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INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON
COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN
ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS
To the Honorable Members of the City Council
City of Laguna Beach, California
We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the City of Laguna Beach, California (hereafter, the City), as of and for the year ended June 30, 2025, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated March 30, 2026.
Report on Internal Control over Financial Reporting
In planning and performing our audit of the financial statements, 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.
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 entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. 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.
Our consideration of internal control was for the limited purpose described in the first paragraph of this section 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. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. We identified certain deficiencies in internal control, described in the accompanying schedule of findings and responses as item 2025-001 that we consider to be significant deficiencies.
Report on Compliance and Other Matters
As part of obtaining reasonable assurance about whether the City’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the financial statements.
However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.
Attachment 2
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To the Honorable Members of the City Council
City of Laguna Beach, California
City of Laguna Beach, California’s Response to Findings Government Auditing Standards requires 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 findings and responses. 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.
Purpose of This Report
The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.
Irvine, California
March 30, 2026
204
To the Honorable Members of the City Council
City of Laguna Beach, California
SCHEDULE OF FINDINGS AND RESPONSES
Reference Number: 2025-001
Finding
Condition
During our audit of the financial statements for the fiscal year ended June 30, 2025, management identified and corrected prior-year capital asset acquisitions related to both governmental activities and business-type activities that had not been capitalized in the appropriate periods.
These omissions were identified during the current fiscal year as a result of management’s implementation of updated internal control procedures. Identified assets were subsequently capitalized along with related accumulated depreciation through prior-period correction entries.
Criteria
GASB Statement No. 34 requires that capital assets be reported in the government-wide financial statements for governmental activities and depreciated over their estimated useful lives. Additionally, business-type activities capital assets are required to be reported in the fund level financial statements and government-wide financial statements and depreciated over their estimated useful lives. As defined by GASB statement No. 34, capital assets are capitalized when placed into service.
Cause
The condition resulted from ineffective controls over capital asset identification and capitalization in previous fiscal years. This includes controls over the identification of capital assets and oversight of management to ensure all capital assets are identified and captured for capitalization and when applicable, depreciated. For the fiscal year ended June 30, 2025, management of the City implemented new control, which led to the identification and correction of the prior-year omissions.
Effect or Potential Effect
Due to a deficiency in internal controls over capital asset accounting in prior fiscal years, the City did not properly capitalize certain assets or record related depreciation. As a result, capital assets and net position for governmental activities and business-type activities were understated in prior periods, and depreciation expense and accumulated depreciation were not recorded in the appropriate fiscal years.
Recommendation
We recommend that management continue to maintain and document the enhanced internal controls over capital asset identification and capitalization that led to the identification of this prior-period error. These controls should include performing regular reconciliations between capital acquisition activity and capital asset subsidiary records for both governmental activities and business-type activities, ensuring timely review and approval of capital asset additions and disposals and related supporting documentation, and periodically evaluating the effectiveness of the updated controls to confirm that capital assets are consistently identified, capitalized, and recorded in the appropriate accounting period.
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To the Honorable Members of the City Council
City of Laguna Beach, California
Management’s Response
Management agrees with the finding and acknowledges that internal controls over capital asset identification and capitalization were not operating effectively in prior fiscal years. As noted, enhanced procedures implemented for fiscal year 2024–25 reporting resulted in the identification and correction of prior-period omissions. With the hiring of a new Accounting Manager in late October 2025, the City has strengthened oversight and review procedures within the Finance Department. Management has implemented, and will continue to formalize, internal controls to ensure capital asset activity is properly identified, recorded, and reconciled on a timely basis. These controls include:
• Reviewing City Council minutes, capital project activity, and general ledger accounts to ensure completeness of capital asset additions and disposals.
• Recording capital asset activity in the appropriate accounting period when assets are placed into service. • Maintaining an accurate and up-to-date detailed capital asset listing. • Performing regular reconciliations between the general ledger and the capital asset subsidiary records. • Reviewing depreciation calculations for accuracy and completeness.
Management believes these enhanced procedures will ensure capital assets are consistently identified, capitalized, and recorded in the appropriate fiscal year going forward. 206