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10 Staff Report - 2003-04 Annual Financial Report~owN of MEETING DATE: 03/07/05 ITEM NO. 0 y,Fk y Y4 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