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HomeMy WebLinkAbout25F - FINANCIAL AUDIT SERVICESREQUEST FOR COUNCIL ACTION CITY COUNCIL MEETING DATE: JUNE 2, 2008 TITLE: AMEND AGREEMENT WITH MACIAS GINI & O'CONNELL LLP, FOR ADDITIONAL COMPREHENSIVE FINANCIAL AUDIT SERVICES CITY MANAGER RECOMMENDED ACTION CLERK OF COUNCIL USE ONLY: APPROVED ^ As Recommended ^ As Amended ^ Ordinance on 15f Reading ^ Ordinance on 2nd Reading ^ Implementing Resolution ^ Set Public Hearing For CONTINUED TO FILE NUMBER Authorize the City Manager and Clerk of the Council to execute an amendment to the agreement with Macias Gini & O'Connell LLP, for additional comprehensive financial audit services increasing the total amount $70,000 to an aggregate amount not to exceed $565,500, subject to non-substantive changes approved by the City Manager and City Attorney. DISCUSSION The City of Santa Ana retained the services of Macias Gini & O'Connell LLP, formerly known as Moreland & Associates, Inc. to conduct the annual audit of the City's financial statements for fiscal years ending June 30, 2006 through June 30, 2009. Since the inception of the contract, new auditing standards were adopted (Statement of Auditing Standards Nos. 104-111, 114). The new standards require changes in how audits are to be conducted and results communicated to the client. The new audit rules will align governmental reporting into closer alignment with the standards imposed on audits of publicly traded companies under Sarbanes Oxley. Sarbanes Oxley, a United States federal law enacted July 2002, established new and enhanced standards for all U.S. public company boards, management, and public accounting firms in response to major corporate and accounting scandals including those that effected Enron, Tyco International, WorldCom and Adelphia. The new auditing requirements are intended to provide a more in-depth understanding by the auditor of the organization including its internal controls; a more thorough assessment of the risks of where and how the financial statements could be materially misstated; and improve communication between the auditor and the governing body. As such, the implementation of the new auditing standards requires more of the auditors' time and effort in order to comply. In addition, the auditors will assist City staff in the completion of the annual financial statements during implementation of the financial system. It is estimated the additional services will total $70,000 over the next two years. 25F-1 Amend Agreement with Macias Gini & O'Connell LLP for Additional Comprehensive Financial Audit Services June 2, 2008 Page 2 FISCAL IMPACT Funds for these services are available in the Finance & Management Services (account no. 011-171-6191). APPROVED AS TO FUNDS AND ACCOUNTS: Francisco Gutierrez ~xecutive Director Finance & Management Services Agency 25F-2 SECOND AMENDMENT TO AUDITING SERVICES AGREEMENT THIS SECOND AMENDMENT TO AUDITING SERVICES AGREEMENT is entered into on June 2, 2008, by and between MACIAS GINI & O'CONNELL, LLP, a California limited liability partnership ("Consultant") and the CITY OF SANTA ANA, a charter city and municipal corporation of the State of California ("City"). RECITALS: A. The City and Moreland and Associates entered into Consultant Agreement A-2006-108, dated May 5, 2006, (hereinafter "said Agreement") by which Consultant has provided comprehensive financial audit services. B. By written Assignment N-2008-052, dated April 11, 2008, Moreland and Associates assigned its rights and obligations in said Agreement A-2006-108 to Macias Gini & O'Connell, LLP. C. Since the commencement of services pursuant to said Agreement, new auditing standards have been adopted which bring auditing rules for governmental units into closer alignment with publicly traded companies. These standards will require more of the auditor's time and effort to conduct the audits required by said Agreement. D. The City is implementing a new financial management system which will require that additional staffing be provided to complete the annual financial statements for the fiscal year ending June 30, 2008. E. In accordance with the terms and conditions of said Agreement, the parties wish to amend the Scope of Services and to increase the compensation to pay for the additional services during the term. WHEREFORE, in consideration of the covenants contained in said Agreement, and subject to all the terms and conditions of said Agreement, except those amended in this Second Amendment to Auditing Services Agreement, the parties agree as follows: Section 1, SCOPE OF SERVICES, shall be amended to include a provision that Consultant shall comply with the new Statement of Auditing Standards in the comprehensive financial audits for the fiscal years ending in 2008 and 2009, and will assist the City's Finance and Management Services staff in the completion of the annual financial statements for the fiscal year ending June 30, 2008 as set forth in the Consultant's Proposal dated April 21, 2008, attached hereto as Exhibit A-2 and incorporated by reference. 25F-3 2. Section 2.a. COMPENSATION, shall be deleted in its entirety and replaced with the following: "a. City agrees to pay, and Consultant agrees to accept as total payment for its services, the following annual fees: • Fiscal year ending June 30, 2006 $87,200 • Fiscal year ending June 30, 2007 $90,600 • Fiscal year ending June 30, 2008 $94,100 • Fiscal year ending June 30, 2009 $97,600. Additional services required to comply with new auditing standards and to assist in the preparation of the trial balance working spreadsheets and prepare the City CAFR for the fiscal year ending in 2008 will be billed at the hourly rates set in Exhibit A-2. Total additional compensation for complying with the new SAS and assisting in the preparation of the 2008 annual financial statements shall not exceed, $70,000.00 as set forth in Exhibit A-2. Consultant shall accept $26,000 as total payment for its internal controls study set forth in Exhibit A-1 to the First Amendment to Agreement. Special examinations, surveys, or detailed reports of any nature outside the scope of this Agreement shall be billed separately by Consultant and must be specifically authorized in writing by City in advance of such additional services proposed to be provided. The total sum to be expended pursuant to this Agreement shall not exceed $565,500.00, during the term of said Agreement." 3. Except as amended hereinabove, all terms and conditions of said Agreement shall remain in full force and effect. // // // // // // // 25F-4 IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment to Auditing Services Agreement on the date and year first written above. ATTEST: PATRICIA E. HEALY Clerk of the Council APPROVED AS TO FORM: JOSEPH W. FLETCHER City Attorney By: Laura Sheedy Assistant City Attorney CITY OF SANTA ANA DAVID N. REAM City Manager MACIAS GINI & O'CONNELL, LLP KEVIN J. O'CONNELL Managing Partner 25F-5 EXHIBIT A-1 CONSULTANT PROPOSAL APRIL 21, 2008 25F-6 3000 S Street, Suite 300 Sacramento, CA 95816 916.928.4600 2175 N. California Boulevard, Suite 645 Walnut Creek, CA 94596 MAC IAS G I N I & O1C0 N N ELL 1 LF 925.274.0 190 _ SIS S. Figueroa Street. Suite 325 CERTIFIED PUBLIC ACCOUNTANTS S MANAGEMENT CONSULTANTS Los Angeles, CA 90071 213.286.6400 402 West Broadway, Suite 400 San Diego, CA 92101 619.573.1 112 April 21, 2008 Ms. Pamela Arends-King Assistant Director of Finance and Management Services 20 Civic Center Plaza Santa Ana, CA 92701 Dear Ms. Arends-King: We are pleased to confirm our understanding of the services we are to provide the City of Santa Ana for the year ended June 30, 2008. We will audit the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information, which collectively comprise the entity's basic financial statements, of the City of Santa Ana (City) and the Community Redevelopment Agency of the City of Santa Ana (Agency) as of and for the year ended June 30, 2008. Accounting Standards generally accepted in the United States provide for certain required supplementary information (RSI), such as management's discussion and analysis (MD&A), to accompany basic financial statements. As part of our engagement, we will apply certain limited procedures to RSI. These limited procedures will consist. principally of inquiries of management regarding the methods of measurement and presentation, which management is responsible for affirming to us in its representation letter. Unless we encounter problems with the presentation of the RSI or with procedures relating to it, we will disclaim an opinion on it. The following RSI is required by generally accepted accounting principles and will be subjected to certain limited procedures, but will not be audited: 1. Management's Discussion and Analysis 2. Budgetary comparison schedules for the general fund and major special revenue funds 3. GASB-required supplementary pension and OPEB information Supplementary information other than RSI, such as combining and individual fund financial statements, also accompanies basic financial statements. We will subject the following supplementary information to the auditing procedures applied in our audit of the basic financial statements and we will provide an opinion in relation to the basic financial statements: City 1. Schedule of expenditures of federal awards (normally in a separate report) 2. Individual and combining fund financial statements and schedules www.mgocpa.com ~8 -^ An jndependent Member of the BDO Seidman Alliance Ms. Pamela Arends-King Assistant Director of Finance and Management Services City of Santa Ana April 21, 2008 Page 2 The following additional information accompanying the basic financial statements will not be subjected to the auditing procedures applied in our audit of the financial statements, and for which our auditor's report will disclaim an opinion. 1. CAFR introductory section 2. Statistical section Audit Objectives The objective of our audit is the expression of opinions as to whether your basic financial statements are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles and to report on the fairness of the additional information referred to in the second paragraph when considered in relation to the financial statements taken as a whole. The objective also includes reporting on - • Internal control related to the financial statements and compliance with laws, regulations, and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements in accordance with Government Auditing Standards. • Internal control related to major programs and an opinion (or disclaimer of opinion) on compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a direct and material effect on each major program in accordance with the Single Audit Act Amendments of 1996 and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. • Internal control and compliance related to the Redevelopment Agency financial statements in accordance with Government Auditing Standards, and including the Guidelines for Compliance Audits of California Redevelopment A encies issued by the State Controller's Office, Division of Accounting and Reporting and as interpreted in the Suggested Auditing Procedures for Accomplishing Com liance Audits of California Redevelopment A encies, issued by the Governmental Accounting and Auditing Committee of the California Society of Certified Public Accountants. The reports on internal control and compliance will each include a statement that the report is intended for the information and use of the audit committee, management, specific legislative or regulatory bodies, federal awarding agencies, and if applicable, pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. c4~ Our audit will be conducted in accordance with U.S. generally accepted auditing standards; the standards for financial audits contained in Government Auditing Standards, issued by the 25F-8 Ms. Pamela Arends-King Assistant Director of Finance and Management Services City of Santa Ana Apri121, 2008 Page 3 Comptroller General of the United States; the Single Audit Act Amendments of 1996; and the provisions of OMB Circular A-133, and will include tests of accounting records, a determination of major program(s) in accordance with Circular A-133, and other procedures we consider necessary to enable us to express such opinions and to render the required reports. If our opinions on the financial statements or the Single Audit compliance opinion are other than unqualified, we will fully discuss the reasons with you in advance. If, for any reason, we are unable to complete the audit or are unable to form or have not formed opinions, we may decline to express opinions or to issue a report as a result of this engagement. Management Responsibilities Management is responsible for establishing and maintaining internal controls including monitoring ongoing activities; for the selection and application of accounting principles; for the fair presentation in the financial statements of the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Santa Ana and the respective changes in the financial position and, where applicable, cash flows in conformity with U.S. generally accepted accounting principles; and for federal award program compliance with applicable laws and regulations and the provisions of contracts and grant agreements. Management is responsible for the basic financial statements and all accompanying information as well as all presentations contained therein. You are responsible for management decisions and functions. As part of the audit, we will prepare a draft of your financial statements and related notes. In accordance with Government Auditing Standards, you will be required to review and approve those financial statements prior to their issuance and have a responsibility to be in a position in fact and appearance to make an informed judgment on those financial statements. Further, you are required to designate a qualified management-level individual to be responsible and accountable for overseeing our services. Management is responsible for making all financial records and related information available to us, including identifying any significant vendor relationships in which the vendor has the responsibility for program compliance. Management is responsible for adjusting the financial statements to correct material misstatements and for confirming to us in the representation letter that the effects of any uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. You are responsible for the design and implementation of programs and controls to prevent and detect fraud, and for informing us about all known or suspected fraud, or illegal acts 25F-9 Ms. Pamela Arends-King Assistant Director of Finance and Management Services City of Santa Ana Apri121, 2008 Page 4 affecting the government involving (1) management, (2) employees who have significant roles in internal. control, and (3) others where the fraud or illegal acts could have a material effect on the financial statements. You are also responsible for informing us of your knowledge of any allegations of fraud or suspected fraud affecting the government received in communications from employees, former employees, grantors, regulators, or others. In addition, you are responsible for identifying and ensuring that the entity complies with applicable laws and regulations and for taking timely and appropriate steps to remedy any fraud, illegal .acts, violations of contracts or grant agreements, or abuse that we may report. Additionally, as required by OMB Circular A-133, it is management's responsibility to follow up and take corrective action on reported audit findings and to prepare a summary schedule of prior audit findings and a corrective action plan. Management is responsible for establishment and maintenance of a process for tracking the status of audit findings and recommendations. Management is also responsible for identifying for us .previous audits or other engagements or studies related fo the objectives discussed in the Audit Objectives section of this letter. This responsibility includes relaying to us corrective actions taken to the address significant findings and recommendations resulting from those audits or other engagements or studies. You are also responsible for providing management's views on our current findings, conclusions, and recommendations, as well as your planned corrective actions, and the timing and format related thereto. Audit Procedures-General An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; therefore, our audit will involve judgment about the number of transactions to be examined and the areas to be tested. We will plan and perform the audit to obtain reasonable rather than absolute assurance about whether the financial statements are free of material misstatement, whether from (1) errors, (2) fraudulent financial reporting, (3) misappropriation of assets, or (4) violations of laws or governmental regulations that are attributable to the entity or to acts by management or employees acting on behalf of the entity. Because the determination of abuse is subjective, Government Auditing Standards do not expect auditors to provide reasonable assurance of detecting abuse. Because an audit is designed to provide reasonable, but not absolute assurance and because we will not perform a detailed examination of all transactions, there is a risk that material misstatements or noncompliance may exist and not be detected by us. In addition, an audit is not designed to detect immaterial misstatements or violations of laws or governmental regulations that do not have a direct and material effect on the financial statements or major programs. Our responsibility as auditors is limited to the period covered by our audit and does not extend to matters that might arise during any later periods for which we are not engaged as auditors. 25F-10 Ms. Pamela Arends-King Assistant Director of Finance and Management Services City of Santa Ana Apri121, 2008 Page 5 Our procedures will include tests of the following, as we consider necessary: 1) documentary evidence supporting the transactions recorded in the accounts, 2) the physical existence of inventories and 3) direct confirmation of receivables and certain other assets and liabilities by correspondence with selected individuals, creditors, and financial institutions. We will request written representations from your attorneys as part of the engagement. At the conclusion of our audit, we will also require certain written representations from you about the fmancial statements and related matters. Audit Procedures-Internal Controls Our audit will include obtaining and understanding of the entity and its environment, including internal .control, sufficient to assess the risks of material misstatement of the financial statements and to design the nature, timing, and extent of further audit procedures. Tests of controls may be performed to test the effectiveness of certain controls that we consider relevant to preventing and detecting errors and fraud that are material to the financial statements and to preventing and detecting misstatements resulting from illegal acts and other noncompliance matters that have a direct and material effect on the financial statements. Our tests, if performed, will be less in scope than would be necessary to render an opinion on internal control and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to Government Auditing Standards. As required by OMB Circular A-133, we will perform tests of controls over compliance to evaluate the effectiveness of the design and operation of controls that we consider relevant to preventing or detecting material noncompliance with compliance requirements applicable to each major federal award program. However, our tests will be less in scope than would be necessary to render an opinion on those controls and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to OMB Circular A-133. An audit is not designed to provide assurance on internal control or to identify significant deficiencies. However, during the audit, we will under professional standards established by the American Institute of Certified Public Accountants communicate to management and those charged with governance internal control related matters that are required to be communicated by GovernmentAuditing Standards and OMB Circular A-133. Audit Procedures-Compliance As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we will perform tests of compliance with applicable laws and regulations and the provisions of contracts and agreements, including grant agreements. However, the objective of those procedures will not be to provide an opinion on overall 25F-11 Ms. Pamela Arends-King Assistant Director of Finance and Management Services City of Santa Ana April 21, 2008 Page 6 compliance and we will not express such an opinion in our report on compliance issued pursuant to Government Auditing Standards. OMB Circular A-133 requires that we also plan and perform the audit to obtain reasonable assurance about whether the auditee has complied with applicable laws and regulations and the provisions of contracts and grant agreements applicable to major programs. Our procedures will consist of tests of transactions and other applicable procedures described in the OMB Circular A-133 Compliance Supplement for the types of compliance requirements that could have a direct and material effect on each of the City of Santa Ana's major programs. The purpose of those procedures will be to express an opinion on the City of Santa Ana's compliance with requirements applicable to each of its major programs in our report on compliance issued pursuant to OMB Circular A-133. Audit Administration, Fees, and Other We may from time to time, and depending on the circumstances, use third-party service providers in serving your account. We may share confidential information about you with these service providers, but remain committed to maintaining the confidentiality and security of your information. Accordingly, we maintain internal policies, procedures, and safeguards to protect the confidentiality of your personal information. We will remain responsible for the work provided by any such third-party service providers. We understand that your employees will prepare all cash, accounts receivable, or other confirmations we request and will locate any documents selected by us for testing. You may request that we perform additional services not addressed in this engagement letter. If this occurs, we will communicate with you regarding the scope of the additional services and the estimated fees. In connection with the requirements of OMB Circular A-133, at the conclusion of the engagement, we will complete the appropriate sections of and sign the Data Collection Form that summarizes our audit findings. We will provide sprint-ready master of our opnion for the Comprehensive Annual Financial Report and the Single Audit Report. We will provide bound copies of the Community Redevelopment Agency report to the City of Santa Ana; however, it is management's responsibility to submit the reporting package (including financial statements, schedule of expenditures of federal awards, summary schedule of prior audit findings, auditors' reports, management letter; and a corrective action plan) along with the Data Collection Form to the designated federal clearinghouse and; if appropriate, to pass- through entities. The Data Collection Form and the reporting package must be submitted within the earlier of 30 days after receipt of the auditors' reports or nine months after the end of the audit period, unless a longer period is agreed to in advance by the cognizant or 25F-12 Ms. Pamela Arends-King Assistant Director of Finance and Management Services City of Santa Ana Apri121, 2008 Page 7 oversight agency for audits. At the conclusion of the engagement, we will provide information to management as to where the reporting packages should be submitted and the number to submit. The audit documentation for this engagement is the property of Macias Gini & O'Connell LLP. and constitutes confidential information. However, pursuant to authority given by law or regulation, we may be requested to make certain audit documentation available to Federal Oversight Agencies or its designee, a federal agency providing direct or indirect funding, or the U.S. Government Accountability Office for purposes of a quality review of the audit, to resolve audit findings, or to cazry out oversight responsibilities. We will notify you of any such request. If requested, access to such audit documentation will be provided under the supervision of Macias Gini & O'Connell, LLP. personnel. Furthermore, upon request, we may provide copies of selected audit documentation to the aforementioned parties. These parties may intend, or decide, to distribute the copies or information contained therein to others, including other governmental agencies. The audit documentation for this engagement will be retained for a minimum of seven years after the report release date or for any additional period requested by the Granting Agency or required by law or regulation. If we are awaze that a federal awazding agency, pass-through entity, or auditee is contesting an audit finding, we will contact the party(ies) contesting the audit finding for guidance prior to destroying the audit documentation. The City and Agency State Controller's Reports will be prepared by us and provided to the City prior to their applicable due dates. Our fees for these services will be at the hourly rates listed below plus out-of-pocket costs (such as word processing, postage, travel, etc.) except that we estimate that our gross fee, including expenses, will not exceed $132,625 for the fiscal year ending June 30, 2008. This includes $94,100 as noted in our original contract agreement dated May 5, 2006. -The fee increase from the original contract is due the implementation of new auditing standazds (SAS 104-111) that require additional consideration and documentation by the auditors plus an additional $15,000 for us to assist in the prepazation of the trial balance working spreadsheets and prepaze the City CAFR. Our hourly rates vary according to the degree of responsibility involved and the experience level of the personnel assigned to your audit. Our invoices for these fees will be rendered each month as work progresses and are payable on presentation. The above fees are based on anticipated cooperation from your personnel and the assumption that unexpected circumstances will not be encountered during the audit. If significant additional time is necessary, we will discuss it with you and arrive at a new fee estimate before we incur the additional costs. 25F-13 Ms. Pamela Arends-King Assistant Director of Finance and Management Services City of Santa Ana Apri121, 2008 Page 8 Hourly Level of Work Performed Rates Partner $ 162 Manager 119 Senior Accountant 86 Assistant Accountant 76 Clerical 37 We appreciate the opportunity to be of service to the City of Santa Ana and believe this letter accurately summarizes the significant terms of our engagement. If you have any questions, please let us know. If you agree with the terms of our engagement as described in this letter, please sign one copy and return it to us. Very truly yours, Macias Gini & O'Connell, LLP ~~ Kathryn Beseau, Audit Director Accepted by City of Santa Ana: Signature: Title: Date: 25F-14