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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 COUNCIL ACTION: APPROVED DENIED CONTINUED WITHDRAWN AMENDED * D Dn CONTINUED TO DATE SPECIFIC CONTINUED TO DATE UNKNOWN RETURNED TO STAFF OTHER - SEE MINUTES n D D D Page 2 the country.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 11 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 19 perform the financial audits of fiscal years 2006-07 through 2010-11, and 20 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. 24 // 25 // 26 // 27 28 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 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. City Attorney Approved Version #11.28.06 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. City Attorney Approved Version #11.28.06 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. City Attorney Approved Version #11.28.06 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. City Attorney Approved Version #11.28.06 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 City Attorney Approved Version #11.28.06 9 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. City Attorney Approved Version #11.28.06 10 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 City Attorney Approved Version #11.28.06 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) City Attorney Approved Version #11.28.06 8 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 City Attorney Approved Version #04.01.02 /3 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. 10 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: 11 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