As Palo Alto considers significant changes to the City Auditor's Office, a national auditing organization on Wednesday issued a letter to the City Council, urging council members to retain the existing structure and to preserve the office's independence.

The City Council has recently commissioned an organizational review of the office, which has been without a permanent head since City Auditor Harriet Richards resigned last year. Since then, the council has flirted with the idea of eliminating five of the six auditor positions in the office — a decision it ultimately reversed. And last year, it commissioned an organizational review of the office from a consultant. One of the areas that the consultant, Kevin Harper, was asked to look at potentially of transferring some of the auditing functions from the city's auditor's office to the city manager — effectively curbing the auditor's independence.

Today, the city auditor is one of just four executive positions — along with city manager, city attorney and city clerk — that report directly to the council.

While the City Council has yet to weigh in on possible organizational changes to the small office, this week the Institute of Internal Auditors issued a letter urging the council to preserve the status quo. Changing the reporting structure so that the city auditor would report to the city manager would "undermine the independence and critically important role of internal audit in Palo Alto, negatively impacting the public's interest."

"We believe that the City of Palo Alto should maintain the current reporting structure of its internal audit function to continue to provide objective insights, improve efficiency of operations, assess controls, evaluate risk and protect assets, and ensure compliance with laws and regulations," Richard Chambers, president and CEO of the institute, wrote to the City Council.

While Harper's report, which was released in December, does not recommend placing the city auditor's office entirely under the purview of the city manager, it proposes a "dual-reporting relationship" under which an audit committee (or, in Palo Alto's case, the City Council) would appoint the city auditor, evaluate the office's performance determine what audits would be conducted.

The city manager, under the proposal, would provide "administrative oversight," which includes review of time sheets and expense reports and consultation about the timing of audits.

"Additional involvement by the City Manager's Office may improve cooperation with the City Auditor’s Office and may improve the quality and quantity of implemented recommendations," Harper's report states.

The report also makes a case for outsourcing some of the audits to consultants — something that the office currently does not do. Harper also found that Palo Alto's city auditor's office performs fewer audits and spends far more per audit than other area cities with internal auditors — a list that includes Berkeley, Fresno, Oakland and Santa Clara. Palo Alto had spent about $417,000 per audit, according to Harper's review, while other cities had spent between $78,000 and $354,000 per audit. And the city was tied for last with Oakland for lowest output, with an average of 0.7 audits per full-time-equivalent position annually.

Harper's report argues that the benefit of outsourcing some audits is that external firms have worked with many other organizations and have a "good understanding of best practices." The work usually costs less than Palo Alto currently spends per audit and firms usually have employees with specialized skills on staff.

The institute, by contrast, makes a case for investing in a stronger internal-auditing operation rather than shifting the functions to consultants or placing it under the city manager.

"The City Council must embrace the importance of independence and objectivity," Chambers wrote. "A properly resourced internal audit function, independent from management, can provide insightful recommendations on how to achieve objectives more effectively, ensure mitigation of related risks, and safeguard taxpayer dollars."

To be effective, Chambers wrote, the City Auditor's Office must have "direct and unrestricted access to both city management and the City Council." It must also be "free from any undue influence of city management."

"This influence can appear in many forms, including inappropriate administrative or functional reporting relationships, budgetary constraints, and decision-making around personnel issues," Chambers wrote.

To fulfill its responsibilities, the auditor must be able to report directly to the City Council or, at the very least, to an independent audit committee. The reporting relationship between the city auditor and the City Council should be the same as between the city manager and the council, Chambers wrote.

"The City Council should view the internal audit function as its primary partner in providing effective and independent oversight of city operations," Chambers wrote.

The Institute of Internal Auditors is the second national auditing group to come out against the proposal to give the city manager some oversight over the auditor. On Dec. 19, the Association of Local Government Auditors submitted its own letter that called Harper's recommendation that the city auditor report to the city manager in an administrative manner "a significant structural threat to the independence of the City Auditor's Office and not appropriate for an external government audit function."

"Some of the administrative reporting examples outlined by the consultant could result in management inappropriately exerting control over audit work," Douglas Jones, chair of the group's Advocacy Committee and city auditor in Kansas City, Missouri, wrote in the letter.

Jones noted that under the existing structure, the city auditor works for the council and audits management.

"The charter and ballot language establishing the city auditor created a position and office that is independent of management to provide elected officials and the public with information," Jones wrote.