HomeMy WebLinkAbout2025-10-21; City Council; 07; Internal Audit UpdateCA Review AZ
Meeting Date: Oct. 21, 2025
To: Mayor and City Council
From: Geoff Patnoe, City Manager
Staff Contact: Toufic Tabshouri, Internal Audit Manager
toufic.tabshouri@carlsbadca.gov, 442-637-3921
Laura Rocha, Deputy City Manager, Administrative Services
laura.rocha@carlsbadca.gov, 442-339-2415
Subject: Internal Audit Update
Districts: All
Recommended Action
Receive a report on internal audit program activity.
Executive Summary
The city’s Internal Audit Program examines city operations to ensure city resources are being
used efficiently and effectively. City Council Policy No. 89 requires the city’s Internal Auditor to
communicate progress on the annual audit plan along with the status of any open
recommendations from past audit engagements to the City Manager and the City Council twice
a year.
This report provides the City Council with:
•An update on the status of ongoing audit activities
•A summary report of transient occupancy tax reviews
•The results of an internal audit of the city’s public liability claims handling function
Explanation & Analysis
Background
The city’s Internal Audit Manager prepares an annual plan that lists audit projects. The internal
audit plan for fiscal year 2025-26 was reviewed and approved by the City Council on April 29,
2025. Reports on each audit are distributed to city management and the City Council as they
are completed during the year and are available to the public on the city’s internal audit
webpage (carlsbadca.gov/departments/internal-audits).
The Internal Audit Manager is conducting audits listed in the FY 2025-26 audit plan as well as
audits that were listed in prior internal audit plans but not started or completed.
Oct. 21, 2025 Item #7 Page 1 of 26
Internal audit projects in Fiscal year 2025-26
Results
Transient occupancy tax
Transient occupancy taxes are collected on overnight stays at hotels, resorts and other
lodging businesses in Carlsbad.. The city contracts with a public accounting firm to
conduct a review of these taxes every year. The firm performed reviews of eleven
businesses’ tax returns for FY 2020-21 through FY 2022-23 and eight tax returns for FY
2023-24. The Internal Audit Manager oversees these reviews and compiles a report
summarizing their results. Because the Internal Audit Manager position was vacant from
November 2023 until December 2024, a summary report was not complied in 2024. The
report, provided as Exhibit 2, identifies all discrepancies noted and the related penalty
and fine amounts.
Public liability claims handling
This internal audit examined the processes and procedures the city follows in
responding to claims of damages against the city. This audit found the city is handling
liability claims properly and detected no anomalies or unusual patterns. The report on
this audit is provided as Exhibit 2.
Procurement
An internal audit of the city’s procurement function was included in the Fiscal Year
2020-2021 Internal Audit Plan but not completed. A report on that audit will be
presented to the City Council at a later date.
Ongoing
Employee overtime
This audit is examining the use of overtime within city departments, including overtime
policy, existing practices, and trends in overtime expenses.
Remaining engagements for FY 2025-26
• FY 2024-25 transient occupancy tax agreed-upon procedures and revenue audit
• Police Department inventory and storage
• Information Technology Department (specific area to be determined)
Fiscal Analysis
There is no immediate fiscal impact to approving the Fiscal Year 2025-26 Internal Audit Plan
because there is sufficient funding in the fiscal year 2024-25 budget to execute the plan.
Next Steps
The city’s Internal Audit Manager will continue performing the audits listed in the Fiscal Year
2025-26 Internal Audit Plan.
Oct. 21, 2025 Item #7 Page 2 of 26
Environmental Evaluation
The proposed action is not a “project” as defined by CEQA Section 21065 and CEQA Guidelines
Section 15378(b)(5) and does not require environment review under CEQA Guidelines Section
15060(c)(3) and 15061(b)(3), because the proposed action to report on Internal Audit activity is
an organizational or administrative government activity that does not involve any commitment
to any specific project which may result in a potentially significant physical impact on the
environment. Any subsequent action or direction stemming from the proposed action may
require preparation of an environmental document in accordance with CEQA or CEQA
Guidelines.
Exhibits
1. Summary report on transient occupancy tax reviews
2. Internal audit report on the city’s handling of public liability claims
Oct. 21, 2025 Item #7 Page 3 of 26
Exhibit 1
Toufic Tabshouri
Internal Audit Manager
Report 2025-02
Results of Transient Occupancy Tax
Agreed-Upon Procedures
October 2025
Oct. 21, 2025 Item #7 Page 4 of 26
2 Transient Occupancy Tax Agreed-Upon Procedures
INTRODUCTION
A transient occupancy tax (TOT) is a tax that applies to hotel guests (transients) who
occupy a hotel room for a short-term period of up to 30 days. This tax is collected by
hotels and other lodging providers and remitted to the city every month, and it is
allocated to the city’s general fund. The TOT is rate is currently set at 10% of gross
short-term rental revenue. The State of California regulates TOT taxes in the
California Revenue and Taxation Code, Sections 7280-7283.51. The City of Carlsbad
has established its own TOT regulations in Chapter 3.12 of the Carlsbad Municipal
Code.
The city has approximately 50 establishments that are currently subject to the TOT
ordinance. Most of these establishments are resorts, hotels or motels, but homes
and accessory dwelling units that are offered for short-term rental are also subject
to TOT. These properties are typically reserved through online rental platforms that
collect and remit taxes to the city on behalf of property owners.
Because TOT revenues represent a significant portion1 of the city’s General Fund
revenues, it is important for the city to ensure that hotels are complying with their
obligations to collect and remit transient occupancy taxes and other assessments.
There are two such assessments currently in effect. The first is for the Carlsbad
Tourism Business Improvement District, and the second is for the Carlsbad Golf
Lodging Business Improvement District. The assessment rates are 2% and 1% of
gross short-term rental revenue, respectively.
There are some exemptions to the TOT. The most common one applies to federal
and state employees traveling on official business. Guests claiming an exemption
from TOT typically attest to an exemption entitlement at the beginning of their stay.
1 The TOT accounted for approximately 14.5%of General Fund revenues in fiscal year 2023-24.
Oct. 21, 2025 Item #7 Page 5 of 26
3 Transient Occupancy Tax Agreed-Upon Procedures
Objective, scope, and methodology
To provide oversight over the TOT, the city engages a public accounting firm to
review the accuracy and completeness of transient occupancy filings of several
establishments each year. These reviews have a more limited scope than audits and
do not entail an expression of any opinion. The public accounting firm simply
performs specific procedures delineated by the city and reports its findings.2 These
procedures are listed in the appendix to this report. When a review indicates that
the city is owed monies, the city will attempt to collect the funds in accordance with
the relevant municipal code sections.
This report provides a summary of the results of the engagement reports. It covers
fiscal years 2020-21 through 2023-24. The results presented in this report are
separated into two parts, one encompassing three fiscal years and the other only
one fiscal year. This division is due to the disruption caused by the COVID pandemic,
which delayed timely TOT oversight work. For fiscal years 2020-21, 2021-21, and
2022-23, eleven hotels were selected for review. For fiscal year 2023-24, six hotels
and two online short-term rental platforms were selected.
2 The technical term for these reviews is an agreed-upon procedures (AUP) engagement. They are one of the
type of engagements outlined by the American Institute of Certified Public Accountants.
Oct. 21, 2025 Item #7 Page 6 of 26
4 Transient Occupancy Tax Agreed-Upon Procedures
BACKGROUND
Hotels report and remit TOTs and assessments to the city on a monthly basis. The
city’s Finance Department is responsible for collecting and administering the TOT
program. The table below shows total TOT revenues received by the city for the past
ten fiscal years.
Table 1: TOT Revenues by fiscal year
SUMMARY OF RESULTS
Results of agreed-upon procedures
As shown in the following two tables, there were discrepancies present in the TOT
calculations for most establishments that were reviewed. In many cases, these
discrepancies were minor. Seven establishments overpaid TOT to the city. However,
as shown in the following two tables, four out of eleven establishments and two out
of eight establishments had variance amounts that exceeded 1% of their reported
TOT amounts respectively. The total underpayment of TOT amounted to $397,941
for the four fiscal years.
$19.7 $20.9 $22.2
$24.2 $26.3
$18.9
$15.6
$32.4
$34.2 $34.0
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
Revenue (millions)
Oct. 21, 2025 Item #7 Page 7 of 26
5 Transient Occupancy Tax Agreed-Upon Procedures
Table 2: TOT variances for sampled entities in fiscal years 2020-21, 2021-22
and 2022-23
Entity Reported
TOT
TOT Per
AUP Results
Underpayment
(Overpayment)
Variance
Percentage
1 $1,004,869 $1,004,833 ($36) 0.00%
2 $597,338 $597,383 $45 0.01%
3 $3,892,332 $3,892,080 ($252) -0.01%
4 $5,884,260 $5,948,367 $64,107 1.08%
5 $1,115,117 $1,115,111 ($6) 0.00%
6 $241,867 $255,924 $14,057 5.49%
7 $456,269 $456,269 $0 0.00%
8 $1,232,751 $1,231,658 ($1,093) -0.09%
9 $927,411 $950,487 $23,076 2.43%
10 $891,342 $894,641 $3,299 0.37%
11 $5,383,765 $5,533,589 $149,824 2.71%
Totals $21,627,321 $21,880,342 $253,021 1.16%
Table 3: TOT variances for sampled entities in fiscal year 2023-24
Entity Reported
TOT
TOT per
AUP results
Underpayment
(Overpayment)
Variance
percentage
1 $1,673,501 $1,673,501 $0 0.00%
2 $989,928 $993,411 $3,483 0.35%
3 $464,539 $460,365 ($4,174) -0.91%
4 $673,799 $674,397 $598 0.09%
5 $104,309 $104,347 $38 0.04%
6 $3,424,203 $3,422,444 ($1,759) -0.05%
7 $357,738 $362,171 $4,433 1.2%
8 $3,283627 $3,425,928 $142,301 4.2%
Totals $10,971,644 $11,116,564 $144,920 1.3%
Oct. 21, 2025 Item #7 Page 8 of 26
6 Transient Occupancy Tax Agreed-Upon Procedures
The findings for Carlsbad Tourism Business Improvement District (CTBID)
assessments generally followed those of the TOT findings. In most cases, the
expectation is that the magnitude of any discrepancy in CTBID would be around 10%
of that of TOT, since the district’s assessment rate is one percent and the TOT rate is
10% of gross short-term rental revenue. However, the errors in some cases are
unique to CTBID collection. In one case (Table 4, entity #4), the CTBID variance
($91,151) was greater than the TOT variance amount ($64,107).
Most establishments sampled were not subject to the Carlsbad Golf Lodging
Business Improvement District (CGLBID) assessment, but there were discrepancies in
the calculations of all four establishments that reported CGLBID.
Table 4: CTBID & CGLBID variances for sampled entities in fiscal years 2020-21,
2021-22 and 2022-23
Entity Reported
CTBID
CTBID per
AUP results
Reported
CGLBID
CGLBID per
AUP results
1 $1,864 $1,869 - -
2 $114,187 $114,194 - -
3 $720,981 $720,930 $277,762 $277,398
4 $1,090,556 $1,181,707 - -
5 $198,030 $198,113 - -
6 $42,516 $45,309 - -
7 $84,145 $84,145 - -
8 $246,548 $246,331 - -
9 $179,708 $183,988 - -
10 $178,268 $178,930 - -
11 $1,047,417 $1,078,201 $431,970 $433,668
Totals $3,904,220 $4,033,717 $709,732 $711,066
Oct. 21, 2025 Item #7 Page 9 of 26
7 Transient Occupancy Tax Agreed-Upon Procedures
Table 5: CTBID & CGLBID variances for sampled entities in fiscal year 2023-24
Entity Reported
CTBID
CTBID Per
AUP Results
Reported
CGLBID
CGLBID per
AUP results
1 $334,700 $334,700 - -
2 $197,986 $198,682 $91,749 $92,056
3 $66,456 $92,072 - -
4 $134,760 $134,878 - -
5 $20,863 $20,870 - -
6 $683,187 $684,489 $341,593 $342,244
7 $71,548 $72,434 - -
8 $656,725 $685,185 $280,356 $289,805
Totals $2,166,225 $2,223,310 $713,698 $724,105
When a deficiency is identified during an audit, Carlsbad Municipal Code Section
3.12.080 requires the tax administrator to invoice the hotel operator for the
following:
• Net tax deficiency (underpayment)
• An audit deficiency penalty of 10% (Section 3.12.080(E))
• Interest of 1.5% per month, or fraction thereof (Section 3.12.080(C))
In practice, penalties and interest account for a large percentage of the amounts
owed to the city. This is because there is a lag of several months or even years
between the time in which an error occurs and the time when it is brought to the
city’s attention through a review. The following two tables display the penalties and
interest amounts levied by the city and also present them as a percentage of the
amount due.
Oct. 21, 2025 Item #7 Page 10 of 26
8 Transient Occupancy Tax Agreed-Upon Procedures
Table 6: Penalties and interest for underpayment of TOT & other
assessments by entity in fiscal years 2020-21, 2021-22 and 2022-23
Entity Amount due
to city Penalties Interest Total due
to city
Penalties and
interest as a
percentage of
amount due
1 ($40) - - ($40) -
2 $48 $10 $20 $78 62.5%
3 ($667) - - ($667) -
4 $154,547 $30,908 $47,682 $233,137 50.9%
5 $0 - - $0 -
6 $14,938 $2,988 $4,241 $22,167 48.4%
7 ($1,122) - - ($1,122) -
8 ($1,310) - - ($1,310) -
9 $28,052 $5,616 $8,434 $42,104 50.1%
10 $11,700 $2,346 $4,839 $18,885 61.4%
11 $198,647 $39,732 $68,461 $306,840 54.5%
Totals $404,793 $81,600 $133,677 $620,072 53.2%
Table 7: Penalties and interest for underpayment of TOT & other
assessments by entity in fiscal years 2023-24
Entity Amount due
to city Penalties Interest Total due
to city
Penalties and
interest as a
percentage of
amount due
1 $0 - - $0 -
2 $4,487 $1,544 $1,694 $7,725 72.2%
3 $21,441 $4,646 $6,574 $32,661 52.3%
4 $712 $146 $179 $1,037 45.6%
5 $47 $14 $23 $84 78.7%
6 $195 $704 $794 $1,693 768.2%
7 $5,323 $998 $1,654 $7,975 49.8%
8 $180,210 $36,048 $52,028 $268,286 48.9%
Totals $212,415 $44,100 $62,946 $319,461 50.4%
Oct. 21, 2025 Item #7 Page 11 of 26
9 Transient Occupancy Tax Agreed-Upon Procedures
Proposed transient occupancy tax ordinance amendment
In the past, some hotels were unresponsive to requests for records from the public
accounting firm conducting TOT engagements. CMC section 3.12.110 requires TOT
records to be retained by hotels and made available for inspection for a period of
three years.
While the responsiveness of establishments to document requests has improved,
other compliance challenges remain. One is that some hotels will argue that the
TOT ordinance does not apply to certain fees, charges and penalties that they apply.
Examples include early check-in fees, extra person fees, resort fees, and pet fees.
Revising the ordinance to include a detailed listing of taxable and exempt charges
will provide helpful clarification and hopefully reduce future instances of
noncompliance and oversight.
The Internal Audit Manager, the Finance Department and the City Attorney’s Office
have reviewed the TOT ordinance and are proposing an amendment to it, which
should be presented to the City Council by the end of calendar year 2025.
Oct. 21, 2025 Item #7 Page 12 of 26
10 Transient Occupancy Tax Agreed-Upon Procedures
Transient Occupancy Tax
Agreed-Upon Procedures
Appendix
SCHEDULE OF PROCEDURES TO BE PERFORMED
Our procedures for each Hotel as agreed upon by the management of the City of Carlsbad
will be as follows:
1. We will obtain and read the City Municipal Code Title 3 Chapter 3.12 Transient
Occupancy Tax and resolution related to the transient occupancy tax, as well as review
the former City Municipal Code Title 3 Chapter 3.37 Carlsbad Tourism Business
Improvement District and Chapter 3.38 Carlsbad Golf Lodging Business Improvement
District as applicable.
2. We will recalculate the mathematical accuracy and observe the timeliness of the
monthly transient occupancy reports filed with the City for the relevant fiscal year.
3. We will trace the transient rent receipts reported on each transient occupancy tax
returns prepared by the Hotel during the fiscal year to the transient rent receipts
recorded in their accounting records.
4. We will select a sample of 45 daily rental transactions (3 days each year and 5 guests per
day) and for each transaction selected, we will recalculate tax computations and trace
the amounts of rental revenues and transient occupancy tax collected to the books and
records of the Hotel.
5. We will trace the total number of days each unit/hotel room is occupied on the
transient occupancy tax returns prepared by the Hotel to the total number of days each
unit/hotel is occupied per Hotel records.
6. We will inquire of management of the Hotel to determine the following:
a. How “transient rent receipts” were accounted for and reported to the City.
b. What procedures were in place to identify transient and non-transient guests?
c. How exemptions, including complimentary rooms, were documented, and
reported to the City.
7. We will select 1 month each year (2018, 2019 and 2020) and will review the transient
occupancy tax returns for claims of exemption from tax. For up to 5 exemptions per
month we will review the Hotel’s documentation supporting the exemption.
Oct. 21, 2025 Item #7 Page 13 of 26
11 Transient Occupancy Tax Agreed-Upon Procedures
8. We will inquire how the Hotel handles reservations and payments done online through
a third party such as Expedia.com and how the transient occupancy tax was collected
and reported to the City for these transactions.
Oct. 21, 2025 Item #7 Page 14 of 26
Exhibit 2
Internal Audit of the
City’s Liability Claims
Handling
REPORT
October 2025
Toufic Tabshouri
Internal Audit Manager
Report 2025-02
Oct. 21, 2025 Item #7 Page 15 of 26
2 Audit of the City’s Procurement and Contracting Functions
TABLE OF CONTENTS
INTRODUCTION………………………………………………………..……………………………..3
Objectives & Scope ..............................................................................................3
Methodology ........................................................................................................3
Results Summary..................................................................................................3
Background ..........................................................................................................4
FINDING 1: LIABILITY CLAIMS ARE BEING PROPERLY
HANDLED…………………………………………………...………………………………………………7
Recommendation 1…………………………………………………………………………………………9
FINDING 2: NO ANOMALIES OR UNUSUAL PATTERNS WERE
FOUND IN CLAIMS DATA…………………………………………………………………..10
Recommendation 2……………………………………………………………………………………….11
MANAGEMENT RESPONSE TO RECOMMENDATIONS…….….12
CONCLUSION……………………………………………………………………………………….…12
Oct. 21, 2025 Item #7 Page 16 of 26
3 Audit of the City’s Procurement and Contracting Functions
INTRODUCTION
Objectives & Scope
This audit had one objective, which was to evaluate the efficiency and effectiveness
of claims handling at the City of Carlsbad. Efficiency and effectiveness were
evaluated based on the reasonableness and timeliness of claims settlements.
The audit period was for claims filed in fiscal years 2022-23, 2023-24, and 2024-25.
Audit work did not include a legal review of litigation strategies for litigated claims.
Methodology
Conducting the audit entailed:
• Researching claims handling best practices
• Reviewing applicable laws and policies
• Reading audit reports of claims handling functions at other government entities
• Interviewing knowledgeable employees
• Obtaining an understanding of the claims handling process
• Analyzing claims data
• Reviewing a sample of claim files
Results Summary
The audit of the liability claims handling function at the City of Carlsbad was included
in the Internal Audit Plan for fiscal year 2025-26. The liability claims handling
function was selected for audit because it is an important component of the city’s
risk management activities that can help control claim costs and prevent
reputational damage when operating effectively.
This report contains two findings. The first is that claims are being properly handled.
The second is that there were no anomalies or unusual patterns in the claims data.
Both findings are reassuring.
There are two recommendations in this audit report. The first is to formalize the
liability claims handling function by writing a policy and guidance on claims handling.
This is an effective way to preserve organizational knowledge in the event of
employee turnover. The second is to provide annual reporting on claims to city
management.
Oct. 21, 2025 Item #7 Page 17 of 26
4 Audit of the City’s Procurement and Contracting Functions
Background
In conducting daily and routine operations, city departments such as the Police, Fire,
Streets, Utilities are exposed to property damage and bodily injury claims. These
arise from:
• Accidents involving city vehicles and automobiles, bicycles, motorcycles and
pedestrians
• Falls on city sidewalks
• Flooding damage from water pipe breaks
• Sewage backup from clogged sewer pipes
• Police use of force
Most of these types of claims entail an allegation of negligence, but claims can also
involve allegations of statutory violations. An example is employment-related claims.
The California Tort Claims Act, codified in sections 810 through 996.6 of the
California Government Code, sets forth requirements for pursuing claims against
government entities. One such requirement is that a party must notify a government
entity in writing by submitting a claim form prior to filing a lawsuit. The Act also
establishes a statutory deadline of six months for bringing a lawsuit against a
government entity for most actions.
Injured parties seeking monetary damages from the city are required to submit a
claim form to the city. The claim is then investigated by city staff to decide whether
to pay the amount requested in the claim, to reject the claim, or to negotiate a
settlement. In many cases, even when the claimant has sustained an injury, the city
has no legal liability for the injury.
The claims handling function is staffed by one claims adjuster who reports to the
Risk Manager within the Human Resources Department. Risk Management’s
responsibilities include overseeing the Worker’s Compensation Program, the
procurement of excess insurance, and overseeing claims handling. The
organizational structure, placement and staffing of Risk Management is common for
California municipalities.
An effective claims handling function is important for several reasons. Financially,
the cost of claims differs from many other budgeted expenses in that it is subject to
greater variability. Furthermore, it can be controlled by implementing good risk
management practices. Timely communication of claims data to other city
departments is an example of such a practice, since it allows departments to modify
their operating procedures, mitigate risks, and remediate hazards to avoid future
incidents and resulting claims. One example of hazard remediation is a pothole that
is repaired quickly before it causes damage to more vehicles.
Oct. 21, 2025 Item #7 Page 18 of 26
5 Audit of the City’s Procurement and Contracting Functions
The following table presents claims data for the past three fiscal years. There were
243 claims, 194 that were closed and 49 that remain open.
Fiscal year Number of
claims
Payments to
claimants Legal expenses
2022-23 83 $541,030 $318,104
2023-24 93 $65,063 $1,226,347
2024-25 67 $36,894 $4,853
Total 243 $642,987 $1,549,304
The City of Carlsbad paid a total of 71 claims in fiscal year 2022-23, 2023-24, and
2024-25. While 87%of those claims were settled for $10,000 or less, the three most
costly claims accounted for more than 60% of the total payment amount for claims.
Payment range Number of
claims
Percentage
of total
Dollar
amount
Percentage
of total
Less than $1,000 26 36.6% $11,003 1.7%
$1,000 to $5,000 28 39.4% $59,224 9.2%
$5,000 to $10,000 8 11.3% $53,794 8.4%
$10,000 to $50,000 6 8.5% $128,115 19.9%
$50,000 to $100,000 1 1.4% $91,851 14.3%
$100,000 to $250,000 2 2.8% $299,000 46.5%
Total 71 $642,987
Legal defense costs for fiscal year 2022-23, 2023-24, and 2024-25 surpassed the
direct payments to claimants. Legal defense costs varied considerably across claims.
While almost half the claims incurred amount of $10,000 or less, the remainder
ranged between $10,000 to $100,000. One claim accounted for more than two
thirds of the total legal defense costs.
Paid legal expense Number of
claims
Percentage
of total
Dollar
amount
Percentage
of total
Less than $5,000 10 43.5% $23,291 1.5%
$5,000 to $10,000 2 8.7% $17,704 1.1%
$10,000 to $50,000 5 21.7% $92,299 6.0%
$50,000 to $100,000 5 21.7% $355,337 22.9%
More than $1,000,000 1 4.3% $1,060,674 68.5%
Total 23 $1,549,304
Oct. 21, 2025 Item #7 Page 19 of 26
6 Audit of the City’s Procurement and Contracting Functions
Proper claims handling is essential to control claims costs. Claimants can be
corporations, insurance companies, small businesses, homeowner’s associations,
parents, professionals, elderly, young, disabled or transient. These claimants have
different concerns, needs, sensitivities and preferences in communication.
Professional and artful claims handling can lower liability costs by disposing of claims
quickly, while mishandling claims will escalate litigation costs and generate bad
publicity. An effective claims adjuster possesses a broad skillset, including:
• A command of liability law and theories
• Knowledge of applicable statutes and regulations, such as the California Motor
Vehicle Code
• Effective negotiation skills to reach fair and reasonable settlement agreements
• Excellent professional communication skills to connect and communicate with
people from varied backgrounds
Oct. 21, 2025 Item #7 Page 20 of 26
7 Audit of the City’s Procurement and Contracting Functions
FINDING 1 : LIABILITY CLAIMS ARE BEING PROPERLY
HANDLED
For this audit, I selected and reviewed a sample of 15 claims from the claim files that
are stored in the claims work area. I reviewed the claim files to determine whether
they contained sufficient documentation to support the disposition of the file, to
determine the reasonableness of any settlement amount, and to measure the
timeliness of claims handling.
The files I reviewed varied considerably in complexity. Files for simple claims
included basic information about the nature of a loss and correspondence with the
claimant, while files for more complex claims were voluminous, containing legal
correspondence and technical reports. For closed claims, the claim files contained
sufficient documentation to support the disposition of the claim and reasonableness
of settlement amounts. Almost 90% of claims are filed within nine months of the
incident or loss date.
Oct. 21, 2025 Item #7 Page 21 of 26
8 Audit of the City’s Procurement and Contracting Functions
Almost 94% of closed claims are closed within one year of filing. This data, along
with a review of correspondence with claimants that was present in claims files,
indicates that claims are being investigated and worked in a timely fashion.
Claims that remain open after one year are generally litigated, but most of those
claims are closed within two to three years as shown in the table below.
Status of claims Closed Percentage
closed Open
FY 2022-23 80 96.4% 3
FY 2023-24 74 79.6% 19
FY 2024-25 40 59.7% 27
Total 194 49
During this audit, the Risk Management Department provided a copy of a review of
liability claims handling that was conducted on behalf of the California Insurance
Pool Authority in February 2024 by a claims consulting firm. The review had a
broader scope than this audit. The reviewers possessed the requisite professional
qualifications for their industry. The review entailed sampling 17 claim files and
scoring them across 18 different categories. Most categories rated a 100% score,
and the overall score was 98.36% .
Oct. 21, 2025 Item #7 Page 22 of 26
9 Audit of the City’s Procurement and Contracting Functions
The following is a listing of the categories that relate most closely to this audit:
• The initial set-up and contacts are made timely.
• Claims are evaluated for sufficiency and timeliness.
• Potential coverage issues are well documented and promptly addressed.
• Each paper claim file is well documented through email correspondence and
reports outlining interactions with claimants, city contacts, and legal counsel.
• Each claim file reviewed contained relevant documents, the current status
and plan of action.
• The claim file documentation outlines active case management and diary
review.
• There is evidence of a proactive and comprehensive investigation in each of
the claim files reviewed.
• Liability assessments are timely and comprehensive taking into consideration
government codes, immunities, case law, etc.
• Damage evaluations are present within the claim files and take into
consideration both compensatory and general damages.
• Negotiations and settlements are proactively pursued which helps mitigate
damages.
• Appropriate evaluation of claim exposure and potential for dismissal through
motion practice or defense verdict.
• Evidence of supervisory involvement and review of claim files.
• Payments are issued in a timely manner and in accordance with CIPA
standards.
• The City of Carlsbad is proactive in promptly closing claims following the
resolution of all outstanding issues and billing.
The results of this independent evaluation increased the Internal Audit Manager’s
confidence in Finding 1 of this report.
Recommendation 1
Risk Management should develop basic policies and procedures for claims handling.
This document should serve as a repository of knowledge for new claims adjusters
that can help mitigate disruption from staff turnover. It should standardize practices.
Oct. 21, 2025 Item #7 Page 23 of 26
10 Audit of the City’s Procurement and Contracting Functions
FINDING 2 : NO ANOMALIES OR UNUSUAL PATTERN S
WERE FOUND IN CITY CLAIMS DATA
This audit scrutinized claims data for fiscal years 2022-23, 2023-24, and 2024-25. No
unusual patterns were detected that warranted further investigation or that raised
any concerns. Examples of claims that would have been concerning would be
recurring and preventable claims from hazards that were not remediated. For
example, a pothole that caused damage to multiple vehicles over a period of
months, or a city employe that was deemed at fault in multiple vehicle accidents.
For some types of claims, such as claims at the Library, the sample sizes were too
small for any pattern to be present in the data. For departments that had multiple
claims associated with their operations or with assets that they operate or maintain,
the types of claims that were present were normal. There was no discernable
growth in a particular type of claim. The following two tables show claims by
department and by type of claim.
Department Number of
claims
Percentage
of claims Claims total
Average
claim
amount
Human Resources 4 1.6% $199,000 $49,750
Transportation 101 41.6% $184,337 $1,825
Parks 48 19.8% $180,449 $3,759
Utilities 26 10.7% $43,692 $1,680
Fire 8 3.3% $16,556 $2,070
Police 34 14.0% $14,467 $425
Recreation 7 2.9% $4,486 $641
Other 7 2.9% $0 $0
Library 3 1.2% $0 $0
City Manager 1 0.4% $0 $0
Community
Development,
Economic
Development
2 0.8% $0 $0
Housing & Homeless
Services 1 0.4% $0 $0
Non-city department 1 0.4% $0 $0
Oct. 21, 2025 Item #7 Page 24 of 26
11 Audit of the City’s Procurement and Contracting Functions
Type of Loss Number Percentage Claims
total
Average
claim
amount
Personnel action 8 3.3% $199,000 $24,875
Tree (other than sewer/water
related) 31 12.8% $158,835 $5,124
Trip/fall 32 13.2% $135,382 $4,231
Sewer/water (other than tree
related) 17 7.0% $42,581 $2,505
Other 27 11.1% $27,762 $1,028
Vehicle collision 40 16.5% $34,661 $867
Vehicle comprehensive (other
than collision) 50 20.6% $31,723 $634
Law enforcement 26 10.7% $10,587 $407
Sewer/water (tree related) 7 2.9% $2,456 $351
Dangerous condition on public
property 5 2.1% $0 $0
Recommendation 2:
Risk Management should provide a basic annual report of claims data to
management. This report should provide information about the types and costs of
claims, as well as any changes or emerging patterns in liability.
Oct. 21, 2025 Item #7 Page 25 of 26
12 Audit of the City’s Procurement and Contracting Functions
MANAGEMENT RESPONSE TO RECOMMENDATIONS
Recommendation 1:
Risk Management should develop basic policies and procedures for claims handling.
This document should serve as a repository of knowledge for new claims adjusters
that can help mitigate the impacts of staff turnover. It should standardize practices.
Management response:
Management agrees with this recommendation and will work to implement it.
Recommendation 2:
Risk Management should provide a basic annual report of claims data to
management. This report should provide information about the types and costs of
claims, as well as any changes or emerging patterns in liability.
Management response:
Management agrees with this recommendation and will work to implement it.
CONCLUSION
The city’s liability claims handling function is operating effectively and efficiently and
conforms to best practices. The city is managing liability claims in a fair, consistent,
and responsible manner that safeguards public resources.
The recommendations in this report are intended to improve the retention of
knowledge within the city and improve the communication of risk-related
information within the city. Both recommendations will help sustain the
effectiveness of claims management in the event of employee turnover.
Oct. 21, 2025 Item #7 Page 26 of 26
Internal Audit Update
Toufic Tabshouri, Internal Audit Manager
October 21, 2025
2
PROPOSED ACTION
Accept the audit report findings and
recommendations.
ITEM 7: INTERNAL AUDIT PLAN
3
TODAY’S PRESENTATION
•Update on Internal Audit Workplan for FY 2025-26
•Transit Occupancy Tax (TOT) reports
•Public Liability Claims Handling – Internal Audit
Report
ITEM 7: INTERNAL AUDIT PLAN
4
INTERNAL AUDIT WORKPLAN
ITEM 7: INTERNAL AUDIT PLAN
Approved Internal Audit Workplan for FY 2025-26 Status
Transit occupancy tax for FY 2024-25 (oversight only)Not started
Police Department inventory and storage Not started
Information Technology Security Not started
Employee overtime In progress
Liability claims handling Completed
Prior year projects
Transit occupancy tax (FY 2020-21 to FY 2023-24)Completed
Procurement (FY 2020-21)Completed*
* To be presented before the City Council in early 2026
5
TRANSIT OCCUPANCY TAX REPORT
ITEM 7: INTERNAL AUDIT PLAN
This report covers work from two periods:
•Fiscal years 2020-21, 2021-22, and 2022-23
COVID delayed TOT work
The Internal Audit Manger position was vacant for one
year
•Fiscal year 2023-24
6
TRANSIT OCCUPANCY TAX REPORT
ITEM 7: INTERNAL AUDIT PLAN
•Eleven establishments were tested for the first period and eight for the
second
•The total TOT underpayment was $253,021 and $144,920 for two periods,
respectively
•There were underpayments for Carlsbad Tourism Business Improvement
District (CTBID) and Carlsbad Golf Lodging Business Improvement District
(CGLBID) in the amounts of $130,799 and $1,985 for the four fiscal years
7
TRANSIT OCCUPANCY TAX REPORT
ITEM 7: INTERNAL AUDIT PLAN
When a deficiency is identified during an audit, the Carlsbad Municipal Code requires the tax administrator to invoice the hotel operator for the following:
•Net tax deficiency (underpayment)
•An audit deficiency penalty of 10%, CMC Section 3.12.080(E)
•Interest of 1.5% per month, or fraction thereof, CMC Section 3.12.080(C)
8
PUBLIC LIABILITY CLAIMS HANDLING
ITEM 7: INTERNAL AUDIT PLAN
Audit Objective:
To evaluate the efficiency and effectiveness of claims
handling at the City of Carlsbad.
9
PUBLIC LIABILITY CLAIMS HANDLING
ITEM 8: INTERNAL AUDIT PLAN
1. Claim investigated & liability determined
2. Direct cause identified & responsible party notified
3. Hazard or cause remediated or mitigated
4. Analysis and reporting of claims trends to stakeholders
Indicators of an effective claims handling function:
10
PUBLIC LIABILITY CLAIMS HANDLING
ITEM 7: INTERNAL AUDIT PLAN
Fiscal Year Number of Claims Payments to
Claimants Legal Expenses
2022-23 83 $541,030 $318,104
2023-24 93 $65,063 $1,226,347
2024-25 67 $36,894 $4,853
Total 243 $642,987 $1,549,304
Claims volume and costs for the past three fiscal years:
11
PUBLIC LIABILITY CLAIMS HANDLING
ITEM 7: INTERNAL AUDIT PLAN
Status of claims per year. Most claims were closed with no payment.
Status of Claims Closed Percentage
Closed Open
Fiscal Year 2022-23 80 96.4%3
Fiscal Year 2023-24 74 79.6%19
Fiscal Year 2024-25 40 59.7%27
Total 194 49
12
PUBLIC LIABILITY CLAIMS HANDLING
ITEM 7: INTERNAL AUDIT PLAN
Payment Range Number
of Claims
Percentage
of Total
Dollar
Amount
Percentage
of Total
Less than $1,000 26 36.6%$11,003 1.7%
$1,000 to $5,000 28 39.4%$59,224 9.2%
$5,000 to $10,000 8 11.3%$53,794 8.4%
$10,000 to $50,000 6 8.5%$128,115 19.9%
$50,000 to $100,000 1 1.4%$91,851 14.3%
$100,000 to $250,000 2 2.8%$299,000 46.5%
Total 71 $642,987
Range distribution of payments to claimants
13
PUBLIC LIABILITY CLAIMS HANDLING
ITEM 7: INTERNAL AUDIT PLAN
Paid Legal Expense Number
of Claims
Percentage
of Total
Dollar
Amount
Percentage
of Total
Less than $5,000 10 43.5%$23,291 1.5%
$5,000 to $10,000 2 8.7%$17,704 1.1%
$10,000 to $50,000 5 21.7%$92,299 6.0%
$50,000 to $100,000 5 21.7%$355,337 22.9%
More than $1,000,000 1 4.3%$1,060,674 68.5%
Total 23 $1,549,304
Range distribution of legal expenses
14
PUBLIC LIABILITY CLAIMS HANDLING
ITEM 7: INTERNAL AUDIT PLAN
Finding 1:
Liability claims are being properly handled
•Claims are being processed in a timely manner
•Claim files are adequately documented
Finding 2:
No anomalies or unusual patterns were found in city
claims data
15
PUBLIC LIABILITY CLAIMS HANDLING
ITEM 7: INTERNAL AUDIT PLAN
Recommendation 1:
Risk Management should develop a basic policies and procedures for
claims handling. This document should serve as a repository of
knowledge for new claims adjusters that can help mitigate against
staff turnover. It should standardize practices.
Recommendation 2:
Risk Management should provide a basic annual report of claims
data to management. This report should provide information about
the types and costs of claims, as well as any changes or emerging
patterns in liability.
NEXT STEPS
•Complete remaining audits on the Internal Audit
Plan for FY 2025-26
•Continue to update the City Council on the
progress of the Internal Audit Plan
ITEM 7: INTERNAL AUDIT PLAN
16 16
17
PROPOSED ACTION
Accept the audit report findings and
recommendations.
ITEM 7: INTERNAL AUDIT PLAN