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11 Staff Report - 2001-02 Comprehensive Annual Financial Report (CAFR) and Memorandum on Internal Control StructureU DATE: TO: FROM: SUBJECT: :MEETING DATE: 5:05 03 FFEM NO. 1 f COUNCIL/AGENCY AGENDA REPORT l APRIL 28, 2003 MAYOR AND TOWN COUNCIL/REDEVELOPMENT CHAIR AND MEMBERS OF THE REDEVELOPMENT AGENCY TOWN MANAGER/EXECUTIVE DIRECTOR ACCEPT THE 2001-02 COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR) AND MEMORANDUM ON INTERNAL CONTROL STRUCTURE RECOMMENDATION: Upon review by the Town Council's Finance Committee, accept the 2001-02 Comprehensive Annual Financial Report (CAFR) and Memorandum on Internal Control Structure. BACKGROUND: This CAFR presents the Town of Los Gatos and Town of Los Gatos Redevelopment Agency's financial condition, results of operations and current economic condition, for the fiscal year ended June 30, 2002. The 2002 CAFR received an unqualified opinion from Maze and Associates, the Town's external auditors. An unqualified opinion indicates the financial data of the Town is fairly presented according to general accounting principles. Additionally, Maze and Associates issued a Memorandum on Internal Control Structure to report on any material weaknesses in the Town's internal controls. A material weakness is a significant deficiency which could lead to a material misstatement of the financial statements. The auditor's report found the Town's internal control structure to have no reportable material weaknesses. DISCUSSION: Maze & Associates, the Town's auditors, conducted an audit in accordance with generally accepted auditing standards and the standards for financial audits contained in the Government Audit Standards (1994 Revision), issued by the Comptroller General of the United States. These standards require that they plan and perform the audits to obtain reasonable assurance as to whether the financial statements are free of material misstatement. Staff and Town's audi PREPARED BY: ' �EPHEN D. Finance and and Associates, met with the Council's Finance Committee on ,Maze j AY nistrative Services Director n:\finance\CAFRICAFR Agenda Items\FY02 CAFR Reviewed by: Attorney .,''--Finance F3.5\sst. Town Mgr Revised: 5/1/03 2:55 pm Reformatted: 10/23/95 PAGE 2 MIAVOR AND TO\VN COUNCIL SUBJECT: 2000-01 COMPREHENSIVE ANNUAL FINANCIAL REPORT. April 28, 2003 Thursday April 24, 2003 for an in-depth review of this year's reports to the Finance Committee. The Committee was advised by staff that the audited statements for the year ended June 30, 2002 received an Lingual itied or "clean" opinion for the year, meaning the Financial statements are fairly presented and contain no material misstatements. In addition, Maze and Associates reviewed the Memorandum on Internal Control Structure with the Town staff and the Council's Finance Committee. Four items were discussed with the Committee and .taffexplained its response to the auditor's comments. The Memorandum on Internal Control Structure and the Town's response are included as Attachment 1 to this agenda item. The internal control comments were of a more routine financial housekeeping nature. The Town's response to each finding describes how staff will address each issue this fiscal year. The Town has applied for and received the Government Finance Officers Association (GFOA), Certificate of Achievement for Excellence in Financial Reporting, for the last eight years. We have applied for and received the California Society of Municipal Finance Officers (CSMFO), Certificate of Award for Outstanding Financial Reporting for the last six years. CONCLUSION: As noted in the auditor's opinion, the CAFR fairly presents the fiscal year ending June 30, 2002 financial activity for the Town of Los Gatos and Redeye! •'ment Agency. The Town's Finance Committee, having reviewed the CAFR and Memorandum un Internal Control Structure with the Town's external auditors and Town staff, recommends their acceptance for the year ended June 30, 2002. ENVIRONMENTAL ASSESSMENTS: Is not a project defined under CEQA, and no further action is required. DISTRIBUTION: CAFR's and Memorandums on Internal Control Structures are available in the Clerk's Office, and on file in the library. ATTACHMENT: (1)Memorandum on Internal Control Structure for Council Members (2) CAFR TOWN OF LOS GATOS MEMORANDUM ON INTERNAL CONTROL STRUCTURE JUNE 30, 2002 ATTACHMENT 1 VIAZE ASSOCIATES November 6, 2002 To the Town Council of the Town of Los Gatos ACCOUNTANCY CORPORATION 1931 San Miguel Drive - Suite 100 Walnut Creek, California 94596 (925) 930-0902 • FAX (925) 930-0135 E-Mail: maze@mazeassociates.com Website: wwwmazeassociates.com Under generally accepted auditing standards in the United States of America, auditors are encouraged to report various matters concerning an entity's internal control structure noted during an audit, and are required to report certain of those matters. Matters that are required to be reported are significant deficiencies in the design or the operation of the internal control structure that, in the auditor's judgment, could adversely affect the organization's ability to record..3rocess, summarize and report financial data consistent with the assertions of management in the financial statements. As part of our audit of the financial statements of the Town of Los Gatos for the year ended June 30, 2002, we considered the Town's internal control structure in determining the scope of our audit procedures for the purpose of rendering an opinion on the financial statements. While our purpose was not to provide assurances on the internal control structure, certain matters came to our attention that we want to report to you. These matters, along with our recommendations, are described in the accompanying memorandum. A material weakness is a significant deficiency control structure elements does not reduce to amounts that would be material in relation to detected within a timely period by employees in • The accompanying memorandum on internal control structure is intended solely for the use of management and the Town Council. This restriction is not intended to limit the distribution of this letter and the accompanying memorandum which, upon acceptance by the Town Council, are a matter of public record. To the extent that the Town Council intends to rely upon this letter and the accompanying -memorandum, such reliance should take into account the limited basis on which our recommendations were developed, as described above, and the limitations inherent in the internal control structure. In addition, the Town Council should understand that the .riteria used by us in considering the internal control structure could differ significantly from the criteria the Town Council may be using for its purpose. We wish to express our appreciation for the courtesies and cooperation extended to our representatives during the course of their work. We would be pleased to discuss these recommendations in greater detail or otherwise assist in their implementation. in which the design or operation of one or more of the internal a relatively low level the risk that errors or irregularities in the financial statements being audited may occur andnot be the normal course of performing their assigned functions. Our consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be significant deficiencies and, accordingly, would not necessarily disclose all significant deficiencies that are also considered to be material weaknesses as defined above. However, none of the significant deficiencies described in the accompanying memorandum is believed to be a material weakness. Very truly yours, A Professional Corporation V TOWN OF LOS GATOS Memorandum on Internal Control Structure Recording Town Investments at Fair Value The California Government Code requires that municipalities record their investments at fair value. While the Town Treasurer has been reporting both the cost and market values of investments on the ► onthly Treasurer's Report submitted to Council, the general ledger is not adjusted for this fluctuation until the year- end audit is completed. In order to be in compliance with the California Government Code and properly state the investment balances, the general ledger should be adjusted to fair value prior to the close of the fiscal year. Town Response The Town is in agreement with this recommendation and will begin adjusting general ledger balances to market on a monthly basis in accordance with the Treasurer's Report effective FY 2002/03. Cashier's Area We reviewed the cash collection procedures and controls at the Cashier's area in the Finance Department. We understand the safe behind the Cashier's desk is kept unlocked during the day while staff is present and locked at night. We also understand the check signature stamps are kept in this safe. In order to strengthen security over the items kept in the safe, we recommend the staff keep the safe locked when not in use. Town Response The Town is in agreement with this recommendation. Finance staff will secure a second small safe to keep the signature stamps in that will be locked at all times. The safe will be opened only to use signature stamps for the weekly check run. Cash Collection Site Procedures — Police Records Department We also reviewed the cash collection procedures and controls at the Police Records Department. We found that the Records Department currently does not have a pre -numbered cash receipts system and there are no controls that are in place that compensate for that. We recommend that the Records Department implement a pre -numbered receipt system and have the receipt number attached to support, in order to aid in reconciling the cash register totals with the register tape. Furthermore, we noted that checks received through the mail are kept in an unlocked drawer. We recommend the Records Department keep the checks in a locked drawer or safe until time of deposit to prevent loss or theft. Finally, the Police Records Communication Manager informed us that the Police Department has a bank account with Washington Mutual used exclusively for warrants. When discussing this with Finance, we came to the conclusion that Finance had not been made aware of this account and the account is not recorded on the general ledger. All bank accounts and check signers must be approved by Council and controlled by Finance. Also, the account must be recorded on the Town's financial statements. TOWN OF LOS GATOS Memorandum on Internal Control Structure Town Response The Town's Police Department will immediately take the following corrective actions in FY 2002/03: (A) The Department will work in conjunction with the Finance Department and our software vendor to investigate whether it is feasible to install a satellite cash register that links with the Town's Pentamation financial software to compensate for no pre -numbered cash receipts. If this is not feasible, then other solutions such as manual receipt duplicates will be considered. (B) The Police Department's Records & Communication Manager's current procedure is to place all checks held overnight in a locked cabinet until they can be delivered to the Finance cashier the next day for deposit. (C) The Police Department's Records & Communication Manager is in the process of closing the warrant checking account (the balance is $23.00), these funds will be transferred to the Town's General account. The closure of the account will lead to a new policy whereby the Police Department will insist on warrant checks being received from our customers in the form of cashier's checks made payable to the Court where the warrant was issued. Outstanding Deposits Payable and Deferred Revenue Last year we issued a recommendation to management that the Deposits Payable account should be reviewed and adjusted. We understand that Finance has taken steps to clean up these accounts but there are still large balances that need to be researched and addressed. The Town should evaluate each item to determine if it is a legitimate liability, and whether the deposit needs to be returned or if the Town should recognize the revenue. Town Response The Town agrees with this recommendation and in FY 2002/03 the Finance Department is pleased to report that actions taken this fiscal year to date have cleared deposit accounts totaling approximately $200,000. Staff is continuing to research the remaining deposits for ultimate disposition either as revenue to the Town or possible refunds to the original depositors. The challenges are that a number of these deposits are ten years old or more. This means in some cases there is no forwarding address for a defunct business or incomplete records kept as to the nature of the deposits. At some point the Town will need to make the determination that no other clearing activities are worthwhile, and then make the decision about the what appropriate next steps should be made. In cases where the deposit is deemed for services due to the Town, we could convert the deposit to Town revenue. If the Town determines after reasonable attempts have been made to locate the depositor, that the funds cannot be returned, the Town would be required to remit the deposit amount to the State under the escheat property regulations.