HomeMy WebLinkAbout2007-05-22; City Council; 19008; Financial Audit: Mayer Hoffman McCann PC(W&J) CITY OF CARLSBAD - AGENDA BILL^gi^
AB# 19,008
MTG. 05/22/07
DEPT. FIN
SELECTION OF MA YER HOFFMAN
McCANN P.C. FOR FINANCIAL AUDIT
DEPT. HEAD t $T
CITY ATTY. /S£^
CITY MGR. -JSS
RECOMMENDED ACTION:
Adopt Resolution No. 2007-121 authorizing the selection of the audit firm of Mayer Hoffman
McCann Professional Corporation to perform the City's financial audit for fiscal years 2006-07
through 2010-11.
ITEM EXPLANATION:
The City retained the certified public accounting firm of McGladrey & Pullen, LLP to perform
audit services for the last five years. The Finance Department has been pleased with their
services, but periodically it is appropriate and recommended to consider changing auditors to
assure service, independence and quality of the audit. Requests for proposals (RFPs) were
solicited from twelve (12) firms with the following seven (7) firms responding with a proposal:
• Moreland & Associates, Inc.
• Macias Gini & O'Connell LLP
• McGladrey & Pullen, LLP
• Caporicci & Larson
• Lance, Soil & Lunghard, LLP
• Moss, Levy & Hartzheim, LLP
• Mayer Hoffman McCann P.C.
An audit selection committee, consisting of three personnel from the Finance Department and
one each from the Redevelopment Agency and Public Works Administration, 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.
The top two firms were interviewed by the selection committee and reference checks were
completed for the top two ranked firms following the interviews. Upon completion of the
selection process and the reference checks, the committee is recommending Mayer Hoffman
McCann, P.C.
Mayer Hoffman McCann P.C. (formerly known as Conrad and Associates, LLP) has an audit
practice predominately focused on local government auditing and comes highly recommended
from other local municipalities. Mayer Hoffman McCann P.C. is a national practice with 29
offices throughout the United States, is licensed in 48 States with approximately 1,800
Accounting and Audit professionals, and is ranked in the top 10 Accounting Service Providers in
DEPARTMENT CONTACT: Brent Gerber 760-602-2428 bgerb@ci.carlsbad.ca.us
FOR CITY CLERKS USE ONLY.
COUNCIL ACTION: APPROVED
DENIED
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the country. Their Western Region practice consists of nine (9) offices, which includes Irvine,
San Diego, and Los Angeles. The audit team will consist of individuals from the Irvine office.
The review committee felt their combination of local experience and resources along with prior
working knowledge of the City of Carlsbad (Conrad and Associates, LLP was the prior auditor
to McGladrey & Pullen, LLP) would provide the City of Carlsbad with the highest level of
capabilities by an audit firm to conduct a thorough audit of the City of Carlsbad's records and
additionally provide a well-trained and qualified staff with which to work with.
FISCAL IMPACT:
Although cost was not a primary factor in the selection, bids for fiscal year 2006-07 ranged from
$65,925 to $196,203. Mayer Hoffman McCann P.C.'s bid for fiscal year 2006-07 is $86,835;
and total cost for the five (5) fiscal years is $461,019. Sufficient funds are available in the
current budget to cover the fiscal year 2006-07 costs. Audit costs for the remaining four years
will be budgeted in the future years' budgets.
EXHIBITS:
1. Resolution No. 2007-121 authorizing the selection of the audit firm of Mayer Hoffman
McCann P.C. to perform the financial audit.
2. Agreement with Mayer Hoffman McCann P.C.
Exhibit 1
1 RESOLUTION NO. 2007-121
2 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
CARLSBAD, CALIFORNIA, AUTHORIZING THE
3 SELECTION OF MAYER HOFFMAN McCANN P.C. TO
4 PERFORM THE FINANCIAL AUDITS FOR FISCAL YEARS
2006-07, 2007-08, 2008-09, 2009-10, AND 2010-11.
5"
6 WHEREAS, the audit of the City of Carlsbad financial records is required by the
7 City Council: and
8 WHEREAS, bids from certified public accounting firms have been solicited,
9 accepted, and evaluated; and
10
WHEREAS, Mayer Hoffman McCann P.C. has been determined to be the most
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qualified at a reasonable cost; and
12
WHEREAS, sufficient funds are available in the current 2006-07 Operating
14 Budget.
15 NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of
16 Carlsbad, California, as follows:
17 1. That the above recitations are true and correct.
18 2. The public accounting firm of Mayer Hoffman McCann P.C. is selected to
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perform the financial audits of fiscal years 2006-07 through 2010-11, and
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3. That the agreement between Mayer Hoffman McCann P.C. and the City of
Carlsbad is hereby approved and the Mayor and City Clerk are hereby authorized and
23 directed to execute said agreement.
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PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council
of the City of Carlsbad on the 22nd day of May 2007, by the following vote to wit:
AYES: Council Members Lewis, Kulchin, Hall, Nygaard
NOES: None
ABSENT: Council Member Packard
ATTEST:
LORRAINE M. WOOD, City Clerk
(SEAL)L
Exhibit 2
AGREEMENT FOR AUDITING SERVICES
MAYER HOFFMAN McCANN P.C.
THIS AGREEMENT is made and entered into as of the cA^ day of
fY\flUJ~-> 2007, by and between the CITY OF CARLSBAD, a municipal
corporation, Cf"City"), and Mayer Hoffman McCann, a Professional Corporation,
("Contractor").
RECITALS
A. City requires the professional services of a Certified Public Accounting
Firm that is experienced in governmental auditing.
B. Contractor has the necessary experience in providing professional
services and advice related to governmental auditing.
C. Selection of Contractor is expected to achieve the desired results in an
expedited fashion.
D. Contractor has submitted a proposal to City and has affirmed its
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
City retains Contractor to perform, and Contractor agrees to render, those services (the
"Services") that are defined in attached Exhibit "A", which is incorporated by this
reference in accordance with this Agreement's terms and conditions.
2. STANDARD OF PERFORMANCE
While performing the Services, Contractor will exercise the reasonable professional
care and skill customarily exercised by reputable members of Contractor's profession
practicing in the Metropolitan Southern California Area, and will use reasonable
diligence and best judgment while exercising its professional skill and expertise.
3. TERM
The term of this Agreement will be effective for a period of five years from the date first
above written, so long as City Council makes the required appropriations to fund this
Agreement for each of the five years. Notwithstanding, this Agreement may be
terminated, in accordance with Section 20, Termination, below, at anytime during the
term of this Agreement.
4. TIME IS OF THE ESSENCE
Time is of the essence for each and every provision of this Agreement.
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5. COMPENSATION
The total fee payable for the Services to be performed during the initial Agreement term
shall not exceed four hundred sixty one thousand, nineteen dollars ($461.019). No other
compensation for the Services will be allowed except for items covered by subsequent
amendments to this Agreement. The City reserves the right to withhold a ten percent
(10%) retention until City has accepted the work and/or Services specified in Exhibit "A".
Incremental payments, if applicable, should be made as outlined in attached Exhibit "A".
6. STATUS OF CONTRACTOR
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
contribution, social security, overtime payment, unemployment payment or workers'
compensation payment which City may be required to make on behalf of Contractor or
any agent, employee, or subcontractor of Contractor for work done under this
Agreement. At the City's election, City may deduct the indemnification amount from any
balance owing to Contractor.
7. SUBCONTRACTING
Contractor will not subcontract any portion of the Services without prior written approval
of City. If Contractor subcontracts any of the Services, Contractor will be fully
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. OTHER CONTRACTORS
The City reserves the right to employ other Contractors in connection with the Services.
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9. INDEMNIFICATION
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 by any negligence, recklessness, or willful misconduct 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.
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
purposes of this section, and that this section will survive the expiration or early
termination of this Agreement.
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
which may arise out of or in connection with performance of the services by Contractor
or Contractor's agents, representatives, employees or subcontractors. The insurance
will be obtained from an insurance carrier admitted and authorized to do business in the
State of California. The insurance carrier is required to have a current Best's Key Rating
of not less than "A-:V".
10.1 Coverages and Limits.
Contractor will maintain the types of coverages and minimum limits indicated below,
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
obtain such additional insurance coverage, as Contractor deems adequate, at
Contractor's sole expense.
10.1.1 Commercial General Liability Insurance. $1.000.000 combined
single-limit per occurrence for bodily injury, personal injury and property damage. If the
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.
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10.1.3 Workers' Compensation and Employer's Liability. 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 Professional Liability. Errors and omissions liability appropriate to
Contractor's profession with limits of not less than $1,000,000 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
Liability.
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.
10.3 Providing Certificates of Insurance and Endorsements. Prior to City's execution
of this Agreement, Contractor will furnish certificates of insurance and endorsements to
City.
10.4 Failure to Maintain Coverage. 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 Submission of Insurance Policies. City reserves the right to require, at anytime,
complete and certified copies of any or all required insurance policies and
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.
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12. ACCOUNTING RECORDS
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,
and activities related to the Agreement for a period of three (3) years from the date of
final payment under this Agreement.
13. OWNERSHIP OF DOCUMENTS
All work product produced by Contractor or its agents, employees, and subcontractors
pursuant to this Agreement is the property of City, except for audit working papers,
notes, and internal documents determined to be the property of the auditor under
professional auditing standards. In the event this Agreement expires or is terminated,
all work product determined to be the property of the City that was/is produced by
Contractor or its agents, employees and subcontractors pursuant to this Agreement will
be delivered at once to City. Contractor will have the right to make one (1) copy of the
work product for Contractor's records.
14. COPYRIGHTS
Contractor agrees that all copyrights that arise from the services will be vested in City
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 Irvine
Finance Department - Director
City of Carlsbad
1635 Faraday Avenue
Carlsbad, California 92008-7314
760.602.2430
For Contractor:
Ken Al-lmam, C.P.A.
Shareholder
Mayer Hoffman McCann P.C.
2301 Dupont Drive, Suite 200
Irvine, California 92612
Office: 949.474.2020 (extension 273)
Cell: 714.222.7299
Fax: 949.26.5520
E mail: kalimam@cbiz.com
Each party will notify 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
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determined that disclosure is required, Contractor or Contractor's affected employees,
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.
Contractor further warrants that neither Contractor, nor Contractor's agents, employees,
subcontractors and consultants have any ancillary real property, business interests or
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
regulations which in any manner affect those employed by Contractor, or in any way
affect the performance of the Services by Contractor. Contractor will at all times observe
and comply with these laws, ordinances, and regulations and will be responsible for the
compliance of Contractor's services with all applicable laws, ordinances and regulations.
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. DISCRIMINATION AND HARASSMENT PROHIBITED
Contractor will comply with all applicable local, state and federal laws and regulations
prohibiting discrimination and harassment.
19. DISPUTE RESOLUTION
If a dispute should arise regarding the performance of the Services the following
procedure will be used to resolve any questions of fact or interpretation not otherwise
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
party and may then opt to direct a solution to the problem. In such cases, the action of
the City Manager will be binding upon the parties involved, although nothing in this
procedure will prohibit the parties from seeking remedies available to them at law.
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20. TERMINATION
In the event of the Contractor's failure to prosecute, deliver, or perform the Services,
City may terminate this Agreement for nonperformance by notifying Contractor by
certified mail of the termination. If City decides to abandon or indefinitely postpone the
work or services contemplated by this Agreement, City may terminate this Agreement
upon written notice to Contractor. Upon notification of termination, Contractor has five
(5) business days to deliver any documents owned by City and all work in progress to
City address contained in this Agreement. City will make a determination 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,
other than a bona fide employee, any fee, commission, percentage, brokerage fee, gift,
or any other consideration contingent upon, or resulting from, the award or making of
this Agreement. For breach or violation of this warranty, City will have the right to annul
this Agreement without liability, or, in its discretion, to deduct from the Agreement price
or consideration, or otherwise recover, the full amount of the fee, commission,
percentage, brokerage fees, gift, or contingent fee.
22. CLAIMS AND LAWSUITS
By signing this Agreement, Contractor agrees that any Agreement claim submitted to
City must be asserted as part of the Agreement process as set forth in this Agreement
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 et seq.. 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
information. If City seeks to recover penalties pursuant to the False Claims Act, it is
entitled to recover its litigation costs, including attorney's fees. Contractor acknowledges
that the filing of a false claim may subject Contractor to an administrative debarment
proceeding as the result of which Contractor may be prevented to act as a Contractor
on any public work or improvement for a period of up to five (5) years. Contractor
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acknowledges debarment by another jurisdiction is grounds for City to terminate this
Agreement.
23. JURISDICTIONS AND VENUE
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. SUCCESSORS AND ASSIGNS
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 terms 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.
26. AUTHORITY
The individuals executing this Agreement and the instruments referenced in it on behalf
of Contractor each represent and warrant that they have the legal power, right and
actual authority to bind Contractor to the terms and conditions of this Agreement.
(Remainder of Page Intentionally Left Blank)
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CONTRACTOR
*By:
ail address)
If required by City, proper notary acknowlelggftren!;
must be attached. If a Corporation. Agreement^
officer from each of the following two groups.
*Group A.
Chairman,
President, or
Vice-President
**Group B.
Secretary,
Assistant Secretary,
CFO or Assistant Treasurer
Otherwise, the corporation must attach a resolution certified by the secretary or
assistant secretary under corporate seal empowering the officer(s) signing to
bind the corporation.
APPROVED AS TO FORM:
RONALD R. BALL, City Attorney
'Deputy City Attorney
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EXHIBIT "A"
SCOPE OF SERVICES
SECTION A
QUALIFICATIONS AND RELATED EXPERIENCE OF THE PERSONNEL
WHO WILL SERVICE THE CITY OF CARLSBAD
The successful outcome of any audit requires personnel with the managerial and technical skills
to perform the work required. The engagement team who will serve the City of Carlsbad have
served together as a team of professionals on numerous financial audit examinations of local
government entities, including complex governmental agencies.
We believe that efficient administrative management and supervision of the audits is an
extremely critical factor in achieving the desired results for the City Council of the City of
Carlsbad. In that regard, we propose to establish the following procedures.
Mr. Ken Al-Imam, Engagement Shareholder, who has 26 years of local government auditing
experience, will be responsible for the coordination of the audit of the City of Carlsbad and
fulfillment of the requirements of the City Council of the City. Mr. Al-Imam, as the Engagement
Shareholder, will be in the field to plan and coordinate the management of the audit examination
of the City of Carlsbad. He will work closely with Ms. Lisa Irvine, Finance Director and other
finance personnel of the City and be responsible to the City Council of the City. Mr. Al-Imam is
past Chairman of the state-wide "Governmental Accounting and Auditing Committee" for the
California Society of Certified Public Accountants and served from 1996-2001 as Chairman of
the Governmental Accounting and Auditing Committee for the Long Beach-Orange County
Chapter of the California Society of CPA's. He is also an active member and past president of
CCMA (California Committee on Municipal Accounting). He has made presentations in public
hearings before the Governmental Accounting Standards Board (GASB) and has been part of the
committee contributing to the past two GASB No. 34 implementation guides. Mr. Al-Imam is
also responsible for the firm-wide training for the Conrad Government Services Division of
MHM in the area of local governmental accounting and auditing.
Mr. Ron Lopez, will serve as Engagement Manager of the audit of the City of Carlsbad. He will
work closely with Ms. Lisa Irvine, Finance Director and other finance personnel of the City and
Mr. Al-Imam. He will plan and review the audit work and work closely with Ms. Danaher,
Senior Auditor. Mr. Lopez has extensive local government auditing experience, including
performing as Engagement Manager on numerous city, redevelopment agency, special district
and authority audits.
Ms. Michelle Danaher (formerly Michelle Kepner), will serve as Senior Associate Auditor.
She will work closely with Ms. Lisa Irvine. Finance Director and other finance personnel of the
City and Mr. Lopez, Engagement Manager. Ms. Danaher will supervise and review all work of
accountants in the field assigned to her.
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SECTION B
APPROACH, TIMING AND WORK PROGRAM OF OUR ENGAGEMENT TEAM
The audit approach of the Conrad Government Services Division of MHM is unique with regard
to the following:
• Our firm is sensitive to the priorities and work requirements of our clients. We work
around the schedules of our clients when scheduling segments of the audit 01
requesting documentation in order to minimize disruption in the Finance Department.
• Whenever possible, we use accounting support already prepared by the Finance
Department in order to avoid duplication or unnecessary requests for audit supporting
schedules.
• Because of our firm's expertise in local governmental auditing, our staff are trained
and familiar with local government accounting. You will spend no time in training
our personnel.
• When formulating internal control recommendations, we obtain a thorough
understanding of the specific circumstances at your City in order to provide a tailored,
practical recommendation.
• Throughout the year we are a resource to our clients in providing accounting advice,
researching technical questions, dealing with tax problems, and helping with other
problems as they arise.
Following our appointment as auditors of the City, Mr. Al-Imam, Engagement Shareholder, Mr. ,
Lopez, Engagement Manager, and Ms. Danaher, Senior Auditor will meet with Ms. Lisa Irvine,
Finance Director and other finance personnel of the City for the purpose of planning the audit of
the City and related entities. In addition to establishing an effective and efficient communication
link with City personnel, the following will be accomplished:
- Dates for audit field work of the various audit examinations will be finalized.
Arrangements will be made with City personnel for the typing of confirmation requests.
Analytical procedures will be utilized in planning the audit which will focus on:
a) Enhancing our understanding of the City of Carlsbad and the transactions and
events that have occurred since its last audit; and
b) Identifying areas that may represent specific risks relevant to the audit (assessment
of control risk).
- Critical audit areas will be identified and the universe of transactions will be identified for
purposes of sampling of transactions and other audit tests in conjunction with determining
whether reliance can be placed upon the system of internal accounting controls.
- We will be evaluating the following cycles of the City:
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SECTION B, rContinued)
• Revenue/Cash Receipting;
• Purchasing/Accounts Payable and Cash Disbursements Cycle; and
• Payroll Cycle/Personnel Services.
We will also be reviewing internal control structure within the infrastructure and capital
equipment and treasury management cycles.
We will identify areas of potential concern to City management.
Based upon our planning procedures we will develop levels of materiality for audit testing
and develop and tailor our audit program of the City.
Following the engagement planning meetings, Mr. Lopez and Ms. Danaher and our designated
professional staff will coordinate with Ms. Lisa Irvine, Finance Director and other finance
personnel of the City those items which would be required by our staff in meeting the timing
requirements of the various audits.
In conjunction with our planning of the engagement, we will perform our interim audit work.
We will have evaluated the critical audit areas and assessed control risk (as mentioned above).
Our review of internal control structure will be by questionnaire, and procedural write-up of your
accounting system. Each of the approaches requires inquiry and observation of City personnel
and will incorporate the new requirements of SAS 99 "Consideration of Fraud in Financial
Statement Audit". Comments and recommendations relating to the accounting system will be
discussed with appropriate City personnel and where appropriate be included in our management
letter which will be issued at the conclusion of the examination.
Additional procedures that will be accomplished during our interim audit procedures include the
following:
1. Reviewing of internal control structure and communication of recommendations to
City Management concerning City policies and procedures.
2. Testing of audit areas where reliance can be placed upon internal control structure for
audit purposes.
3. Reviewing of minutes of the City Council.
4. Following up on unusual items noted from analytical procedures. (We will perform
significant comparison and inquiry regarding fluctuations of revenues and expenditures
by fund budgets versus actual).
5. Reviewing of important contracts, debt issues, leases and joint power agreements.
6. Performing required compliance and internal control testing relating to the federal
grant programs of the City, if any.
7. Testing for compliance with City budgetary policies and procedures, including testing
the integrity of the budgetary data reflected in the City's accounting system.
12
SECTION B. (Continued)
8. Providing the City with suggestions regarding the close of the City's books after year
end. Our assistance and communication in the closing of the City's books is expected
to minimize the number of audit adjustments required after the close of City's books.
The foregoing procedures will be accomplished at both the planning, interim and final
examination stages of the audit.
As a part of our Single Audit for the years in which the City expends greater than $500,000 in
federal funding, we would supplement our approach with the following procedures in performing
the single audit. (This would be accomplished as a part of our planning and interim audit work.)
1. Re-review all pertinent federal and AICPA publications including:
• The Single Audit Act Amendments of 1996 (Public Law 104-156) signed into law
on July 5, 1996 and effective for the fiscal years ending on or after June 30, 1997.
This law amends the Single Audit Act of 1984 (Public Law 98-502) previously
applicable to local governments
• OMB Circular A-133 entitled Audits of States, Local Governments, and Non-
Profit Organizations
• GAO Government Auditing Standards (Yellow Book), 2003 revision
• AICPA Audit and Accounting Guide Audits of State and Local Government Units
(1994 revision) and Statement of Position 98-3, Audits of States, Local
Governments, and Not-for-Profit Organizations Receiving Federal Awards
• SAS No. 74, Compliance Auditing Considerations in Audits of Governmental
Entities and Other Recipients of Federal Financial Assistance
• Revised Compliance Supplement for Single Audits of State and Local
Governments
• Revised Audit Guide for Auditors of Child Development Programs Administered
by Private, Private Nonprofit, and Public Agencies, issued by the California
Department of Education
• Catalog of Domestic Assistance Programs
• OMB Circular A-87
• OMB Circular A-102
2. Identify the federal programs administered by the City of Carlsbad and the amounts
expended during the audit period.
3. Apply the risk-based auditing approach mandated by the Single Audit Act Amendments
of 1996 (Public Law 104-156) and OMB Circular A-333 entitled Audits of States,
Local Governments, and Non-Profits Organizations for the determination of major
programs to be selected under the single audit process. As prescribed by the directives
of the new single audit requirements, this will involve a consideration of the
complexity of the program, prior audit findings, changes in personnel, the competency
13
n
SECTION B, (Continued)
of personnel, the extent to which sub-recipients are used, the extent of overview and
monitoring by granting agencies, the extent of recent changes in program requirements,
the newness of the program, the size of the program, and the inherent risk of the
program.
4. Identify the oversight audit agency (U.S. Department of Housing and Urban
Development.)
5. Identify and list the major compliance supplements and subrecipients of the City, if
any.
6. Review the administrative control systems to ensure compliance,
7. Execute the sampling plan.
8. Perform audit procedures for the selected transactions.
9. Test compliance with other material compliance requirements.
10. Test matching requirements, if any.
11. Test indirect costs, if any.
12. Review reports and claims for advances and reimbursements to the federal
government.
13. Review processing of audit reports for state and local government subrecipients.
14. Prepare the independent auditors' reports required by OMB Circular A-133.
15. Prepare the data collection form required to be filed with the Single Audit Central
Clearinghouse.
On approximately September 1, 2006 (after the final closing of the books and preparation of final
trial balances by City personnel for the year ended June 30), we will commence performing our
year-end substantive audit. Our final examination will include tests which we deem necessary,
including:
1. Confirmation of cash and investment balances.
2. Testing of bank reconciliations.
3. Testing of allocations of interest income to the various funds.
4. Examination of support and subsequent receipt (if any) of significant receivable
balances.
5. Search for unrecorded liabilities.
6. Testing of long term debt balances.
14
SECTION B, (Continued)
7. Consideration of support and proper valuation of the liabilities for compensated
absences and claims and judgments.
8. Testing of support for other significant assets and liabilities of the City.
9. Testing for the proper establishment of reserves and designations.
10. Review of significant events after year end (through the completion of oxir audit).
11. Review of attorney letters for significant legal matters affecting the City's financial
position.
12. Testing of revenues and expenditures and lesser significant asset and liability balances
through analytical procedures and other substantive procedures as necessary,
The aforementioned tests are only a few of the tests performed during the examination and by no
means is it meant to be all inclusive. At the completion of the audits each year, Mr. AMmam,
Mr. Lopez and Ms. Dauaher will meet with Ms. Lisa Irvine, Finance Director and other finance
personnel of the City to review our audit findings and any adjusting journal entries. Based upon
the City's records being closed and ready for audit at the commencement of our final exam, we
plan to comply with the audit timeline set forth in the RFP for fmaUzation of all audit reports.
Utilisation of Computers on Govern mental Audits
Each audit team in our firm is assigned and utilizes a portable personal computer at the job site.
We extensively use the computer in the conduct of our audit and in the preparation of the
financial statements. Additionally, each of our audit Seniors are knowledgeable of controls
surrounding the EDP environment and assessing the effectiveness of those controls within the
audit of the local government.
Risk-Focused Audit Approach
Our firm uses a risk-based audit approach. Every year, at the commencement of the planning
phase of the audit, our engagement team will meet and identify for that client those areas
(account balances, transaction classes, funds, activities, etc.) for which there is a heightened risk
of fraud or misstatement. We will also obtain from management their thoughts concerning audit
and fraud risk. Additional procedures are performed in those areas identified during this risk
assessment.
Use of Statistical Sampling
Based upon our preliminary assessment of control risk for the District's internal control structure,
we identify those major transaction cycles where reliance upon the internal control structure is
deemed to be the most effective audit approach. For those transaction systems we utilize
statistical sampling techniques to support a lower assessment of control risk.
In conducting our tests of controls, we use the parameters set forth in the A.ICPA Audit Sampling
Guide for statistical sampling techniques. The Guide establishes the following sample sizes
when a 10% allowable risk of over-reliance is used and when the preliminary review of the
internal control structure supports an expectation of no significant weaknesses or errors:
15
SECTION B, (Continued)
Planned Degree on Tolerable Sample
Reliance of Controls Rate Sizes
Substantial 2% - 7% 32-114
Moderate 6% - 12% 18- 38
Minimal 11%-20% 11- 20
The actual sample sizes used will depend upon our preliminary assessment of control risk and the
extent of our planned substantive tests and analytical procedures. We statistically evaluate the
results of our sampling techniques to determine whether or not any modifications need to be
made to the nature, timing and extent of our planned substantive tests. Our substantive tests are
designed to be responsive to the areas of higher control risk revealed by our statistical sampling.
We use our on-site computer equipment to randomly select the transactions to be tested. Our
computer has specialized software designed for this purpose which can produce a statistically
random sample even when there are breaks in the District's transaction sequence (for example,
different sets of check numbers are used).
Analytical Procedures to Improve Understanding of Clieot
Analytical procedures are used by our firm in general planning to improve the auditor's
understanding of the governmental unit's operations and to identify audit areas for increased
attention. SAS No. 56 requires the use of analytical procedures in the planning and overall
review stages of all audits.
SAS No. 56 states that "analytical procedures should be applied to some extent.. . for all audits
of financial statements made in accordance with generally accepted auditing standards" for the
following purpose among others:
To assist the auditor in planning the nature, timing and extent of other auditing procedures.
Analytical procedures may be used in both general planning and audit program planning.
SAS No. 56 describes the two broad uses of analytical procedures in audit planning as follows:
• Enhancing the auditor's understanding of the client's business and the transactions and
events that have occurred since the last audit date; and
• Identifying areas that may represent specific risks relevant to the audit.
Comparisons of account balances between accounting periods and ratio and trend analysis
usually improve the auditor's understanding of the client and its operations and may identify
critical audit areas, e.g., comparing general and special revenue fund expenditures by functions
and revenue by source for the past two years provides an understanding of the governmental
unit's operations and may identify a revenue source that requires increased attention in the
current audit.
SAS No. 56 requires use of analytical procedures in audit planning, but does not specify
particular procedures that are always necessary. Our firm believes that in a governmental
engagement, the auditor's preliminary analytical procedures should include, as a minimum, a
16
SECTION B, (Continued)
comparison of current account balances in the working trial balance to similar amounts in the
prior annual period's financial statements and the current period's budget. However, a
thoughtful consideration of expected relationships among account balances and periods by an
experienced auditor is far more important than a mechanical comparison. The auditor should
think about these relationships and bring to bear other knowledge about the governmental unit
and government operations.
Consideration of Laws and Regulations
Our audit approach recognizes the importance of laws and regulations in planning the audit of a
local governmental entity. As a part of the audit, our firm obtains an understanding of those laws
and regulations that have a direct and material effecton the determination of financial statement
amounts. We then design the audit to provide reasonable assurance of detecting material
instances of noncompliance that will have a direct and material effect on the determination of
financial statement amounts.
Assistance from City Staff
Normal cooperation and assistance from City staff is expected by the auditors including typing of
confirmation requests, and normal year-end PBC ("prepared by client") schedule preparation
(i.e., leacf schedules, bank reconciliations, subsidiary support, and other schedules showing the
composition of the year end balances of significant assets and liabilities of the City) and
providing the auditors at the start of the final exam a trial balance reflecting all necessary year
end adjustments. We normally use whatever year end supporting schedules the Finance
Department is accustomed to preparing for year end. We are extremely flexible in this regard. We
would also expect reasonable assistance from City staff in reproducing permanent files or other
documents and refiling requested documentation during the audit examination. For GASB No.
34 the Cily is expected to prepare: management's discussion and analysis, infrastructure records,
depreciation schedules for general fixed assets, revenue amounts classified into the
program/general classifications required by OASB 34, major fund determination schedules,
accrued interest computations for long term debt, original and final budget data at the level of
detail required for the financial statements, and schedules to support the capital asset, long-term
debt, and interfund disclosures required by GASB No. 34. Should the City require our technical
and accounting assistance, this would be conducted at the hourly rates set forth in our proposal.
17
SECTION B, (Continued)
OUR FIRM'S UNDERSTANDING OF THE OBJECTIVES AND
SCOPE OF THE ENGAGEMENT
Our understanding of the objectives and scope of the work to be performed is based upon your
request for proposal.
Based upon the foregoing we understand the objectives and scope of work to be as follows:
1. We will perform an audit examination of the comprehensive annual financial report
(CAFR) of the City of Carlsbad for a five (5) year period beginning with the fiscal year
ending June 30, 2007. Our examination will be conducted in accordance with generally
accepted auditing standards and Government Auditing Standards set forth by the U.S.
, Comptroller General. The City will prepare the CAFR. We will review and test the
CAFR for conformity to GAAP and GFOA award requirements. We will comply with the
time table indicated in {he City's request for proposal with respect to the delivery of audit
reports.
2. We will perform a Single Audit of the City of Carlsbad in accordance with the Single
Audit Act Amendments of 1996 (Public Law 104-156) and OMB Circular A-133 entitled
Audits of States, Local Governments, and Non-Profits Organizations. This would be
required when Federal expenditures are greater than 5300,000 in any given year. Our
single audit will cover all federal grants received by the City of Carlsbad either as a
primary or secondary recipient. The City will provide to the auditors the Schedule of
Federal Financial Assistance encompassing all direct and pass-through federal funds
received by the City. We will render our reports on the single audit in accordance with the
single audit requirements as described in Section E of this proposal. We will also prepare
the data collection form required by OMB Circular A-133.
3. We will perform a financial and compliance audit of the Carlsbad Redevelopment
Agency for a five (5) year period beginning with the fiscal year ending June 30, 2007.
Our compliance procedures will meet the State Controller's guidelines for compliance
audits of the redevelopment agencies. We will issue our separate auditors' reports on the
Carlsbad Redevelopment Agency. City staff will draft and word process the financial
statement schedules and notes. We will review the same, make the necessary copies, and
bind the final reports in accordance with the City's request for proposal.
4. We will perform an audit of the financial statements of the Public Improvement
Corporation of the City of Carlsbad for a five (5) year period beginning with the fiscal
year ending June 30, 2007. City staff will draft and word process the financial statement
schedules and notes. We will review the same, make the necessary copies, and bind the
final reports in accordance with the City's request for proposal,
5. We will perform an audit of the financial statements of the Enema Financing Joint
Powers Authority for a five (5) year period beginning with the fiscal year ending June
30, 2007. City staff will draft and word process the financial statement schedules and
notes. We will review the same, make the necessary copies, and bind the final reports in
accordance with the City's request for proposal.
18
SECTION B. (Continued)
6. We will test the City's appropriation limit and provide a letter of Agreed-Upon
Procedures for a five (5) year period beginning with the fiscal year ending June 30, 2007.
7. We will prepare a letter to the City Council reporting matters dealing with internal control
that meet the threshold of being reporlable conditions, as defined by professional auditing
standards. We will immediately report any irregularities or illegal acts that come to our
attention to the Finance Director, City Attorney, City Manager, and City Council as
required by governmental auditing standards.
8. We will also prepare a letter to the Finance Director that will provide other
recommendations to the City ensuing from our review of the City's internal control
procedures. This letter will address nonreportable conditions (those constructive
comments not required to be included in the letter of reportabie conditions to City
Council or in the single audit report). We will discuss those comments with the Finance
Director prior to its finalization.
9. The Conrad Government Services Division of MHM desires to keep its clients abreast of
new developments affecting local government finance. We would plan to advise City
staff of new accounting developments (such as GASB Statements 43 and 45) during the
interim/planning stage of each year's audit and through our annual GASB Update that we
provide for our clients.
10. Finally, we perceive the scope of our work as being advisors to the City of Carlsbad.
Throughout the year, City personnel will have access to the Engagement Shareholder,
Ken Al-Imam, Technical Review Shareholder, Michael A. Harrison, and Engagement
Manager, Ron Lopez, and Michelle Danaher to seek advice in the application of
accounting principles;, financial statement preparation and content and other matters
relating to the City, including matters of taxation and policy relating to City fringe
benefits.
With respect to the City of Carlsbad and its component units, Mayer Hoffman McCann P.C.
meets the independence requirements of generally accepted accounting standards and the
Government Auditing Standards (2003 revision) published by the U.S. General Accounting
Office. Our firm has never had a record of substandard audit work. No conflicts of interest exist
relative to our firm performing the audit. The Conrad Government Services Division of MHM
does not intend to use subcontractors for this engagement.
19
SECTION C
OUR HOURLY RATES AND MAXIMUM FEE TO PERFORM THIS ENGAGEMENT
The following is a summary of our estimated hours and a breakdown of our maximum fee
(which includes reimbursement for all of our out-of-pocket expenses) for this engagement:
Fiscal Year Ending
CAFR
Public Improvement Corporation
Carlsbad Redevelopment Agency
Encina Fin. Joint Powers Authority
Single Audit
Gann Limit Verification
Total all-inclusive maximum price
Hours
550
40
110
55
62
10
2007
S 57,750
4,200
1 1,550
5,775
6,510
1,050
2008
59,483
4,326
1 1 ,897
5,948
6,705
1.082
2009
61,267
4,456
12,254
6,126
6,906
1,114
2010
63,105
4,590
12,622
6,310
7,113
1.147
2011
64,998
4,728
13,001
6,499
7,326
1.181
827 86,835 89,441 92,123 94,887 97,733
Hourly rates in effect for additional services (including assistance in the preparation of year
end entries and schedules) that the City may request are as follows:
Classification
Shareholder
Manager
Senior Associate
Associate
2007 2008 2009 2010 2011
S!75
115
105
100
180
118
108
103
185
122
111
106
191
126
114
109
!97
130
117
112
Professional Hours and Segmentation of Audit
Interim Final Total Percentage
Partner
Manager
Senior Auditor
Staff Auditor
Total
15
25
80
80
26
99
251
251
41
124
331
Hi
5%
15%
40%
40%
200 627 827 100%
20
SECTION C, fContinued)
We wiJI progress bill the City for the above services as the engagement hours are expended.
Final billing will be made upon delivery of the final audit reports. Any special projects, extra
work, accounting assistance, or additional assignments will be performed at the standard hourly
rates indicated in the accompanying fee schedules.
Our fees contemplate conditions satisfactory for the performance of the audit, including the City
providing at the start of the audit, trial balances reflecting all year end adjustments, necessary
subsidiary schedules supporting asset and liability balances, all necessary reconciliations in
agreement with general ledger balances, and customary supporting analyses and schedules. If
assistance is needed in preparing year end journal entries or resolving reconciliation issues, we
would perform the same at the hourly rales indicated in this cost proposal.
The City will type confirmation requests and pull supporting documentation. If there are changes
in the scope of the audit (added enterprise activity, additional component units, new audit or
accounting requirements, etc.), we would discuss these changes with the Finance Director and the
effect of these changes on the professional audit hours and costs of the engagement. Our fixed
fee pricing contemplates two major programs for the single audit. A price adjustment of $3,000
will be made for each additional major program.
21