AUDIT AND FINANCE
California Penal Code Section 925 requires the Grand Jury to "investigate and report on the operations, accounts, and records of the officers, departments, or functions of the county including districts in the county for which the officers of the county are serving in their ex -officio capacity as officers of the districts." The investigations may be conducted on some selective basis each year. California Government Code Section 25250 mandates the Board of Supervisors to audit, or cause to be audited, the financial accounts and records of the county. The county and the Grand Jury meet these requirements by contracting the service of an independent auditor and monitoring that auditor's work.
To meet the statutory requirements of Penal Code Section 925: investigate and report on the operations, accounts, and records of the county.
In our approach, the Grand Jury :
_ Attended audit status meetings held by the outside
_ Reviewed audit status reports and the Comprehensive
Financial Report (CAFR) for fiscal year ended
June 30, 1996
_ Reviewed the CAFR for selected districts
_ Reviewed reports delivered by the outside auditor
_ Studied the audit contract
_ Interviewed the outside auditors, the county
and selected members of his department
_ Reviewed financial reports from selected Special
Outside Auditor Contract
The County of Santa Barbara and the 1995-1996 Grand Jury contracted with KPMG Peat Marwick LLP for the fiscal year 1995-1996 annual audit of its financial accounts and records.1 The contract refers to the requirement of Section 925 of the Penal Code that directs the Grand Jury to investigate and report on operations, records, and accounts. The contract scope of services identified 18 specifications for the contractor work and 10 reports to be issued.2 The Grand Jury inspected the KPMG reports and services.
The outside auditor's contract provided for a second renewal option for the fiscal year 1996-1997.3 Based on the performance for fiscal year 1995-1996, the Grand Jury agreed with the County Administrator and County Auditor-Controller to extend the contract for the fiscal year 1996-1997 work. This contract extension includes an audit of the Comprehensive Annual Financial Report for the county's Retirement System. The Grand Jury is a party to the contract extension, but no line existed on the extension for the Grand Jury's signature.
Management Letter and County Response
KPMB has audited the general purpose financial statements of the County of Santa Barbara for the year ended June 30, 1996. During their audit, KPMG noted certain matters involving the internal control structures and other operational matters that are presented in their management letter.4 The Grand Jury received this letter on December 3, 1996. This letter also contains the responses of the affected departments within the county
In the review of prior years' Management Letters, the Grand Jury found that the subjects of Federal Grants, Claims Management and Fixed Assets were reported in the 1993-94 and 1995-96 Management Letters. They were reported again in this year's letter.
After interviews with the Auditor-Controller, this Grand Jury came to the same conclusions as the 1995-96 Grand Jury: that these subjects appear repetitively because they are not given the priority needed for resolution.
The Auditor-Controller has concurred with the independent auditor's recommendation that the fixed asset register be updated on a regular basis during the year. However, there is no commitment on the part of the Auditor-Controller to implement the recommendation in a timely manner.5
As recommended in the Management Letter, the County Administrator has recently sent memoranda to each department head addressing the suggested improvements to internal controls. These improvements are regarding grant reimbursement, on-site visits by outside auditors, timely reporting of asset dispositions, and segregation of duties. The memoranda specify department actions to be implemented, and include a chart to be used by departments to report on implementation of the recommendations.
Auditing of Federal Grants
It has come to the attention of the Grand Jury that when an outside auditor visits any department administering federal grants, there is no one present from the county's Auditor-Controller Department. A standard practice in industry is to have a company auditor present anytime an employee is giving information to an outside auditor. This practice is a safeguard to both the employee being interviewed and the company.
Audit of Automation Systems
The Auditor-Controller and the Treasurer use computer programs for the processing of warrants, direct deposits of receipts and other electronic transfer of funds. The present audit conducted by the outside auditor (KPMG) does not run independently generated test software for testing these transactions. Test programs generated by an independent auditor experienced in this field should be used to verify these financial transactions. This would assure that presently used financial computer programs are performing the desired functions confined within the approved financial rules.
Santa Barbara County Pension Plans
The Santa Barbara County Employees' Retirement System (SBCERS) is a defined benefit pension plan operating under the California County Employees Retirement Act of 1937. As of June 30, 1996 SBCERS consisted of 6011 members. At present, Pension Plan information is included in the Comprehensive Annual Financial Report (CAFR) issued by the Auditor-Controller for fiscal year ended June 30, 1996. On December 31,1995 the date of the most recent actuarial valuation, net assets (at cost) available for benefits were $586.7 million and the unfunded pension benefit obligation was $50.1 million.6 The Governmental Accounting Standards Board (GASB) has issued Statement No.25 & No. 27 establishing financial reporting standards for Pension Plans. The provisions of Statement No.25 are effective for periods beginning after June 15, 1996. The provisions of Statement No. 27 are effective for periods beginning after June 15, 1997.
GASB Statement No.25 "establishes financial reporting standards for defined benefit pension plans and for the notes to the financial statements of defined contribution plans of state and local governmental entities."7
GASB Statement No. 27 "establishes standards for the measurement, recognition, and display of pension expenditures/expense and related liabilities, assets, note disclosures, and, if applicable, required supplementary information in the financial reports of state and local governmental employers."8
The Grand Jury has been informed that the County Treasurer will issue a separate CAFR for the Santa Barbara County Pensions Plans in 1997 using the guidelines stated in GASB Statements No. 25 and No. 27. The Retirement CAFR will be audited by the independent auditor for fiscal year ending June 30, 1997.
Funding County Infrastructure
The county has a Cost Allocation Plan "to identify the total program costs of delivering County services to the citizens" of the county.9 Direct costs are those that can be seen, such as road maintenance, sheriff services, or planning. Indirect costs are those which are not readily seen, such as accounting, purchasing, building maintenance, utilities. The county's cost allocation plan is in accordance with federal guidelines provided in Office of Management
and Budget Circular A-87. Direct "line" costs are those departments or programs that provide direct services to the public. Indirect "staff" costs provide services to the organization, including postage, telephones, utilities. These indirect costs "use allowance (similar to depreciation schedules) costs for capital assets."10
The cost allocation plan can be used in several ways:
_ to determine costs applicable to grant programs for recovery of county costs;
_ in administering and providing support services to special districts, enterprise funds and internal service programs;
_ in establishing service fees for cost recovery (all indirect costs associated with fee-for-service activity).
In the cost allocation plan, there is a category entitled "STRUCTURE USE." The cost of that use is based on the age of the building. Part of each grant allows cost recovery for the use and maintenance of county structures in administering the grant program. In our study of the county audit, the Grand Jury found that the cost recovery from grants for "structure use " is put into the general fund, and not set aside for building replacement.
According to KPMG, Santa Barbara County received $87,357,154 in federal grants during FY 95-96.11 The county expends county money on grant programs, then is reimbursed from grant money. Requests for reimbursement are prepared on a quarterly basis, but could be submitted more often. The county "is entitled to the grant revenue once the expenditure is made."12 The county earned interest income from grant money due to time lags (two days) "between receipt of grant revenue and expenditure of grant funds."13
The amount of interest earned in the two-day time lag is less than the interest cost by delays in reimbursement of county expenditures on grant programs. The memorandum issued by the County Administrator directs departments to request more frequent grant reimbursement.
Financial Highlights Report
The Grand Jury has reviewed the current Financial Highlights document, as well as a previous issue. These reports, which have received commendations, appear to be very informative for non-financial specialists. These reports "highlight the significant financial and economic activity of Santa Barbara County."14 The Grand Jury reviewed annual reports for several
publicly held corporations in the United States. These annual reports tend to include financial highlights as well as quantitative statements of performance.
Special District Financial Reports
The Grand Jury selected special districts based on geographic location and diversity of functions. We requested and received financial statements and management letters for fiscal year ending June 30, 1996 from the Goleta Sanitary District15 and the Lompoc Hospital District.16
1. Goleta Sanitary District: The Certified Public Accountant, Michael O. Lyon, who
performed the audit of the financial statements of the District stated in his report that the financial statements of the District as of June 30, 1996 and 1995 and the results of its operations and cash flows for the years then ended is in conformity with generally accepted accounting procedures.17 During his audit, the auditor noted that there were "several matters that are opportunities for strengthening internal controls and operating efficiencies." These comments and suggestions were reviewed by the Grand Jury. On the matter raised concerning Segregation of Duties, the Grand Jury requested information on the actions that the District was taking to accomplish increased segregation of duties. The Grand Jury reviewed the District's reply and found the District's corrective actions were acceptable.18
2. Lompoc Hospital District: The report from the independent accountants (Coopers &
Lybrand) on the financial statements of the District states: "In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lompoc Hospital District as of June 30, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles."19
In their report to management,20 the independent accountants submitted recommendations designed to help the District make improvements and achieve operational efficiencies in the internal control structure and its operation. The Grand Jury requested and received from the District their responses to the Management Report. The Grand Jury reviewed these responses and found them to be acceptable.21
FINDINGS AND RECOMMENDATIONS
FINDING 1: The Grand Jury is a party to the contract to hire an independent auditor, but there is no provision for the Grand Jury to sign the extension of the contract with KPMG.
RECOMMENDATION 1: Provide
for the Grand Jury's participation and signature in any future contract
for an independent auditor and subsequent extensions.
1997-1998 Grand Jury
FINDING 2: The Auditor-Controller has not given priority in the past three years to updating the fixed asset register on a regular basis during the year.
RECOMMENDATION 2: The
Auditor-Controller should set a firm date to establish and implement a
plan to update the fixed asset register on a regular basis during the year.
AFFECTED AGENCY: Auditor-Controller Response
FINDING 3: Internal Audit Division is not represented when departments administering grants are being audited by outside auditors.
RECOMMENDATION 3: The
County Administrator should establish, adopt and implement a policy that
whenever an outside auditor is auditing any program within the county,
a county auditor is present during the audit process and interviews with
AFFECTED AGENCY: County Administrator Response
FINDING 4: The independent outside auditor (KPMG) does not thoroughly test and verify financial processing software.
RECOMMENDATION 4: The
Auditor-Controller and the Grand Jury should assure that the next contract
with an independent auditor includes testing and verification of computer
processed financial transactions by an expert in that field.
AFFECTED AGENCY: Auditor-Controller Response
1997-98 Grand Jury
FINDING 5: The county experiences delays in reimbursement of county funds spent on grant programs. The County Administrator has issued a directive to department heads to request frequent reimbursement from federal grants.
The County Administrator should review the frequency of grant reimbursement
requests to assure that there is minimal delay in receiving the funds.
AFFECTED AGENCY: County Administrator Response
FINDING 6: The county is a public enterprise whose revenues are approximately half a billion dollars per year ($500,000,000). Publicly held corporations of this size publish an annual report containing financial highlights and quantitative product summaries.
RECOMMENDATION 6: The
Auditor-Controller should publish an annual report to Santa Barbara county
residents. This document should expand Financial Highlights to include
all departments, with quantitative statements of services provided and
comparisons to previous years.
AFFECTED AGENCY: Auditor-Controller Response
AFFECTED AGENCIES California Penal Code Section 933(c) requires that comments to Grand Jury Findings and Recommendations be made in writing to the presiding judge of the superior court within 60 days by all affected agencies except governing bodies, which are allowed 90 days. In accordance with Section 933.05, the responding person or entity shall indicate the following:
1. The respondent agrees with the finding.
2. The respondent disagrees wholly or partially with the finding, in which case the respondent shall specify the portion this is disputed and include an explanation.
3. The recommendation has been implemented, with a summary of the implemented action.
4. The recommendation has not been implemented, but will be in the future, with a time frame.
5. The recommendation requires further analysis, with an explanation and a time frame. This time frame shall not exceed six months from the date of publication of the grand jury report.
6. The recommendation will not be implemented because it is not warranted or is not reasonable, with an explanation.
The Grand Jury requests that all responses be submitted on a 3 inch computer disk along with the printed response.
1 Agreement to Audit Certain County Financial Statements made among the County of Santa Barbara, California, the Grand Jury of the County of Santa Barbara for 1996-97 and the joint venture of KPMG Peat Marwick LPL and Nasif, Hicks, Harris & Co.
2 Ibid., pages 3-8
3 Extension of Contract (See Exhibit 1)
4 See Exhibit 2, pages 1-17
5 Ibid., page 9
6 CAFR Pension Trust fund, page 8
7 GASB Statement 25 - Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, Nov. 1994
8 GASB Statement 27- Accounting for Pensions by State and Local Government Employers, Nov. 1994
9 Cost Allocation Plan For use in the Fiscal Year 1996-1997, page i
11 Single Audit Reports, pages 2-5
12 See Exhibit 1, KPMG Management Letter, page 5-6
13 Single Audit Reports, page 18
14 Financial Highlights, Published by the County Auditor-Controller, Robert W. Geis, CPA,
page 1, July 31, 1996
15 Goleta Sanitary District, Financial Statements, June 30, 1996
16 Lompoc Hospital District, Financial Statements, June 30, 1996 & 1997
17 See Exhibit 3
18 See Exhibit 4
19 See Exhibit 5
20 Coopers & Lybrand, June 30, 1996
21 See Exhibit 6