Stating potential financial impacts of recommendations

Potential savings are also important to mention when reporting on audit results. Where possible, we use impact statements to report the potential financial impact of addressing our recommendations. This helps communicate to management and elected officials the magnitude of the issue at hand if left unresolved. More importantly, it motivates management to prioritize and implement our recommendations; sometimes, dollars speak louder than words.

Here are two examples of impact statements from recent audit reports:

• “[A]nnually an average of about $7,200 in RGI [rent-geared-to-income] assistance is provided to each RGI household. While we expect that the vast majority of people are eligible [for the subsidies they receive], for every one per cent of current RGI households that are ineligible, we estimate that the City is providing over $4 million annually in unwarranted assistance which could be used to provide stable housing for over 650 households who are waiting and eligible⁴.”
• “Based on the data we collected and analyzed, we estimated that TTC’s [the Toronto Transit Commission] overall fare evasion rate is 5.4 per cent for all three modes of transit. TTC’s annual revenue loss due to fare evasion and other related factors is estimated to be at least $64 million. A one per cent reduction in fare evasion results in $11 million in additional passenger revenue⁵.”

These statements emphasize that implementing the audit recommendations could help to increase the effectiveness of RGI eligibility reviews and to improve the TTC fare evasion rate, which could result in significant savings. We quantify potential savings using the information available to us at the time of our audit fieldwork, and we communicate our calculation methodology with management.

Impact statements can capture attention and drive positive change. Once management has implemented our audit recommendations, our office can then verify management’s assertions and calculate and report on any realized direct and indirect financial benefits. When communicating the value of our audits, we ensure we clearly differentiate between potential savings and achieved savings.

Calculating realized savings

Quantifying the potential magnitude of an audit finding in our initial audit report helps us to determine the actual dollar savings during the recommendation follow-up process. More specifically, financial data collected at the time of the original audit is used as a baseline against which the implementation results can be compared. The difference is essentially the value that management achieved as a result of our audit recommendation.

We use the following principles to help determine and report savings achieved:

• Identify any one-time savings or revenues not expected to recur in future years.
• Set a maximum five-year horizon for recurring annual savings, even though savings can extend beyond five years.
• Review savings figures and calculation methodology with City management.
• Deduct implementation costs from savings so that we report conservative figures.

The following real-life examples illustrate how we calculated savings that management achieved by implementing our audit recommendations. These savings were all reflected in budgets across the City as a reduced cost or new revenue. It is important to note that savings, cost avoidance, and revenue increases are all calculated differently.

• Solid Waste Management Services Division – Review of the Green Lane Landfill Operations – Management of Contracts Needs Improvement, 2018 (reduced costs): Our office recommended that the City could take advantage of better pricing by moving the volume of waste landfilled from a third-party site to a City-contracted site. This resulted in annual savings of approximately $970,000. We determined these savings by identifying the opportunity to optimize the tonnage limits to achieve lower-tiered pricing as outlined in the contract, and by minimizing the use of third-party commercial landfill sites that charge higher rates.
• Management of the City’s Employee Extended Health and Dental Benefits, October 2016, March 2017, June 2017 (avoided costs): When our audit findings on unusual claims reimbursement costs were made public, it changed employees’ health benefits claim behaviour. Coupled with our recommendation to procure a benefits administrator with processes and controls to identify unusual trends and patterns, and to detect and prevent fraud and abuse at both the provider and individual plan member level, the City saved an average of $5.45 million in health benefits costs every year. We quantified the value of this audit by comparing the average health benefit reimbursement costs before and after our audit.
• Audit of Water Billing and Collection – Phase II: Part 2 – Management of Water Supply Contract for the Region of York, 2016 (increased revenues): Our office recommended that certain clauses in an existing contract be renegotiated to reflect current economic and environmental factors. By implementing our recommendations, the City will receive an additional estimated $33 million over five years. We calculated these incremental revenues by applying the renegotiated higher water rate to historic water consumption.
• Audit of City Cleaning Services, 2016 (reduced costs): Our two audit reports identified that applying industry and corporate cleaning standards and making changes to how cleaning contracts are procured could reduce cleaning costs. By implementing our recommendations, the City achieved annual savings of $850,000 beginning in 2017 and an additional $740,000 annually beginning in 2018.
• Management of the City’s Long-Term Disability Benefits Phase One: Improving City Management to Address Growing Trends in Long-Term Disability Benefits, 2015 (avoided costs): In reviewing a sample of the City’s health benefit administrator’s monthly billing statements, we noted that the City was charged for a service that was not consistent with the administrator’s bid proposal. The third party attributed the error to a new billing system and the City recovered $1.82 million for the City and its agencies and corporations before the audit even finished.

By regularly reporting on City management’s efforts to effectively implement our audit recommendations, City Council and Audit Committee members are taking interest in outstanding recommendations. We make sure we highlight any successful efforts to achieve savings. Where dollars are at stake because of delayed implementation, elected officials want to know the reason for the delay, which in turn motivates management to prioritize our audit recommendations.

In 2019, City Council reinforced the importance of reporting on the impacts of implementing audit recommendations. It requested the City’s Chief Financial Officer to identify and include in future annual budget processes the costs, cost reductions, and revenue increases resulting from the Auditor General’s reports and recommendations.

Conclusion

It may seem like a daunting task to report the financial and non-financial impacts of performance audits, but many audit offices already have processes in place to gather the kind of information needed to prepare such reports, including follow-ups on previous audit recommendations; annual reports; and audits of economy, efficiency, and effectiveness. Taking this work a step further and quantifying the benefits is incremental.

Our office has found it incredibly useful to do this work. Not only does it help City Council see our value, but it helps City management to see the impact they can achieve if they implement audit recommendations. And it shows the public that we’re all making efforts to ensure their tax dollars are spent in the best way possible.

⁴ From the October 2019 audit Safeguarding Rent-Geared-to-Income Assistance: Ensuring Only Eligible People Benefit.

⁵ From the February 2019 audit Review of Toronto Transit Commission’s Revenue Operations: Phase One – Fare Evasion and Fare Inspection. This audit was highlighted in the December 2019 CAAF Featured Audit.