This report is intended for the internal use of City of Cupertino, and may not be provided to, used, or relied upon by any third parties.
Proprietary & Confidential
FINAL REPORT
CITY OF CUPERTINO
SPECIAL REVENUE FUND PROCESS REVIEW
June 10, 2025
Moss Adams LLP
999 Third Avenue, Suite 2800
Seattle, WA 98104
(206) 302-6500
Special Revenue Fund Process Review
FOR INTERNAL USE OF CITY OF CUPERTINO ONLY
Table of Contents
Executive Summary 1
A. Introduction 1
B. Summary of Observations and Recommendations 1
Background, Scope, and Methodology 2
A. Commendation 4
Summary of Special Revenue Fund Expenditure Controls 5
Summary of Testwork 6
Observations and Recommendations 8
A. Process Documentation and Training 8
Additional Process Improvement Opportunities 9
Process Map: Invoice Processing 11
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I. EXECUTIVE SUMMARY
A. INTRODUCTION
As part of the City of Cupertino’s (the City’s) fiscal year (FY) 24–25 internal audit program, Moss Adams LLP (Moss Adams) conducted a special revenue fund process review. The purpose of this engagement was to document the process used for special revenue fund accounting, identify gaps compared to best practices, and conduct testing of prior years’ accounting. We conducted this engagement between August 2024 and April 2025 using a four-phased approach consisting of project initiation and management, fact-finding, analysis, and reporting.
B. SUMMARY OF OBSERVATIONS AND RECOMMENDATIONS
Observations and recommendations are summarized below.
OBSERVATIONS AND RECOMMENDATIONS
PROCESS
1. Observation
Processes and controls exist to ensure only allowable expenditures are recorded to special revenue funds, but some processes and controls are not well-documented. Gaps in documentation, staff knowledge, and training led to miscoding expenditures to a special revenue fund in FY24.
Recommendation
● Verify the processes and controls that ensure only allowable expenditures are recorded to special revenue funds are well-documented and easily replicable.
● Conduct and document staff training on permitted uses of all special revenue funds.
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II. BACKGROUND, SCOPE, AND METHODOLOGY
Moss Adams conducted this special revenue fund process review for the City as part of its FY24–25 internal audit program. Special revenue funds are established to account for the proceeds of specific revenue sources that are legally restricted for expenditures for particular purposes. As of FY24–25, the City tracks 10 designated special revenue funds; some of these funds are grouped for Annual Comprehensive Financial Report (ACFR) purposes, as shown in the table below.
CITY OF CUPERTINO SPECIAL REVENUE FUNDS
ACFR Grouping Special Revenue Fund with
General Ledger Fund Code Purpose of Fund
Storm Drain
Improvement
Special Revenue
Fund
210 Storm Drain
Improvement
Accounts for the construction and maintenance of
storm drain facilities, including drainage and sanitary sewer facilities. Projects are funded by the Capital
Reserve.
215 Storm Drain Accounts for revenues from developers as a result of connections to the storm drainage sewer system.
Environmental
Management/Clean
Creeks Special
Revenue Fund
230 Environmental
Management/Clean
Creek/Storm Drain
Accounts for activities related to operating the Non-
Point Source Pollution Program. Revenues are from
parcel taxes.
Housing
Development
Special Revenue
Fund
260 Community Development
Block Grant (CDBG)
Accounts for the Federal Housing and CDBG
Program activities. CDBG is a federally funded
program for housing assistance and public
improvements.
261 Housing and Community
Development (HCD) Loan
Rehab
Accounts for activities related to rehabilitation loans. 265 Below Market Rate
(BMR) Housing
Accounts for activities related to the BMR Housing
Program. Revenues include BMR housing mitigation
fees collected from developers to mitigate the
impact of housing needs. Monies in this fund are
governed by the program’s rules.
Transportation
Special Revenue
Fund
270 Transportation Accounts for the City’s gas tax, vehicle registration fees, and grant revenues and expenditures related
to the maintenance and construction of City streets.
All revenue in this fund is restricted exclusively for
street and road purposes, including related
engineering and administrative expenditures.
Traffic Impact
Special Revenue
Fund
271 Traffic Impact Accounts for development impact fees to ensure that new development and redevelopment projects
pay their “fair share” to mitigate traffic impacts.
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CITY OF CUPERTINO SPECIAL REVENUE FUNDS
ACFR Grouping Special Revenue Fund with
General Ledger Fund Code Purpose of Fund
Park Dedication
Special Revenue
Fund
280 Park Dedication Accounts for the activity granted by the business and professions code of the State of California in
accordance with the open space and conservation
element of the City’s General Plan. Revenues are
restricted for the acquisition, improvement,
expansion, and implementation of the City’s parks
and recreation facilities.
281 Tree Accounts for revenues from in-lieu tree replacement fees and tree damage and removal fees. The
revenues are transferred to the Street Tree
Maintenance Program to pay for new and
replacement trees.
Our project objectives for this engagement included the following:
Document the process used for special revenue fund accounting Identify gaps compared to best practices
Conduct testing of prior years’ accounting
Develop actionable recommendations for consideration by management This analysis was informed by staff interviews, document reviews, research on industry best practices, and testing of a sample of expenditure transactions. The study was conducted between August 2024 and April 2025, and consisted of four major phases:
1. Project Initiation and Management: This phase concentrated on comprehensive project planning and project management, including setting the scope, identifying staff to interview and documents to review, communicating the plan, and establishing a game plan for execution.
2. Fact-Finding: This phase included staff interviews, document reviews, research on industry best practices, and testing of a sample of expenditure transactions. We worked with City staff to obtain the most currently available information and insights.
○ Staff Interviews: We conducted interviews with six staff members. We included representation from City leadership and departments such as Public Works and Community Development.
○ Document Review: We reviewed documents, including policies and procedures, City resolutions and other regulatory documents, and prior reports pertaining to special revenue funds.
○ Industry Best Practice Research: Based on the opportunities for improvement identified, we conducted research to ascertain industry standards and best practices. ○ Testing of Expenditure Transactions: We obtained expenditure details for FY23–24, validated the completeness of the expenditure population, and judgmentally selected a sample of 22 transactions for testwork.
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3. Analysis: This phase served as the assessment portion of the project. Based on the information gathered, we evaluated the importance, impact, and scope of our observations in order to draw conclusions and develop process recommendations.
4. Reporting: This phase concluded the project. We reviewed draft observations and recommendations with City leadership to validate facts and confirm the practicality of recommendations.
A. COMMENDATION
Although the focus of the engagement was to identify areas that need improvement within the special revenue fund process, it is important to note the areas of strength that can be leveraged for further improvement within the City. The Moss Adams team would like to note the following commendation:
Commitment to Continuous Improvement: In February 2024, the City was informed of an issue regarding the miscoding of transactions to the BMR Housing Fund, specifically transactions involving attorney fees. The City took immediate steps to implement additional controls for BMR fund invoice processing to prevent similar miscoding in the future. Additional controls included requiring a Director-level departmental review on invoices coded to the BMR fund. In addition, City staff conducted a review of all transactions processed to the BMR Housing Fund from 2019 to 2024, and Community Development held a number of meetings to educate department personnel on the process for recording and regulations related to BMR expenditures. These actions demonstrate a commitment to continuous process improvement and strengthening controls by Community Development and Finance.
We would like to commend City staff for their willingness to assist us in this assessment process. This commendation, coupled with our observation and recommendations, provide an overview of areas of strengths and weaknesses that can help improve operations and reduce risk at the City.
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III. SUMMARY OF SPECIAL REVENUE FUND
EXPENDITURE CONTROLS
Accounts payable controls, budgeting controls, payroll controls, communication (particularly between departments and Finance), and staff education are critical to ensure that special revenue funds finance only the particular activities for which they are designated.
We noted that expenditures are posted against special revenue funds by the City in the following ways:
Accounts payable/invoice processing
Quarterly allocation of Citywide costs (cost allocation) Payroll
Transfers between funds (transfers out)
A summary of controls within each of these processes is described in the table below. In addition, a map of the invoice processing process is included in Section VII of this report.
EXPENDITURE
SOURCE DESCRIPTION OF CONTROLS
Invoice Processing Invoices are processed and coded at the department level and subject to three levels of review after coding: departmental supervisor review (at the individual invoice level), AP review (at the individual invoice level), and Finance Manager review (at the payment batch level). See Section VII of this report for a process map.
Additionally, expenses are budgeted by fund annually and budget-to-actuals are monitored by departments as well as by Finance. Within the invoice coding process, the system compares the expense that the department is trying to encumber against the budget for that string. Finance override is needed for transfers between account strings within each fund; departments cannot transfer budgeted amounts between funds or exceed budgeted encumbrances.
Cost Allocation A Cost Allocation Plan is created by Finance to allocate Citywide central service and administrative expenses to departments/funds based on a number of allocation formulas/bases. Cost allocation expense is posted quarterly. Finance reviews and updates allocation formulas periodically to ensure that allocations are fair and not charged to funds that cannot be used for administrative expenses.
Payroll Employee timesheets are reviewed and approved by supervisors prior to payroll processing. Each employee’s time is designated to a fund (or funds) during the annual budgeting process, based on employee job duties. Payroll budget-to-actuals are monitored by departments as well as by Finance.
Transfers Out In most cases, transfers are included within budget modification resolutions, which are prepared by Finance and approved by City Council.
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IV. SUMMARY OF TESTWORK
Moss Adams obtained expenditure detail for FY24, validated the completeness of the expenditure population, and judgmentally selected a sample of 22 transactions for testwork. This sample included 17 transfer and expenditure transactions, three payroll transactions, and two cost allocation transactions. A summary of testwork results by special revenue fund grouping is presented below.
CITY OF CUPERTINO SPECIAL REVENUE FUNDS
ACFR Grouping
Special Revenue
Fund with General
Ledger Fund Code
Summary of Expenditure and Transfer
Testwork
Summary of Payroll
Testwork
Summary of Cost
Allocation Testwork
Storm Drain
Improvement
Special Revenue
Fund
210 Storm Drain
Improvement
We judgmentally selected and tested one
transfer and two expenditure transactions
posted to these funds during FY24.
Transfers and expenditures were supported
by documentation and approvals.
Transactions appeared allowable based on
Municipal Code 3.36.010 and 3.36.170 and
associated City resolutions.
We noted no payroll
expenses posted to
these funds during FY24.
We noted no quarterly cost
allocations allotted to these
funds during FY24.
215 Storm Drain
Environmental
Management/Clean
Creeks Special
Revenue Fund
230 Environmental
Management/Clean
Creek/Storm Drain
An agreed upon procedure (AUP) engagement is completed each year by an independent third party to assess the allowability of expenditures, including payroll transactions, posted to this fund. We reviewed the most recent four years of finalized AUP reports and noted no exceptions. Expenditure allowability is guided by Municipal Code 3.38.010 and 3.38.160.
Housing
Development
Special Revenue
Fund
260 Community
Development Block
Grant
We judgmentally selected and tested one
transfer and four expenditure transactions
posted to funds 260 and 265 during FY24.
We noted no expenditures or transfers out
from fund 261 during FY24. Transfers and
expenditures were supported by
documentation and approvals. Four of five
transactions appeared allowable based on
the CDBG Annual Action Plan and the BMR
Housing Mitigation Program Procedural
Manual. For one of five transactions tested,
additional narrative information was required
from Finance and Community Development
We judgmentally
selected one FY24
payroll transaction for
testwork. We verified that
the employee timesheet
was approved, and labor
allocated between funds
260 and 265 appeared
reasonable based on
employee’s approved
Personnel Action Form.
We noted no payroll
We traced the FY24 cost
allocation allotted to fund
265 to the Cost Allocation
Plan provided by Finance.
We noted no cost allocated
to funds 260 or 261. We
noted that allocated costs
appeared reasonable, and
we confirmed that the BMR
Housing Mitigation Program
Procedural Manual allows
261 Housing and
Community
Development (HCD)
Loan Rehab
265 Below Market Rate
(BMR) Housing
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CITY OF CUPERTINO SPECIAL REVENUE FUNDS
ACFR Grouping
Special Revenue
Fund with General
Ledger Fund Code
Summary of Expenditure and Transfer
Testwork
Summary of Payroll
Testwork
Summary of Cost
Allocation Testwork
in order to support allowability. This is not
considered an exception. See the Additional
Process Improvement Opportunities section
for a recommendation related to this sample.
expenses posted to fund
261 during FY24.
for administrative costs to be
charged to the fund.
Transportation
Special Revenue
Fund
270 Transportation We judgmentally selected and tested five expenditure transactions posted to this fund
during FY24. Expenditures were supported
by documentation and approvals.
Expenditures appeared allowable based on
Municipal Code 14.02.010 and 14.02.080.
We judgmentally
selected one FY24
payroll transaction for
testwork. We verified that
the employee timesheet
was approved, and labor
allocated to fund 270
appeared reasonable for
the selected sample
based on employee job
title.
We traced the FY24 cost
allocation allotted to fund
270 to the Cost Allocation
Plan provided by Finance.
We noted that allocated
costs appeared reasonable,
and we confirmed that
Municipal Code 14.02.080
allows for administrative
costs to be charged to the
fund.
Traffic Impact
Special Revenue
Fund
271 Traffic Impact We noted no expenditures or transfers out from this fund during FY24. Further testwork was not considered necessary.
Park Dedication
Special Revenue
Fund
280 Park Dedication We judgmentally selected two transfers and two expenditure transactions posted to these
funds during FY24. Transfers and
expenditures were supported by
documentation and approvals. Transactions
appeared allowable based on Municipal
Code 13.08.060, 14.05.030, and 14.05.100.
We noted no payroll
expenses posted to
these funds during FY24.
We noted no quarterly cost
allocations allotted to these
funds during FY24. 281 Tree
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V. OBSERVATIONS AND RECOMMENDATIONS
Based on the input gathered from interviews, document review, and review of expenditure transactions as well as comparisons to best practices, we prepared the following observation and recommendation.
A. PROCESS DOCUMENTATION AND TRAINING
1. Observation Processes and controls exist to ensure only allowable expenditures are recorded to special revenue funds, but some processes and controls are not well- documented. Gaps in documentation, staff knowledge, and training led to miscoding expenditures to a special revenue fund in FY24.
Recommendations ● Verify the processes and controls that ensure only allowable expenditures are recorded to special revenue funds are well-documented and easily replicable.
● Conduct and document staff training on permitted uses of all special revenue funds.
Accounts payable controls, budgeting controls, payroll controls, communication, and staff education are critical to ensure that special revenue funds finance only the particular activities for which they are designated. Interviewees reported that controls are in place and that special revenue fund expenditures are reviewed by individuals with knowledge to assess their allowability. In cases where expenses are allocated between funds, interviewees reported that allocation is consistent.
However, in FY24, the City experienced an incident involving the coding of unallowable expenditures to a special revenue fund. This incident indicated a gap in internal controls and a lack of staff training related to permissible uses of the BMR fund.
The City took steps to correct the miscoding and implement additional controls for the BMR fund as a result of this discovery. Additional controls included the following:
A Director-level review is required on each BMR invoice, which is checked manually by Finance. Additional education was given to Community Development personnel regarding permissible uses of BMR funds.
While we commend the City for these corrective actions related to the BMR fund, the City should also consider the following:
Where the City has processes and controls in place for special revenue funds that ensure only allowable expenditures are recorded, the City should verify that the processes and controls are well-documented and easily replicable. This is particularly important for manual controls. When processes and controls are not well-documented, there is a risk of inconsistent practices by City personnel and knowledge loss during staff turnover.
The City should provide staff training related to each special revenue fund, including instructions on permissible uses of funds. The City should record or document this training and store it in a central location as well as require departmental and Finance staff to participate in this training.
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VI. ADDITIONAL PROCESS IMPROVEMENT
OPPORTUNITIES
Moss Adams identified the following two opportunities for process improvement as a result of this review.
NO. CATEGORY PROCESS IMPROVEMENT RECOMMENDATION
1 Allowability of
Expenditures
For one of five expenditure samples tested for Fund 265, we were unable to confirm the allowability of the expenditure transaction based on a review of the BMR Housing Mitigation Program Procedural Manual, section 2.2.2 Permitted Use of Fees, and the invoice documentation. For this sample, additional narrative information was obtained from Community Development to substantiate the connection between the expenditure and the list of permitted fees.
Section 2.2.2.A, Permitted Use of Fees, states, “Affordable housing mitigation fees deposited into the BMR AHF shall only be used for the provision of affordable housing in Cupertino.” Section 2.2.2.B lists example uses of the fund’s revenue. Some of these include land acquisition, new construction, substantial rehabilitation, BMR program administration, and down payment assistance. Section 2.2.2.C notes that a portion of the BMR AHF will be targeted to specific target populations.
The invoice we reviewed as part of our expenditure sample included expenses related to the Haven to Home and Rotating Shelter Car Park programs.
Expenses invoiced included case management, indirect administration costs, ready-to-cook food, insurance, car repair, and registration.
Per inquiry with Community Development, “These programs [Haven to Home and Rotating Shelter Car Park] provide intensive case management and social services for the unhoused with the ultimate goal of helping them to secure permanent housing…[T]hese programs assist extremely low income and homeless persons find permanent housing, which makes it a qualified service that assist[s] in the provision of affordable housing.” While we accept Community Development’s explanation for these expenditures, we observe that some ambiguity exists in the link between the tested expenditures (e.g., ready-to-cook meals) and the “provision of affordable housing” as outlined in Section 2.2.2.A. Where ambiguity exists between permitted use of special revenue fees and City expenditures, we recommend the following:
● Obtain and document City Attorney review of the proposed expenditure or expenditure category.
● If appropriate, consider revising the BMR Housing Mitigation Program Procedural Manual to clarify permitted use of fees.
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NO. CATEGORY PROCESS IMPROVEMENT RECOMMENDATION
2 Roles and
Responsibilities
The City’s Accounts Payable Processes and Procedures specify that City departments are responsible for coding invoices to appropriate budget line items (including fund number) that correspond to expenditures. Finance is responsible for verifying that general ledger accounts (including fund) appear appropriate.
During the fieldwork portion of this engagement, we noted that Finance had difficulty identifying a complete list of departmental points of contact with whom we could discuss the process for posting expenditures to special revenue funds.
While we were ultimately able to identify and connect with departmental points of contact, we recommend Finance maintain the following information centrally for each special revenue fund:
● Regulatory documentation, such as Municipal Code section or City resolution, that guides the use of each special revenue fund ● Department responsible for managing each special revenue fund ● Position or person within department responsible for ensuring that invoices coded to special revenue funds adhere to regulatory requirements and restrictions
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VII. PROCESS MAP: INVOICE PROCESSING
We mapped the invoice processing workflow to illustrate review and approval controls that occur during invoice processing. See next page.