HomeMy WebLinkAbout2-2018 City of Orange - Audit Communication Letter2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893
Offices located in Orange and San Diego Counties
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To the Honorable City Council
of the City of Orange
Orange, California
We have audited the financial statements of the governmental activities, business-type activities, each
major fund and aggregate remaining fund information of the City of Orange, California (the City), for
the year ended June 30, 2018. Professional standards require that we provide you with information
about our responsibilities under auditing standards generally accepted in the United States of America
and Government Auditing Standards, as well as certain information related to the planned scope and
timing of our audit. We have communicated such information in our engagement letter dated
May 2, 2018 and our letter on planning matters dated May 22, 2018. Professional standards also
require that we communicate to you the following information related to our audit.
Significant Audit Findings
Qualitative Aspects of Accounting Practices
Management is responsible for the selection and use of appropriate accounting policies. The significant
accounting policies used by the City are described in Note 1 to the financial statements. As discussed
in Notes 1, 18, and 19E to the financial statements, in fiscal year 2017-2018, the City implemented
Governmental Accounting Standards Board (GASB) Statement No. 75, Accounting and Financial
Reporting for Postemployment Benefits Other Than Pensions. The adoption of this standard required
retrospective application resulting in a reduction of $12,685,738, $6,065,866, and $303,293 previously
reported net position of the governmental activities, business-type activity, and the private-purpose
trust fund, respectively. Additionally, the water and sanitation enterprise funds required a retrospective
application resulting in a reduction of previously reported net position of $4,246,106 and $1,819,760,
respectively. No other accounting policies were adopted and the application of other existing policies
was not changed during the year ended June 30, 2018. We noted no transactions entered into by the
City during the year for which there is a lack of authoritative guidance or consensus. All significant
transactions have been recognized in the financial statements in the proper period.
Accounting estimates are an integral part of the financial statements prepared by management and are
based on management’s knowledge and experience about past and current events and assumptions
about future events. Certain accounting estimates are particularly sensitive because of their
significance to the financial statements and because of the possibility that future events affecting them
may differ significantly from those expected.
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Significant Audit Findings (Continued)
Qualitative Aspects of Accounting Practices (Continued)
The most sensitive estimates affecting the City’s financial statements were as follows:
a. Management’s estimate of the fair value of investments is based on quoted prices in
an active market. When quoted prices in active markets are not available, fair values
are based on evaluated prices received by the City’s broker or custodian.
b. Management’s estimate of the value of capital assets (infrastructure assets) is based
on industry standards.
c. The estimated useful lives of capital assets for depreciation purposes are based on
industry standards.
d. The annual required contributions, pension expense, net pension liability and
corresponding deferred outflows of resources and deferred inflows of resources for
the City’s public defined benefit plans with CalPERS are based on actuarial
valuations provided by CalPERS.
e. The OPEB expense, total OPEB liability, and corresponding deferred outflows of
resources and deferred inflows of resources for the City’s OPEB plan are based on
certain actuarial assumptions and methods prepared by an outside consultant.
f. Management’s estimate of the claims payable liabilities related to general liability
and workers’ compensation claims are based on actuarial valuations.
We evaluated the key factors and assumptions used to develop these estimates in determining that they
were reasonable in relation to the financial statements taken as a whole.
Certain financial statement disclosures are particularly sensitive because of their significance to
financial statement users. The most sensitive disclosures affecting the financial statements were
reported in Note 6 regarding CalPERS defined benefit plans, Note 7 regarding claims payable, Note 8
regarding the City’s other post-employment benefit plan, and Note 18 and 19E regarding the
restatement of previously reported net position due to implementation of GASB 75.
The financial statement disclosures are neutral, consistent, and clear.
Difficulties Encountered in Performing the Audit
We encountered no significant difficulties in dealing with management in performing and completing
our audit.
Corrected and Uncorrected Misstatements
Professional standards require us to accumulate all known and likely misstatements identified during
the audit, other than those that are clearly trivial, and communicate them to the appropriate level of
management. As a result of our audit-related test work, we proposed no corrections to the financial
statements.
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Significant Audit Findings (Continued)
Disagreements with Management
For purposes of this letter, a disagreement with management is a financial accounting, reporting or
auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial
statements or the auditors’ report. We are pleased to report that no such disagreements arose during the
course of our audit.
Management Representations
We have requested certain representations from management that are included in the management
representation letter dated December 10, 2018.
Management Consultations with Other Independent Accountants
In some cases, management may decide to consult with other accountants about auditing and
accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation
involves application of an accounting principle to the City’s financial statements or a determination of
the type of auditor’s opinion that may be expressed on those statements, our professional standards
require the consulting accountant to check with us to determine that the consultant has all the relevant
facts. To our knowledge, there were no such consultations with other accountants.
Other Audit Findings or Issues
We generally discuss a variety of matters, including the application of accounting principles and
auditing standards, with management each year prior to retention as the City’s auditors. However,
these discussions occurred in the normal course of our professional relationship and our responses
were not a condition to our retention.
Other Matters
We applied certain limited procedures to management’s discussion and analysis, budgetary comparison
schedules - general and major special revenue funds, the schedules of changes in net pension liability
and related ratios and the schedules of pension plan contributions, and the schedule of changes in the
total OPEB liability and related ratios, which are required supplementary information (RSI) that
supplements the financial statements. Our procedures consisted of inquiries of management regarding
the methods of preparing the information and comparing the information for consistency with
management’s responses to our inquiries, the basic financial statements and other knowledge we
obtained during our audit of the basic financial statements. We did not audit the RSI and do not
express an opinion or provide any assurance on the RSI.
We were engaged to report on the combining and individual nonmajor fund financial statements and
schedules (supplementary information), which accompany the financial statements but are not RSI.
With respect to this supplementary information, we made certain inquiries of management and
evaluated the form, content and methods of preparing the information to determine that the information
complies with accounting principles generally accepted in the United States of America, the method of
preparing it has not changed from the prior period and the information is appropriate and complete in
relation to our audit of the financial statements. We compared and reconciled the supplementary
information to the underlying accounting records used to prepare the financial statements or to the
financial statements themselves.
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Other Matters (Continued)
We were not engaged to report on the introductory and statistical sections, which accompany the
financial statements but are not RSI. We did not audit or perform other procedures on this other
information and we do not express an opinion or provide any assurance.
Regulatory Updates
Procurement Rules under the Uniform Guidance
The Uniform Guidance has different procurement rules than those previously required by the
Circular A-133. Due to the work required by nonfederal entities to implement these new rules, a
two-year grace period was given. In May 2017, an additional one-year grace period was given.
Beginning July 1, 2018, nonfederal entities will be required to comply with all of the Uniform
Guidance procurement rules. Included in these new rules is the requirement for written policies and
procedures.
Commencing with the fiscal year 2018-2019 audits, auditors will request the written policies of the
nonfederal entity for all single audits and review the procurement policies and procedures for
compliance with the Uniform Guidance procurement rules.
Debt Management Policy
Government Code Section 8855(i) requires any issuer of public debt to provide to the California Debt
and Investment Advisory Commission (CDIAC), a Report of Proposed Debt Issuance no later than
30 days prior to the sale of the debt securities. Effective January 1, 2017, SB 1029 requires issuers of
public debt to certify on the Report of Proposed Debt Issuance that they have adopted local debt
policies concerning the use of debt and that the proposed debt issuance is consistent with those policies.
The purpose of a debt management policy is to establish guidelines governing the issuance of debt or
other financial obligations. It provides a framework for debt issuance, capital planning, and post-
issuance debt administration. A debt management policy establishes conditions for use of debt, to
ensure that debt capacity and affordability are adequately considered, to minimized interest and
issuance costs, to maintain the highest possible credit rating, to provide complete financial disclosure
and reporting, and to maintain financial flexibility.
California state and local governments should review the amended provisions of Government Code
Section 8855 either to ensure that their existing debt management policy have been updated for the
new requirements resulting from the adoption of SB 1029, or to develop and adopt the required debt
management policy.
Restriction on Use
This information is intended solely for the information and use of City Council and management of the
City and is not intended to be, and should not be, used by anyone other than these specified parties.
Irvine, California
December 10, 2018