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HomeMy WebLinkAboutRPT 3 AUDIT COMM RPT 02-06-89~. %~1 REPORTS ~ 2-6-89 Inter- Corn · J~U~Y 11, 1989 TO: FROM: SUBJECT: HONORABLE MAYOR AND MEMBERS OF 'THE CITY COUNCIL FRANK GREINKE, CHARIMAN, CITY OF TUSTIN AUDIT COMMITTEE ANNUAL REPORT OF THE AUDIT COMMITTEE AND SUBMITTAL OF THE CITY OF TUSTIN'S COMPREHENSIVE ANNUAL FINANCIAL REPORT DATED 6-30-88 . J The City of Tustin 'Audit Committee has completed'its first year of operation and has fulfilled our duties as outlined in Resolution 87-131. As it is to be expected, the Committee has spent time learning about the financial operations of the City. The experience of each of the .Committee's members enabled it to conduct a meaningful review of the Audit Report despite being a new Committee. To the best of our ability, within our understanding of the responsibilities for which we are charged, we hereby present to you the City of Tustin's Comprehensive Financial Report for the period ending June 30, 1988 and the Committee's Annual Report. Report The first two meetings were spent reviewing' the previous years Financial Reports and furnishing the Committee with the scope of the present .audit engagement and the procedures that the auditors intended using. Prior years Management Letters were reviewed and questions were asked regarding the current status of the auditors comments. Generally, the Committee found that the in'formation provided to it was acceptable and agreed with the procedures outlined for the current audit year. While ideas were expressed regarding expanding the scope of subsequent audits, they were withheld to be included in this report as suggestions to be acted on at the pleasure of the City Council. At our meeting on November 18, we were presented with the Draft Audit Report for 6-30-88 and the Draft Management Letter, dated November 17, 1988. These documents were reviewed by our Committee, and staff was requested to provide the Committee a reply to the auditors comments in time for a November 29 meeting. A copy of the Auditors Management Letter and the Finance Director's response are attached as part of this report. Page 2 Annual Report of the Audit Committee While there were no material weaknesses found by the auditors, they made seven suggestions that they felt wouid strengthen. internal controls presently in place. We have reviewed each Suggestion and staf~ responses extensively, and find that generally, we agree that these items are not material and find that staff's responses are appropriate. The only exception to this general agreement is regarding investments. As you are aware, Federal Savings and Loan Insurance Corp., (FSLIC), has denied insurance reimbursement on what appears to be two separate CD deposits that, in total, exceed the $100,000 maximum coverage provided by FSLIC. Regardless· of the materiality of this loss, we as the Audit Committee, feel very strongly that a re-occurance of this problem is to be avoided at all costs. We have spent a considerable amount of time reviewing this area, and believe that this situation does not presently exist in the balance of the City's investments. The City Attorney has informed us of his review of the situation, and the Audit Committee suggests that all avenues of recovery be pursued. An additional informational report dated December 15, 1988, is attached for your review. Recommendation Along with the presentation of the attached report, the Audit Committee has the following recommendations regarding future audits: 1. In accordance with the City's Cable T.V. Franchise Agreements, an audit of American Cable T.V. and Community Cable Television's records for compliance with the franchise fee provisions of the agreements. 2. We suggest that a fixed assets tagging system be initiated for all non-consumable items with a value greater than $499. Because the City does not have centralized purchasing, the cost effectiveness of an outside vender providing this service should be investigate'd during the upcoming budget process. 3. The scope of the audit should be expanded to include testing of purchases of $10,000 and above for compliance with the government code and the City's purchasing ordinance. Page 3 Annual Report of the Audit Committee 4. The City should review the new Occupational Safety and Health Adminis_tration' (OSHA) Hazard ComMunication Standard to determine whether or not the City is exempt. If the City is no-t exempt, steps should be taken to bring the City into compliance. 5. The Police Department's procedures for handling property and evidence should be reviewed and tested for compliance with existing legal requirements. 6. The Committee suggests that the present auditor's engagement be extended for one year with a new fee negotiated to include the suggestions contained herein. 7. Resolution 87-131, should be amended to provide for an alternate .Committee member, to be compensated for attending meetings, and that the Committee member may be selected that may not be a resident but has a business in town. T~e term of.two Committee members, Jerry Well and Walt Sullens, has expired and it would be appropriate for the City Council to make appointments filling the'se positions. This concludes the Committees Report. Respectfully submitted, FG:RAN:ls Attachment December 15, 1988 Audit'Committee · Additional Data on 2 C.D's Considerable controversy has been brewing over the timing of the release of the information of the apparent loss of $93,000 from Farmers Savings Bank financial failure. It is our belief from going over the records, that Management knew, or should have known about this in mid July. The Finance Director became aware on July 18th by reading it in the newspaper. He in fact, reacted very quickly to obtain the insurance from both certificates. The $98,000 certificate issued directly to the City of Tustin on April 26, 1988 (maturity date November 7, 1988), was .paid to the City shortly after August 18, 1988 by FSLIC in the amount of $98,392.00. No interest was paid from July 18th through August 18th. Everything on this transaction was handled -in a normal manner by a governmental agency. As to the matter of the first certificate from Farmers Savings Bank issued through Colson Services Corp. and Westcap Government Securities, Inc., on November 8, 1985 for $100,000.00, the circumstances were different. Because this Was issued "through a pool", it became necessary to apply for insurance through Colson Services. Colson notified us on July 26th (letter dated July 21, 1988). The City completed the necessary refund forms on August 1, 1988 and we received a refund of $1608.00 from Colson on September 2, 1988 (letter dated August 30, 1988) leaving the City of Tustin uninsured for $93,791.95. It is always easy to "2nd guess" any activity and come up with a better plan on things that go wrong. The City had several opportunities to re-evaluate the Farmers Savings Bank starting with a request to lower the face value of this certificate from $100,000 to $95,000 in a letter dated March 15th. This was accomplished by May 3, 1988 when Colson sent their check for $5033.73. However, on April 24, 1988, the City purchased the other certificate directly from Farmers, thus Page 2 Additional Data on 2 CD"s creating a net deposit ~of $193,000. During the time from March 15, and March 21, and April 26, and May 3, 1988, all kinds of bells and whistles were blowing that we were not insured, and .that there was trouble from the tone of Farmers Savings letter of March 15th. The action of placing the $98,500 C.D. April' 26, 1988 was contrary to the publication, "An Elected Officials Guide to Government Finance". On page 22, heading of "Safety First", it discussed "The financial responsibility of the governing body is to provide a framework for the safe investment of public funds. As with judiciary investments, the primary goal. of public investments is to obtain market rates of return while preserving capital." The Finance Director failed this basic charge in spite of considerable correspondence during March, April and May. On the matter of the timing of the release of'this information it is our belief that these type matters should be discussed with Council as soon as a potential loss is known. The date of the official notice of non-insurance was received on September 3, 1988. Council and perhaps the Audit 'Committee should have been notified on September 3, 1988. The Audit Committee had a meeting scheduled during September that staff postponed to November 18 because the Management letter would not be ready until then. The Audit Committee could have been notified at that meeting. This was not done. This gives the -strong appearance that this information 'was shielded from the Committee. It is also our opinion that there is confusion about the size Of the loss. The loss is really $93,000 plus legal fees and the use of that money in future years. In summary, the City of Tustin would not have had any loss if the second C.D. were' not purchased on April 26. The "Colson" C.D. would have been paid in full if the request for insurance was made prior to the second certificate. DIEHL, EV S (xT COMPANY CERTIFIED PUBLIC ACCOUI~qTANTS · PAIITN~II~ilP INCLUDING ~ANC'f CORJ"O~AllONS 1910 NORTH BUSH S~ SA~A ~A · CA~O~ ~94 PHO~ ~4) ~ F~ (714) ~18 November 17, 1988 DONALD E. CALLAIIAN. CPA L. PETER SCHERER, CPA RODNEY K. McDANIEL, CPA RALrtl H. WEINTRAUg. CPA MICHAEL R. LUDIN. CPA ROBERT R. WINE. CPA PHIUP H. HOLTI~.AMP, CPA THOMAS M. PERLOWSKL CPA City Council City of Tustin Tustin, California We have examined the financial statements of the City of Tustin for the year ended June 30, 1988 and have issued our report thereon dated August 25, 1988. As part of our examination, we made a study and evaluation of the City's system of internal accounting control to the extent we cons. idered necessary to evaluate the system as required by generally accepted auditing standards. The purpose of our study and evaluation was to determine the nature, timing, and extent of the auditing .procedures necessary for expressing an opinion on the City's financial statements. Our study and evaluation was more limited than would be necessary to express an opinion on the system of internal accounting control taken as a whole. The management of the City of Tustin is responsible for establishing and maintaining a system of internal accounting control. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of a system are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. Because of inherent limitations in any system of internal account'~ng control, errors or irregularities may neverthe, le~o occur and not be detected. Also, projection of any evaluation of the system to future periods is subject to the risk that procedures may become inadequate because, of changes in conditions or that the degree of compliance with the procedures may. deteriorate. Our study and evaluation made for the limited purpose described in the first paragraph would not necessarily disclose ali material weaknesses in the system. Accordingly, we do not express an opinion on the system of internal accounting control of the City of Tustin taken as a whole. Out' study and evaluation disclosed no condition that we believed to be a material weakness. However, during the course of our examination we noted the following matters, the correction of which should strengthen the existing system of internal accounting control. OTHER OFFICES AT: 2965 ROOSEVELT ST. CARLSBAD, CA 920(~2389 (619) 729-2343 120 Wl~ST WOODWARD AVE. ESCONDIDO, CA 92025-9990 (619) 741-3141 City Counc i 1 City of Tustin November 17, 1988 Page 2 , CASH DISBURSEMENTS We noce'd an instance in which a check for ~paymenC for services was sent to a department head to mail to the vendor. The request for payment sene'rated from an intercommunication memo from the department head, and invoices were nsc attached to support the request. We recommend that payments be made .only after reviewing actual invoices from vendors.. In addition, all checks should be mailed by the Finance Department, PAY ROLL The City has a policy which requires that all payroll changes be made through the personnel department. These payroll changes are not always documented in the personnel department. We recommend that care be taken Co assure thaC all payroll changes are properly documented. INVES~tENTS State law requires the City treasurer to enter a contract for deposits of moneys with each bank ascertaining thaC the bank has guaranteed municipal funds by pledging government securities with a value of 110% of the City's depos£C. For certain small banks, the City treasurer has nsc entered into Chis contract. We recommend Chat the City Treasurer enter into a contract with all banks in which more Chart $100,000 is invested, In 6ne instance the security limit was overstepped due to investments in the same institution bein$ made by both the Treasurer and a broker, resulting in a loss ~f over $90,000. Care should be taken Co prevent such instances from occ,urrin$. COMPUTER OPERATIONS Access to computer operations and cash-custody responsibilities cannot be adequately sesresated, due to the limited size of the City's accountin$ staff. Ideally, personnel having access to computers should nsc have cash-custody re sports ib i 1 i C ies. I~ATER' ENTERPRISE FIXED ASSETS We noted that contributions of water system fixed assets by developers had nsc been recorded. The water department should maintain records for the value and descriptions of contributed assets so that they may be properly recorded. , PURCHASING Purchasing duties are not adequately segregated. Department heads issue purchase orders, receive merchaudise and approve payment of vouchers. Ideally, the duties of issuing purchase' orders and receiving merchandise should be separated. City Council City of Tustin November 17, 1988 P~ge 3 This report is in~ended solely for the use of manasemenC and should noc be used for any o~her purpose. If we may .be of any assistance in clarifying or implemenCin$ any of the above items please do noC hesitate Co call us. .. ~0: CIT~2~UDIT CO~ITTEE FROM: EONS? NAULT, DIRECTOR OF FINANCE %- SUBJECT: RESPONSE TO AUDITOR'S MANAGEMENT LETTER. As part of the annual audit process, our external auditors test the internal controls of the City's Finance Department. First, they determine what internal controls are in place, and then they test for any material weaknesses In the system of internal controls. The resulting Management Letter will either disclose material weaknesses or make suggestions that are intended to strengthen existing systems. · While no material weaknesses were found, the following 'suggestions were made. I've responded with a proposed corrective action or other comment following each suggestion. CASH DISBURSEMENTS ,,, We noted an instance in which a check for payment for services was sent to a Department Head to mail to the vendor. The request for payment generated from an intercommunication memo from the Department Head, and invoices, were not attached to support the request. We recommend that payments be made only after reviewing actual invoices from vendors. In addition, all checks should be mailed by the Finance Department. RESPONSE: , This particular item was a deposit made in the Tustin Ranch area for the extension/moving of the underground utilities. They estimate the cost and require us to pay upfront, to be followed by an "invoice" at the completion of the project. This is not a typical way of doing business and is not an ongoing problem. Once we've completed the utility work in East Tustin these types of deposits will no longer be needed. We will reinforce our policy of "no invoice, no check" with all internal staff.. PAYROLL The City has a policy which requires that all payroll changes be made through the Personnel Department. These' payroll changes are not always documented in the Personnel Department. We recommend thaC care be taken to assure that all payroll changes are properly documented. Page 2 November 22, 1988 RESPONSE: · We had to temporarily ~uspend ah internal payroll audit procedure due to personnel turnover. We will reinstate this prOcedure. INVESTMENTS State law requires the City Treasurer to enter a' contract for deposits of moneys with each bank ascertaining that the bank has guaranteed Municipal Funds by pledging government securities with a value of 110% of the City's deposit. For certain small banks, the City Treasurer has not entered into this contract. We recommend that the City Treasurer enter into a contract with all banks in which more than $100,000 is invested. In one instance, the security limit was overstepped due to investments in the same institution being made by both the Treasurer and a broker, resulting in a loss of over $90,000. Care should be taken to prevent such instances from occurring. RESPONSE: Whenever investments are made, I follow up on deposit contracts and' security wavers. The banks have the contracts and we have to rely on them to send them to. us. In some cases several requests are made with little or no response. will continue to' follow up on those banks who do not have a deposit contract on file. The Department Investment Report Software has been modified to provide an alphabetical listing of all investments that will highlight duplicity. Internal staff that reconciles the investments monthly have been d~rected to review the investment schedule for duplicity. Also, new software-has been acquired that will aid in tracking C.'D's. -? COMPUTER OPERATIONS Access to computer operations and cash-custody' responsibilities cannot be adequately segregated, due to the limited size of the City's accounting staff. Ideally, personnel having access to computers should not have cash-custody responsibilities. RESPONSE: . We do not have a significant volume of cash customers nor mail receipts that can Justify this level of segregation. Page 3' Novembe~ 22, 1988 WATER-ENTERPRISE FIXED ASSETS We noted that contributions of water system fixed assets by developers had not been recorded. The Water Department should maintain records for the value and descriptions of contributed assets so that they may be properly recorded. RESPONSE: We have been aware of this proplem and concerned with the long term impact of the loss of this information. Public Works has budgeted a new engineering position that will provide the expertise to keep track of these assets and provide annual updates. PURCHASING Purchasing duties are not adequately segregated. Department Heads issue purchase orders, receive merchandise -and approve payment of vouchers. Ideally, the duties of .issuing purchase orders and receiving merchandise should be separated. RESPONSE: · The only practical response to this suggestion is Centralized Purchasing. For a ~ity our size, I feel that Centralized Purchasing is not cost effective. In todays purchasing environment, competition among vendors is such that they can provide iow bids and warehousing services. At th~s time we have no indication that the purchasing system is being abused. R~ctfully sub~itted, R~ald A. Nault Director of Finance RAN:is