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HomeMy WebLinkAbout05-05-1999 City Council Agenda 7BSARATOGA CITY COUNCIL -, CUTIVE SUMMARY NO. AGENDA ITEM EXE MEETING DATE: May 5,1999 CITY MANAGER: ' 1 ORIGINATING DEPT: Administrative Services DEPT. HEAD: ~ SUBJECT: Response to Independent Auditor's Memorandum on Internal Control Structure for Fiscal Year Ended June 30,1998 RECOMMENDED MOTIONS}: Accept and file this report, and direct staff to implement recommended procedures. REPORT SUMMARY: Each year, as part of the audit process, the independent Certified Public Accounting firm which performs the City's annual audit, in this case Maze and Associates, issues to their clients a Memorandum on Internal Control Structure, also known as the Management Letter Comments. The purpose of this letter is to provide the City Council and management staff with recommendations for improving upon the internal control system and fiscal management. This procedure is an important aspect of the annual audit process, and is a meaningful financial management tool. This yeaz, the letter contains six recommendations, along with a general word of caution which Maze and Associates is issuing to all of their clients. Below is summarized the auditor's comments, along with stafFs response. The Finance Commission reviewed the auditor's comments and staff's draft responses at their April 12 meeting, and the Commission's comments have been incorporated into this report. 1. The City should provide additional training to staff to the extent needed to effectively use and operate the information systems. Response -The City believes in a well trained staff, The implementation of the new financial system, coupled with high turnover in the Administrative Services Department and an extremely heavy workload, has left a training shortfall in certain areas. One training area of concern is in the technical aspects of the financial system administration. The plan is to arrange for the City's Technology Coordinator to attend a series of training classes presented by either or both HTE and IBM during the upcoming year. Funds have been programmed in the proposed fiscal year 1999-2000 MIS budget to do this. Personnel in the Finance Division have participated in various forms of training on the HTE system over the past two years, and are fairly comfortable and pleased with the system. Funds have been recommended in the 1999-2000 Financial Management budget to further staffs knowledge on an ongoing basis. A problem which the City faces is that training opportunities specific to the HTE system are often logistically difficult to arrange. HTE offers considerable training, but only at their Florida campus, which is costly and time consuming. The City does make use of these training services when other alternatives are not available. Several times, we have arranged for expert users from other California cities to come to Saratoga to train staff on specific subjects, with very positive results. Staff has recently arranged for a three hour training session over the telephone with an HTE trainer on the Fixed Asset module. Additionally, the City actively participates in HTE's Western Region Users' Group which meets annually for a two day conference. These alternative methods have provided some very good training for our staff, and are efficient uses of our resources. We intend to continue using these types of training and networking opportunities. 2. Bank reconciliations should be brought and kept current. Response -The City has three bank accounts which need monthly reconciliation: general checking, payroll checking, and savings. Staff has brought the bank reconciliationson all three accounts up to date, and has trained staff on the reconciliationprocess to keep them current. 3. Housing Assistance and Rehabilitation Loan (HCDA) reconciliations should be balanced monthly, liens should be documented for new loans, and non-current loans should be followed-up. Response -With the cutback in staffing two years ago and the recent high turnover, the process of performing the very detailed tracking of HCDA loans has suffered. Staff has been in discussions with Santa Clara County to take over the administration of this program, which would include the issuance and collection of HCDA loans. Prior to this taking place, however, staff must update the City's loan records, and an agreement with the County needs to be executed. These tasks will be completed by June 30,1999. 4. Developer deposits, some of which date back to 1982, should be researched and refunded where appropriate. Also, a central location should be created and maintained for documentation of deposits payable. Response -The City has a detailed record of approximately 200 such deposits which ties to the amount indicated in the audit. Some of them are quite old, and need to be refunded. The City Attorney has researched the process for disposing of unclaimed monetary deposits in the City's deposit fund. The next steps are to identify which refunds are able to be released, contact those individuals, and release the funds to the appropriate parties. Staff has begun this process, and hopes to conclude it by June 30, 1999. During this process, staff will also compile a more comprehensive and centralized documentation system. • MgmtLetter .. 2 5. Fixed assets records should be updated through the performance of a physical inventory and ongoing records maintenance. Response -The City's fixed asset records are over seven years old and staff agrees that they should be updated. The taking of a physical inventory after this many years requires a well organized effort involving all departments, as well as a significant amount of research to document older assets. The plan is to perform the physical inventory during next fiscal year, either in the fall or early spring. $17,500 has been recommended in the fiscal year 1999-2000 budget to perform the physical inventory. On an ongoing basis, about .2 FTE will need to be allocated to maintain the fixed asset records, as that is not a function which is currently performed. The staffing plan proposed in the FY 1999-2000 draft budget does this. 6. Supporting documentation should be attached to each receipt, and the accounts should be recorded on the receipt. Response -Last September, the City's receipt form was revised to more accurately reflect the types of payments which the City collects, along with their respective accounting codes. This addresses the auditor's primary concern raised. Staff currently attaches all documentation to the receipt, except for photocopies of checks, due to time constraints. Conversations with Maze and Associates indicated that attaching check copies is not a priority. Debt Covenant Management The letter states that there has been an increase in compliance problems noticed at other municipalities due to errors caused by trustees overseeing municipal debt issues. The City does use trustees to administer its municipal debt, and has therefore followed the auditor's _ recommendation in assigning the Accounting Supervisor to review debt compliance to ensure the - City maintains full compliance with its debt covenants. FISCAL IMPACTS: To address training (Comment 1), a total of $13,000 has been included in the Administrative Services Department program budgets for ongoing technical training. There are no direct fiscal costs involved with researching and refunding developer deposits (Comment 4), although the City may realize revenues if the original depositor can not be located. In these cases, the deposit will escheat to the City's General fund. The amount of the escheatment is unknown at this time. The estimated cost of the physical inventory (Comment 5) needed to bring the fixed asset records current is estimated at $17,500. The cost of a .2 FTE to maintain the records is about $7,500 annually. These are both included in the proposed budget for FY 1999-2000. There are no direct fiscal impacts of performing the bank reconciliations (Comment 2), the HCDA loan reconciliations (Comment 3), cash receipts documentation (Comment 6), or debt covenant management, although there could be significant impacts of not performing these functions, should errors arise which go undetected. MgmtLetter 3 ADVERTISING, NOTICING AND PUBLIC CONTACT: Nothing additional. CONSEQUENCES OF NOT ACTING ON RECOMMENDED MOTION(S): • Management letter comments are intended as a tool to assist the City in improving the it's system of internal controls and financial management. The auditors aze experts in this field, and generally their recommendations add valuable policy and procedural changes to the current system. Therefore, it is wise for the City to seriously consider the auditor's comments. If a recommendation is not followed, and the problem is perceived by the auditors as being serious enough to compromise the City's system of internal controls, the auditors could issue a qualified audit opinion, rather than the highly desirable unqualified opinion which the City now receives. The consequences of not acting on the auditor's specific recommendations aze detailed below: 1. Training -Lack of adequate training could reduce efficiency and prevent staff from utilizing the financial system to its fullest. 2. Bank reconciliations -Not performing bank reconciliations is a serious problem. Bank errors or fraudulent transactions would go undetected until the reconciliation is performed. 3. HCDA loan reconciliations -Regular reconciliations of these loans will immediately disclose any delinquencies or changes in loan administration such as payoffs. 4. Developer deposits -The consequences of not keeping developer deposits current and well documented is that much more effort is required to bring them up to date, particularly in _ locating the original depositor. 5. Fixed assets - A fixed asset system helps safeguard the City's assets from theft or loss. It also allows the City to accurately reflect on its books the cost of the City's assets. Fixed assets is an issue for which auditors have issued qualified reports to their clients when the problem was not dealt with adequately. 6. Cash receipts documentation - If cash receipts aze not properly documented with supporting records, research is much more difficult or even impossible, possibly increasing the likelihood of mistakes. Debt covenant management -The consequences of not monitoring debt compliance could result in the City missing a debt service payment if the trustee fails to notify the City of the payment. FOLLOW UP ACTIONS: Accept and file the report. Staff to implement recommended procedures. ATTACHMENTS: Independent Auditors Memorandum on Internal Control Structure for year ended June 30, 1998. MgmtLetter ,. ~ + AZE & ASSOCIATES ACCOUNTANCY CORPORATION December 17,1998 To the City Council of the City of Saratoga 1670 Riviera Avenue -Suite 100 Walnut Creek, California 94596 (9Z5) 930-090? • FAX (925) 930-0135 Under generally accepted auditing standards, auditors are encouraged to report various matters concerning an entity's internal control structure noted during an audit, and are required to report certain of those matters. Matters that arc required to be reported are significant deficiencies in the design or the operation of the internal control structure that, in the auditor's judgment, could adversely affect the organization's ability to record, process, siurinari~e and report financial data consistent with the assertions of management in the financial statements. As part of the interim phase of our audit of the financial statements of the City of Saratoga for the year ended June 30, 1998, we considered the City's internal control structure in determining the scope of our audit procedures for the purpose of rendering an opinion on the financial statements. While our purpose was not to provide assurances on the internal control structure, certain matters came to our attention that we want to report to you. These matters, along with our recommendations, arc described in the accompanying memorandum. A material weakness is a significant deficiency in which the design or operation of one or more of the internal control structure elements does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be significant deficiencies and, accordingly, would not necessarily disclose all significant deficiencies that are also considered to be material weaknesses as defined above. However, none of the significant deficiencies described in the accompanying memorandum is believed to be a material weakness. The accompanying memorandum on internal control structure is intended solely for the use of management and the City Council. This restriction is not intended to limit the distribution of this letter and the accompanying memorandum which, upon acceptance by the City Council, are a matter of public record. To the extent that the City Council .intends to rely upon this letter and the accompanying memorandum, such reliance should take into account the limited basis on which our recommendations were developed, as described above, and the limitations inherent in the internal control structim. In addition, the City Council should understand that the criteria used by us in considering the internal control structure could differ significantly from the criteria the City Council may be using for its purpose. We wish to express our appreciation for the courtesies and cooperation extended to our representatives during the course of their work. We would be pleased to discuss these recommendations in greater detail or otherwise assist in their implementation. Very truly yours, °m~.p~„u,~, A Professional Cmm~raNnn CITY OF SARATOGA MEMORANDUM ON INTERNAL CONTROL STRUCTItRE Administrative Services Department Staffing During fiscal 1998 the Administrative Services Departriient's rebuilding and reorganization was still in progress. Under the circumstances, the amtual closing and audit were completed relatively smoothly. However, the closing and issuance of the financial statements were delayed due to the lack of adequate full time staff in the Administrative Services DeparOment. Since year end, the Department has added additional staff and in now one person short of its staffing goals. We encourage the Administrative Services Department to continue to stabilize staffing and assign specific duties to improve the internal control environment and timeliness of information. Some specific areas that should be addressed include: • All Administrative Services staff need a thorough knowledge aad understanding of the Administrative Services information systems. The City should provide additional braining to the Administrative Services staff to the extent they need to effectively use and operate the information systems. This will be extremely important this year as the City addresses Year 2000 issues. • Bank reconciliations should be brought and kept current. Reconciliations should be completed within 60 days of month end and there should be no unreconciled differences. • Housing Assistance and Rehabilitation Loans should receive attention. Monthly loan reconciliations should be balanced to loan payment records to ensure all payments are received. Administrative Services should obtain a copy of recorded loan documents far all new loans to ensure a lien has been placed on each borrower's property. There also should be a procedure for following up on non- current loans. • Deposits from developers and others should be researched and refunded, where appropriate. Some = outstanding balances date back as far as 1982 and not every deposit is supported by originating documentation. These balances should be analyzed and supporting documentation retrieved. Balances should be refunded or written off' where appropriate. We also recommend that a central location be created and maintained for documentation of deposits payable. • Fixed assets records are out of date and should be updated. We recommend performing a physical inventory which should be used to update the City's detail fixed assets records. • An area we believe needs to be addressed concerns support retained for cash receipts which should be attached to each receipt. These items include, but are not limited to copy of the check, cover letters or other supporting records. Also the account to be credited should be recorded on the receipt. Debt Covenant Management Over the past several years there have been numerous changes of Trustees overseeing municipal debt issues and compliance with associated covenants. While our audit did not reveal compliance exceptions with the City's debt covenants, we have secs an increase in compliance problems with other municipalities due to trustee errors and we recommend the City assign an employee to review debt compliance to ensure the City maintains compliance with its debt covenants.