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HomeMy WebLinkAboutMINUTES - 05311994 - IO.3 I0.3 To BOARD OF SUPERVISORS s L Contra 1•. FROM: Costa Internal Operations Committee 8 s CC x�, _._:....: ,•40¢ County �. DATE: May 23, 1994 coon SUBJECT: Response to the 1992-1993 Management Letter SPECIFIC REQUEST(S)OR RECOMMENDATION(S)&BACKGROUND AND JUSTIFICATION RECOMMENDATION: ACCEPT the Departments ' responses to the 1992-1993 Management Letter. BACKGROUND: The general .purpose financial statements of Contra Costa County for the year ended June 30, 1993 were audited by KPMG Peat Marwick, Certified Public Accountants, and a report was issued thereon dated November 1, 1993. During the audit certain matters involving the internal central structure and other operational matters were presented and discussed with appropriate members of County management. These comments and recommendations are intended to improve the internal central structure or result in other operating efficiencies and were summarized in a' February 28, 1994 letter. On March 22, 1994 the Management Letter was referred to the County Administrator and Internal Operations Committee. This report provides a synopsis of the Management Letter comments and recommendations and the responses from the appropriate department head. CONTINUED ON ATTACHMENT: X YES SIGNATURE: RECOMMENDATION OF COUNTY ADMINISTRATORRECO ENDATION OF BOARD COMMITTEE APPROVE OTHER SIGNATURES : SU ervisor Jeff Smith % Su ervisor Mark DeSaulnier ACTION OF BOARD ON 1 1 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 Contact: PHIL BATC LOR.CLEWK OF THE BOARD OF CC: SEE LAST PAGE SUPERVISORS AND COUNTY ADMINISTRATOR BY `_ DEPUTY COMMENTS/RECOMMENDATIONS: FINANCIAL REPORTING REPORTING ENTITY In June 1991, the Governmental Accounting Standards Board (GASB) issued Statement No. 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 in its 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. RESPONSE FROM THE COUNTY AUDITOR-CONTROLLER: We have been reviewing, in conjunction with GASB Statement No. 14, the structure of various entities not currently a part of our reporting entity to :determine whether changes need to be made in the presentation of the fiscal 1994 financial statements. In addition, the audit request for proposals included the requirement for the 1993-94 auditors to assist us in our analysis and implementation of GASB Statement No. 14 . COMMENTS/RECOMMENDATIONS: 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. RESPONSE FROM THE COUNTY AUDITOR-CONTROLLER: We would like to continue updating and writing an Accounting Policies and Procedures Manual . However, the task is hampered by the fact that the workload of existing staff precludes assigning an individual to be responsible for the task. COMMENTS/RECOMMENDATIONS: 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 -2- 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 $1,000 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. RESPONSE FROM THE COUNTY AUDITOR-CONTROLLER: We are currently pursuing the modification of our fixed asset capitalization policy. Once the modifications are finalized we will emphasize to departments the importance of adherence to the policy. COMMENTS/RECOMMENDATIONS: 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 . RESPONSE FROM THE RETIREMENT ADMINISTRATOR: We concur with the audit comment regarding the need to adhere to the Investment Policy for Real Estate Appraisals and it is currently being met. The policy states that a market appraisal shall be conducted by an independent appraiser every two years. The three properties referenced in the audit comment had a written appraisal done within two years and six months . As of July 1, 1994, the two-year time schedule is in place and will be followed for all current and future appraisals of properties held by the Retirement Association. COMMENTS/RECOMMENDATION: 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- 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. RESPONSE FROM THE RETIREMENT ADMINISTRATOR: VALUATION OF REAL ESTATE HOLDINGS The Retirement Board revised its Investment Policy with respect to valuation of its separately owned real estate investments at the regular board meeting in February 1993 . The Investment Policy specifies three conditions where properties will be written down, which removes the "judgement" call that would occur if the policy did not contain these specific conditions . This Investment Policy will be followed as written and properties will continue to be monitored. To reiterate our comment from the prior year response, the Investment Policy is considered to be a "living" document and will continue to be reviewed and revised on a regular basis . COMMENTS/RECOMMENDATIONS: 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 . 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. RESPONSE FROM THE COUNTY AUDITOR-CONTROLLER: We concur with the recommendation that the County investigate the feasibility of implementing a new financial accounting and reporting system. We have taken initial steps in our feasibility study and we have determined that software development has not reached the level of sophistication that we require. We will -4- continue to evaluate the availability of software and develop a thorough needs assessment in preparation for technological improvements in financial accounting software. COMMENTS/RECOMMENDATIONS: 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 retaining savings . 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 resource. RESPONSE FROM THE COUNTY AUDITOR-CONTROLLER: We concur with KPMG Peat Marwick' s recommendation to review the detail of contributed capital to ascertain what the proper balance should be based on the value of assets still remaining. This task has already been undertaken. We are currently in the process of developing a recommendation regarding what entries should be made and anticipate that prior to June 30, 1994, we will have met with the Health Services Controller to review our recommendations and make any appropriate entries to the finance system. Contact: Dean Lucas (646-4077) Orig. Dept. : County Administrator cc: Auditor-Controller Retirement Administrator -5-