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ACCEPT THE SINGLE AUDIT AND INDEPENDENT AUDITORS’ REPORTS AND THE REPORT ON INTERNAL CONTROLS FOR THE YEAR ENDED JUNE 30, 2017
recommended action
RECOMMENDATION
It is recommended that the City Council accept by motion the Single Audit and Independent Auditors’ Reports and the Report on Internal Control Related Matters Identified in the Audit for the year ended June 30, 2017.
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Summary
Presented for the City Council’s review is the City of Stockton’s Single Audit and Independent Auditors’ Reports (Attachment A) and the Report on Internal Control Related Matters Identified in the Audit (Attachment B) for the year ended June 30, 2017. On April 23, 2018, the Audit Committee received, reviewed, and accepted these audit reports.
DISCUSSION
Single Audit
The Single Audit and Independent Auditors’ Reports (Attachment A) is an annual audit of federal awards or pass-through of federal awards to the City. The City’s federal awards expenditures in Fiscal Year (FY) 2016-17 totaled $16.1 million. The Single Audit report identifies, one cleared finding from the prior year and two findings (2017-005 and 2017-006) related to noncompliance of the HOME Investment Partnerships Grant.
The prior year finding cleared in this audit was related to the timing and accuracy of submissions of the schedule of federal awards to the auditors. In the current audit process, the City submitted the final schedule of federal awards to the auditors for their review.
One new finding is an eligibility determination finding (2017-005) that raises concerns over monitoring by the City of HOME loan borrowers and the eligibility of multi-family tenants. HOME loan borrowers rent property to tenants and are held to certain federal guidelines. The auditors were unable to confirm that property owners were complying with these guidelines as they pertain to the rent charged within certain income levels. The City worked with property owners to address specific procedures and policies to address tenant compliance, however more work needs to be done in this area. During the upcoming year, the City will improve its monitoring and review of income level and rent requirements.
One reporting finding (2017-006) identified that the City was unable to provide proof of submission of the final report for the HOME program. The requisite federal guidelines require submission of the report through a website and this was not completed. The City will review its reporting procedures, ensure timely reporting and that appropriate staff have access to the reporting system.
Both findings are similar to prior year findings. Although the City made changes in the HOME program to improve reporting and eligibility monitoring, additional efforts are underway in the current fiscal year. Those efforts include 1) review and revision of monitoring procedures to ensure property owners are following income and rent federal guidelines and 2) ensuring staff have access to the federal reporting system and that reporting submissions are done timely.
Internal Control Related Matters
The Report on Internal Controls provides a review of the City’s financial reporting systems and procedures that are used to ensure accurate financial statements. An internal control is designed to provide reasonable assurance that the City meets its objectives regarding the reliability of financial reporting, effectiveness, and efficiency of operations and compliance with applicable laws and regulations. The auditor considers the City’s internal control over financial reporting during the design of audit procedures for financial statements. The auditors do not express any opinion on the effectiveness of the City’s internal controls.
The auditors included four findings in the report for the year ended June 30, 2017; all are findings continued from the prior fiscal year. The findings pertain to 1) internal control systems that increase risk, 2) lack of a full accounting manual that documents processes, 3) an antiquated financial system that does not support proper levels of internal controls, and 4) the City’s ability to retain qualified accounting professionals. Management concurs with all findings.
1. The internal control system finding is predicated on various auditor findings received throughout the past several years specifically addressing weaknesses in the internal control systems. To address this finding, the City, in collaboration with the City’s internal auditors, has categorized all findings and focused on mitigating the highest areas of risk. The City continues to make progress in implementing effective internal controls and closing related findings.
2. The Administrative Services Department is currently developing an accounting manual that will tie together the financial policies with the accountant’s procedures to document accounting processes. The department expects to complete this effort in 2018 after review by the City’s internal auditors.
3. The City continues its multi-year effort to select, procure and implement a new financial system that will support modern, best practices for local government business processes. A software vendor contract is anticipated to be awarded in summer 2018.
4. The new accountants hired in the past two years continue to learn and make progress in their knowledge of governmental accounting which is an advanced specialty area of the accounting discipline. Staff in this area participate in training and career coaching as part of their transition during probation. Recruitment is underway for all remaining vacancies within the Accounting Division with expected hiring of all vacant professional accounting staff by June 2018.
The City continues to make progress in these areas, although more time is needed to resolve these findings fully.
FINANCIAL SUMMARY
There is no financial impact associated with accepting this item.
Attachment A - 2017 Single Audit and Independent Auditors’ Reports
Attachment B - 2017 Internal Control Related Matters