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Council to consider outsourcing city auditor's work

New report makes case for keeping internal auditor, supplementing it with consultants

The City Auditor's Office in Palo Alto is usually applying scrutiny, not attracting it, but after an extended period of dysfunction and a prolonged vacancy at the very top, the office itself is undergoing an audit of sorts.

On Thursday, a City Council committee will discuss a commissioned study that reviewed the Palo Alto auditor's office and recommends shifting some of its functions to external firms. The meeting of the Council Appointed Officers Committee will come nearly a year after City Auditor Harriet Richardson announced her retirement — a vacancy that still hasn't been filled. The office is now overseen by a special adviser, Don Rhoads of the firm Management Partners.

The office, which was created by the voters in 1983, has played the leading role in recent years in uncovering inconsistencies in the city's code-enforcement operation, glitches in its new business registry program and deficiencies in the local animal shelter. At the same time, it has been hobbled by a prolonged squabble between a group of performance auditors and their now former boss, Richardson.

In May 2018, the council Finance Committee voted to eliminate five of the six positions in the office — a vote that it opted to reverse a week later after public criticism. At the same time, council members agreed to explore possible changes, including the idea of outsourcing some — or most — of the office's function.

The outsourcing idea is among the issues explored in a new report by the firm Kevin W. Harper CPA & Associates. The analysis, which was commissioned by the council earlier this year, recommends that the city retain an internal auditor's office. It also, however, highlights inefficiencies in the existing operation and recommends that some of the office's functions be outsourced to consultants.

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After looking at the budget — and output — of internal auditors in Berkeley, Fresno, Oakland and Santa Clara, the Harper review concluded that Palo Alto's cost per audit is the highest of any city on the list. While other cities spent between $78,000 and $354,000 per audit.

In contrast, Palo Alto used up $417,000 per audit, which the review concluded is "very high." By comparison, the report states, the 2019-20 budgeted cost for Palo Alto's annual independent financial audit (which the report describes as "a more comprehensive audit than most internal audits") is $168,000.

At the same time, the office's output is tied for the lowest, with an average of 0.7 annual audits per full-time-equivalent position (same as Oakland). The review points out that the result can be caused by many factors, including working on the National Citizen Survey, compiling larger audits and inefficiencies.

The review recommends that the city devotes fewer hours for each internal audit in order to increase the number of risk areas they can look into each year. Those audits that yield "surprising negative results" can be expanded, the report states.

The benefits of internal resources are that they know the culture of the organization, the people, where to find information, how to use information systems and the policies and procedures, the report states.

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"Local governments often have difficulty maintaining an effective internal audit staff due to the difficulty of providing career path opportunities," it states.

External auditors have their own benefits, according to the report. Their work with a large number of organizations provides a good understanding of best practices. They are also more likely to have specialized skills and provide audits at lower costs.

"In some cases, the cost per audit is lower for external firms because there is less scope creep, there are less demands on the time of auditors, or auditors are more experienced with the audit outsourced to them," the Harper report states.

The report tries to balance these benefits by recommending that Palo Alto hire external auditors for one or two audits.

"This will bring the average cost per audit down, and will give the City the opportunity to better assess the costs vs. benefits of outsourcing for future consideration," the report states.

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If the city chooses to outsource all internal audits, it should also designate an "in-house liaison" who would manage audit activity and oversee the consultants, the report recommends.

The report relies on guidance from The Institute of Internal Auditors, which believes that a "fully internally resourced audit function is most effective and can be supplemented by external experts in specialty knowledge areas."

"Nevertheless, several sources indicate most internal auditing practitioners agree it is appropriate to use a combination of external resources, in co-sourcing or outsourcing models, to complete the audit plan," the report states.

The special meeting is scheduled for noon on Thursday at the Council Conference Room at City Hall, 250 Hamilton Ave. View the agenda here.

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Gennady Sheyner
 
Gennady Sheyner covers the City Hall beat in Palo Alto as well as regional politics, with a special focus on housing and transportation. Before joining the Palo Alto Weekly/PaloAltoOnline.com in 2008, he covered breaking news and local politics for the Waterbury Republican-American, a daily newspaper in Connecticut. Read more >>

Follow on Twitter @paloaltoweekly, Facebook and on Instagram @paloaltoonline for breaking news, local events, photos, videos and more.

Council to consider outsourcing city auditor's work

New report makes case for keeping internal auditor, supplementing it with consultants

The City Auditor's Office in Palo Alto is usually applying scrutiny, not attracting it, but after an extended period of dysfunction and a prolonged vacancy at the very top, the office itself is undergoing an audit of sorts.

On Thursday, a City Council committee will discuss a commissioned study that reviewed the Palo Alto auditor's office and recommends shifting some of its functions to external firms. The meeting of the Council Appointed Officers Committee will come nearly a year after City Auditor Harriet Richardson announced her retirement — a vacancy that still hasn't been filled. The office is now overseen by a special adviser, Don Rhoads of the firm Management Partners.

The office, which was created by the voters in 1983, has played the leading role in recent years in uncovering inconsistencies in the city's code-enforcement operation, glitches in its new business registry program and deficiencies in the local animal shelter. At the same time, it has been hobbled by a prolonged squabble between a group of performance auditors and their now former boss, Richardson.

In May 2018, the council Finance Committee voted to eliminate five of the six positions in the office — a vote that it opted to reverse a week later after public criticism. At the same time, council members agreed to explore possible changes, including the idea of outsourcing some — or most — of the office's function.

The outsourcing idea is among the issues explored in a new report by the firm Kevin W. Harper CPA & Associates. The analysis, which was commissioned by the council earlier this year, recommends that the city retain an internal auditor's office. It also, however, highlights inefficiencies in the existing operation and recommends that some of the office's functions be outsourced to consultants.

After looking at the budget — and output — of internal auditors in Berkeley, Fresno, Oakland and Santa Clara, the Harper review concluded that Palo Alto's cost per audit is the highest of any city on the list. While other cities spent between $78,000 and $354,000 per audit.

In contrast, Palo Alto used up $417,000 per audit, which the review concluded is "very high." By comparison, the report states, the 2019-20 budgeted cost for Palo Alto's annual independent financial audit (which the report describes as "a more comprehensive audit than most internal audits") is $168,000.

At the same time, the office's output is tied for the lowest, with an average of 0.7 annual audits per full-time-equivalent position (same as Oakland). The review points out that the result can be caused by many factors, including working on the National Citizen Survey, compiling larger audits and inefficiencies.

The review recommends that the city devotes fewer hours for each internal audit in order to increase the number of risk areas they can look into each year. Those audits that yield "surprising negative results" can be expanded, the report states.

The benefits of internal resources are that they know the culture of the organization, the people, where to find information, how to use information systems and the policies and procedures, the report states.

"Local governments often have difficulty maintaining an effective internal audit staff due to the difficulty of providing career path opportunities," it states.

External auditors have their own benefits, according to the report. Their work with a large number of organizations provides a good understanding of best practices. They are also more likely to have specialized skills and provide audits at lower costs.

"In some cases, the cost per audit is lower for external firms because there is less scope creep, there are less demands on the time of auditors, or auditors are more experienced with the audit outsourced to them," the Harper report states.

The report tries to balance these benefits by recommending that Palo Alto hire external auditors for one or two audits.

"This will bring the average cost per audit down, and will give the City the opportunity to better assess the costs vs. benefits of outsourcing for future consideration," the report states.

If the city chooses to outsource all internal audits, it should also designate an "in-house liaison" who would manage audit activity and oversee the consultants, the report recommends.

The report relies on guidance from The Institute of Internal Auditors, which believes that a "fully internally resourced audit function is most effective and can be supplemented by external experts in specialty knowledge areas."

"Nevertheless, several sources indicate most internal auditing practitioners agree it is appropriate to use a combination of external resources, in co-sourcing or outsourcing models, to complete the audit plan," the report states.

The special meeting is scheduled for noon on Thursday at the Council Conference Room at City Hall, 250 Hamilton Ave. View the agenda here.

Comments

Sally
Downtown North
on Dec 18, 2019 at 10:41 pm
Sally, Downtown North
on Dec 18, 2019 at 10:41 pm

Apparently we didn't pay the consultant enough to read our city charter. An internal, council appointed City Auditor is mandated. The charter also explicitly says the auditor will conduct internal audits. This implies, though doesn't say explicitly, a distinction between supervising external work. Presumably some portion of that could be mixed in. The charter also explicitly forbids mixing with other departments, city manager...

Also poorly executed in the report is constant reference to IAA. Governments follow The Yellow Book, with the primary stakeholders being the public, which is very much not the case for IIA and private sector audits.


Resident
another community
on Dec 19, 2019 at 7:17 pm
Resident, another community
on Dec 19, 2019 at 7:17 pm

I agree with Sally. However, if productivity is the real issue, which I also remember being the reason for recommending to downsize the office, then the focus should be on getting staff who can do the work in a reasonable amount of time. I also remember that the former city auditor agreed that productivity was an issue when the proposal was made. Perhaps that is the reason for the prolonged disagreement between her and the staff? If so, that further supports the need to address the real issue head on. Fire the staff, get ones who are willing to work hard, and keep things as required in the city charter.


mjh
Registered user
College Terrace
on Dec 21, 2019 at 3:43 pm
mjh, College Terrace
Registered user
on Dec 21, 2019 at 3:43 pm

As much as anything this department has not had the support of the city manager in the past, or of certain members of the council, who it has appeared would rather have an outside consultant who is less familiar with the city and does not have the knowledge to ask the right questions or scrutinize as deeply.


Mark Weiss
Registered user
Downtown North
on Dec 22, 2019 at 2:54 pm
Mark Weiss, Downtown North
Registered user
on Dec 22, 2019 at 2:54 pm

Maybe current leadership can outsource self governance back to the people of Palo Alto who want a representative and responsive group not a bunch of wonks and bureaucrats and retreads and puppets And enemies of democracy.
Happy holidays .


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