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HomeMy WebLinkAboutMINUTES - 03221994 - 1.98 TO: BOARD OF SUPERVISORS Contra FROM: Costa Phil Batchelor, County Administrator County �.. DATE: March 22 . 1994 c°srq count�P SUBJECT: Management Letter, 1992-1993 Audit SPECIFIC REQUEST(S)OR RECOMMENDATION(S)&BACKGROUND AND JUSTIFICATION RECOMMENDATION Receive KPMG Peat Marwick FY 1992-1993 Audit Management Letter and refer it to the County Administrator and Internal Operations Committee. BACKGROUND During the audit of the general purpose financial statements of the County for the year ended June 30,1993, KPMG Peak Marwick noted certain matters involving the internal control structure and other operational matters which .are presented in the Management Letter for consideration. These comments and recommendations are intended to improve the internal control structure or result in other operating efficiencies. CONTINUED ON ATTACHMENT: YES SIGNATURE: RECOMMENDATION OF COUNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE APPROVE OTHER SIGNATURE (S): ACTION OF BOARD ON 4a- APPROVED AS RECOMMENDED OTHER VOTE OF SUPERVISORS I HEREBY CERTIFY THAT THIS IS A TRUE 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. ATTESTED ZI Z2 Contact: Dean Lucas 646-4077 PHIL BATCHELOR,CLERK OF THE BOARD OF CC:, County Auditor-Controller SUPERVISORS AND-.COUNTY ADMINISTRATOR County Administrator Internal Operations Committee BY DEPUTY Peat Marwick Certified Public Accountants One Kaiser Plaza Telephone 510 465 4663 Telefax 510 465 4764 Oakland, CA 94612 February 28, 1994 CONFIDENTIAL The Honorable Board of Supervisors County of Contra Costa, California: We have audited the general-purpose financial statements of the County of Contra Costa for the year ended June 30, 1993, and have issued our report thereon dated November 1, 1993. In planning and performing our audit of the general-purpose 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 general-purpose 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 in the attached letter. Our audit procedures are designed primarily to enable us to form an opinion on the general-purpose financial statements and,therefore,may not bring to light all weaknesses in policies or procedures that may exist. We endeavor,however, to use our knowledge of the County's organization gained during our audit to make comments and suggestions that we hope will be useful to you. We would be pleased to discuss these comments and recommendations with you at any time. This report is intended solely for the information and use of the Board of Supervisors and management of the County of Contra Costa . Very truly yours, Pte} 20-A mow. I Enclosures Bay Area Practice Member Firm of Klynveld Peat Marwick Goerdeler San Francisco Oakland Palo Alto San Jose Walnut Creek KPMG Peat Marwick FINANCIAL REPORTING REPORTING ENTITY In June 1991, the Governmental Accounting Standards Board (GASB) issued Statement Number 14, "The Financial Reporting Entity" which establishes standards for defining and reporting on the financial reporting entity. It also establishes standards for reporting participation in joint ventures. It applies to financial reporting by primary governments, governmental joint ventures, jointly governed organizations, and other stand-alone governments as well as to separately issued financial statements of governmental component units. Additionally, this Statement should be applied to governmental and nongovernmental component units when they are included in a governmental financial reporting entity. This statement is effective for the 1993-94 fiscal year. We recommend the County review, in conjunction with GASB Statement No. 14, the various entities currently included in its reporting entity as well as related organizations that are currently excluded from the reporting entity to determine whether changes need to be made in the presentation of the fiscal 1994 financial statements. We would be glad to assist the County in its efforts to implement this new standard. POLICIES AND PROCEDURES ACCOUNTING POLICY AND PROCEDURES MANUAL As noted in our previous year's letter to management, we recommended that the County develop a comprehensive written manual to document its accounting policies and procedures. Although we noted that the County was in the process of compiling such a document, it has not yet been completed We recommend that the County continue its efforts to develop and complete this manual as discussed in our previous year's letter. FIXED ASSET CAPITALIZATION POLICY The County's policy with respect to the capitalization of equipment is that acquisitions greater than $1,000 are capitalized. For items less than $1,000, a judgment is made whether the asset will be useful for a period greater than one year. If this is the case, the asset will be capitalized. A significant amount of time appears to be spent by County personnel at both the department level and in General Accounting to determine what should be capitalized. We recommend the County modify its capitalization policy to describe in detail which assets should be capitalized at the department level. The Auditor-Controller's office should emphasize to the departments the importance of adherence to this policy. Alternatively, the County may decide that purchases under the $1000 threshold not be capitalized Such a modification would eliminate unnecessary time spent in determining whether a specific asset should be capitalized. A periodic review of the acquisition report and repairs and maintenance account by the Auditor-Controller's office or Internal Audit would facilitate compliance with the capitalization policy. - 1 - r7 K-Rnr-IM� Peat Marwick REAL ESTATE APPRAISALS The Employees' Retirement Association's (ERA) policy with respect to its separately owned real estate holdings requires property appraisals every two years. During our review of the ERA's real estate portfolio for the year ended December 31, 1992, we noted several properties that had not been re-appraised in accordance with the stated policy. We recommend the ERA arrange for the appraisals to be performed on the appropriate properties in accordance with its policy. Due to the continued weakness in the real estate market, it is important that management have timely information to assist in properly accounting for its real estate holdings. VALUATION OF REAL ESTATE HOLDINGS In relation to the aforementioned comment on real estate investments, the ERA revised its policy with respect to the valuation of its separately owned real estate investments. The policy states three conditions in which the ERA will write-down real estate holdings to their market value: 1. "If the Board determines that a property shall be sold in the near future, the lower of market value or cost shall be reflected in the system's financial statements." 2. "If it can be identified that the physical condition of the property has deteriorated substantially, this shall be immediately reflected in the system's financial statements." 3. "For each year that a property is appraised at a value lower than cost and where there is no persuasive evidence to indicate this is due to factors which are other than temporary, the system's financial statements will reflect a decrease in that property's value calculated to be 20% of the difference between appraised market value and the cost value at the time of appraisal." Because of the considerable judgment involved in determining whether a decline in market value is caused by factors which are "other than temporary," it is essential that the ERA continue to analyze the nature of any declines in value of its real estate holdings, especially where they are repeatedly appraised at values below their carrying cost, and account for such declines in conformity with generally accepted accounting principles (GAAP). GAAP requires that assets with impairments deemed "other than temporary" be written down to market value at the time this determination is made. OPERATIONS FINANCIAL ACCOUNTING MANAGEMENT SYSTEM The County's current financial accounting and reporting system is over 20 years old. The system requires a significant amount of staff resources to maintain the level of reporting required by state and federal funding agencies as well as in the yearly preparation of the Comprehensive Annual Financial Report. Additionally, the system does not consistently allow for the timely production of financial and other operating information that management could be using to assess the financial condition of the County on a monthly or quarterly basis. - 2 - KPN1 Peat Marwick We recommend the County investigate the feasibility of implementing a new financial accounting and reporting system. A new system should be capable of providing useful and timely information to management and not require a significant amount of resources to maintain its operation. Reliable and timely information will assist management to better assess the results of its operations and financial condition and to identify potential problems earlier for faster resolution. CONTRIBUTED CAPITAL In our review of the Hospital and HMO enterprise fund's contributed capital accounts, we noted the County does not maintain a detail of the composition of this balance. Additionally, the County has not consistently recorded the depletion of its contributed assets by reducing the contributed capital account. Rather, the disposition or loss on those assets are recorded as charges to retained earnings causing an overstatement of the contributed capital account and an understatement of retained earnings. Because the expenditure budget is based on retained earnings, this has resulted in the County not having full use of its expendable resources. We recommend the County review the detail of contributed capital to ascertain what the proper balance should be based on the value of assets still remaining. As contributed assets are transferred from one fund to another and disposed, the related amounts should be appropriately added to or deducted from the contributed capital account and not charged against retained earnings. Proper accounting for contributed capital will ensure the County fully utilizes its available resources. - 3 -