19 Addendum.ACFR Preparation Services
PREPARED BY: Gitta Ungvari
Finance Director
Reviewed by: Town Attorney, and Assistant Town Manager
110 E. Main Street Los Gatos, CA 95030 ● 406-354-6832
www.losgatosca.gov
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
MEETING DATE: 08/20/2024 ITEM NO: 19 ADDENDUM
DATE: August 19, 2024
TO: Mayor and Town Council
FROM: Laurel Prevetti, Town Manager
SUBJECT: Authorize The Town Manager to Reissue a Request for Proposal (RFP) for the
Preparation of the Annual Comprehensive Financial Report (ACFR) with a
Modification to Start the ACFR Preparation Services for the FY 2024/25 ACFR
REMARKS:
Attachment 1 contains public comment received after 11:00 a.m. Friday, August 16, 2024, and
before 11:00 on Monday, August 19, 2024.
Attachment Received with this Addendum:
1. Public Comment Received After 11:00 a.m. Friday August 16, 2024, and Before 11:00 on
Monday, August 19, 2024.
<GWhelan@losgatosca.gov>; 'Wendy Wood' <WWood@losgatosca.gov>
Subject: Agenda Item #1 - Finance Commission - Auditor Independence concerns
Dear Ms. Prevetti,
We have read your report for agenda item #1 which is attached. We are
encouraged the Town Council agrees with the Finance Commission’s
recommendation to address the Commission’s concern regarding the
long-standing AICPA professional requirement that auditors who provide
services to entities (regardless of the entity being a company or a state or
local government) for which independence is required, be independent
both in fact (that is, of mind) and in appearance.
In addition to the AICPA requirement, the Government Accountability
Office sets independence rules that apply to entities audited under
Government Auditing Standards (referred to as GAGAS). The Government
Auditing Standards apply to the Town of Los Gatos and the auditor must
also comply with these independence rules. We have attached the
relevant GAGAS rules for your review. For sake of clarity, the AICPA rules
also require a member to comply with more restrictive independence
provisions if applicable, such as the Government Accountability Office.
In listening to the Town Council discussion of this topic and reading the
attached staff memo, we believe more disclosure is required so both the
Town Council and the public fully understand and appreciate the “self-
audit” concerns we have raised.
With this in mind, we respectfully offer the following comments and
observations:
The threat to independence as outlined in GAGAS section 3.88
is triggered by the auditor preparing the basic financial
statements and footnotes from a client provided trial balance.
Creating a threat of independence increases audit risk which
must be addressed. Please refer to the attached flow chart of
independence considerations for preparing accounting records
and financial statements prepared by the Government
Accountability Office.
While it may be common practice for municipalities to have
basic financial statements prepared by their “independent”
auditor (the Finance Commission is not able to agree or
disagree with this assertion), this is not a “best practice” and is
not recommended by GFOA or the Government Accountability
Office. This might be convenient or expedient but so doing
creates a “significant” threat to independence which requires
mitigation.
As a result of preparing the basic financial services (called non-
attest service), the auditor must meet several requirements
which are safeguards to clear the presumptive hurdle of
impairment of independence. The auditor must document
actions taken to mitigate this impairment to an acceptable
level. This adds additional cost, time, and risk to the audit
process.
Auditing a trial balance does not provide sufficient assurance
the basic financial statements are free from material
misstatements and certainly does not “allow” the auditor to
issue an opinion on the Town’s basic financial statements. The
auditor is expressing an opinion on the basic financial
statements taken as a whole, not an opinion on an “audited”
trial balance. Please refer to Chavan and Associates
engagement letter dated March 9, 2022.
The Town should prepare the basic financial statements and
footnotes on their own to avoid tripping section 3.88. If the
Town is unwilling or incapable of preparing the basic financial
statements and footnotes, then a separate firm should be
retained to prepare the financial statements and footnotes.
This would avoid the “self-audit” independence concern arising
from performing a non-attest service when also performing an
attest engagement.
The auditor is currently performing the non-attest work
(approximately 16% of engagement work) and with proper
scheduling a third party or the Town staff should be able to take
on this work without elongating the audit schedule or materially
increasing the cost of the audit. To be clear, the Town currently
issues its ACFR 6 months after the close of the fiscal year.
We look forward to discussing with Staff the best way to achieve the
objective of reducing the independence concerns arising from the non-
attest services currently performed by the auditor as outlined in his
engagement letter.
Sincerely,
Phil Koen Linda Reiners
Chair of the Finance Commission Vice Chair of
the Finance Commission