Honorable Judge Frank J. Ochoa
Presiding Judge, Santa Barbara County Superior Court
1100 Anacapa Street
Santa Barbara, CA 93121
SUBJECT: Response to the 1998-99 Grand Jury Report Entitled Audit and Finances of County Government
Dear Judge Ochoa:
Thank you for the opportunity to respond to the 1998-99 Grand Juryís Report entitled Audit and Finances of County Government. Attached is our officeís response to the relevant findings and recommendations in the report.
Michael F. Brown
c: Robert Geis, Auditor-Controller
Gary Feramisco, Treasurer-Tax Collector-Public Guardian
Finding #1: Identification and resolution of Y2K operational issues in the County of Santa Barbara have not been subject to sufficient centralized coordination and verification.
Response to Finding #1: Disagree. Last February, ISAC formed a "Y2K Compliance Team" with the primary purpose of reviewing, documenting and monitoring each departmentís efforts to be Y2K compliant. The teamís work is also serving to document the Governmental Accounting Standards Board (GASB)-required June 30, 1999 public disclosures of the Y2K problem and progress in addressing it.
The project teamís organizational structure reflects three primary elements of the Countyís Y2K readiness (see organization chart in Attachment A): the Countyís Emergency Response Plan; the readiness of computer hardware and software (including interfaces with other governmental agencies); and date sensitive embedded chips in elevators, vehicles and other equipment.
The team began meeting with individual departments on February 22, 1999, and completed this first series of meetings on March 17, 1999. The purpose of these initial meetings was to ascertain each departmentís progress in preparing an inventory of its computer systems and embedded chips, to prioritize those systems considered Ďmission critical,í to determine the Y2K compliance status of each system and where necessary, the departmentís plans to achieve compliance.
From the first series of meetings, the team found that although significant progress has been made in the departments, the degree of progress varies, and the quantity and quality of documentation supporting departmentsí progress has not been standardized to achieve a uniform degree of sufficiency. The team will continue to monitor departments to ensure their progress in identifying systems and components for which work is needed, the remediation and validation actions planned and taken, and the standardized documentation of such actions. This team provides weekly progress reports to a project executive committee, and beginning March 23, 1999, periodic reports to the Board of Supervisors.
While the County has effectively initiated the Y2K compliance projects and activities recommended by the Grand Jury, its efforts prior to late 1998 were, in retrospect, less than sufficient because it lacked the central capability to fully attend to the issue. It is clear that in the future, enterprise-wide technology issues in Santa Barbara County government should not be dealt with piecemeal by departments or on a part time basis by ISAC. With the many new directions that are quickly emerging in such areas as the Internet, GIS, and the telecommunications industry, as well as the new opportunities being created for improving services to citizens, internal business processes, and information for decision makers, the Countyís information technology should be given full time high level attention. Many local governments and private companies have fulfilled this requirement with the addition of a Chief Information Officer (CIO) to their executive teams.
Accordingly, the County Administratorís office will recommend funding in the FY 1999-00 Proposed Budget for a consultant to assess and evaluate our current information technology goals and objectives, resources, organizational structure, and assignment of responsibilities including the potential cost/benefit of a CIO.
Recommendation #1: The County Administrator should ensure that ISAC or a specially appointed task force with authority to act should take a more proactive stance regarding department resolution of Y2K issues, including the earliest possible installation and testing of fixes and new systems as well as ensuring that systems which interface with County computers will not impact operations.
Response to Recommendation #1: The recommendation has been implemented. Please refer to response to Finding #1.
Finding #2: There are no departmental accountability measures or standards in place to ensure Y2K compliance.
Response to Finding #2: Disagree. The reasons for disagreeing are contained in the response to Finding #1. Accountability standards are inherent in the Review Program Outline and Questionnaire provided in Attachment A.
Recommendation #2: The County Administrator should direct ISAC to develop countywide standards and completion dates for resolution of Y2K issues and hold departments responsible for meeting those dates.
Response to Recommendation #2: The recommendation has been implemented. Please refer to responses to Finding #1 and Finding #2.
Finding #4: Unfunded capital improvements and liabilities have been identified but not presented in a manner that is easily available to the public.
Response to Finding #4: Disagree. The Comprehensive Annual Financial Report (CAFR) includes the disclosures required by the Governmental Accounting Standards Board (GASB) for workers compensation liabilities, unfunded retirement liabilities, uncompensated absences, litigation reserves and related liabilities. The CAFR is a public document; copies are available at local libraries and on the Auditor-Controller website. This publication is the appropriate place for these comprehensive liability disclosures.
The County Five Year Capital Improvement Plan contains the Countyís unfunded capital improvement needs. The plan is published and publicly presented to the Board of Supervisors annually.
Recommendation #4: The Board of Supervisors should identify all unfunded liabilities and capital improvements each year in the annual budget document in a single, concise table.
Response to Recommendation #4: The recommendation will not be implemented because it may be misleading to include these complex liabilities and the projected long-term unfunded capital improvements in a simple table without the comprehensive disclosures currently required by the Governmental Accounting Standards Board. The GASB recognizes the complexity of the liabilities and requires comprehensive disclosure standards for inclusion in the CAFR. With regard to unfunded capital needs, they are contained in the Five Year Capital Improvement Plan which is the appropriate place for their disclosure.
Finding #5: Significant errors in calculating revenues due the County of Santa Barbara from the State may require the County to return revenue to the State.
Response to Finding #5: Disagree in part. Each case cited in the Grand Jury report involves good faith differences in the interpretation of complex legal issues. As of this writing, no determination of error exists in any instance cited. However, we agree that the County may have to return money to the State if judicial decisions or other authoritative interpretations do not concur with those of the County or local Fire Districts.
The referenced findings in the Grand Jury Report by the State Controllerís Office (SCO) are of a legal nature. The Fire ERAF shift finding is still under review by the State Controllerís Chief Legal Counsel. In addition, legislative relief is currently proposed in AB 236 for the Fire Districts. The SCO finding regarding a Teeter calculation error has two parts: $1.2 million will probably be corrected by legislative change currently proposed in AB 284, which would essentially validate an existing interpretation and practice by most counties. At a recent audit exit conference with the SCO, it was agreed that the remaining $2.0 million would be reclassified from a finding to an observation not requiring repayment at this time.
Trial Court Funding provides exposure because of the construction of the original implementing legislation. The County has had a team working on the effect of the legislative changes, but control of court functions is transitioning to the State and Courts. We agree that the vagaries of the legislation and transition require extra effort by all parties to prevent misinterpretations or errors.
The obligation to reduce taxes because of Proposition 62 does not arise unless and until there is a determination that an imposed tax is illegal. The $5.3 million referred to in the Grand Jury Report are the cumulative proceeds from an increase to the Transient Occupancy Tax. The situation and dollar amount are disclosed in the CAFR as a contingency; however, there has been no legal determination that the County is not entitled to continue to collect the taxes.
Recommendation #5: The Auditor-Controller and the County Administrator should institute procedures and provide adequate resources to test and verify the formulas used for revenue calculations as they are changed by the State.
Response to Recommendation #5: The recommendation has not been implemented, but will be implemented in the future. Additional resources for one Cost Analyst position are recommended as part of the FY 1999-00 Proposed Auditor-Controllerís Office Budget. This position is to be utilized in large measure to address the issues contained in the Grand Juryís recommendation.
Finding #6: There is no regular external audit procedure in place to audit and report on procedures in the Treasurer-Tax Collectorís office or other agencies that routinely handle large funds.
Response to Finding #6: Disagree in part. As part of the audit of the Countyís CAFR, an external auditor examines the Countyís cash balances. This includes at a minimum, an examination of the Countyís financial internal control structure so that the auditor can gain an understanding of the relevant processes and notify the County of any material weaknesses found. No indication has ever been presented that material weaknesses exist in the processes surrounding the recording and safeguarding of cash.
In addition, the Countyís Internal Audit Division audits the Treasurerís Cash and Investments on a quarterly basis in accordance with Government Code Section 26920 (b). In addition, the cash is balanced daily. However, it is true that the County does not contract with its external auditors specifically for an operational or internal control audit of the Treasurer or other agencies that "handle large funds."
Recommendation #6:(a) The Board of Supervisors should expand the annual independent audit to include an examination of the Treasurer-Tax Collectorís office and other agencies where appropriate, to assure that funds are being handled properly and opportunities do not exist for misuse or theft.
Response to Recommendation #6 (a): The recommendation will not be implemented. The purpose of an external audit is to express an opinion on the Countyís financial statements. It is the responsibility of County management to ensure that internal controls exist so that County assets are safeguarded. The Internal Audit Division is one major tool that management uses to ensure that those controls exist and are working. Internal Audit is a much more appropriate and cost effective way of ensuring that adequate internal controls exist then that of hiring an outside auditor. The existing financial examination procedures are in accordance with Government Code. Currently, Internal Audit conducts county-wide cash handling audits approximately every two to four years.
Finally, it is impossible to ensure that "opportunities do not exist for misuse or theft." The responsibility of management is to reduce the risk to an acceptable cost effective level. All risk of theft or misuse cannot be totally eliminated..
Recommendation #6 (b): The Auditor-Controller should, at a minimum, perform operational audits bi-annually in those departments that routinely handle large funds
Response to Recommendation #6 (b): This recommendation has been implemented in part but will not be fully implemented. Currently, the Internal Audit Division of the Auditor-Controllers Office conducts county-wide cash handling audits every two to four years. The Internal Audit Divisionís long-range plans call for an annual county-wide audit of basic level internal financial control processes (for example, this next cycle the Auditor will look at county-wide revenue controls and in future cycles county-wide expenditure controls for safeguarding assets, etc.). It has not proved feasible or cost effective to perform in-depth operational audits of all or even half of the County departments biannually. However, the Internal Audit Division plans to complete annually at least two performance or business improvement audits of specific business processes within County departments.
Finding #7: The Grand Jury was not automatically informed of the independent auditor's progress during the course of the annual audit.
Response to Finding #7: Disagree in part with the finding. The Grand Jury Audit Committee received flash reports from the outside audit firm(KPMG) which document audit progress and interim audit findings. Moreover, Grand Jury members attended the audit exit conference. In addition, it is our understanding that Grand Jury members met directly with KPMG. Finally, we are unable to interpret exactly what the Grand Jury means by stating that it "was not automatically informed."
Recommendation #7: The Auditor-Controller should ensure that each Grand Jury automatically receives all information regarding the annual audits including, but not limited to, copies of correspondence, meeting notifications and flash reports generated by the auditors.
Response to Recommendation #7: The recommendation
will not be implemented. The essence of this recommendation could be implemented
contingent on the Grand Jury being more specific in lieu of requesting
all information automatically. An audit consists of numerous
correspondence, meetings, and work papers. Providing all of them to the
Grand Jury would be unduly burdensome to the outside auditors, staff and
the Grand Jury. The Auditor will continue to provide the Jury with audit
flash reports; in addition, his office will invite the Jury to audit entrance
and exit meetings.