, waste and misuse of City assets are occurring but are not being detected as quickly.

In an effort to provide assistance to these City departments requesting assistance, these unplanned audits were routinely added to the scheduled fiscal year’s audit plan while other planned audits were removed to compensate.  For example, 12 of the 22 audits scheduled to be completed during the 2017/18 fiscal year or 54.55% were unplanned (ex. BDO Report Findings Follow-up; Living Arts Trust, Inc. d/b/a O Cinema Management Agreement; and Property Management AVL and Procurement Card to name a few).  As a result of these unplanned requests, the previously scheduled high and medium risk audits are delayed and are not audited as frequently as desired.

Consequently, the Office of Internal Audit updated their listing of auditable areas during the 2017/18 fiscal year whereby it was determined that the number of identified auditable areas has increased to 303.  However, the risk assessment matrix has only been updated for the contracts/agreements to date as the remaining auditable areas will be revised once the planned Citywide Fraud Risk Assessment is completed.

As a result, the Office of Internal Audit has identified thirty (30) contracts/agreements that are considered higher risk and we believe should be audited every seven (7) years.  Examples of these higher risk contracts/agreements include the operators of the Miami Beach Marina, the Miami Beach and Normandy Golf Clubs, the beach concessionaires and the City’s public/private partnerships (Pelican Garage, Fifth and Alton Garage, Lincoln Plaza and Lincoln Place).

Although this listing of auditable areas includes the three (3) audits that are required to be completed annually (Public Works Inventory, State Beachfront Management Agreement and Cultural Arts Council), it excludes the following reviews (smaller scope and less extensive testing performed than for audits) that are currently being performed each year:

• Monthly reviews are performed to confirm that the Finance Department has completed all bank reconciliations by the dates specified in their standard operating procedures and that all outstanding transactions are cleared timely (started as a result of the BDO report).

• Quarterly reviews of the Parking Department’s Coin Room operations, attended lots (46^th Street and Collins Ave plus South Pointe) and valet operations.

• Quarterly reviews of SP Plus and their review of parking garage validations and exceptions (started in June 2018).

• Semi-annual reviews of the Accounts Payable and Treasury functions per the BDO report.

The Office of Internal Audit currently has three auditors (excluding the Assistant Internal Auditor who was named the Interim Director in November 2017).  In addition, one (1) temporary auditor was hired in January 2018 with the salary savings related to the vacant Director position.  However, this temporary auditor position will be eliminated once a new Director is hired.

Due to the aforementioned reasons, Office of Internal Audit staff have been only able to audit approximately two of these contracts/agreements per year during the past five (5) years.   Yet, the completion of the following eight (8) contract/agreement audits has resulted in the savings/collection of significant dollars to the City:    

As shown above, the completion of these eight (8) contract/agreement audits have resulted in total savings/collections of $520,787.16 to the City or $65,098.40 ($520,787.16/8 audits) per audit.  With a targeted goal of completing four audits each per year, it is expected that an internal auditor hired to focus on these thirty (30) higher risk contracts/agreements should be able to audit each one every seven (7) to eight (8) years.  This listing of contracts/agreements will be reviewed periodically whereby it would be revised as deemed necessary.

CONCLUSION:

The Audit Committee unanimously recommended the hiring of an additional internal auditor to focus on contracts/agreements whereby the City’s risk of potential financial loss is magnified.  In addition, there is the increased likelihood that the contract/agreement operator will more accurately report going forward given that their terms will be more frequently audited which should result in additional revenues being realized.

The Office of Internal Audit has recently identified thirty (30) high and medium risk contracts/agreements through our risk assessment matrix.  Prior to the substantial increase in the listing of auditable areas and the growing number of unplanned audit requests, previous goals were to audit all high and medium risk areas every seven (7) years which is no longer feasible under current staffing levels. 

Eight (8) of these thirty (30) deemed high to medium risk contracts/agreements have been audited in the past five (5) years whereby the City has either collected or realized savings of a total of $520,787.16 which equates to $65,098.40 per audit.  Meanwhile, the current salary range for an internal auditor is projected to start at approximately $62,000 as adjusted for the July 2018 COLA increase (excluding benefits). 

Although there is no guarantee of future audit assessments, the internal auditor’s starting salary range begins at less than the average amount collected/saved from the completion of these eight (8) contract/agreement audits during the past five (5) years.  Consequently, the hiring of an additional internal auditor to focus on these contracts/agreements audits may be revenue neutral or even revenue positive if this trend continues.