ADMINISTRATIVE REPORT

Date: July 12, 1999

Author/Local: E. Lo/7610
G. Horwood/7225

RTS No. 00922
CC File No. 1194

Council: July 27, 1999

TO:	Vancouver City Council
FROM:	General Manager of Corporate Services
SUBJECT:	SAP System Conversion Review for Financial Audit Purposes

RECOMMENDATION

THAT Council approve a contract with KPMG to undertake a review of the SAP internal controls for financial audit purposes at a maximum cost of $49,000 (plus applicable taxes). The source of funding to be Contingency Reserve.

COUNCIL POLICY

Council approval is required for appointment of consultants to contracts exceeding $30,000.

Council approval is required for the allocation of funds from Contingency Reserve.

PURPOSE

To request funding for our external auditor KPMG to undertake an internal control review of our newly implemented SAP systems. This will enable them to undertake their audit of our 1999 financial statements with a full understanding of the controls environment.

DISCUSSION

The City has replaced the financial systems by implementing the SAP system during 1999. The SAP project represents a significant component of the City's Year 2000 strategy and hence its success is critical. Our external auditor, KPMG, has not been involved in the implementation yet they rely heavily on the processes and controls built into a system in order to evaluate the reliability of the financial statements and to express their opinion thereon.

Accordingly, KPMG will have to examine the new system to evaluate the adequacy of the internal control in the new SAP environment. The proposed internal controls initiative will be to assess the SAP business process controls in support of the annual financial statement audit, as well as an assessment of the City's information technology control environment related to the SAP system. The annual audit fee does not include a review of controls in an entirely new financial system - this was clearly laid out in the contract extension given to them in 1998; the fee will be in addition to the 1999 audit fee. However, Ernst & Young has done a review and has reported on the controls under SAP. KPMG will review the documents and use them as a basis for their review thereby minimizing their fees.

KPMG's review of the new control environment is extremely important this year because SAP has radically altered the management and control philosophy of the City. Control has moved from a strong centralized responsibility to a decentralized environment of authority and responsibility vested in the individual operating departments. This has considerable impact on the reliability of the financial accounting system. As well, their review will have the following benefits:

· A second opinion that the controls have been properly implemented.
· Additional comfort knowing that proper application controls have been implemented during the development of the system.
· Management will be made aware of any significant weaknesses in internal control.
· Areas of concern, if any, can be addressed immediately rather that after the audit.
· KPMG will be in a proactive partner rather than a third party critic after the fact.

Accordingly, it is important that KPMG's review be undertaken sooner than later.

FINANCIAL CONSIDERATIONS

KPMG's fee and expenses for this review will be a maximum of $49,000 (plus applicable taxes) unless delays are experienced. The source of funding will be Contingency Reserve.

CONCLUSION

KPMG should undertake their review of the internal controls under the SAP system at the earliest time so they can properly prepare for their audit of the 1999 financial statements and to provide us with constructive suggestions for enhancements to the controls.

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(c) 1998 City of Vancouver