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HomeMy WebLinkAbout1997/1998 Review of Financial Audit for Fiscal Year 1997/199 MEETING ASSI' NCE NOTICE - AMERICANS' WITH' 3ABILITIES ACT In accordance with the America._.rith Disabilities Act the following services are;-.-aable to members of our community who require special assistance to participate in City Council and Redevelopment Agency meetings. If you require, American sign language interpreters, a reader during the meeting, and/or large print agendas, to make arrangements, please call: Office of the City Clerk(714)536-5227. To make arrangements for an assisted listening system (ALD)for the hearing impaired, please call: Building Maintenance Department(714)536-5534. 72 hours prior notification will enable the city to make reasonable arrangements to ensure accessibility to a meeting. ACTION AGENDA CITY COUNCIUREDEVELOPMENT AGENCY CITY OF HUNTINGTON BEACH TUESDAY, JULY 6, 1999 5:00 P.M. - Room B-8 7:00 P.M. - Council Chamber Civic Center, 2000 Main Street Huntington Beach, California 92648 5:00 P.M. - Room B-8 Call City Council/Redevelopment Agency Meeting To Order Roll Call Julien, Bauer, Garofalo, Green, Dettloff, Harman, Sullivan [Present — (Garofalo arrived during closed session)] Public Comments Regarding Study Session & Closed Session Agenda Items [Speaker questioned auditor's report relative to sale of surplus property. Staff report was presented.] /ems- /99s (City Council/ development Agency) Study Session — Review of Financial Audit for Fiscal Year 1-9 9/-2000 (300.20) —Communication from Diehl, Evans & Company, LLP transmitting a report relative to the audit of the financial statements of the City for the year ended September 30, 1998. Staff report titled Responses To Management Letter From Diehl, Evans and Company, Fiscal Year 1997198 included. [Study session held.] Call Closed Session Of City Council/Redevelopment Agency Recommended Action: Motion to recess to Closed Session on the following items. [Approved 7-0] (City Council) Closed Session - City Council pursuant to Government Code Section 54957.6 to meet with its designated representatives William Osness, Personnel Director, and Daniel Cassidy, Esquire, Liebert, Cassidy and Frierson, regarding labor relations matters - meet and confer with the following employee organizations: MSOA, POA, PMA, MEA, MEO, HBFA and SCLEA. (120.80) COMPUTER INTERNET ACCESS TO CITY COUNCIUREDEVELOPMENT AGENCY AGENDAS 1S AVAILABLE PRIOR TO CITY COUNCIL MEETINGS http://www.ci.huntington-beach.ca.us Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997/98 .. .�+. ;�"�,G -��Yr- � .�.� _'» .� _ �.� ��'�'''n�� -`gam' "`,x. `�`�" �' .✓-..�2?�� r;--•. ✓ Record Storage and Retrieval Certain accounting records were not easily located. ✓ Response. Staff concurs, new optical imaging system and business software will solve this issue. C7D� ozrt! cvc, O n8r zorv;rtt => Z ITtYtI �g 'a'a.aG ix �« Rt o „ s �m IC sA IT Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997/98 .,.• .'_ «z :r._ .., :,. '- ':_Pr .;_ ,., F '^a ' ", , ''•"'+.-amsrv" ,Garg:,a" `T=.. ' ' _� t 's;� . ✓ Cash and Investments (Bank Accounts One bank account was not recorded on the 1 City's General Ledger. ✓ Response Staff concurs, account has been closed. Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997/98 ' r ..: i ='j' � °.`-rt''63. +x ...s°.`'�� • =s Rs-'` s""s -- _`xit� .•£' =�' ✓ Cash and Investments (Stale Dated Checks) The City has several checks that have been outstandingfor more than one year. y ✓ Response Staff has refined its escheat policy and is developing an implementation plan. Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997/98 .... ,..::• .._ ;tea.. _�..� __ �. ._:. �, � - ,�, ;.ca -" '�`'� �r _��-� �� if Accounts Receivable Reconciliation's The City's accounts receivable system does not interface well with the City's general ledger. ✓ Response The new business software will be fully integrated and operate from one data base. Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997/98 W a i-z M m Insurance Reserve The City should increase funding for insurance reserves Res onse Staff concurs - the City has developed a plan to augment these funds beginning with the FY 1999/2000 budget. Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997/98 -w aka xua°a' � saa+- Fa.kc mom.,. vf . Service Organizations n The City contracts with a management company for the Emerald Cove Apartment Complex and has not audited the financial records of the company Response Concur - staff will proceed with an audit as time permits. DIEHL, EVANS & COMPANY, LLP CERTIFIED PUBLIC ACCOUNTANTS& CONSULTANTS •RODNEY K.MCDANIEL CPA MICHAEL R.LUDIN.CPA A PARTNERSHIP INCLUDING ACCOUNTANCY CORPORATIONS - CRAIG W. SPRAKER.CPA NITIN P.PATEL CPA 2121 ALTON PARKWAY,SUITE 100 •PHILIP H.HOLTKAMP.CPA •THOMAS M.PERLOWSKI.CPA IRVINE,CALIFORNIA 92606-4906 •HARVEY1.SCHROEDER.CPA (949)399-0600 • FAX(949)399-0610 A PROFESSIONAL CO"OkkTION February 8, 1999 RECEIVED FROM Nce h`' tl City Council AND MADE A PART OF THE RECORDAJTH9 COUNCIL MLETINQ OF -7 ` City of Huntington Beach OFFICE OF THE CITY CLERK Huntington Beach, California CONNIE RROCKWAY,CITY CLERK In planning and performing our audit of the financial statements of the City of Huntington Beach for the year ended September 30, 1998, we considered its internal control structure in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control structure. 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 and we do not express such an opinion. The management of the City 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. CA During our audit, we noted certain matters involving the internal control structure and its operation that we wish to call to your attention. These matters are set forth below,together with our recommendations for improvement. h Record Storage Policy During our audit,we noted an instance where accounting records could not be located. The record storage area dil not have a listing of documents to be maintained and a procedure for the removal of records from- the storage area. An absence of a record storage policy increases the risk of accidental destruction of records and results in an inefficient use of resources in locating documents. 51 � y OTHER OFFICES AT. 2965 ROOSEVELT STREET 613 W.VALLEY PARKWAY,SUITE 330 CARLSBAD,CALIFOIL-41A 92008-2389 ESCONDIDO,CALIFORNIA 92025-2598 (760)729-2343•FAX(760)729-2234 (760)741.3141•FAX(760)741-9890 ( 1 ' Record Storage Policy( -tinued • We recommend that the finance department establish a policy specifying which records should be . retained permanently(perhaps on microfiche after a time)and which records should be kept only for a given period before being destroyed and how long that period should be. (It might differ for different types of documents). Also,decide on when records should be removed from more accessible files to other storage areas. For example, some companies keep the current and prior year records in the accounting department or in storage rooms on the company's premises and store older records in off-premises warehouses. Finally,assign personnel the responsibility to periodically clean out the files in accordance with the established policy. Cash and Investments ' During our audit,we observed the following methods regarding the reconciliation of cash to the General Ledger which were not functioning efficiently. • Bank Accounts - We noted that one bank account was not recorded on the City's General Ledger by the accounting department. We recommend that the City record all existing bank accounts on the General Ledger. • Stale Dated Checks - We noted that the City had several checks that have been outstanding for more than one year. These checks were recorded as a liability on the general ledger at September 30, 1998. We suggest that the City adopt a policy to periodically review its outstanding checklist and implement state escheat laws. Accounts Receivable Reconciliations The Finance Department made many adjustments to account balances as a result of an inability of the accounts receivable subsidiary ledgers to properly interface with the general ledger. During our review of the receivables, we noted many accounts receivable balances which did not agree to subsidiary information or were not fully reconciled. The City should consider updating its accounting software to allow the accounts receivable subsidiary ledgers to interface with the general ledger. Until new software is obtained, we recommend that the City implement procedures to assist in the supporting of General Ledger account balances throughout the year, such as monthly maintenance of subsidiary ledgers or spreadsheet listings. There should be a periodic review of General Ledger,account balances comparing amounts to the subsidiary ledgers and schedules. This sh$ ld allow the Finance Department to spend less time and effort in its year-end closing procedures. -2- • Insurance Reserve The City's Insurance Reserve Internal Service Fund accounts for the City's self-insured liability,health and workers' compensation activities, which are to be funded by City departments on a cost-reimbursement basis. At the City's fiscal year-end, September 30, 1998, this fund had an accumulated deficit of $10,778,000 consisting of a deficit of$1,732,000 for the medical program,a deficit of$4,823,000 for the workers 'compensation program and a deficit of$4,223,000 for the general liability program. This . accumulated deficit indicates that claims to date for each of the programs are in excess of the amounts reimbursed by other City departments. As such,total assets of the Insurance Reserve Internal Service Fund are significantly below anticipated payouts related to existing litigation and claims. Correspondingly, 'liabilities•of the funds which must ultimately pay self-insurance losses are understated. We recommend that the City refine its plan for the eventual funding of self-insured costs to ensure that incurred but not reported liabilities are included. We also recommend that the plan and related reserve levels be monitored annually for reasonableness in relation to cash requirements. We also recommend that on a periodic basis the insurance requirements of the City be reviewed for adequacy and determine the cost/benefit of any additional insurance. Service Organizations During our audit, we noted that some accounting functions related to the senior housing project are being performed on behalf of the City by the Living Opportunity Management Company (contractor). Each month the contractor provides reports detailing the financial activity which includes an analysis of the cash retained by the contractor. The City maintains this cash account on an imprest basis and therefore does . not record this information to the General Ledger. We also noted that the City does not verify the financial activity information provided by the outside contractor. We recommend the City, on a semiannual or quarterly basis, verify the financial information provided by the contractor and each period record the financial activity on the General Ledger. Cross Training During our audit we performed procedures relating to the City's internal controls over various transaction cycles. While performing these procedures, we noted that the City's Accounting Department Senior Accounting personnel are not cross trained to ensure that job duties can be performed by another person in an employee's absence. We recommend that the City establish a practice of cross training Accounting Deportment Senior Accounting personnel to provide the City with coverage of job duties in an Accounting Department employee's absence. Electronic Data Processing (EDP) Disaster Recovery Plan We recommend that the City develop a formalized Electronic Data Processing (EDP) disaster recovery plan. This plan is a written set of instructions to assist City personnel to process data in such events as power outages, hardware or software breakdown, or other disasters that keep data from being processed in a normal manner. This plan should contain such information as the name and phone number of the firms providing hardware and software support, location of documentation for all hardware and software, and the location of back-up data and alternative processing locations (such as other cities using the same software). This would assist the City in the absence of those employees familiar with the system. -3- Deferred Compensation During our review of the City's deferred compensation amounts,we observed that the notes receivable held by the plan were being stated at cost and were not adjusted for declines in value for notes receivable which were in default or when the property securing the note receivable was foreclosed upon. A significant adjustment was made to reduce the notes receivable to record an estimated decrease in the market value of notes. The City should appraise the value of the notes receivable or the foreclosed property and make . changes on the individual participant balances. Journal Entries During the course of the'year, numerous journal entries are written, approved and entered into the General Ledger. We observed that documentation supporting year-end closing journal entries was inadequate. We recommend that the accountant approving the journal entries verify that adequate supporting documentation is attached. Pgyroll System Interface During our review of payroll entries being booked through the payroll system interface with the General Ledger, we noted that in certain situations amounts on the payroll system were not properly being transferred to the City's General Ledger. We recommend in the City's search for new accounting software that the interface of the payroll module to the General Ledger be reviewed. The City should also review the postings from the payroll system to the General Ledger system and review when the discrepancies occur and provide an analysis of possible ways to correct or improve the interface. Vacation and Disability Advances The City records amounts paid in advance for vacation and disability as receivables as the City is reimbursed for these amounts. At September 30, 1998, adjustments were made to these accounts to reduce the receivables as these accounts are not being reconciled. To ensure that the City is reimbursed for all advances it makes for vacation and disability amounts, we recommend that these accounts be reconciled on a monthly basis. Property, Plant and Equipment We observed that the City's methods regarding the sale of surplus property were not functioning properly. These issues are discussed below: • All surplus property is required to be processed through the asset receiving department. During our review of the disposal of surplus property, we noted that the Huntington Beach Police Department (police department) sold property directly and instructed the buyer to make remittances to the police department. The police department should be informed that all surplus property is to be processed through the asset receiving department. -4- • Property. Plant and Equipment (Continued) • All assets sold by the City during the fiscal year are deleted from the property,plant and equipment master listing and General Ledger by the finance department,based on deletion remittances forwarded by the asset receiving department at the end of the year. We noted that the finance department does not review the General Ledger to verify that the cash receipts from the sale of assets are recorded properly. To verify that proceeds received from disposal of assets are received and recorded properly, we recommend that the City finance department prepare a listing of assets indicating the gain or loss from the sale of assets which can be reconciled to the General Ledger. We also noted that a land sale between the City and Redevelopment Agency was not recorded on the General Ledger. The finance department should review its procedures regarding recording these types of transactions and modify the procedures to prevent unrecorded transactions. These conditions were considered in determining the nature, timing and extent of the audit tests to be applied in our audit of the City of Huntington Beach's financial statements and this letter does not affect our report on these financial statements dated February. 8, 1999. This report is intended solely for the information and use of the City Council and management of the City of Huntington Beach, and is not intended and should not be used by anyone other than these specified parties. -5- RESPONSES TO MANAGEMENT LETTER FROM DIEHL, EVANS AND COMPANY FISCAL YEAR 1997/98 FINDING RESPONSE COST/BENEFIT IMPLEMENTATION PLAN Record Storage and Retrieval-The City does not have.an Concur-Due to general City Hall Cost-Effort to write and review a When the City's optical imaging adequate storage and retrieval procedure for accounting' space limitations,this has not records retention plan. Benefit- and new accounting systems are documents. received proper attention. We Better accounting records and installed,staff will review all of the intend to review this in detail when reduced possibility of not finding relevant workflow and document implementing the optical imaging relevant information needs. Many of the current and new financial systems. prodedures may be changed or eliminated with new sotware. ash and Investments(Bank Accounts)—One bank account Concur- This account has not been Cost-None Benefit-Better Contact the department(City not recorded on the City's general ledger used in three years and is inactive. accounting records Attorney)and obtain documentation to either activate and record the account,or to obtain any funds and revert them to the City's general account Cash and Investments(Stale Dated Checks)-the City had Concur- The City is currently Cost-Administrative Time Continue to work on refining the several outstanding checks on its outstanding check list that had working on refining its policy Benefit-Better accounting records escheat policy. been outstanding for more than one year. Accounts Receivable Reconciliations—The City's accounts Concur. Although the City's Cost-None since staff is not Ensure that any new software is receivable system does not interface well with the City's accounts receivable system does recommending spending large fully integrated and does not accounting system not interface well with the City's amounts of time to correct the continue the problems accounting system,staff believes program.. encountered in the past. that all monies due the City are Benefit-Better accounting records. being recorded and pursued by staff.This problem has persisted for several years. It has caused problems in closing the City's books and accurately reflecting amounts owed the City. It has not,to staffs knowledge, resulted in any funds lost. When new business software is implemented,these problems should no longer exist. Staff feels that the limited amount of programming time available would best be used in other areas. Staff v will continue to monitor these accounts RESPONSES TO MANAGEMENT LETTER FROM DIEHL, EVANS AND COMPANY FISCAL YEAR 1997/98 Insurance Reserve-The City's insurance reserve funding is not Concur. Cost-Increased transfers from Implementation Plan- Staff will adequate and has resulted in deficits in all three of the insurance other funds reduces amounts continue to refine plans to reduce programs available for other needs. these deficits. Benefit-Better accounting records and assurance that the City has reserves to fund workers compensation, health,and tort claims Service Organizations-There is not a review of the Concur-The Emerald Cove Cost-Staff time to review the Staff will assess workload disbursements made by LOMCO for the Emerald Cove Project by operating budget(approximately records priorities and determine if an audit ';ty staff $316,000)is closely monitored and Benefit-Reduced risk of is feasible during 1999. staff receives monthly disbursement irregularities reports from LOMCO. Cross Training-The Senior Accountants are not cross-trained to Concur Cost- Efforts to cross-train. Staff will begin cross-training ensure that job duties can be performed by another person in an Benefits- Increased flexibility over during 1999. employee's absence accounting operation EDP Disaster Recovery Plan-The City does not have an Concur_This was requested in prior Cost-Funds and hardware to Re-evaluate funding in future adequate EDP Disaster Recovery Plan budget but was not considered a develop the plan(approximately budgets high priority. This item will be re- $40,000 per year) submitted for the 1999/2000 budget Benefit-Better records security over accounting records. Deferred Compensation—The value of certain notes receivable Concur-. Cost-Staff time and money to hire The City is hiring an attorney to in the City's section 457 deferred compensation plan had not been the attorney and appraiser. Benefit- determine the proper course of reduced to their probable value. A reduction($239,000)was More accurate accounting records action and appraisals. made to the City's books to reflect this estimated reduction in and participant balances Participants will be notified of the value. The City should appraise these notes and make situation appropriate reductions in participant statements. )umal Entries-Journal entries did not always have adequate Concur- It should be noted that all Cost-None Benefit-Better Ensure that all entries have ackup documentation. entries did have support. This accounting records adequate backup documentation support was not always attached to prior to approval the documentation. Payroll System Interface-The payroll system does not transfer Concur- However,these amounts Cost-N/A When the new business software the exact amount of the payroll to the accounting system. are very minor(less than$28)total Benefit-N/A is purchased,this situation should per pay period. They are due to be eliminated since these systems rounding errors and the effort to will be more fully integrated. correc t the situation would be greater than benefits derived. v RESPONSES TO MANAGEMENT LETTER FROM DIEHL, EVANS AND COMPANY FISCAL YEAR 1997/98 Vacation and Disability Advances-The City did not reconcile Concur Cost-Effort to reconcile accounts, Staff has already begun certain general ledger accounts relating to advanced disability Benefit-Better accounting controls monitoring and reconciling the retirement and advanced paychecks. and records account Property, Plant and Equipment(Surplus Property)-Certain Concur-Departmental procedures Cost-None. Existing procedures Continue to inform line personnel property that was being sold as surplus did not go through the will be modified to ensure that this will be enforced as to the current fixed asset normal channel. does not happen again Benefit-Better accounting records disposal procedures. and control over fixed assets. Property, Plant and Equipment,(Master Ledger)-The City did Concur_Our departmental Cost-None-These are normal not review the General Ledger to determine and match fixed asset procedures normally would have departmental procedures that were sales against the subsidiary ledger. Also,a land sale between the had us doing this. Due to time not followed this year. ity and Agency was not recorded on the General Ledger. limitations,they were not done this Benefit-Better accounting records year. and control over fixed assets. v Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997/98 --* � `w ✓ Cross-Training The Senior Accountants should be cross- ; trained. %f Response This is underway and will be continued in future years. Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997/98 ✓ EDP Disaster Recovery Plan The City should develop a detailed disaster recovery plan. ✓ Response Concur - this will be considered for funding in the FY 1999/2000 budget. Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997198 j ✓ Deferred Compensation The City had not yet adjusted participant deferred compensation statements to the actual value of trust-deed investments. ✓ Response Concur - staff has hired an attorney and is developing a plan to re-structure the trust-deed program . Participants will be notified regarding recommended changes in the status of the program . Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997/98 - _ -._ .'': _i ..e3,_, .fix=. - �1'y .-.;�,C,...y�� - z "x,«"'^....v�. r w+ .tY x, r ' �• '"'�"-.m"..a .'y" if Journal Entries Some journal entries were made without attaching documentation. ✓ Response Concur - entries will not be approved without documentation. Documentation was in fact available for all entries but not always attached. Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997/98 41; 1-14WR • r. a Payroll Svstem Interface The City's payroll system is not fully integrated with the accounting system and the proper amounts are not always transferred to the general ledger. Response Concur - these were minor amounts ($28). The new business software will solve this problem. Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997/98 ✓ Vacation and Disability Advances The City's vacation and disability advances were not reconciled to the general ledger. ✓ Response Concur - these amounts are currently being reconciled. Responses to Management Letter from Diehl, Evans & Company Fiscal Year 1997/98 if Property, Plant and Equipment The disposition of surplus fixed assets was not handled in accordance with City Policy. ✓ Response Concur - line personnel will be informed of City procedure and staff will reconcile appropriate fixed asset records. Currently, staff is performing a 100% inventory of all City fixed assets and will review all procedures and policies.