Transcript - Audit Exposes Asset, Lease Flaws - 2026-03-23

26. Individuals interested in participating in today's meeting were eligible to register online using the delegation registration form at www.kitchener.ca/delegation or via email at delegation@kitchener.ca. Any written comments received uh have been circulated to members of council prior to the meeting and will form part of the public record. The meeting live stream and archive videos are available at www.kitchener.ca/watch now. Are there any disclosures of pecunary interest? There being none, we'll go into status updates and I'll turn the floor over to Miss Tasker to give us the update on the first quarter work of uh internal audit. Welcome. 6 a.m. yesterday. I was on the ball diamond all day yesterday in 28 degree heat and then I stood for nine hours in the Atlanta airport in security line and then missed my flight. Had to get go on standby this morning. Oh no. Flew to Detroit. Had a flat tire. Had to change tire. Oh. Drove there. Got home. Karina, we could have postponed the meeting. So that's why I'm not standing. And uh I am I am just about done. So, uh, thank you. Thank you. Be gentle with me and I may need some help with from my colleagues for any tough questions you have. Thank Thank you for uh thank you for being here and and making it. It it speaks to the dedication of team Kitchener. So, over to you. All right. Um, so today I'm going to be sharing with you one audit and one consulting engagement with you. Um, namely the physical inventory of our hardware assets and a current state analysis and process review of our real estate lease portfolio. Um so also in progress right now is a continuation of the concrete maintenance review from 2025. Uh and unfortunately due to the severe weather that we had this winter um we had to postpone the decision-making workshops with staff and management several times for that one. Um but now we're scheduled for the end of March to conclude that review. Um and then the success factors review. Um since it was installed in the last fall for time entry, um management has requested that I conduct a current state scan of how divisions are using software and if there are any challenges or anomalies that they are dealing with. Um I'll do a phase two of that review later in the year um which will focus on controls um to test if staff are complying with uh corporate policies. So first up we we have the uh physical inventory of our hardware assets in storage. So the objective of this audit was to ensure that we have proper controls in place to safeguard our assets from theft and to ensure that we're at that they are adequately tracked. So to clarify um I'm talking about inventoryable assets only and these are the higher value hardware assets such as laptops, computers, monitors, laptop docking stations and printers which are tracked using serial barcodes. All other computer equipment such as keyboards and mice are low dollar value and aren't tracked by serial number. The nature of this type of inventory is that they are desirable assets for individuals to steal for personal use. And while it may be difficult to walk out unnoticed with a large monitor or printer, taking laptops and doc uh docks would be fairly easy. So I'm not saying that there's any theft that has happened, but there is a high risk of theft with this type of asset. So in general, we want to make sure that we have proper controls in place. So the scope of this audit only included the inventoryable assets as I mentioned and only those that are in storage at city hall and at the cough. It did not include inventory of assets deployed uh to staff in the field. A previous audit of the field audits was done in field assets was done in 2023. This is also the second time doing the inventory of the stored assets with the first one taking place in 2020. Both of these previous audits were unable to uncover any theft, but they did recommend improvements to ensure accuracy of the database records to be able to identify missing assets quickly. While some of the recommendations were implemented, you'll see in a moment that the controls have uh slipped again and need some improvement. So, I started this audit by interviewing the TIS staff to confirm the current process for procuring, deploying, and retiring assets. The process was the same as previously documented with only some minor changes as the SC cough storage room was added to the mix. I conducted the physical count of the assets by comparing the asset tags of items found in the storage rooms to the database. I made note of any missing assets from the database as well any as any additional items that were found in the rooms that weren't on the list. I also analyzed the physical access to the rooms in terms of who has access to them and who has actually entered the rooms in the last year. And finally, I spoke with HR and security to understand and document the process for obtaining access cards for new employees and what happens when employees leave the city. So, I was disappointed um following my initial count when only 35% of the audit of the assets were found. TIS then attempted to find the missing assets and they were able to use some software to pinpoint the last known login for any of the computers and laptops that were missing. This resulted in a number of them being found um deployed to staff, but the location just wasn't updated properly in the database. Unfortunately, there is no way to track the login of the other types of assets. So, the monitors and printers um and the docs. So, in the end, we're still missing 12 laptops or computers and 166 other assets or 38% with an estimated total of approximately 53,000. So, I want to emphasize that this doesn't necessarily mean that they have been stolen. Um, staff feel that the majority are likely deployed in the field and that the database just wasn't updated. We wouldn't be able to confirm this until another full inventory is done. It does point to some control weaknesses however with the database um including the limited controls ensuring that all purchases have been added to the database, difficulties with some of the scanners properly entering new assets and a lack of consistency in updating the database when assets are deployed. Um, when I looked at who had access to the rooms, there's actually 250 unique users with access. And this includes not only TIS staff, but others with the need to enter the space, such as security, custodial, fire, and facilities management staff for routine building maintenance, security, and safety reasons. There were 35 other people on the list, however, who had no business need to access the rooms. Although there was no evidence that they had entered the room, simply having the ability to do so adds risk to this process and so their access has been since removed. So, in order to allow staff to more quickly identify when there are discrepancies between the inventory and the database and identify if theft has occurred, I recommended four main control improvements including first um reconciling the purchase orders for new assets on a monthly basis to ensure everything has been added to the datab base correctly. Previously, they were only doing random checks of this. um adding another layer of random audits by management of the deployment checklists which indicate where the new assets are being deployed. Currently, staff check that the data from the checklist has been entered to the database. Um but adding an additional random check by management will help encourage staff to be more diligent in their input. And then a quarterly physical inventory of all three rooms by staff. It took me less than a day to do all of the checks. So if multiple staff um assisted, it could be done in a few hours. And finally, modifying the new employee access card form to make it necessary to opt into access for the restricted rooms rather than being automatically granted access to all places. Some of these things like the random deployment audits and the quarterly frequency of physical counts may seem a little overkill. Um but until such such time as we're confident that the database is being updated correctly, um these measures are necessary. Otherwise, we'll never be able to tell if theft has occurred or not. Are there any questions on this audit? I don't have a mouse. I have a mouse, but it's not uh Okay, Council Johnson, go ahead. We'll do it the oldfashioned way. Go ahead. Uh, hold on. Staff will need to turn you on. Um, thank you, Mr. Mayor, and thanks so much for for your presentation and thanks for getting yourself back here. Sounds like planes, trains, and automobiles. Thank you. Um, yeah, my question was around um, have we considered things like putting air takes or something on the equipment? Does that make sense or is that invasive? I don't know. I am not able to answer that question. I looking to anyone over on the other side of the room if anyone knows if we have looked at that before. Air tags actually need to be recharged every certain amount of time or when I when I use that that's kind of like saying Kleenex brand. Is there something like that? Maybe maybe that's not something we can answer. I don't know. But um maybe just something we can look into. Yeah. And and so I'll just say um there is actually hardware software tools that can be used that actually monitor all the anything that attach can't really do a keyboard but anything else. So I'm not sure if we have that something that it could look at. Oh, good. Thank you. So we do have that for the laptops and the computers and that's how we identified those missing ones and we just don't have it for the things like the monitors, the docking stations and the printers. Yeah. Thank you. I'm looking across. Okay, it's a Yeah, thank you. Um, I had two questions. Um, what percentage of the assets were not found in 2020 compared to, you know, the 38% this time around? I'll have to get back to you on the actual number, but it was a much smaller number not found. So, we were in a a much better uh position at that point. Okay. And were any um changes made at that point to to even reduce those numbers further? So there were some um recommendations at that time just in terms of more accurately doing the the deployment checklists, making sure that they I had recommended doing the inventory more often at that point as well. They just didn't have the staff available to do it. Um I think they're in a better position now that they can start to do uh the quarterly inventory as I' I've mentioned. Okay. Um the other question had to do with um you mentioned that until you do another full inventory, we won't actually necessarily know where that 38% um those 38% those assets where they've gone. When is when are you expecting to do another full inventory? Um, when did I say I did that one? That was 23 I did it, I believe. So, it will probably be 2028. It's quite extensive to do the full inventory. Um, it took me several months to go through it last time because I have to go around and check every single laptop. There's thousands of them. Right. Okay. Thank you. Nobody else in the queue. So, go ahead. My clicker isn't working. Okay. So, the next review is a consulting engagement that I did on behalf of CLT related to the city's lease portfolio. So in 2021 the CEO identified centralizing the real estate function as a priority based on the growing volume and complexity of work and the need for specialized in-house expertise. The realy services team was created with one manager and two staff positions namely the analyst and specialist with an initial focus of supporting land sales. There have been some challenges with turnover and vacant positions which has meant that the team hasn't had enough capacity to fully take on the lease management portfolio in addition to the land sales duties. Therefore, lease management has remained largely decentralized. So, prior to the creation of the realy team, the lease administration responsibilities were u completed by the operating areas with support from legal and finance. With the capacity issues in the realy services team, we have continued to operate in a decentralized lease management model where most of the lease management activities were being performed by the operating divisions such as sport, economic development, and neighborhood programs and services divisions. Staff felt that there were significant risks related to the portfolio with many missing lease agreements, inconsistent lease terms, many expired leases with rents that were felt to be well below fair fair market value. So once being made aware of these issues by staff, CLT requested that I conduct a thorough current state analysis to quantify the problem and the risk and recommend a project plan to help mitigate those risks. The scope of the review included all city-owned leased properties with the exception of the Odd Suites, Kitchener Market Vendors, and 44 GCL Street, all of which have short-term leases which require a slightly different approach to the other properties. So I approached this review with starting first to talk with all of the stakeholders including the directors of the operating areas who were responsible for the various leases, legal, finance, facilities management and the realy team. From their input, I created a current state process map and more importantly roles and responsibilities matrix which showed which divisions were currently completing each step of the process for each type of lease or venue. I also conducted research and benchmarking with other municipalities to see how they resource their lease management and what software they are using to manage their lease portfolio. I did analysis of the pros, cons, and costs of several resourcing models. And as part of this review, I also worked with the realy team to try to pull together an inventory of the entire lease portfolio with copies of the agreement for each known leasable space. The realy team also provided a highle fair market value assessment based on the class of building and square meters of leasable space for the facility and residential properties. And finally, I conducted a risk assessment relating to this staying with the status quo, moving too quickly to implement the recommendations and conversely moving too slowly. So when creating the inventory of leases, we found it very difficult to track all of the agreements down because there was no centralized storage. We did the best that we could with the limited time that I had, but more work is required to track them all down. We do have a list of what agreements we should have though and that includes 82 agreements where we are the lessor or landlord and seven agreements where we are the lei or tenant. Of the 82 where the city is the less or they can be broken down into categories. 29% are related to facility or residential leases which are the ones uh that the fair market value assessments were done for. 20% relate to 44 goal which was out of scope for the analysis around resourcing but was still captured as part of the inventory. 6% were related to the SDG idea factory which wasn't out of scope but perhaps should have been as they operate very similar to 40 goal with short-term leases and facility maintenance provided by the city. The remaining 45% is made up of a number of subcategories for things like leased storage spaces for sports groups, land for telecom towers, leased land for lawn bowling and other sports. While all of these types uh do have leases and do require lease management, the main category requiring the most staff effort on an ongoing basis is the facility and residential leases. So in terms of improvements, I recommended that that the realy team create a centralized repository on SharePoint for all of the leases which has the ability to set automatic renewal reminders for staff. Along with this, they need to decide on a standardized naming convention to make it easier to locate the lease agreements in the repository and confirm the details of each lease such as the lease term, the rent amount, and the conditions. I also recommended that the stakeholders work with legal to develop some standard contract terms to go in all leases and also to create some standard agreements for various types of facilities and this will help to keep the agreements consistent. The next set of uh recommendations is around the org structure and roles and responsibilities. Our current org structure which has two staff and one manager position within the realy team is sufficient to handle the lease administration component of the process. They haven't been fully utilized in the past uh for these tasks because as I mentioned there's been turnover and two vacant positions for a long time. One position has uh recently been filled with the management position recruitment still in progress. This team will act as the overall process owner for the le lease process and will take on the administrative components such as tenant sourcing, lease negotiations and agreement preparation, lease renewals, fair market value assessments, ensuring rent collection has occurred, and managing the centralized repository of leases. Other internal divisions will continue to support the function, including legal, who will help draft and finalize the agreements. Finance, who collects the rent and post to the ledger, facilities management, who will complete reactive and preventative maintenance on the facilities, and operating divisions, who will provide input on tenant preferences and lease terms. The new component that I'm recommending is the additional of of a thirdparty property management company to be the boots on the ground and act as the tenants's first point of contact. They will help facilitate reactive repairs with FM, conduct required inspections, collect insurance, provide access control, and enforce tenant responsibilities. We felt that this was the most cost-effective and flexible option to complete this body of work which currently is not being done. This recommendation has been referred to the 2027 budget process for approval for the additional operating funds. So no need to worry about that just yet, but when it comes time for budget, you'll know where the request came from. So the final piece of the review that I want to share with you today is around the fair market value. So while completing the list of leases, uh we found that many were expired with rents that were well below fair market value. As staff work to prioritize the list of expired leases for updating and renewal, they will seek council direction for which ones to pursue an actual fair market value assessment for as there may be leases which council continues to want to subsidize for strategic reasons. In conclusion, I have provided a detailed action plan to staff with timelines and owners for each of the tasks. By implementing the recommendations, we will have an org structure that will provide centralized and consistent realy services. The lease portfolio will be understood, documented, and upto-date. And the tenant experience will be improved by having a single point of contact with the city. Before we get into questions, um I will just say that any questions that are related to specific tenants, tenant agreements, negotiations, lease rates, or land acquisition or disposition um can be taken once we move in camera. But if you have any general questions, turn it over to you now. Councelor Davey. Uh, yes. Thank you for the report. I'm not sure if it's a question necessarily for you, Karina, but just in terms of the um potential, and this is in a broad sense, general term, in terms of the potential subsidization of some of the leases, a concern of mine going back a number of years in different properties is that when we subsidize, we I am concerned about lack of transparency to the public and um in that subsidy um that's across a number of different organizations. So I guess my general question would be why would we not endeavor to charge full market value for everyone and then if we choose to subsidize that comes back in the form of a grant. So then that's very clear exactly how much money we're subsidizing different organizations. So, you said that that wasn't a question for me, but more of a general comment for everyone. Well, I'm not sure. I guess I'm asking staff, is that something that they've considered in general? And if you don't have an answer for it today, that's fine. Um, or if it's more of a case by case basis and you want to take it up separate, that's fine as well. But I'm just wondering why we wouldn't like let's take the museum as an example. Um, I think that one's very public, so there's no issue there. But the museum, as everyone knows, we um they have that property for free. they don't pay any any rent at all and that's part of the grant. They pay $1 exactly. Um, and that to the average citizen, they would think that perhaps we're not subsidizing the museum to the to the degree that we should be when that's not the case at all. So, I don't know why we wouldn't charge the museum full rent value and then add that value to the grant so it's clear and transparent for the public. Mr. Chapman, um, through you, Mr. Mayor, it's our intention to bring more structure and a policy basis to lease management going forward. And so I think the question you've raised, councelor Dave, is a fair one that council may grapple with in time. Um, and I understand the transparency value of what you're describing. Um, the one thing the council would want to consider is that where long-term arrangements were entered into with other parties. And so I think of the museum as an example where building provided uh at nominal rent was part of the original operating model. you would need to consider how you provide the necessary level of certainty around a cash grant that would offset market rent. Um because in many cases the arrangements um are either subject to long-term agreements or were understood between the parties at the point at which they entered into those agreements. And so I think you're correct that we would have to look at each one on a case- by case basis to understand what is the context in which that lease was entered into. But we would certainly support council um having a stronger policy position around subsidized rents and how those are accounted for. Okay, that's my only question for out here. Thank you. Okay, I don't see anybody else in the queue. Um so back to you, Mr. Tasker. That's it. That's it. That's it. Uh other than we need to go into camera. Yes. So, um, madame clerk, I I just take a motion to go on camera, but we don't need to come back out afterwards. Sorry. Okay. But we need to go into camera for this item from what I understand. So, okay, we'll just add it in as part of caucus. Okay. Okay, that's fine. Um so motion to adjurnn then moved by councelor Micho seconded by councelor Chapman. All those in favor.

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