HomeMy WebLinkAbout15 - June 30, 2016 Audit ResultsTO:
FROM:
CITY OF
NEWPORT BEACH
City Council Staff Report
May 9, 2017
Agenda Item No. 15
HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
Dan Matusiewicz, Finance Director - 949-644-3123,
dmatusiewicz@newportbeachca.gov
PREPARED BY: Rukshana Virany, Accounting Manager,
rvirany@newportbeachca.gov
PHONE: 949-644-3146
TITLE: June 30, 2016 Audit Results
ABSTRACT:
In connection with the City's financial statement audit, the auditors have expressed an
"unmodified" opinion of the City's Fiscal Year 2015-2016 financial statements, meaning
they are presented fairly without reservation, in all material respects. In connection with
the Single Audit, a compliance audit of federally assisted grant programs, the auditors did
not note any findings or questioned costs. The auditors also have certain obligations to
communicate the audit results with both City Council and management. The attached
letters from the City's auditors, White Nelson Diehl Evans, fulfill those obligations for the
required communication. On March 30, 2017, the Finance Committee recommended this
item be forwarded to the City Council.
RECOMMENDATION:
a) Determine this action is exempt from the California Environmental Quality Act (CEQA)
pursuant to Sections 15060(c)(2) and 15060(c)(3) of the CEQA Guidelines because
this action will not result in a physical change to the environment, directly or indirectly;
and
b) Receive and file.
FUNDING REQUIREMENTS:
There is no fiscal impact related to this item.
DISCUSSION:
The first audit letter (see Attachment A) communicates matters of particular significance
that City Council should be aware of including:
• Qualitative Aspects of Accounting Practices
• Difficulties Encountered in Performing the Audit
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June 30, 2016 Audit Results
May 9, 2017
Page 2
• Corrected and Uncorrected Adjustments
• Disagreements with Management
• Management Representations
• Management Consultations with Other Independent Accountants
• Other Audit Findings or Issues
The auditors reported no significant difficulties encountered in connection with the
performance of the audit, disagreements with management or other audit findings or
issues. They did report audit adjustments that were waived because they were immaterial
both individually and taken together, to the financial statements taken as a whole.
The second letter (see Attachment B) entitled "Independent Auditors' Report on Internal
Control Over Financial Reporting and on Compliance and Other Matters" communicates
deficiencies, significant deficiencies or material weaknesses in internal control and
instances of non-compliance or other matters. We are pleased to report that the auditors
did not identify any deficiencies in internal control considered to be a material weakness
that would result in more than a remote likelihood of a material misstatement of the
financial statements or would not otherwise be prevented by the City's internal controls.
The auditors did not identify any instances of noncompliance or other matters that require
specific communication to the governing body as promulgated by Government Auditing
Standards.
Items of lesser significance are documented in the third letter designated as Management
Letter (see Attachment C). There was one management comment on pension expense
and no instances of non-compliance concerning federal award programs as indicated
below.
During their analysis of the Fiscal Year 2015-2016 pension expense calculation
for the City's defined benefit pension plans, the auditors noted the City included
certain prior year employer contributions that were not recorded as a deferred
outflow of resources as of June 30, 2015.
Explanation
The Government Accounting Standards Board (GASB) and General Accepted
Accounting Principles (GAAP) require different types of financial statements in the
City's Comprehensive Annual Financial Report. The Governmental Fund Financial
Statements report on a modified accrual basis and have a narrower focus. The
Government -Wide Financial Statements report on a full accrual basis and
represent expenses rather than expenditures, with a broader focus, portraying the
financial health of the City as a whole.
Staff correctly captured a new pension object code used to account for an
additional discretionary payment to the pension system in the Governmental Fund
Financial Statements in Fiscal Year 2014-2015. However, the object code was
inadvertently overlooked from the data query when staff was constructing the
Government -wide financial statements for Fiscal Year 2014-2015 and should have
recorded as a deferred outflow of resources as of June 30, 2015.
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June 30, 2016 Audit Results
May 9, 2017
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Corrective Action
Staff will be sure to review the entire scope of pension related object codes before
preparing the Government Wide financial statements in the future.
ENVIRONMENTAL REVIEW:
Staff recommends the City Council find this action is not subject to the California
Environmental Quality Act (CEQA) pursuant to Sections 15060(c)(2) (the activity will not
result in a direct or reasonably foreseeable indirect physical change in the environment)
and 15060(c)(3) (the activity is not a project as defined in Section 15378) of the CEQA
Guidelines, California Code of Regulations, Title 14, Chapter 3, because it has no
potential for resulting in physical change to the environment, directly or indirectly.
NOTICING:
The agenda item has been noticed according to the Brown Act (72 hours in advance of
the meeting at which the City Council considers the item).
ATTACHMENTS:
Attachment A — Auditor's "Audit Committee Letter"
Attachment B — Auditor's Letter "Independent Auditors' Report on Internal Control Over
Financial Reporting and on Compliance and Other Matters"
Attachment C — Auditor's "Management Letter"
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ATTACHMENT A
Auditor's "Audit Committee Letter"
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To the Honorable Mayor and
Members of the City Council
of the City of Newport Beach
Newport Beach, California
We have audited the financial statements of the governmental activities, the business -type activities,
each major fund, and the aggregate remaining fund information of the City of Newport Beach,
California (the City), as of and for the year ended June 30, 2016. Professional standards require that we
provide you with information about our responsibilities under generally accepted auditing standards, as
well as certain information related to the planned scope and timing of our audit. We have
communicated such information in our letter on planning matters dated August 3, 2016. Professional
standards also require that we communicate to you the following information related to our audit.
Significant Audit Findings
Qualitative Aspects of Accounting Practices
Management is responsible for the selection and use of appropriate accounting policies. The significant
accounting policies used by the City are described in Note 1 to the financial statements. As discussed
in Note 1 d to the financial statements, in fiscal year 2015-2016, the City implemented Governmental
Accounting Standards Board (GASB) Statement No. 72, "Fair Value Measurement and Application ".
GASB Statement No. 72 requires the City to use valuation techniques which are appropriate under the
circumstances and are either a market approach, a cost approach or income approach. GASB Statement
No. 72 establishes a hierarchy of inputs used to measure fair value consisting of three levels. Level 1
inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs,
other than quoted prices included within Level 1, which are observable for the asset or liability, either
directly or indirectly. Level 3 inputs are unobservable inputs, and typically reflect management's
estimates of assumptions that market participants would use in pricing the asset or liability. GASB
Statement No. 72 also contains note disclosure requirements regarding the hierarchy of valuation
inputs and valuation techniques that were used for the fair value measurements. There was no material
impact on the City's financial statements as a result of the implementation of GASB Statement No. 72.
No other accounting policies were adopted and the application of other existing policies was not
changed during the year ended June 30, 2016. We noted no transactions entered into by the City during
the year for which there is a lack of authoritative guidance or consensus. All significant transactions
have been recognized in the financial statements in the proper period.
Accounting estimates are an integral part of the financial statements prepared by management and are
based on management's knowledge and experience about past and current events and assumptions
about future events. Certain accounting estimates are particularly sensitive because of their
significance to the financial statements and because of the possibility that future events affecting them
may differ significantly from those expected.
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2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893
Offices located in Orange and San Diego Counties
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Significant Audit Findings (Continued)
Qualitative Aspects of Accounting Practices (Continued)
The most sensitive estimates affecting the City's financial statements are as follows:
a. Management's estimate of the fair value, the price that would be received to sell an
asset in an orderly transaction between market participants, of investments is based
on market values provided by outside sources.
b. Management's estimate of the value of capital assets (infrastructure assets) is based
on industry standards.
c. The estimated useful lives of capital assets for depreciation purposes are based on
industry standards.
d. The annual required contributions, pension expense, net pension liability and
corresponding deferred outflows of resources and deferred inflows of resources for
the City's public defined benefit plans are based on actuarial valuations provided by
outside resources.
e. The annual required contribution and actuarial accrued liability for the City's Other
Post -Employment Benefit Plan are based on certain actuarial assumptions and
methods prepared by an outside consultant.
f. Management's estimate of the claims payable liabilities related to general liability
and worker's compensation claims are based on actuarial valuations.
We evaluated the key factors and assumptions used to develop these estimates in determining that they
were reasonable in relation to the financial statements taken as a whole.
Certain financial statement disclosures are particularly sensitive because of their significance to
financial statement users. The most sensitive disclosures affecting the financial statements were
reported in Note 8 regarding claims payable, Note 10 regarding the Ca1PERS defined benefit plans,
and Note 11 regarding the City's Other Post -Employment Benefit Plan.
The financial statement disclosures are neutral, consistent, and clear.
Difficulties Encountered in Performing the Audit
We encountered no significant difficulties in dealing with management in performing and completing
our audit.
Corrected and Uncorrected Misstatements
Professional standards require us to accumulate all known and likely misstatements identified during
the audit, other than those that are trivial, and communicate them to the appropriate level of
management. The attached schedule summarizes uncorrected misstatements of the financial statements.
Management has determined that their effects are immaterial, both individually and in the aggregate, to
the financial statements taken as a whole.
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Significant Audit Findings (Continued)
Disagreements with Management
For purposes of this letter, a disagreement with management is a financial accounting, reporting, or
auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial
statements or the auditors' report. We are pleased to report that no such disagreements arose during the
course of our audit.
Management Representations
We have requested certain representations from management that are included in the management
representation letter dated December 23, 2016.
Management Consultations with Other Independent Accountants
In some cases, management may decide to consult with other accountants about auditing and
accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation
involves application of an accounting principle to the City's financial statements or a determination of
the type of auditor's opinion that may be expressed on those statements, our professional standards
require the consulting accountant to check with us to determine that the consultant has all the relevant
facts. To our knowledge, there were no such consultations with other accountants.
Other Audit Findings or Issues
We generally discuss a variety of matters, including the application of accounting principles and
auditing standards, with management each year prior to retention as the City's auditors. However,
these discussions occurred in the normal course of our professional relationship and our responses
were not a condition to our retention.
Other Matters
We applied certain limited procedures to management's discussion and analysis, and the schedules of
changes in net pension liability and related ratios, and the schedules of defined benefit plan
contributions related to the City's defined benefit plans, which are required supplementary information
(RSI) that supplements the financial statements. Our procedures consisted of inquiries of management
regarding the methods of preparing the information and comparing the information for consistency
with management's responses to our inquiries, the basic financial statements, and other knowledge we
obtained during our audit of the basic financial statements. We did not audit the RSI and do not
express an opinion or provide any assurance on the RSI.
We were engaged to report on the combining and individual non -major fund financial statements and
schedules (supplementary information), which accompany the financial statements but are not RSI.
With respect to this supplementary information, we made certain inquiries of management and
evaluated the form, content, and methods of preparing the information to determine that the
information complies with accounting principles generally accepted in the United States of America,
the method of preparing it has not changed from the prior period, and the information is appropriate
and complete in relation to our audit of the financial statements. We compared and reconciled the
supplementary information to the underlying accounting records used to prepare the basic financial
statements or to the basic financial statements themselves.
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Other Matters (Continued)
We were not engaged to report on the introductory and statistical sections, which accompany the
financial statements but are not RSI. We did not audit or perform other procedures on this other
information and we do not express an opinion or provide any assurance on them.
Restriction on Use
This information is intended solely for the use of the City Council and management of the City of
Newport Beach and is not intended to be, and should not be, used by anyone other than these specified
parties.
Irvine, California
December 23, 2016
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City of Newport Beach
Fiscal Year 2015-2016 Passed Adjusting Journal Entries
June 30, 2016
DESCRIPTION
OtherAzwesate Funds
Prior Year Effect
Current Year Reimbursements
Accounts payable
To record reconciling cash items as of 6/30/16 in the
Carl Warren Imprest Acct for reimbursements pending
from the Cityfor June.
Current Year Receivable
Deposit payable
To accrue the June 2016 tourism bids in the agency
fund, which would represent a receivable and a
payable.
DEBIT (CREDIT)
ASSET LIABILITY EQUITY REVENUE EXPENSE
131,592
(206,262)
366,648
(366,648)
74,670
Total Passed Adjusting Journal Entries 366,648 (572,910) 131,592 74,670
Overall Fund Balance Effect 206,262
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ATTACHMENT B
Auditor's Letter "Independent Auditors' Report on Internal Control Over Financial
Reporting and on Compliance and Other Matters"
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INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS
BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED
IN ACCORDANCE WITH GO VERNMENTA UDITING STANDARDS
The Honorable Mayor and
Members of City Council
City of Newport Beach
Newport Beach, California
We have audited, in accordance with the auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing Standards
issued by the Comptroller General of the United States, the financial statements of the governmental
activities, the business -type activities, each major fund, and the aggregate remaining fund information
of the City of Newport Beach, California (the City), as of and for the year ended June 30, 2016, and the
related notes to the financial statements, which collectively comprise the City's basic financial
statements and have issued our report thereon dated December 23, 2016.
Internal Control over Financial Reporting
In planning and performing our audit of the financial statements, we considered the City's internal
control over financial reporting (internal control) to determine the audit procedures that are appropriate
in the circumstances for the purpose of expressing our opinion on the financial statements, but not for
the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly,
we do not express an opinion on the effectiveness of the City's internal control.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent, or
detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a
combination of deficiencies, in internal control such that there is a reasonable possibility that a material
misstatement of the City's financial statements will not be prevented, or detected and corrected on a
timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal
control that is less severe than a material weakness, yet important enough to merit attention by those
charged with governance.
Our consideration of internal control was for the limited purpose described in the first paragraph of this
section and was not designed to identify all deficiencies in internal control that might be material
weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify
any deficiencies in internal control that we consider to be material weaknesses. However, material
weaknesses may exist that have not been identified.
2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893
Offices located in Orange and San Diego Counties
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Compliance and Other Matters
As part of obtaining reasonable assurance about whether the City's financial statements are free from
material misstatement, we performed tests of its compliance with certain provisions of laws,
regulations, contracts, and grant agreements, noncompliance with which could have a direct and
material effect on the determination of financial statement amounts. However, providing an opinion on
compliance with those provisions was not an objective of our audit, and accordingly, we do not express
such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that
are required to be reported under Government Auditing Standards.
We noted a certain matter that we have reported to management and the City Council in a separate
letter dated December 23, 2016.
Purpose of this Report
The purpose of this report is solely to describe the scope of our testing of internal control and
compliance and the results of that testing, and not to provide an opinion on the effectiveness of the
City's internal control or on compliance. This report is an integral part of an audit performed in
accordance with Government Auditing Standards in considering the City's internal control and
compliance. Accordingly, this communication is not suitable for any other purpose.
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Irvine, California
December 23, 2016
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ATTACHMENT C
Auditor's "Management Letter"
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The Honorable Mayor and
Members of the City Council and Management
City of Newport Beach
Newport Beach, California
In planning and performing our audit of the financial statements of the governmental activities, the
business -type activities, each major fund, and the aggregate remaining fund information of the City of
Newport Beach, California (the City) as of and for the year ended June 30, 2016, in accordance with
auditing standards generally accepted in the United States of America and Government Auditing
Standards, we considered the City's internal control over financial reporting (internal control) as a
basis for designing our auditing procedures that are appropriate in the circumstances for the purpose of
expressing our opinions on the financial statements, but not for the purpose of expressing an opinion
on the effectiveness of the City's internal control. Accordingly, we do not express an opinion on the
effectiveness of the City's internal control.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent, or
detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a
combination of deficiencies, in internal control, such that there is a reasonable possibility that a
material misstatement of the City's financial statements will not be prevented, or detected and
corrected, on a timely basis.
Our consideration of internal control was for the limited purpose described in the first paragraph and
was not designed to identify all deficiencies in internal control that might be material weaknesses.
Given these limitations during our audit, we did not identify any deficiencies in internal control that we
consider to be material weaknesses. However, material weaknesses may exist that have not been
identified. As discussed below, we identified a certain matter involving the internal control and other
operational matters that is presented for your consideration. This letter does not affect our report dated
December 23, 2016 on the financial statements of the City. Our comment and recommendation is
intended to improve the internal control or result in other operating efficiencies. Our comment with our
recommendation for improvement is summarized as follows:
Pension Expense
Auditors' Comment and Recommendation
During our analysis of the current year pension expense calculation for City's defined benefit pension
plans, we noted that the City included certain prior year employer contributions that were not recorded
as a deferred outflow of resources as of June 30, 2015. These contributions were not identified in the
prior year since they were coded to a new general ledger account that was inadvertently overlooked.
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2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893
Offices located in Orange and San Diego Counties
15-14
Pension Expense (Continued)
Auditors' Comment and Recommendation (Continued)
We recommend that the City implement procedures to ensure that all general ledger accounts affecting
the reporting of deferred inflows and outflows of resources, net pension liability and pension expense
related to the City's defined benefit pension plans are considered in the calculations.
Management's Response
The City concurs with the comment and recommendation. While the expenditure was properly
recorded on the City's general ledger, a new pension object code was used to account for an additional
discretionary payment to the pension system. This new object code was inadvertently omitted from the
data query when staff was constructing the Government Wide financial statements. Staff will be sure to
review the entire scope of pension related object codes before preparing the Government Wide
financial statements in the future.
City's Response to Comment and Recommendation
The City's response to the comment and recommendation identified in our audit is described above.
The City's response was not subjected to the auditing procedures applied in the audit of the financial
statements and, accordingly, we express no opinion on it.
This communication is intended solely for the information and use of management, the City Council,
and others within the City, and is not intended to be, and should not be, used by anyone other than
these specified parties.
4;&-1
Irvine, California
December 23, 2016
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