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City Council Report

City Council Regular Meeting: July 28, 2015

Agenda Item: 11-A

To:          Mayor and City Council

From:      Elaine Polachek, Asst. City Manager, City Manager's Office, Administration

Subject:   Establishment of an Audit Subcommittee

 

Recommended Action

Staff recommends that the City Council:

1)  Adopt the attached amended resolution of the City of Santa Monica establishing an audit subcommittee; and

2)  Appoint Council members to serve on the Audit Subcommittee.

 

Executive Summary

Following the City’s FY 2014-15 internal controls assessment, Council recommended establishing an audit subcommittee in accordance with best practices in financial management.  Staff proposed a recommended structure for the Audit Subcommittee on July 14, and has returned with a modified structure based on Council’s request.  The modified Subcommittee structure includes two community members who are financial experts and who would serve alongside the three proposed Council member positions.  Additionally, staff has responded to some questions raised by Council on the ability for the Subcommittee to directly retain, compensate, and manage the work of the contracted auditors. The recommended structure and responsibilities are included in the attached amended resolution.

 

Background

On January 27, 2015, following a discussion about the audit subcommittee function, Council requested staff return with a discussion of current city auditing practices and a description of best practices in other city governments.  On March 17, 2015, staff presented this information to Council along with the results of the City’s internal controls assessment (see attachment B).  At that time, Council voted to form an audit subcommittee and requested that staff return with a proposed internal audit work plan.  On July 14, 2015, staff presented a proposed resolution establishing the structure and scope of a new Audit Subcommittee (see attachment C).  Council requested that staff return with an amended resolution that included changes to the structure and scope of the proposed Subcommittee.

 

Discussion

During Council’s discussion of item 11-A on July 14, a motion was made to establish an audit subcommittee as recommended by staff but with a number of changes to the structure and scope of the proposed subcommittee:  changes included the addition of two resident financial experts to the proposed three Council members, and a revised audit subcommittee scope that would incorporate responsibilities recommended by the Government Finance Officers Association (GFOA) in paragraph 2 of its Audit Subcommittee best practice documentation.  The following describes the steps taken by staff to respond to these requests.

 

Addition of two financial expert members who are also Santa Monica residents

Staff has modified the resolution to increase the size of the Audit Subcommittee from three Council members to three Council members and two financial experts who are also residents of Santa Monica.  Consistent with paragraph 3 of GFOA’s best practices on the establishment of audit committees, other professional auditing organizations, and the Sarbanes-Oxley Act, it is highly desirable that these financial experts have the following:

·    Knowledge of generally accepted accounting principles and financial statements, and in particular governmental accounting,

·    Experience in preparing or auditing financial statements of comparable entities (i.e., municipalities),

·    Experience in applying such principles in connection with the accounting for estimates, accruals and reserves,

·    Experience with internal accounting controls and governmental internal audit and controls,

·    At least five years of experience as a Certified Public Accountant, Certified Internal Auditor, Certified Management Accountant, or ten years of relevant experience in the areas noted above,

·    Knowledge of applicable California laws and regulations.

 

Applications for these positions will be available in the City Clerk’s Office at City Hall beginning July 29, 2015 and must be submitted to the City Clerk by 5:00 pm on August 11, 2015 to be considered.  Appointments to the Audit Subcommittee will be agendized for the August 25, 2015 Council meeting. Eligible applications will included in the Councilmembers’ agenda packets.

 

Incorporate responsibilities as described in paragraph 2 of the GFOA Audit Committee best practices documentation

The following matrix includes the components recommended by GFOA, and staff’s response on whether it will be possible to implement these responsibilities given the City’s legal structure.

 

GFOA Best Practices

City Response

 

The audit committee should be formally established by charter, enabling resolution, or other appropriate legal means

 

The Audit Subcommittee will be formally established using a resolution.

 

…made directly responsible for the appointment, compensation, retention, and oversight of the work of any independent accountants engaged for the purpose of preparing or issuing an independent audit report or performing other independent audit, review, or attest services...(and)… that all accountants thus engaged report directly to the audit committee

Consistent with both the role of the Audit Subcommittee and the City’s existing contracting policies and practices, staff suggests that the Audit Subcommittee provide guidance on selection criteria for the auditor and that staff prepare and issue an RFP.  The Audit Subcommittee would review proposals and make a recommendation to the City Manager, who would make a recommendation to the full Council for final approval.  All documents generated through the process, including the RFP, would be available for review by the Subcommittee during the process. 

 

This approach would ensure the Subcommittee’s ability to oversee the process undertaken by staff.   Additionally, it is staff’s intention that both the internal and external auditor would report on project scope and progress, as well as provide early drafts of audit reports, to the Subcommittee, thereby allowing the Subcommittee to oversee their work.

The written documentation establishing the audit committee should prescribe the scope of the committee’s responsibilities, as well as its structure, processes, and membership requirements.

This is included in the attached resolution.

The audit committee should itself periodically review such documentation, no less than once every five years, to assess its continued adequacy.

The Audit Subcommittee should review its structure at least every five years.

 

Alternatives

During Council’s discussion on July 14, Council noted the possibility of a Subcommittee comprised solely of Council members, which would have the benefit of public comments and for which staff could arrange consulting services if necessary.  This is consistent with paragraph 4 of GFOA’s best practices on the establishment of audit committees and the Sarbanes-Oxley Act. 

 

Next Steps

Staff recommends that the Council appoint the three Council members of the Audit Subcommittee at the July 28, 2015 meeting and open the application process for the two open financial expert/community member positions at that time.  Applications will be due to the City Clerk at 5:00pm on August 11, 2015 and will be considered by Council at the August 25, 2015 meeting.

 

The Brown Act requires approval of a regular meeting schedule of the Audit Subcommittee.  Staff is in the process of identifying dates and locations and will return to Council with a meeting schedule. 

 

Financial Impacts and Budget Actions

There is no immediate financial impact associated with the recommended action.  Staff has included contingency amounts in internal and external auditor contracts to cover additional technical support which may be required throughout the year.  Staff will monitor needs on an ongoing basis and return to Council with a request if additional funds are needed.

 

Prepared By:         Stephanie Manglaras, Accounting Manager

 

Approved

Forwarded to Council

 

Attachments:

A.    Resolution Establishing an Audit Committee      (TXT)

B.    March 17, 2015 Staff Report (web link)

C.    July 14, 2015 Staff Report (web link)