PURPOSE   

The purpose of this report is to request City Council authorization to enter into professional service agreements for the provision of annual audit services and internal audit services for Fiscal Years (FY) 2003-04, and 2004-05.

BACKGROUND     

In June 2000, after an extensive Request for Proposal (RFP) process, and pursuant to the direction subsequently recommended by the Audit Committee, the City Council approved an agreement with KPMG to provide annual audit services for a three-year period.  Additionally, an agreement was entered into with Vavrinek, Trine, Day and Co. (VTD),  to provide internal audit services for the same duration.  Each firm proposed a three-year commitment at set fixed fees, subject to annual City Council approval.

At the December 2002 Audit Committee meeting, staff sought direction to seek out a new two-year contract extension proposal from KPMG and VTD.  This was done for a variety of reasons.  First, it is the recommendation of the Government Finance Officers Association (GFOA) that local government agencies, among other things, engage an auditor for a minimum of five years. Such agreements allow for the greater continuity and help to minimize the potential for disruption in connection with the independent audit.  Multiyear agreements can also help to reduce audit costs by allowing auditors to recover certain �start up� costs over several years, rather than over a single year.

Additionally, there are inherent costs that the City incurs when a different auditor is engaged.  To that end, the committee was in agreement to seek a two-year extension, and perform an RFP at the end of that time.

DISCUSSION

The annual audit engagement performed by the independent auditor includes producing financial statements for the City taken as a whole (The Comprehensive Annual Financial Report or CAFR), and separate statements for the Redevelopment Agency, the Water and Electric Utility, as well as other required reports, such as the Single Audit Report, and the Air Quality Management District (AQMD) compliance report.  The contract also includes 100 hours of management consultation. The City has traditionally included management consulting time to assist the City in researching various financial areas such as tax questions, employee benefit issues, and other items as they arise.

The engagement to provide internal audit services involves the audit firm, at the direction of management, performing a variety of internal control audits, revenue compliance audits (such as Transient Occupancy Tax and Transient Parking Tax audits), and any special audits as needed.

ANALYSIS 

Annual Audit   In response to staff�s request for a two year proposal, KPMG has submitted a price of $82,500 for FY 2002-03 and $84,900 for FY 2003-04 audits.  While the price has increased by 10 percent, the proposed hours to perform the audit have gone up by 13 percent, which is actually a reduction in the hourly rate.  There are several reasons for the price increase, most notably the City�s compliance in reporting under the Government Accounting Standards Board (GASB) 34 format, and due to the fact that the auditing industry is under increased scrutiny and regulations, hence, causing additional procedures to be performed. 

In order to gain a comfort level as to the reasonableness of the price proposal, staff performed a survey of audit costs with our five survey cities: Glendale, Inglewood, Pasadena, Santa Monica, and Torrance.  The results are shown below.

Annual Audit Fee Survey Results

Internal Audit   In seeking a two year extension for internal audit services with VDT, as with the annual audit engagement, a five year commitment was optimum for the same reasons stated above; the GFOA five year recommendation, and the inherent costs of switching firms.  Additionally, staff has been very pleased with the work product of VDT. In budgeting for internal audit services, staff proposed a contract of $31,500, which is a 10 percent reduction from FY 2002-03.  Audits planned for the 2003-04 fiscal year include Transient Parking Tax (TPT), Transient Occupancy Tax (TOT), a Purchasing Audit, and the Castaways Restaurant.  Composite Billing Rate for 2003-04 is $85/hour, an increase of $2/hour.

FISCAL IMPACT

The cost of the proposed agreements between the City of Burbank and KPMG for annual audit services, and the proposed agreement between VTD and Co, for internal audit services are included within the Financial Services Department budget each year in account 001-FN01A-62085; Professional Services.  Fees for the annual audit contract will not exceed $82,500 for FY 2003-04, and $84,900 for FY 2004-05.  Fees for internal audit services will not exceed $31,500 for FY 2003-04. Fees for FY 2004-05 have not been negotiated, and will depend on future budgetary constraints as well as the input of the Audit Committee.

RECOMMENDATION

Staff recommends that the City Council approve a resolution approving the proposed professional service agreements with KPMG to perform annual audit services for the fiscal year ending 2003-04 and 2004-05, and with Vavrinek, Trine, Day and Co. to provide internal audit services for fiscal year ending 2003-04, and 2004-05.

DH: RPE:H:work:AuditContCC1-1SRpt2002-04.doc

go to the top