05 Staff Report - Civil Grand Jury Report
DATE: TO: FROM: SUBJECT: MEETING DATE: 9/0704 AGENDA ITEM: 5 COUNCIL AGENDA REPORT August 30, 2004 ORRY P. KORB, TOWN APPROVERESPONSE
TO SANTACLARACOUNTYCIVILGRAND JURy REPORT -INQUIRY INTO FINANCIAL AND PERFORMANCE AUDITS FOR THE COUNTY AND CITIES IN THE COUNTY RECOMMENDATION: Approve response to Santa Clara County
Civil Grand Jury Report -inquiry into financial and performance audits for the County and cities in the County. BACKGROUND: The Santa Clara County Civil Grand Jury conducted a survey
of the auditing practices of city and county governments in Santa Clara County. The Grand Jury found that the City of San Jose, the County, and to a lesser extent, several other cities
in the county, the Town included, make effective use of financial and performance audits to save money and to increase service and efficiency. Several cities have no formal auditing
program and may be passing up savings and efficiency improvements. DISCUSSION: The Civil Grand Jury is empowered to investigate the policies and practices of public agencies within the
County of Santa Clara and to make recommendations for changing current or adopting new procedures. California Penal Code section 933(c) requires that the governing body ofthe entity
subj ect to a grandjuryreport respond within 90 days to the findings and recommendations contained in the report. The response must either agree or disagree in whole or in part with
the findings and PREPARED BY: ORRYP.KORB, TOWN ATTORNEY OPK/wp (N:\ATY\TC.Report.grandjury.Performance.•udits.wpd] Reviewed by: Town Manager < & Finance Rev: 8/30/04 11:38 am Reformatted:
7/19/99 Assistant Town Manager Community Development Clerk File# 301-05
PAGE 2 SUBJECT: APPROVE RESPONSE TO SANTA CLARA COUNTY CIVIL GRAND JURy REPORT -INQUIRY INTO FINANCIAL AND PERFORMANCE AUDITS FOR THE COUNTY AND
CITIES IN THE COUNTY August 30, 2004 state the reasons for any disagreement, and further state whether the recommendations will be implemented, the plan for doing so, or an explanation
ofthe reasons for not doing so. The Grand Jury report contains three factual findings and three recommendations. Attached are the findings and the staffs proposed responses to each.
Attachments: 1. 2. Santa Clara County Civil Grand Jury Report -Inquiry into Financial and Performance Audits for the County and Cities in the County Proposed Response
..,.: ". F(ENDORSED) D I LE JUN 042004 KIRI TORRE Chief f;xecullve Of/Ieor Superior rs: BY 2003-2004 SANTA CLARA COUNTY CIVIL GRAND JURY INQUIRY INTO
FINANCIAL AND PERFORMANCE AUDITS FOR THE COUNTY AND CITIES IN THE COUNTY Summary The Santa Clara County Civil Grand Jury (Grand Jury) reviewed the auditing practices of city and county
governments in Santa Clara County (County). It found that the City of San Jose (San Jose), the County, and to a lesser extent, several other cities in the county make effective use of
financial and perfonnance audits to save money and to increase service and Several cities have no fonnal auditing program and may be passing up savings and efficiency
improvements. Background All government jurisdictions in the state are required to have an annual financial audit, often summarized in a lengthy document called a Comprehensive Annual
Financial Report (CAFR). In addition, most of the government entities within the County routinely commission audits of the operations of departments within their organizations. These
audits probe in greater depth and in more detail into the operations of the audited departments than do the annual financial audits. They may be done by an internal auditing division
or contracted to an external agency. The audits may focus on either or both the financial and management perfonnance of the organization. The Grand Jury surveyed the fourteen municipalities
listed in Appendix A regarding their past use of audits. It was found that over the last three years, seven cities regularly used external audits to assess government functions. Three
had less extensive programs and four had no audits beyond the CAFR. The City of San Jose has the most extensive internal auditing program in the County and provides an effective example
to emulate. It is managed by the Office of the City Auditor (City Auditor), reporting to the City Council. Section 805 of the San Jose Charter outlines the City Auditor's primary duties:
• Conduct or cause to be conducted annual post audits of all the City's fiscal transactions and accounts kept by or for the City, including the examination an.d analysis of fiscal procedures
and the examination, checking, and verification of accounts and expenditures; I A1TACHMENl 1
• Conduct performance audits, as assigned by the City Council, to detennine whether (1) City resources are being used in an economical, effective, and efficient manner; (2) established
objectives are being met; and (3) desired results are being achieved; • Conduct special ,audits and investigations as assigned by the City Council; • Submit a monthly report to the City
Council of the City Auditor's activities, findings, and reconlmendations to improve the admipistration of the City's fiscal affairs; and • Perform other such auditing functions consistent
with the City Charter and submit reports as required. As part of a comprehensive audit system, the City Auditor states that: "Detennining which areas to audit and allocating scarce audit
resources to . those areas is the key to a successful internal audit function. To assess the relative importance of potential audit subjects, the City Auditor prepares an annual risk
assessment model of the City's budgeted programs and revenue sources. For each of 300 specific budgeted programs or revenue sources, the model compares the following factors: . • proposed
expenditures • estimated revenues • fund type • capital expenditures • three-year revenue trend • number ofstaff • estimated beginning fund balance • value of fixed assets • date of
audit request • date of last audit For each specific budgeted program or revenue source, the model scores each of the above factors from 0 throug.h 10 based on a series of tables the
City Auditor designed. In addition, the City Auditor weights each of the above factors from 1 to 5 according to their relative importance to produce a weighted score for each budgeted
program or revenue source. The model then sorts these scores from highest to lowest and recommends that the City Council Finance Committee' include in the City Auditor's
Annual Audit Workplan those budgeted programs or revenue sources with the highest weighted scores. Because the City Auditor applies this scoring system evenly across the entire citywide
organization, it promotes a sense of fairness to auditees and helps ensure that audit resources will be focused on those areas with the highest audit potential." During 2003, the office
issued nine repo'rts. The City Auditor's principal objective is to identify $4 in savings (or increased revenues) for every $1 of audit cost. For the last four years, the office 2
identified approximately $10 in savings for every $1 spent on the auditing function. As an essential aspect ofthe audit system, the City Auditor prepares a quarterly follow-up report
on the status of all those audit recommendations that the San Jose City Council has approved but which remain unimplemented. The most striking example of a successful audit was one on
the vehicle replacement process of the Fleet Man3:gement Division of the General Services Department. The audit led to reduced vehicle purchases and saved San Jose from planned spending
of $11 million. In addition, the audit identified projected savings for the following two years that approached $20 million. Vehicles were being purchased before they were needed and
sitting idle because of a process that lacked feedback, communication, and the proper checks. The recommendations from the audit were to fix the process so that the system would use
San Jose funds efficiently. The other government entity which has a wide-ranging audit program is the County. It performs approximately a dozen audits per year under the management of
the illternal Audits Division, which does most ofthe financial audits. The majority ofthe performance (or management) audits are performed by the Harvey M. Rose Accountancy.Corp., an
external auditor that is very familiar with County operations through years of working together. By having both internal and external auditors, the County follows an auditing best practice
ofchanging auditors periodically. Discussion One of the functions of the Civil Grand Jury is to investigate government operations to ensure that they are operating efficiently and effectively.
On a routine basis, the Grand Jury finds that that role is performed best by a disciplined auditing program administered by the government organization itself. The Grand Jury can then
monitor those ongoing processes and focus its effort on deficiencies and failures, especially in those areas initiated by citizen complaints. The Grand Jury reviewed several dozen audits
and selected five of them for greater scrutiny. Those five had recommendations that could prevent significant losses, generate additional revenue, or provide substantial cost savings.
The Grand Jury found that, in general, the follow-up actions in response to the recommendations were timely, complete, and professionally administered. Two audits performed by the City
Auditor indicated a need in the San Jose General Services Department (GSD) for a more active review of the resources GSD controls. Both the Facilities Management Division and the Fleet
Management Division are managed by GSD and lacked adequate policies and procedures for the periodic review of their performance, as well as· a program for timely corrective action. ill
both cases, GSD management has not only embraced an active, positive response to the audit findings, but has moved towards doing its own internal audits. 3
" Follow-up to a San Jose Facilities Management Division Performance Audit A report of an audit of the Facilities Management Division by the City Auditor found that the division "lacked
adequate and documented procedures and controls in all three work sections." Following the City Auditor's Risk and Vulnerability Assessment process, 53 specific threats (unwanted events
or occurrences usually involving non-compliance or abuse of a law, regulation, contract, or policy) were identified. Recommendations for the corrective process included: • Develop a
procedures. manual to formally documentprocedures. • Continuously develop controls and procedures to address operational threats as they arise. Use the procedures manual to advise
and train current and new staff. • L"'1stitute management oversight to ensure compliance with the new procedures. Appendices to the audit gave specifics for threat .details·, cost-benefit
analysis, procedural. development, and identified priorities. The director of the GSD responded in writing promptly and positively to the audit, making a commitment to implement all
of the recommendations. The Grand Jury reviewed the new "Procedures Manual" and the performance measures, and noted satisfactory results through the first quarter of fiscal year 2003-2004.
In discussions with the Grand Jury, the GSD director repeated the department's commitment to continue the improvements, along with an additional intent to increase oversight via an internal
GSD audit program. Follow-up to a San Jose Fleet Management Division Performance Audit Metered equipment (such as construction equipment that has a built-in meter to monitor hours of
use) in San Jose is the responsibility of the Fleet Management Division. The City Auditor found that San Jose's metered equipment was not being used efficiently, but if used in a cost-effective
manner could result in a $3.5 million economic benefit. The scope of the audit included the vehicle leasing and usage policies for all San Jose departments (from backhoes to even the
the scooters used at the Environmental Water Pollution Plant), and equipment maintenance and replacement. The audit found that excess equipment was being purchased and maintained because
the Fleet Management Division was meeting the needs for various San Jose departments individually rather than sharing equipment among departments. Audit recommendations included: • Designate
the Fleet Management Division as the administrator for all metered equipment. • Develop and consistently implement utilization standards. • Ensure development of a complete and current
inventory of equipment. • Conduct frequent utilization assessments for redeployment, retirement, or pool inclusion. • Develop a proposal to establish a city pool ofmetered equipment.
• Establish a low-use metered equipment pool, together with policy and procedures. 4
.. .' Again, the director of GSD responded promptly and positively to this audit, making a written commitment to implement all of the recommendations and reiterated the department's
intent to develop and implement an internal GSD audit program. The Grand Jury found that the division was making progress in implementing its new stated goal to ensure that metered equipment
on hand was "sized to meet needs" as opposed to either falling short or exceeding the quantity required. It is working toward a community pool of equipment by consolidating various departmental
needs. Foilow-up to a County Department of Planning and Development Custody Audit Whenever there is a change in the manager of a County organization that has responsibility for County
funds, an intemal custody (financial) audit is performed to assure both the out-going and the in-coming manager that there are no account discrepancies. In addition, the audit provides
an opportunity to assess the processes and procedures in place for handling resources and to recommend any needed improvements. The "Custody Audit -Part II Internal Control Report" for
the County Department of Planning and Development provides an excellent example ofthe benefits ofthat kind of audit. The County Environmental Resources Agency (ERA) Administration is
responsible for four departments: Planning and Development, Agriculture and Resource Management, Environmental Health, and Parks and Recreation. On March 27, 2003, the County auditor
issued a report with 11 findings and 53 recommendations. None of the findings or recommendations were cause for serious concern, yet each of the recommendations would make ERA a more
effective organization. By March 2004, 38 of the recommendations had been satisfactorily completed, 7 required information technology (IT) support, 5 still needed updated policies and
procedures to be written, and 3 required County counsel action. The issue involving these last three is a good example of the type of problem and possible . benefit that can result from
this kind of audit. The finding was "Development Services should establish polieies and procedures to increase recovery of costs associated with code enforcement." (For a similar problem,
see the 2003-2004 Grand Jury report entitled "Inquiry into the City of Palo Alto's Code Enforcement Process.") The Office of the County Counsel is drafting ordinance amendments that
may address the recommendations: .. • Record a code enforcement lien for any unpaid costs.. • Work with County Counsel to consider an ordinance that designates uncollected code violation
fees as special assessments to be included in the property tax bill. • Work with County Counsel to consider a revision to the County Ordinance to change a building code violation to
a misdemeanor instead of the current charge of an infraction. The misdemeanor penalties allow much higher fines than those allowable for an infraction. 5
Follow-up to a County Facilities Department Capital Programs Performance Audit A management (perfonnance) audit was completed January 14, 2002, entitled "Management Audit of the Facilities
Department Capital Programs Division of the General Services Agency." The Acting Director ofthe County General Services Agency (GSA) stated that "This audit was a very useful tool for
improving the operations of the GSA Facilities Capital Program." The audit contained 12 findings and 46 recommendations. As of January 15, 2004, most (35) of those recommendations had
been implemented or were awaiting approval by the County Board of Supervisors. Of the 11 remaining recommendations, 9 required revised policies and procedures an9 were in the process
of being changed, one required IT support, and I required County counsel to revise an ordinance. Several of the recommendations by the auditor were listed as "Priority 1", a category
described as "if not corrected could lead to significant financial loss." An example of such a reconI.inendation is: "The Board should have an independent reconciliation ofproject accounts
to Board appropriations perfonned by a certified public accountant." That recommendation has been accepted and implemented. The advantage to even well-functioning organizations of outside
audits is that methods of operation which are accepted as standard procedures are reviewed critically from an external and independent, uninvolved perspective. The fact that most recommendations
are· quickly and enthusiastically accepted indicates both the need for the audit and the willingness of an organization to make itself ever better. County Treasury Balances Audit The
County manages a $3.3 billion pool ofmoney for various entities in the County with nearly a thousand different sub-accounts. As tax monies are collected, they are placed in a sub-account
before being allocated to the appropriate entity. The reserve and working funds for school districts and County government operations, including Valley Medical Center are kept in the
pool. Money received as part of authorized bond sales but not yet spent are also collected together and invested as part ofthe total assets. Some funds are not expected to be required
in the near future and are invested separately in longer tenn investments, but most are required to be available for current expenditures. Still, by pooling together all the funds to
smooth out the cash flow fluctuations, the commingled investments can be invested within formal guidelines and restrictions for a longer duration and achieve interest rates equivalent
to a 2-year U.S. Treasury bill instead of the less than 1% rates available at present for demand deposits. The majority of the sub-accounts, as well as most of the funds (:::::75%),
are the resources of school districts. The County had 343 trusts accounts with cash balances of $644 million at the end of 2001. The County has been conservative financially in past
years, building reserves greater than required by more aggressive accounting standards. In spite of depressed economic activity during the past several years, the pool account has not
diminished as much as might be expected. In part that is because funds in one trust account often can not be diverted for other activities or to the County general fund for ordinary
expenditures. An audit dated June 27,2002, 6
·' identified several trust accounts which could appropriately be closed, freeing the funds but only for $4 million. Under contract to the County, the Harvey M. Rose Accou.1J.tancy Corp.
.submitted an "Analysis of County Reserves, Fund Balances And Other Funding Issues Related to the FY 2003-2004 Budget." Under pressure ofprojected budget cuts for this fiscal year and
the next, the audit was more aggressive in identifying reserve funds that could be used for general County expenses, either by closing accounts or by reducing reserves exceeding minimum
requirements. For instance, the counties of Los Angeles and San Francisco pay their workers compensation claims on a current basis rather than setting aside reserves for future liabilities
as does the County. Including reserves for a liability self-insurance fund, the audit identified $72 million that could . be removed from reserves using more aggressive accounting. The
Finance and Government Operations Committee recommendation was more conservative: move onlY onlY $8.7 million to the general fund. If the County accepted all the measures suggested by
the audit as acceptable accounting, as well as some budget cuts and revenue improvement actions, approximately $245 million could be added to the general fund budget. The County has
chosen a more aggressive accounting stance to the extent oftransferring ::::::$50 million to fiscal years 2003-04 and 2004-05 budgets. A number of the reserve transfers were overdue
since the reserve accounts had been dormant for a decade, no longer had a function, or were otherwise obsolete. Those monies were not serving the public and transferring them to the
County general fund would allow them to contribute to the local economy while preserving some County services and spending. Conclusion Financial and performance audits are a proven means
of reducing risk, saving and improving efficiency in city and county government operations. San Jose and the County have formal and extensive auditing programs that have
more thaI! paid for the costs of the audits. Several other cities in the County have less extensive programs, and a few have no formal program. Since both the costs and the savings of
an auditing progra.TTI should scale proportionately, the Grand Jury recommends that all municipalities perform appropriate fina.l1cial and performance audits. Finding I The City of San
Jose and the County of Santa Clara make effective use of internal and external financial and performance audits to improve the functioning of their government operations. Both were found
to be diligent in following up on the findings and recommendations of the audits. 7
Recommendation I None. Finding II The Office ofthe City Auditor of San Jose makes effective use of a risk analysis to focus audits on the most vulnerable areas of government operations
and those functions with t.lJ.e potential for greatest savings. Recommendation II-A All municipalities in the County should consider performing fujd annually updating a fonnal risk analysis
oftheir operations similar to that done by Sa.."'1 Jose. Recommendation II-B Municipalities in the County should consider perfonning internal or external audits of the most vulnerable
operations identified in a risk analysis. . Finding III Several cities in the County do not have financial and perfonnance management auditing programs. Recommendation III Municipalities
in the County without auditing programs should consider using local external auditors such as the City Auditor, via a contract, or the County's external auditor to perfonn audits if
an internal auditor is not cost-effective. PASSED and ADOPTED by the Santa Clara County Civil Grand Jury on this 13th day ofMay 2004. .chard H. Woodward Foreperson 8 f£ I •.
.. AppendixA· Number of Municipal Financial and Performance Audits Completed (in addition to the required external financial auditlCAFR) Municipality ·2001-2 2002-3 2003-4 Comments City
of Campbell 0 0 0 City of Cupertino 0 0 0 City of Gilroy 3 3 1 IF, IP, EP City of Los Altos 1-2 1-2 3,;.5 IF, EP Town of Los Altos Hills 0 1-2 1-2 EP Town of Los Gatos 0 0 1 EP,CIM City
of Milpitas 0 0 0 City of Monte Sereno 1 1 1 IF I City of Morgan Hill 3-5 3-6 3-5 EF, IP, EP City of Mountain View 3-5 >5 >5 IF, EF, EP City of Palo Alto 3-5 3-5 3-5 EF,IP City of Santa
Clara 0 5 0 EP City of Saratoga ·0 0 0 City of Sunnyvale >5 >5 >5 EF, IP, EP Legend: IF -internal financial, EF -external financial, IP -internal performance, EP -external performance
CIM -uses continuous improvement methodology 9
'. References Documents "An Audit of the Fleet Management Division of the General Services Department's Vehicle Replacement Program," City Audit dated February 7, 2003. "Analysis
of County Reserves, Fund Balance And Other FUnding Issues Related to the FY20032004 Budget," Harvey M. Rose Accountancy Corp. Financial Audit, June 12, 2003. "Custody Audit -Part IT
Internal Control Report," County Audit dated March 27, 2003. "Management Audit of the Facilities Department Capital Programs Division of the General Services Agency," County Audit dated
January 14,2002. ' Letter from the Acting Director ofthe General Services Agency, January 15, 2004. Letter from the Director ofthe Environmental Resources Agency, March 5, 2004. Management
Audit of the Controller-Treasurer Department of the Finance Agency, June 27, 2002. Office ofthe City Auditor website: http://www.ci.san-jose.ca.us/auditor/www.shtml. Report Number 03-08,
"An Audit ofthe Facilities Management Division ofthe General Services Department," August 2003. Report Number 03-11, "An Audit ofthe Utilization and Replacement of the City's Metered
Equipment," Ja.TJ.uary 2004. Interviews hlterview with San Jose City Auditor, September 4,2003. Meeting with the GSD Director and Facilities Management Division staff, November 20,2003.
Meeting with the GSD Director and Fleet Management Division staff, April 15,2004. 10
4? -568 ·K ... ifF "92& <' iT' t,",··" e......... d' ..::<:.,'#_........\5 SYm;!"" ...."t' 1),0".-6•.-..•-1 g'$,,·",9 , .?_--!.....-------------------------------------, Response
to Grand Jury Report 2003-2004 Civil Grand Jury Report Title: Inquiry into Financial and Performance Audits for the County and Cities in the County Report Date: Response by: May 13,
2004 Honorable Steve Glickman and Members of the Town Council, Town of Los Gatos Title: Mayor, and Members of the Town Council FINDINGS o I (we) agree with the Findings numbered: g I
(we) disagree wholly or partially with the Findings numbered: III (Attach a statement specifying any portion of the Findings that are disputed; include an
explanation of the reasons therefor.) RECOMMENDATIONS &1'/Recommendations numbered II-A;· II-B have been implemented. (Attach a summary describing the implemented actions.) o Recommendations
numbered but will be implemented in the future. (Attach a timeframe for the implementation.) have not yet been implemented, o Recommendations numbered require further analysis. (Attach
an explanation and the scope and parameters of an analysis or study, and a timeframe for the matter to be prepared for discussion by the officer or director of the agency or department
being investigated or reviewed, including the governing body of the public agency when applicable. This timeframe shall not exceed six months from the date of publication of the grand
jury report.) oRecommendations numbered III will not be implemented because they are not warranted or are not reasonable. (Attach an explanation.) Date Number of pages attached: Signature
Print Name AllACflMENT
The Town ofLos Gatos is in receipt of the Civil Grand Jury's final report, mquiry into Financial and Performance Audits for the County and Cities in the County. As required by California
Penal Code sections 933c and 933.05c, the Town hereby responds to the findings and recommendations addressed to it as follows: Recommendation II-A Municipalities in the County should
consider performing and annually updating a formal risk analysis oftheir operations similar to that done by San Jose. Response to Recommendation II-A This recommendation has been implemented.
The Town ofLos Gatos has a number ofprocesses, policies and procedures in place to help ensure that it delivers programs and services in a cost effective and efficient manner. These
policies, practices and procedures help ensure that Town services have and will continue to be provided in an appropriate, effective and efficient manner. They include the following:
••••••••••••• Consistent adherence to formal financial and purchasing policies; Town-wide strategic planning; Departmental performance measures tracking productivity and results published
in the Town's annual budget; Annual departmental work plans coordinated with the Town's strategic planning process; A biannual community survey reflecting high levels of community satisfaction
with the services delivered by the Town; Annual updates of user fees and related cost recovery objectives; A balanced annual budget, including substantial contingency reserves; Organizational
assessments ofoperations and service delivery; Service level enhancements, despite revenue reductions; Repeated awards from state and national organizations recognizing the Town's annual
reporting and budget documents; Annual audits repeatedly resulting in unqualified opinions and limited, if any, recommended
changes; Security audits ofTown information technology services; and Collaborative working environment that fosters "performance excellence" and "continuous improvement methodologies"
throughout a talented and dedicated workforce. 4':\ , ..r.!;,:. .,-, '...,...,....... ...-J i
Additionally, the Fiscal 2004-2005 work plan for the Town contains special program audits, including: • A Town-wide organizational assessment of department service levels and resources
for determining appropriate resource deployment and efficiency and effectiveness of service delivery. • Transient occupancy tax ("TOT") audits on motels and hotels to ensure the proper
collection and remission of tax revenues; .. • Sales tax and business license program audits to ensure that businesses are licensed and that sales tax generators are reporting the correct
amounts; • Annual updates ofTown-wide service delivery costs, including updates of user fees and the Town's cost allocation plan; . • Risk management assessment to fully evaluate the
Town's collective exposure to financial and human loss and how it is managed to prevent losses and develop best practices; and • The Fiscal 2004-2005 work plan includes the Town's planned
emphasis on continued use ofperformance management measures for future operating budgets, which will be employed by the Finance Department and the Town Manager's office in restructuring
the budget process and related documents to incorporate performance management into future budget decisions. Recommendation II-B Municipalities in the County should consider performing
internal or external audits ofthe most vulnerable operations identified in a risk analysis. Response to Recommendation II-B This recommendation is being implemented. As detailed in the
response to Recommendation IT-A, the Town has a work plan item contained within its Fiscal 2004-2005 budget pertaining to a risk management assessment to evaluate exposure to fmancial
and human loss, evaluate how risk is managed and losses are prevented, and develop best practices. An external risk management firm will prepare the analysis. The Town would then consider
internal or external audits of the most vulnerable operations as identified in the analysis. Finding III Several cities in the County do not havefinancial andperformance management auditing
programs. Response to Finding ill The Town does not agree with this finding. The exhibit to the Report points to only four of 14 cities, or only one quarter ofthe cities in the County
reported that they had no financial or performance audits. Those cities, Campbell, Cupertino, Milpitas and Saratoga, contract for the performance ofindependent financial audits on an
annual basis. This is
evidenced in the Comprehensive Annual Financial Reports ("CAFR") prepared and approved by each ofthose cities. Similarly, as detailed in the response to Recommendation II-A, the Town
contracts for annual independent financial audits that include extra examinations of financial transactions such as the verification of accounts and expenditures, and special audits
as directed by the Town Manager, Town Council, Redevelopment Agency Board, and the Financial Committee ofthe Town Council. Recommendation III Municipalities in the County without auditing
programs should consider using local external auditors such as the City Auditor, via a contract, or the County's external auditor to perform audits ifan internal auditor is not cost-effective.
Response to Recommendation III This recommendation is not warranted. As detailed in the response to Recommendation II-A, the Town contracts for annual independent financial audits and
performance audits. fudependent audits performed by outside contractors are commonly used by by smaller public agencies as a substitute for less cost effective internal auditors. The
Grand Jury report fails to demonstrate that outside audits performed under contract with the City Auditor or the County's external auditor would be any more efficient, effective or thrifty
than are the audits currently performed by independent auditors under contract with the Town.