DATE: January 19, 2016
TO: Mayor and City Council
FROM: Director of Finance
SUBJECT
Title
Transmittal of the Comprehensive Annual Financial Report for the Year Ended June 30, 2015; and of the Memorandum on Internal Control and Required Communications
End
RECOMMENDATION
Recommendation
That the Council adopts the attached Resolution (Attachment I) to receive and file the City’s Comprehensive Annual Financial Report (CAFR) and the Memorandum on Internal Control and Required Communications for the fiscal year ended June 30, 2015.
Body
BACKGROUND
The City’s independent external auditor, Maze and Associates, has completed its audit of the City’s financial records for the fiscal year ended June 30, 2015. Maze was selected as the City’s independent external audit firm in early 2011 after a thorough proposal review process. Fiscal year 2015 marks year five of a five-year contract. Maze and Associates has over twenty-eight years of municipal auditing experience with more than 200 government agencies. In addition to the audited financial statements, the auditors have completed and provided the required Memorandum on Internal Control and Required Communications (Attachment II). The City’s Comprehensive Annual Financial Report (CAFR) (Attachment III) represents all funds of the City, including the General Fund, Water, Sewer, Airport, and all other enterprise and special revenue funds.
Auditing standards require auditors to formally communicate the results directly to the agency’s governing body. The purpose being to establish direct and effective two-way communication with the Council and staff, to convey audit matters, the scope of work, difficulties, adjustments to financial statements, or any possible disagreements with management.
DISCUSSION
Comprehensive Annual Financial Report - Staff is pleased to report that, as in previous years, the auditor’s opinion on the financial statements for fiscal year 2015 is without exception and is unmodified (formerly referred to as “unqualified”). That is, the auditor’s report is not restricted (modified) in any manner, nor does it take exception with any of the information contained in the City’s financial statements. While a modification (known before as a qualification) or exception is not necessarily detrimental, the ability to report that the City’s financial statements continue to earn a “clean opinion” is a positive statement about the City’s financial management and oversight.
Staff has submitted the fiscal year 2015 CAFR to the Government Finance Officers Association (GFOA) award program, which is a prestigious national award recognizing conformance with the highest standards for preparation of local government financial reports. The City of Hayward has received this award for the last twenty-eight consecutive years.
Changes to reporting for GASB 68 and 71 implementation - Pursuant to the requirements of the Governmental Accounting Standards Board (GASB), during fiscal year 2015, the City implemented GASB statement numbers 68 and 71 related to pension liability. GASB 68 requires, among other things, that state and local governments present net pension liabilities at the entity wide level for the first time, which results in a reduction of total net position of $311.7 million. The implementation of GASB 68 resulted in a restatement and reduction of beginning net position of $293.0 million to governmental activities, which includes the General Fund. Implementation of GASB 68 and the presentation of this liability on the financial statements does not impact the City’s ability to fund continuing operations.
Fiscal Year 2015 Year-end Status of the General Fund - On December 15, 2015, staff presented City Council with a preliminary year-end summary for the General Fund, General Purpose Fund (excluding amounts related to Measure C District Sales Tax) and conveyed to Council that the year ended with a negative balance of $1,593,000. For fiscal year 2015, the final net change to General Fund, General Purpose Fund (excluding amounts related to Measure C District Sales Tax) balance is a larger negative balance of $1,735,620, which will deplete the General Fund reserve by a like amount. This change resulted from the final year-end close process and now includes all fiscal year 2015 year-end adjustments.
Communication Letters from Auditors - The Required Communications letter is intended to identify any communication issues and present new accounting standards pronouncements that may affect the audit. The auditor did not report any difficulties in performing the audit or any disagreements with management.
The second letter presented to management is the Memorandum on Internal Control. This letter has two major objectives: (1) to advise the governing body or City Council of any significant deficiencies or material weaknesses in the City’s systems of internal financial controls; and (2) to communicate to the Council any opportunities for improved controls or efficiencies that the auditors noted during the course of their audit. This letter may also advise the Council of upcoming accounting regulations, which may affect the City’s financial records. Staff’s responses to the auditor’s comments and recommendations are noted in the Letter within Attachment II.
The audit identified one Significant Deficiency relating to the timely reconciliation of the City’s bank, investment and escrow accounts. As seen in the Recommendation portion of Finding 2015-01 of Attachment II, the conditions identified were resolved prior to the completion of the audit.
FY 2015 Finding
2015-01 Timeliness of Bank, Investment, and Escrow Accounts Reconciliations and Journal Entries Posting: The auditor identified that during the interim phase of their audit in June 2015, the City’s Bank, Investment & Escrow accounts had not been properly reconciled within forty-five days of receipt of account statements. Additionally, corresponding journal entries to reconcile the City’s general ledger to the account statements had not been completed.
a. The City concurs that the condition existed at the time of the interim audit. In the months between the interim and final phase of the audit, the City corrected the issue and has put processes in place to ensure that the condition is prevented from repeating in future fiscal years.
Fiscal Year 2014 Findings
As part of the audit protocol, the auditor includes findings from the previous fiscal year (fiscal year 2014) to allow for a final management response and, if cleared, to confirm that the findings are no longer valid.
The City resolved two of the four findings from fiscal year 2014 during fiscal year 2015. Findings 2014-01 (Timeliness and Accuracy of Year-End Close) and 2014-03 (Accounts Receivable and Payable Detail Reports and Reconciliation) will not require further action and will be removed from future audit transmittals. Finding 2014-02 (Accurately and Timely Reconciliations of Bank, Investment, and Escrow Accounts) remained for a portion of fiscal 2015 and is noted above as part of fiscal year 2015 (Finding 2015-01). Finding 2014-04 (Proper Recording of Capital Assets) was not removed completely as the audit revealed one exception. Although it related to immaterial amounts, measures have been taken to ensure that the condition does not remain in future fiscal years.
FISCAL IMPACT
There is no direct fiscal impact resulting from the approval of the annual audit.
PUBLIC CONTACT
On October 7, 2015, Maze & Associates presented to the Council Budget & Finance Committee and overview of the fiscal year 2015 audit process and role of the external auditor; staff presented a preliminary, unaudited fiscal year 2015 General Fund summary to the Council Budget and Finance Committee on November 4, 2015 and to City Council on December 15, 2015. Staff presented the final audit findings and the CAFR to the Council Budget & Finance Committee on January 11, 2016.
Prepared by: Tracy Vesely, Director of Finance and Dustin Claussen, Deputy Director of Finance
Staff contact
Recommended by: Tracy Vesely, Director of Finance
end
Approved by:
Fran David, City Manager
Attachments:
Attachment I Resolution
Attachment II Memorandum of Internal Control and Required Communications
Attachment III Comprehensive Annual Financial Report (CAFR) located on the
City website <http://www.hayward-ca.gov/CITY-GOVERNMENT/DEPARTMENTS/FINANCE/documents/2015/FY2015_Hayward_CAFR.pdf>