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HomeMy WebLinkAbout12-19-2002 Audit Committee MinutesfjK//p~, ~.,;Z /? Minutes AUDIT COMMITTEE MEETING City of Orange - WeimerRoom Thursday, December 19, 2002, 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.Eric H. Woolery CPA - arrived 4:55 p.m.Dwight Nakata CPA David Piper, CPA CITY STAFF Helen Bell, Finance Director Richard Jacobs, Assistant Finance Director David Christian, Accounting Manager EXTERNAL AUDITORS Ken AI- Imam CPA, Partner, Conrad & Associates, LLP -left at 4:37 p.m.Steven Dobrenen, Conrad & Associates, LLP - absent Dean Votava CPA, Sr. Mgr., Conrad & Associates, LLP -left at 4:37 p.m.1. Call to Order - Chairman David Sundstrom called the meeting to order at 4: 15 p.m.2. Approval of Minutes of September 29,2002 -reviewed and approved as submitted.3. Presentation of Comprehensive Annual Financial Report and other Audited Financial Statements and related reports for the year ended June 30, 2002 - Ken AI-Imam spoke regarding results of the audit and financial statements that have been delivered. This was an important transition year with respect to the audit and the preparation of the CAFR. Last year, the City of Orange implemented GASB 34 and there were profound changes in the format of financial reporting. Last year, Conrad prepared and compiled the CAFR on behalf of the City. One of the key reasons was that the accounting manager position that orchestrates that process was vacant. The Finance Department was commended on their preparation of the CAFR. The preparation of the financial statements is more difficult due to GASB 34. Two sets of financial statements are being prepared, one under the modified accrual basis of accounting and another on the accrual basis of accounting, in one bound document. Conrad's role was limited this year to auditing the accounting records and they assisted the Finance Department with respect to answering questions and helping to explain where some of the numbers came from and provided consultation and technical assistance with respect to preparation of the CAFR. David Christian was commended for the fine job he did in putting it together this year. Helen Bell mentioned that the deadline was moved up two to three weeks to meet the committee's desire and redevelopment's need to get everything out early. Rich Jacobs was also commended for his involvement. Conrad mentioned that last year's CAFR received both the GFOA and CSMFO Awards for excellence and financial reporting and the City of Orange did implement GASB 34 a full year early. The Finance staff pulled into the CAFR the results of their remaining fixed assets studies that were done this year. The infrastructure studies began last year and the results of those studies were reflected in last year's CAFR. This year, all the remaining areas of fixed asset record keeping were analyzed and updated by the use of consultants. This new data on the infrastructure for bridges, storm drains and sewers was included in the 6- 30-02 CAFR. Adjustments were reflected in the CAFR for the water system and for general fixed assets. Incorporating those adjustments was just another complication in what has become a very difficult process of preparing a year end local government financial statement. The fixed asset consultant did re-value the right of way associated with the streets. They had been asked to have the valuation be more reflective of undeveloped land values rather than land values in their current metropolitan developed state so they did make an adjustment downward to make that a more accurate number. There was a significant transaction that was reflected in the CAFR that represents the contributed infrastructure associated with the Serrano Heights development. That was the most significant development that took place during the year and there was about $7.5 million of streets and related rights-of-way that were contributed by the developers from the Serrano Heights development and about $4.2 million water system fixed assets. Those are all reflected here as a capital contribution which is required by GASB 34.On the accrual basis of accounting, the equity or net assets of the City of Orange increased by a total of $14 million, and that's a favorable financial indicator. The RDA financial statements show a negative equity of about $34 million and that's not necessarily alarming. Redevelopment agencies are created to incur debt. The proceeds are used to eliminate blight and further the redevelopment objectives of the project area which involves buying and selling land, generally at losses, providing incentives to promote development and make infrastructure improvements. Virtually all the things that redevelopment does with its debt proceeds does not create an asset that they can put on their balance sheet. We're required to put the debt on the balance sheet of the redevelopment agency but we're not allowed to recognize all of the tax increments that you're going to be collecting in the future that' s going to service that debt. We also issued clean audit reports with respect to our audit of the City's investment portfolio and performed additional procedures with respect to the investment portfolio. All of the compliance issues tested out ok. We also provided audit reports for the air pollution reduction fund, the transportation improvement authority, the appropriation limitation that's required by state law and the single audit report. All of those were performed without exception. An audit is performed on a selected test basis and is not a 100% examination took place during the fiscal year, therefore, the audit cannot be expected to catch every instance of fraud or every error that might be inherent in the financial statements. It's not focused on operational efficiency or what is the financial health of the City. Neither is the audit process designed to give an opinion on internal control. There were no material weaknesses that were noted in our study of your internal control system. There were no significant changes in accounting policies during the year. For the first time this year, certain infrastructure assets that have not previously been recorded were reported and adjustments were reflected for those. All financial statements reflect a certain amount of estimation. Probably, the biggest accounting estimates that are reflected in your financial statements are the infrastructure numbers. GASB has recognized that and acknowledged the legitimacy of reasonable methods for estimating the original value of the infrastructure. Probably the single biggest adjustment that we noted in the audit process that we passed on, was that the fair market value adjustment for investments of about a million dollars -the difference between cost and fair market value. That sounds like a lot of money but it's only a 1% fluctuation between fair market value and cost. Conrad stated they audit 40 cities at this time and of these 40 cities, only about 12 or 13 prepare their CAFR. The Finance Department was commended for their cooperation with the audit. Helen Bell mentioned her staffs goal this year was to produce a CAFR for the Redevelopment Agency, which they did. The Redevelopment Agency CAFR will also be submitted to both the GFOA & CSMFO awards programs.4. Status of 2002-03 Audit Plan - JeanneArehart. During the period since the last meeting in September, 4 more audits were completed. The review of internal controls over position control and the segregation of duties between personnel and payroll was performed by Conrad. A few minor items were found and in each case, we are already working on enhancing those controls and putting all the recommendations into place. On the deposit, trust and agency funds, the review was to look at the type of funds that were reported as a trust and agency fund and there are some recommendations on moving some of those funds from a trust and agency fund to the general fund. We have some deposits that we've had for years, so the recommendation is to pursue those and either refund them or book them as revenue and resolve them one way or another. In some cases rather than booking them as deposits, the recommendation is they be booked as revenue and expenditure because of the nature of the funds that are held there. The use of City vehicles was reviewed and there were a few findings which are being resolved. Weare updating that policy and coming into compliance. We had Diehl Evans do a review of inventory controls of the garage, warehouse and the water plant and they came up with a number of recommendations. Some were controls related to the actual physical inventory and some were controls on segregation of duties and the day to day process of accounting for the inventory. Other reviews in process are the controls in the recreation programs cash collection, review of employee evaluation tracking and the monitoring of the waste management contract compliance. All of those are nearing completion.Conrad & Associates left at 4:37 p.m. 5. Review RFP For Annual Financial Statement Audit Services - JeanneArehart. There were two items of discussion. First was the committee's role in the process and second was whether or not Conrad should be excluded from bidding. There are 34 vendors and Conrad is one of them. The City's policy is that we go to bid every 5 years. It doesn't really address whether or not the current auditor should get the RFP or whether we should get a new auditor. Most of the vendors on our list are names CSMFO has compiled of vendors used by government agencies over the past years.Most of the pool does government work which is a specialty. Moreland and KPMG have been excluded for the time being due to law suits we've had with them. As Conrad has been with us 7 years, do we exclude them? As this is an important issue to Conrad, they were hoping that this would be decided upon as soon as possible. It was suggested that if we were to select Conrad to continue as our auditors, we could set out criteria that the current partner could remain for another year or two and in the contract specify that after that the partners would change again so we could have a change mid-contract. Perhaps in any accepted contract, we should specify that the partners have to change every three years. The Audit Committee should start reviewing the RFP. We hope to distribute them the first week in January. There will also be a pre-proposal conference. David Piper was selected as the representative from the committee to review any proposals received. It was suggested that candidates could be interviewed, and then have another meeting about what was learned in the interviews. If the list is narrowed down to 3 or 4, the whole interview committee could be involved in a short interview. In that case, a follow- up meeting would probably not be necessary.Eric Woolery arrived.6. Public Comment There was no public comment.David Sundstrom mentioned that at the least meeting there was discussion about establishing an audit universe and asked what is happening with that. Jeanne Arehart mentioned that she is working on that and will have information by the next meeting.7. Adjournment - A motion was made to adjourn the meeting, which was seconded.Motion carried and David Sundstrom adjourned the meeting at 4:57 p. m. Approved: