Introduction
Based on the Board of Supervisor's discussion and the wording of motion number M03-81, the Board of Supervisors requested this management audit pending consideration by San Francisco voters of a Charter amendment to assign the Controller with the responsibilities of the "City Services Auditor." If approved by the voters, this Charter amendment will significantly expand the Controller's duties and responsibilities for monitoring the level and effectiveness of services rendered by the City and County of San Francisco to its residents. The measure also will require the Mayor and the Board of Supervisors to allocate 0.2 percent of the City's annual budget, apportioned by fund, for a Controller's audit fund. Based on the ballot measure analysis prepared by the Controller, this would equate to an allocation of $8,505,037 in FY 2003-2004, or $5,330,037 more than was appropriated for Controller audit related activities in the current year.
Because the motion to conduct the management audit was approved by the Board of Supervisors just prior to the beginning of the City's annual budget hearing cycle, the Controller indicated that he would not be prepared to participate in the management audit during May or June. Accordingly, he suggested that the project be postponed until July 2003. In deference to the Controller, the Budget Analyst delayed the entrance conference until July 1, 2003 and began field work immediately thereafter. The draft management audit report was completed and provided to the Controller for review, approximately eight weeks later, on August 27, 2003. A final report was submitted to the Board of Supervisors on September 9, 2003.
Purpose and Scope
The purpose of this management audit has been to examine the operations, management practices and finances of the Controller's Office, and to identify opportunities to increase the department's efficiency, effectiveness and economy. The scope of the management audit included a review of all of the divisions within the Department, including:
· Accounting Operations and Systems;
· Payroll and Personnel;
· Finance and Administration;
· Budget and Analysis;
· Internal Audit;
· Performance Management; and,
· City Projects.
Audit Methodology
As part of this management audit, the Budget Analyst interviewed the Controller, Deputy Controller and managers from each of the seven divisions in the Department; section managers; and, selected unit managers and staff. The Budget Analyst also interviewed representatives from other City and County Departments, responsible Controller officials from other jurisdictions, and representatives from the State Controller's Office who have certain regulatory responsibility over Controller activities.
In addition to interviews, the Budget Analyst reviewed the City Charter, various State statutes and local codes; examined various documents, reports and work products prepared by the Controller's Office; reviewed the audited financial statements for the City and County of San Francisco, including the management letters prepared by the outside auditors for each of the last three fiscal years; obtained and analyzed various data and financial reports from the City's FAMIS accounting system; and evaluated the effectiveness of the various tools used by the Controller, his managers and staff to oversee the activities of the organization.
The management audit was conducted in accordance with Government Auditing Standards, 1994 Revision, by the Comptroller General of the United States, U.S. General Accounting Office. In accordance with these requirements and standard management audit practices, we performed the following management audit procedures:
· Audit Planning - A preliminary management audit workplan was developed and provided to the Department, which generally defined the scope of review.
· Entrance Conference - An entrance conference was held with the Controller and his upper management personnel to introduce the management audit staff, describe the management audit program and scope of review, and respond to questions. A letter of introduction from the Budget Analyst, the management audit work plan, and a request for background information about the Department's operations were provided prior to the entrance conference meeting.
· Pre-Audit Survey - Interviews with key management personnel and a preliminary review of documentation provided by the Controller's Office were conducted to obtain an overview understanding of the Controller's Office, and to isolate areas of operations which warranted more detailed assessment. Based on the pre-audit survey, the work plan for the management audit was refined for internal use by the Budget Analyst.
· Field Work - Field work activities were conducted after completion of the pre-audit survey, and included: (a) interviews with managers, supervisors and staff; (b) a further review of documentation and other materials provided by the Controller's Office; (c) analyses of data collected manually and from the Controller's automated systems and records; and, (d) contacts with other jurisdictions and authorities outside of the City and County.
· Status Reporting - Periodic status meetings were held with the Controller, the Deputy Controller and the Controller's designated project liaison to describe the study progress and provide general information on our preliminary findings and conclusions.
· Draft Report - A draft management audit report was prepared and provided to the Controller for review and quality assurance purposes.
· Exit Conference - An exit conference was held with the Controller and his designated managers to collect additional information pertinent to the report, and to obtain the Controller's views on the report findings, conclusions and recommendations.
· Final Report - A final report was prepared after review and discussion of the report content with the Controller and his management staff. The Controller was requested to provide a written response to the report, which is attached.
Description of the Services Provided by the Controller's Office
The Controller is responsible for various duties and responsibilities defined in State law, the Charter of the City and County of San Francisco, and various local codes approved by the Board of Supervisors. The Controller's core powers and duties are defined in Charter sections 3.105, 9.101, 9.102, 9.105, 9.111, 9.113, 9.116 and 13.107, related to financial management, revenue certification, analysis and reporting to the Mayor and the Board of Supervisors. Other powers and duties are included elsewhere in the Charter.
The Controller's website states that, "The Controller is responsible for all financial management systems, procedures, internal control processes and reports that disclose the fiscal condition of the City to managers, policy makers and citizens. The Controller is also the auditor for the City and County, performing financial and performance audits of departments, agencies, concessions and contracts. In furtherance of these Charter-mandated functions, the Controller's Office provides a variety of support services. These include processing the City's budget, developing and maintaining a financial accounting information system for use by all departments, and preparing and distributing paychecks for all City employees." The Controller's stated mission is to "ensure the City's financial integrity and promote efficient, effective and accountable government."
In FY 2003-2004, the Board of Supervisors authorized total operating expenditures of $22.3 million for the Controller's Office. The Department is authorized 161 staff (142 budgeted staff), who were assigned to the seven major divisions of the department. The FY 2003-2004 budget reflects reductions in the staffing resources available to the Controller's Office in prior years. The Controller's Office was required to reduce the department's operating budget $954,660 below final budgeted levels in FY 2002-2003 (year-to-year comparison). These reductions reflected the net impact of (a) the transfer of the automated purchasing system from the Department of Administrative Services, which increased the Controller's budget by 4.0 FTE positions; and, the elimination of a total of 14 positions from Payroll and Personnel Services, Management, and Budget and Analysis. An additional four FTE positions were reduced from attrition savings.
Table 1
San Francisco Controller's Office Comparison Between
FY 2002-03 FY 2003-04 Authorized Expenditures
The following organization chart illustrates the structure by division within the Department, during the period of the audit.
Exhibit 1
San Francisco Controller's Office
Functional Organization as of June 2003
A brief description of each of each primary organizational division is provided below:
Finance and Administration
This division includes the Controller, the Deputy Controller and various administrative staff who provide a wide array of support services for the Department. Through the Controller, the division provides general fiscal oversight for the City. The division also responds to information requests from the Mayor, Board of Supervisors, concerned citizens and the press.
Accounting Operations and Systems
This division's responsibility is to control the financial activities of the City. The division is charged with certifying contracts; paying vendors; approving and reviewing personnel requisitions; and, monitoring, controlling and projecting departmental expenditures on a continuous basis to assess the City's overall financial condition. The division is also responsible for assisting departments with fiscal compliance, accuracy, timeliness and meaningfulness of financial information, and for producing the City's annual financial statements.
Payroll and Personnel Services
This division provides payroll and personnel services for 27,000 City employees, and ensures compliance with City, State and federal tax, wage and hours regulations. The division receives and processes large volumes of automated input and over 160,000 paper documents annually which result in the issuance of about 800,000 paychecks.
Budget and Analysis
The division provides general fiscal oversight and financial analysis for the City. Its staff prepares the City's budget, bond official statement information, and bond secondary disclosure data. In addition to expenditure reports and cost analyses, the division tracks, projects and reports on all the City's revenue items, and performs property tax allocations. The division also prepares six and nine month financial projection reports, and a joint three year financial projection with the Mayor and the Budget Analyst.
Internal Audit
The Internal Audit Division provides performance, financial, investigative and concession audits and reviews of City operations as a service to the City's boards, committees, commissions and departments. The division reports findings of its audits to the Mayor, Board of Supervisors, Civil Grand Jury, commissions, and department management.
Performance Management
The Performance Management Division works with departments to develop performance measures and tracking mechanisms. The division also coordinates the annual survey of citizen's opinions of City services, and trains managers to administer the Pay-for-Performance program.
City Projects
The City Projects Division is charged with developing and implementing initiatives to increase the City's effectiveness in a wide variety of functional areas. City Projects staff works with City departments on problem solving and implementing audit recommendations. The division also conducts financial analysis of ballot measures, as required by the City Charter.
Controller's Office Accomplishments
Management Audits typically focus on opportunities for improvements within an organization. Therefore, Section 7.43 and Section 7.44 of the Government Auditing Standards, 1994 Revision, published by the United States General Accounting office, require that the management audit report include "noteworthy management accomplishments" to provide a more balanced perspective on operations.
Accordingly, this section of the Introduction summarizes some of the current noteworthy accomplishments of the Controller's Office. In order to allow the Controller to highlight those accomplishments he feels are the most noteworthy, the Budget Analyst requested and received a list of accomplishments from the Controller. This list of accomplishments is included with this report as Attachment I.
Some of the more noteworthy accomplishments of the Controller's Office are described below:
Expansion of the Controller's Role
During recent years, the current Controller's Office has assumed a greater analytical, management reporting and consulting role in the City. While many of these added functions have stemmed from requests made by the Mayor and the Board of Supervisors, others have resulted from the Controller's professional goals to enhance financial management and the performance of departments within the City. Although these activities are largely non-mandated, the efforts made by the Controller and his staff are commendable.
Implementation of GASB 34
The Controller's Office successfully converted to a new financial reporting model, pursuant to Governmental Accounting Standards Board (GASB) 34 provisions affecting financial reporting, a year before the required deadline. The conversion significantly changed the ways in which financial data is reported within the City's Comprehensive Annual Financial Report (CAFR), given the unique requirements of GASB 34. Further, the Controller's Office successfully implemented alterations to its financial reporting processes to meet the new accounting standards of GASB and provided training to all departments on the GASB 34 model. The Controller's Office received a Government Finance Officers Association Certificate of Achievement for these efforts.
Accountant Intern Program
The 1649 Accountant Intern Program that was devised by the Controller's Office, has been recognized as a successful mechanism for improving the quality of accounting personnel throughout the City. Designed, operated and maintained by the Controller's Office, the program was created to improve accounting staff training and abilities. The program offers beginning accountants extensive training for 18 months, with two 9-month rotations in different departments. Since its inception in 1995, the Intern Program has graduated 59 of 67 participants. Approximately 40 percent of those participants were already City employees when they entered the program.
Payroll and Personnel Services Division
The Payroll and Personnel Services Division has been successful in attaining its goals and meeting performance measures. The division met their 98 percent accuracy target in the disbursement of approximately 29,000 paychecks for each of the 27 pay periods in FY 2002-03. The Payroll and Personnel Services Division also successfully issued all W-2 forms to City employees within 14 days of the calendar year, approximately two weeks ahead of the deadline.
Budget and Financial Analysis
The Controller continues to produce monthly, 6-month and 9-month Budget Status reports that provide useful tools for City policy makers and financial managers. These reports provide reasonable projections of revenue and expenditure trends, and in combination with the three-year budget projection report prepared jointly with the Mayor and the Budget Analyst, provide the basis for assessing the overall financial health of the City and financial planning.
Budget Analyst Comments
In accordance with Government Auditing Standards Sections 7.45 and 7.46, certain issues identified during an audit may be brought to the attention of the department being audited and the Board of Supervisors, even though specific findings are not included in the report.
This Management Audit Report, prepared by the Budget Analyst, includes 13 findings and associated recommendations that encompass major areas of the Controller's operations. Included are findings related to the department's organization, financial management, budgetary controls, fund management, indirect costs, mandated cost claiming and internal audit.
As detailed in the appendix to this introduction, the report identifies at least $1.1 million in potential savings, including reduced costs and increased revenues annually, and one-time available resources of approximately $2.4 million. Additional resources and revenues would be realized if the recommendations in this report to conduct a full analysis and reconciliation of funds and cost reimbursement opportunities are adopted. Further, the report focuses on methods for improving internal controls and accomplishing other systemic improvements to the operations of the Department.
Discussed below are other operational issues for which we did not develop specific findings, but which are of particular note to the organization, its effectiveness, and various factors impacting its ability to function in an efficient and economical manner.
Focusing on the Department's Core Mission
During the last decade, the Controller's Office has changed its financial management approach. Previously, the Office functioned in a more traditional manner by focusing its efforts on the processing of accounting transactions and budget control activities. With the advent of on-line FAMIS and other system enhancements, the Controller has moved its focus away from this more traditional role. Today, much of the responsibility for processing financial transactions has been decentralized and placed with the departments. While the Controller has established systems to monitor financial administration activities performed by the departments, using automated audit functions within FAMIS and performing post-audit testing, there are opportunities to strengthen the department's performance in this area.
In recent years, the Controller has expanded his administrative role in the City. The Performance Management and City Projects divisions have been created and expanded in an attempt to provide oversight of Citywide management initiatives, such as the development of an effective performance measurement system and technical consulting services to departments. While commendable, the Controller's Office needs to refocus its attention on strengthening the mechanisms that will ensure that the City continues to operate in a sound financial environment. As we discuss in several findings, the Controller needs to develop formalized standards, policies and procedures for departmental fiscal personnel, and develop effective systems for monitoring departmental compliance.
Controlling Expenditures
The Controller has specific responsibilities related to the monitoring and control over department spending. Charter Section 3.105 states, "Should the Controller determine at any time during the fiscal year that the revenues of the General Fund, or any special, sequestered or other fund are insufficient or appear to be insufficient to support the remaining anticipated expenditures from that fund for the fiscal year for any department, function or program, the Controller shall reduce or reserve all or a portion of the expenditure appropriation until such time as the Controller determines that the anticipated revenues for the remainder of that fiscal year are sufficient to support the level of expenditure anticipated for the remainder of the fiscal year."
As part of this management audit, we reviewed the procedures and processes used by the Controller to monitor and control departmental expenditures. The Controller's Office uses a hierarchy of actions to control the budget, beginning with the reservation of funds during the budget process for those departmental accounts where there may be some uncertainty regarding revenues. When the Board of Supervisors adopts the Annual Appropriation Ordinance, the Controller enters monthly and quarterly spending allotments for all City departments. During the year, fund accountants will monitor departmental expenditures and work with department fiscal staff when it appears that expenditures may exceed budget. If over expenditure patterns become more evident, the Controller will place departments on "watch lists," require the development of expenditure plans, and may meet with department management on a regular basis to encourage budget compliance. If the Controller believes the over expenditure patterns cannot be resolved, he will report his projections to the Mayor and the Board of Supervisors in a special report, or as part of the standard 6-month and 9-month budget reports that he submits in the Spring.
The Controller asserts that his ability to stop departmental over spending is limited. He is unable to deny payroll obligations, including overtime if determined appropriate by department officials such as the Sheriff, Police Chief or Fire Chief; but, he can stop personnel requisitions and expenditures for equipment and non-essential services and supplies. Usually, such actions have minimal impact on the departments, since many personnel requisitions are already stopped by action of the Mayor, and other non-personnel expenditures are less problematic for departments.
Our assessment indicates that the Controller's procedures in this area are appropriate, and that resolution of historical over expenditure patterns by departments must be addressed more strategically. The development of a strategic approach to expenditure control issues that are apparent in the City was outside of the scope of this review.
Analysis of Ballot Measures
The Controller is also mandated to conduct "impartial financial analysis of each City and County ballot measure which shall include the amount of any increase or decrease in the cost of government of the City and County and its effect upon the cost of government. Such analysis shall be issued in sufficient time to permit inclusion in the voters' pamphlet."
As part of this study, we reviewed the analysis conducted for the November 2002 elections, evaluating assumptions and work papers, and conducting limited testing of the Controller's computations. We also evaluated the timeliness of reporting to Elections. We found the Controller's analysis reasonable and timely.
City Services Auditor
In November 2003, the voters in San Francisco will consider a ballot measure to assign the Controller as the "City Services Auditor." If passed, this measure will significantly expand the Controller's authority, duties and responsibilities for monitoring the level and effectiveness of services rendered by the City to its residents. This management audit did not evaluate the Controller's organizational capacity or ability to assume these expanded duties.
Acknowledgements
We would like to thank the Controller, his staff and various representatives from City departments for their cooperation and assistance throughout this management audit.