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SR-08-26-2014-3ICity o City Council Report Santa Monica City Council Meeting: August 26, 2014 Agenda Item: 5-1 To: Mayor and City Council From: Rod Gould, City Manager Subject: Internal Audit Services for the City of Santa Monica Recommended Action Staff recommends that the City Council authorize the City Manager to negotiate and execute a professional services agreement with Moss Adams LLP, a Washington -based company, for internal audit services in an amount not to exceed $561,000 for a 3 -year period with one option to renew for an additional two years in the annual amount of $187,000, for a total amount not to exceed $935,000 over a 5 -year period, with future year funding contingent on Council budget approval. Executive Summary Internal audits are used to assist the City in the efficient use of resources by providing analysis and recommendations for improved operations and stronger internal controls. Staff recommends engaging the services of an independent audit firm to perform internal audit services in accordance with applicable industry standards and relevant rules and regulations established by the City. Staff recommends the firm of Moss Adams LLP to provide internal audit services for the City and help ensure the most efficient use of resources. All reports and results would be communicated with the City Manager. The total cost of the agreement would not exceed $935,000. Discussion In the past, the City of Santa Monica has typically used City staff to perform the internal audit functions. These functions include assessing and identifying risks, assessing internal controls and compliance with laws, regulations and contractual agreements and preventing and detecting fraud to ensure the safeguarding of public assets. Over the last five years, accountants and auditors have been in high demand and as a result the City has experienced turnover in internal audit positions. it The City attempted to recruit an Internal Audit Manager in January 2014 but was unable to attract an individual with the requisite combination of auditing knowledge, presentation skills and experience. Staff considered available alternatives and now recommends that an external firm be engaged to perform in -house internal audit functions and report directly to the City Manager. Such a firm would provide continuity and efficiencies to the process while maintaining an independent and objective approach that would add value and help improve the City's operations. Specifically, a firm would provide a variety of personnel with experience in the many areas of a City's operations and a deep knowledge of best practices obtained through training and experience gained working with other cities and governments. Further, such a firm might utilize audit management software, audit techniques and other up -to -date resources otherwise unavailable to the City to perform the internal audit functions in the most efficient and effective way possible. Vendor Selection The City issued a Request for Proposals (RFP) for internal auditing services in April 2014. The RFP was posted on the City's on -line bidding site, and notices were advertised in the Santa Monica Daily Press in accordance with City Charter and Municipal Code provisions. The deadline to respond was April 29, 2014. The City received five proposals in response to the request. The City's selection committee, comprised of staff from the Finance Department and the City Manager's office, evaluated the proposals based upon each firm's relevant knowledge and prior experience, capacity and technical resources, audit approach and work plan, references and costs. The two top candidates were invited to a short presentation with the selection committee where they addressed topics directly relevant to the submitted proposals. 2 As a result of this evaluation process and based upon the above criteria, Moss Adams LLP is recommended as the best qualified firm to provide internal auditing services and relevant agreed -upon procedures for the City of Santa Monica Headquartered in Seattle, Moss Adams has been in business for over 100 years and currently employees 2,000 staff, including 260 partners and maintains locations in several states including a heavy presence in California. The firm has provided similar services to hundreds of government agencies throughout the western United States, including dozens in Southern California. Most of the firm's proposed team members have been practicing public accounting for more than 10 years and many are Certified Public Accountants, Certified Internal Auditors, Certified Fraud Examiners and Certified Information Systems Auditors. The firm's seasoned internal audit team members have significant experience performing compliance audits, financial audits, fraud audits, performance audits, and revenue enhancement audits. The firm currently serves as internal auditor to other government agencies including Carson City, Nevada; Modesto, California; and Stockton, California. The firm's work plan would be coordinated with the City Manager and is anticipated to cover a variety of projects /audits. Examples of such projects may include the following: ® a review and assessment of the City's plans for dissolution of the RDA and an evaluation and analysis of the associated financial impact, risks and reserve levels; and ® a review of internal controls in key areas to determine the adequacy of those internal controls and identify any areas warranting more in -depth review. The total cost of the agreement would be for an amount not to exceed $935,000. 3 Financial Impacts & Budget Actions The agreement to be awarded to Moss Adams LLP is for a total amount not to exceed $935,000. Funds in the amount of $187,000 are available in the FY 2014 -15 budget in account 01202.555060. Budget authority for subsequent budget years will be requested in each budget for Council approval. Future year funding is contingent upon Council approval and budget adoption. Prepared by: Yiannis Kalaitzidis, Financial Operations Manager Approved: Rod Gould City Manager 11 Forwarded to Council: Rod Gould City Manager Reference: Contract No. 9956 (CCS)