CITY OF EMERYVILLE
MEMORANDUM ON INTERNAL CONTROL
FOR THE YEAR ENDED JUNE 30, 2023
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CITY OF EMERYVILLE
MEMORANDUM ON INTERNAL CONTROL
For the Year Ended June 30, 2023
Table of Contents
Page
Memorandum on Internal Control ......................................................................................................................... 1 Schedule of Significant Deficiency ................................................................................................................ 3 Schedule of Other Matters.............................................................................................................................. 5 Status of Prior Year Significant Deficiency ................................................................................................... 11 Status of Prior Year Other Matters ................................................................................................................. 13 This Page Left Intentionally Blank
MEMORANDUM ON INTERNAL CONTROL
To the City Council of
the City of Emeryville, California
In planning and performing our audit of the basic financial statements of the City of Emeryville (City) as of and for the year ended June 30, 2023, in accordance with auditing standards generally accepted in the United States of America, we considered the City’s internal control over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control.
Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore material weaknesses or significant deficiencies may exist that were not identified. In addition, because of inherent limitations in internal control, including the possibility of management override of controls, misstatements due to error or fraud may occur and not be detected by such controls. However, as discussed below, we identified a deficiency in internal control that we consider to be a significant deficiency.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the City’s financial statements will not be prevented, or detected and corrected on a timely basis. We did not identify any deficiencies in internal control that we consider to be material weaknesses.
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiency in internal control included on the Schedule of Significant Deficiency to be a significant deficiency.
Included in the Schedule of Other Matters are recommendations not meeting the above definitions that we believe are opportunities for strengthening internal controls and operating efficiency.
Government Auditing Standards require the auditor to perform limited procedures on the City’s response to the findings identified in our audit and described in the accompanying Schedule of Significant Deficiency and Schedule of Other Matters. The City’s response was not subjected to the other auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on the response.
This communication is intended solely for the information and use of management, City Council, others within the organization, and agencies and pass-through entities requiring compliance with Government Auditing Standards, and is not intended to be and should not be used by anyone other than these specified parties.
Pleasant Hill, California
December 5, 2023
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CITY OF EMERYVILLE
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF SIGNIFICANT DEFICIENCY
2023-01: Pension Related Accounts and Reconciliations
Criteria: Any discrepancies between entries in the general ledger and actual payments made to CalPERS for pension related payments should be investigated and addressed timely to determine the accuracy of the benefits payments.
Condition: During our audit, we noted that the City has a process for reconciling payroll related benefits and taxes payable accounts in the general ledger on a quarterly basis. We reviewed two reconciliations for the quarters ended September 30, 2022 and December 31, 2022 and noted that there were unreconciled differences between the general ledger and actual payments made within the PERS payroll liability accounts that had not been resolved.
Cause: We understand that the City’s staff turnover has affected the timing of resolving these variances.
Effect: Without a resolution to these variances noted in the PERS payroll liability accounts, the City may by under or over paying the PERS benefits.
Recommendation: We recommend that the City resolve these differences going forward to ensure that the PERS payroll liabilities are recorded and paid accurately.
Management Response: The City hired a Human Resources Technician (Payroll) in November 2022 to handle payroll processing including reconciliation of all payroll related accounts. As of June 30, 2023, all liability accounts are reconciled and up to date. The technician will reconcile the payroll accounts quarterly.
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CITY OF EMERYVILLE
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
2023-02: Investment Policy Compliance
Criteria: The City’s Investment Policy, as well as the California Government Code Section 53601, state that the City’s investments in money market mutual funds should not exceed 20% of the City’s investment portfolio.
Condition: During our testing of the City’s investment portfolio as of December 31, 2022 for compliance with the City’s Investment Policy, we noted that the City’s investment portfolio included money market mutual funds comprising 24% of the City’s total investment portfolio, exceeding the maximum of 20% specified in the City’s Investment Policy.
Cause: City staff indicated that they have been aware of the excess investment in money market mutual funds and they have since hired outside investment advisory services to assist them with managing the portfolio and policy.
Effect: The City is not in compliance with the City’s Investment Policy or California Government Code Section 53601.
Recommendation: Now that the City has hired outside investment advisory services, we recommend that the City work with the advisors to diversify its investment portfolio to meet the compliance requirements set forth by the current Investment Policy.
Management’s Response: The City amended the contract with Chandler Asset Management in September 2023 for investment advisory and management services, including the money market funds.
The goal is to increase diversification, and optimize the City’s investment portfolio, while complying with the City’s Investment Policy and California Government Code. 5 CITY OF EMERYVILLE
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
NEW GASB PRONOUNCEMENTS OR PRONOUNCEMENTS NOT YET EFFECTIVE The following comment represents new pronouncements taking affect in the next few years. We have cited them here to keep you informed of developments.
EFFECTIVE FISCAL YEARS 2022, 2023 and 2024:
GASB 99 – Omnibus 2022
The objectives of this Statement are to enhance comparability in accounting and financial reporting and to improve the consistency of authoritative literature by addressing (1) practice issues that have been identified during implementation and application of certain GASB Statements and (2) accounting and financial reporting for financial guarantees. The practice issues addressed by this Statement are as follows:
• Classification and reporting of derivative instruments within the scope of Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, that do not meet the definition of either an investment derivative instrument or a hedging derivative instrument • Clarification of provisions in Statement No. 87, Leases, as amended, related to the determination of the lease term, classification of a lease as a short term lease, recognition and measurement of a lease liability and a lease asset, and identification of lease incentives • Clarification of provisions in Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements, related to (a) the determination of the public-private and public-public partnership (PPP) term and (b) recognition and measurement of installment payments and the transfer of the underlying PPP asset
• Clarification of provisions in Statement No. 96, Subscription-Based Information Technology Arrangements, related to the subscription-based information technology arrangement (SBITA) term, classification of a SBITA as a short term SBITA, and recognition and measurement of a subscription liability
• Extension of the period during which the London Interbank Offered Rate (LIBOR) is considered an appropriate benchmark interest rate for the qualitative evaluation of the effectiveness of an interest rate swap that hedges the interest rate risk of taxable debt • Accounting for the distribution of benefits as part of the Supplemental Nutrition Assistance Program (SNAP)
• Disclosures related to nonmonetary transactions
• Pledges of future revenues when resources are not received by the pledging government 6 CITY OF EMERYVILLE
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
GASB 99 – Omnibus 2022 (Continued)
• Clarification of provisions in Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, as amended, related to the focus of the government-wide financial statements
• Terminology updates related to certain provisions of Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position • Terminology used in Statement 53 to refer to resource flows statements.
The Requirements of this Statement are Effective as Follows:
The requirements in paragraphs 26–32 related to extension of the use of LIBOR, accounting for SNAP distributions, disclosures of nonmonetary transactions, pledges of future revenues by pledging governments, clarification of certain provisions in Statement 34, as amended, and terminology updates related to Statement 53 and Statement 63 are effective upon issuance.
The requirements in paragraphs 11–25 related to leases, PPPs, and SBITAs are effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter.
The requirements in paragraphs 4–10 related to financial guarantees and the classification and reporting of derivative instruments within the scope of Statement 53 are effective for fiscal years beginning after June 15, 2023, and all reporting periods thereafter.
Earlier application is encouraged and is permitted by individual topic.
How the Changes in This Statement Will Improve Financial Reporting The requirements of this Statement will enhance comparability in the application of accounting and financial reporting requirements and will improve the consistency of authoritative literature. Consistent authoritative literature enables governments and other stakeholders to more easily locate and apply the correct accounting and financial reporting provisions, which improves the consistency with which such provisions are applied. The comparability of financial statements also will improve as a result of this Statement. Better consistency and comparability improve the usefulness of information for users of state and local government financial statements.
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MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
EFFECTIVE FISCAL YEAR 2023/24:
GASB 100 – Accounting for Changes and Error Corrections The primary objective of this Statement is to enhance accounting and financial reporting requirements for accounting changes and error corrections to provide more understandable, reliable, relevant, consistent, and comparable information for making decisions or assessing accountability This Statement defines accounting changes as changes in accounting principles, changes in accounting estimates, and changes to or within the financial reporting entity and describes the transactions or other events that constitute those changes. As part of those descriptions, for (1) certain changes in accounting principles and (2) certain changes in accounting estimates that result from a change in measurement methodology, a new principle or methodology should be justified on the basis that it is preferable to the principle or methodology used before the change. That preferability should be based on the qualitative characteristics of financial reporting—understandability, reliability, relevance, timeliness, consistency, and comparability. This Statement also addresses corrections of errors in previously issued financial statements.
This Statement prescribes the accounting and financial reporting for (1) each type of accounting change and (2) error corrections. This Statement requires that (a) changes in accounting principles and error corrections be reported retroactively by restating prior periods, (b) changes to or within the financial reporting entity be reported by adjusting beginning balances of the current period, and (c) changes in accounting estimates be reported prospectively by recognizing the change in the current period. The requirements of this Statement for changes in accounting principles apply to the implementation of a new pronouncement in absence of specific transition provisions in the new pronouncement. This Statement also requires that the aggregate amount of adjustments to and restatements of beginning net position, fund balance, or fund net position, as applicable, be displayed by reporting unit in the financial statements.
This Statement requires disclosure in notes to financial statements of descriptive information about accounting changes and error corrections, such as their nature. In addition, information about the quantitative effects on beginning balances of each accounting change and error correction should be disclosed by reporting unit in a tabular format to reconcile beginning balances as previously reported to beginning balances as restated.
Furthermore, this Statement addresses how information that is affected by a change in accounting principle or error correction should be presented in required supplementary information (RSI) and supplementary information (SI). For periods that are earlier than those included in the basic financial statements, information presented in RSI or SI should be restated for error corrections, if practicable, but not for changes in accounting principles.
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MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
EFFECTIVE FISCAL YEAR 2024/25:
GASB 101 – Compensated Absences
The objective of this Statement is to better meet the information needs of financial statement users by updating the recognition and measurement guidance for compensated absences. That objective is achieved by aligning the recognition and measurement guidance under a unified model and by amending certain previously required disclosures.
Recognition And Measurement
This Statement requires that liabilities for compensated absences be recognized for (1) leave that has not been used and (2) leave that has been used but not yet paid in cash or settled through noncash means. A liability should be recognized for leave that has not been used if (a) the leave is attributable to services already rendered, (b) the leave accumulates, and (c) the leave is more likely than not to be used for time off or otherwise paid in cash or settled through noncash means. Leave is attributable to services already rendered when an employee has performed the services required to earn the leave. Leave that accumulates is carried forward from the reporting period in which it is earned to a future reporting period during which it may be used for time off or otherwise paid or settled. In estimating the leave that is more likely than not to be used or otherwise paid or settled, a government should consider relevant factors such as employment policies related to compensated absences and historical information about the use or payment of compensated absences. However, leave that is more likely than not to be settled through conversion to defined benefit postemployment benefits should not be included in a liability for compensated absences.
This Statement requires that a liability for certain types of compensated absences—including parental leave, military leave, and jury duty leave—not be recognized until the leave commences. This Statement also requires that a liability for specific types of compensated absences not be recognized until the leave is used.
This Statement also establishes guidance for measuring a liability for leave that has not been used, generally using an employee’s pay rate as of the date of the financial statements. A liability for leave that has been used but not yet paid or settled should be measured at the amount of the cash payment or noncash settlement to be made. Certain salary-related payments that are directly and incrementally associated with payments for leave also should be included in the measurement of the liabilities.
With respect to financial statements prepared using the current financial resources measurement focus, this Statement requires that expenditures be recognized for the amount that normally would be liquidated with expendable available financial resources.
Notes To Financial Statements
This Statement amends the existing requirement to disclose the gross increases and decreases in a liability for compensated absences to allow governments to disclose only the net change in the liability (as long as they identify it as a net change). In addition, governments are no longer required to disclose which governmental funds typically have been used to liquidate the liability for compensated absences. 9 CITY OF EMERYVILLE
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
GASB 101 – Compensated Absences (Continued)
How the Changes in this Statement Will Improve Financial Reporting The unified recognition and measurement model in this Statement will result in a liability for compensated absences that more appropriately reflects when a government incurs an obligation. In addition, the model can be applied consistently to any type of compensated absence and will eliminate potential comparability issues between governments that offer different types of leave.
The model also will result in a more robust estimate of the amount of compensated absences that a government will pay or settle, which will enhance the relevance and reliability of information about the liability for compensated absences.
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MEMORANDUM ON INTERNAL CONTROL
STATUS OF PRIOR YEAR SIGNIFICANT DEFICIENCY
2022-01: Payroll Related Accounts and Reconciliations
Criteria: The City’s Human Resources Department should have procedures to review payroll related accounts timely. Any discrepancies between entries in the general ledger and actual payments made to third parties for payroll related payments should be investigated and addressed timely, at least on a monthly basis.
Condition: During our audit, we noted that the City does not have a process for reconciling payroll related benefits and taxes payable accounts in the general ledger. We selected the month of April 2022 to review these transactions and noted unreconciled differences between the general ledger and actual payments made totaling $30,698 in the health insurance, long-term disability, and PERS payroll liability accounts.
Cause: We understand that the City’s understaffing levels within the Human Resources Department has affected the timing and frequency of reconciliations and related follow up.
Effect: The general ledger does not accurately reflect payroll related payables balances and expenditures throughout the fiscal year and therefore, the payroll related liabilities and expenditures could be overstated or understated. Misstatement, error or unauthorized transactions may occur and not be detected and corrected on a timely basis.
Recommendation: We recommend that the City’s Human Resources Department develop procedures to reconcile the employee benefits payable accounts on a timely basis, at least monthly. Furthermore, we recommend that the City investigate any discrepancies between the payable accounts and what was actually paid for employee benefits during the reconciliation process to ensure proper recording and payment.
Current Status: See 2023-01.
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CITY OF EMERYVILLE
MEMORANDUM ON INTERNAL CONTROL
STATUS OF PRIOR YEAR OTHER MATTERS
2022-02: Investment Policy Compliance
Criteria: The City’s Investment Policy, as well as the California Government Code Section 53601, state that the City’s investments in money market mutual funds should not exceed 20% of the City’s investment portfolio and that the Investment Policy must be adopted annually by resolution of the City Council.
Condition: During our testing of the City’s investment portfolio as of December 31, 2021 for compliance with the City’s Investment Policy, we noted that the City’s investment portfolio included money market mutual funds comprising 50% of the City’s total investment portfolio, exceeding the maximum of 20% specified in the City’s Investment Policy. We also noted that the City did not adopt an Investment Policy during fiscal year 2022.
Cause: City staff indicated that they have been aware of the excess investment in money market mutual funds and they have since hired outside investment advisory services to assist them with managing the portfolio and policy.
Effect: The City is not in compliance with the City’s Investment Policy or California Government Code Section 53601.
Recommendation: Now that the City has hired outside investment advisory services, we recommend that the City work with the advisors to diversify its investment portfolio to meet the compliance requirements set forth by the current Investment Policy. Furthermore, we recommend that the City develop a process to ensure that the Investment Policy is adopted annually by City Council.
Current Status: See 2023-02.
2021-01: Investment Policy Compliance
Criteria: The City’s Investment Policy as well as the California Government Code Section 53601 state that the City’s investment in money market mutual fund should not exceed 20% of the City’s investment portfolio.
Condition: During our examination of the City’s investment portfolio as of December 31, 2020 for compliance with the City’s Investment Policy, we noted that the City’s investment in money market mutual funds comprised 40 percent of the City’s total investment portfolio.
Cause: City staff indicated that they had been aware of the excess investment in money market mutual funds. However, they would like to wait to correct it after they hire an outside investment advisory service.
Effect: As of December 31, 2020, the City was not in compliance with the above requirements stated on the City’s Investment Policy and the California Government Code.
Recommendation: We recommend the City diversify its investments to meet the above compliance requirements.
Current Status: See 2023-02.
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