HomeMy WebLinkAbout2023-08-29; City Council; ; Fiscal Year 2023-24 Internal Audit Plan and Internal Audit UpdateCA Review JRT
Meeting Date: August 29, 2023
To: Mayor and City Council
From: Scott Chadwick, City Manager
Staff Contact: Robert Threatt, Internal Audit Manager
robert.threatt@carlsbadca.gov, 442-339-2418
Laura Rocha, Deputy City Manager, Administrative Services
laura.rocha@carlsbadca.gov, 442-339-2415
Subject: Fiscal Year 2023-24 Internal Audit Plan and Internal Audit Update
Recommended Action
That the City Council:
1.Receive a report regarding the Fiscal Year 2022-23 Internal Audit Activity Summary and
the Fiscal Year 2023-24 Internal Audit Plan
2.Adopt a resolution approving the Fiscal Year 2023-24 Internal Audit Plan
Executive Summary
The city’s internal audit program examines city operations to ensure city resources are being
used effectively and appropriately. The internal audit plan is developed for the City Council’s
review and approval each fiscal year, in accordance with City Council Policy No. 89. The plan is
attached as Exhibit 1, Attachment A.
This policy also requires the city’s internal auditor to communicate progress on the annual audit
plan along with the status of any open recommendations from past audit engagements to the
City Manager and the City Council twice a year.
Reports on each audit are distributed to city management and the City Council as they are
completed during the year and are available to the public on the city’s internal audit webpage
(carlsbadca.gov/departments/internal-audits).
This report provides the City Council with updates on:
•The status of audit activities from fiscal year 2022-23
•The internal audit engagements identified in the city’s Fiscal Year 2023-24 Internal Audit
Plan (Exhibit 1, Attachment A)
Explanation & Analysis
Annual internal audit update
At the end of fiscal year 2022-23, there were three internal audit engagements completed with
two other engagements in-process.
Aug. 29, 2023 Item #7 Page 1 of 26
Completed engagements
• Fraud and ethics hotline implementation
• Vice Narcotics Investigative Unit “Buy Fund” audit (Exhibit 4)
• Transient occupancy tax (FY22) agreed-upon procedures (Exhibit 5)
Engagements in-process
• Procurement audit
• Transient occupancy tax review (FY23)
A detailed summary of all fiscal year 2022-23 internal audit activities, including those carried
over into fiscal year 2023-24 is provided as Exhibit 2.
Before the most recent internal audit update on February 7, 2023, the city had completed the
implementation of the last of the open audit recommendations from the city’s previous internal
audits engagements. As a result, there are no status updates to provide on open audit
recommendations. However, due to recently completed engagements, the internal audit
program has a new set of open audit recommendations to track and report on, during semi-
annual internal audit updates. These open audit recommendations are detailed in Exhibit 3.
Annual internal audit plan
The city’s Internal Audit Manager performs independent and objective assurance services to
safeguard city resources and improve city operations. Such services may include internal audits
of any city department, division, function, or program. The audit plan outlines the internal
audits and other value-added engagements the Internal Audit Manager proposes to conduct
during the fiscal year.
The attached internal audit plan for fiscal year 2023-24 includes information about the basis for
the audit engagements selected, their preliminary objectives and the resources required. It
includes four engagements carried over from the previous year’s audit plan and one new
engagement for the City Council’s consideration. With City Council approval, the internal audit
plan serves as the operating roadmap for the city’s internal audit program. A resolution
approving the plan is provided as Exhibit 1.
At the conclusion of each internal audit engagement, the auditor issues an internal audit report
that summarizes the auditor’s findings and recommends corrective actions to city departments,
when necessary. An engagement could be a detailed audit of a major city program or a less
comprehensive “agreed-upon-procedures review,” which examines certain specified aspects of
city operations.
Proposed internal audit engagements in FY 2023-24
Engagements in-process and carried over
• Transient occupancy tax (FY23) agreed-upon procedures
• Procurement program audit
• Payroll audit
• Business application user access review
New engagements for FY 2023-24
• Transient occupancy tax (FY24) agreed-upon procedures and revenue audit
Aug. 29, 2023 Item #7 Page 2 of 26
Fiscal Analysis
There is no immediate fiscal impact to approving the Fiscal Year 2023-24 Internal Audit Plan as
there is sufficient funding in the fiscal year 2023-24 budget to execute the plan.
Next Steps
With the City Council’s approval. the city’s Internal Audit Manager will conduct the
engagements detailed in the Fiscal Year 2023-24 Internal Audit Plan.
Environmental Evaluation
This action does not require environmental review because it does not constitute a project
within the meaning of the California Environmental Quality Act under California Public
Resources Code Section 21065 in that it has no potential to cause either a direct physical
change in the environment or a reasonably foreseeable indirect physical change in the
environment.
Exhibits
1. City Council resolution
2. Fiscal Year 2022-23 Internal Audit Activity Summary
3. Open audit recommendations
4. Vice Narcotics Investigative Unit “Buy Fund” audit report
5. Transient Occupancy Tax Agreed-Upon Procedures report
Aug. 29, 2023 Item #7 Page 3 of 26
BESQLUTION NO. 2023-232
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD,
CALIFORNIA, APPROVING THE FISCAL YEAR 2023-24 INTERNAL AUDIT PLAN
WHEREAS, the city's Internal Audit Manager performs independent and objective assurance
services to safeguard city resources and improve city operations; and
WHEREAS, the services provided may include internal audits of any city department, division,
function or program; and
WHEREAS, as required by City Council Policy No. 89, the internal audit manager has presented
a Fiscal Year 2023-24 Internal Audit Plan (Attachment A) for the City Council's review and approval; and
WHEREAS, the purpose of the internal audit plan is to outline internal audits and other value
added engagements the Internal Audit Manager proposes to conduct during the fiscal year; and
WHEREAS, the Fiscal Year 2023-24 Internal Audit Plan includes information about the basis for
the audit engagements selected, preliminary objectives and the consideration of resources; and
WHEREAS, once approved, the Fiscal Year 2023-24 Internal Audit Plan will serve as the
operating roadmap for the city's Internal Audit Manager.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as
follows:
1.That the above recitations are true and correct.
2.That the City Council approves the Fiscal Year 2023-24 Internal Audit Plan, attached as
Attachment A.
PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of
Carlsbad on the 29th day of August, 2023, by the following vote, to wit:
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KEITH BLACKBURN, Mayor
SHERRY FREISINGER, City Clerk
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Exhibit 1
Aug. 29, 2023 Item #7 Page 4 of 26
(1k
Attachment A
Fiscal Year
2023-24
Internal Audit
Plan
Aug. 29, 2023 Item #7 Page 5 of 26
(city of
Carlsbad
Fiscal Year 2023-24 Internal Audit Plan
OVERVIEW
The City of Carlsbad’s internal auditor performs independent and objective assurance services to
safeguard city resources and improve city operations. Internal audits help to mitigate risks by
recommending improvements to the city’s internal controls and governance, risk, and compliance
processes. Potential audits may include any city department, division, function, or program
administered by the city.
The purpose of the annual internal audit plan is to outline audits and other value-added engagements
the internal auditor proposes to conduct during the current fiscal year. This document serves as the
primary work plan to carry out the responsibilities of the internal auditor. The basis for the audit plan
results from numerous inputs, including a limited scope risk assessment, auditor observations,
inquiries of management, and audit requests from the City Council. The internal auditor’s strategy in
developing this plan seeks to identify, prioritize, and manage audits important to city operations,
programs, and systems.
Currently, the Internal Audit Division is comprised of one full-time internal auditor. The internal audit plan considers available staff hours, level of expertise and experience, the estimated size and
complexity of audits, time allocated to satisfy continuing professional education requirements, time
allocated to performing audit follow-up procedures, and use of external consultants/auditors.
The internal audit plan is a working document. During the year, causes for changes to the audit plan
may include internal auditor judgement, a change in the risk assessment profile of an engagement, or
conflicting priorities. As such, projects identified in the current year may carry over into the following
fiscal year.
The following page identifies the list of prioritized internal audit engagements for FY 2023-24, and
their preliminary objectives. At the beginning of each engagement, the internal auditor will establish
familiarity with the department, function or process identified for audit. During that initial period,
audit objectives may be refined, and the audit methodology will be established.
Aug. 29, 2023 Item #7 Page 6 of 26
{city of
Carlsbad
Fiscal Year 2023-24 Internal Audit Plan
Fiscal Year 2023-24 Internal Audit Engagements
Entity, function,
program or
process to audit
Type of
engagement
Primary
stakeholder/audit
lead
Preliminary objectives
In-process engagements FY2023-24
Transient
Occupancy Tax
(FY23)
Agreed Upon
Procedure
Engagement
Selected hotels,
Finance
Department/Davis
Farr, LLP
• To determine if hotels are properly
reporting and remitting occupancy
taxes in compliance with city
ordinance.
Procurement
Audit Internal Audit Finance and Public
Works
Departments/Internal
Audit Manager
• To assess the city’s compliance with
applicable procurement guidelines.
• Evaluate whether the city’s
procurement process is adhered to.
Carryover engagements
Payroll Audit Internal Audit Human Resources,
Finance
Department/Internal
Audit Manager
• Evaluate the segregation of duties in
the city’s bi-weekly payroll and data
entry processes.
• Evaluate the controls and test the
accuracy of timecards for part-time
employees.
Business
Application User
Access
Internal Audit Information
Technology
Department/Internal
Audit Manager
• Evaluate the city’s management of
user access across its enterprise
resource planning systems and
software applications.
New engagements for FY 2023-24
Transient
Occupancy Tax
(FY24) &
Revenue Audit
Agreed Upon
Procedure
Engagement
and Internal
Audit
Selected hotels,
Finance
Department/Davis
Farr, LLP & Internal
Audit Manager
• To determine if hotels are properly
reporting and remitting occupancy
taxes in compliance with city
ordinance.
• Evaluate the city’s receipt and
recordkeeping of transient occupancy
tax revenues
Aug. 29, 2023 Item #7 Page 7 of 26
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Exhibit 3
Aug. 29, 2023 Item #7 Page 9 of 26
Internal Audit Review:
Vice Narcotics Investigative Unit Buy Fund
Robert Threatt
Internal Audit Manager
Report 2023-03
Exhibit 4
Aug. 29, 2023 Item #7 Page 10 of 26
2 Vice Narcotics Investigative Unit Buy Fund Review
TABLE OF CONTENTS
INTRODUCTION
Scope & objectives ......................................................................................................... 3
Methodology .................................................................................................................. 3
Background ..................................................................................................................... 3
Summary of Results ........................................................................................................ 4
OBJECTIVE 1: ADHERENCE TO POLICIES AND PROCEDURES
Review Procedures ........................................................................................................ 4
Results ........................................................................................................................... 5
OBJECTIVE 2: EFFECTIVE INTERNAL CONTROLS
Review Procedures ........................................................................................................ 6
Results ........................................................................................................................... 7
RECOMMENDATIONS
Recommendations and management’s response .......................................................... 8
Aug. 29, 2023 Item #7 Page 11 of 26
3 Vice Narcotics Investigative Unit Buy Fund Review
INTRODUCTION
Scope & Objectives
The City's fiscal year 2022-23 internal audit plan called for a review of the Vice Narcotic
Investigative Unit’s Buy Fund (Buy Fund). The following objectives were the focus of the
review engagement.
• To determine whether the unit’s Buy Fund was managed in accordance with City
policies and procedures.
• To assess whether established Buy Fund policies and procedures provide for
effective internal controls to safeguard program assets.
Methodology
• Performed a cash count of the unit’s Buy Fund.
• Interviewed personnel from the Police Department’s Vice Narcotics Investigative
Unit and the Finance Department.
• Reviewed Buy Fund transactions and supporting documentation.
• Observed the physical controls in place to safeguard Buy Fund assets.
• Performed a cash count of the unit’s Buy Fund.
Background
The Carlsbad Police Department’s Vice Narcotics Investigative Unit (VNIU) is responsible for
targeting those responsible for the use, distribution, sale, and proliferation of illegal drugs in
the community. The unit is also responsible for enforcing laws related to gambling, liquor
laws, prostitution, and other illegal activities. The Buy Fund supports the unit’s activities and
is intended to be used for purposes such as prop and drug purchases, flash money,
informant payments and to purchase supplies to support the unit’s operations.
The Vice Narcotics Investigative Unit is comprised of a sergeant who serves as the unit’s
supervisor, three detectives and two task force officers. Use of the Buy Fund is governed by
two police department policies, Policy 607 Vice Narcotics Investigative Unit-Buy Fund (Policy
607) and Policy 608.5 Narcotics Informant Payment Procedures (Policy 608.5) as well as City
of Carlsbad Administrative Order No. 85, Cash Funds Policy (Admin Order 85).
Policy 607 Vice Narcotics Investigative Unit-Buy Fund provides guidance concerning the
purpose and scope of the Buy Fund, documentation requirements, budgetary levels and
mandated audits. Policy 608.5 Narcotics Informant Payment Procedures provides the
approval criteria for payments to informants, guidance for payments at different dollar
value thresholds and approval documentation requirements. The City’s Administrative
Order No. 85 Cash Funds Policy establishes the city’s cash handling standards.
Aug. 29, 2023 Item #7 Page 12 of 26{city of
Carlsbad
4 Vice Narcotics Investigative Unit Buy Fund Review
Summary of Results
The VNIU Buy Fund review engagement was comprised of two objectives. The first objective
called for a determination of whether the Buy Fund was managed in accordance with city
policies and procedures. The second objective, called for an assessment of whether those
policies and procedures provide for effective internal controls to safeguard Buy Fund assets.
The first component of the review engagement was an evaluation of the city’s compliance
with established Buy Fund and citywide policies and procedures. This was achieved by
interviewing VNIU personnel regarding the procedures they adhere to and performing a
detailed review of Buy Fund records to confirm their assertions. First, a physical cash count
was performed to evaluate the accuracy of the program’s recordkeeping and adherence to
the policies referenced earlier. All Buy Fund transactions associated with the fiscal quarter
ending March 31, 2023, were then reviewed to ensure they were documented in
accordance with existing policies and procedures.
As a result of procedures performed, it was noted that Buy Fund activities were largely
compliant with established policies and procedures and documentation was consistent
throughout. However, there were two audit recommendations identified during this
segment of the review, associated with maintaining segregation of duties.
The second objective called for an assessment of whether established Buy Fund policies and
procedures provide for effective internal controls and safeguarding of program assets
(cash). This was achieved while performing many of the same procedures identified in the
first objective. Performing a cash count and evaluating physical controls, reviewing
transactional documentation, and interviewing staff provided an effective evaluation of the
Buy Fund’s system of internal controls. While it was noted that existing policies do provide
for effective controls and strong physical controls are present, there were opportunities
identified for strengthening city policies and implementing procedures to bring about
stronger control activities and the safeguarding of Buy Fund assets.
OBJECTIVE 1: ADHERENCE TO POLICIES AND
PROCEDURES
To determine whether the Buy Fund is managed and accounted for in accordance with
authorized policies and procedures.
Determining whether the Buy Fund is managed and accounted for in accordance with
established policies and procedures was achieved by employing several different review
procedures. Initial steps involved identifying and reviewing the relevant policies and
procedures, which were identified as Police Department policies 607 and 608.5 as well as
Administrative Order No. 85, Cash Funds Policy. Key VNIU personnel were interviewed and
Buy Fund recordkeeping and documentation were evaluated to determine the degree to
which the program is adhering to established policies and procedures.
Aug. 29, 2023 Item #7 Page 13 of 26{city of
Carlsbad
5 Vice Narcotics Investigative Unit Buy Fund Review
The initial step in evaluating Buy Fund recordkeeping and documentation involved a physical
cash count as of the month ended February 28, 2023. The cash count verified that the
balance of the Buy Fund, without exception, agreed with the records maintained by VNIU
staff.
The second procedure involved a detailed review of Buy Fund transactions (disbursements)
from the fiscal quarter ending March 31, 2023. This included the evaluation of transactions
from January, February, and March 2023. To evaluate staff’s adherence to the referenced
policies, the backup documentation associated with each disbursement was subjected to a
detailed review.
For each disbursement, VNIU personnel are required to prepare a Carlsbad Police
Department VNIU Investigative Unit Buy Fund disbursement form. The disbursement form
enables staff to thoroughly document each transaction by recording approval signatures,
witnesses, case numbers, if applicable, and payment details. Often the disbursement form
includes attachments, such as invoices, receipts or other supporting documents that
corroborate the recorded disbursements.
During the review of the Buy Fund documentation there were several disbursements
identified where the VNIU Supervisor approved and disbursed funds, without a second
approver reviewing the transaction prior to the disbursement of cash. It is noted that Policy
607 and 608.5 are the primary Buy Fund policies and in only a few instances do they provide
detailed, procedural direction. While Policy 607 does call for the preparation of a monthly
summary report, which is reviewed and approved by the Investigations Commander, this
procedure takes place at month end, well after the cash disbursements are completed. The
other relevant city policy, Administrative Order No. 85, establishes the city’s cash handling
standards and in Section 2.8 it indicates that fund (cash) custodians are not permitted to
both approve and disburse funds. Segregation of duties is a standard internal control
associated with financial transactions. Such a control serves to mitigate the likelihood of
inappropriate disbursements and theft. Given direction from Admin Order 85 and the VNIU
Supervisor’s primary responsibility to disburse and safeguard Buy Fund cash assets, approval
is required from a second authorized approver. Given the Buy Fund carries a balance of up
to $10,000 in cash at any point in time, this is an important standard.
It was noted during the review, nearly half of the annual Buy Fund balance was disbursed to
pay for supplies or services, which most entities purchase with a city credit card or check
and not cash. While Policy 607 states that it is appropriate to buy such supplies with cash
from the Buy Fund, using a city credit card or issuing a check against a purchase order would
reduce the overall risk represented by the Buy Fund, as the VNIU could carry a lower cash
balance.
Recommendation #1: To adopt cash handling best practices and comply with Administrative
Order No. 85, Section 2.8, the VNIU management should identify a separate authorized
approver as soon as practical. This second staff member shall serve as the approving
authority for all VNIU cash disbursements by reviewing and approving cash transactions
prior to disbursement. This must be someone other than the VNIU Supervisor as that role
serves as the disbursing authority and cash custodian for the Buy Fund.
Aug. 29, 2023 Item #7 Page 14 of 26{city of
Carlsbad
6 Vice Narcotics Investigative Unit Buy Fund Review
Recommendation #2: As required for change funds in Administrative Order No. 85, Section
2.3.6, it is recommended that VNIU personnel with oversight or management
responsibilities associated with the Buy Fund, attend annual cash handling training.
Historically, the Finance Department has provided such training. The County of San Diego
also has an annual cash handling training course available to public agencies. Lastly, there
are also commercial continuing professional education (CPE) offerings online that provide
training associated with widely accepted cash handling standards.
OBJECTIVE 2: EFFECTIVE CONTROLS
To assess whether the VNIU’s policies and procedures provide effective controls for
safeguarding Buy Fund assets.
To assess whether the Buy Fund policies and procedures provide for sound controls and
effectively safeguard assets, the program’s policies and processes were evaluated against
cash handling best practices. The policies and processes were evaluated using interviews, a
cash count and reviewing disbursement documentation. As a result of the procedures
performed, several opportunities for strengthening internal controls and safeguarding
assets were identified.
As noted in the review procedures associated with Objective 1, there is an opportunity to
strengthen the Buy Fund’s segregation of duties. During the review, it was observed that
Buy Fund personnel consistently adhered to direction from all known policies. For several
years that was comprised of only Policy 607 and Policy 608.5. Then in May 2020
Administrative Order No. 85, Cash Funds Policy, was issued and established citywide cash
handling standards. While the Buy Fund does not fall within the limited scope of cash funds
defined by the administrative order, the cash handling standards it establishes are
universally applicable to cash transactions.
Recommendation #3: Given the material balance and activity of the Buy Fund and the
unique nature of VNIU operations, it is recommended that VNIU staff collaborate with the
Finance Department to develop a Buy Fund cash handling procedure. The procedure should
incorporate guidelines from Policy 607 and cash handling standards referenced in
Administrative Order No. 85. The purpose of the procedure is to provide detailed cash
handling guidance to VNIU staff. Adherence to these procedures will contribute to sound
internal controls and will help safeguard Buy Fund (cash) assets.
Administrative Order No. 85, Cash Funds Policy, Section 2.14 authorizes the development of
department specific cash handling policies so long as they do not contradict or supersede
those in the administrative order. This enables staff to develop stand-alone, local
procedures that adhere to citywide cash handling standards while addressing unique Buy
Funds operations.
To process disbursements in support of VNIU operations, the Buy Fund always maintains a
cash fund balance. This is achieved through annual funding from the city’s General Fund.
Typically, once, or twice a year, the Buy Fund is replenished with the allocated budget. The
Aug. 29, 2023 Item #7 Page 15 of 26{city of
Carlsbad
7 Vice Narcotics Investigative Unit Buy Fund Review
Budgetary Process section of Policy 607 provides general guidelines staff are to follow
during the replenishment process.
The policy for the replenishment process currently indicates that the Finance Department is
to issue a check to the VNIU Supervisor who then cashes the check at the city’s bank. After
cashing the check, the VNIU Supervisor transports the cash back to the unit where it’s
secured in the VNIU safe. It is noted that similar to segregation of duties, the policy
associated with the cash replenishment process, Policy 607, provides a general framework
but lacks definitive procedures. For a process that is typically detail intensive, this represents
an opportunity for strengthening the city’s internal controls associated with cash handling.
During the Buy Fund review, a cash replenishment deposit of $7,000, dated February 9,
2023, was selected and documentation was reviewed. This included reviewing the
transaction documentation and discussing the process with the VNIU Supervisor. As a
result, it was discovered that the Finance Department made the determination that the
documented policy, which called for the city to cut a check in the name of the VNIU
Supervisor, did not provide for sufficient control of City funds.
To address the matter, on an interim basis, the Finance Department revised the
replenishment process and strengthened the associated controls. The interim process calls
for a check to be cut to “petty cash” and issued to the Treasury Accountant. If there is a
significant amount of time between the check being cut and personnel meeting at the bank,
Accounts Payable secures the check. Then at an agreed to date and time, the Treasury
Accountant meets the VNIU Supervisor at the City’s bank of record. The check is cashed by
the bank, and then after completing a chain of custody form prepared by the Finance
Department, the VNIU Supervisor takes possession of the cash and transports it back to the
VNIU safe. This deviation from Policy 607 ensures the check remains in the control of
Finance Department staff until cashed.
After reviewing the replenishment documentation, the applicable section of Policy 607 and
discussing the process with the VNIU Supervisor and Finance Department staff, it is noted
there are control weaknesses associated with the replenishment process outlined in Policy
607. While interim procedures provide increased control, it was noted that at times, there
has been a gap in time between when the check is cut and issued to the Treasury
Accountant and when that staff member meets the VNIU Supervisor at the bank. This gap
represents a risk to the city, as a petty cash check is a live check that anyone can deposit.
During the procedures referenced in this review, it is noted that the physical controls of the
Buy Fund cash balances were found to be secure. The Buy Fund cash balance is secured in a
safe, located in a secured office, within the Police Department Headquarters. It is noted
there are three layers of physical barriers preventing unauthorized access. Given these
observations, the risk of unauthorized access is quite low.
Recommendation #4: It is recommended that the Finance Department evaluate the
feasibility and cost effectiveness of utilizing an armored transport service to deliver the cash
replenishment directly to the VNIU department at Police Headquarters. This represents a
best practice, and the service is often coordinated directly by large banks. If armored
transport is not utilized, it is recommended that Accounts Payable secure the petty cash
Aug. 29, 2023 Item #7 Page 16 of 26{city of
Carlsbad
8 Vice Narcotics Investigative Unit Buy Fund Review
check until just prior to the Finance Department staff meeting the VNIU Supervisor at the
bank. This will serve to reduce the risk the check is unsecured for periods of time prior to
being cashed at the bank.
Once the new process is finalized, the Finance Department and VNIU staff should take steps
to ensure the relevant policies and procedures are updated to reflect the new process.
SUMMARY OF RECOMMENDATIONS
Recommendation 1: To adopt cash handling best practices and comply with Administrative
Order No. 85, Section 2.8, the VNIU management should identify a separate authorized
approver as soon as practical. This second staff member shall serve as the approving
authority for all VNIU cash disbursements by reviewing and approving cash transactions
prior to disbursement. This must be someone other than the VNIU Supervisor as that role
serves as the disbursing authority and cash custodian for the Buy Fund.
Management Response: VNIU agrees with the recommendation and will implement a
second authorized approver in the form of the Unit Commander to verify/approve
transactions.
Recommendation 2: As required for change funds in Administrative Order No. 85, Section
2.3.6, it is recommended that the VNIU Supervisor and Investigations Commander, attend
annual cash handling training given their roles in overseeing the Buy Fund cash balances.
Historically, the Finance Department has provided such training. The County of San Diego
also has an annual cash handling training course available to public agencies. Lastly, there
also are commercial continuing professional education (CPE) offerings online that provide
training associated with widely accepted cash handling standards.
Management Response: VNIU agrees with the recommendation and will attend annual cash
trainings.
Recommendation 3: Given the material balance and activity of the Buy Fund and the unique
nature of VNIU operations, it is recommended that VNIU staff collaborate with the Finance
Department to develop a Buy Fund cash handling procedure. The procedure should
incorporate guidelines from Policy 607 and cash handling standards referenced in
Administrative Order No. 85. The purpose of the procedure is to provide detailed cash
handling guidance to VNIU staff. Adherence to these procedures will contribute to sound
internal controls and will help safeguard Buy Fund (cash) assets.
Administrative Order No. 85, Cash Funds Policy, Section 2.14 authorizes the development of
department specific cash handling policies so long as they do not contradict or supersede
those in the administrative order. This enables staff to develop stand-alone, local
procedures that adhere to citywide cash handling standards while addressing unique Buy
Funds operations.
Management Response: The Finance Department agrees with the recommendation.
Finance staff will work collaboratively with VNIU staff to either amend an existing or
Aug. 29, 2023 Item #7 Page 17 of 26{city of
Carlsbad
9 Vice Narcotics Investigative Unit Buy Fund Review
establish a new policy to ensure the scope sufficiently incorporates cash handling standards
referenced in Administrative Order No. 85.
Management Response: VNIU agrees with the recommendation. VNIU staff will work
collaboratively with Finance staff to either amend an existing or establish a new policy to
ensure the scope sufficiently incorporates cash handling standards referenced in
Administrative Order No. 85.
Recommendation 4: It is recommended that the Finance Department evaluate the
feasibility and cost effectiveness of utilizing an armored transport service to deliver the cash
replenishment directly to the VNIU department at Police Headquarters. This represents a
best practice, and the service is often coordinated directly by large banks. If armored
transport is not utilized, it is recommended that Accounts Payable secure the petty cash
check until just prior to the Finance Department staff meeting the VNIU Supervisor at the
bank. This will serve to reduce the risk the check is unsecured for periods of time prior to
being cashed at the bank.
Once the new process is finalized, the Finance Department and VNIU staff should take steps
to ensure the relevant policies and procedures are updated to reflect the new process.
Management Response: Management agrees with the recommendation. Finance staff will
pursue options for armored transport services and evaluate applicable cost benefit
considerations. In the interim, upon issuing a check made out to “petty cash,” staff will
immediately secure the check in a safe or locked cabinet until needed for routing to the
bank.
Aug. 29, 2023 Item #7 Page 18 of 26{city of
Carlsbad
Results of Transient Occupancy Tax
Agreed-Upon Procedures
Robert Threatt
Internal Audit Manager
Report 2022-01
Exhibit 5
Aug. 29, 2023 Item #7 Page 19 of 26
2 Transient Occupancy Tax Agreed-Upon Procedures
INTRODUCTION
Objective, scope, and methodology
Transient occupancy taxes (TOT) represent a significant portion of the city’s governmental
fund revenues. As a result, it’s important that the city perform oversight measures to ensure
hotels are complying with Carlsbad Municipal Code (CMC) that governs transient occupancy
taxes and related business improvement districts.
The objective of this engagement was to determine if a selection of hotels operating within
the City of Carlsbad properly remitted and reported their TOTs and any applicable
assessments for calendar years 2018, 2019 and 2020. The program’s assessments are
comprised of as many as two business improvement districts, the Carlsbad Tourism Business
Improvement District (CTBID) and the Carlsbad Golf Lodging Business Improvement District
(CGLBID).
To fulfill this objective, the city engaged a regional CPA firm, CliftonLarsonAllen, LLP to
perform a transient occupancy tax agreed-upon (AUP) procedures engagement. The
engagement calls for the firm to perform a set of agreed upon procedures, as listed in the
appendix, to evaluate the degree to which a group of 11 selected hotels are complying with
the existing municipal code chapters 3.12, 3.37, and 3.38 pertaining to TOT, CTBID, and
CGLBID respectively. This report summarizes the results of those procedures.
It is important to note that this is not an audit. Rather, this is an agreed-upon procedures
engagement, which is a limited scope engagement carried out by performing a
predetermined set of procedures. The procedures are identified by the city and agreed to by
CliftonLarsonAllen, LLP, prior to beginning the engagement. At the conclusion, the city is
presented with the results of the procedures for each hotel and that concludes the
engagement. In contrast, an audit engagement would involve a broader focus, a risk
assessment would be performed to determine the scope of procedures to perform, and at
the conclusion of the engagement there would be an auditor’s opinion. The agreed-upon
procedure engagement is well defined, provides sought after results and information the
city must then act upon in accordance with the relevant municipal codes.
BACKGROUND
California Revenue & Taxation Code Sections 7280-7283.51 sets forth the state’s regulations
for transient occupancy taxes and Chapter 3.12 of the Carlsbad Municipal Code sets forth
the city’s regulations on its TOT. This tax applies to hotel guests who occupy a hotel room
for a period of up to 30 days. There are several conditions that exempt guests from this tax.
One common exemption is available to federal and state employees when traveling on
official business. Guests wishing to be exempted from TOTs typically must attest to the
status which makes them exempt at the beginning of their stay. The revenues generated
from TOTs are allocated to the city’s General Fund.
Aug. 29, 2023 Item #7 Page 20 of 26{city of
Carlsbad
3 Transient Occupancy Tax Agreed-Upon Procedures
In addition to TOTs, the city collects assessments from hotels to support its two business
improvement districts, the CTBID and CGLBID. The regulations governing the two districts
are set forth in Carlsbad Municipal Code Chapters 3.37 (CTBID) and 3.38 (CGLBID). Proceeds
from the CTBID assessments, which are paid by all hotels operating within the city’s
boundaries, are utilized to fund marketing and sales promotion efforts to benefit the hotels.
Proceeds from the CGLBID assessments, which are paid by hotels that elected to join the
district, are spent to promote golf related tourism within the boundaries of the CGLBID, as
well as marketing related capital improvements such as golf signage, equipment and to pay
for administrative costs.
Hotels participating in the CTBID and CGLBID are required to report and remit the following
assessments:
• For CTBID, through October 31, 2020, all hotels in the City of Carlsbad are to pay $1
per occupied room, per rental night.
• For CTIBD, beginning November 1, 2020, all hotels in the City of Carlsbad are to pay
2% of gross room revenues.
• For CGLBID, hotels who opt to participate in the improvement district, are to pay a
flat fee of $2 per occupied room per night.
Hotels report and remit TOTs and assessments to the city monthly. The city’s Finance
Department is responsible for collecting and administering the TOT program. The table
below (Table 1) summarizes total TOT, CTBID, and CGLBID revenues received by the city
during fiscal years 2018 through 2020.
SUMMARY OF RESULTS
Results of agreed-upon procedures
The procedures performed for the 11 selected hotels for calendar years 2018 through 2020
identified additional revenue owed to the city along with associated penalties and interest.
Tables 2 and 3 below present the findings by hotel, however the names of the hotels are
intentionally omitted. Of the 11 hotels selected only one was a participant in the CGLBID
and there were no findings associated with the CGLBID assessments.
As a result of the procedures performed it is noted that hotels owe additional TOT to the
city for a few specific reasons:
• Overreporting tax exempt rent revenues because the hotel was unable to provide
support for exemptions claimed.
Fiscal Year TOT CTBID CGLBID
FY2018-19 26,320,000 1,332,185 719,735
FY2019-20 18,898,000 1,086,188 534,241
FY2020-21 15,584,000 1,867,249 335,402
Table 1: TOT Revenues by Fiscal Year
Aug. 29, 2023 Item #7 Page 21 of 26
I I I I I
{city of
Carlsbad
4 Transient Occupancy Tax Agreed-Upon Procedures
• Variances were found when the mathematical accuracy of tax remittances were
evaluated.
• Not adhering to the city’s new (November 2020) CTBID assessment rate.
When a deficiency is identified during an audit, the Carlsbad Municipal Code Section
3.12.080 requires the tax administrator to invoice the hotel operator for the following:
• Net tax deficiency (underpayment)
• An audit deficiency penalty of 10%, CMC Section 3.12.080(E)
• Interest of 1.5% per month, or fraction thereof, CMC Section 3.12.080(C)
The penalties and interest, referenced in the tables above account for the penalties cited
here as well as the net deficiency.
Hotel #
TOT Revenues Collected
2018-2020
TOT underpaid
(overpaid)
Penalties &
Interest
Total due to city
(owed by city)
1 1,232,045 -
2 664,355 1,765 1,138 2,903
3 707,716 15,129 13,410 28,539
4 2,272,701 1,002 927 1,929
5 1,224,817 2,489 1,764 4,253
6 5,404,442 310 266 576
7 440,660 1 - 1
8 761,864 529 418 947
9 1,336,075 - - -
10 10,002,965 - - -
11 571,332 - - -
Total 24,618,972 21,224 17,923 39,147
Hotel #
CTBID Collected 2018-
2020
CTBID underpaid
(overpaid)
Penalties &
Interest
Total due to city
(owed by city)
1 82,853 84,565 35,180 119,745
2 85,598 634*- 634
3 57,207 - - -
4 144,966 - - -
5 105,079 - - -
6 188,303 - - -
7 19,434 - - -
8 42,553 - - -
9 114,680 - - -
10 307,962 - - -
11 80,908 - - -
Total 1,229,543 84,565 35,180 120,379
Table 2: TOT underpaid or overpaid by hotel for calendar years 2018 through 2020
Table 3: CTBID overpaid or underpaid for calendar years 2018 through 2020
*Note: In November 2020 the city adopted a new CTBID assessment, which changed the way the
assessment is calculated. Due to the new calculation, the city waived penalties and interest for hotels
that did not correctly calculate their CTBID assessments in the first month after adoption.
Aug. 29, 2023 Item #7 Page 22 of 26{city of
Carlsbad
5 Transient Occupancy Tax Agreed-Upon Procedures
Transient occupancy tax ordinance
During the TOT engagement there were several hotels that became unresponsive to
requests for records from the city’s consultant, CliftonLarsonAllen, LLP. The hotels in
question, simply stopped responding to requests, despite actively responding in the early
stages of the engagement. As a result, the city’s internal auditor, with support from code
enforcement staff and in consultation with the City Attorney’s Office, implemented
administrative measures to obtain their cooperation. The measures ranged from additional
outreach in the form of calls and visits to the referenced hotels, to the city’s Code
Enforcement Division issuing notices of violation and administrative citations, which carry
fines.
The process of applying additional administrative measures utilized considerable resources
on the part of both the consultant and city staff. While there are periods in TOT
engagements where city staff coordinate with the hotels directly to obtain reports or
additional data, the measures required in this engagement are atypical.
During the process of following up with the hotels in question staff looked to the applicable
municipal code, Chapter 3.12 Transient Occupancy Tax, for language that would aid in
obtaining compliance from all hotels. In doing so, it was noted that language concerning
penalties in the TOT ordinance focus solely on the accurate remittance of TOTs. There was
no mention of penalties if hotels refused to cooperate. While the city has more severe
administrative actions and penalties it may apply, there is no reference to those actions.
To further support the city’s inspection of TOT records, required by CMC 3.12.110 to be
retained by hotels and made available to inspection for a period of three years, it was
recommended to staff that the TOT ordinance be reviewed and updated. Doing so would
support the city’s oversight and collection of TOT remittances. As a result, the Finance
Department and City Attorney’s Office, with input from the city’s internal auditor, have
begun a thorough review of the TOT ordinance. Several recommendations, aimed at
facilitating the city’s review of TOT records are due to be brought forward for City Council’s
consideration prior to the end of calendar year 2023.
Review of transient occupancy tax filings
Effective November 1, 2020, the city’s CTBID assessment was increased from one dollar per
room, per occupied night to two percent of gross room rental revenues per month. This
represented a significant increase in the CTBID assessment. During the TOT engagement one
of the selected hotels was discovered to still be paying the previous CTBID assessment
amount of one dollar per room, per occupied night.
Despite the city thoroughly communicating the change in the assessment as well as noticing
and holding the required public hearing and public meeting sessions, the hotel in question
continued filing their TOT returns as they had been and paying the previous assessment. As
a result, the hotel accrued a large net deficiency associated with their CTBID assessments
plus penalties and interest.
Aug. 29, 2023 Item #7 Page 23 of 26{city of
Carlsbad
6 Transient Occupancy Tax Agreed-Upon Procedures
In addition to the hotel not recognizing the change in the assessment and identifying the
error, the city continued to receive and process the hotel’s TOT returns, including the
incorrect CTBID assessments, without identifying the error. This carried on for well over a
year, until the error was identified by the city’s consultant during the TOT engagement. To
ensure such an error does not repeat, the Finance Department was notified of the oversight
and instructed to review their process for receiving and recording TOT, CTBID and CGLBID
assessments. As a result, the Finance Department corrected this item on the spot, by
establishing a process by which TOT filings received by the Finance Department are subject
to a detailed review before being recorded. Additionally, since the new assessment went
into place, the city has begun accepting online remittances of TOTs from hotels. This allows
hotels to remit their TOTs online, in a streamlined digital payment process. This process
collects the same information the TOT forms require. Additionally, any time there is an
update to the TOT form, the updates are automatically published within the online payment
process. This serves to limit the likelihood of errors and streamlines the city’s process.
Aug. 29, 2023 Item #7 Page 24 of 26{city of
Carlsbad
7 Transient Occupancy Tax Agreed-Upon Procedures
Transient Occupancy Tax
Agreed-Upon Procedures
Appendix
SCHEDULE OF PROCEDURES TO BE PERFORMED
Our procedures for each Hotel as agreed upon by the management of the City of Carlsbad
will be as follows:
1. We will obtain and read the City Municipal Code Title 3 Chapter 3.12 Transient
Occupancy Tax and resolution related to the transient occupancy tax, as well as review
the City Municipal Code Title 3 Chapter 3.37 Carlsbad Tourism Business Improvement
District and Chapter 3.38 Carlsbad Golf Lodging Business Improvement District.
2. We will recalculate the mathematical accuracy and observe the timeliness of the
monthly transient occupancy reports filed with the City for the calendar years 2018,
2019, and 2020.
3. We will trace the transient rent receipts reported on each transient occupancy tax
returns prepared by the Hotel during the calendar years 2018, 2019 and 2020 to the
transient rent receipts recorded in their accounting records.
4. We will select a sample of 45 daily rental transactions (3 days each year and 5 guests per
day) and for each transaction selected, we will recalculate tax computations and trace
the amounts of rental revenues and transient occupancy tax collected to the books and
records of the Hotel.
5. We will trace the total number of days each unit/hotel room is occupied on the
transient occupancy tax returns prepared by the Hotel to the total number of days each
unit/hotel is occupied per Hotel records.
6. We will inquire of management of the Hotel to determine the following:
a. How “transient rent receipts” were accounted for and reported to the City.
b. What procedures were in place to identify transient and non‐transient guests?
c. How exemptions, including complimentary rooms, were documented, and
reported to the City.
7. We will select 1 month each year (2018, 2019 and 2020) and will review the transient
occupancy tax returns for claims of exemption from tax. For up to 5 exemptions per
month we will review the Hotel’s documentation supporting the exemption.
Aug. 29, 2023 Item #7 Page 25 of 26{city of
Carlsbad
8 Transient Occupancy Tax Agreed-Upon Procedures
8. We will inquire how the Hotel handles reservations and payments done online through
a third party such as Expedia.com and how the transient occupancy tax was collected
and reported to the City for these transactions.
Aug. 29, 2023 Item #7 Page 26 of 26{city of
Carlsbad
Tammy Cloud-McMinn
From:
Sent:
To:
Subject:
Mary Real <anewday4me2020@gmail.com>
Saturday, August 26, 2023 2:41 PM
All Receive -Agenda Item # ..2
For the Information of the:
_ 't,l~'L~ou NCIL
Date~CA V cc V
CM ✓ACM v DCM (3) v
City Clerk; Council Internet Email; Scott Chadwick; Geoff Patnoe; Kyle Lancaster; Mary
Real
Comments Item 7 , C-bad City Council• Mtg. 8-29-2023
7. FISCAL YEAR 2023-24 INTERNAL AUDIT PLAN AND INTERNAL AUDIT UPDATE-1) Receive a report regarding Fiscal Year
2022-23 Internal Audit Activity Summa ry and the Fiscal Year 2023-24 Internal Audit Plan; and 2) Adoption of a resolution
approving the Fiscal Year 2023-24 Internal Audit Plan (Staff contact: Robert Threatt and Laura Rocha, Administrative
Services Department)
To all Concerned about how money is prioritized and how much planning is done for the future and to serve the people
to the best of their ability.
After the age of 6 or so, when I learned that the tooth fairy and the Easter bunny and Santa Claus
were not 'real', I ceased to believe that the Adults knew everything and would do what is right
"because they were fine people who could sell ice to Eskimos and began questioning if there were
a better way to do things! I understand those who want to believe the City Council will do the
'right thing' but Absolute Power corrupts absolutely as 'they' say and anybody can take the easy
road especially as this is a part time job?
Should those in Power, the Decision Makers consult with the general public for ideas or should
they just continue to say whatever sounds good and spout that idea as the best and only way to
do something?
Where is the money going? The library closed down on Sunday in Carlsbad but the County is open
less hours than Carlsbad but the County hours are designed to be open 7 hours a day on Sat & Sun
and only 5 hours a day on slower days thru the week and the library is open All Seven days to
Serve the Community. Carlsbad is no longer a leader in Serving the Community under the current
leadership who are not looking out for the community. The City Manager wants to keep his job
(at his salary I can understand this!) so he is not about to rock the boat by suggesting they steal
good ideas from other cities. Please consult or email your City officials who are supposed to be
leading for the good of All ---a Win Win situation.
Is it true that All depts were told to reduce their budgets by 3%? Does that mean sending City
Council members on junkets to other cities has reduced their budget?
Are you willing to accept less to have more money in the bank?
If there is so much money in special accounts, why did the pension fund not receive their funds in
a timely manner so that the City had to use 14 million dollars from Sacramento to pay the pension
fund debt ---What is going on ????
1
Why is Park & Rec. letting the Senior Center go down hill? Why are they not planning on paying
for a study by an outside firm to upgrade and build a second Senior Center to keep up with the
growing Senior population? Kyle Lancaster is too busy or doesn't care about seniors and Mick ' .
Calarco is too busy giving private tours of the Ranch to oversee the Senior Center and provide
leadership. The Staff avoids seniors or solving problems of communication as they have learned
that they get paid regardless and do not have to answer to seniors who ask questions? If you can
not figure out a way to respond to seniors and their requests, how can you manage to grow and
expand the population using the Senior Center? Does the Mayor and the City Council want to
ALLOW seniors to utilize the Senior Center as a place to meet and greet and have fun with other
seniors and some recent volunteers who ask seniors to leave the cafeteria instead of listening to
music because Staff needs to clean for Rentals who Pay Money to use the Senior Center
facility? The Council has not taken an interest in upgrading the experience for seniors and are not
spending money (donated Money} to buy karaoke machines or equipment or games to allow
seniors to bring in their own food. What are the concrete goals to update and grow the use of the
Senior Center for the benefit of actual seniors?
Some Council People are up for re-election, and yet they do not visit the Senior Center or
apparently the Library to see if they can inspire upgrades from Staff. Is this leadership? Get the
best person for the job and watch to make sure that they are not too comfortable when listening
to the Party line. Critical thinking is part of keeping everyone on track or not. Do you want
mediocre management for the community?
Respectfully Submitted,
Mary Lucid
CAUTION: Do not open attachments or click on links unless you recognize the sender and know the content i
safe.
2
Internal Audit Update and
Fiscal Year 2023-24 Internal
Audit Plan
Robert Threatt, Internal Audit Manager
Administrative Services Branch
August 29, 2023
1
{city of
Carlsbad
TODAY’S PRESENTATION
•Fiscal year 2022-23 internal audit update
•Proposed fiscal year 2023-24 internal audit plan
ITEM 7: Internal Audit Update
2
{ City of
Carlsbad
PROPOSED ACTION
Adopt resolution approving the fiscal
year 2023-24 internal audit plan
Item 7: Internal Audit Update
3
{ City of
Carlsbad
FISCAL YEAR 2022-23 INTERNAL AUDIT ACTIVITIES
Completed internal audit engagements
•Vice Narcotics Investigative Unit “Buy Fund” review
•Transient occupancy tax review engagement
Item 7: Internal Audit Update
4
FISCAL YEAR 2022-23 INTERNAL AUDIT ACTIVITIES
Vice Narcotics Investigative Unit “Buy Fund” review
•Procedures
•Cash count
•Evaluation of program’s internal controls
•Results (exhibit 3)
•Four audit recommendations focused on strengthening internal
controls
•Identify a secondary approver for cash transactions
•Attend annual cash handling training
•Cash replenishment process to be evaluated and updated
•Publish cash handling procedures specific to “Buy Fund”
Completed Engagements
5
FISCAL YEAR 2022-23 INTERNAL AUDIT UPDATE
Transient occupancy tax agreed-upon procedures engagement
•Procedures
•Engaged regional CPA firm to perform fieldwork
•Evaluated compliance with remittance and reporting
requirements
•Results of engagement
•Identified $159k in underpaid TOTs, penalties, and interest
•Improved upon the city process for verifying accuracy of
TOT filings and remittances received
•TOT ordinance improvements identified
Completed Engagements
6
TRANSIENT OCCUPANCY TAX FINDINGS
Underpayments Penalties & Interest
Transient Occupancy Taxes $21,224 $17,923
CTBID Assessments $85,199 $35,180
•Underpayments of TOTs were primarily the result of unsupported exemptions claimed by hotels
•CTBID finding occurred due to a hotel not adopting a change in the city’s CTBID assessment in
November 2020
7
FISCAL YEAR 2023-24 INTERNAL AUDIT PLAN
•Transient occupancy tax engagement (ongoing engagement from
FY23)
•Procurement program audit (ongoing engagement from FY23)
•Payroll audit (rollover engagement)
•Business applications user access review (rollover engagement)
•Transient occupancy tax engagement and revenue audit (new
engagement)
Proposed Audit Engagements
8
PROPOSED ACTION
Internal Audit Plan and Update
9
Adopt resolution approving the fiscal
year 2023-24 internal audit plan
{ City of
Carlsbad
THANK YOU!
Internal Audit Plan and Update
10
{ City of
Carlsbad