HomeMy WebLinkAbout12-19-2006 Audit Committee MinutesMinutes
AUDIT COMMITTEE MEETING
City of Orange - Weimer Room Tuesday,
December 19, 2006 3:00 p.m.OR \
SCO.o .;17./7 ATTENDEES:
AUDIT
COMMITTEE Voting
Members)Present
David
E. Sundstrom CPA, Chair John
W. Sibley, City Manager Jeanne
Arehart CPA, Internal Audit Mgr.Dwight
Nakata, CPA David
Piper, CPA Absent
Eric
Woolery, CPA CITY
STAFF Richard
Jacobs, Finance Director David
Christian, CPA, Assistant Finance Director Pascal
Saghbini, Accounting Manager OTHER
Carolyn
Cavecche, Mayor EXTERNAL
AUDITORS Ken
AI-Imam, CPA, Partner - MayerHoffman McCann P.C.1.
Call to Order: Chairman David Sundstrom called the meeting to order at 3: 1 0 p.m.2.
Approval of Minutes of Julv 3 L 2006: Minutes approved as read.3.
Presentation of 2005-06 Audited Financial Statements: Ken AI-Imam reported
the completion of the audit of the City's accounting records and theComprehensiveAnnualFinancialReport (CAFR). City records are in very good order, with
excellent support for its account balances. Commented that of the 40 cities that he auditsinSouthernCalifornia, most do not prepare their CAFR in-house, especially
an award-winning one. It was also commendable that the City also prepares the CAFR
for its Redevelopment Agency. The City did a fine job using thenewaccountingstandard-GASB Statement No. 44. It revamped the statistical schedulesinthebackofthereport, and is generally difficult to implement because some dataishardtoobtain, especially for
a Redevelopment Agency.A new auditing standard SAS1l2 will go into effect for periods ending 12/31/06 or later, and will be applicable to next year's audit. According to the authorofSAS112,head of the Technical Division of the AICP A, an audit risk alert iscomingoutthisweek, which will make it clear that it is not their intent to forceentitiestopreparetheirownfinancialreports. The auditor, however, does need to assesstheabilityoftheFinanceDepartmenttotakeownershipandresponsibilityfor
the financial data.Regarding the CAFR, page 17, net assets have increased from theprioryearand,most notably, unrestricted net assets have increased from $8.3 million in '
05
million in '06. Page 18 shows a change in net assets, which means that the Citygeneratedrevenuesexceedingexpensesof $22 million-a good marker of the City's financial condition. It shows that the City had sufficient revenues to cover the cost
of providing government services, and actually generated a
surplus.Sundstrom asked if this analytical data-such as cost adjusted for inflationand/or decreasesinpopulation--{;ould be used on a broader basis to determine thecity's financial health, one year versus another. Although this element has notbeenpulledintoGASB44, AI-Imam can see it coming in the future, as this kindofdataanalysiswould
be extremely valuable.Referring to page 22, the General Fund is healthy. Total assets are $39 million; total liabilities $2.7 million. The total fund balance is $36 million, and
a number of reserves have been established. There is $17 milliondesignatedforcontingenciesand $16 million for
undesignated fund balance.On page 26, the General Fund revenues of $84 million exceededexpendituresof $79 million, creating surplus revenue of $4.8 million. Even afteraccountingfortransfersout, the city was still able to increase the fund balance of $
2.9 million.The audit process requires that they look for errors andmisstatementsthataresignificanttothefinancialstatementtakenasawhole, but doesn'teliminatetheriskofmaterialmisstatementbecausetheauditorscannotlookateveryfinancialtransaction, which would be audit cost prohibitive. All auditingprocedureshavebeenperformedasrequiredbythestandardsandhavebeenabletoissueanopinionwithoutqualificationthatthefinancialstatementsarefairlystated. AI-Imam was pleased to report that there were no disagreements withmanagementordifficulties
in performing the audit.The Audit Committee has a responsibility to inform the external
auditor if there are concerns or information relevant to the objectives of the audit
process, i.e., fraud,errors, or misstatements that could potentially be materialtothefinancialstatement.The committee must hold management accountable for theproperdispositionofauditfindings. Last year, there were two policy-oriented auditfindings. One had to do with implementing a fraud policy, which hasnowbeenfinished. The other recommendation was to have a disaster contingencyplan,
which is currently being developed.As a by-product of the auditprocess, they give recommendations to management.
This year, four areas were identified.A. Controls over who has the abilitv to access dataintheCitv's svstem. They noticed that our InformationSystemsDepartmenthadreviewedthatsameobjective, and the Auditor identifiedseveralformeremployeesthatstillhadaccesstooursystem. The Auditor recommendssupportingthisstudysothatourpolicyisenforced. Current policy statesthatwhenanemployeehasseparatedservice, Personnel sends aterminationnoticeconfirmationtotheInformationSystemsDepartmentsotheycanmaketheappropriatechangesinsystemaccess.This policy
needs to be more faithfully executed.B. A 36% increase in overtime in the PoliceDepartmentfromthepriorfiscalvear.Although this is a natural consequence of
running
police department, they suggest that the City better monitor and control the costofovertime. Every month, the PD should examine its levels of overtime andevaluatewhetherornottherearetrendsofovertimeincrease. If an increase, thereshouldbediscussionwiththesupervisorsresponsibleforcreatingthatovertimeto
see if there were adequate reasons, or if there should be some counseling with
respect to alternative methods ofreacting to situations without having to translatethatintoovertime. There should be monitoring during the year of the overtimesituationatthelinelevelsothattherecanbeappropriatetraining, counseling, andmonitoringofthesituation. A suggestion to the PD might be to reevaluatestaffinglevels.
C. In the city audit process, there are a number of legal compliance issues that arerequiredrelatingtotheRedevelopmentAgency. One is whether the city isgettingalltheinformationthattheRedevelopmentAgencyobtainedfromownersofhousingunitsthathavebeentheproductofRedevelopmentAgencyactivityorforwhichlow/mod funds have been expended to create those housing units. StatelawrequiresthattheAgencyreceivesomedatafromthesepropertyownerstoensurethattheycontinuetobeusedforlow/mod persons. Although certaincertificationswerebeingreceivedbytheAgencyfromthepropertyowners, notallofthedatastipulatedbyStatelawhasbeenreceived. There are no materialweaknesses; these are suggestions for improvement.D. Recommend that the city consider having a written policies and procedures withrespecttoaccountingpracticesintheFinanceDepartment. Benefits would bethatthecitycouldbetterensurethatfunctionsareexecutedinaccordancewithmanagement's directive; it provides a better opportunity for training; it helps intheeventofunanticipatedturnoverwhenpeopleleavethecitysuddenlyandthereisdifficultyintransitioningoverlappingthenewpersonnelandoldpersonnel.E. Status report of audit of Transportation System Improvement Authority (TSIA),in which Orange is partnered with Santa Ana. This 05-06 audit is still inprocess,however, there are a number of findings under evaluation, mainly having todowiththeCityofSantaAna's participation in the Authority. Santa Ana hasnotbeenimmediatelyremittingtotheCityofOrange, which has the TSIAtreasuryresponsibility (mitigation fee funds that are collected from the City of SantaAna).Santa Ana has held onto those funds, paid what may be appropriatelyeligibleexpendituresandafteraconsiderableperiodoftime-a numberofyears-remitted the net to the treasurer for the Authority. This is in violationoftheAuthorityagreement, which provides that the CFO for the City ofOrangehavecustodyofallmoniesfortheAuthority, be the depository, the custodian, and be responsible for all disbursements of the Authority. This matter willbeaddressedintheirmanagementletterfortheTSIA. It also requires that weincursomeunanticipatedadditionalauditcoststogooutonsiteattheCityofSantaAnalocation. All accounting records are maintained at the City ofOrange, and maintained by the treasurer, which should be sufficient. Duringthispresentlyongoingaudit, they have found no unallowable expenditures in theirtesting, but they did find some expenditures incurred by Santa Ana that they arecurrentlyintheprocessofreviewing, for which there was insufficient documentationforthemtodrawaconclusionastofullacceptability. The auditors areinvestigatingbackseveralyearsandwillreportbackonthefinaloutcome. It was also notedthattheJPAissupposedtomeetonceayear; however, sometimes meetings havebeenasmuchas18monthsapart. Santa Ana spent about $400-500,000lastyear, and Orange spent about $200,000 for this mile-
square
Status of 2006-07 Audit Plan: Jeanne Arehart. The audit report of
Community Developments collection of fees on behalf of other departments and agencies,
was submitted at the July 2006 Audit Committee meeting. The Department's responses
to the audit findings and recommendations were not due from the department until
after that meeting. Their response has since been received and is included with this
agenda packet. In their response, Community Development has agreed with all
the recommendations that will reinforce their calculation of the fees. They are putting
in double check processes and working more closely with the departments, getting
more things in writing, etc., to enhance that
process.A review of the City's compliance with our Quimby ordinance was
completed.Findings showed that the City should have designated a separate fund specifically
for Quimby, however the City had co-mingled them with some
non-Quimby funds.Backtracking efforts are being made to separate the funds, and
henceforth will keep monies in the proper funds. She also looked at some
ordinance requirements that weren't understood and carried out regarding the processes
between the Finance Department, City Manager's office, and so forth. The City Attorney'
s office is revising the ordinance-not necessarily reflecting any
problems with complying with the intent of Quimby, but more administrative in nature. One of the
areas is to make sure that the city spends the fees that we collect in a certain
area within that specific area. Community Services Department has worked out
a relatively detailed process to track this, working with the City Attorney's office, to
make sure that everyone agrees that it complies with the intent
of the Quimby ordinance.Thirdly, she looked at the Economic Development process
for verifying that people with whom we have agreements are actually complying
with the agreements. The department has a good process, particularly on
developer agreements. There were only a few instances, particularly with required
insurance-related issues where there was non-compliance. The city requires certain
insurances, and that the Agency be named as additional insured. In some cases, we
did not have the proper confirmation that they had met those insurances
requirements. Regarding the housing side, the Housing Manager keeps track of a lot of information in
her own head, so Jeanne's recommendation was to have this well-
documented. They agreed, and are in the process of beefing it
up so that compliance verifications are done.Fourth, she reviewed the calculation and collection
of building permit fees and with a few minor exceptions, the fees are
being calculated correctly. One issue, however, is that building permit fees and the plan check
fees are based on building valuation, but the fee ordinance doesn't say how
to determine the valuation. The Building official currently determines the valuation. She recommends
that the city be more detailed on how we determine that valuation. Secondly, if that
is the best way to calculate the fees-should it be based on valuation at all. As long
as we are certain that we're not charging more than it costs to provide
the service, then the process is fine. She recommends that
their staff do some analysis to determine this.Audits currently underway: The library
requested that she look at their policies and procedures on renting out meetingrooms. In doing so, Jeanne looked at citywide policies regarding other meeting rooms. The library will contain a big new meeting room that has a potential to be used formanymorethingsthanbefore. She's working mainly with the library staff, and
other departments to review our policy and make recommendations
on
A review of Waste Management of Orange compliance with their agreement-
the city has a contract with Diehl Evans because there are some specific areas that
are more technical in nature, and they have done this for us and other cities
before.She worked with Public Works on reviewing Waste Management's annual request
for a rate increase, and determined that their rate increase request was proper, but
there was an issue on how they calculate their disposal costs. After the first ofthe year,
she will be working with them because they have several different types of
disposal-landfill, green waste, concrete, etc. They take each to a different place at
different cost for each, but they are calculating it based on one cost. It's not anticipated
that there will be a major difference, but we want to make
sure.Reviewing compliance with lease agreements related to cell towers located on
city properties. We have agreements that allow for putting cell towers on city
property and we get certain revenues. We want to make sure that we're getting those
revenues as agreed. The city has limited documentation on how many towers are on
city property, so this audit will provide that answer. Finance is diligently working
to make sure that the cell towers have a business license, whether they're located on
city property or
not.5. Annual Writeoff of Receivables: Jeanne Arehart. The city's policy requires
that write-offs be broken into the utility bills versus general accounts
receivable. Because ofthe nature of the utility bills and the ability to turn the water if customers don'
t pay,the amount of write-off is quite low-less than.l %, or $16,844. It
is more difficult to arrive at a percentage for accounts receivables, but the
total write-offs for accounts that exceed $2,000 were $15, 642. Those under $2,000
totaled $28,974. Total is 45,000 worth of accounts receivables write-offs.
Write-offs are only made after the city has exhausted
its resources-collection agency, etc. Customers receive three notices, and then they go to collection.
Most have been in collection for
months prior to our actually writing them off.
6. Public Comment: There was no public comment.7. Adjournment: The
meeting