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2012-12-12 Finance Committee MinutesFINANCE COMMITTEE CITY OF SAINT JOHN MINUTES WEDNESDAY, DECEMBER 12, 2012 - 4:30 p.m. Present: Councillor Merrithew Councillor Reardon Councillor MacKenzie Councillor Fullerton Greg Yeomans Cathy Graham Kevin Fudge Hilary Nguyen Lloyd Foote — Deloitte Emily DiPaolo — Deloitte Alexis Brown - Deloitte Also present — Barbara Mahaffy, Recording Secretary Presentation of Audit Process & Audit Service Plan Mr. Foote of Deloitte introduced their presentation concerning the audit process and audit service plan. He outlined the objectives of the presentation — to outline the audit service plan; the audit scope; the audit timelines; where they see the risks and to provide clarity. Ms. Brown discussed the Public Sector Accounting Standards (PSA). She reviewed why we are mandated to adopt PSA — to ensure consistency with respect to government reporting and to allow an ability to benchmark. Question: Councillor Fullerton asked if PSA will allow us to provide more timely information to the citizens. Will our statements be in the same format as other municipalities across the country? Response: Ms. Brown responded that there will be some differences, but they should be very similar; items will differ, numbers will differ, but the same information will be there. Question: Councillor Fullerton asked if all cities in Canada will be compelled to have their water budgets, for example, on the main statement. Response: Ms. Brown responded that it should — all entities will be consolidated; there will be consolidated statements. The activities should be common throughout municipalities. It should allow comparability — must also be able to bench it against the level of service. Ms. Brown also reviewed the important dates related to the transition to PSA. The date of transition (opening balance sheet) — January 1, 2010; comparability period — December 31, 2011; PSA adoption — December 31, 2012. This standard applies to municipalities. There are significant areas of change regarding PSA: • Financial statement presentation • Tangible Capital Assets (TCA) (fixed assets) — significant amount of work involved to gather this information o Controlled entities - consolidation Question: Councillor Fullerton asked about the deadline date to have this information on the City's website — worst -case scenario. Response: Mr. Foote responded — August 2013 Ms. Brown noted that if the City has control over certain government entities or other government organizations, the City must do full consolidation — figures must be added into City's statements. Assessments need to be done on anything that the City controls — huge amount of work. Mr. Fudge reviewed some of the controlled entities for the City of Saint John — Saint John Transit Commission, Saint John Parking Commission, Saint John Industrial Parks, Saint John Non - Profit Housing, Harbour Station, Saint John Free Public Library, Canada Games Aquatic Centre, Trade & Convention Centre, Saint John Energy, etc. These entities include anything that the City provides funding for. Question: Councillor Fullerton asked what the difference was between providing funding versus providing a grant. Response: Ms. Graham responded that we included anything for which we provided funding or grants — looked at what we control, how much influence we have, what is their board composition, etc. The criteria for this exercise are stipulated in the PSA handbook. Mr. Foote discussed their audit approach — risk -based approach. Their approach is: • Partner led — Mr. Foote's responsibility • Focused on where risks exist • Quality driven • Interactive and dynamic — are aware of new developments & changes in activities; adjust their audit process to meet changing needs • Year -round involvement • "No surprises" interactive approach. Ms. Dipaolo reviewed the four steps in their audit approach. • Initial planning process — come in for two -week period • Assessing and responding to risk of material misstatement • Developing and executing the audit plan • Reporting and assessing performance These steps are not necessarily sequential nor are they mutually exclusive. 2 Ms. Dipaolo then reviewed these steps in more detail. In the Initial planning stage, they determine the engagement team & involvement of experts; determine materiality; identify material classes of transactions, account balances & disclosures. Assess risk of material misstatement - perform and assess results of preliminary analytical review; internal control evaluation & assessing risks of material misstatement done in tandem — look at what risks exist & would identify a control currently in place to mitigate this risk; identify areas of special audit consideration. Executing the audit plan — respond to risks of material misstatement through audit procedures; consider appropriateness of accounting policies (TCA); evaluate audit evidence Reporting and assessing performance — final reporting; adding value to the City They will issue a management letter at the end of the audit with recommendations for improvement for next year. Mr. Foote continued the presentation reviewing audit procedures. He touched on confirmations and reliance on third parties — e.g. property tax assessment, unconditional grants from the Province, confirm debt and cash balances; impact of shared risk model on pension plan and employee future benefits. They couple this with substantive analytical procedures — revenue & expenses, other income, inventory (year -end) and depreciation — to satisfy themselves of the accuracy of the balances. They also look at internal controls and test them to make sure that the controls in place are operating effectively and also perform tests of detail. From a revenue perspective, 90% of City's revenue comes from third parties, tax assessments and unconditional grants. Only 10% of revenue comes from other sources and not subject to the third party process. This is similar on the expenditures side — payroll, debt repayments. Discretionary spending by the City is not large. Ms. Brown talked briefly about group audit. Because the City will be consolidating certain controlled entities now, the City is considered a group and will be performing a group audit. An audit of a group's financial statements includes financial statements with more than one component. The controlled entities are considered components. She reviewed the group audit approach. Their approach is designed to meet the PSA standard. They will be providing an opinion on the consolidated financial statements, but these entities are audited by other accounting firms. As a result, they have to be aware of any potential misstatements that may occur and will be issuing referral instructions, which are instructions to the other audit firms explaining that their results will be incorporated into the results of the City of Saint John. Deloitte will search for potential misstatements and consideration will be given to significant risks at each entity. The entities will be asked to look at significant accounts and disclosures using the same level of materiality and report back to Deloitte. 3 Question: Councillor Merrithew asked how many other accounting firms are involved in the auditing process related to the controlled entities. Response: There is a variety of firms used. Each entity uses a different firm. Ms. Brown explained that they like to gain an understanding of the nature of the operations of the controlled entities and internal controls and accounting issues that they have to ensure the right information gets incorporated into the City's statements. Deloitte will gain this knowledge through a review of their financial statements. They will be asking the entities to report back to Deloitte any misstatements that they have identified, as well as any internal control deficiencies identified in the current and previous periods. Ms. Dipaolo reviewed the significant areas of audit risk and their proposed audit response. These areas include: o Change in accounting framework and financial statement disclosure and presentation — will conduct an audit of opening PSAS statement & assess transitional adjustments; review application of accounting policies; ensure disclosures for comparative periods are accurate, as well as reconciliations o Accounting for controlled entities — to review Management's assessment of controlled entities and method of consolidation under PSAS; will test final consolidation and elimination entries o Accounting for and valuation of tangible capital assets — to test controls around TCA process; risk that TCA include amounts not eligible for capitalization and certain assets may be impaired. o Revenue recognition — to test operational effectiveness of controls; to look at journal entries posted to revenue accounts; confirm revenues from other parties (unconditional grant and property tax assessments) o Retirement, post - employment and other employee benefits — deals with pension plan; once they know date of any changes are, it will impact 2012 financial statements as it relates to the pension liability; will assess the actuarial determinations associated with the liability Ms. Brown reviewed the audit timeline. The planning portion of the timeline is now complete. She highlighted a few key client deliverables, being an engagement letter, audit service plan and a listing of schedules to be completed by the Finance Dept. Their main visit will be in July for a few weeks. They will also be coming in March for the interim audit. There will be draft financial statements to review in July. They are targeting for August 2013 for the concluding and reporting portion of the timeline. At that time, they will be meeting with Management, the Finance Committee and Council to discuss audit results and present the management letter. Mr. Foote reviewed the members of the Service Team from Deloitte. Mr. Foote is the Lead Client Service Partner. They've divided the audit team into three areas — Public Sector Accounting (Alexis Brown); Audit (Emily DiPaolo) and Enterprise Risk Services (IT) (Barb Leaman). 0 Mr. Fudge asked Mr. Foote about a specialized resource for consolidation. Christy Foster at Deloitte will be filling this role, with assistance from Ms. Brown. Mr. Foote mentioned their Client Service Principles. They want to deliver an experience, from an audit perspective, that works. They will undertake the following to meet their commitment: • To understand the City's business and what's important • To provide value and build trust • To invest in this relationship to grow it • To demonstrate professionalism through communication and interaction • To provide a "no surprises" experience They will seek Management and this Committee's feedback on their performance and adherence to these principles when the audit is concluded. Mr. Foote asked the Committee members if there are areas that they perceive are at risk or any areas that they want Deloitte to look at in particular. Councillor Fullerton would like to get the timeline moved up. She feels March is too late. She would like to get the timeline tightened up. Mr. Foote explained that it is a resource and process issue. Ms. Graham explained further that the PSA change and the conversion have put a strain on the City's resources. Key resources in the TCA project were lost last year in the Finance Department and were not replaced. Pension reform consumed a large amount of Finance's time. We are still awaiting finalization on the 2011 deferral. We had to await the Province's approval to defer (as we are not allowed to defer) without which they would not have accepted our statements. Mr. Foote noted that March and April are very normal for the issue of financial statements. Question: Councillor MacKenzie asked if the process could be streamlined if one firm was conducting the audits of all the ABC's. Response: This does present opportunities for efficiencies and cost savings. To be completed more quickly would depend on the preparedness of the ABC. It would also allow the same "set of eyes" to look across all the ABCs and would increase transparency, as well as consistency in reporting. Question. Councillor Reardon asked Ms. Graham if the Finance Department was short staffed. Response: Ms. Graham responded that there will be something on this going before Council shortly. There are the same people doing multiple things, as staff is juggled around in order to accommodate PSA. Councillor Merrithew noted that the department just wants to replace people that have left or retired; they are not adding new staff. Ms. Graham did respond that the hiring freeze has definitely kept us from moving forward. We have to change the process going forward, as PSA will continue on once these statements are done. PSA Presentation Ms. Graham opened her presentation by noting that PSA stands for Public Sector Accounting. She reviewed the what, when and why of PSA: • Mandated by province to be compliant for statements Dec. 31/12 • Changes include TCA, compliant financial statements & consolidation of statements She reviewed what has been done so far: • Draft TCA policy and procedures • TCA inventory list — 2010 completed; finishing 2011; working on 2012 • Working on controlled entities • Reviewing required statement requirements & entries • Assistance and review by outside consultants — provide expertise • Working with new auditors • Reviewing disclosure and accounting changes Ms. Graham noted that the City is going to have to set up an accrual for sick time. This has to be done by an actuary — is very labour intensive. She outlined what still needs to be done: • Complete TCA inventory and reconcile 2010 to financial statements; finishing 2011 and working on 2012 • Communicating with ABCs — to start meeting with them; working on elimination entries and consolidation of statements The benefits of PSA were looked at: • Need to PSA compliant to receive Federal and Provincial funding • Provides understanding of the infrastructure owned, ongoing maintenance and replacement and financial implications of decisions • Used to support long -term financial plan and assist in budget decisions • Supports decisions on capital investment to support sustainable objectives • Better comparability to other cities PSA is continuous from now on — procedure and way of reporting. TCA does not go away. Mr. Fudge noted that we are going to have to do two sets of books concerning tax assessments until the Province adopts PSA for property tax purposes. Question: Councillor Fullerton asked if it is in our better interests to keep two sets of books as long as possible. Is it to our advantage to do so? She requested a yes or no answer. Response: Mr. Fudge can give a yes or no once this project is completed. Ms. Nguyen said yes from the City's perspective, but no from the taxpayers' perspective. Ms. Graham noted that once this exercise is over, the City will know what it owns, what the value of it is and what the amortization is. 0 The meeting adjourned at 6:10 p.m. Chairperson