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SR-04-23-2013-8BTo: Mayor and City Council From: Gigi Decavalles- Hughes, Director of Finance Subject: Presentation of Independent Auditor Report Recommended Action Staff recommends that the City Council receive and file the independent auditors' unqualified audit report for the City's financial statements for the fiscal year ended June 30, 2012 and the attached Auditor's Letter to Council. Executive Summary As required by the City Charter, independent auditors audit the City's financia statements each fiscal year. The City's financial statements for the fiscal year ended June 30, 2012, with the independent auditors' unqualified opinion, are embodied in the City's Comprehensive Annual Financial Report (CAFR). The CAFR is available at the audit findings and other matters is e also submitted with this report uditors communicating Discussion As required by the City Charter, financial statements are prepared by the City and audited by independent auditors. The City's independent auditors, Macias Gini O'Connell, LLP, have audited the financial statements for the fiscal year ended June 30, 2012, issued an unqualified opinion, and have provided a letter summarizing their audit findings and other matters, a required communication under generally accepted auditing standards. . with an unqualified opinion, the auditors have neither qualifications nor reservations about the financial statements as presented. The auditors' formal opinion and accompanying financial statements are embodied in the City's CAFR, which is now accessible at the City's libraries and on the City's Finance web site as well as attached to this report. 1 In the letter to Council, auditors have identified sensitive disclosures related to the dissolution of the City's Redevelopment Agency and have summarized audit differences and recommended reclassifications to the financial statements. The uncorrected recommended reclassifications were proposed for presentation only and have no impact on the financial condition of City funds. Jim Godsey, audit partner from Macias Gini and O'Connell, LLC, will be available during the meeting on April 23, 2013, to answer any questions. Financial Impacts & Budget Actions There is no budget/financial impact to receive and file this report. Prepared by: Candace Tysdal, Financial Operations Manager Approved: daA Gigi - - ,.. Director of Forwarded to Council: Rod Gould City Manager Attachments: A. Auditor's Letter to Council B. Comprehensive Annual Financial Report for the year ended June 30, 2012 2 We have audited the financial statements of the governmental activities, the business-type activities, each Seattle major fund, and the aggregate remaining fund information of the City of Santa Monica (City) for the year ended June 30, 2012. Professional standards require that we provide you with information about our nder generally accepted auditing standards, Government Auditing Standards, and OMB responsibilities n related to the planned scope and timing of our audit. We Circular Aities as well as certain informatio have that communicated communicate information you the following nfomation relat dOto oar audit. Professional standards also Si nif rMt Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the City are described in Note I to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during 2012. We noted no transactions entered into by the governmental unit during the year for which there is a lack Of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the governmental activities' and business -type activities' financial statements were: Management's estimate of depreciation is based on the estimated useful lives of capital assets. We evaluated the expense in determining thate t sareaso able n relation to the financialstatements taken as a whole. Management's estimate of the claims payable is based on reports prepared by third party administrators, actuarial valuations, and the reports prepared by management. We evaluated the key factors and assumptions used to develop the claims payable in determining that it is reasonable in relation to the financial statements taken as a whole. ost Management's estimates of the net pension obligation and adm nher pons and actuarial benefits obligation is based on reports prepared by third party valuations. We evaluated the key factors and assumptions used to develop the net pension obligation and the other post - employment benefits obligation in determining that they are reasonable in relation to the financial statements taken as a whole. www.mgocpa.com ATTACHMENT Los eA 777 S. Figueroa Street, Suite 2500 Los Angeles, CA 90017 e>r °fied Public Accountants. 213.408.8700 Sacramento Walnut Creek Oakland April 23, 2013 Century City To the Honorable City Council Newport Beach City of Santa Monica, California San Diego We have audited the financial statements of the governmental activities, the business-type activities, each Seattle major fund, and the aggregate remaining fund information of the City of Santa Monica (City) for the year ended June 30, 2012. Professional standards require that we provide you with information about our nder generally accepted auditing standards, Government Auditing Standards, and OMB responsibilities n related to the planned scope and timing of our audit. We Circular Aities as well as certain informatio have that communicated communicate information you the following nfomation relat dOto oar audit. Professional standards also Si nif rMt Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the City are described in Note I to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during 2012. We noted no transactions entered into by the governmental unit during the year for which there is a lack Of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the governmental activities' and business -type activities' financial statements were: Management's estimate of depreciation is based on the estimated useful lives of capital assets. We evaluated the expense in determining thate t sareaso able n relation to the financialstatements taken as a whole. Management's estimate of the claims payable is based on reports prepared by third party administrators, actuarial valuations, and the reports prepared by management. We evaluated the key factors and assumptions used to develop the claims payable in determining that it is reasonable in relation to the financial statements taken as a whole. ost Management's estimates of the net pension obligation and adm nher pons and actuarial benefits obligation is based on reports prepared by third party valuations. We evaluated the key factors and assumptions used to develop the net pension obligation and the other post - employment benefits obligation in determining that they are reasonable in relation to the financial statements taken as a whole. www.mgocpa.com Management's estimate of the pollution remediation obligation is based on expected outlays to be incurred to settle those liabilities. We evaluated the key factors and assumptions used to develop the pollution remediation obligation in determining that it is reasonable in relation to the financial statements taken as a whole. Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. The most sensitive disclosures affecting the financial statements were: The disclosure in Note 17 to the financial statements, which discusses the California State Legislature's enacted legislation that dissolved redevelopment agencies in the State of California as of February 1, 2012. On February 1, 2012, the City, as the Successor Agency to the City of Santa Monica Redevelopment Agency, became responsible for the overseeing of the dissolution process and the wind down of redevelopment activity. The disclosure in Note 17 to the financial statements, which discusses the Moody's downgrade of all California redevelopment Tax Allocation Bonds within the State, including the City of Santa Monica Redevelopment Agency's (Former Agency) Earthquake Redevelopment Bonds Series 2006. This downgrade triggered an event of default in two of the Former Agency's loans, making them subject to call. The lender on one of the loans has agreed to forbear on exercising default remedies at least through April 2013, at which time the status of this loan will be evaluated for continuing forbearance. The lender on the other loan has taken no action. The disclosure in Note 18 to the financial statements, which discusses the State of California Department of Finance's (DOF) determination regarding the Due Diligence Review required under redevelopment dissolution law. The Successor Agency does not agree with the entire amount included in the DOF's determination. Due to the inherent uncertainties involved in the application of the redevelopment dissolution law, management cannot presently determine the ultimate outcome of this issue. The financial statement disclosures are neutral, consistent, and clear. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are clearly trivial, and communicate them to the appropriate level of management. The attached schedule summarizes audit differences and reclassifications recommended for the financial statements. Management has determined that the effects of these differences are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. The uncorrected recommended reclassifications in the attached schedule were proposed for management consideration. There is no impact to the financial condition of City funds. They are proposed for presentation purposes only. 2 Disagreements with Management For purposes of this letter, a disagreement with management is a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated January 31, 2013, as updated through February 25, 2013. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the governmental unit's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the governmental unit's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Other Matters With respect to the supplementary information accompanying the financial statements, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary' information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. This information is intended solely for the use of City Council and management of the City of Santa Monica and is not intended to be, and should not be, used by anyone other than these specified parties. Very truly yours, Los Angeles, California CITY OF SANTA MONICA Audit Difference and Reclassification Summary June 30, 2012 Recommended Journal Entry DESCRIPTION I Debit I Credit GOVERNMENTAL ACTIVITIES/ BUSINESS -TYPE ACTIVITIES Net Pension Asset- Gmernmental Activities $ 15,218,168 Net Pension Asset- Business -type Actvities 4,781,832 Expenses - General Services - Governmental Actvites 7,589,096 Expenses - Business-type Acdvities 2,410,904 Unrestricted Net Assets- Govermnental Activities 7,629,072 Un,mieted Net Assets - Business -type Activities 2,370,928 To record a net persinn asses for the dlsa On, nmy payment made m PRRS in FYI a,,dFY12 Item No. 8 -13 Attachment B April 23, 2013 • • ' ' This document is available online at: http://Www.smciov.net/departments/clerk/agendas.aspx A hard copy of this document is also available for public review at the City Clerk's Office and the Main Library. Item No. 8 -13 Attachment B April 23, 2013