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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 1 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 2 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. 3 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 4 Reference Contract No. 9373 (CCS).