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HomeMy WebLinkAbout01-29-2001 Audit Committee Minutesj;(/f(Jt). (J.) 1/1 Minutes AUDIT COMMITTEE MEETING City of Orange - Weimer Room Monday, January 29, 2001, 4:00 p.m.ATTENDEES: AUDIT COMMITTEE Voting Members)Present David E. Sundstrom CPA, Chair David L. Rudat, City Manager Jeanne Arehart CPA, Internal Audit Mgr.Dwight Nakata CPA Eric H. Woolery CPA Non- Voting Members) Present Mark Murphy, Mayor Absent Dan Slater, Councilman CITY STAFF Helen Bell, Finance Director Rich Jacobs, Asst. Finance Director EXTERNAL AUDITORS Mike Harrison CPA, Partner, Conrad & Associates, LLP Steven Dobrenen CPA, Sr. Mgr., Conrad & Associates, LLP Michael Gutierrez CPA, Partner, Conrad & Associates, LLP OTHER ATTENDEE David Piper, Alternate Audit Committee member I. Call to Order - Chairman David Sundstrom called Meeting to order at 4:03 p.m.2. Review of Minutes - Minutes of the August 10, 2000 meeting were reviewed and approved as submitted.3. Update on Transient Occupancv Tax (TOT) Audit - Steve Dobrenen. The remaining two of the nineteen audits are now finished. Revenue to the City was $33,299, primarily from thirteen of those hotels/motels. The preponderance was the 30-day exemption (i.e., no tax was collected on the first thirty days when a guest stayed over thirty days), however, one hotel/motel operator was erroneously giving exemptions to employees of non-profits. The 1998/ 99 results were about one-half of those for 1996/97, which indicates that operators are now becoming compliant. The voluntary revenue being reported, however, has increased. Jeanne Arehart recommends that the City conduct this audit on alternating years. For example: For the year 2000, the half of the group that had the most problems would be audited. The following year, the other half would be audited. Cost of this audit was about $20,000. Helen Bell indicated that the City's TOT revenue is on the increase- doesn't know whether this could be a result of the audit. 4. Presentation of Comprehensive Annual Financial Report for the Year ended June 30. 2000 Mike Harrison summarized their duties as the City's independent auditor. Said that the City of Orange is in solid financial condition from an auditor's perspective. There are no 1 deficits in any of the funds throughout the City; the General Fund has an excess of revenues over expenses of more than $5 million for the current year to go down to the unrestricted fund balance; and the staff did a good job displaying the tax revenue information on a colorful type ofform with a good transmittal letter. They found no fraud or illegal acts at the City of Orange during the year they were auditing. There were no significant accounting policy changes, other than one in the area of capitalization of fixed assets when the City changed from a $1000 capitalization policy to $5000, resulting in a $5 million write-down of fixed assets (most likely in anticipation ofGASB 34).No significant management judgments or accounting estimates were discovered other than some routine judgments made throughout the audit. Conrad had no disagreements with management over accounting applications, and wasn't aware of any outside consultations with another firm on accounting or auditing issues. They received all the required preliminary information they needed and timetables set by Conrad and the City were realistic.Internal control had no material weaknesses and no reportable conditions. Specific grant testing was done on two major programs-the Community Development Block Grant Program and the COPS Program-and there were no compliance exceptions.The City has submitted its 1999-00 CAFR to both the CSMFO and GFOA awards program and has submitted its investment policy to the CMT A award program. Conrad performed specific testing to determine whether the City is compliant with its investment policy.Mike Harrison reiterated that Orange's year of implementation of GASB 34 is 2001-02.Some of the activities in which he was involved this past year include: meeting with Helen Bell and the Public Works Director to discuss Public Works infrastructure that needed to be inventoried and valued; Conrad's GASB 34 training class, attended by a number of City employees; and his participation in two selection processes for the City---one for the Audit Committee vacancy, and another in selecting the City's Assistant Finance Director.For the year 2001, there are some new investment reporting requirements-both under AB 943. One requires submitting to the California Debt Advisory Commission the City's second and fourth calendar quarter treasurer's reports. Second, the City needs to send a copy of its investment policy for the year 200 I within 60 days of adoption by our City Council. Conrad will make sure that these two items are incorporated into the agreed- upon procedures for the year 200 I.Mike Guiterrez went over the agreed-upon procedures on the investment portfolio, which was put together in a step-by-step report format, with results underneath. They compared the amounts detailed on the City's investment portfolio to confirmations received directly from independent sources such as Union Bank and Wells Fargo, and found no material differences. There was a discrepancy in the market value from what was reported and independent sources, but the differences were immaterial. Helen Bell responded that the City is using different valuations and firms, Conrad compared the types of investments, purchase dates, maturity dates to those listed on Bloomberg reports that are maintained by the City, and no differences were found. No treasurer's investments had a maturity exceeding the five-year limitation as stipulated by the investment policy. All investment types were correctly within their limitations--either in dollars or percentages. The treasurer's report met the requirements of the government code. The investment policy of the City and the City Council resolution were approved within the current fiscal year (September 29, 1999).City broker dealers had signed a compliance statement that they'd read and received the current fiscal year's investment policy, of which they found no discrepancies. Conrad obtained the city's investment file folders, and found no discrepancies in that there were signed approval authorization forms for each investment sale and purchase. There were no discrepancies in comparing the list of authorized individuals for custodial transactions to current city employee listings.Conrad inquired about the entire reconciliation process in the investment cycle, and found no material weaknesses in internal control. All monthly treasurer's reports in the fiscal year were submitted within their monthly requirement. At the back of the report is a schedule of the investment portfolio for June of 2000.David Rudat spoke on the high-risk nature of some investments; however, it is the City's policy to try to keep the risk low. Mike Harrison corrected his earlier statement that investments in general are "high risk" from an auditor's standpoint. Helen Bell said that the City has never gone out of compliance since she has been here. The City's investment policy is extremely conservative in its approach.Mike Harrison reiterated his wish to continue as the City's auditor, and would be willing to change management members or anything else for the sake of continuity purposes for GASB 34. His counterpart, Ken AI-Imam, is equally capable to be the partner on this engagement. Keeping Mike Guiterrez on the engagement, however, might provide some continuity with the Finance Department.5. GASB 34 Implementation Update - Helen Bell commented that GASB 34, one of the most sweeping changes in governmental accounting in the last twenty years, will improve financial reporting, and will enhance the awareness of fiscal issues--especially as it relates to maintaining infrastructure. Although its implementation will make the City's statements much longer, more complex and more costly to audit, she assured the committee that the City will wholeheartedly comply with the GASB 34 requirements, and plans to implement them early.Rich Jacobs said that the City of Orange is considered a Phase I entity, and therefore the required implementation date is June 30, 2002. The City, however, will early implement GASB 34 effective June 30, 2001. In STEP I-which is planned to be accomplished in the next two months-the City will restate its June 30, 2000 statement so that numbers are comparable on the GASB reports. This will be one of the first things that the external auditors will be reviewing to be sure that the City has its spreadsheets, numbers, and logic set up correctly.The next big part ofGASB 34 is the infrastructure reporting. With the City's training and through consultations with Conrad, the City has decided for use the depreciation method for infrastructure reporting. GASB 34 allows two options- depreciation or a modified approach-and the City has chosen to go with the straight-line depreciation method. It will not only be quicker and easier to implement, but will also keep the door open to shift things to the modified method down the road, if desired.So far, City reps have attended several GFOA, CSMFO, as well as Conrad training sessions. They have received CAFR copies from Corona and Indian Wells, both of whom have early implemented, which will be helpful to the City. Orange has contracted with Berryman & Hennigar to value and pick up some of the City's infrastructure, such as streets, right of ways, sidewalks, curb and gutter, and alleyways, which are the City's largest dollar component of its infrastructure and we plan to pick those up in the first year.Early implementation of the City's June 30, 2001 statements will be completed in December of this year. In summary, the plan is that the City will pick up just a portion of its infrastructure this year, and in future years pick up the balance of the infrastructure,which would include the sewer lines, storm drain lines, and bridges.Helen Bell added that in many agencies in the beginning, there has not been a lot of cooperative work between Public Works and Finance. In Orange, however, they've worked very cooperatively together, making it easier to move forward.David Sundstrom discussed the problem of not recognizing revenues on grant projects in the year in which a project is completed or incurred expenses. Helen Bell indicated that some City grant-funded projects are budgeted to other funds, which are later reimbursed by the grant.4:45 p.m. - Conrad representatives left the meeting)6. Miscellaneous Audit Reports - Jeanne Arehart. From the State Controller's office for FY 98/99 single audit report, the City received a certification in audit findings. For several years in a row, the City is pleased to have had no audit findings.The City collects fees on behalf of the Transportation Corridor Agency (TCA) and remits them to the agency through the Building Department. In July, the TCA did an audit of the calendar year 1999, and their report shows some findings where they determined fees were not collected properly on a number of permits. The fees amount to about $18- 19,000 fees that the City had to try to go back and collect. So far, the City has collected from four of the six people that were billed. The City just received notice that the TCA is coming to audit the year 2000. The audit identified areas where they may have been some weaknesses and the City has made some changes to minimize things like this happening in the future.7. Request for Proposal for Audit of 2000-0 1 Financial Statements - Jeanne Arehart. A draft RFP was distributed to the committee members for review. Jeanne pointed out that as Mike Harrison mentioned a couple things related to the agreed- upon procedures for investments, they will need to be added to the scope for that particular item.The City is looking to get the RFP out as soon as possible so that the City can meet the timeframe of getting auditors on board-particularly if a firm other selected. The City needs to decide whether to invite Conrad to propose with a change of staff/without a change of staff/or not at all, and have a completely different audit firm. Helen Bell mentioned the shortage of firms that specialize in governmental accounting. Since Moreland and KPMG are precluded from proposing, the City is already limiting two large firms from the list. The RFPs will generally emphasize that the firm will need to deal with GASB 34. Because GASB 34 will be an extremely tough issue even with the same auditor, it was recommended to stay with Conrad to get the City "over the hump" with GASB 34. Conrad has done an excellent job, and the City is in better shape than it has in a long time. To get a fresh perspective and to ward off possible criticism, it was further suggested that the City change to a different partner. Eric Woolery moved that the City of Orange extend its contract with Conrad for two years, with a change in partner. Dwight Nakata seconded the motion, and the motion was passed 5- 0.8. Current Status of 2000 Audit Plan - Jeanne Arehart. In-House Audits:Controls over cash receipts in various departments are on-going, and is at a maintenance level.Economic/Redevelopment Agency Agreement - A number of agreements have compliance issues (maintaining a certain amount of sales tax, making loan payments, etc.). Jeanne is reviewing Economic Development's monthly monitoring process to ascertain whether it' s a good process, and to make sure it is being followed.Controls over petty cash - This is an annual process where they check petty cash drawers to make sure everything is proper. They have made some fine-tuning to make sure that documentation was in order, and they are resolving some minor issues.Police alarm billings - Jeanne has been working with Police Department staff member who does the alarm billings. Some weaknesses here, and she is working with Finance Department to get them identified and corrected. More on this at the next meeting. City paid property tax/sanitation assessments - Even though the City pays no property tax, there are certain assessments on city-owned properties. Providing certain information can get lower rates, if based on water consumption. Small dollars, but the City is keeping on top of this, and annually providing information to get the reduced rates. Contracted Audits: Police evidence and property room - The firm selected is one of the few in the country that does a thorough police evidence room audit versus CPA firms, which do only certain aspects such as cash control, etc. The auditor is a retired police sergeant, and he makes sure that they comply with State laws for handling weapons, freezer temperature, etc. The audit delay has been due to obtaining the required insurance; however, it should be resolved today and the audit will begin soon.5 Parking citation process - The City contracts with Judicial Data Systems to collect parking and street sweeping tickets. We have contracted with Diehl Evans to perform an audit of Judicial Data Systems to assure that they have proper internal controls. Audit is currently underway.Property tax audit - The City contracts with HDL to make sure that properly taxes are allocated properly to the City. In turn, the City pays them a percentage of anything they find. Jeanne has been working with the Revenue Manager to assure a good process to verify the corrections are being made.Paramedic billing - City contracts with Wittman Enterprises to do our paramedic billing.Diehl Evans is being contracted to assure proper billing and to make sure City is getting right amount. Jeanne is meeting with the auditors next week to go over some items they have come up with.TOT Audit - already discussed.Cable franchise technical audit - Irma Hernandez, of the City Manager's office, provided a report for the agenda, and is available should there be questions on this audit. There is an RFP to perform the technical audit, and the Video Advisory Board plans to present an annual report to the Council in May, 2001, on the review of the customer services provided by Time Warner during the five-year period of the contract.Waste Management of Orange contract compliance - There are a number of compliance issues in the City's contract with Waste Management for trash collection. Jeanne met with Jamie Herbon, Administrative Analyst in Public Works who oversees this contract, and discussed process for monitoring.Audit of utility bills paid by the City - Gas, electric, and telephone bills. L.S. Lichty &Associates performed the telephone audit, and many of the resulting changes have been implemented, and the City is now realizing some savings. Jeanne is meeting with Pac Bell next week to implement some of the other suggested changes. Utility Cost Management performed the gas and electricity audit, and identified approximately $300,000 in annual savings by changing to advantageous rates. They also identified areas where the City is entitled to refunds of almost $200, 000--Edison does not agree with these calculations and feel it is more like $ 13-15,000 in refunds. Utility Cost Management will take the issue to the PUC, who will determine whose calculations are correct. More on this later. In reviewing the City's gas bills, they were unable to find any cost savings.9. 2001 Audit Plan - Jeanne Arehart presented her audit plan. There are two reasons for the six-month period (January 1 through June 30). First, she is putting together a risk assessment that will help determine the areas most in need of auditing. In the next couple months, she may hire a consultant to get input from the department heads and compile a risk assessment. Secondly, Jeanne felt it important to get on the same fiscal year cycle as the budget.She outlined her plans for the next six months, which include cash receipt controls,Economic Development performance based agreements, signature authorization process,false alarm billing, Waste Management contract compliance, and reviewing procedures for 6 selection of the City's health insurance broker, their contract, and the broker's process for recommending health insurance companies to the City. Also during the next six months, the police evidence room audit should start, as well as the next round of TOT audits. Among those audits that should be completed are: parking citations, paramedic billings, and cable franchise technical audit. The City will be following up on audit recommendations for utility bills. The City just signed contracts with two firms: Diehl Evans for an audit of the cable franchise fees; and DMG Maximus for an audit of the franchise fees for gas and electric. Regarding continuing professional education or training, Jeanne has included under Administrative" and "Other," the Institute ofInternal Auditors meetings in California and other various training, so that she can maintain her CPA rating. 10. Audit Committee and Audit Division Charters - Jeanne Arehart presented two draft charters, one for the Audit Committee and one for the Internal Audit Division. David Sundstrom commented that although the Internal Audit Division has a staff of one, the charter gives the appropriate authority for Jeanne to carry out her responsibilities as the manager of the audits.Although a charter may seem perfunctory at times, it's important to "fall back on" to look at the purpose of the committee. It may not be critical, but can be shown if asked what authority one has to review information for an audit. David Sundstrom says that approving a charter is one of the most important things an audit committee should do.Discussion ensued regarding Council member voting status on the Audit Committee,which is an advisory committee. Sundstrom mentioned the similarities and differences between a corporation's audit committee and that of government. Mayor Murphy's concern was that since the committee is advisory to the City Council, and the Council ultimately approves Treasurer and Audit Committee reports, then items could actually be voted upon twice.Unless it were shown that decision-making would be improved by adding the vote of the elected officials, Mayor Murphy would prefer to see it remain the way it is. Mayor Murphy said there was a belief at the time it began that we wanted the audit committee to be independent of the elected bodies. He prefers getting the residents and community members involved to make sure the interests and expertise is broad enough so that good advice is available. Mayor Murphy suggests getting some legal perspective, so this matter will be discussed with the City Attorney. There was discussion as which documents (i.e., charters) need to be presented to Council. Jeanne indicated that both charters are reformatted from the Council-approved resolution.Our City Attorney will also be consulted about whether it's necessary to take this to Council, since it has already been passed in Resolution form. It was understood, of course, that if there are recommended changes, it would need to be reviewed by Council.Another concern surfaced as to whether the Resolution actually empowers Jeanne Arehart to be the auditor. This is another matter for City Attorney review. Helen Bell referenced the similarity (in form and role) of the Audit Committee to the Investment Advisory Committee, which is considered advisory. Their charter of responsibility is in a resolution form. The Investment Committee approves items, but on a recommendation basis, such as an investment policy, etc. There needs to be a determination as to whether the intent of the Audit Committee is advisory or whether all actions of the committee are subject to ratification by vote of the Council. If it is an advisory committee, then the group will present this charter and have the Council approve or confirm it. Mayor Murphy suggested that an Audit Committee report be submitted annually to Council in a consent-type format or administrative report. It could confirm the yearly actions and include a brief summary of the reports that we received. Included could be a side note that both charters were approved with or without change. Jeanne had already planned to do an annual report, so this could be tied all together.5:40 p.m. - Mayor Murphy left the meeting) David Sundstrom brought up Jeanne Arehart's Internal Audit charter, and the reference to yellow book standards. He recommends that-if the yellow book standards are followed-we also follow the IIA's standards ( red book).Another yellow book standard requires that within three years of forming the Audit Committee, a "peer review" or "external review" be conducted of that department. All they do is set guidelines whether the standards are still being followed. It's a good check-up, because there are things that happen in the reporting process.II. Selection of a new committee chair - David Sundstrom thanked the committee for the opportunity to serve as Chair for the past two years, and solicited nominations for Chair for the next two years. The committee unanimously voted to re-elect Mr. Sundstrom committee chair.David Rudat moved that David Sundstrom receive a two-year extension on his term as Chair of the Audit Committee. Dwight Nakata made a second, and the motion passed with a 5-0 vote. 12. Public Comment -None.3. Adjournment-The next meeting is be scheduled for approximately six months. With no further business,David Sundstrom adjourned the meeting at 5:47 p.m.David E. Sundstrom