sr-062612-8aTo: Mayor and City Council
From: Gigi Decavalles- Hughes, Director of Finance
Subject: Presentation of Comprehensive Annual Financial Report (CAFR) for the
Fiscal Year Ended June 30, 2011
Recommended Action
Staff recommends that the City Council receive and file the City's Comprehensive
Annual Financial Report ( "CAFR ") for the fiscal year ended June 30, 2011.
Executive Summary
As required by the City Charter, the City's financial statements are audited annually by
independent auditors. The City's financial statements for the fiscal year ended June 30,
2011, with the independent auditors' opinion, are embodied in the City's Comprehensive
Annual Financial Report.
Discussion
The City of Santa Monica issues a Comprehensive Annual Financial Report (CAFR)
reflecting the City's financial condition each fiscal year. The CAFR includes financial
information about all funds of the City, along with statistical information of general
interest about the Santa Monica community.
As required by the City Charter, the City's financial statements are audited by
independent auditors. The unqualified opinion of the City's independent auditors,
Macias Gini O'Connell, LLP, is provided as pages 1 and 2 of the CAFR. The auditors
have also provided a letter to the City Council summarizing opportunities for
strengthening operating efficiency.
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The auditors made two recommendations. They recommended that the City Council
consider the creation of an audit committee and that staff evaluate the status of the
City's internal service funds; that is, Vehicle Management, Information Technology
Replacement and Services, and Self Insurance funds. Staff recommends that the
recommendation to establish an audit committee be considered during the next City
Council retreat. The evaluation of the City's internal service funds is underway.
A summary overview and analysis of the City's financial condition and activities for the
fiscal year ended June 30, 2011, can be found in the CAFR in the form of a "Letter of
Transmittal" and "Management's Discussion and Analysis." In addition, Jim Godsey,
audit partner from Macias Gini and O'Connell, LLC, will be available during the meeting
for any questions.
The City's CAFR for the Fiscal Year Ended June 30, 2011, can be accessed online at
http://wML.s_m_qov.net/finance/financ'ial_operations/index.htm. The auditor's letter to
City Council is attached.
Financial Impacts & Budget Actions
There is no budget/financial impact to receive and file this report.
Prepared by: Candace Tysdal, Financial Operations Manager
Director of Finance
Forwarded to Council:
Rod Gould
City Manager
Attachment: Auditor's Letter to Council
Copy of the City's CAFK for 2011
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Certified Public Accountants.
Savamento • N/alnm Creek. • Oaklmul • I us Angeles /Cenrtny City' Nervy ..t 1leach • Sun Oieltu
January 30, 2012
Honorable Members of the City Council
City of Santa Monica
1717 4h Street
Santa Monica, CA 90045
mgocpa.com
In planning and performing our audit of basic financial statements of the City of Santa Monica, California
(City), as of and for the fiscal year ended June 30, 2011, in accordance with auditing standards generally
accepted in the United States of America, we considered the City's internal control over financial
reporting (internal control) as a basis for designing our auditing procedures 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.
However, during our audit we became aware of several matters that are opportunities for strengthening
operating efficiency. The memorandum that accompanies this letter summarizes our comments and
suggestions regarding those matters. We previously reported on the City's internal control in our report
dated January 30, 2012. This letter does not affect our report dated January 30, 2012, on the financial
statements of the City.
We will review the status of these comments during our next audit engagement. We have already
discussed these comments and suggestions with City personnel, and we will be pleased to discuss them in
further detail at your convenience.
Sincerely,
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Macias Gini & O'Connell LLP
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CA 90067
C'A 9260
CA 92101
1. Audit Committee
Best practices for local governments recommend that an entity establishes an audit committee of
the governing board to assist in carrying out their fiscal responsibilities. While financial
management is primarily responsible for the quality of financial reporting, City Council has
oversight as part of its governance responsibilities. The City Council is the highest level of
authority and has the ultimate responsibility for monitoring the financial reporting process. An
audit committee is a vehicle to provide oversight and review of an entity's financial reporting
process, internal controls and the independent audit function. By effectively carrying out its
functions and responsibilities, an audit committee helps to ensure that management properly
develops and adheres to a sound system of internal controls, that procedures are in place to
objectively assess management's practices, and that the independent auditors, through their own
review, objectively assess the City's financial reporting practices.
An audit committee should be composed of members who possess a basic understanding of the
City's financial reporting process. These members can be a Council member or an external party
engaged by the committee for the process of providing expertise in this area.
Recommendation
We recommend that the City Council consider the creation of an audit committee to assist in
fulfilling their responsibility of financial accountability to their citizenry and other external users.
2. Internal Service Net Asset Balances
The City maintains six (6) internal service funds to service funds, departments and agencies of
the City. We noted large net asset balances exist in the City's internal service funds with an
aggregate total of approximately $70 million representing the equivalent of approximately 3
years of total expenses. These balances represent excess fees and charges collected from funds,
departments and agencies of the City.
Internal service funds are used to provide benefits to other funds, departments or agencies of the
City. These funds accumulate costs related to a given activity on an accrual basis so that costs
can be allocated to the benefiting funds through fees and charges.
Recommendation
The City should evaluate their cost recovery methodology assessed to the funds, departments and
agencies of the City and adjust the charges to these City activities.
Attachment available for
review in the City Clerk's
Office