15 Staff Report - 2004/05 Annual Financial Report°wN of MEETING DATE: 01/17/06
ITEM NO.
SOS Gay°S COUNCIL/AGENCY AGENDA REPORT
DATE: JANUARY 17, 2006
TO: MAYOR AND TOWN COUNCIL/REDEVELOPMENT CHAIR AND
MEMBERS OF THE REDEVELOPMENT AGENCY
112
FROM: TOWN MANAGER/EXECUTIVE DIRECTOR
SUBJECT: ACCEPT THE 2004/05 COMPREHENSIVE ANNUAL FINANCIAL REPORT
(CAFR) AND MANAGEMENT LETTER
RECOMMENDATION:
Accept the 2004/05 Comprehensive Annual Financial Report (CAFR) and Management Letter.
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, 2005. The 2005 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 Management Letter 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:
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.
Staff and Town's auditors, C.G. Uhlenberg LLP, met with the Council's Finance Committee on
Monday, January 9th, 2006 for an in-depth review of this year's reports to the Finance Committee.
PREPARED BY: STEPHEN D. CONWAY
Finance and Administrative Services Director
n:\finance\CAFR
Reviewed by:
Items\FY04 CAFR
Town Mgr Revised: 1/12/06 2:48 pm
Reformatted: 10/23/95
PAGE 2
MAYOR AND TOWN COUNCIL
SUBJECT: 2004-05 COMPREHENSIVE ANNUAL FINANCIAL REPORT.
January 17, 2006
The Committee was advised by staff that the audited statements for the year ended June 30, 2005
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 third 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, 2005
financial activity for the Town of Los Gatos and Redevelopment Agency. After reviewing the
financial documents with the Town's external auditors and Town staff, the Committee recommends
that the Council accept the CAFR and audit Management Letter for year ending June 30, 2005.
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) CAFR
(2) Audit Management Letter
ATTACHMENT 1
COPY OF THE COMPREHENSIVE ANNUAL FINANCIAL
REPORT IS AVAILABLE FOR REVIEW IN THE CLERK
DEPARTMENT
TOWN OF LOS GATOS
MANAGEMENT LETTER
FOR THE FISCAL YEAR
ENDED JUNE 30, 2005
Submitted by:
('nr 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
September 23, 2005
ATTACHMENT 2
January 3, 2006
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, 2005, and have issued our reports thereon dated
September 23, 2005.
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
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 2004-2005 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
By
Jeffrey J. Ira
JJI/sc
CURRENT YEAR FINDINGS
AND RECOMMENDATIONS
TOWN OF LOS GATOS
CURRENT YEAR FINDINGS AND RECOMMENDATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 2005
FORMAL PURCHASING POLICY
Finding 05-01- The purchasing policy that the Town currently follows was issued in 1997.
Recommendation - This is a repeat recommendation from previous audits. We recommend the
purchasing policy 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 and staff training should be provided.
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. Staff anticipates
incorporating the updates as part of a proposed comprehensive Financial Systems Upgrade
planned to begin in FY 2006/07.
Status - In progress.
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PRIOR YEAR FINDINGS
AND RECOMMENDATIONS
TOWN OF LOS GATOS
PRIOR YEAR FINDINGS AND RECOMMENDATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 2005
CREDIT CARD CONTROL AND POLICY
Finding 04-01 - 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:
L 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 terminated 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.
Status - The Town has fully implemented this recommendation.
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.
Statics - The Town has fully implemented this recommendation. The Town continues to
monitor and update the cardholder list on an ongoing basis.
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.
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TOWN OF LOS GATOS
PRIOR YEAR FINDINGS AND RECOMMENDATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 2005
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.
Status - Fully Implemented. Procedures are in place to immediately cancel the cardholder's
card upon notification of termination received by Finance staff from the Town's Human
Resources staff.
CASH AND INVESTMENTS
Finding 03701 - Check Stock Safety Features and Positive Pay - Currently, the only safety
feature on, the Town's check stock is a watermark. 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 - Upon expiration of the current remaining check stock, staff intends to order new check
stock with the suggested additional safety features. Staff believes that Positive Pay will be a
feature that can be implemented with the proposed financial system upgrade project which is
anticipated to begin in FY 2006/07.
8
r-
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, 2005
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
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