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HomeMy WebLinkAbout2002-06-11; City Council; 16784; Selection of McGladrey & Pullen - Financial Audit,E# 16,784 ITG. 06/11/02 IEPT. FIN CITY OF CARLSBAD - AGENDA BILL TITLE: SELECTION OF MCGLADREY & PULLEN, LLP FOR FINANCIAL AUDIT b DEPT HD. CITY Am. CITYMGR. a [ECOMMENDED ACTION: Adopt Resolution No. 2002-170 authorizing the selection of the audit firm of McGladrey & Pullen, LLP to perform the City’s financial audit for fiscal years 2001-02 through 2005-06. TEM EXPLANATION: The City has retained the certified public accounting firm of Conrad and Associates, LLP to perform audit services for the last eight years. The Finance Department has been pleased with their services, but periodically it is appropriate to consider changing auditors to assure service, independence and quality of the audit. Requests for proposals (RFPs) were solicited from ten (IO) firms with the following eight (8) firms responding: . Caporicci, Cropper & Larson, LLP Lance, Sol1 & Lunghard, LLP . Conrad & Associates, LLP McGladrey & Pullen, LLP Diehl, Evans & Company, LLP Moreland & Associates, Incorporated KPMG, LLP Teaman, Ramirez & Smith An audit review committee examined the RFPs for firm and staff qualifications, experience, audit approach, expertise in governmental auditing, and experience in providing on-going financial consulting services to municipalities. Additional reference checks were completed for the top ranked firms following the initial review. Upon completion of the selection process and reference checks, the committee has selected McGladrey & Pullen, LLP. McGladrey & Pullen, LLP specializes in local government accounting and comes highly recommended from other municipalities. McGladrey & Pullen represent the nation’s sixth largest accounting and consulting firm with over 4,800 people and 100 offices across the nation. Their southern California practice consists of four (4) core offices located in San Diego, Anaheim, Riverside, and Pasadena. The audit team will consist of individuals from both the San Diego and the Riverside offices. The review committee felt their combination of national resources and local experience would provide the City of Carlsbad with the knowledge and experience needed by an audit firm to conduct a thorough audit of the City’s records and additionally provide a well-trained and qualified staff with which to work. WCAL IMPACT: Although cost was not a primary factor in the selection, bids for fiscal year 2001-02 ranged from $39,320 to $88,400. McGladrey & Pullen, LLPs bid for fiscal year 2001-02 was $69,600; and total cost for the five (5) fiscal years is $369,785. Sufficient funds are available in the current budget to cover the fiscal year 2001-02 costs. Audit costs for the remaining four (4) years will be budgeted in future years’ budgets. Page 2 of Agenda Bill # 16,784 I. Resolution No. 2002-170 authorizing the selection of the audit firm of McGladrey & 2. Agreement with McGladrey & Pullen, LLP. Pullen, LLP to perform the financial audit. 2 I 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 RESOLUTION NO. 2002-170 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, CALIFORNIA, AUTHORIZING THE SELECTION OF MC GLADREY & PULLEN, LLP TO PERFORM THE FINANCIAL AUDITS FOR FISCAL YEARS 2001-02,2002-03,2003-04,200445, AND 2005-06. WHEREAS, the audit of the City of Carlsbad financial records is required by the City Council; and WHEREAS, bids from certified public accounting firms have been solicited, accepted, and evaluated; and WHEREAS, McGladrey & Pullen, LLP has been determined to be the most qualified at a reasonable cost; and WHEREAS. sufficient funds are available in the current 2001-02 Operating Budget. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as follows: 1. That the above recitations are true and correct, and 2. The public accounting firm of McGladrey & Pullen, LLP is selected to perform the financial audits for fiscal years 2001-02, through 2005-06, and Ill 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3. That the agreement between McGladrey & Pullen, LLP and the City of Carlsbad is hereby approved and the Mayor and City Clerk are hereby authorized and directed to execute said agreement. PASSED, APPROVED AND ADOPTED at a regular meeting of the Carlsbad City Council held on the day of JUNE , 2002 by the following vote, to wit: AYES: Council Members Lewis, NOES: None ABSENT None CLAUDE A. LEWIS, Mayor LORRAINE M. WOOD, city Clerk Page 2 of 2 of Resolution No. 2002-170 AGREEMENT FOR INDEPENDENT AUDITING SERVICES MC GLADREY & PULLEN, LLP 4” IS AGREEMENT is made and entered into as of the ;d. day of , 2002, by and between the CITY OF CARLSBAD, a municipal corpor ion, (“City”), and McGladrey & Pullen, a Limited Liability Partnership, (“Contractor”). PECITALS A. City requires the professional services of a Certified Public Accounting B. Contractor has the necessary experience in providing professional C. Selection of Contractor is expected to achieve the desired results in an D. Contractor has submitted a proposal to City and has affirmed its Firm that is experienced in governmental auditing. services and advice related to governmental auditing. expedited fashion. willingness and ability to perform such work. NOW, THEREFORE, in consideration of these recitals and the mutual covenants contained herein, City and Contractor agree as follows: 1. SCOPE OF WORK Citv retains Contractor to perform. and Contractor agrees to render, those services (the “Services”) that are defined in the attached proposal to provide professional audit services to the City of Carlsbad (Exhibit ”A”), which is incorporated by this reference in accordance with this Agreement‘s terms and conditions. 2. STANDARD OF PFRFORMANCE While oerformina the Services. Contractor will exercise the reasonable Drofessional . . . . . . - care and skill customarily exercised by reputable members of Contractor‘s profession diligence and best judgment while exercising its professional skill and expertise. practicing in the Metropolitan Southern California Area, and will use reasonable r_.~~~~~~~_ ~ ~~ ~ ~ ~ ~ 3. - TERM first above written, subject to the annual appropriation of funds by the City Council of the The term of this Agreement will be effective for a period. of five (5) years from the date fiscal year during the five (5) year term, this agreement will terminate consistent with City of Carlsbad (City Council). If the City Council does not appropriate funds for any satisfactory review of Contractor‘s performance, City needs, and appropriation of funds paragraph one on clause 20, Termination, below. Extensions will be based upon a by the City Council. The parties will prepare a written amendment indicating the effective date and length of the extended Agreement. 4. TIME IS OF THE ESSENCE Time is of the essence for each and every provision of this Agreement. 1 City Altorney Approved Version #04.01.02 5 5. c- The total fee Davable for the Services to be Derformed durina the five (51 vear Agreement term will be three hundred sixty-nine thousand, sevenhundred eighty-five dollars ($369.785), with annual payments incrementally shown in Exhibit A, subject to the annual appropriation of funds by the City Council. No other compensation for the Agreement. The City reserves the right to withhold a ten percent (10%) retention until Services will be allowed except for items covered by subsequent amendments to this City has accepted the work andlor Services specified in Exhibit "A". Incremental payments, if applicable, should be made as outlined in attached Exhibit "A". 6. STATUS OF CONTRACTOI? Contractor will perform the Services in Contractor's own way as an independent contractor and in pursuit of Contractor's independent calling, and not as an employee of City. Contractor will be under control of City only as to the result to be accomplished, but will consult with City as necessary. The persons used by Contractor to provide services under this Agreement will not be considered employees of City for any purposes. The payment made to Contractor pursuant to the Agreement will be the full and complete compensation to which Contractor is entitled. City will not make any federal or state tax withholdings on behalf of Contractor or its agents, employees or subcontractors. City will not be required to pay any workers' compensation insurance or unemployment contributions on behalf of Contractor or its employees or subcontractors. Contractor agrees to indemnify City within thirty (30) days for any tax, retirement compensation payment which City may be required to make on behalf of Contractor or contribution, social security, overtime payment, unemployment payment or workers' Agreement. At the City's election, City may deduct the indemnification amount from any any agent, employee, or subcontractor of Contractor for work done under this balance owing to Contractor. .~~~ ~~~~ .. . 7. SUBCONTRACTlNG of City. If Contractor subcontracts any of the Services, Contractor will be fully Contractor will not subcontract any portion of the Services without prior written approval responsible to City for the acts and omissions of Contractor's subcontractor and of the persons either directly or indirectly employed by the subcontractor, as Contractor is for the acts and omissions of persons directly employed by Contractor. Nothing contained in this Agreement will create any contractual relationship between any subcontractor of Contractor and City. Contractor will be responsible for payment of subcontractors. Contractor will bind every subcontractor and every subcontractor of a subcontractor by the terms of this Agreement applicable to Contractor's work unless specifically noted to the contrary in the subcontract and approved in writing by City. 8. The City res8rv8s the right to employ other Contractors in connection with the Services. 9. ~NDEMNIFICATION Contractor agrees to indemnify and hold harmless the City and its officers, officials, employees and volunteers from and against all claims, damages, losses and expenses including attorneys fees arising out of the performance of the work described herein caused in whole or in part by any willful misconduct or negligent act or omission of the Contractor, any subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable. City recognizes its responsibility for the preparation of accurate financial statements prepared in accordance with accounting principles generally accepted in the United States of America appllcable to governmental units such as the City of Carlsbad. Furthermore, City understands that it is primarily responsible for statutory, legal and regard, City acknowledges that Contractor will require formal written representations as regulatory compliance that may materially impact its financial statements. In this part of the audit(s) and that the Contractor intends to rely on those representations. The parties expressly agree that any payment, attorney's fee, costs or expense City incurs or makes to or on behalf of an injured employee under the City's self- administered workers' compensation is included as a loss, expense or cost for the termination of this Agreement. purposes of this section, and that this section will suwive the expiration or early 10. INSURANCE Contractor will obtain and maintain for the duration of the Agreement and any and all amendments, insurance against claims for injuries to persons or damage to property or Contractor's agents, representatives, employees or subcontractors. The insurance which may arise out of or in connection with performance of the sewices by Contractor will be obtained from an insurance carrier admitted and authorized to do business in the of not less than "A-:V". State of California. The Insurance carrier is required to have a current Best's Key Rating 10.1 Coverms and L Contractor wit1 maintain the types of coverages and minimum limits indicated below, imitg. unless City Attorney or City Manager approves a lower amount. These minimum amounts of coverage will not constitute any limitations or cap on Contractor's indemnification obligations under this Agreement. City, its officers, agents and employees make no representation that the limits of the insurance specified to be carried by Contractor pursuant to this Agreement are adequate to protect Contractor. If Contractor believes that any required insurance coverage is inadequate, Contractor will oblain such additional insurance coverage, as Contractor deems adequate, at Contractor's sole expense. 10.1.1 single-limit per occurrence for bodily injury, personal injury and property damage. If the iabilitv In . $i,OOO,OOO combined submitted policies contain aggregate limits, general aggregate limits will apply separately to the work under this Agreement or the general aggregate will be twice the required per occurrence limit. 10.1.2 Automobile Liability (if the use of an automobile is involved for Contractor's work for City). $1,000,000 combined single-limit per accident for bodily injury and property damage. 10.1.3 Workers' ComDensation and EmDlover's Liabilitv. Workers' Compensation limits as required by the California Labor Code and Employer's Liability limits of $1,000,000 per accident for bodily injury. Workers' Compensation and Employer's Liability insurance will not be required if Contractor has no employees and provides, to City's satisfaction, a declaration stating this. 10.1.4 Professm I iability. Errors and omissions liability appropriate to Contractor's profession with limits of not less than 81,000,000 per claim. Coverage must be maintained for a period of five years following the date of completion of the work. 10.2. Additional Provisions. Contractor will ensure that the policies of Insurance required under this Agreement contain. or are endorsed to contain, the following provisions: 10.2.1 The City will be named as an additional insured on General Llability. 10.2.2 Contractor will obtain occurrence coverage, excluding Professional Liability, which will be written as claims-made coverage. 10.2.3 This insurance will be In force during the life of the Agreement and any extensions of it and will not be canceled without thirty (30) days prior written notice to City sent by certified mail pursuant to the Notice provisions of this Agreement. of this Agreement, Contractor will furnish certificates of insurance and endorsements to 10.3 E. Prior to City's execution City. 10.4 Failure to Maintain Coveraae. if Contractor fails to maintain any of these insurance coverages, then City will have the option to declare Contractor in breach, or may purchase replacement insurance or pay the premiums that are due on existing policies in order to maintain the required coverages. Contractor is responsible for any payments made by City to obtain or maintain insurance and City may collect these payments from Contractor or deduct the amount paid from any sums due Contractor under this Agreement. 10.5 Subm complete and certified copies of any or all required insurance policies and isslon of Insurance PolicIeS. City reserves the right to require, at anytime, endorsements. 11. BUSINESS LICENSE Contractor will obtain and maintain a City of Carlsbad Business License for the term of the Agreement, as may be amended from time-to-time. 12. Contractor will maintain complete and accurate records with respect to costs incurred under this Agreement. All records will be clearly identifiable. Contractor will allow a representative of City during normal business hours to examine, audit, and make transcripts or copies of records and any other documents created pursuant to this Agreement. Contractor will allow inspection of all work, data, documents, proceedings, final payment under this Agreement. and activities related to the Agreement for a period of three (3) years from the date of 13. OWNERSHIP OF DOCUMENT@ All work Droduct Drcduced bv Contractor or its agents. employees, and subcontractors ~ ~~~ ~~ pursuant'~to this Agreement-is the property of city. In the-event this Agreement is terminated, all work product produced by Contractor or its agents, employees and will have the right to make one (1) copy of the work product for Contractor's records. subcontractors pursuant to this Agreement will be delivered at once to City. Contractor 14. COPYRIGHT$ Contractor agrees that all copyrights that arise from the services will be vested in Clty and Contractor relinquishes all claims to the copyrights in favor of City. 15. NOTICES The name of the persons who are authorized to give written notices or to receive written notice on behalf of City and on behalf of Contractor under this Agreement. For City: Lisa Hildabrand Director City of Carlsbad Finance Department Carisbad, CA 92008-7314 1635 Faraday Avenue 760-602-2430 For Contractor: Joe LaPlante Rod LeMond Partners McGladrey & Pullen. LLP 31 11 Camino del Rio North, #1150 San Diego. CA 921 08 61 9-280-3022 Each party will notlfy the other immediately of any changes of address that would require any notice or delivery to be directed to another address. 16. CONFLICT OF INTEREST City will evaluate Contractor's duties pursuant to this Agreement to determine whether disclosure under the Political Reform Act and City's Conflict of Interest Code is required of Contractor or any of Contractor's employees, agents, or subcontractors. Should it be determined that disclosure is required, Contractor or Contractor's affected employees, 5 City Attorney Appmved Vemlon W.01.02 agents, or subcontractors will complete and file with the City Clerk those schedules specified by City and contained in the Statement of Economic Interests Form 700. Contractor. for Contractor and on behalf of Contractor's agents, employees, subcontractors and consultants warrants that by execution of this Agreement, that they have no interest, present or contemplated, in the projects affected by this Agreement. subcontractors and consultants have any ancillary real property. business interests or Contractor further warrants that neither Contractor. nor Contractor's agents, employees, income that will be affected by this Agreement or, alternatively, that contractor will file with the City an affidavit disclosing this interest. 17. GENERAL COMPLIANCE WITH LAWS Contractor will keep fully informed of federal, state and local laws and ordinances and affect the performance of the Services by Contractor. Contractor will at all times observe regulations which in any manner affect those employed by Contractor, or in any way compliance of Contractor's services with all applicable laws. ordinances and regulations. and comply with these laws, ordinances, and regulations and will be responsible for the Contractor will be aware of the requirements of the Immigration Reform and Control Act of 1986 and will comply with those requirements, including, but not limited to. verifying the eligibility for employment of all agents, employees, subcontractors and consultants that the services required by this Agreement. 18. & Contractor will comply with all applicable local, state and federal laws and regulations prohibiting discrimination and harassment. 19. DISPUTE RESOLUTION procedure will be used to resolve any questions of fact or interpretation not otherwise If a dispute should arise regarding the performance of the Services the following settled by agreement between the parties. Representatives of Contractor or City will reduce such questions, and their respective views, to writing. A copy of such documented dispute will be forwarded to both parties involved along with recommended methods of resolution, which would be of benefit to both parties. The representative receiving the letter will reply to the letter along with a recommended method of resolution within ten (10) business days. If the resolution thus obtained is unsatisfactory to the aggrieved party, a letter outlining the disputes will be forwarded to the City Manager. The City Manager will consider the facts and solutions recommended by each the City Manager will be binding upon the parties involved, although nothing in this party and may then opt to direct a solution to the problem. In such cases, the action of procedure will prohiblt the partles from seeking remedles available to them at law. 20. TERMINATION In the event of the Contractor's failure to prosecute, deliver, or perform the Services. certified mail of the termination. If City decides to abandon or indefinitely postpone the City may terminate this Agreement for nonperformance by notifying Contractor by 6 Cii Anomy Apprwed Versbn #04.01.02 work or services contemplated by this Agreement, City may terminate this Agreement (5) business days to deliver any documents owned by City and all work in progress to upon written notice to Contractor. Upon notification of termination, Contractor has five City address contained in this Agreement. City will make a detemination of fact based upon the work product delivered to City and of the percentage of work that Contractor has performed which is usable and of worth to City in having the Agreement completed. Based upon that finding City will determine the final payment of the Agreement. Either party upon tendering thirty (30) days written notice to the other party may terminate this Agreement. In this event and upon request of City, Contractor will assemble the work product and put it in order for proper filing and closing and deliver it to City, Contractor will be paid for work performed to the termination date: however, the total will not exceed the lump sum fee payable under this Agreement. City will make the final determination as to the portions of tasks completed and the compensation to be made. 21. COVENANTS AGAINST CONTINGENT FEES Contractor warrants that Contractor has not employed or retained any company or person, other than a bona fide employee working for Contractor, to solicit or secure this Agreement, and that Contractor has not paid or agreed to pay any company or person, or any other consideration contingent upon, or resulting from, the award or making of other than a bona fide employee, any fee, commission, percentage, brokerage fee, gift, this Agreement without liability, or, in its discretion, to deduct from the Agreement price this Agreement. For breach or violation of this warranty, City will have the right to annul or consideration, or otherwise recover, the full amount of the fee, commission, percentage, brokerage fees, gin. or contingent fee. 22. City must be asserted as part of the Agreement process as set forth in this Agreement By signing this Agreement, Contractor agrees that any Agreement claim submitted to and not in anticipation of litigation or in conjunction with litigation. Contractor acknowledges that if a false claim is submitted to City, it may be considered fraud and Contractor may be subject to criminal prosecution. Contractor acknowledges that California Government Code sections 12650 m, the False Claims Act applies to this Agreement and, provides for civil penalties where a person knowingly submits a false claim to a public entity. These provisions include false claims made with deliberate ignorance of the false information or in reckless disregard of the truth or falsity of entitled to recover its litigation costs, including attorney's fees. Contractor acknowledges information. If City seeks to recover penalties pursuant to the False Claims Act, it is that the filing of a false claim may subject Contractor to an administrative debarment on any public work or improvement for a period of up to five (5) years. Contractor proceeding as the result of which Contractor may be prevented to act as a Contractor Agreement. acknowledges debarment by another jurisdiction is grounds for City to terminate this 7 City ARmey Appmved Version #04.01.02 23. -E JU Any action at law or in equity brought by either of the parties for the purpose of enforcing a right or rights provided for by this Agreement will be tried in a court of competent jurisdiction in the County of San Diego, State of California, and the parties waive all provisions of law providing for a change of venue in these proceedings to any other county. 24. It is mutually understood and agreed that this Agreement will be binding upon City and Contractor and their respective successors. Neither this Agreement or any part of it nor any monies due or to become due under it may be assigned by Contractor without the prior consent of City, which shall not be unreasonably withheld. 25. ENTIRE AGREEMENT This Agreement, together with any other written document referred to or contemplated by it, along with the purchase order for this Agreement and its provisions, embody the entire Agreement and understanding between the parties relating to the subject matter of it. In case of conflict, the tens of the Agreement supersede the purchase order. Neither this Agreement nor any of its provisions may be amended, modified, waived or discharged except in a writing signed by both parties. Ill (Remainder of this page lntentlonelly left blank) 8 City Atlomey Appmved Version W4.01 .M CONTRACTOR If required by City, proper notarial acknowledgment of execution by contractor must be attached. If a Cornoration, Agreement must be signed by one corporate ofticer from each of the following two groups. "Group A. Chairman, President, or Vice-president -Group 0. Assistant Secretary, Secretary, CFO or Assistant Treasurer Otharwlre, the corporation a attach a resolution certffled by the secretary or assistant secretary under corporate seal empowering the ofbr(s) signing to bind the corporation. APPROVED AS TO FORM: R. BALL, City Attorney -e -City Attorney L/lfx37e- 9 City Atlmey Approved Vemion 1104.01.02 CALIFORNIA ALL-PURPOSE ACKNOWLEDGMENT personally appeared , -, ?.,.<.. . Though me informauon below is not required by taw, it may pmve valuable to persons'relyng on the document and could prevent fraudulent removal and reanachment of this form to another document. Description of Attached Document Document Date: Capacity(ies) Claimed by Signer(@ 0 Corporate Officer 3 Partner - 3 Limited 0 General D Attorney-in-Fact El Guardian or Conservator Signer Is Representing: ~~dol: c.11 TOII-FW t%c+wsaen Signer's Name: 0 Individual 0 Corporate Officer 0 Partner - 0 Limited 0 General Titie(s): I7 Attornev-in-Fact ~ ~ ~~~~ 0 Trustee I3 Guardian or Conservator U Other: Signer Is Representing: u CALIFORNIA ALL-WRPOSE ACKNOWLEDGMENT State of California 1 County o 1 flwrsonally known to me Moved to me on the basis of satlsfactory evidence to be the personM whose nam6 idam- subscribed to the within instrument and acknowledged to acted, executed the instrument. OPTlONAL Though Ihs infmafion below Is nol required by law, d may prow valuable to persons relying on the dooument and could prevent fmuduleni mvaI and reaftachmsnt of this fonn lo another document. DescripUon of Attach Title or Type of Docume W Document Date: Signer@) Other Than Named Above: kv Capaclty(ies) Clalmed by Signer 0 Individual Signer's Name: 0 Corporate Officer - Title@): Partner - 0 Limited 0 General Attorney in Fact 0 Trustee 0 Guardian M Conservator 0 Other: Signer Is Representing: I 0 0 EXHIBIT A I I I I I I I I I I I I I I I I THE CITY OF CARLSBAD Audit Proposal Fiscal Years Ending June 30,2002 through 2006 March 28,2002 Contact: Rod LcMond, Partner M%LADREY&PULLEN,LLP Certified Public Accountants I I I I 1 I I I I I I I I I I I I I m Certltlsd Public Accountants March 28,2002 Ms. Lisa Hildabrand, Finance Director Finance Department City of Carlsbad 1635 Faraday Carlsbad, California 92008-1314 RSM international Dear Ms. Hildabrand: We appreciate the opportunity to submit our proposal ‘to provide audit services to the City of Carlsbad (“City”). In response to your Request for Proposal (“FtFP”), we have prepared a proposal that reflects our understanding of the City‘s requirements and demonstrates our capability and commitment to serve. This proposal represents a collaborative effort by RSM McGladrey, Inc. (“RSM McGladrey”) and McGladrey & Pullen, LLP (“McGladrey & Pullen”). We intend to demonstrate that RSM McGladrey and McGladrey & Pullen are the right professional services fms for the City. As we. understand the audit requirements described in the RPP guidelines, you expect a timely audit conducted in a professional manner in accordance with audit standards specific to governmental entities such as yours. We are committed to meet all the requirements you have indicated and will issue the reports and meet the timing requirements outlined in the enclosed proposal. We believe RSM McGladrey and McGIadrey & Pullen are uniquely qualified to provide the quality and scope of service that the City desires. Focured on the Gwemmental Indurrry We are focused on your industry. As a firm, we serve the audit and compliance needs of over 700 (“GFOA”) they informed us that they review for their award program over 200 reports annually that are governments on a .yearly basis. In a rent poll of the Government Finance Officers Association audited by McGladrcy & Pullen. RSM McGladrry and McGIadrcy & Pdkn - The Righf Choice Working together, the RSM McGladrey and McGladrey & Pullen team is one of the largest accounting, tax and consulting Finns in the nation, as well as in Southern California and San Diego County. In addition, we have been ranked one of the top ten municipal auditors by ‘The Bond Buyer” in their Quarterly Statistics Supplement. As a full-service auditing and consulting firm operating from over 100 offices across the nation, we currently offer a wide range of professional services to counties, cities, school districts, and other governmental entities. Many of our governmental clients have been referred to us by regulators, among whom we have developed a reputation-for providing quality auditing and consulting services. In addition, we have assisted many clients in earning the GFOA Certificate of Achievement for Excellence in Financial Reporting. Sula 1150 31 11 Carnino Del Rlo North Snn Diego, California 9ZlC8-5744 (619) 280-3022 *Fax (619) 260-6902 W.mCg&d~.COm The Ci of carlsbad pw 2 March 28,2002 Our size, depth of resources and spccific govanmental experience am substantial, but it is not these factors that set us apart from other firms. bther, it is the commitment to deploy those resources and experience on behalf of the City. Simply put, the City will become one of our most important clients and, accordingly, will receive the priority service it deserves. 1 Our approach to the engagement will establish adelivcry system for providing a truly exceptional level of service. Each element of that system, including team structure, staffing, audit approach, communication and coordination, will be examined and refined to fit the needs ofthe City. I am authorized to make nprcsentations for MCGI~ICI~~~B~ PUII~~, LLP. our proposa~ repnseats our firm and irrevocable offer for a period of 60 days from the date of this letter to provide audit services to the City of Carlsbad for the ycars ending June 30,2002 through 2006. If you have any questions or noed additional information, please contact me at (909) 248-1800, extension 313, or at 3880 Lamon Stwet, Suite 100, Riverside, California 92501. In addition to myself, my partner Mr. Joe Laplante is also authorizodtomakerepresentationstotheCityonbshalfofthefirm.Hecanb.~achcdat(619)5161102 or at 3 I 11 Camino del Rio North, Suite 11 50, San Diego, California 92 108. We invite you to visit our web sites at www.nrg~~.com or www.rs1)71c8lodicy.com Sincttcly, MOGLADREY & PULLEN, LU Rod LcMond, Partner I I I I I I I I I I I I I I I I I I 1 TABLE OF CONTENTS Letter of Transmittal SECTION I TECHNICAL INFORMATION OUR PROPOSAL OBJECTIVES EXPANDED SERVICES AS NEEDED THE FIRM LOCALLY RELATIONSHIPS WITH REGULATORY AND PROFESSIONAL SANDARDS ORGANIZATIONS PROFESSIONAL DEVELOPMENT OUR QUALITY CONTROL SYSTEM DISCIPLINARY ACTION RSM MCGLADREY, INC. AND MCGLADREY & PULLEN, LLP NATONWIDE FIRM PHILOSOPHY OFTHE RELATIONSHIP BETWEEN CLIENT AND THE AUDIT PROCESS CURRENT GOVERNMENT AUDIT REFERENCES THE RSM MCGLADREY, INC. AND MCGLADREY & PULLEN, LLP DIFFERENCE THE MCGLADREY AUDIT WRITTEN COMMUNICATION TERM OF ENGAGEMENT AUDITSERVICES REQUIREMENTS OTHERNEEDS TIMING OF OUR PROCEDURES AFFIRMATIONS CLIENT SERVICE TEAM KEY PERSONNEL PROPOSED AUDIT HOURS SECTION I1 PROPOSED FEES FEE SCHEDULE OTHER SERVICES MANNER OF PAYMENT - I 1 3 4 4 6 I I 8 9 IO IO 12 13 13 14 IS 16 16 16 19 21 22 22 I TABLE OF CONTENTS I *APPENDICES I A. 0. I C. D. E. I F. G. AUDIT APPROACH SAMPLE CLIENT PARTICIPATION SCHEDULE CLIENT SERVICE TEAM PROFILES SAMPLE MANAGEMENT REPORT EXTERNAL QUALITY CONTROL REVIEW - CPE, QUALITY CONTROL, PRACTICE MANUAL GOVERNMENT 2000 AND BEYOND CASB NO. 34 IMPLEMENTATION STEPS . I I I I I I I I I I I I *NOTE: Appendicies are on file with the City of Carlsbad's City Clerk's Office. I I e I I I I I I I I I I I I I I I I Technical Information Our Proposal Objectivea In the sections that follow, our objectives are to demonstrate to the City of Carlsbad that: Our service approach will achieve the reporting and accountability objectives of the City in a The City will bc a valued client of RSM McGladrey, Inc. and Mdjladrey & Pullen, LLP and the quality services that meet your delivery requirements. ofice and personnel assigned to the engagements are both capable and committed to providing manner that provides a high degree of reliability with efficient execution. RSM McGladrey, Inc. and McGIadrey & Pullen, LLP Nationwide In the summer of 1999, McGladrey & Pullen, UP sold its non-attest (non-audit) services to H&R Block, Inc. Under the terms of the agreement, RSM McGladrey, Inc was established to hold the non-attest business services. The former consulting and tax setvices provided by McGIadrey & hllen, UP are now provided under the name RSM McGladrey, Inc. While legally separate, both organizations operate from the same locations and often use the same personnel when pcrforming engagements. The partners of McGladrcy & Pullen, LLP are Managing Directors in the RSM McGladrcy, Inc. organization. RSM McGladrey, Inc. and McGladrey & Pullen, LLP, when combined, represent the nation’s sixth largest accounting and consulting Firm, with over 4,800 people serving more than 120,000 clients through 100 offices across the nation. McGladrey & Pullen, LLP, which provides audit and other &st function services, is organized as a partnership, headed by 450 partners. The Firm is led by a 12-partner Board of Directors, and Firm-wide administrative functions arc performed cost-effectively from sevql ofices around the country. Its 100 offices are divided into six geographic and market-related regions for administrative purposes. Together, RSM Mdjladrey, Inc.‘s and McGladrcy & Pullen, LLP’S (the Firm’s) collective expertise is organid along both functional and industry lines. Audit and accounting, tax and consulting divisions are headed by Firmwidc coordinators who spend much of their time ensuring that our practitioners have access to the latest information in their areas of fi~nctional specialization. The City will have access to two key Firmwidc resource groups: I The City of Cwlsbad Page I I I I I I I I I I I I I I I I I I I I I Nariond Audit and Accounting is the Finn’s technical ~c~lch and quality control function. This resource would be made available to the City on mattem relating to govcmmental accounting and financial reporting, as well as internal audit policies, standanis and procedum. The Firm spccislii in serving government clients throughout the country. TheGovernment Consulling Group will assist the audit team in reviews related to the City’s EDP environment and will serve as a rcsource in matters relating to the operations of government entities. The City of Carlsbad Page 2 Expanded Services as Needed The unity of McGladrey & F’ull~n, LLP and RSM McGledrey, Inc. provides a full array of services ranging from cost-dcient, high quality audits like those we are proposing to you, ta tax and management consulting. A sample of the services that our accountants and consultants can provide are listed below: General Services Opinion Audits Gnnpli~ccRcviewr Internal Conbol Evaluations e Financial Projections Internal Audit Rogram Client Nads Assessment Development/Eva~uafion Litigation Support Cash Management Budget F’mprdon AsShnK Debt Refunding Verification Ropds Tax Services TaxR~Rspsration Tax Planning Tax Penalty Exposure Reviewa Employee Benefib Planning Repnsmmtion Before Taxing Arbitrage Calculations and Reporting Telecommunications Services Needs Assessment Studies System Design and Sclodion System Implementation Management Voice and Data Communication Voice and Data Integration Operations Enhancement Services Operations Reviews Organizational Reviews and Analysis Work and Performance Mmumcnt Workflow Rccngineering/Rocms Policies and Roccduns Dsvelopment Organizational Training Assaasment and Authorities Networks Analysis Improvement Planning Information Technology Planning Services . . 0 Strategic Tschnology Planning Ned Aas*ument Studies Contrad RoviewMegotiations Hardwarr/Softwm Evaluatinu/Stkctiona ReJpost-Conversion Audits Workgroup TcchnologyiLotus Noics consulting Intunetnntranct Design and Development Disaster Recovety Systcm Capacity Reviews and Analysis Information Security Services IntaneVFiiall Security Reviews Internet Intrurion Testing Security Policy Dcvclopment Infomation Systems Auditing LocallWide Area Network Sewica LANiWAN Design and Sslection NccdrAssesa~nent Network Implementation Assistance ContractReview Cabling Design Human Resonrces Consulting Services Executive Sed and Personnel Selenion Employee Climate and Attitude Surveys Performance Evaluation and Appraisal Wage and Salary Adminismtion Programs Third:Party Administrators Review Human Resource Compliance Project Management programs The Ci@ of Carlsbad Page 3 The Firm Locally McGladrey & Pullen, LLP made its initial commitment to the Southern California region when we merged with an established local practice in 1977. We continue our commitment to the region through quality to the governmental and private sectors, community involvement and employment of graduates of our local universities. . Our Southern California practice consists of four core offices, which are located in San Diego, Anaheim, Riverside, and Pasadena, California. We Serve a diverse client base in industries such as local governments, nonprofit organizations, banking, construction, manufacturing, wholesale and retail trade, and professional practices (medical, legal). Sewices to the City and its component units will be provided primarily by professionals from our San Diego and Riverside offices. The professional staffcomplement is illustrated in the following table: Partners 16 9 4 29 Managers 16 IO 13 39 Supervisors I8 la 4 32 Professionals sa 27 14 121 I 30 56 35 22 1 Approximately twenty percent of our audit professionals in the Southern California area practice have expcrience in serving local governmental units. AI1 of our offices are connected with one another via our Wide Area Network (WAN) and Lotus Notes servers. Using e-mail, we can communicate or exchange files with the City via the Internet. Relationships with Regulafnry and Professional Standards Organizations Government auditing and accounting is one of the most dynamic aspects of public accounting. The needs of clients and the expectations of government financial statemens and audit report users are changing rapidly. As a result, it is necessary that both our Firm and our clients have a means to keep current on changing requirements, to access decision makers when laws, regulations, standards and principles are being considcred and established, and to have an avenue of appeal, if necessary. To assure these benefits for both our Finn and our clients, we have established extensive formal and informal relationships with government officials, industry associations, standard sening hodies and professional organizations at the national, regional and state levels. At the national level, we have established both formal and informal relationships with officials of most key federal departments. Formally, we participated as an advisor to the President’s Council on Integrity and Efficiehcy through the Quality of Audit Roundtable. Numerous relationships are maintained with officials in the Office of Inspector General and most federal service capabilities departments and agencies, and close working relationships exist with key officials of the General Accounting Office and the Office of Management and Budget. At the regional level, we participate BS members (where allowed) or as observers of intergovernmental audit fONmS. In those forums wha such active participation is allowed, we have had representatives on the Executive Board. Participation m forum 6ctivities gives additional sources of information and opportunities to expnss the opinions of our clients and ourselvc~ on questions of audit policy, practices and standards. But most importantly, it helps us establish close relationships with top officials of the regional offices of Inspector Gmeral and state audit officials. In individual states, we maintain working relationships with state auditors and officials responsible for local government regulatory activities. Where such opportunities are available, we participate BS members of state advisory or regulatoj committees and boards concerned with local government accounting and auditing matters. To be informed of problems likely to be expenaced by individual clients, we maintain memberships in and participate to vatying dew at the national and state levels of industry organizations. Some of the organizations include the Government Finance Officers Association, Association of School Business Ofiicials, National Association of Counties, , the National Association of State Comptrollers, the California Society of Municipal Finance OWcers and the California Redevelopment Association. In addition to maintaining relationships with officials of these organizations, we emphasize building and maintaining a confidant and counselor relationship with the organizations’. officials concerned with audit matters and accounting principles. We believe the expression of the views of our clients in the professional standards and regulatory establishment process is particularly importsnt. At the federal level, in addition to formal responses to exposure drafts of proposed General Accounting Of3ice and Office of Management and Budget pronouncements, we also use the relationships describedin earlier paragraphs to communicate out views, BS well as those of our clients. Governmental accounting principles, established by the Governmental Accounting Standards Board, an evolving rapidly. In this important area, we maintain close relations with both Board members and staff personnel, and actively engage in both formal and informal communications on Board projects. This assures that the interests of our clients are well represented and that we and our clients have a clear and complete understanding of the nature and intent of Board actions. In the profession, we actively participate in the American Institute of Certified Public Accountants (AICPA) and various state society committees and task forces concerned with governmental acoounting, auditing and other matters. Our membership in AICPA committees, such as the Federal Government Accounting and Auditing Committee and the State and Local Government Committee, also provides our clients and us with a source of information and a means to express our respective views. In addition, our AICPA membership on the senior AICPA committees that establish accounting principles, auditing standards and the Code of Ethics assures that matters of concern to our governmental clients also receive consideration at the highest professional level. The Cig of Carlsbrrd Page 5 a Professional Development McGldrey & Pullen, LW’S professional development program is principally of an internal nature, with outside programs utilized when n&ssary to supp~ement the internal program. We also encowage mllment in postgraduate courses and have many employees in masters programs. Our professional development program is designed to support and promote the growth and wmpetence of all personnel, and is tailored to meet the needs of the various levels and specialties of our personnel. The and lmowlcdge necessary to provide exceptional services to our clients. primary aim of our professional development program is to quip our partners and staff with the talent Our professional development prograni can be divided into threa distinct elements on-the-job development, self-study, and continuing professional education (CPE). Our approach to professio& development emphasizes the importance of on-thGjob development, i.e., learning from experience. The components of our on-the-job development an appropriate work effectiveness. In-charge accountants instruct, review and evaluate staff accountants. Managers and assignments, effective coaching by supervisors, performance appraisal and feedback, and monitoring all employees with on-the-job development through constructive feedback during reviews of engagement supervisors provide similar on-the-job learning opportunities for in-charge accountants. Partners provide performance and end products. Self-study is essential to our professional development progtam. Directed Self-Study is assigned and monitond. A self-study lending library is available to all professionals. Wing on a planned and continuous basis is encouraged and axpscted. The capstone on our professional development program is CPE. The Firm has developed programs which are believed to be responsive to Firm needs and the expectations of our professionals. Needs assessment participant andlor discussion and report review memos, technical review and research notes, performance is the basis for planning our CPE program. Some of the soum of our needs assessment information are appraisal reports and interviews, interoffice and/or peer review comments, emerging technical issues, and management recommendations for organizational change. Once we have determined our needs, the discussion leader selection receive high priority consideration in the development of our CPE programs. program is planned to produce the desired learning outcomes. Course materials development and Outside consultants arc engaged to supplement our in-Firm capabilities. Program evaluation is an integral part of the CPE program. All professionals participate in formal CPE programs that exceed the minimum standards of mandatory CPE for all jurisdictions when we maintain practice offices and for AICPA section membership. Our CPE programs generally require a chin number of courses-in genml audit and.accounting areas and then permit the individuals to select programs that fit into their particular functional or industry specialty. The elective courses offered include governmental audit and accounting programs. A11 personnel assigncd to the City engagements will have met the 24-hour requirement of mandatory State Board of Accountancy. governmental CPE established by the General Accounting Office and now mandated by the California I The Cily of Carhbad Pnge 6 I In addition, our industry specialists have attended, and are encouraged to attend, courses conducted by external organizations in order to enhance their area of expertise. Educational coutseslscminars attended by supervisory personnel assigned to the audit are. show in the enclosed resumes in Appendix B to this ppo=I. Our Quality Control System - Quality begins with the professionals assigned to the engagement ’lle staff assigned will be qualified by Yellow Book CPE standards. In addition, the Firm has stringent standards as to who can perform the in- charge (senior) and manager/supm’isor function on a governmental audit. The in-charge must have completed a Firm-sponsored course titled, ‘Y3overnmental Auditing for In-Charge Auditors.” The topics of this course include: Our approach to governmental audits Government adit planning and supervision Auditingthc systems The mle and proper use of transaction testing Integration of financial and compliance audit procedures Every governmental audit engagement quires the following supewisory reviews: The in-charge auditor review A wmprebensive review by the audit manager The engagement mer review A repoe review by a designated government specialist partner Per review is now quid by the AICPA for all firms of a minimum size who perform audits, As members of the AICPA Public Companies Practice Section, our Firm has participated in ‘’peer review” since 1977 and has,been examined every threc years since that date. The external quality control review included a review of specific government engagements. A copy of our external quality review report is included in Appendix D. The quality control review included a review of specific government engagements. In addition, during the past three years, we have cwnplied with all federal and state requirements of their desk or quality reviews. Diseiplinary Action There has been no disciplinary action against McGladrey & Pullen, UP by the AICPA or any other governing agthority which ovofsees the accounting profession. The Clfy of Carlrbad Page 7 2? I a Firm philosophy of the Relationship Between Client and the Andit Process organizations should be conducted. Much of this guidance is in the form of mandatory professional There is substantial guidance provided to auditors of government organizations as to how audits of these. standards that must be followed by the auditor. These standards deal with technical issues and the “how to:’ as well as the training and attitude an auditor must have. ne underlying reason for audit standards is to provide uniformity and credibility to the audit process. with this, the audit should demonstrate accountability by those who receive and expend govmment ~SOUrccO. At McGladrcy & Pullen, UP, we BIC wbll aware of these sIandani8 and their imporIanw to the audit process. They are our professional responsibility and form the foundation for our governmental audit approach. As Certified Public Accountants performing a government audit, ow first responsibility is to the public for which the government exists. We discharge this responsibility by directing our results to the body of eld officials. Bemuse management has phary respmibility for the custody and proper use of public funds and, in this regard, must report on its own activities, our role is to authenticate that reporting. To perform this role, we must understand the organization’s control environment in which financial decisions are made and executed, as well as understand the pertinent laws and regulations. A fundamental part of our philosophy is to provide more than just a report card on management. We are, in addition to auditors, advocates for our clients. Much of what is involved in an audit is a learning exercise for the auditor in order to independently reach the right conclusion. This learning exercise gives us a valuabk insight into an organization’s operations. Our mission as advocates for our clients is to use this insight to make meaningM recommendations for improvement The City of Carkbud Puge 8 Current Government Audit References ENTITY CONT'ACWTITLE TELEPHONE NUMBER nlmcd entities Finance Direelor 818-548-2085 Valley and Finance Ditcctor rclmcd entities (909)113-3075 nlltcd entities (818)288-6671 and nlltcd entities (818)288-6671 SERVICES AND LENGTH OFSERVICE Annual financial and compliance dits and consultine. ineluding GFOA catificate ofAchievunen1 for Excellma in Fimial Annual financial and cornplb dits, including Sai to the City for sutnnissiw for their first GFOA Cmificstc of Achievement for ex cell^ in Financial Reporting Jl997to2000) Annual financial and eomplima dits, including GFOA CuIifiW of Achievement for Exallrace in ~ZWO lo PQnt) Fimcial Reportins Annual finencinl and compliance audits. including GFOA ~~~~ ~ g997 toprC.Rn) ;NCACEMENT HOURS TEAM TOTAL Rod LcMond. P~K -800 Lisa Poa, Manager Rod 700 LcMond, Parha Lisa POJI, Managa LeMond. Partner Rod 625 Li Paq Manager Jeff Altshulcr, P~K 600 Lisa Po* MM~K The Cl@ of Carlsbad Page 9 The RSM McGlndrey, he. and McGlndrey & Pullen, LLP Difference their auditors. These factors include the skills and personalities of the persons assigned to an engagement, A number of impoat factors contribute to good, productive working relationships between clients and the quality of the services delived, experience, cost, and more. However, we have some spccial qualities that distinguish us from other public accounting and consulting firms. - Providing services of the highest quality is a basic tenet of our fis. We believe this fundmental strength is enhad by our orientation toward helping clients anticipate future needs. This approach is pslt of our basic service to clients. McGladrey & Pullen, LLP3 staff-to-partner ratio of approximately 6-to-I is designed to provide clients with prompt and thoughtful partner attention to ensure that experienced counsel is available when it is needed. This ‘enables clients to make important decisions quickly, capitalizing on opportunities as they arise and avoiding cos.Uy mistakes. The low staff-to-partner ratio helps maintain continuity on the engagement through the significant involvement of pmtners in client projects. Frequent partner contact throughout the year is sLrcssed to ensure the client’s Mi for prodve involvement is satisfied. %is contact is intended to keep clients up-to-date on technical or other issues, as well as to keep the firms informed of the client’s current situation and concerns. The firms provide professional services in a cost-efficient manner. We are competitive because we are not a ”headquarters” organization. We locate the best professionals in our operating offices to better and more efficiently serve you. We have made a solid commibnent to using the most advanced computer technology and skills extensively in conducting the audit and in helping solve the management and operational problems of our clients. The MeGlndrey Audit MeGIsdrey & Pullen, UP, rs a fm, has organized its audit practice by industry specialty. The Firm who is responsible for the creation and update of all audit programs and for the dissemination, thmugh serves several specialized industries, including governmental. Each industry has a Firm-wide coordinator audit and accounting alerts, of information deemed critical for the industry, Accordingly, the Firm develops its own govmmental audit approach and audit programs designed to obtain sufficient, competent evidential matter within the framework of a risk assessment pmess, the end result of which is naturally unique to each government. Our approach to the audit of the City will be organized along the suine lines as the City’s financial report. Each account balance and class of transactions has its own unique area of audit concern. Accordingly, our approach will be tailor-made for each account pup and transaction class. Factors which will be considered Ilre: Nature of transactions affecting the account Susceptibility of financial data to error and other inherent risks The Cily ofCar1sbad Page IO I 0 Budgetary control lntrmal mtrols/control risk 0 Materiality of the munt balance Planning is necessary to ensure a quality audit, efficient use of professional Staff and timely delively of and other letters. Adequate planning of the audit is essential to minimize disruption of the ongoing daily operations of the City. McGladrey & Pullen, LLP has developed a comprehensive, efficient planning process. overall audit approach is to understand the control structure for purposes of assessing the control risk, the reliability of analytical review procedures and inherent risks associated with each account balance. After this evaluation, appropriate modifications are made to reduce the amount of substantive tests of balances to a commensurate level. Critical to the overall success of the audit is the manner in which the process itself is conducted. As you know, since the implementation of the Single Audit Act of 1984, now amended, the governmental audit performed by CPAs has transformed from being almost entirely financial-oriented to a process that is increasingly compliance in nature. McGladrey & Pullen has responded to this by integrating the, financial end compliance procedures into a single comprehensive process. This eliminates treating the financial and compliance audits as something apart from one another. Consequently, we’ve improved efficiency and on-time delivery through the elimination of redundant steps and procedures. An overview of our financial and compliance audit approach is presented in Appendix A. The path our audit actually takes is dependent on our risk assessment. This assessment is the determining factor of statistical sample sizcs and, ultimately, the extent of all our procedures. Our sample size . ., determination and evaluation methodology is performed on Sampling CPA, a computer software program developed by McGladmy & Pullen, LLP. EDP Audit ResponsibiIim An additional factor critical to our understanding is our evaluation of the City’s data processing (DP) system. Our concerns here are not only with basic input and output wntrols, but also with programming changes and system-generated transactions. Our professional responsibilities mandate this evaluation. Our Use ofthe Cify ‘s Data Professing vslem Besides obtaining the required control understanding for the data processing system, we will determine early in the audit process if we can use the City’s system to aid in audit testing. One of our audit software applications is ACYFund, which enables us to receive downloaded general ledger information from diskette and, in turn, create trial balances, lead schedules and report groupings. This application improves work paper eficiency and streamlines the preparation of financial statements. In addition, we utilize IDEA (Interactive Data Extraction and Analysis) audit software that enables us to extract information directly from your data files for audit testing and analytical analysis. After our first audit (initial audit year) we anticipate moving the City to a “paperless” audit. A “paperless” tool will enable a more efficient audit andreduce the amount of City staff time associated with schedule and workpaper preparation. The Ciiy of Carlsbad Page I I I 31 The Oral Report In’ addition to our wriam reports and ImeR, we believe an oral presentation to City management and the Council, if requested, to bc a minimum service provided by the auditors and would ba pld to schedule a mutually convenient time for such a presentation at the conclusion of the engagement. Written Communication A major benefit of employing outside auditors is the opportunity for the City’s Board and management to m.cive comments about various aspects of their operations from qualified, independent professionals. We will issue three letters which will give you such comments: the Intemaf Control Letter, the Management Letter, and the Gowning Board Letter. > The IntemaZ Control Letter will communicate any repottable conditions we noted during our evaluation of those controls for the limited purpose of determining the 6, timing and extent of improvements in those controls which might be needed. audit procedures to be performed. 7his letter will also contain our recommendations for any The Management Letter will provide prioritized ideas and recommendations to help take advantage of, .. spific opportunities to promote operational efficiency, achieve financial goals and help you improve effectiveness and efficiency within your options. The Governing Board Lefter will communicatethe auditor’s responsibility under generally accepted auditing standards, significant accounting policies, management judgments and accounting estimatea, significant audit adjustments; other information in documents containing audited fmancial statements, disagreements with management, management consultations with other accountants, major issues discussed with management prior to retention, and any difficulties encountered in performing the audit. The preparation of these communications is an essential part of our work. Management and Internal Control Letters are authored by the senior members of the audit team, in conjunction with governmental experts in our consulting group. Clients fiuluently comment that the recommendations presented in these documents are the most important part of the audit. Our ability to provide innovative suggestions and ideas to management sets us apart from other firms. Our assistance centers on practical solutions, which can bc implemented. A goal we have with every client is to provide management advice that will generate significant annual savings. Providing management assistance requires more than having talented people on staff. First, we assign experienced senior level professionals to our engagements. Our client base of governmental entities, entrepreneurs and middle-market companies demands broad business and industry experience, as well as technical expertise. Those talented professionals have to bc exposed to clients and develop an in-depth understanding of particular situations. The Ciry ofCnrlshd Page 13 Second, wc actively look foroppo~itics to pvidc assistance. We by to initiate rather than mpnd. If we believe a situation is developing, wc will approach the client, offer to investigate and provide recommendations. If a formal project to address the problem is called for, we will defile the approach, execute the assignment and follow through with implementation assistance. Term of Engagement * ne city seeks a fiveyear arrangement for audit and related services. Audit Services Requirements I. 2. 3. 4. 5. An audit of the City's general p(lrP0se financial statomcnts and supplemental schedules for all funds, which will include the City's blended component units, in accordance with generally accepted auditing standards, and the "Standards for Audits of Governmental Organizations. Programs, Activities and Functions," promulgated by the General Accounting Ofice (GAO) (the Yellow-Book - 1994 Revision), as of and for the fiscal year ending on June 30. We understand that these statements will be included in the City's Comprehensive Annual Financial Report (CAFR). An audit of the Public Improvement' Corporation of the City of Carlsbfid financial statements in accordance with generally accepted auditing standards, and the standards applicable to financial audits contained in Government Auditing Standards as of and for the fiscal year ending on June 30. An audit of the financial statements of the Carlsbad Redevelopment Agency in eccordance with generally accepted auditing standards, and the standards applicable to financial audits contained in Government Auditing Stand& 11s of and for the fiscal year ending on June 30. The audit will meet the compliance and reporting requirements of State's Health & Safety Code as it pertains to Redevelopment Agencies. generally accepted auditing standards, and the standards applicable to financial audits contained An audit of the Encina Financing Joint Powers Authority financial statements in accordance with in Government Auditing Standards as of and for the fiscal year ending on June 30. Because the City is the recipient of federal funddawards, the audit must wmply with the "Standards for Audits of Govemmmtsl Organizations, Programs, Activities and Functions." In addition, the following fedaal Office of Management and Budget (OMB) Citculars and/or publications will apply: A-133, which has replaced A-128, "Audits of State and Local Governments," due to the A-102, "Orants and Cooperative Agreements with State and'local Governments" (Common A-87, "Cost Principles for State and Local Governments" (Revised May 1995) Circular A-133, Compliance Supplement We will perform a single audit in accordance with the OMB Circulars noted above with respect to the federal awards expended during the fiscal year ending June 30. 1996 amendments to the Single Audit Act .Rule) The Clty of Corlsbod Page 13 0 6. We will perform agreed-upon PIOcedurs~ sufficient to provide an Independent Auditors' Report on Agreed-Upon proceduns Applied to Appropriations Limit Worksheets for the City and the Carlsbad Municipal Water District. 7. We will complete the Data Collection Form for Reporting on Audits of States, Local 8. In addition to the compliancc and control reports required by "Government Auditing Standards," and OMB Circular A-I33 for federal ads, we will provide written communication (management letter) of recommendations to improve managerial or operational effectiv- and In addition, this communication will also include any immaterial instances of non-compliance we efficiency, as well as contml comments, if any, that are not considered "reportable conditions." may find. 9. Statement on Auditing Standards (SAS) No. 61 cstablishss a requirement for auditors to communicate certain matters dated to the conduct of the audit to those who have responsibility for oversight of the financial reporting process. This oommunication, often referred to as the audit matters relating to fraud and illegal acts. This letter will address the auditor's responsibilities committee letter, is in addition to the requirement to communicate internal control matters and under generally accepted auditing standards, significant accounting policies, management judgments and accounting estimates significant audit adjustments, other information in documents containing audited financial statements, any disagreements with management, management consultation with other accountants, major issues discussed with management prior to retention, and difficulties encountered in performing the audit. 10. The 1994 revision to "Government Auditing Standards" (the "Yellow Book") includes an additional reporting standard that auditors must follow. It requires the auditor to communicate hiher responsibility in a financial statement audit, including responsibilities for testing and discharge this responsibility at the front end by communication with the City's audit committee or reporting on internal controls and mnpliance with laws and regulations. It is our desire to its equivalent. Governments, and Non-Profit Organizations I Other Needs The partner in charge of the audit will be available to attend meetings of the City Council to discuss and report on the audit process and the deliverables associated with the audit. We will provide the City with accounting advice regarding subjects that could affsct the financial "port. We consider it our responsibility to keep the City advised, on a timely basis, of any new authoritative pronouncements of an audit or reporting nature, as well as any changes in finance-related compliance requirements as they pertain to the City's reporting responsibilities, The City will submit its Comprehensive Annual Financial Report to the Government Finance Officers Asmiatioq and the California Society of Municipal Finance Directors. As such, completion of the CAFR must coincide with the requirements and the deadlines established for these award programs. Additionally, we will keep the City apprised of any significant changes in the Award Program criteria. The City of Carlsbad Page I4 As a national firm, we have many similar-sized governments as clients. We have a National Coordinator and 12 governmental reporting specialists who review all governmental repats produced by our firm, including as many as 700 different reports of governmental agencies impacted by GASB Statement No. 34. we have spent significant time, effort and resources to understand this Statement and the accomplish the conversion requid by this standard. implementation issues associated with it and have developed the necessary tools and processes to Timing of Our Procedures In order to accomplish our audit objectives and meet your deadlines for delivery, the sequence and timing of our procedures are critical. Interim work is to bc performed during the months of May and June of each year; year-end fieldwork to begin on or before September 1" of each year, concluding by October Sm of each year; and delivery of auditor's reports on the financial statements, no later than November 15* of each year. The final reports for the Single Audit, Gann Limit Verifications, and Data Collection Form will be delivered no later than December IS* of each year. In the table that follows, we provide a summary of our planned activities and their timing: AFtivtty . . ', i Timiog. (Set AapeadiX.A~ fo; mola.d&jl). ' .. May IS efforts, initial control assessments, minute and contract/major agreement review, major transaction review, Commence preliminary procedures including: transition May - June Conduct entrance conference determine Federal Award compliance requirements and initiate testing, conduct EDP review, final controls assessment, determination of specific audit procedures, provide finance department with audit plan and listing of audit schedules required, conduct progress conference with key Finance personnel. September 1 Commence audit field work and execute detailed audit plan, conduct progress conference with key Finance personnel and Audit Committee or equivalent, communicate audit responsibilities, both financial and compliance, to the Committee October 15 - December 1 Provide drafts reports with auditor opinions as well as drafts of required compliance reports and letters including the management letter. By October 4 Complete final reports for the Single Audit, Gann Limit December IS Complete final financial siatement reports November 1 S Conduct end of audit exit conference Verifications, and Data Collection Form I e I ACf,nnatioM we affii the following based on the request for proposal: I I We confirm that we are independent of the City, including component units, as ddiaed by "Generally Accepted Governmental Auditing Standards," promulgated by the Comph'oller General of the United States (1994 Revision). me Fm and all key pasonnel an properly licensed in the State of California. working papcrs shall be retained by the audit Firm for a minimum of three yean alter the conclusion of the engagement unless authorized to do otherwise. We will respond to the reasonable inquiries of successor auditors. I I Client Service Team The quality of the service you receive is dependent upon the capabilities of the individuals assigned to the engagement and the manner in which those personnel re.sources are organized to efficiently focus their abilities on providing you with the requested audit services. The sbucture of our planned client services team is depicted in the chart on Page 18 of this proposal. 1 Key Personnel - The people selected to fill the roles on the organizational chart are vital to a successti11 audit. We have formed a team that passcsses the capabilities and experience we believe an indispcnsable for this engagement. This includes a background in: A variety of local government units; Large organizations with multiple timaions and divisions; Sophisticated computer auditing and statistical sampling techniques; Full-scope audits encomimsing management efficiency and economy, as well as financial Accounting, auditing and financial reporting principles applicable to local government; and Management of large, complex projects. I I I I I I I I I matters; Profiles of the proposed client service team are included below. Resumes for theso individuals may be found in Appendix B ofthis proposal. concurnine Parmer. lnduslrv Soecialiv Mr. Rod LeMond, a genwal saVices/audit partner in the Rivmide office of McGladrcy & Pullen, throughout the engagement, including development of the audit plan and approach, providing LLP who specialized in audits of governmental entities will work closely with the audit team industry expertise, and quality control review. The Crtv o/Carlsbad Puge 16 Key Personnel (Continued) client Service Partner audit of the City of Carlsbad will be conducted under the direct supervision of Mr. Joe Laplate, a gend scrvicesfaudit Parma in the San Diego office of McGladrey & Pullen, LLP. A-r Ms. Michelle Bello, a general services audit Senior Manager in the Firm’s San Diego office will serve as the audit team’s field manager and will be responsible for administrative and technical oversight throughout the engagement. 1 A-& working closely with Ms. Bello to provide industry expenisein the des& and execution of the office. Lisa has extensive cxpwience in the audit of local government entities. engagement will be Ms. Lisa Post, a genaal smriceslaudit.manager in the Firm’s Riverside .&dit Suaervisor/Senior Mr. Wendell Bryant a general scrvicedaudit supervisor with the firm’s Riverside office and Ms. Kristen Kuncl a general aervicedaudit senior with the fum’s San Diego office, will serve as the in-charge auditors and will handle the day-to-day aspects of the audit engagement under the direct supervision of Ms. Bello and Ms. Post. Coordinator of Governmental Services As the Firm’s Coordinator of Govcm~entaI SeMcei Mr. Brian Schebla is responsible for the Finn’s govmuncntal practice, including adminiswtioa, professional development, practice standards and procedures, and quality control. Quality control activities include the pre-release review of municipal, school district. federal, state, county and other governmental unit audits and management advisory services reports issued by the Firm, either by Mr. Schebler or by other qualified industry specialists. Qmc Mr. Jeff Altshuler will be responsible for the fml quality control review of the fmcial reports that received the Government Pice Officers Association’s Certificate of Achievement statements. He has assisted cities and othn local govmunental units with the pre-paration of for Excellence in Financial Reporting. ,YtaffAccountao@ Staff accountants from our local practice will be designated at a later date for the audit of the City and its component units. We will plan and schedule our staff accountants in such a way that we obtain the maximum amount of staff continuity throughout the audit and in future years. The City of Carlsbad Puge I7 I I I I I I I I I I I I I I I I I I I 0 Key Personnel (Continued) Brian Schebler Coordinator of Governmental Services I Rod LeMond Partner Industry Specialist Client Service Concumng Partner, Joe LsPlante Reviewer Jefl Alhhuler Quality Control Llss Post Michelle Bello Audit Manager, Audit Senior Indm Spccialist Manager Wendell Bryant Audit Senior Audit Supervisor Kristen Kunel Staff Accountantcl for Audit Services required by the The City of Carlsbad Note: Profiles of these individuals are included in Appendir B. I I I I I I I I I I I I I I I I I I I 8 Proposed Audit Hours We understand the City is looking for value in the professional rrlationship they have with their auditors. employ because all of the knowledge and expertise shown on paper will have no benefit for you unless it Vdw comes from the knowledge, experience and dedication that the auditing firm employs. We stress accomplish the objectives of the City and meet your special needs. The information which you have is applied. This application equates to time spent. We have developed an burs plan thatwe feel will &&with us has been used to develop an effective and efficient plan for all involved. we anticipate that, for the year ending June 30, 2002 the audit of the City and its related entiti- will of GASB 34, and an extra 75 hours in fafniliarizing ourselves with the financial activities and operations approximate 815 hours. This includes our audit and Fcporting efforts associated with the City’s adoption of the City and its component units. These hourg, by major area, are summarized as follows: Major Areas Hours Funds and account groups of the City 410 Compliance and Control letters required by he Govemmmtal Auditing Includedin Standards and communication of auditors responsibilities - SAS No. 61 letter hours above Management Lmcr Funds and Account Groups of the Cnrlsbad Redevelopment Agency Single Audit procedures and requid reporting Encina Financing Joint Powers Authority Public Improvement Corporation Gann Limit Verifications Total Hours Estimated one-time hours to familiarize ourselves with the City and its component units. Total Hours I” Year Included in hours above 105 105 55 45 2s 74s 70 815 The City of Carlibad Page 19 39 0 Proposed Audit Hours (Conrinued) Partners (includes EDP AuditorlConsultant) 70 Managers 140 Senior In-Charge 200 Staff 335 745 I Phase I -Transition Phase I1 - Planning Phase 111 -Interim Phase IV - Year end We anticipate that most of these hours would be supplied by staff from our San Diega and Riverside and Managers assigned to the engagement. offices. As shown above, we expect approximately 28% of engagement hours to come from the Partners I I 1 I I I I 8 I I I I I I I I I I I Proposed Fees Section 2 Fee Schedule Based on our understanding of the City of Carlsbad’s requirements, our fee for audit services a! our standard rates for the fiscal year ending June 30, 2002 would be approximately $97,500; however, our not-to-excced fee for first-year audit services is $69,600. This not-+exceed fee is based on our not. charging for approximately 70 hours to familiarize us with the City &d basingthe mmaining hours on our discounted hourly rate Schedule as reflected on the following page. The components of our not to exceed fee for ~e year ended June 30,2002 are summarized as follows: Otd-ol~expanm Mx) 620 635 bSS 67s ‘Id AIClmlluive Wxii Ria 0 69.m S 71.l20 f 13.05 f 76,155 1 78.415 Our not-to-exceed fee proposal is contingent upon our understanding of your requirements and the assistance we require as described in Appendix A to our proposal. Our fees are predicated on existing GASB promunccments through No. 38. Should there be new pronouncements beyond 38 that require implementation during our contract period, our fees may require revision. Additionally, our fees for the Single Audit procedures and required reporting assume that the City is a low risk auditee as defined by OMB A-133 and are predicated on no mom than three major programs. Should the City’s risk level change or if additional major programs are added, our fees would be adjusted accordingly. Given our The Civ of Carlsbad Page 2 I need to familim’ze ourselves with ~~s~~IIIs, operations and past transactions, wo estimate this will require approximately 50 hours of additional City stafftime beyond what you are accustomed to for the first audit YW. Ofher Service3 Should the City rcquin the jnclusion of the auditor’s report (opinion) in the ofticial statement of new debt statement. Our additional charges for these efforts range from $4,500 to $6,800. issues, our Firm policy requires additional post-audit reviews as well as a review of the draft official Additional services not included in this proposal will be based on the following discounted billing rates proposal which would be charged to the City at our discounted billing rates as shown below, include based on the level of experience required. Some of the examples of servicas outside the scope of this attendance at any additional (other than thc required meetings as agreed to in our proposal) Committee and/or City Council meetings for non-financial statements issues and any other items not within the scope of OUT proposal. Informal advice and consultation not requiring significant &search or a formal report shall be included in the total All-Inclusive Maximum Price. Standard ROllrty Desirnation Billing Rates PartnerNanaging Director $2754360 Senior ManageriManager $200-$260 Manager $155-S185 Professional Staff SS0-$140 Clerical Support Staff $70 Disrounted HonrJy Billing Rates $2404300 S165-$195 SI 104135 $50 $65-$105 Manner of Payment Progress payments will be made on the basis of hours of work completed during the wurse of the engagement and out-of-pocket expenses incund in accordance with our Firm’s dollar cost bid proposal. Interim billing shall cover a period of not less than a calendar month. The final ten percent (10%) of the Total All-Inclusive Maximum Prim will be paid upon delivery of the firm’s final reports. The Ciw of Carlsbad Page 22 v.3 McGladrey Commercial Audit Policies Won: 02009298 hangemants- ahta and Other Auditors ARRANGEMENTS WITH THE CLIENT - A. INTRODUCTION 1. Once the engagement partner has accepted a new client audit engagement or reevaluated an existing client relationship end decided to continue the client relationship. helshe must reach an understanding in writing with the client. The understanding should be detailed in an arrangement letter which identifies the objectives of the engagement, management's and the auditor's responsibilities, and the limitations of the engagement. 2. An arrangement letter should be agreed with the client for evely period's audn engagement and a signed copy received fmm the client, with another copy retained by the client, prior to the commencement of fieidwork. An arrangement letter should not be issued prior to the engagement partner being satisfied, through discussion with the client, that helshe has been informed of all changes in the ciienrs business. organization, risks of material misstatement due to fraud and the nature of services that should be reflected in the arrangement letter. 6. pOLlClES AND REQUIRED PROCFDURES Reaching an undentanding with the client 1. The engagement partner should reach an understanding wnh the client regardlng: a. The purpose, nature, scope and limitation of the audit, and the auditor's responsibility under US, Including our responsibility for the detection of errors, fraud and illegal acts and making certain communications. b. Management's responsibillty for the financial statements. including responsibility for adjusting the financial statements to correct material misstatements and for affirming to the auditor in the representation letter that the effects of any uncorrected misstatements aggregated by the auditor during the current engagement and pertaining to the latestpericd presented are whole. immaterial. both individually and in the aggregate, to the financial statements taken as a c. Managemenrs responsibillty for establishing and maintaining effective internal control over financial reporting, for compliance with applicable laws and regulations, for making all financial wrilten representattons. records and related information available to the auditor, and for prwiding us with certain d. The timing ofthe audl and the resulting rep&, including any special reports to be issued. e. Other sewices to be provlded by the Firm (these services should not include services to be 1. The assistance to be provided by the client. g. Authorization by the client to allow employees of RSM McGladrey, inc. access to the client's provided by RSM McGladrey, Inc.). files, financial information and other confidential information as determined by the Firm. RSM McGladrey, Inc.. which is not a licensed certified public accounting firm and will not offer or AICPA Code of Professional Conduct, Confidential Client Information. perform public accounting services, has nonetheless agreed to comply with Rule 301 of the h. If an SEC client audit engagement, acknowledgment by the client that the company and its affiliates agree not to own a direct or indirect financial interest in H8R Block, inc. while we am sertlon: 0200.00 - Page 1 44 engaged as audw. At the conclusion of the audit, the Firm will request written representation to that effect from management of the client. I. Fee and billing arrangements. me above undentandlngs are normally discussed with the cllent and then summarized In the arrangement letter. Identiffcation of thlrd palties and third party pllvlty letten 1 2. Our arrangement letter, as initially submitted to the client, should not identify any third party who will be relying on our report other than a regulatory agency. If the cllent requests that the letter identify a specific third party who will be relying on our report we will normally do so. Third pames identified should be limited to a specific third party who is the intended primary benekiary in connection with a specific transaction. Such a third party should be specifically identified and Ilmited to one party. It should notinclude shareholders, bondholders or other groups of "at large" agency, party to a speciIiC agreement, etc. investors. A named third party would normally be a specific bank, bondlng company, regulatoly 3. Acknowledgment of the anticipated rellance by a third party on our report should be limited to situations where we are fully aware of the nature of the speck transaction contemplated by the third party. Further, when a third party. other than a regulatory agency, is named in our arrangement letter, we should issue to the third party a letter acknowledging the third party's anticipated reliance. Such a letter should include appropriate language describing the nature and limitation of our engagement. In addition, the letter should include appropriate language reminding the third party of its own due diligence responsibility.' * Banks and other lenden or another specific third party may seek to document a direct and sufficient relationship between themselves and us in connection with the audit of a client's financial statements or another attestation engagement so as to be able to rely on our report Establishing such a relationship may extend our legal duty of care to the bank, the other lender acknowledge. in writing, reliance by the third patty on our report (Le., a privity letter), our legal or specific third party. When a third party is named In our arrangement letter or when wa responsibility of due care may extend to the third party. 4. In Illinois, we must notify the third party, that it is our understanding that the client will be care to only the named third party and the client This notification should describe the client's providing them with a copy of our report This is necessary to limit our legal responsibility for due responsibilities with respect to the financial statements, the limitations on the audit and the third party's own due diligence responsibilities. This notification should take place as swn as possible This requirement applies to: after the client signs the arrangement letter and, in any event before the release of our report a. All offices located in Illinois regardless of the location of the client: and b. All offices performing audits for clients hted In Illinois regardless of the locatkm of the office. 5. Occasionally. we may be requested to acknowledge. in writing, rellance by a third party on an audit report (i.e.. a privity letter) subsequent to the issuance of the report. In such circumstances. consultation with the Reaional Coordinator of Audit and AcMunCna is reauired Drior to the subseauent to the issuance of the re~ort. The Regional Coordinator of Audit and Accounting will issuance of the ~rivii letter. assist you in responding lo those requests in a manner that will not compromise the Firm's intemsts. Documentatlon requlmmentr 6. Arrangements covering each engagement should be confirmed annually in writing by having the client sign a copy of the arrangement letter. However, if contract bidding requires contractual arrangements for multiple periods, an arrangement letter may cover several annual or periodic Section: 0200.00 - pase 2 engagements, as long as each engagement is cwered by the letter. 7. Arrangement letters covering multiple year engagements should be reviewed annualty for any other aspects of our anangements with the client. Those revisions, where appropriate, should be possible revision In their tenw resulting from changes in circumstances, our responsibilities or documented by a copy of a letter addressed to the client updating our hitial arrangement letter. 8. The content of the arrangement letter should generally cover the foilowing elements: 1 a. Addressee: The letter should be addressed to the Client's Board of Directors or Audlt Committee, general partner, pmprietw, or other appropriate committee or official authorized to enter into such agreements on behalf of the Clint. The letter should request the addressee to return a signed copy of the arrangement letter to us indicating approval. 6. Nature of the engagement(s): me letter should specif!cally describe the nature of each engagement we are to perform and our responsibility under GAAS. as well as list all the reports we intend to issue. c. Errors, fraud and illegal acts responsibility: always be included in the letter. Language describing our responsibility for the detection of ermrs,.fraud and illegal acts should d. Client's responslbllities: A discussion of the dient's responsibility for the financial statements, adjusting the financial statements to correct material misstatements, internal control, compliance with ims and regulations, making ail financial records and information available to us and for providing us with certain written representations shoukf always be included. A list of those tasks we expect the client's personnel to perform should be included or referred to if listed separately. This list could include those documents and schedules we would llke to have available and prepared in advance of our fieldwork. e. RSM McGladrey. Inc. personnel: Language describing the client's authorization of the Firm's use of RSM McGladrey, Inc. personnel and related confidentiality requirements should be included in the letter. f. Fee and bluing arrangements: The letter should include a discussion ofthe fee arrangement The method of billing should the feasibility of the method selected based on the type, scope and duration of the be stated. However, before indicating the method of billhg. consideration should be given to engagement and whether, in fact, we intend to bill as we say we will. In addition to the method of billing, the expected timing of payments should be included. The letter should include services to be provided by RSM McGladrey, Inc. g. Public entities: The letter should include the client's acknowledgment that the client and its affiliates agree not to own a direct or material indirect financial interest in H8R Block. Inc. while we are engaged as auditor. h. Signatures: Because of the contractual nature of arrangement letters, both paps should indicate acceptance ofthe agreement. (I) On behalf of the Finn: sectbn: 02M).Gu - Page 3 The engagement parlner should Sign the arrangement letter on behalf of the Firm. The senior manager may sign (he letter when assigned as engagement partner on low risk Firm name should be typewritten followed by the signature of the engagement partner. A engagements. In certain circumstances (such as for client relations reasons), a partner other than the engagement partner may s@n the arrsngement letter. In this case, the engagement partner should review the arrangement letter before it is signed and mailed to-the client. (2) On behalf of the client: An extra copy of the arrangement letter should be furnished to the dint so that its the extra copy and returning it to us. appropriate representative can acknowledge the acceptance of the agreement by signing SeWon: 0200.00 - Page 4