HomeMy WebLinkAbout2019-08-27; City Council; ; Report on a potential audit for The Crossings at Carlsbad Golf CourseCA Review e{J
~ CITY COUNCIL
~ Staff Report
Meeting Date:
To:
From:
Staff Contact:
Subject:
August 27, 2019
Mayor and City Council
Scott Chadwick, City Manager
Brigid Okyere, Internal Auditor
Brigid.okyere@carlsbadca.gov or 760-602-2429
Laura Rocha, Deputy City Manager, Administrative Services
Laura.Rocha@carlsbadca.gov or 760-602-2415
Report on a potential audit for The Crossings at Carlsbad Golf Course
Recommended Action
Receive an informational presentation describing options for auditing The Crossings at Carlsbad
Golf Course.
Executive Summary
At the Feb. 26, 2019 City Council meeting, the City Council received The Crossings at Carlsbad
Golf Course Report on 2018 Calendar Year Financial Performance. The City Council directed
staff as follows: "to return with a staff report at a future meeting authorizing an independent
audit of The Crossings at Carlsbad Golf Course (golf course):"
This report will provide an overview of audit engagement types for City Council to consider,
including potential objectives and final products for each type of audit.
Discussion
Background
In April 2000, the City Council of the City of Carlsbad and the Board of Directors of the Carlsbad
Municipal Water District formed the Carlsbad Public Financing Authority (Authority), a joint
powers authority, to assist with the financing, construction, and management of the daily
operations of a municipal golf course. On May 10, 2006, the Authority awarded a five-year
agreement to Kemper Sports Management (KSM) to manage the golfcourse. After completion
of a Request for Qualifications and Proposals (RFQP) process, the Authority awarded a
successor agreement to KSM to manage the golf course, which terminated on Feb. 28, 2018.
On Sept. 5, 2017, an RFQP was advertised for management and operations of the golf course.
JC Resorts Management (JCM) was selected as the best qualified firm for recommendation of
execution of the agreement. The term for this agreement began March 1, 2018 and terminates
Feb. 28, 2023 with an optional 5-year extension.
August 27, 2019 Item #10 Page 1 of 5
JCM was favored due to its strong showing in areas such as financial processes/accounting,
internal and external auditing, human resources culture, information technology and
administration, tournament conduction, food and beverage capabilities, sales and marketing,
course maintenance and regulatory compliance, local region industry experience, and for
having the leading Southern California affinity program. In addition, JCM's fixed management
fee per Agreement year was less than that of KSM, and JCM's percentage management fee was
flat compared to that of KSM's tiered fee structure.
The agreement is structured in a way that shifts operational responsibility from the city to the
golf course management company, currently JCM. This structure saves the city time and
resources as the expertise, day-to-day operational requirements, financial requirements, and
regulatory compliance requirements are the primary responsibility of JCM. While JCM has
assumed this responsibility, JCM is required to comply with all applicable laws of the city and
other governmental bodies with jurisdiction over the golf course. As such, JCM's operational
activities adhere to the same types of regulatory requirements which govern city operations
(e.g. bidding requirements for capital projects or workplace discrimination and harassment).
JCM's financial activities adhere to generally accepted accounting principles and the annual
budget is approved by the Authority, similar to other city operating budgets approved by the
City Council.
Current Oversight & Audit Activities
The city maintains oversight responsibility through the standing committee (committee) and
other ad-hoc meetings. The committee includes the following city positions: deputy city
manager, administrative services, finance manager, parks & recreation director, parks services
manager, and parks planning manager. The parks & recreation staff members are responsible
for operational oversight while the administrative services staff members are responsible for
the financial oversight of the golf course. The committee also includes various JCM positions
such as golf course general manager, vice president of golf operations, and corporate director
of golf operations.
The committee has several responsibilities. For example, the committee meets monthly to
review the operational and financial performance of the golf course. The committee also meets
to review the annual budget proposal, operating and marketing plan, etc. Parks & recreation
staff also conduct monthly "standards of care" meetings to review the condition of the course,
compliance with environmental regulations, and status of the clubhouse/restaurant.
Additionally, specific committee members may meet on an ad-hoc basis to address items that
need immediate attention.
The city's external auditors also meet with JCM staff as part of the city's annual financial audit
process. For the fiscal year 2017-18 audit, the city's external auditors reviewed JCM's internal
controls and found them to be appropriate. For example, the external auditors reviewed a
selection of checks written by JCM, on behalf of The Crossings, and supporting documentation
to determine whether they followed proper internal control policies and that the payments
related to the golf course. The city's external auditors also issued an opinion that the golf
course financial statements were fairly presented and free of material misstatements.
August 27, 2019 Item #10 Page 2 of 5
In addition, JCM has an internal audit & compliance manager that routinely visits all of JCM's
properties, including The Crossings, to ensure all internal control and compliance policies are
being followed. The manager performs continuous monitoring and full property audits at least
once a year. Financial controls are reviewed and audited by the company's corporate and
regional controller monthly to ensure financial compliance.
The city also conducted other reviews during KSM's prior management. For the period 2006-
2014, the city contracted with an external auditor for an agreed-upon procedures engagement
to review internal controls and transactions. The firm discovered several issues in its report.
The city's internal auditor wrote a follow-up report in 2015 and determined that KSM
addressed most of the outstanding issues. Lastly, the city's internal auditor performed a review
of FY 2016-17 to determine if cash disbursements had appropriate approvals and were valid
expenses, and to assess the design and operational effectiveness of key controls. Cash
disbursements were found to be appropriate and valid, but several key controls were not
operating as designed. KSM's management contract terminated on Feb. 28, 2018 and the city
has not performed any additional engagements during JCM's management of the golf course.
Prior City Council Discussion
At the Feb. 26, 2019 City Council meeting, the City Council received The Crossings at Carlsbad
Golf Course Report on 2018 Calendar Year Financial Performance. At this meeting, Roxana
Asian with Unite Here Local 11 spoke regarding the underperformance of The Crossings
restaurant and merchandise revenue. John McNair, Vice President of JC Resorts, responded to
the speaker and answered the City Council questions. A discussion ensued regarding questions
and/or concerns about the golf course's long-term sustainability and self-sufficiency, its
financial performance against comparable golf courses, employee practices, planning for future
capital improvement projects, restaurant and merchandise revenue, and whether the
established fees are appropriate and best serve city residents. The City Council passed a Minute
Motion directing staff to return with a staff report at a future meeting authorizing an
independent audit of The Crossings Golf Course.
Additional Audit Options
In accordance with section 5.5 of the Authority's management contract with JCM, "The
Authority or its authorized agents, auditors, or representatives shall have the right during
normal business hours and upon at leastthirty six (36) hours' prior written notice to review,
inspect, audit, and copy the books, records, invoices, deposit receipts, canceled checks, and
other accounting and financial information maintained by JCM in connection with the operation
of the golf course ... The Authority shall have the right to retain an independent accounting firm
to audit the books and records of the golf course, the cost of which shall be a golf course
expense and included in the annual plans."
Staff consulted with the city attorney's office and determined that the City Council is unable to
contract directly with an external audit firm as it is not a separate legal entity with contracting
authority. Therefore, city staff must contract directly with an external firm. Potential audit
engagements include:
1. a performance audit,
2. An agreed-upon procedures engagement, or
August 27, 2019 Item #10 Page 3 of 5
3. a consulting engagement.
1. Performance Audit
A performance audit is an independent service that provides assurance on the performance of
projects, programs, activities, or functions, such as the operation of the golf course. The auditor
provides objective analysis with findings, conclusions, and recommendations. The auditor may
assess the efficiency and effectiveness of a program, with the goal of assisting decision-makers
in implementing improvement. Often, the goal is to improve performance and operations,
reduce costs, oversee corrective action, or contribute to public accountability. The city may
contract with an external audit firm to provide a comprehensive performance audit of the golf
course. Alternatively, the city may select its internal auditor to conduct an audit.
The city must first determine the overall objectives of the audit, or the questions that it wants
the auditor to answer. These objectives may be related to compliance, operations, internal
controls, financial sustainability, etc. The auditor is then responsible for developing specific
procedures to address audit objectives. Procedures often include interviews with management,
observations, and testing transactions. The firm must follow standards in planning and
conducting the audit, supervising its staff, obtaining sufficient and appropriate evidence, and
reporting. This audit type is the most rigorous of all the options. Costs vary depending on the
audit's scope and objectives; generally, this audit may cost more and take longer than other
engagements. A performance audit results in a written report, generally including the
background, scope, objectives, methodology, findings, recommendations, and a response from
the audited entity.
2. Agreed Upon Procedures
An agreed-upon procedures (AUP) engagement is not an audit; instead, it is a type of
attestation service. It is substantially less in scope than an audit._ The city is responsible for
determining sufficiency of procedures. Unlike an audit, in an AUP the firm does not perform any
of its own planning activities and does not assess risk areas in determining its approach for
performing work. The firm documents the procedures it performed and summarizes the results
in a final report. The report does not include any corresponding findings or recommendations.
Generally, AUPs tend to be used more for compliance-based engagements, such as testing
internal control procedures and effectiveness. Generally, an AUP may cost less and be
completed more quickly than a performance audit.
3. Consulting Engagement
A consulting engagement is not an audit; the services are more advisory in nature.
Independence is not required for a firm to provide consulting services. A consulting
engagement may assist management in decision-making. It offers a more flexible approach and
a working relationship between the city and the firm. Often, the end goal is to identify
additional revenues or cost savings. The final product of a consulting engagement may be titled
August 27, 2019 Item #10 Page 4 of 5
an operational review or a study. The objectives of the engagement would be crafted based on
the city's needs. The cost and time to complete the engagement may vary.
In Summary
The City Council should consider the extent of work being done currently by the City's external
audit firm and JCM's internal audit & compliance manager. If the scope of work that the City
Council wants audited is beyond what is currently being done, then the City Council should
determine its overall objectives and concerns before selecting an engagement type.
Specifically, City Council should consider the level of involvement it wants to have in the .audit
engagement, the overall objectives, timing and budget, and whether it should be performed by
an external audit firm or the city's internal auditor. Once City Council determines these factors,
staff can return with an estimated cost and time frame to complete the engagement.
Fiscal Analysis
This is an informational presentation with no financial impact. In the event City Council provides
direction staff will return with any fiscal impacts.
Next Steps
Receive and accept staff presentation. This report is provided for informational purposes unless
direction is provided by City Council.
Environmental Evaluation (CEQA)
Pursuant to Public Resources Code section 21065, this action does not constitute a "project"
within the meaning of CEQA in that it has no potential to cause either a direct physical change
in the environment, or a reasonable foreseeable indirect physical change in the environment;
and therefore, does not require environmental review.
Public Notification and Outreach
This item was noticed in accordance with the Ralph M. Brown Act and was available for viewing
at least 72 hours prior to the meeting date.
Exhibits
None.
August 27, 2019 Item #10 Page 5 of 5
Audit Engagement Options for
The Crossings at Carlsbad
Laura Rocha, Deputy City Manager, Administrative Services
Brigid Okyere, Internal Auditor
Aug. 27, 2019
Matters of Interest
•Ensuring long-term sustainability
•Planning for long-term capital replacement
•Standards of performance
•Appropriateness of established fees, rates,
prices
•Fraud risk
2
Past Engagements
Issue Date Engagement Type Objectives
February & May
2015
External Auditor –
Internal/forensic
Investigation
Determine whether bank and credit card account
charges were personal in nature, look for other areas of
misappropriated assets, and quantify the loss
February 2015 External Auditor –Agreed-
Upon Procedures (AUP)
Review internal controls and transactions
December 2015 Internal Auditor –Follow up
Status Report on AUP
Determine whether KSM addressed the AUP results
October 2017 Internal Auditor –Review Determine if cash disbursements had appropriate
approvals and were valid expenses; assess the design
and operational effectiveness of key controls.
3
Current Golf Management
•Managed by JC Resorts Management (JCM)
•Contract term: 3/1/18 –2/28/2023; optional 5-year extension
•City pays JCM a management fee
•The City Council has authority to set fees,
charges, and prices
•Contract requires JCM to submit annual plan
4
Current Oversight Activities
•The city maintains oversight responsibility
through the standing committee and other
ad-hoc meetings.
•Parks & recreation –operational oversight
•Finance –financial oversight
•Compliance with standards of performance
5
City’s Financial Auditor
•Performed annually by an external auditor
–Included reviewing JCM’s internal
controls in current and prior year.
–Financial statements presented fairly and
free of material misstatements
6
JCM’s Quality Internal Control Program
•Internal audit & compliance manager
–Routine visits to ensure adherence to internal control and compliance policies
–Program includes:
•Continuous monitoring
•Quarterly procedural audits
•Annual full property internal audits
7
JCM’s Quality Internal Control Program
•Continuous monitoring
–Reviews and maintain all contracts
–Maintain current certificates of insurance for
all vendors
–Complete lists of licenses and permits
–Detect, prevent, and investigate fraud
–Follow-up on prior audit recommendations
8
JCM’s Quality Internal Control Program
•Quarterly procedural audits
•Annual full property internal audit
–Evaluate the current state of internal controls
and the accuracy of financial reporting at the
property
•Questionnaire with controller
•Analytical review of changes in account balances
•Examination of detail transactions
9
Audit -Options
•Audit engagement –external/internal
•Agreed upon procedures
•Consulting engagement
Audit
•Auditor does more planning
•Higher Cost
•More Time
Agreed Upon Procedures
•Auditor does no planning
•Lower Cost
•Less Time10
External Performance Audit
•Independent, external firm
•Provides objective findings, conclusions, and recommendations
•Potential scope:
–Assess the operations of The Crossings since new management
•Potential goals:
–Improve operations, initiate corrective action, public accountability
•Thorough assessment more work, higher cost
11
Internal Performance Audit
•Performed by city’s internal auditor
•Determine specific audit objectives
–Assess internal controls
–Evaluate management’s compliance with
key contract provisions
–Assess performance in relation to
comparable golf courses
12
The Auditor’s Role
•City determines scope and objectives
•Auditor plans audit procedures
–Inquiry and interviews with management
–Auditor observation
–Review procedures and manuals
–Review controls for cash and test a selection of daily receipts
13
Performance Audits -Final Result
•Written report
–Background, scope, objectives, and
methodology
–Findings and recommendations
–Management’s response
14
Agreed Upon Procedures (AUP)
•City determines scope, objectives, and specific
procedures
•No opinion or conclusion provided; results only
•Tends to be internal controls testing or compliance based
–Testing internal controls around cash receipts/disbursements
•No planning, lowest cost
15
AUP -Final Result
•Written Report
–Procedures performed
–Results
16
Consulting Engagement
•Not an audit; offers no assurance
•Best for internal decision-making
•More flexible, solution-based
•Less rigorous
•Can take many forms
–“operational review” or “study”
17
Consulting Engagement – Example Objectives
•Operations analysis and evaluations
•Development of strategic approach to address
long-term fiscal challenges
•Financial projections
•Application of best practices to increase efficiencies
•End goal: identify additional revenues or cost savings
18
Consulting Engagement -Final Result
•Flexibility to determine the nature, timing
and communication of engagement results.
19
Considerations:
•If the City Council determines another
engagement is necessary, consider:
–Timing & budget
–Internal auditor or external audit firm
–An additional audit engagement should
complement existing financial and internal
audits, not duplicate it.
20
In Conclusion:
•Staff intends to:
–Add AUP engagement to annual financial audit contract for additional internal control testing
–Increase transparency of city’s oversight activities
•Add a golf webpage to the city’s website to include monthly financial status reports
•Present to City Council the Annual Plan for the golf course
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Thank you
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