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HomeMy WebLinkAboutFIN 18-23Report to Executive Committee Report Number: FIN 18-23 Date: November 6, 2023 From: Stan Karwowski Director, Finance & Treasurer Subject: 2023 Year End Audit (Interim) File: F-3300-001 Recommendation: That the Audit Service Plan as submitted by Deloitte LLP, set out in Attachment 1 to this report, be received for information. Executive Summary: In accordance with generally accepted auditing standards, the Audit Service Plan is prepared to communicate the auditor’s approach and reporting responsibilities to the Executive Committee, who has oversight responsibility for the financial reporting process . This plan is submitted at the commencement of the year end audit. Financial Implications: The base audit fee for City and Library is estimated at $94,745.00. Sufficient provision is available in the 2023 Budget. Discussion: In the Executive Committee’s role as the body responsible for oversight of the financial reporting process, it must review the Audit Service Plan for the 2023 year end audit. The Audit Service Plan includes the scope of the audit services to be provided, the auditor’s reporting responsibilities and an outline of the audit approach. It is included as Attachment 1 to this report. Attachment: 1.2023 Audit Service Plan FIN 18-23 November 6, 2023 Subject: 2023 Year End Audit (Interim) Page 2 Prepared By: Approved/Endorsed By: Original Signed By: Original Signed By: Kristine Senior, CPA, CA Stan Karwowski, MBA, CPA, CMA Manager, Accounting Services Director, Finance & Treasurer Recommended for the consideration of Pickering City Council Original Signed By: Marisa Carpino, M.A. Chief Administrative Officer 00 The Corporation of the City of Pickering 2023 Audit service plan For the year ending December 31, 2023 Attachment #1 to Report FIN 18-23 Deloitte LLP Bay Adelaide East 8 Adelaide Street West Suite 200 Toronto ON M5H 0A9 Canada Tel: 416-601-6150 Fax: 416-601-6610 www.deloitte.ca October 10, 2023 Private and confidential To the Members of the Executive Committee of The Corporation of the City of Pickering 1 The Esplanade Pickering ON L1V 6K7 2023 Audit service plan Dear Executive Committee Members: We are pleased to provide you with our audit service plan for The Corporation of the City of Pickering (the “City”), for the year ending December 31, 2023. This document describes the key features of our plan including our audit scope and approach, our planned communications with you, and our team. Our audits will include: ● An audit of the City of Pickering’s consolidated financial statements (the “Financial Statements”) for the year ending December 31, 2023 prepared in accordance with Canadian Public Sector Accounting Standards (“PSAS”) ● An audit of the City of Pickering Public Library Board’s financial statements for the year ending December 31, 2023 prepared in accordance with Canadian PSAS, and ● An audit of the Trust Funds of the City of Pickering’s financial statements for the year ending December 31, 2023 prepared in accordance with Canadian Accounting Standards for Not-for-Profit Organizations. Our commitment to you is straightforward: we will provide you with outstanding professional services delivered by an experienced and dedicated team of professionals. Our professionals will continue providing you with best practices and insights to face the increasingly complex array of issues and challenges encountered by the City. This report has been provided to the Executive Committee (the “Committee”) on a confidential basis. It is intended solely for the use of the Committee to assist you in discharging your responsibilities with respect to the various financial statement audits enumerated above and is not intended for any other purpose. We look forward to discussing our audit service plan with you and answering any questions you may have. Yours truly, Chartered Professional Accountants Licensed Public Accountants The Corporation of the City of Pickering | Table of contents i © Deloitte LLP and affiliated entities Table of contents Executive summary 1 Audit risks 3 Appendix 1 – Audit approach 6 Appendix 2 – Communication requirements 10 Appendix 3 – New and Revised Public Sector Accounting Standards 12 Appendix 4 – Deloitte resources a click away 13 Appendix 5 – Assurance services 14 The Corporation of the City of Pickering | Executive summary 1 © Deloitte LLP and affiliated entities Executive summary Audit scope and terms of engagement We have been engaged to perform an audit of the City, Library and Trust Funds’ Financial Statements, as at, and for the year ending, December 31, 2023 (the “Financial Statements”) prepared in accordance with Canadian Public Sector Accounting Standards (“PSAS”) for the City and the Library Board, and Canadian Accounting Standards for Not-For-Profit Organizations for the Trust Funds. Our audit will be conducted in accordance with Canadian generally accepted auditing standards (“Canadian GAAS”). The terms and conditions of our engagement are described in the Master Services Agreement for Professional Services dated April 16, 2023, which has been signed on behalf of the Committee and management. Audit risks 1 Revenue recognition 2 Management override of controls 3 Management judgments and accounting estimates 4 Implementation of PS 3280 Asset Retirement Obligations and PS 3450 Financial instruments accounting standards Materiality (for consolidated City audit) 5% of materiality 3% of expenses Preliminary materiality Clearly trivial threshold We are responsible for providing reasonable assurance that your financial statements as a whole are free from material misstatement. Our materiality levels are based on professional judgment and will be determined using total expenses or fund balances as a reference point for the ultimate determination of materiality as follows: • Consolidated financial statements for the City – approximately 3% of expenses • City of Pickering Public Library Board – approximately 3% of expenses, and • City of Pickering Trust Funds – approximately 3% of fund balances We will inform the Executive Committee of all uncorrected misstatements greater than a clearly trivial amount (5% of materiality) and any misstatements that are, in our judgment, qualitatively material. In accordance with Canadian GAAS, we will ask that any misstatements be corrected. The Corporation of the City of Pickering | Executive summary 2 © Deloitte LLP and affiliated entities Fraud risk We will develop our audit strategy to address the assessed risks of material misstatement due to fraud. Determining this strategy will involve: 1. Enquiry of those involved in the financial reporting process about inappropriate or unusual activity. 2. Testing a sample of journal entries throughout the period as well as adjustments made at the end of the reporting period. 3. Identifying and obtaining an understanding of the business rationale for significant or unusual transactions that are outside the normal course of business. 4. Evaluating whether your accounting policies may be indicative of fraudulent financial reporting resulting from management’s effort to manage earnings. 5. Evaluating whether the judgements and decisions related to management estimates indicate a possible bias. 6. Incorporating an element of unpredictability in selecting our audit procedures. We will ask the Committee for their views about the risk of fraud, whether they know of any actual or suspected fraud affecting the City and their role in the oversight of management’s antifraud programs. If we suspect fraud involving management, we will immediately inform the Committee of our suspicions and discuss the nature, timing, and extent of audit procedures necessary to complete the audit. Use of the work of specialists We intend to rely on the work of the following expert during our audit: •Deloitte Risk Advisory We intend to use our own IT specialists to assess the design and implementation of general computer controls. If our assessment does not provide us with sufficient, appropriate audit evidence, we will need to perform additional audit procedures to address the risks of material misstatements in the Financial Statements. The Corporation of the City of Pickering | Audit risks 3 © Deloitte LLP and affiliated entities Audit risks The following tables set out the audit risks that we identified during our preliminary planning activities, including our proposed response to each risk. Our planned audit response is based on our assessment of the likelihood of a risk’s occurrence, the significance should a misstatement occur, our determination of materiality and our prior knowledge of the City. Revenue recognition* Significant Audit risk Under Canadian GAAS, we are required to evaluate the risk of fraud in revenue recognition. We have pinpointed this fraud risk to the following revenue streams: • Taxation revenue (Occurrence, Accuracy and Cut- off) • User charges (manual entries only) • Developer contributions and development charges (Occurrence, Accuracy and Cut-off) and the corresponding Deferred Revenue (Existence, Rights and Obligations, Completeness, and Valuation and Allocation) • Other contributions and donations (Occurrence, Accuracy and Cut-off) • Contributed tangible capital assets (Occurrence, Accuracy and Cut-off) • Equity share of Elexicon Corporation earnings (Occurrence, Completeness, Accuracy and Cut-off) • Penalties and interest on taxes (manual entries only) Our proposed audit response Certain revenue streams are presumed areas of significant audit risk. We will test the design and implementation of controls in significant revenue streams and perform substantive analytic procedures and/or detailed testing in these areas (including testing of manual journal entries). We will perform substantive testing to determine if restricted contribtions (i.e. development charges), and government transfers/grants have been recognized appropriately (revenue vs. deferred revenue). The Corporation of the City of Pickering | Audit risks 4 © Deloitte LLP and affiliated entities Management override of controls* Significant Audit risk Under Canadian Auditing Standards, it is the responsibility of the management, with the oversight of those charged with governance to place a strong emphasis on fraud prevention and detection. Oversight by those charged with governance includes considering the potential for override of controls or other inappropriate influence over the financial reporting process. Management override of controls is present in all entities. It is a risk of material misstatement resulting from fraud and therefore is considered as a significant risk. Our proposed audit response Our audit tests the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of financial statements We obtain an understanding of the business rationale for significant transactions that we become aware of that are outside of the normal course of business, or that otherwise appear to be unusual given our understanding of the City and its environment We review accounting estimates for bias and evaluate whether the circumstances producing the bias, if any, represent a risk of material misstatement In addition, experienced Deloitte personnel are assigned to the testing and review of journal entries and areas of estimates, and Professional skepticism will be maintained throughout the audit. *Area of Significant risk The Corporation of the City of Pickering | Audit risks 5 © Deloitte LLP and affiliated entities Areas of Special Audit Consideration During our risk assessment, we identified some areas of audit risk that will require special audit consideration. These areas of risk, together with our planned responses, are described below: Management judgments and accounting estimates Implementation of PS 3280 Asset Retirement Obligations and PS 3450 Financial instruments accounting standards Audit risk Our proposed audit response The City must adopt two new significant accounting standards, PS 3280 Asset retirement obligations, and PS 3450 Financial instruments, in fiscal 2023. Both standards require preparation by the City, including development of accounting policies, information gathering with various City departments, engagement of external consultants to assist with valuation, and development of go-forward processes for policy maintenance. • We will discuss with management their implementation plan for the new standards. • Obtain an understanding from management of the approach to ARO identification, including procedures undertaken to ensure completeness of identification of such obligations. • Obtain management’s calculation of ARO and opening balance adjustment, and any assumptions and estimates used. Perform detailed testing on the inputs to the calculation, including assessing the reasonableness of assumptions and recalculation of the ARO liability, amortization and accretion expense. • Review management’s assessment of the applicability of PS 3450. • Review financial statements disclosures with respect to the first time adoption and new accounting policies. Audit risk Our proposed audit response Management judgments and accounting estimates may be subject to estimation uncertainty. Significant judgements and estimates Accounts involving significant estimates include allowance for doubtful accounts, certain accrued liabilities, post-employment benefits liability, WSIB liabilities, estimates relating to the useful lives of tangible capital assets, and estimates relating to asset retirement obligations. Understand how management makes the accounting estimates and the underlying data on which those estimates are based. Review support for significant assumptions made by management. (i.e., third party source data). Evaluate whether the significant assumptions made by management provide a reasonable basis for the accounting estimate, whether and how management considered alternative assumptions or outcomes, and why they have rejected them. Review transactions and events occurring subsequent to year-end to determine the reasonableness of estimates made at year-end. Review the consistency of assumptions made by management. The Corporation of the City of Pickering | Appendix – Audit approach 6 © Deloitte LLP and affiliated entities Appendix 1 – Audit approach Deloitte’s audit approach is a systematic methodology that enables us to tailor our audit scope and plan to address the unique issues facing the City. Focus area Risk based audit • Deliver a customized risk assessment, focusing our attention and resources on the audit areas that are most relevant to the City. Confidential Information • Protecting the privacy and confidentiality of our clients and the firm is a cornerstone of the professional standards every Deloitte partner and practitioner commits to upholding every day. • Deloitte employs technical, physical, and procedural safeguards, including our Confidential Information Program, to appropriately safeguard your data before, during, and after the course of the engagement. Professional skepticism • Obtain a thorough understanding of the relevant facts and information, analyze reasonable alternatives, apply a questioning mindset and challenge management’s assumptions. • Perform a more rigorous review of potential contradictory evidence. Consultations • Involve additional resource or consult with technical resources concerning the significant or unusual events. • Understanding your current business and its structure • Understanding your accounting processes and internal controls • Understanding your IT systems • Identifying potential engagement risks and planning control testing and substantive procedures directly related to the risks • Consideration of the risk of fraud • Inquiring directly of the Committee about fraud risk • Assessing risks and controls relating to information technology • Incorporate an element of unpredictability when selecting the nature, timing and extent of our audit procedures. • Evaluating the design and determining the implementation of internal controls relevant to the audit • Performing substantive audit procedures • Prior to rendering our report, we will conclude whether: o The scope of the audit was sufficient to support our opinion, and o The misstatements identified during the audit do not result in the financial statements being materially misstated. • Reconfirming our independence Delivering professional excellence Assesssing and responding to engagement risk Developing and executing the audit plan Reporting and assessing performance Initial Planning The Corporation of the City of Pickering | Appendix – Audit approach 7 © Deloitte LLP and affiliated entities When general IT controls (GITCs) may be relevant? For example: A billing system that performs many functions (such as processing orders, generating invoices, and tracking financial balances) and it processes and houses data. The entity relies on the functionality and the data processed by the system. Additionally, the volume and complexity of transactions processed by system is considered high. Therefore, the billing system is relevant to the audit. Factor #1 Data For example: •3-way match of the purchase order, goods receipt and invoice prior to payment •The calculation of depreciation expense •Access is restricted to update inventory quantity Factor #2 Automated Controls For example, a system- generated A/R aging report from the financial reporting application is used to determine the allowance for doubtful accounts. Factor #3: System Generated Reports For example, a telecommunications company uses its application system to create a log of the services provided to its customers, to initiate and process its billings for the services, and to automatically record such amounts in the general ledger. It is a highly automated environment and therefore most of the audit evidence is maintained in the application system itself. The team has concluded that substantive procedures alone would not be sufficient to address certain risks of material misstatements. Therefore, the application system is relevant for the audit. Factor #4: Highly automated environment where substantive procedures alone are insufficient The determination of which IT system aspects are relevant to our audit is based on the four factors. The Corporation of the City of Pickering | Appendix – Audit approach 8 © Deloitte LLP and affiliated entities Focus area Audit technology • Deloitte Connect – Use Deloitte’s secure, online collaboration site to facilitate a two-way dialogue between the Deloitte team and the City team to effectively manage engagement coordination and provide greater transparency allowing both management and auditor visibility over client request status. • Deloitte Spotlight - Gather data and test journal entries, identify risks and anomalies more quickly, and generate meaningful insights through data visualization. • Argus – Use Deloitte’s artificial intelligence tool to analyze the population of contracts or other documents to identify variations, potential risks and hone in on items of interest. Innovating our audit approach Use of Innovation Audit Analytics Argus Excel analytics Deloitte Spotlight Deloitte Signal Deloitte Connect Deloitte Signal delivers a comprehensive, customized, and flexible data analysis using trends, metrics, and ratios from coordinated external and internal resources. Deloitte’s artificial intelligence tool that extracts analytics across an entire population of documents and highlights variations that can help us identify risks. Deloitte’s proprietary tool, focuses testing on high-risk transactions and streamline common audit test procedures. We are leveraging specialists and technology-powered solutions in our audit delivery model to transform the way we plan and execute our audits. Deloitte Spotlight mines journal entry data to test 100 percent of select populations in a matter of minutes, identifies risks and anomalies more quickly, and generates meaningful insights through data visualization. Deloitte’s secure, online collaboration site that facilitates a two-way dialogue between the Deloitte team and client team to effectively manage engagement coordination. The Corporation of the City of Pickering | Appendix – Audit approach 9 © Deloitte LLP and affiliated entities Focus area Processes • Project management - Enhance project management oversight and effective communications between the audit team and management. The Corporation of the City of Pickering | Appendix – Communication requirements 10 © Deloitte LLP and affiliated entities Appendix 2 – Communication requirements Required communication Reference Audit Service Plan 1. Our responsibilities under Canadian GAAS, including forming and expressing an opinion on the financial statements CAS1 260.14 2. An overview of the overall audit strategy, addressing: CAS 260.15 a. Timing of the audit b. Significant risks, including fraud risks 3. Significant transactions outside of the normal course of business, including related party transactions CAS 260 App. 2, CAS 550.27 Enquiries of those charged with governance 4. How those charged with governance exercise oversight over management’s process for identifying and responding to the risk of fraud and the internal control that management has established to mitigate these risks CAS 240.21 5. Any known suspected or alleged fraud affecting the City CAS 240.22 6. Whether the City is in compliance with laws and regulations CAS 250.15 Year-end communication 7. Modification to our audit plan and strategy CAS 260.A26 8. Fraud or possible fraud identified through the audit process CAS 240.40-.42 9. Significant accounting policies, practices, unusual transactions, and our related conclusions CAS 260.16 a. 10. Alternative treatments for accounting policies and practices that have been discussed with management during the current audit period CAS 260.16 a. 11. Matters related to going concern CAS 570.25 12. Management judgments and accounting estimates CAS 260.16 a. 13. Significant difficulties, if any, encountered during the audit CAS 260.16 b. 14. Material written communications between management and us, including management representation letters CAS 260.16 c. 15. Circumstances that affect the form and the content of the auditor’s report CAS 260.16d. 16. Modifications to our opinion CAS 260.A21 17. Our views of significant accounting or auditing matters for which management consulted with other accountants and about which we have concerns CAS 260.A22 18. Significant matters discussed with management CAS 260.A.22 1 CAS: Canadian Auditing Standards – CAS are issued by the Auditing and Assurance Standards Board of CPA Canada The Corporation of the City of Pickering | Appendix – Communication requirements 11 © Deloitte LLP and affiliated entities 19. Matters involving non-compliance with laws and regulations that come to our attention, unless prohibited by law or regulation, including illegal or possibly illegal acts that come to our attention CAS 250.23 20. Significant deficiencies in internal control, if any, identified by us in the conduct of the audit of the financial statements CAS 265 21. Uncorrected misstatements and disclosure items CAS 450.12-13, 22. Any significant matters arising during the audit in connection with the City’s related parties CAS 550.27 The Corporation of the City of Pickering | Appendix – New and Revised Public Sector Accounting Standards 12 © Deloitte LLP and affiliated entities Appendix 3 – New and Revised Public Sector Accounting Standards The following is a summary of certain new or revised Canadian Public Sector Accounting Standards that will become effective in 2023 and beyond. Public Sector Accounting Standards Title Description Effective Date Section PS 3280 - Asset retirement obligations This Section establishes standards on how to account for and report on the legal obligations associated with the retirement of tangible capital assets. Effective April 1, 2022. Earlier adoption is permitted. The City will be adopting this standard in the current fiscal year under audit. Section PS 3450 - Financial instruments This Section establishes standards on how to account for and report all types of financial instruments including derivatives. Effective April 1, 2022, earlier adoption is permitted. The City will be adopting this standard in the current fiscal year under audit. Section PS 3400 - Revenue This Section establishes standards on how to account for and report on revenue. Specifically, it differentiates between revenue arising from transactions that include performance obligations and transactions that do not have performance obligations. Effective for fiscal years beginning on or after April 1, 2023. Earlier adoption is permitted. This Section may be applied retroactively or prospectively. Section PS 3160 – Public Private Partnerships This Section establishes standards on how to account for public private partnership arrangements. Effective for fiscal years beginning on or after April 1, 2023. Earlier adoption is permitted. Guidelines PSG 8 – Purchased Intangibles This new Guideline explains the scope of the intangibles now allowed to be recognized in financial statements given the removal of the recognition prohibition relating to purchased intangibles in Section PS 1000. Effective for fiscal years beginning on or after April 1, 2023. Earlier adoption is permitted. The Corporation of the City of Pickering | Appendix – Deloitte resources a click away 13 © Deloitte LLP and affiliated entities Appendix 4 – Deloitte resources a click away At Deloitte, we are devoted to excellence in the provision of professional services and advice, always focused on client service. We have developed a series of resources, which contain relevant and timely information. See links below to receive practical insights, invitations to Deloitte events/webcasts, and newsletters via email and other electronic channels. You will be able to select business topics and industries that align with your interests. Canada’s Best Managed Companies (www.bestmanagedcompanies.ca) Target audience Directors and CEO/CFO The Canada's Best Managed Companies designation symbolizes Canadian corporate success: companies focused on their core vision, creating stakeholder value and excelling in the global economy. Deloitte Viewpoints (https://www.iasplus.com/en-ca/tag- types/deloitte-viewpoints) Target audience CFO Controller and Financial reporting team Electronic communications that helps you to stay on top of standard-setting initiatives impacting financial reporting in Canada. CFO's corner (https://www.iasplus.com/en-ca/cfos-corner) Target audience CFO and VP Finance Controller and Financial reporting team Editorial providing insights into key trends, developments, issues and challenges executives face, with a Deloitte point of view. Deloitte Dbriefs (https://www.iasplus.com/en- ca/dbriefs/webcasts) Targeted audience CFO and VP Finance Controller and Financial reporting team Learning webcasts offered throughout the year featuring our professionals discussing critical issues that affect your business. Recent publications ESG (November 2022) Proposed PS 3251 – Employee benefits (September 2021) PSAB’s government NPO strategy (April 2021) Centre for Financial Reporting - PSAS (https://www.iasplus.com/en- ca/standards/psas/public-sector-accounting- standards) Target audience CFO and VP Finance Controller and Financial reporting team Web site designed by Deloitte to provide the most comprehensive information on the web about financial reporting frameworks used in Canada. Summaries of each standard that forms part of the Public Sector Accounting Standards can be found on our Deloitte Centre for Financial Reporting. The Corporation of the City of Pickering | Appendix – Assurance services 14 © Deloitte LLP and affiliated entities Appendix 5 – Assurance services At Deloitte, we offer a variety of services to assist our clients. We have included below some assurance services that we offer to our public sector clients for your consideration. Complex Accounting Advisory As accounting standards and the regulatory interpretations of these standards are ever evolving, we often see our clients asking what are the best practices for their business. Below are some common areas where technical accounting support is often needed as clients prepare to implement, implement and subsequently monitor. 1. Adoption of New Accounting Standards Deloitte often supports a business through its adoption of new accounting standards, including accounting memo review, advisory services on best practices related to accounting policy implementation and financial statement preparation. Topics often advised on include but are not limited to asset retirement obligations, financial instruments, purchased intangibles, and public private partnerships. 2. On-Call Advisory Many of our clients require technical accounting insights on an on-going basis, to ensure their accounting policies and treatments to new transactions reflect the industry best practices. Deloitte can discuss key considerations with management on the best treatments, provide relevant accounting guidance. 3. Training on new or amended accounting standards To ensure their organizations are up to date on their technical accounting knowledge and/or their professionals meet their certified professional development hour (CPD) requirement, Deloitte regularly hosts training for our clients. These trainings can include new accounting standards/amendments, regulatory exposure draft findings and upcoming standards to name a few. 4. Sustainability and ESG Compliance There is growing pressure for public sector entities to recognize and mitigate their environmental and social impact, and provide credible, transparent information to their stakeholders. The complexity only grows as changes in government policies and enforcement shift. Deloitte can assist an organization in creating strategies and practices to address the extensive oversight, disclosure, and reporting requirements in a context of evolving regulatory environment and stakeholder expectations. The Corporation of the City of Pickering | Appendix – Assurance services 15 © Deloitte LLP and affiliated entities Accounting Operational Advisory As the business needs of our clients are ever evolving, we are often asked how their systems and operational functions can be optimized. Below are common areas where accounting operational advisory services have been rendered, resulting in increased operational capacity, enhanced financial insights or optimized system functionality. Finance Diagnostic Do you have new business processes? Are there new regulatory requirements? Has the business completed an acquisition or restructuring? Does your process have a history of control failures? Deloitte can assess the finance functions, evaluating whether the process has any weaknesses or inefficiencies that can be remediated. Deloitte can advise management through the development or integration of new business processes, ensuring they reflect the industry best practices. Data Analytics Do you have a limited use of data to complete your analysis? Are you looking to understand the leading data tools and the benefits they can provide your business? Deloitte can review current data limitations and provide a road map for improved data transformation. Deloitte can assist in leveraging enabling technologies to centralize and harmonize various information to enhance reporting, analysis, and decision-making. System Optimization & Selection Does your process have inefficiencies or excessive manual elements? Does your system meet all your business needs? Do your systems integrate effectively? Deloitte can assess your current processes and recommend adjustments to improve inefficiencies or reduce manual tasks. Deloitte can evaluate your existing systems and advise on optimal transformation and integration. KPIs & Benchmarking Do you know how your competitors are benchmarking their performance? Do your KPIs align with your long-term strategic objectives and those of the market? Deloitte can advise on the most appropriate benchmarking metrics based on the industry. Deloitte can assess your alignment of KPIs with your strategic goals, evaluate potential gaps and recommend changes to promote better alignment.