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HomeMy WebLinkAboutMINUTES - 02051991 - 1.81 -081 A4 TO: BOARD OF SUPERVISORS yF L Contra �..• c FROM: l•Y ... f �.' Costa Phil Batchelor, County Administrators z 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,