EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: February 15, 2022
TO: Honorable Mayor and Members of the City Council
VIA: Jaime M. Fontes, City Manager
BY: Tomohito Oku, Finance Director
Greg Henry, Senior Management Analyst
SUBJECT: Amendment No. 4 to Agreement with Badawi & Associates Recommendation
Adopt a Resolution:
1. Authorize the City Manager to execute Amendment No. 4 to the Agreement with Badawi & Associates extending the term to provide Fiscal Year (FY) 2021-22 independent audit services in an amount not to exceed $67,785;
2. Find that special circumstances exist to warrant dispensing with bid procedures pursuant to Section 2.84.070(D) of the East Palo Alto Municipal Code.
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
Priority No. 3: Increase Organizational Effectiveness and Efficiency Background
Government agencies are required by law to undertake an independent audit of the annual financial statements. The audit is performed by an independent firm, or individual, qualified and licensed to conduct such audits and express an opinion regarding whether the financial statements prepared by management are free of material misstatement and fairly present financial position in conformance with generally accepted accounting principles, and in compliance with the Government Accounts Standards Board (GASB) statements. While management is responsible for the fair presentation of the financial statements, an annual audit provides an independent, professional examination of the financial records, accounts, and internal controls of an entity’s accounting records.
California Government Code Section 53891 requires each local agency to provide an annual report of financial transactions to the State Controller’s Office. Such report is to contain data from audited financial statements prepared in accordance with generally accepted accounting principles.
California Government Code Section 12410.6 further provides that local agency audits shall be conducted by a certified public accountant or public accountant licensed by, and in good standing with, the California Board of Accountancy. The statute also requires that a local agency may not employ a public accounting firm to provide such services if the lead or coordinating audit partner having primary responsibility for the audit has performed audit services for the local agency for six consecutive fiscal years.
Additionally, the Government Finance Officers Association (GFOA), an association whose mission is to advance excellence in state and local government financial management, has issued recommendations regarding audit procurement best practices, including that governmental entities enter into multi-year agreements of at least five years when obtaining the services of independent auditors. This recommendation is made in recognition of the gains in efficiency and potential cost reduction due to allowing for greater continuity and minimizing the potential for disruption given that such audits entail significant hours to obtain knowledge and support the basis for issuing an independent opinion on the financial statements.
Analysis
In May 2014, the City concluded an extensive, competitive bid process to select an independent auditor. Upon evaluating all proposals based upon technical experience, performance, and client references; staff recommended Badawi & Associates. Based on such, the City approved a three-year agreement with authority to extend the services for two additional annual periods. Last year the City approved a contract amendment for an additional one-year period through the fiscal year audit ending June 30, 2021.
Badawi & Associates contractual audit costs during the contract period are as follows:
Fiscal Year Amount
FY2013-14 29,820
FY2014-15 61,615
FY2015-16 63,463
FY2016-17 63,463
FY2017-18 63,463
FY2018-19 63,850
FY2019-20 64,785
FY2020-21 67,785
In 2014, staff iterated a policy intention to solicit audit services every five years. As indicated from the GFOA best practices cited above, changing auditors frequently is a substantial, costly, and time-consuming organizational undertaking, and determining the optimal length of time to engage an independent audit firm ought to include consideration of several factors.
Staff is seeking Council approval to extend the agreement with Badawi & Associates for one additional year to perform independent audit services for the fiscal year ending June 30, 2022 due to the current COVID-19 pandemic and remote work environment as well as the Enterprise Resource Program (ERP).
If an Request-for-Proposal (RFP) bid process were to result in hiring a new audit firm, the process would involve substantial communication, information exchange, and work often referred as “start-up” effort required for a new firm to understand and document the City’s systems, practices, and procedures. The unusual and extended nature of the COVID-19 pandemic remote work and social distancing circumstances warrant dispensing with bid procedures pursuant to section 2.84.070(D) of the East Palo Alto Municipal Code.
Staff does not engage this request lightly or easily; however, the benefits in consistency and stability during the Pandemic and during the ERP implementation indicate this is a worthy path to pursue and meets the requirements of the California Government Code Section 12410.6.
Badawi & Associates has provided consistent, timely, and quality audit services to the City.
The firm is a member of the AICPA Peer Review Program - Governmental Audit Quality Center. Staff confirmed the audit firm, and proposed audit partner (Mitesh Desai) is currently licensed and in “clear” status with the California State Board of Accountancy. The firm appropriately rotated the audit partner during the contract service period as required by California Government Code 12410.6 cited above, and the firm may perform audit services over the additional audit period (and beyond).
The City is in the process of implementing it’s new ERP which will dramatically change the City audit process and Annual Comprehensive Financial Report (ACFR). It makes sense for the City to issue and RFP and potentially enlist a new auditing firm for the audit for Fiscal Year 2022-23. In particular, Badawi and Associates currently maintain and develop the tables for the City’s ACFR. It is anticipated that with the new ERP, staff will take this over. So, for this Fiscal Year, the added staff time needed to develop the ACFR with a new firm would slow implementation of the ERP.
Fiscal Impact
Proposed audit costs are reasonable based upon past, competitively bid payments for such services. The City will incur cost for services for the fiscal year (FY) 2021-22 in an amount not to exceed $67,785.
Environmental
The action being considered by the City Council is exempt from the California Environmental Quality Act (CEQA) because it is not a “project” pursuant to 15378(b)(4) because it is a fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant impact on the environment.
Attachments
1. Resolution Amend 4 with Badawi and Associates
2. City of East Palo Alto 2022 - Pricing Proposal