10 Staff Report - 2003-04 Annual Financial Report~owN of MEETING DATE: 03/07/05
ITEM NO. 0
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SOSN"~°~ COUNCIL/AGENCY AGENDA REPORT
DATE: FEBRUARY 18, 2005
TO: MAYOR AND TOWN COUNCIL/REDEVELOPMENT CHAIR AND
MEMBERS OF THE REDEVELOPMENT AGENCY
FROM: TOWN MANAGEWEXECUTIVE DIRECTOR'
SUBJECT: ACCEPT THE 2003-04 COMPREHENSIVE ANNUAL FINANCIAL REPORT
(CAFR) AND MANAGEMENT LETTER
RECOMMENDATION:
Upon review bythe Town Council's Finance Committee, accept the 2003-04 Comprehensive Annual
Financial Report (CAFR) and Management Letter.
BACKGROUND:
This CA-FR 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, 2004. The 2004 CAFR received an unqualified opinion from C.G. Uhlenberg LLP, the
Town's external auditors. An unqualified opinion indicates the financial data of the Town is fairly
presented according to general accounting principles. Additionally, C.G. Uhlenberg LLP issued a
Managment Letter 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:
C.G. Uhlenberg LLP, 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.
PREPARED BY: STEPHEN D. CONWAY
Finance and Administrati Services D.~ 'etor
n:Afinance\CAFR\CAFR Agenda Items\FY04 CAFR
Reviewed by:
Attorney Finance
Asst. Town Mgr Revised: 3/3/05 5:32 pm
Rdonmatted: 10/23/95
PAGE 2
MAYOR AND TOWN COUNCIL
SUBJECT: 2003-04 COMPREHENSIVE ANNUAL FINANCIAL REPORT.
March 07, 2005
Staff and Town's auditors, C.G. Uhlenberg LLP, met with the Council's Finance Committee on
Monday, February 28th, 2005 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, 2004
received an unqualified or "clean" opinion for the year, meaning the financial statements are fairly
presented and contain no material misstatements. In addition, C.G. Uhlenberg LLP reviewed the
Management Letter with the Town staff and the Council's Finance Committee. One current year
finding was reviewed with the Committee and staff explained its response to the auditor's comments.
The audit Management Letter 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 ten years. This report
is the Town's second CAFR prepared under the new reporting format required by the Governmental
Accounting Standards Board (GASB) Statement #34.
CONCLUSION:
As noted in the auditor's opinion, the CAFR fairly presents the fiscal year ending June 30, 2004
financial activity for the Town of Los Gatos and Redevelopment Agency. The Town's Finance
Committee, having reviewed the CAFR and audit Management Letter with the Town's external
auditors and Town staff, recommends their acceptance for the year ended June 30, 2004.
ENVIRONMENTAL ASSESSMENTS:
Is not a project defined under CEQA, and no further action is required.
DISTRIBUTION:
CAFR's and audit Management Letter are available in the Clerk Department, and on file in the
library.
ATTACHMENT:
(1) Audit Management Letter
(2) CAFR
TOWN OF LOS GATOS
MANAGEMENT LETTER
FOR THE FISCAL YEAR
ENDED JUNE 30, 2004
Submitted by:
%l_ C. G. UHLENBERG LLP
Certified Public Accountants
333 Twin Dolphin Rd., Ste. 230
Redwood Town, CA 94065
Phone: (650) 802-8668
Fax: (650) 802-0866
Contact: Jeffrey J. Ira
February 2, 2005
ATTACHMENT I
C. G. U LEEG LL
CERTIFIED PUBLIC ACCOUNTANTS
ROBERT E. BARSANTI (RETIRED) • PEGGY H. CHEN, C.P.A. . JEFFREY J. IRA, C.P.A.. KATHERINE CHAO, C.P.A. - JULIE LIN, C.P.A.
February 2, 2005
The Honorable Mayor
Town of Los Gatos, California
We have audited the basic financial statements of the Town of Los Gatos California (the Town),
as of and for the year ended June 30, 2004, and have issued our reports thereon dated November
11, 2004.
In planning and performing our audit of the basic financial statements of the Town, we
considered internal control in order to determine our auditing procedures for the purpose of
expressing our opinion on the basic financial statements and not to provide assurance of internal
control. As part of our audit, we made a study and evaluation of internal controls, including
applicable internal administrative controls used in administering federal award programs, to the
extent we considered necessary to evaluate such controls as required by auditing standards
generally accepted in the United States of America; Government Auditing Standards, issued by
the Comptroller General of the United States; and Office of Management and Budget Circular A-
133, Audits of States, Local Governments and Non-Profit Organizations.
A description of the responsibility of the management for establishing and maintaining the
internal control structure, and of the objective of inherent limitations in such a structure, is set
forth in the attached Appendix 1, and should be read in conjunction with this report.
We did not note any matters involving the internal control and its operation that we consider to
be reportable conditions. Reportable conditions involve matters coming to our attention relating
to significant deficiencies in the design or operation of the internal control over financial
reporting and compliance that, in our judgment, could adversely affect the Town's ability to
record, process, summarize and report financial data consistent with the assertions of
management in the financial statements.
A material weakness is a reportable condition in which the design or operation of the specific
internal control structure elements does not reduce to a relatively low level the risk that errors or
irregularities in amounts that would be material, in relation to the basic financial statements
being audited, may occur and not be detected within a timely period by employees in the normal
course of performing their assigned functions.
We did not note any matters involving the internal control structure and its operations that we
consider to be material weaknesses as defined above. The following comments present our
findings with suggested solutions for your consideration and possible implementation. These
comments and recommendations, all of which have been discussed with the appropriate
C. G. U LEEG LL
CERTIFIED PUBLIC ACCOUNTANTS
ROBERT E. BARSANTI (RETIRED) • PEGGY H. CHEN, C.P.A. • JEFFREY J. IRA, C.P.A. • KATHERINE CHAO, C.P.A. • JULIE LIN, C.P.A.
members of management, are intended to improve internal control or result in other operation
efficiencies.
Our comments contained herein are based solely on observations made during our audit of the
Town's 2003-2004 basic financial statements and, accordingly, are not based on the results of
any special studies designed to report on these matters. Accordingly, additional information and
study may be required before acting on our suggestions.
This letter is intended solely for the information and use of management, the Mayor, and Town
Council and should not be used for any other purpose. However, this restriction is not intended
to limit the distribution of this letter, which is a matter of public record.
We would be pleased to discuss these matters in greater detail at your convenience.
Very truly yours,
C. G. UHLENBERG LLP
d"j, 01--- L6F
CURRENT YEAR FINDINGS
AND RECOMMENDATIONS
TOWN OF LOS GATOS
CURRENT YEAR FINDINGS AND RECOMMENDATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
CREDIT CARD CONTROL AND POLICY
Findinp, 04-1 - From a sample of twenty employees with assigned credit cards we noted the
following areas of control over credit card handling that the Town may want to consider for
further review:
1. Supervisor signatures on credit card requests forms. We noted inconsistencies in the
approval of the request forms when transferring between departments and when issuing new
cards.
2. The list of cardholders by position in the credit card handbook. We noted two cardholder
positions were not included in the list kept in the handbook.
3. The list of employees with credit cards. We noted four tenninated employees that were still
on list of current cardholders.
Recommendations - We recommend the following for each of the above points:
1. We recommend that the Town adhere more diligently to the policy of having the director of
finance and the department managers approve the credit card request forms before they are
sent to the town manager for approval. This should include the approval of new credit card
requests and transfers between departments.
Town Response - The Town agrees with this recommendation. Town staff will be reminded
that all required signatures or substitute authorized signatures must be obtained before new
credit cards are issued or inter-departmentally transferred to Town staff.
2. We recommend that the Town review the list of cardholders by position annually to ensure
the list is current.
Town Response - The Town agrees with this recommendation. The Finance Department will
initiate a procedure this fiscal year to include a Town-wide review of the list of current
cardholders to ensure the list is current and valid.
3. We recommend the Town adhere more diligently to their policy requiring cardholders to
return the cards when their employment ends and that the list of cardholders be reviewed
more routinely for terminated employees still on the list.
Town Response - The Town agrees with this recommendation. The Town Manager's office
will coordinate with its Human Resources function to ensure termination procedures include
the return of all Town property, including credit cards. It should be emphasized that current
procedures do provide for canceling the card upon termination, whether or not the card is
actually returned to the Town for destruction or not.
PRIOR YEAR FINDINGS
AND RECOMMENDATIONS
TOWN OF LOS GATOS
PRIOR YEAR FINDINGS AND RECOMMENDATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
CASH AND INVESTMENTS
Treasurer's Report - The California Government Code §53646 requires that the Town Treasurer
submit a quarterly investment report to the Town Council within 30 days following the end of
the quarter covered by the report. The Town Treasurer has elected to submit these reports on a
monthly basis, which is allowed by the California Government Code. We have noted, however,
that the December 31, 2002, March 31, 2003, and June 30, 2003 reports were not submitted
within the required timeframe.
Town Response - The Town Treasurer agrees to the finding. The Treasurer believes she can
meet the submitted requirement date of 30 days after month end by considering the date the
report is submitted to the Town's Agenda review process as the "date submitted". Workload and
timely receipt of bank statements, have occasionally led to delays in the Treasurer meeting this
deadline, but she informs staff that she has taken steps to meet the deadline submission dates.
Status - Implemented
Timely Reconciliations of Bank Accounts - We noted that the December 2001 and March 2002
bank statements were not reconciled in a timely manner. As we recommended to the Town
Treasurer last year, bank reconciliations must be completed within 30 days of receipt of the bank
statements. After 30 days, the financial institutions have the discretion of holding the Town
responsible for any bank errors.
Town Response - The Town agrees with this recommendation. The Treasurer and staff will
work to develop a calendaring memorandum or other automated system where positive
confirmation that the Treasurer reconciliation has taken place will be confirmed by a designated
Finance staff person.
Status - Implemented
Check Stock Safety Features and Positive Pay - Currently, the only safety feature on the
Town's check stock is a watennark. First, and foremost, we once again recommend that the
Town consider utilizing the Positive Pay system offered by most commercial banks, whereby the
bank can only cash checks that are listed on the Town's check register. Until the Town is ready
to do this, we recommend that the next time checks are ordered, other safety features are added,
such as a "void clause," laser ink printing, etc.
Town Response - The Town agrees that fraud prevention is very important. The Town has
contacted a vendor who we will put in touch with our financial system vendor (Pentamation) to
see if positive pay has a potential for being implemented in the Town's system.
Status - Because of certain limitations of the Town's current financial system and compatible
technologies, positive pay has yet to be implemented. Implementation may wait to be scheduled
as part of a finance system upgrade.
TOWN OF LOS GATOS
PRIOR YEAR FINDINGS AND RECOMMENDATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
Petty Cash Funds - Surprise Counts - We understand a surprise petty cash fund count has not
been performed since December of 2001. We recommend these be done at least quarterly.
Town Response - The Town agrees that surprise counts of petty cash were delayed due to
workload issues. This is an important internal control procedure. We are pleased to announce
that a surprise count was performed in September 2003 and is now scheduled for quarterly
preparation by the Town Accountant. We do believe because of the relatively small size of our
total petty cash (8 petty cash accounts totaling $2,400 for all accounts), a quarterly surprise count
may be too frequent to support a cost vs. benefit analysis. We believe perhaps three surprise
counts a year should be considered as an alternative.
Status - Implemented. The Town has performed two comprehensive surprise petty cash counts
in FY 2004/05 and additional counts are expected to be performed before year end.
FORMAL PURCHASING POLICY
The purchasing policy that the Town currently follows was issued in 1997. We recommend it be
reviewed and updated to provide strict guidelines on current day issues such as petty cash, travel
reimbursements, credit card purchases and the amount for which a formal purchase order is
required. It should also designate those individuals that are authorized to have a Town credit
card and who can approve purchases. Once these policies are established, the rules and
guidelines must be enforced.
Town Response - The Town agrees. An update to the Town's purchasing policies is listed as
item #3 in the Finance divisions Work Plan approved for FY 2004/05.
Status - In progress.
CAPITAL ASSETS
Although the Town maintains a detailed listing of capital assets, a physical inventory of these
fixed assets has not been completed in several years. We recommend that the Town complete a
physical inventory and update its listing of capital assets and related accumulated depreciation.
Town Response - The comment is correct as of the period ending June 30, 2003. However, the
Town is pleased to report that a Town-wide inventory of capital assets was completed by staff in
September 2003.
Status - Implemented.
TOWN OF LOS GATOS
MANAGEMENT'S RESPONSIBILITY FOR, AND THE OBJECTIVES AND
LIMITATIONS OF, THE INTERNAL CONTROL STRUCTURE
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
The following comments concerning management's responsibility for the internal control
structure and the objectives of, and the inherent limitations in, the internal control structure are
adapted from the Statements on Auditing Standards of the American Institute of Certified Public
Accountants.
Management's Responsibility
Management is responsible for establishing and maintaining an internal control structure. In
fulfilling this responsibility, estimates and judgments by management are required to assess the
expected benefit and related costs of the internal control structure policies and procedures.
Objectives
The objectives of an internal control structure are to provide management with reasonable, but
not absolute, assurance that assets are safeguarded against loss from unauthorized use or
disposition, and that transactions are executed in accordance with management's authorization
and recorded properly to permit the preparation of basic financial statements in accordance with
accounting principles generally accepted in the United States of America.
Limitation
Because of inherent limitations in any internal control structure, errors or irregularities may
occur and not be detected. Also, projection of an evaluation of the structure to future periods is
subject to the risk that procedures may become inadequate because of changes in conditions or
that the effectiveness of the design and operation of policies and procedures may deteriorate.
APPENDIX
ATTACHMENT 2
Comprehensive Annual Financial Report (CAFR)
COPY AVAILABLE IN THE
TOWN CLERK'S OFFICE FOR REVIEW