The Need for a Provincially Mandated Auditor General

30 Jan 2010

The Issue:

With the recent economic upheaval there is an ever increasing pressure on the part of municipalities in the Province of Ontario to deliver added value for stretched taxpayer dollars. This pressure is of course felt at all three levels of government but none more so than on the taxpayers of Ontario who have seen their taxes rise exponentially while their investments and job security continue to erode. More oversight and more accountability demonstrate not only good leadership – they ensure a higher degree of competitiveness, cost effectiveness and an appropriate return on investment.

Background:

Resulting from enabling legislation passed in the Province of Ontario in 2007 - Municipal Act Amendments of January 1, 2007 which conferred broader powers to municipalities.

Municipalities may under the Act appoint, among other accountability officers, an Auditor General (AG) who reports to council and is responsible for assisting the council in holding itself and its administrators accountable for the quality of stewardship over public funds and for achievement of value for money in municipal operations. 2006, c. 32, Sched. A, s. 98.

The Auditor General conducts audits that assist municipal councils in achieving added value for taxpayers' dollars. Audits focus on efficiency and effectiveness of town operations and program delivery and on compliance with laws and regulations.

Subject to prescribed exceptions, all programs, activities and functions of municipal departments, local boards and any municipally-controlled corporations and grant recipients may be subject to audit by the Auditor General. These functions assure an added dimension of oversight and accountability in keeping with the “Broader Powers� of the amended Act but more importantly they provide the taxpayers of Ontario with a new confidence that is critical in today’s turbulent economic environment.

What others are doing:

Ottawa, Oshawa, Markham & Sudbury each have demonstrated great leadership by appointing an Auditor General in their communities (Windsor has approved appointment of AG). Toronto has also appointed an Auditor General; although in Toronto’s case the appointment of an Auditor General is mandated by legislation. Ontario is not alone in this movement towards more open and transparent accountability.

Municipalities in the Province of Alberta including the City of Edmonton & City of Calgary have an AG. Municipalities in the Province of Nova Scotia including the City of Halifax have appointed an AG while one AG is appointed for smaller municipalities.

In Quebec, municipalities must appoint and Auditor General for municipalities whose population is 100,000 or greater.

Audit Models:

In many Ontario municipalities there are two audit models presently being used - The External Audit Model and the Internal Audit Model.

The External Audit Model is mandatory for auditing of financial statements where the focus of the audit is to determine if the operations and financial position of the Municipality, (as reflected in its financial statements), has been fairly presented in compliance with Canadian GAAP. Funding for External Audits is generally set through a competitive bidding process.

The Internal Audit Model is comprised of employees reporting to senior management. The Internal Audit Focus is on financial controls, compliance, auditing and providing internal consulting services to departments. Audits are generally limited to the municipality, unless local boards, corporations etc. request such an audit. In this case there is no requirement for audit findings to be made public except if the Municipality makes this a requirement. Funding for this model is generally set annually by Council.

The Auditor General Model differs in that it has legislated powers, privileges and immunity that provide it with the tools necessary to conduct thorough audits with little or no external impediments. The Primary Role of an AG is to Assist Council to hold itself accountable for quality of stewardship over public funds and to achieve value-for-money in municipal operations. In this model the primary focus is on Value-for-Money Audits. This includes (Source: CICA Handbook) Examining & reporting on the adequacy of management systems, controls and practices to ensure due regard to economy, efficiency and effectiveness; resource management with due regard to economy and efficiency; and effectiveness of programs, operations or activities.

What do Auditor Generals audit? Some samples of recent Audit Reports of Auditor General Reports in Ontario Municipalities include: Fleet Operations Review; Management of Construction Contracts; Review of Parks and Recreation Revenue and Cash Control; Review of Sole Source Contracts; Review of procurement of goods and services; By-law Services - Compliance, Efficiency, and Effectiveness.

Why an Auditor General?

The Municipal Act confers upon Auditor Generals certain powers, privileges and immunity and imposes certain obligations on audited entities. External and Internal Auditors have no legislated powers, privileges or immunity. Some of the powers, privileges, immunity and obligations provided for in the Municipal Act include; Duty to Furnish Information, Access to Records, No Waiver of Privilege, Powers of Examination, and Duty of Confidentiality and Immunity.

Although the Municipal Act is permissive as to whether an Auditor General is an employee or not of the municipality, Auditor Generals that thus far have been appointed under the Municipal Act are not employees of the Municipality. Municipalities are cognizant of the need to ensure that the Auditor General is independent and perceived to be independent from those entities that are subject to audit. In this regard Municipalities have, to varying degrees, followed best practices with regard to preserving independence. One such practice is to ensure that the Auditor General is not an employee of the Municipality and that the Auditor General’s budget is pegged at a specified percentage of the operating budget to avoid interference by Council from year to year with the Auditor General’s budget.

Return on Investment (ROI):

There are both intangible and tangible returns on the investment that would be required to run an Auditor General Office. The intangible returns include enhanced public confidence and engagement. The tangible return on investment includes costs savings, revenue increase, cost avoidance and protection of assets. In 2008, for every dollar invested by Toronto in its Auditor General Office the municipality obtained a return of $5.60 or 560%. In the City of Oshawa the average ROI for 2007, 2008 & 2009 (est.) is 331%. From a Provincial perspective, the government can move with much greater confidence to invest in those cities that have an Auditor General as opposed to those who don’t.

Issues with current Municipal Act

The appointment of an Auditor General is not mandatory under the Municipal Act. A number of cities with a population of greater than 100,000 and with significant operating budgets have not appointed an Auditor General. Furthermore, the Municipal Act does not provide for a formula to determine what at a minimum should be the funding allocated to an Auditor General’s office, that the Auditor General should be independent and that the Auditor General should not be an employee of the Municipality. Since the Municipal Act is silent on these points a Municipality could appoint an Auditor General, but fail to put in place safeguards to ensure a high degree of independence on the part of the Auditor General.

Recommendations:

The Ontario Chamber of Commerce urges the Government of Ontario move to:

1. Amend the Ontario Municipal Act to make mandatory the appointment of an Auditor General for municipalities whose population exceeds 100,000 and -

• to expressly state that the Auditor General must be independent and not an employee of the Municipality, and -

• to ensure municipalities provide for a budget for the Auditor General that would be no less than a fixed percentage of the municipality’s operating budget, and -

• that these amendments should be moved and brought into effect by 2012.

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