HomeMy WebLinkAboutMINUTES - 02051991 - 1.81 -081 A4
TO: BOARD OF SUPERVISORS yF L Contra
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FROM: l•Y ... f �.' Costa
Phil Batchelor, County Administrators
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County
DATE: •+�*��;vc'�
February 5, 1991
SUBJECT:
Grand Jury Audit Management Letter
SPECIFIC REQUEST(S)OR RECOMMENDATION(S)&BACKGROUND AND JUSTIFICATION
RECONIlIENDATIONS
ACCEPT the KPMG Peat Marwick Management Letter resulting from the
audit of the County financial statements for the year ended June
30, 1990 and DIRECT the appropriate department heads to respond
to the County Administrator on the comments and recommendations
contained therein.
BACKGROUND:
KPMG Peat Marwick under agreement with the Grand Jury and the
Board of Supervisors audited the financial statements of the
County for the fiscal year ended June 30 , 1990 and issued their
report thereon dated November 21, 1990.
During the audit KPMG Peat Marwick noted certain matters
involving the internal control structure and other operational
matters and presented them in a January 15, 1991 letter to the
Board and the Grand Jury. The comments and recommendations, all
of which have been discussed with appropriate department
representatives, are intended to improve the internal control
structure or result in other operational efficiencies.
On January 24, 1991 , Mr. Lou Miramontes; Partner, KPMG Peat
Marwick, reviewed the comments . and recommendations of the letter
with the Grand Jury Audit Committee and County Administrator' s
office representatives.
1
CONTINUED ON ATTACHMENT: RYES SIGNATURE:
RECOMMENDATION OF COUNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITT
APPROVE OTHER
SIGNATURE(S):
ACTION OF BOARD ON FEB 5 IN! APPROVED AS RECOMMENDED OTHER
VOTE OF SUPERVISORS
I HEREBY CERTIFY THAT THIS IS A TRUE
X UNANIMOUS(ABSENT ) AND CORRECT COPY OF AN ACTION TAKEN
AYES: NOES: AND ENTERED ON THE MINUTES OF THE BOARD
ABSENT: ABSTAIN: OF SUPERVISORS ON THE DATE SHOWN.
FEB 5 V91-
ATTESTED
PHIL BATCHELOR,CLERK OF THE BOARD OF
SUPERVISORS AND COUNTY ADMINISTRATOR
M382 (10/88)
BY eaa 'DEPUTY
-2-
We recommend that the Management Letter be distributed to the
departments about which comments or recommendations were made and
request, that the. department head respond to the County
Administrator on those remarks.
Orig. Dept. : County Administrator
cc: Grand Jury
Auditor-Controller
County Counsel
Health Services Director
Retirement
KlPMG� Peat Marwick
Certified Public Accountants
2121 No.California Blvd., Suite 840 Telephone 415 943-1555 Telecopier 415 946-0371
Walnut Creek,CA 94596-3572
January 15, 1991
The Honorable Grand Jury
The Honorable Board of Supervisors
County of Contra Costa, California
We have audited the financial statements of the County of Contra Costa, as of and for the
year ended June 30, 1990, and have issued our report thereon dated November 21, 1990.
In planning and performing our audit of the financial statements of the County of Contra
Costa , we considered its internal control structure in order to determine our auditing
procedures for the purpose of expressing our opinion on the financial statements and not to
provide assurance on the internal control structure. We have not considered the internal
control structure since the date of our report.
During our audit we noted certain matters involving the internal control structure and other
operational matters that are presented for your consideration. These comments and
recommendations, all of which have been discussed with the appropriate members of
management, are intended to improve the internal control structure or result in other
operating efficiencies and are summarized as follows:
BUDGETARY PROCESS
The County budgetary process is dependent upon many factors, including the condition of
the economy, the ability of State and Federal governments to provide funds, and the
County's ability to contain costs. Economists indicate that there is potential for a recession
which would impact property values and business operations, in turn impacting the
County's collection of revenues. Because both the State and Federal governments are in
deficit positions, they may continue to eliminate and reduce the funding of programs,many
of which will impact the County. In order to cope with these external forces which will
limit future revenues, the County should monitor the impact these factors have on its
operations. We encourage the County to continue its short and long range planning and
budgeting process which is directed at addressing these observed conditions.
ITIT
San Francisco Bay Area Practice
Mr:mber Firm of
Klynvelo Pant Marwick Goerdeler San Francisco Oakland Palo Alto Walnut Creek
The Honorable Grand Jury
The Honorable Board of Supervisors
January 15, 1991
Page 2
FUNDING OF SELF INSURANCE RESERVES
The county is self insured for various workers compensation, medical malpractice and
general liability claims. During the past several years, the County has provided for
substantial costs in connection with its self insurance programs and as of June 30, 1990
one of its self insurance funds, the Public Liability Insurance fund, has a deficit balance.
This will require the county to budget for self insurance payments over the next several
years.
We understand that the Risk Management department has established a one year cash flow
forecast (payment stream) for the self insurance programs. We recommend that the cash
flow forecast be expanded to three years. The forecast will provide for the timely
monitoring of cash available for ongoing operations as well as better awareness of short
and long term financing needs. The Risk Management department should use this data to
determine if anticipated revenues, primarily premiums charged to other County
departments, are adequate to fund anticipated claims.
ACCOUNTING PERSONNEL
During the 1990-91 fiscal year, the County will receive a new Auditor/Controller. In
addition,other key positions within the finance department,which have not changed in the
past several years,will be filled. This situation represents an opportunity for the County to
evaluate its accounting function and determine if it is properly structured to support
operations for the next several years.
We recommend that the Auditor/Controller's department thoroughly evaluate its accounting
function. Areas which should be considered for analysis include the following:
• Structure
• Reporting Lines
• Personnel
The 1990's will bring new and complex issues to governments requiring the County
consider these matters when selecting new personnel to fill key positions.
The Honorable Grand Jury
The Honorable Board of Supervisors
January 15, 1991
Page 3
INTERNAL AUDIT
Role of Internal Audit
At present, the Internal Audit department is primarily concerned with the role of ensuring
that functions of the County are in compliance with established policy guidelines. We
recommend that the role of the department be expanded to include the following:
• Operational analysis
• Management Development
The Internal Audit department is in a unique position to analyze departments and agencies
to make recommendations for the improvement of the operations. Internal Audit should
analyze these functions and provide recommendations for operational changes in
departments to improve both effectiveness and efficiency. As budget constraints continue
to restrict the growth of the departments, it becomes increasingly important to identify
methods of improving department performance within the resources available.
Due to the exposure and training received by the internal auditors, the department would
provide an excellent training ground for County middle management positions. At present,
the Internal Audit department is staffed primarily with career internal auditors.
We also recommend that the department be used as a vehicle through which new County
managers are employed for a period of 2 to 3 years before moving to operational positions
within the various departments. Implementation of this policy would provide a wide
exposure to the County operations resulting in more effective and meaningful internal
audits and the improvement in the general level of experience of County managers.
Reporting lines
Presently,the Chief of the Auditing Division reports directly to the Auditor/Controller. The
internal audit function is designed to provide a review of County operations independent of
the financial and operating functions of the County. Reporting directly to the
Auditor/Controller may impede the independence of the department and could reduce the
effectiveness of the function.
We recommend that the Chief of the Auditing Division have access to and periodically meet
directly with representatives of the Board of Supervisors. Access to the Board of
Supervisors will ensure that the internal audit function remains independent of the
controller's department.
The Honorable Grand Jury
The Honorable Board of Supervisors
January 15, 1991
Page 4
Audi
The present internal audit plan provides for the completion of multiple audits during a fiscal
year. This plan allows the internal auditors to interact with several departments. However,
due to the quantity of audits conducted during the year, the audits may not be
comprehensive enough to provide the County with maximum benefit from the performance
of internal audit procedures.
We recommend that the number of audits performed by the internal audit department be
reduced and that the scope of work performed in each audit be expanded accordingly. This
change would allow the internal audit department to perform in-depth reviews of
procedures and systems within operating departments which should allow them to identify
recommendations for departments to operate more efficiently.
RETIREMENT SYSTEM
Custodial Account
The Retirement System has transferred custodianship of its stock and bond investments
from First Interstate Bank to Banker's Trust. A residual amount of cash remains with First
Interstate Bank. As noted in the previous year's audit, the Retirement System's records
indicate an.amount approximately $300,000 in excess of the amount confirmed by the
bank. The Treasurer, Retirement Office and Internal Audit had been aware of and actively
involved in researching the discrepancy.
We understand that a reconciliation was subsequently completed and the financial
statements adjusted.
General Ledger Accounts
We noted that supporting documentation and schedules prepared by the Retirement System
for several accounts did not agree to the County General Ledger. Upon our request, such
accounts were reconciled by personnel of the Retirement System
Reconciliations between the Retirement System's records and the County's general ledger
should be performed at year end in connection with the preparation of the general purpose
financial statements. The reconciliations should be prepared in a standardized format, with
all reconciling items fully resolved and documented. Furthermore, County accounting
personnel should take a more active role in ensuring that differences identified during the
reconciliations be resolved on a timely basis.
Timely and accurate reconciliations will increase accounting control over the Retirement
System's investment accounts by the County.
The Honorable Grand Jury
The Honorable Board of Supervisors
January 15, 1991
Page 5
EDP SYSTEM
Annual Einancial Statements
The County's EDP system accounts for and organizes the General Ledger in a manner that
is not consistent with the financial statement format. Preparation of general purpose
financial statements and supporting schedules from the General Ledger is performed
manually by County personnel. This process is time consuming and can be more
efficiently expedited through the use of an EDP application.
We recommend that the County develop an EDP application which converts the General
Ledger into a format consistent with the general purpose financial statements and prepares
supporting schedules. Such application should provide a trail which is traceable from the
General Ledger to the financial statements.
Development of this application will reduce the amount of time required County personnel
in preparing the annual financial statements.
Payroll system
We noted recurring errors occurring when payroll advances are posted. Advances made
for payroll are incorrectly posted to accounts payable rather than to accounts receivable. As
a result, a manual entry to correct that error must be made by General Accounting.
We recommend that the County modify its computer program to prevent the occurrence of
this error in the future. Correction of this programming error will reduce unnecessary time
spent by County personnel to manually correct the error.
GENERAL ACCOUNTING
Revenue accrual
Each department in the County is responsible for determining the amount of revenue that
should be accrued at year end. However, there is not a formal policy established which
establishes the criteria or procedures to be used by departments when recording receivables
nor is there a centralized review of the balances reported
We recommend that the Auditor/Controller's department develop and provide standardized
guidelines to the various departments and districts for the proper reporting of accrued
revenues. These guidelines should emphasize the importance of recording receivables that
are considered collectible and meet the requirements of governmental accounting principles.
Revenue accruals should be reviewed by an individual at the Auditor/Controller's office to
verify accuracy and propriety. Implementation of a policy will ensure that the reporting of
revenue accruals is uniform and enhance the accuracy and reliability of the financial
information obtained.
The Honorable Grand Jury
The Honorable Board of Supervisors
January 15, 1991
Page 6
Accounting for sick leave
Effective January 1, 1990, a sick leave incentive plan was implemented for management
employees. The program was initiated as an incentive for management employees to
safeguard sick leave accruals as protection against wage loss due to time lost for injury or
illness. Payment of the accrued amount for eligible employees is payable only if the
employee terminates employment prior to retirement. As of June 30, 1990, the maximum
potential liability was approximately$2.7 million. As the plan was implemented during the
1990 fiscal year, no statistics are available as to how many of these eligible employees
terminate their employment in any given year. This information would provide a
reasonable approximation of the actual liability to be accrued.
We recommend that a study be performed to determine the average number of management
employees who terminate their employment prior to retirement.This will allow the County
to provide an accrual for the potential sick leave payments during each fiscal year.
Outstanding checks
Checks amounting to approximately $5000 in the County's Workers' Compensation
Account(Wells Fargo)which were over six months outstanding had not been cancelled
We recommend that the County monitor outstanding checks on a regular basis. This will
allow the County to put to productive use cash made available upon cancellation of stale
dated checks.
STATEMENT OF CASH FLOWS
The Governmental Accounting Standards Board recently released GASB Statement No. 9,
"Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental
Entities That Use Proprietary Fund Accounting". This statement requires the County to
present a Statement of Cash Flows for proprietary and nonexpendable trust funds,
replacing the Statement of Changes in Financial Position as a basic financial statement. The
Statement is effective for fiscal periods beginning after December 15, 1989. The County
will need to implement this statement for the 1990-91 CAFR.
The Honorable Grand Jury
The Honorable Board of Supervisors
January 15, 1991
Page 7
MERRITHEW MEMORIAL HOSPITAL
Accounts Receivable
Currently,the Hospital records contractual allowances associated with services rendered to
the County HMO as bad debt allowance. The Hospital bills the County HMO services
rendered at approximately 85% of established rates. The difference between revenue at
established rates and amounts realizable from the third-party payors under contractual
agreements is a contractual allowance.
We recommend that the Hospital record the discount given to the County HMO as a
contractual allowance. The segregation of bad debt and contractual allowances will result
in more accurate accounts receivable information available to management. This procedure
will help management monitor accounts receivable and collection efforts.
Charity Care
Pursuant to the audit and accounting guide "Audits of Providers of Health Care Services",
recently issued by the American Institute of Certified Public Accountants (AICPA), new
requirements for accounting and reporting charity care have been developed. This change
is based in part on the increasing demand of governmental agencies to quantify the level of
charity care provided in some way other than through gross charges. Under the new guide
charges and accounts receivable will be disclosed in memorandum only. This is based on
Financial Statements Accounting Standards (FASB) Concepts Statement No. 6 which
states that revenues represent actual or expected cash flows. FASB has concluded that no
expectation of cash inflow exists for charity care. Implementation of the new guidelines is
required for fiscal years beginning on or after July 15, 1990 (i.e., fiscal year end 1992 for
the Hospital) and requires restatement of all previous years presented. We recommend that
the Hospital begin implementation of these provisions for the fiscal year ended June 30,
1991,in order to ensure that comparative data is available when implemented in 1992.
State of California Proposition 99, the Tobacco Tax Initiative, established funds to be
available for health care services for indigent persons and others who are unable to pay for
health care services. Effective July 1991, to qualify for Proposition 99 funds, the Hospital
will be required to maintain documentation substantiating the existence of all charity cases,
including substantial demographic documentation on the patient,verification the the patient
meets the minimum poverty levels, and proof that the patient is unable (not unwilling) to
pay for services. Determination of the Hospital's allocation of Proposition 99 funds is
dependent on the amount reported for charity care. Charity care reimbursement is
considered at 100% whereas bad debts are considered at 50%of this allocation. Adherence
to these requirements is further mandated by the Hospital's susceptibility to compliance
audits by the state and county government agencies.
The Honorable Grand Jury
The Honorable Board of Supervisors
January 15, 1991
Page 8
The Hospital currently maintains a policy for charity guidelines which addresses eligibility
criteria and determination of poverty levels. We recommend that management review these
policies for compliance with AICPA and Proposition 99 requirements and take corrective
action when necessary. Additionally, we suggest that management advise the relevant
Hospital employees of the importance of properly identifying and documenting charity
care.
* * * * * * * * * * *
This report is intended solely for the information and use of the Grand Jury, the Board of
Supervisors, County management, and others within the County.
We wish to express our appreciation for the courtesy and assistance extended to us by the
personnel of the County during the course of our audit.
Very truly yours,