Loading...
HomeMy WebLinkAbout2024-04-25; Financial Auditor Communications to the City Council (Districts - All); Rocha, LauraTo the members of the: CITY COUNCIL Date ~/2c,/.24 CA / CC ✓ CM -~ /ocM (3) ✓ April 25, 2024 Council Memorandum To: From: Via: Honorable Mayor Hall and Members of the City Council Laura Rocha, Deputy City Manager, Adm~ative Services Geoff Patnoe, Assistant City Manager €!/' Re: Financial Auditor Co mmunications to the City Council (Districts -All) {city of Carlsbad Memo ID# 2024028 This memorandum provides information on the regularly scheduled annual financial audit of the city that will be conducted by Lance, Soll & Lunghard, LLP (LSL). Background The city has contracted with LSL to conduct the annual financial audit of the City of Carlsbad for the fiscal year ending June 30, 2024. Professional auditing standards require LSL to communicate certain matters and inquiries directly to members of the City Council. Attached for your reference is a letter from LSL regarding the timing and planning ofthe city's annual financial audit. Discussion LSL's responsibility, as described by professional auditing standards, is to express opinions about whether the financial statements prepared by the city's management are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. Mr. Ryan Domino, CPA, is the engagement partner and is responsible for supervising the engagement. Next Steps Interim fiscal year-end fieldwork will begin in April 2024. Finance Department staff will begin closing the financial books of the city beginning in July 2024 in anticipation of the year-end audit fieldwork commencing in September 2024. The audit should conclude in November 2024, with the Annual Comprehensive Financial Report (ACFR) and other related audit reports issued shortly thereafter. Attachment: A. Letter from Lance, Soll & Lunghard, LLP, dated April 8, 2024 cc: Scott Chadwick, City Manager Cindie McMahon, City Attorney Zach Korach, Finance Director Administrative Services Branch Finance Department 1635 Faraday Avenue I Carlsbad, CA 92008 I 442-339-2430 t Ls~ .... •••• •• April 8, 2024 To the Honorable Mayor and the Members of the City Council City of Carlsbad, California Attention: Keith Blackburn, Mayor Attachment A This letter is intended to communicate certain matters related to the planned scope and timing of our audit of the City of Carlsbad's (the City) financial statements as of and for the year ending June 30, 2024. The scope of this engagement also includes audits of the financial statements of the governmental activities, the business-type activities, each major fund, the aggregate remaining fund information, and the Single Audit (if applicable), for the year ending June 30 , 2024. Communication Effective two-way communication between our firm and the Mayor and the Members of the City Council is important to understanding matters related to the audit and developing a constructive working relationship. Your insights may assist us in understanding the City and its environment, identifying appropriate sources of audit evidence and providing information about specific transactions or events. We will discuss with you your oversight of the effectiveness of internal control and any areas where you request additional procedures to be undertaken. We expect that you will timely communicate to us any matters you consider relevant to the audit. Such matters might include strategic decisions that may significantly affect the nature, timing and extent of audit procedures, your suspicion or detection of fraud, or any concerns you may have about the integrity or competence of senior management. We will timely communicate to you any fraud involving senior management and other fraud that causes a material misstatement of the financial statements, instances of noncompliance with laws and regulations that come to our attention (unless they are clearly inconsequential), and disagreements with management and other serious difficulties encountered in performing the audit. We also will communicate to you and to management any significant deficiencies or material weaknesses in internal control that become known to us during the course of the audit. Additionally, we will communicate significant unusual transactions, matters that are difficult or contentious for which we consulted outside the engagement team, and circumstances that affect the form and content of the auditor's report. Other matters arising from the audit that are, in our professional judgment, significant and relevant to you in your oversight of the financial reporting process will be communicated to you in writing. Shared Responsibilities: AICPA Independence The American Institute of Certified Public Accountants (AICPA) regularly emphasizes that auditor independence is a joint responsibility and is managed most effectively when management, audit committees (or their equivalents), and audit firms . work together in considering compliance with AICPA independence rules. For LSL to fulfill its professional responsibility to maintain and monitor independence, management, the Mayor and the Members of the City Council, and LSL each play an important role. www.lslcpas.com 203 N Brea Blvd, Suite 203 I 24422 Ave111da de la Carlota Suite 275 I 161 t E Fourth Street, Suite 200 I 2151 R1ve1 Plaza Dr., Suite 150 I 21 Waterway Avenue, suite 30039 Brea, CA 9282 1 Laguna Hills CA 92653 Santa Ana, CA 92701 Sacramento CA 95833 Tl1e Woodlands TX 77380 t714J 672-0022 (949) 829-8299 (714) 569-1000 (916) 503-9691 (93G) 828-4587 Ls~ .... •••• •• Keith Blackburn, Mayor City of Carlsbad, California April 8, 2024 Page 2 I Our responsibilities • AICPA rules require independence both of mind and in appearance when providing audit and other attestation services. LSL is to ensure that the AICPA's General Requirements for performing non-attest services are adhered to and included in all letters of engagement. • Maintain a system of quality management over compliance with independence rules and firm policies. • Identify and assess threats to independence. • Exercise professional judgement in maintaining independence. • Maintain objectivity and impartiality in all engagements. • Adhere to relevant ethical principles and standards. • Ensure that conflicts of interest are appropriately managed. • Disclose any relationships or interests that may impair independence. • Collaborate with colleagues and stakeholders to uphold independence standards. • Seek guidance or clarification when faced with independence issues or conflicts. Your responsibilities • Ensure cooperation with auditors and providing access to necessary information. • Maintain accurate records and documentation for audit purposes. • Disclose any conflicts of interest or relationships that may impact the audit process. • Provide timely responses to auditor inquiries and requests. • Collaborate with auditors to address any identified deficiencies or areas for improvement. • Comply with relevant laws, regulations, and standards applicable to the audit process. • Facilitate open communication with auditors to ensure a thorough and effective audit. • Implement recommendations or corrective actions resulting from audit findings. • Respect auditor independence and impartiality throughout the audit process. • Engage in discussions with auditors to resolve any disagreements or disputes regarding audit findings. Ls~ .... •••• •• Keith Blackburn, Mayor City of Carlsbad, California April 8, 2024 Page 3 Our Independence Policies and Procedures Our independence policies and procedures are designed to provide reasonable assurance that our firm and its personnel comply with applicable professional independence standards. Our policies address financial interests, business and family relationships, and non-audit services that may be thought to bear on independence. For example, our partners and professional employees are restricted in their ability to own a direct financial interest or a material indirect financial interest in a client or any affiliate of a client. Also, if an immediate family member or close relative of a partner or professional employee is employed by a client in a key position, the incident must be reported and resolved in accordance with firm policy. In addition, our policies prohibit us from providing certain non- attest services and require audit clients to accept certain responsibilities in connection with the provision of permitted non-attest services. The Audit Planning Process Our audit approach places a strong emphasis on obtaining an understanding of how your organization functions. This enables us to identify key audit components and tailor our procedures to the unique aspects of your business. The development of a specific audit plan will begin by meeting with you and with management to obtain an understanding of your business objectives, strategies, risks and performance. As part of obtaining an understanding of your organization and its environment, we will obtain an understanding of your system of internal control. We will use this understanding to identify risks of material misstatement, which will provide us with a basis for designing and implementing responses to the assessed risks of material misstatement. We will also obtain an understanding of the users of the financial statements in order to establish an overall materiality level for audit purposes. We will conduct formal discussions among engagement team members to consider how and where your financial statements might be susceptible to material misstatement due to fraud or error. The Concept of Materiality in Planning and Executing the Audit We apply the concept of materiality in both planning and performing the audit; evaluating the effect of identified misstatements on the audit and the effect of uncorrected misstatements, if any, on the financial statements; and forming the opinion in our report. Our determination of materiality is a matter of professional judgment and is affected by our perception of the financial information needs of users of the financial statements. We establish performance materiality at an amount less than materiality for the financial statements as a whole to allow for the risk of misstatements that may not be detected by the audit. We use performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures. Our assessment of materiality throughout the audit will be based on both quantitative and qualitative considerations. Because of the interaction of quantitative and qualitative considerations, misstatements of a relatively small amount could have a material effect on the current financial statements as well as financial statements of future periods. We will accumulate misstatements identified during the audit, other than those that are clearly trivial. At the end of the audit, we will inform you of all individual uncorrected misstatements aggregated by us in connection with our evaluation of our audit test results. Significant Risks of Material Misstatement Our audit of the financial statements includes the performance of risk assessment procedures in order to identify risks of material misstatement, whether due to fraud or error. As part of these risk assessment procedures, we determine whether any risks identified are a significant risk. A significant risk is an identified risk of material misstatement for which the assessment of inherent risk is close to the upper end of the spectrum of inherent risk due to the degree to which inherent risk factors affect the combination of the likelihood of a misstatement occurring and the magnitude of the potential misstatement should that misstatement occur, or that is to be treated as a significant risk in accordance with auditing standards generally accepted in the United States of America. As part of our initial risk assessment procedures, we identified the following risks as significant risks. Additional significant risks may be identified as we perform additional audit procedures. Ls~ .... •••• •• Keith Blackburn, Mayor City of Carlsbad, California April 8, 2024 Page 4 Risk Name Management Override of Controls Improper Revenue Recognition Due to Fraud Risk Description Management override of controls poses a significant risk to financial reporting integrity, potentially leading to fraudulent activities such as misrepresentation of financial statements, unauthorized transactions, asset misappropriation, and collusion. This risk arises when management manipulates or circumvents established controls to conceal irregularities, evade detection, and achieve personal gain. Improper revenue recognition due to fraud involves deliberately misrepresenting the timing or amount of revenue in financial statements to deceive stakeholders. This fraudulent practice may entail recognizing revenue prematurely, inflating revenue or receivables figures, or fabricating transactions to portray a healthier financial picture than reality. By manipulating revenue recognition, perpetrators can artificially boost profitability, meet financial targets, or purport to comply with debt covenants. This deceitful conduct not only distorts financial performance but also undermines investor trust, leading to severe repercussions for the City's reputation, financial stability, and legal liabilities. Planned Response A robust audit response to management override of controls involves comprehensive testing, including assessing control effectiveness, analyzing transactional data for anomalies, conducting substantive procedures, evaluating management's integrity, reviewing documentation and audit trails, considering external corroborative evidence, and maintaining professional skepticism throughout the audit process. Responding to the risk of improper revenue recognition due to fraud includes conducting thorough analytical procedures to identify irregularities, examining supporting documentation for transactions, assessing the effectiveness of internal controls over revenue recognition, scrutinizing revenue recognition policies and procedures for compliance with accounting standards, and performing substantive testing to verify the accuracy and validity of reported revenue. Additionally, we will assess management's integrity and ethical behavior, engage in professional skepticism, and consider external corroborative evidence. Ls~ .... •••• •• Keith Blackburn, Mayor City of Carlsbad, California April 8, 2024 Page 5 Our Approach to Understanding Your System of Internal Control Our audit of the financial statements will include obtaining an understanding of internal control sufficient to plan the audit and determine the nature, timing and extent of audit procedures to be performed. A financial statement audit is not designed to provide assurance on internal control or identify significant deficiencies or material weaknesses. Our review and understanding of the City's internal control is not undertaken for the purpose of expressing an opinion on the effectiveness of internal control. Timing of the Audit Preliminary audit work is schedule for the week of May 28, 2024, and we have scheduled final field work for the week of October 14, 2024. Management's adherence to its closing schedule and timely completion of information used by us in performance of the audit is essential to timely completion of the audit. Closing We will be pleased to respond to any questions you have about the foregoing. We appreciate the opportunity to continue to be of service to the City. This communication is intended solely for the information and use of the Mayor and the Members of the City Council and is not intended to be, and should not be, used by anyone other than this specified party. EXHIBIT A Recent Accounting Pronouncements RECENT ACCOUNTING PRONOUNCEMENTS The following accounting pronouncements have been issued as of April 8, 2024, but are not yet effective and may affect the future financial reporting by the City. Pronouncement GASB Statement No. 101, Compensated Absences GASB Statement No. 102, Certain Risk Disclosures Summary The objective of this statement is to update the recognition and measurement guidance for compensated absences by aligning the recognition and measurement guidance under a unified model and amending certain previously required disclosures. The statement requires that liabilities for compensated absences be recognized for leave that has not been used and leave that has been used but not yet paid in cash or settled through noncash means. The statement also establishes guidance for measuring a liability for leave that has not been used. The requirements of this statement are effective for fiscal years beginning after December 15, 2023, and all reporting periods thereafter. The unified recognition and measurement model in this statement will result in a liability for compensated absences that more appropriately reflects when a government incurs an obligation and will enhance the relevance and reliability of information about the liability for compensated absences. This pronouncement by the GASB addresses certain risk disclosures for state and local governments. The statement defines concentrations and constraints and requires governments to assess their vulnerability to risks. Governments are also required to disclose information about these risks in their financial statements. The statement is effective for fiscal years beginning after June 15, 2024, and aims to improve financial reporting by providing essential information about risks to users of financial statements. EXHIBIT 8 Industry Insights INDUSTRY INSIGHTS We're excited to provide relevant industry updates and perspectives to help you and your organization anticipate and address the unique issues and challenges facing you. Our insights and analysis help deepen your understanding of industry best practices and stay on top of changes to regulatory environment and local economy. Follow our recent articles available on our website: https ://Is lcpas. com/blog/ View all LSL resources. https://lslcpas.com/view-all/ ARTICLE ' I I LINK GASB 96: Lessons Learned for Local Government Organizations https :l//s/cpas. com/gasb-96- /essons-/earned-for-/ocal- government-organizationsl Let it Go ... How to Let Go of Unclaimed Property The Federal Data Transparency Act and Your Local Government Agency The Importance of Month-end Close Process in Your Local Government Finance Department (and 4 Software Solutions To Help Get It Done Many more! https:/1/s/cpas. com/let-it-go-how- to-/et-go-of-unc/aimed-propertyl https:lllslcpas. comlthe-federal- data-transparency-act-and-your- local-government-agency/ https:ll/slcpas. comlthe- importance-of-month-end-c/ose- process-in-your-loca/-government- finance-department-and-4- software-so/utions-to-he/p-get-it- donel https:///slcpas. com/blog/