A2

ADMINISTRATIVE REPORT

Date: October 16, 2000
Author/Local: T. Corrigan/7225

RTS No. 01712

CC File No.

TO:	Vancouver City Council
FROM:	General Manager of Corporate Services/Director of Finance
SUBJECT:	Re-appointment of External Auditors

RECOMMENDATION

A. THAT the accounting firm of KPMG LLP (KPMG) be confirmed as the City's External Auditors for the fiscal year 2000 as required under Section 230 of the Vancouver Charter in accordance with the terms of engagement as set out in the attached letter from KPMG dated September 5, 2000.

B. THAT the audit fee of $128,173 (exclusive of GST) proposed in the attached letter dated September 5, 2000, be approved.

C. THAT the appointment of the accounting firm of KPMG as the City's External Auditors be extended for a period of two years to cover the fiscal year 2001 and 2002.

D. THAT the fees for the 2001 and 2002 audit be set at the fee for the 2000 audit adjusted annually for the change in the Vancouver CPI.

COUNCIL POLICY

Section 230 of the Vancouver Charter requires that Council annually appoint a firm of chartered accountants to audit the accounts and transactions of the City and every other administrative body. In addition, it is Council's policy to consider re-tendering the audit services engagement upon completion of the normal term of appointment of five years.

PURPOSE

To confirm the appointment of KPMG as the City's External Auditors, as required by Section 230 of the Vancouver Charter, for the fiscal year ended December 31, 2000 in accordance with Council resolution on January 7, 1997.

Also, as the current term of appointment of KPMG as external auditors for the City expires at the end of 2000, to recommend the extension of the term of appointment for an additional term of two years subject to annual confirmation of the appointment in accordance with Section 230 of the Vancouver Charter.

DISCUSSION

KPMG is the City's External Auditor. Staff is recommending re-appointment of KPMG for 2001 and 2002 fiscal audits for several reasons:

1. Timing of Process

The re-tendering process normally commences in April of the year immediately preceding the appointment. This means that the re-tendering process for the 2001 audit should have commenced in April, 2000. This was not practical as two key senior vacant positions in Financial Services were filled only in January, 2000 and the 1999 year end work was the highest priority at that time. If the engagement of KPMG is not extended for two years, staff would have to start the re-tendering process in April, 2001. This would be particularly onerous on staff resources due to the reasons cited below.

2. Refocus of day-to-day activities

The current work stoppage has diverted exempt staff away from normal duties in order to maintain the critical services of the City. This has caused delays in the completion of regulartasks. When the work disruption is resolved, there will be a period of catch up. This will extend into year 2001 as well as the year 2000 year end reporting period and will overlap with the tender review process if we are to re-tender the audit for 2002.

3. Review of Policies and Processes

The City has implemented a new financial system in 1999. With the system now stabilized, staff have started a review of policies and processes to ensure the City is taking advantage of opportunities to achieve efficiencies and cost savings. With the re-channeling of staff resources to critical service areas in the city as a result of the work stoppage, it is likely that this project will extend into 2001. There needs to be a period of stabilization of any changes made on policies and procedures before an effective review of the audit engagement can occur. Due to the long association of KPMG with the City and their understanding of existing systems, they can be of assistance in developing appropriate policies and revisions of procedures that preserve good internal control.

4. Compliance with New Reporting Requirements

The Province has legislated mandatory compliance by municipalities with the Public Sector Accounting Board new reporting requirements. For the City of Vancouver, the Year 2000 Financial Reporting has to comply with the requirements and staff will have to spend an unusual amount of time between now and the first quarter of 2001 to ensure adherence to the standard. KPMG has expertise in this area and will be able to assist in the identification of required changes to accounting and reporting policies as well as with the implementation. These changes will have significant impact on the financial position of the City and it is important that these be communicated in a favourable way to external agencies. KPMG's knowledge of both the City and reporting issues will be invaluable in making the transition.

5. Potential audit fees increase

There is a risk that fees may actually increase as a result of a re-tender. There is independent evidence that auditing firms are facing pressure to adjust fees upward in order to cover significant increases to salaries needed to attract and retain professional staff. In the most recent biennial survey of public practice employees, the Institute of Chartered Accountants of British Columbia reported that, in 1998, salaries for new chartered accountants had increased 4.5%. KPMG has indicated that, in their recently concluded university student recruiting, starting salaries for new recruits have risen 10.5% over 1999. These starting salaries have been reflected in similar increases for all levels of professional staff. To avoida potential large audit fee increase, Council may wish to take advantage of the favourable fee offered by KPMG for a two year extension.

6. 2002 Civic Election

If a two year extension is approved, the next appointment of external auditors will coincide with the new term of Council.

FINANCIAL IMPLICATION

The table below shows the Year 2000 proposed fee by audit entity compared with 1999 fees (excluding GST), based on a 1.5% increase in the Vancouver CPI.

Audit Program	1999 Fees	2000 Fees
City general and related funds	$117,621	$119,385
City Public Housing Corporation	8,658	8,788
Total Basic Fee	$126,279	$128,173

The annual fees charged by KPMG has increased, in accordance with their contract, by the lesser of the change in the Consumer Price Index for Vancouver or the increase in the tax rate approved by Council. KPMG has indicated that this increase has been substantially less than the increases in standard billing rates of the firm for the same period.

The following chart illustrates that the fees for the City's audit have increased on average 0.5% over the last three years, after adjusting for the increase in 1998 due to a reduction in the year end audit assistance by internal audit staff.

Audit Program	1999		1998 (Note 1)		1997
	Fee	% change	Fee	% change	Fee	% change
City general and funds	$117,621	0.6%	$116,920	4.5%	$111,860	0.4%
City Public Housing	8,658	0.6%	8,608	0.5%	8,565	0.4%
Total Basic Fees	$126,279	0.6%	$125,528	4.2%	$120,425	0.4%

Note 1: The fee for "City general and funds" was increased in 1998 by $4,500 to reflect the reduction in assistance with the audit from internal audit. The percentage change in the fee without this adjustment was 0.5%.

CONCLUSION

The re-tendering of the audit engagement will require significant resources both from the City as well as audit firms. Also, to ensure we select the most qualified audit firm, the re-tendering process should be thorough and comprehensive. The process is best undertaken when the operating and systems environment is relatively stable and there is a history of consistency.

KPMG has been the City's external auditors for a considerable number of years. They continue to provide the City with excellent advice and service. The extension of the appointment of KPMG as the City's external auditors for a two year period is recommended.

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(c) 1998 City of Vancouver