sr-051011-8aCity Council Meeting: May 10, 2011
Agenda Item: ~-
To: Mayor and City Council
From: Carol Swindell, Director of Finance
Subject: Auditing Services for the City of Santa Monica
Recommended Action
Staff recommends that the City Council: 1) authorize the City Manager to negotiate and
execute a professional services agreement with Macias, Gini and O'Connell for auditing
services for an amount not to exceed $675,000 for afive-year term; and 2) provide
direction on its preferred form of communication with auditors.
Executive Summary
The City of Santa Monica engages an independent auditing firm to audit its financial
statements in accordance with generally accepted accounting principles and to perform
agreed-upon procedures in accordance with attestation standards established by the
American Institute of Certified Public Accountants. The firm of Macias, Gini and
O'Connell was selected through a competitive process to provide these services for up
to a five-year term at a cost not to exceed $675,000. The auditors will communicate
scope and timing of audit, the auditor's responsibilities under generally accepted
auditing standards and findings with those charged with governance. Staff is seeking
Council direction on how they prefer to receive that communication.
Discussion
The City engages an independent auditing firm to perform an examination of the City's
basic financial statements as well as an examination of the City's Redevelopment
Agency financial statements, the City's Big Blue Bus Fund financial statements, the
City's Air Quality Improvement Program, and the City's Schedule of Expenditures of
Federal Awards (Single Audit). The Auditor also performs agreed-upon procedures to
test and report on the City's GANN appropriation limit calculation.
While City staff assumes full responsibility for the completeness and reliability of the
City's financial information, the audit firm is expected to communicate audit planning
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and results to those charged with governance. There are a number of options as to
how Council can receive communication by the auditor. Staff has outlined those options
below and seeks direction from Council on its preferred method of communication about
the audit.
There is no best practice for communications with those in governance. Some local
governments have established ad hoc committees of the governing body; others ask the
audit firm to make an annual report to the governing body at aregularly-scheduled
meeting; still others, like Santa Monica, delegate the planning activities to an internal
Audit Committee comprised of representatives from the City Manager's office and
departments, and transmit annual reports to Council as information or consent items.
The City's historical practice has been the latter form of communication. Given the
recent focus on audit practices in other California cities, as Santa Monica transitions to
anew independent auditor, this is a good opportunity for Council to consider whether it
prefers to retain the existing communication method or make a change to that process.
If Council wishes to make a change to the process, one option would be to have the
audit firm make a formal presentation to Council annually to discuss the results of the
audit. Another option would be for Council to establish an ad-hoc audit committee that
would meet more often with the audit firm and report back to the Council as a whole.
This would include the opportunity for the Council ad hoc audit committee to meet
directly with the auditors without staff being present.
In December 2010, the City terminated its contract with Mayer Hoffman McCann (MHM) ;
in the wake of a State Controller's Office (SCO) review of the firm's audit of the City of
Bell. The SCO released the results of its review in December 2010 and concluded that
MHM's audit was "performed in accordance .with some of the standards and
requirements set forth" in auditing standards. "However, the firm did not comply, to
varying degrees, with the majority of fieldwork auditing standards with regard to audit
documentation, audit evidence, risk of fraud, litigation, claims and assessments,
subsequent events, going concern, and OMB Circular A-133 requirements for testing
federal program internal control and compliance." MHM disagreed with the SCO's
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conclusion and subsequently had its own quality control review performed by Carr,
Riggs and Ingram, an independent audit firm. Their review concluded that the audit
work performed by MHM with respect to its local government audit practice in California
conforms to professional auditing standards and the firm's system of quality control. City
staff is confident that the City's financial statements fairly reflect the City's financial
position and that its annual audits were done properly in all material respects.
However, rather than have any question about whether Santa Monica's audit is
performed in accordance with all applicable standards as a result of the SCO report, the
City terminated its relationship with MHM in December 2010 and issued a request for
proposal for auditing services in January 2011.
In response to the request for proposal, the City received six proposals. The City's Audit
Committee, comprised of staff from the Finance, Housing and Economic Development,
Community and Cultural Services, and Big Blue Bus departments evaluated the
proposals based upon each firm's relevant local government experience, the quality of
the firm's professional personnel, the firm's quality control standards, audit approach
and fixed cost for the annual audit services.
As a result of this evaluation process, the selection committee recommends that the firm
of Macias, Gini and O'Connell be retained to provide audit services for the City of Santa
Monica in an amount not to exceed $675,000 for audits to be conducted for the fiscal
years ending June 30, 2011 through June 30, 2016, in an amount approximating
$135,000 in each of the five fiscal years. Macias, Gini and O'Connell is a local CPA firm
with offices in Century City, Sacramento, Walnut Creek, Oakland, Newport Beach and
San Diego. The firm currently serves as independent auditors for 28 California cities,
including the cities of San Diego and Ventura. Audit work for the five fiscal years will
begin in May 2011 and is expected to be completed in March 2016.
Before entering into the contract Macias, Gini and O'Connell will be advised of the
Council's preferred method of communication.
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Financial Impacts & Budget Actions
The cost of audit services will be allocated based on anot-to-exceed fee schedule to
the City's General Fund, the Redevelopment Agency, the Big Blue Bus Fund, the
AQMD program, and any other program where an audit is a requirement for funding.
The General Fund cost will be further allocated among the remaining City funds through
the City's annual administrative indirect cost allocation plan.
The total cost of auditing services will not exceed $675,000 during the five-year term of
the professional services agreement and will approximate $135,000 in each of the five
fiscal years. Funds for these services will be .included in proposed biennial budgets
within the various funds in the fiscal years beginning July 1, 2011.
Prepared by: Candace Tysdal, Assistant Finance Director
Approved:
Carol Swindell
Director of Finance
Forwarded to Council:
Rod Gould
City Manager
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Reference Contract No.
9373 (CCS).