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HomeMy WebLinkAbout08-30-2001 Audit Committee MinutesOK/?(j(), t).,2 7/7 Minutes AUDIT COMMITTEE MEETING City of Orange - Weimer Room Thursday, August 30, 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, Councilmember CITY STAFF Helen Bell, Finance Director EXTERNAL AUDITORS Ken AI-Imam CPA, Partner, Conrad & Associates, LLP Dean Votava CPA, Sr. Mgr., Conrad & Associates, LLP Michael Gutierrez CPA, Auditor, Conrad & Associates, LLP - (absent) OTHER ATTENDEES Carolyn Cavecche, Councilmember David Piper, Alternate Audit Committee member I. Call to Order- Chairman David Sundstrom called meeting to order at 4:12 p.m. 2. Approval of Minutes of January 29, 2001 - reviewed and approved as submitted.3. Update on Transient Occupancv Tax (TOT) Audit - Ken AI-Imam, a new member of the audit team, introduced himself to the committee, and gave a short professional background of both Dean Votava and himself. Having two new auditors will give a fresh outlook to the audit process, combined with the continuity of Mike Gutierrez, who continues to be the in-charge auditor. Ten hotel audits are now complete, and they identified $10,000 additional tax and penalties for the city. Two audits remain: Seven Crowns Motel-field work is finished,and a draft of the audit report will be submitted next week; Orange-Tustin Inn audit field work will beginon 9/7. In general, it appears that the City's continued audit effort to monitor compliance in this area is producing the desired result. They see substantial compliance and fewer problems than in previous years, with a heightened perception of audit interest and control environment.4. Update on Annual Audit - Ken AI-Imam. They have completed the interim planning stage of the audit, during which they focus on assessing control risk for City's major transaction cycles, including the cash disbursement cycle, the investment controls, cash receipts cycle,and the payroll cycle. They are still in the process of completing their risk assessment utility billing revenue cycle, which will be completed during the final exam. In areas completed, they have identified no material weaknesses and no reportable conditions. Another focus during the interim phase of audit is on the Redevelopment Agency compliance. No instances of non-compliance have been noted so far.Single audit process - there are six major Federal programs being audited, including CDBG. Much of the compliance test work has been performed, and no problems have been noted in their testing of these programs for compliance with Federal laws and regulations. There is more work that needs to be done, however, as part of the audit. A difference in the audit this year is that the city is implementing GASB 34 ahead of schedule. Conrad has met with Finance staff and provided telephone consultation to provide direction on the project. Cathy Knopf reformatted the financial data in last year's CAFR to conform to GASB 34 in the form of spreadsheets, which will provide a helpful audit trail for data that will be reported in the CAFR this year under GASB 34. Also set up is a conversion worksheet, required because governmental funds such as the General Fund and the Special Revenue Fund need to be reported on the traditional modified accrual basis. In the entity wide financial statement schedules in front of new CAFR, one has to use the accrual basis of accounting-the Economic Resource Measurement focus.This conversion worksheet converts data from the modified accrual basis of accounting to accrual basis of accounting.During Cathy's maternity leave, Conrad will take over during the final exam part of the audit, and using the CAFR templates, will drop in numbers for the audited data for 2001.Next year, the Finance Department will take over the CAFR again.Seven major funds have been identified that account for 90% of the City's revenues:A. General Fund B. Water Fund C. Sanitation Fund D. Gas Tax Fund E. Capital Improvements Fund F. RDA Debt Service Fund G. RDA Capital Projects Fund This is a major shift with GASB 34, which is also one of the major benefits. Instead of focusing on fund types (which were overly-generalized reporting of the operations of the city), it focuses on the few very significant funds of the City where most of the financial activity takes place. This gives the reader a better idea as to what's going on at the City of Orange-where is the significant activity, where are the big dollars, etc. This will make the financial statements more usable.After some discussion, it was decided that the City should develop a defensible policy on what constitutes a major fund.Under GASB 34, a City can declare a fund to be a major fund, regardless of its magnitude.For continuity and consistency in reporting from year to year, the Finance Department considers designating these funds to always be major funds. The City cannot prohibit other funds that would otherwise qualifY from becoming a major fund. An still be necessary each year to identify a new fund (with perhaps unusual financial activity) that would throw it into the mix of the major funds. It was further explained the every fund of the City is identifiable in the CAFR~with the non major funds in the back, combining schedules with the other twenty funds~with the seven major funds highlighted in the front of the financials. It is more a matter of emphasis and presentation, other than audit effort. One school of thought is to have consistency from year to year; the other philosophy is that if something major and material happens in one of the non-major funds, it's important to reveal it and not have it obscured in the back of the report. GASB reflects that school of thought. A major fund is determined numerically, using predetermined criteria established by GASB 34. However, GASB 34 also covers "politically sensitive" funds that might be of community interest, which may be separately disclosed. It is noted that the definition of "sensitive" can be subjective. For the sake of consistency, the Audit Committee decided that the seven funds would hereby be designated as the major funds each year. Even though 90% of Orange's revenue falls within these seven major funds, it was noted that the percentage is unique to each and every agency, and may change slightly from year to year. Sundstrom concurred that reporting be kept as mathematically oriented as possible, and limit the politically sensitive "absolutely extraordinary" items as this is an option" of GASB 34, and not a requirement. Bottom line: mathematical with consistency.If a City is submitting for the GFOA award, and therefore putting together a CAFR, a City is required to add some elements to financial reporting that are not required to meet the minimum requirements of GASB 34-a statistical section, a shortened transmittal letter,and the combining schedules; the budget/actual schedules in the back of the CAFR are an element of the CAFR reporting and not required by GASB 34. Under GASB 34, budget/actuals for the General Fund must be shown in each special revenue fund, but GFOA and CSMFO require for CAFR reporting budget actuals for all the other governmental funds,even the non-major ones. In summary, the Major Fund emphasis is a GASB 34 requirement.Conrad has also worked closely with the City's infrastructure consultants, Berryman and Hennigar, so that they arrive at a result acceptable for audit purposes. They are pleased with the result. Helen Bell stated that they had just received the first preliminary report~all in draft form~and mentions that a tremendous amount of the infrastructure value is going to be right-of-way. The City's balance sheet will look great, however, the City cannot spend it.GASB statements 37 and 38 are new pronouncements that were just issued in July, 2001,and will impact the City's GASB 34 project this year. GASB 37 is a technical corrections bill and "tweaks" some of the original requirements ofGASB 34, i.e., defines more clearly what subjects should be covered in the management discussion analysis, clarifies how to determine major funds, and specifies that interest expense should not be capitalized for governmental activities-only proprietary activities. GASB 38 deals with financial statement footnote disclosures associated with 34, requiring a description for each of the major funds, and also detailed information about inter-fund transactions and the composition of receivables 5. Internal Audit Division Charter - Jeanne Arehart brought up the charters for both the Audit Committee and for the Internal Audit Division. In previous meetings, there was discussion as to whether the Council Resolution that was adopted could be considered the charter for the Committee. The City Attorney concurred with this thought. The voting status and make-up of membership will be left as it was. Regarding the Internal Audit Division, the Committee recommended that I.I.A. standards be inserted into the charter, and so this is the only change that has been made. This charter will need to go before the Council with a recommendation by the Audit Committee. A motion was made by Dave Rudat to accept the Internal Audit Charter as presented, seconded by Eric Woolery. Motion passed unanimously. 6. Results of 2000-01 Audit Plan - Jeanne Arehart. Some of the completed in-house audits are as follows:Hart Park Pool - They have tightened up some of the controls, and have implemented some of her recommendations on swim passes, signing up for classes, etc. Economic Development Agreement Compliance - This department enters into development agreements with businesses, with deal points and performance measures that need to be met. Jeanne found an excellent process in place for assuring compliance with the agreements. Regarding results, there were a few instances where Economic Development was behind on the getting the necessary monitoring paperwork actually in the files, but this are getting caught up. Also, there were a couple of instances where the agreements could not be found, which dates back several years, but they are also getting those up to speed, getting copies, etc. Other than that, there are no major issues in this area. Dave Rudat added that in instances where agreements cannot be found, these are agreements that were made with the City prior to six years ago-in other words, before he was City Manager. One of the things he did first as City Manager was to make significant management changes in the Redevelopment Department. Helen Bell and Linda Boone spent more than a year rebuilding all of the files. Subsequently, Jeanne Arehart was hired for the Internal Audit function, and it has been a very positive decision for the City. Third Party Collection of Parking Citations. Diehl Evans did some agreed- upon procedures in this area, and found no major issues. Diehl Evans recommended some processes to better monitor this area, and they are being reviewed by our Police Department. Police Department will be providing response to this recommendation.Third Party Billing of Emergency Medical Transportation Services. Diehl Evans reviewed procedures, and identified-both from the city's side and from the contractor's side-some procedural areas for change. The Fire Department has already implemented every recommendation made.Cable Franchise - Diehl Evans performed a review of the cable franchise fees that are paid by Time Warner, and there are no findings. Everything has been reported correctly according to their review.Gas and Electric Franchise Fees - DMG is doing a review of these fees. So far, there are no major findings. Draft report to be submitted next month. TOT audit - Over the three years that this audit has covered, the City has recovered 98, 000 in fees, less the recovery cost of $48,000, resulting in a net gain of $50,000.Compliance has increased, and revenues are quite strong. Audits are generally repeated every two to three years-basically 50% of hotels/motels every year. It was suggested that the City might want to do a "random" selection of half the group every year. Additional note: the City makes about $3 million per year on TOT. Audits/Reviews Underway - Waste Management contract compliance audit--Hilton Farenkopfand Hobson are completing an audit of some of the aspects of that contract and results should be complete next month; police evidence room audit is complete and a voluminous report has been submitted, police currently reviewing; audit of utility bills gas and electricity)-city is implementing audit's recommendations and through June 30, 2001, has realized a savings $54,000. Additional audits/reviews underway are: Review of signature authorization forms; Police False Alarm Billing; and the process of how City selects health insurance brokers Sundstrom made a few suggestions; one of which is to paraphrase responses so that they are easier to read. Ask the contractors to paraphrase the responses of the auditees and put it in the report so the reader can understand the comments. Another suggestion would be to set timetables for auditees to get back to the auditor. This keeps people accountable. David Sundstrom suggested that Jeanne keep a record of how she spent her time, comparing actual to budget. Jeanne has not done so up until now, but can do so. Sundstrom recommends even keeping it in a "ballpark sense," or even an estimate at the end of each month. 7. Approve 2001-02 Audit Plan - Jeanne Arehart. The audit plan is broken down into In- House and the Contract Audits: IN -HOUSE AUDITS Review of the Third Party Administrator of Flexible Spending Account - this is a Section 125 plan, in which employees voluntarily contribute for medical reimbursement and childcare reimbursement into a pre-tax account. The audit is to make sure that the administrator is following correct procedure with the money. Helen Bell said that the plan would be expanding on January I to incorporate legitimate transportation expenses, such as train passes, etc. Reviewing the Third Party Administrator of Worker's Comp claims - Same type of review as is being done with the flexible spending account. Whenever a third party is administering our plans, the City wants to oversee this.Reviewing Internal Controls Over Position Controls, which is the control of employees that are hired and making sure all the internal controls are in place between position control and payroll.Review of Cash Controls and Recreation Programs - is an ongoing area where a lot of cash is sometimes taken in, often at off-site areas. The pool has been reviewed; now Jeanne wants to look at other recreation programs and how cash is controlled.5 Review of Employee Evaluation Tracking Process - making sure a process is in place of ensuring that employees are receiving timely evaluations, with appropriate step increases in pay.Review of Controls over Trust and Agency Funds - When money is taken in on behalf of another agency or person, making sure controls are tight.Review of Segregation of Duties between Personnel and Payroll Function. Position control is one of the areas where controls need to be in place. There are many other areas where it is critical to have proper segregation of duties between Personnel and Payroll.Use of City Vehicles - those that are taken home, and policy in place that provides correct authorization to do so. Properly reporting income tax liability if city vehicles are being used by employees. Use of City Telephones for Personal Use - We currently have a call tracking system in place that monitors that. Review to ensure that proper monitoring of the data from the system is being done and that the system provides adequate data to do so. Includes the use of cell phones.Waste Management Contract Compliance - following through to completion.General Ongoing Review of Department' s Internal Control over Cash Receipts - in all departments, city -wide.CONTRACT AUDITS Waste Management - portion that is being contracted out, and will be completed during this fiscal year.Transient Occupancy Tax Audits - ongoing.Review of Inventory Controls at Corps Yard, the Garage, and Water Yard - making sure that we have good controls on inventory, assets are being protected and accounted for, etc.Other Audits as Requested - Jeanne is meeting with departments at their management staff meetings and outlining the function of an internal audit function- their role, and her role.Getting their feedback on possible audit risks will assist in planning future years.David Sunstrom commented on the audit plan's good mixlbalance between heavy fiscal and operational areas.Jeanne explained her workplan, and inserting the information into various categories-how many hours are for in-house audits, how many hours for contract, administrative, etc.8. Miscellaneous Audits bv Other Agencies - Jeanne Arehart. Transportation Corridor Agencies - the City collects fees on their behalf, and they periodically audit to make sure City has remitted all that is collected. No findings.Department of Housing and Community Development - They were looking at the Agency compliance with statutory housing and housing fund requirements. They recommend that the Agency should annually determine in writing the appropriateness of planning and 6 administrative costs. Also, it was indicated that the implementation plan does not accurately reflect project area production requirements and should be revised to clearly identifY this data. The City's Economic Development Director and City Attorney do not agree with these findings and the Agency has written an extensive letter on their position. They are currently waiting to hear back from the Department of Housing and Community Development. There doesn't appear to be any monetary impact to be concerned about. Dave Rudat added that the City has three different areas, and different accumulations of housing set-aside monies, and the City has been aggressive with accommodating that, with the largest focus on trying to rehabilitate in high-crime areas. It takes awhile to accumulate the funds, and then find a developer to partner with. This is not an easy task to proportionately share your housing monies throughout any particular area and accomplish a task within a certain period of time.Helen Bell added that this is the first year that HCD has done audits, and all agencies are experiencing some frustration because their laws and descriptions have been quite indefinitive. Even the people who the City talks to who are on the audit did not agree with people in Sacramento. So, actually the findings the City has had--- compared to other agencies that they have selected- have been comparatively few.The South Coast Air QualityManagement District AQMD - No findings.9. Annual Write Off of Accounts Receivable - Helen Bell eXplained some history: the City had an antiquated accounts receivable policy (write-off policy) that went back to 1978,that any item over $75 had to go to City Council. Last year, the City recommended that the Council approve a new write-off policy that basically gave her the authority to write off anyone item between zero and $2,000. Dave Rudat, between $2, 000 and $30,000.Any write-off over that went to City Council for approval. This is consistent in the way the City handles other monetary approvals. The City Council indicated that the write-offs should be presented to the Audit Committee strictly from a "receive and file" perspective.Helen pointed out that the report in the Audit Committee packet was for the prior year,with a total of $52,000 in individual claims that were under $ 2,000 each. This represents a total basis of less than 2110's of 1% of the total receivables. In utility billing, the City brings in about $22 million and about $6.8 million on other receivables, so the base is about $28 million, and the City is writing off only $52, 000. Once the City has exhausted every collection effort they can, the accounts are turned over to a collection agency, where they would probably collect 20%. Helen Bell then handed out the write-offs for the current year, the numbers on which are being finalized at the present time. Out of the 38,000, $20,000 is utility billing, $17, 000 is accounts receivable ( business licenses, and damageto city property).10. Public Comment - No business for the good of the order.11. Adjournment - A motion was made to adjourn the meeting, which was seconded. Motion carried, and David Sundstrom adjourned the meeting at 5:20 p.m. David E.