Manteca City Council
November 15, 2022

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

FOR THE YEAR ENDED
JUNE 30, 2020
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ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL
For the Year Ended June 30, 2020
Table of Contents
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Memorandum on Internal Control ................................................................................................................... 1 Schedule of Material Weaknesses ........................................................................................................... 3 Schedule of Significant Deficiencies ....................................................................................................... 7 Schedule of Other Matters ....................................................................................................................... 9 Status of Prior Year Material Weakness ................................................................................................ 21 Status of Prior Year Significant Deficiencies ........................................................................................ 23 Status of Prior Year Other Matters ........................................................................................................ 41 ATTACHMENT 2
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MEMORANDUM ON INTERNAL CONTROL
To the City Council of
the City of Manteca, California
In planning and performing our audit of the basic financial statements of the City of Manteca for the year ended June 30, 2020, 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 our auditing 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 certain deficiencies in internal control that we consider to be material weaknesses and other deficiencies that we consider to be significant deficiencies.

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 consider the deficiencies in internal control included on the Schedule of Material Weaknesses 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 deficiencies in internal control included on the Schedule of Significant Deficiencies to be significant deficiencies.

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.

Management’s written responses included in this report have not been subjected to the audit procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them.

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
March 10, 2022
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CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF MATERIAL WEAKNESSES
2020-001 Timely and Accurate Year-End Close
As we noted in prior year comment #2019-001, the year-end financial closing and preparation of the general ledger data should be completed timely and accurately. In addition, well-managed organizations should develop a plan to ensure that adequate resources will remain available in the event of employee departures. Part of that is ensuring there are resources available to be utilized on short notice to fill gaps in key positions, especially in the Finance Department. These resources need to be in place throughout the fiscal year to ensure accounting processes and procedures continue and allow time for analysis of account balances and activities.

Due to the staff turnover during the year, there is a significant strain on the City’s ability to maintain a good internal control environment and to produce accurate and timely financial data. As a result, the year-end audit was adversely affected. During the audit, we discovered and/or City staff proposed ninety post-closing journal entries, including a number of material post-closing adjustment entries. City staff had difficulty completing material closing entries prior to providing the general ledger for audit for areas including recording the fiscal year 2020 closing entries for cash and investments, debt service transactions and the issuance of new bonds, interfund activities, accounts and grants receivable, capital assets, the sale of Successor Agency land, contracts payable, compensated absences, unearned revenue, pension liabilities and related deferred outflows/inflows of resources and OPEB liabilities and related deferred outflows/inflows of resources. In addition, the components of fund balance in the General Fund had not been adjusted to reflect the fiscal year 2020 activity. These areas affected the year-end closing process and most of the City’s funds.

The above condition delayed the completion of the year-end closing process, which increases the risk that errors or misstatements may go undetected by staff and corrections may not be made in a timely manner.

Audit effort was substantially increased in response to these increased risks.

The City should analyze staff resources to determine what plans can or should be made to ensure that the financial data is processed properly and timely during staffing transitions. In addition, the City must develop procedures to ensure that accounts are analyzed throughout the fiscal year and after the year end close to ensure that additional closing entries are not required prior to providing the general ledger for audit.

Management’s Response:

Staff continues to evaluate processes and procedures to ensure a more timely and accurate close.

Staff turnover made this difficult during FY 20. Additional positions were added in FY 21 which should help alleviate some of these issues. In addition, Finance is working on a more formalized close process which will be in effect during FY 23.

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CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF MATERIAL WEAKNESSES
2020-002 Timely Preparation of Bank Reconciliations
Bank reconciliations are one of the most important internal controls a city can have, and the bank reconciliation cannot be considered complete until it has been reviewed and approved. To be an effective control, bank reconciliations and the associated review should be completed in their entirety as soon as reasonably possible after each month-end, usually within thirty to forty-five days of bank statement month end.

We reviewed the City’s February 2020 bank reconciliations for the General Checking and Payroll Checking Accounts and noted they were not prepared until August 3, 2020 and were not reviewed until August 13, 2020. The Payroll Section 125, Successor Agency Checking, and Worker’s Compensation Checking Accounts were prepared on March 3, 2020, however, they were not reviewed until August 13, 2020.

We reviewed the City’s June 2020 bank reconciliation for the General Checking Account and noted it was not prepared until March 23, 2021 and it was reviewed on March 24, 2021. The bank reconciliations for the Payroll Checking, Payroll Section 125, and Worker’s Compensation Checking Accounts were not prepared until August 5, 2020 and then were not reviewed until October 20, 2020. The Successor Agency Checking Account reconciliation was not prepared until August 4, 2020 and was not reviewed until October 20, 2020.

In addition, the June 2020 Payroll Checking Account bank reconciliation included an unreconciled variance of $168. Subsequently, we were provided with an updated bank reconciliation for the account that was prepared and reviewed on July 19, 2021 that identified and corrected the variance.

We understand the delays in preparing and reviewing the bank reconciliations were due to the high volume of staffing changes that occurred in the Finance Department during the fiscal year.

By not completing and reviewing the bank reconciliations timely, accounting errors, misstatements and/or unauthorized activities may not be identified or corrected in a timely manner.

The City must implement procedures to ensure the timely preparation and review of bank reconciliations throughout the fiscal year, and the completion should be documented/dated in some formal manner. In addition, as unreconciled differences appear, they should be fully researched to identify the cause and ensure they are resolved timely.

Management’s Response:

During FY 21, sufficient staff was available for the timely review and approval of bank reconciliations. However, some turnover in FY 22 again put us behind on this, but cross training has occurred and all reconciliation are prepared within 30 days of the end of the month, beginning in April 2022.

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CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF MATERIAL WEAKNESSES
2020-003 CalPERS Safety Plan Unfunded Accrued Liability (UAL) Budgeting Recurring activities should be included in the annual budget and variances between the prior year budgeted amounts and the current year budget should be reviewed to ensure recurring activities were not omitted in error.

The City’s fiscal year 2020 adopted budget did not include appropriations for the required payment to CalPERS for the UAL for the City’s Safety Pension Plan in the amount of $3.77 million. The payment is a recurring payment that is required to be made to CalPERS each fiscal year.

We understand the exclusion of the appropriation in the adopted budget was an oversight by City staff.

The omission of the payment caused significant expenditures in excess of appropriations in the General Fund in both the Police and Fire departmental expenditure categories and in the Public Safety Sales Tax Special Revenue Fund.

Prior to the adoption of the original budget, a review should be completed to ensure that all recurring expenditures have incorporated into the budget on an annual basis. In addition, procedures should be established to analyze variances between prior year actual results and current year budgeted activities to ensure approved recurring activities are included.

Management’s Response:

The City recognizes the need for accurate CalPERS UAL budgeting. Staffing turnover and issues led to an oversight. The budget team has implemented procedures to compare budget years to identify omitted recurring expenses.
2020-004 Redevelopment Bonds Projects Fund
Fiscal agent cash from a bond issuance that is being used to fund the costs of a capital project should be drawn down to reimburse the City for costs incurred as soon as it has been determined that the costs are eligible for reimbursement. This process of drawing down the eligible funds should help manage the cash flow demands of the City to complete the project.

The Redevelopment Bond Projects Capital Projects Fund incurred costs in the current and prior years related to projects that were eligible to be reimbursed with funds drawn from fiscal agent accounts in the amount of $31.1 million and the Low and Moderating Income Housing Special Revenue Fund incurred costs in the current and prior year related to fiscal agent cash eligible projects in the amount of $2.8 million. As of June 30, 2020, the City had not drawn down any of the eligible funds from the fiscal agent accounts to reimburse the City for the costs that had been paid.

When funds are not drawn down on a regular basis to reimburse the City for eligible costs that have been paid, it increases the pressure on the City’s ability to meet its overall cash flow demands for its normal operations.

We understand the funds were not drawn down due to staffing turnover at the City.

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CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF MATERIAL WEAKNESSES
2020-004 Redevelopment Bonds Projects Fund (Continued)
The City should develop processes to ensure that when projects that are funded with bond proceeds have expenditures, that those expenditures are reviewed for eligibility and the cash is drawn down from the fiscal agent accounts on a timely basis to help manage the City’s cash flow demands.

Management’s Response:

Staff recognizes the need to make timely drawdowns of project funds to match eligible expenses.

Staff turnover has delayed the drawdowns. With adequate staffing now, the City is preparing to draw down the project funds.
2020-005 Accurate Preparation of the Schedule of Expenditures of Federal Awards In accordance with the requirements of OMB Uniform Administrative Requirements Subpart D Section 200.302(b) (1), the City should report all Federal awards expended in the Schedule of Expenditures of Federal Awards (SEFA) each fiscal year.

During our testing of the fiscal year 2020 SEFA provided for audit we noted that federal expenditures for the Highway Planning and Construction Grant (CFDA #20.205) were overstated for the Yosemite Avenue – Main to Cottage project in the amount of $210,174 and understated for the Main Street – Yosemite to Atherton project in the amount of $95,362. The projects were misstated due to the City including the total general ledger expenditures for the projects in prior years, rather than the federally reimbursable expenditures. And, the SEFA did not include federally reimbursed expenditures for the Main Street: Northgate to Alameda and Yosemite: Walnut to Main projects in the amounts of $640 and $810, respectively.

In addition, the SEFA identified one grant in the amount of $39,719 as being part of the Department of Justice Edward Byrne Memorial Justice Assistance Program (CFDA #16.738), but the grant was actually for the Department of Transportation Office of Traffic State and Community Highway Safety Program (CFDA #s 20.600, 20.616 and 20.608) and the program expenditures should have been reported in the amount of $40,736.

Finally, the SEFA included expenditures in the amount of $73,248 for the Department of Homeland Security Staffing for Adequate Fire and Emergency Responses (SAFER) Program (CFDA #97.083), but City staff later determined that amount included the City’s 25% matching requirement of $18,312 Incorrect reporting not only misstates the SEFA, it also implies that the City is not in compliance with the reporting requirements of the OMB Uniform Administrative Requirements. As a result, future federal funding could be adversely affected.

The City must develop procedures to ensure that amounts reported on the SEFA are accurate and include all Federal awards expended each fiscal year.

Management’s Response:

Staff has reviewed procedures related to preparing the schedule of expenditures of federal awards.

As a result, staff has updated procedures to have an additional staff member designated to confirming expenses are being applied to the correct project.

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CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF SIGNIFICANT DEFICIENCIES
2020-006 Prior Year Significant Deficiencies Not Implemented During the current year audit, we followed up on the status of Significant Deficiencies identified on the Status of Prior Year Significant Deficiencies. We found that the following deficiencies had either been partially or not mitigated at June 30, 2020. Therefore, they are deemed to be current year Significant Deficiencies. Details of these deficiencies and associated management’s responses are listed in the Status of Prior Year Significant Deficiencies.
 2019-004 Finance Personnel Super-User Rights
 2019-007 Determine Disposition of Lease Proceeds
 2017-002 Golf Enterprise Fund Working Capital
 2015-002 Timely Review and Approval of Journal Entries  2015-003(a) Timely Preparation and Approval of Treasurer’s Reports  2015-003(b)iii Investment Reporting and Compliance
 2015-004 Timely Filing of Continuing Disclosure Reports  2014-002 Timely Preparation and Approval of Bank Reconciliations Management’s Response:

See Management’s Response to Current Year Status for each of the above deficiencies as listed in the Status of Prior Year Significant Deficiencies.
2020-007 Authorization and Communication of New Bank Accounts Bank accounts should not be opened by any City department without prior communication with the Finance Department. In addition, when bank accounts are opened, the account should have more than one authorized signer to ensure operational continuity if an authorized signer is unavailable.

During the fiscal year 2020 audit, we noted that a new bank account was opened by the Development Services Department without the knowledge or prior approval of the Finance Department. In addition, the new account only included one City staff member as an authorized signer.

Bank accounts that are opened without the knowledge of the Finance Department increase the risk that the account and its activity will not be recorded in the general ledger or reconciled timely. By not completing and reviewing the bank reconciliations timely, accounting errors, misstatements and/or unauthorized activities may not be identified or corrected in a timely manner.

City staff stated that the account was opened to provide small business assistance grants in response to the coronavirus pandemic and we understand it was staff oversight that it was not communicated to the Finance Department.

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CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF SIGNIFICANT DEFICIENCIES
2020-007 Authorization and Communication of New Bank Accounts (Continued) The City should develop policies and procedures for the approval of the opening of any new bank accounts and the communication of the opening of the account to the Finance Department. Once policies and procedures have been established, they should be communicated to each of the City’s departments.

In addition, each account should have more than one authorized signer to ensure continuity of operations if one of the signers is unavailable.

Management’s Response:

The City agrees (1) bank accounts should not be opened by any City department without prior communication with the Finance Department and (2) bank accounts should have more than one authorized signer. Staff has educated departments on the importance of and necessity for this policy. The unauthorized-by-finance bank account was closed in August 2021. 2020-008 Timely Preparation and Approval of Treasurer’s Reports This comment is an update of matters repeated in prior years as discussed in Other Matters 2015-003a, and 2014-007 and 2012-07, the latter two of which are not repeated in this report since they are substantially redundant with our comments below.

To be an effective control, Treasurer’s Reports and the associated review should be completed in their entirety as soon as reasonably possible after each month or quarter-end, typically within thirty to fortyfive days of the bank statement month end. In addition, Section XX, Reporting, of the City’s Investment Policy requires that the City Treasurer review and make available the monthly investment reports to the City Manager and City Council.

During the audit, we noted that Treasurer’s Reports had not been prepared and reviewed since January 2020 and therefore were not made available on a monthly basis to the City Manager and the City Council.

We did note that City staff prepared a Summary of Investments for the quarters ended March 31, 2020 and June 30, 2020; however, the summary reports were not signed by a preparer or a reviewer.

With such delays, any errors, misstatements and/or unauthorized activities may not be identified or corrected in a timely manner.

We understand the delay in preparing the Treasurer’s Reports was due to the turnover in staffing in the Finance Department.

The City should implement procedures to ensure the timely preparation of the monthly Treasurer’s Reports and ensure that preparation and review are documented in a formal manner, including the date on which each takes place.

Management’s Response:

The City began formal quarterly investment reporting to the City Council and the public in November 2020, for the period ending September 2020. In addition, the investment policy was updated in December 2020 and includes a requirement for quarterly investment reporting.

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CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF OTHER MATTERS
2020-009 Timely Updating of Bank Account Signature Cards Signature cards for the bank and investment accounts should be updated timely when there are changes in authorized signers.

During our review of authorized signers in June 2020 for the Union Bank and Local Agency Investment Fund (LAIF) accounts, we noted that the previous Finance Director and Deputy Finance Director were still listed as authorized signers on the accounts even though they had departed the City in November 2019 and May 2019, respectively. We noted that the authorized signers for those accounts were not updated until August 2020. In addition, the Wells Fargo Bank account included the same signers and the authorized signers were not updated until April 2020.

We understand certain changes were not made timely due to the City experiencing turnover in the upper management positions during the fiscal year.

Keeping terminated employees as authorized signers on the City’s bank and investment accounts exposes the City to the risk of misappropriation of assets.

The City must immediately remove the former employees from the authorized signer lists of all bank and investment accounts. In the future, a step should be added to the employee departure checklist or process to ensure that outside parties (such as banks and investment advisors) are informed that the departed employee no longer represents the City.

Management’s Response:

Staff agrees with the immediate need to remove former employees from authorized signer lists of all bank and investment accounts. Now that staffing in Finance and Administration has stabilized, staff will put practices in place to ensure prompt remove and addition of authorized signers on all bank and investment accounts.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF OTHER MATTERS
2020-010 Wire Transfer Authorization
Wire transfers should have processes in place to ensure that it takes more than one person to prepare and complete the wire transfer. In addition, there should be documentation in place to provide support to show which of the authorized employees prepared and approved the transfer.

During the audit, we selected a sample of two wire transfers for testing of separate preparer and reviewer and noted that one of the samples that was related to a debt service payment had no indication of who had approved the transfer. We were able to agree the wire transfer information to the applicable bank statements and to the debt service schedules, however, controls over the wire transfer process should include documentation of who approved the transfer after it was prepared.

Without a segregation of duties related to the preparation and review of wire transfers, it increases the risk that accounting errors or unauthorized transactions may go unnoticed.

We understand that due to turnover in the Finance Department the documentation showing who approved the transfer could not be located.

The City should have processes in place to ensure that each wire transfer has formal documentation surrounding the preparer and the reviewer of the transaction along with the dates the preparation and review took place.

Management’s Response:

Staff agrees segregation of duties is an essential component to processing wire transfers. Staff have practices in place to ensure each wire transfer has formal documentation surrounding the preparer and the reviewer of the transaction along with the dates the preparation and review took place. As an added level of protection, the City’s bank does not allow wire transfers without two authorized users approving the wire transfer.
2020-011 Consistency of Public Facilities Improvement Program Accounting The City has developed a Public Facilities Implementation Plan (PFIP) to ensure that public facilities are adequate and constructed in accordance with the adopted master plans for water, sewer, storm drainage and traffic as the City grows and develops in accordance with its General Plan. Development Impact Fees are collected at or near the time of development and are used wherever practical to finance the expansion of infrastructure necessary to accommodate the demand for new capacity. In certain cases, developers may construct public improvements that are in the PFIP and enter into reimbursement agreements with the City. Developers are then granted credit against the fees owed or are reimbursed any remaining amounts owed to the developer by the City when sufficient funds are available from future development impact fees paid by subsequent development that benefit from the available improvements.

As of June 30, 2020, the City had outstanding reimbursement commitments totaling $25,619,197, that are reported as contracts payable in the City’s financial statements. Related to those contracts payable, interfund advances between the Public Facilities Improvement Plan, General Fund, Water, and Sewer Funds are recorded in the general ledger that are expected to be repaid out of future developer fees.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF OTHER MATTERS
2020-011 Consistency of Public Facilities Improvement Program Accounting (Continued) The City tracks the activity related to the developer commitments in a spreadsheet, but the spreadsheet does not connect that activity with the balances of the interfund loans and some of the contracts payable are recorded as fund liabilities, while others are considered long-term liabilities.

We understand that due to the staff turnover, the City has not documented when balances should be recorded as a fund liability versus a long-term liability and when the interfund advances should be repaid.

The City should develop policies and procedures around the accounting for the PFIP activities, to ensure that all transactions and balances are recorded consistently and documented for future reference.

Management’s Response:

Staff agrees policies and procedures around the accounting for PFIP activities is necessary. Staff responsibilities have been realigned to ensure PFIP accounting properly records and documents balances and liability lines. Additionally, staff has secured consultant services to assist in reconciling the PFIP programs to ensure accuracy of all balances. 2020-012 Timely Payment of Disbursements
Payments to vendors should be made timely, usually within thirty to forty-five days of receiving the related invoice from the vendor.

During the audit we selected 25 disbursements to test for compliance with the City’s Purchasing Policy and timeliness of the payments. We noted one disbursement in the amount of $346,651 that was paid in November 2019 for a lease payment for the period July 1, 2018 through June 30, 2019.

When invoices are not paid timely, it increases the likelihood of late fees from the vendor and increases the risk that errors or misstatements surrounding the invoice may occur.

City staff stated that the invoice was paid late due to the turnover in staffing in the Finance Department during the fiscal year.

The City should develop procedures to ensure that all invoices are paid timely, usually within thirty to forty-five days after being received by the Finance Department.

Management’s Response:

Staff agrees with the need for timely payment of disbursements. Staff turnover and vacancies during FY 2019 and FY 2020 caused delays in processing some payments. The Finance Department is now staffed adequately to ensure timely payments.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF OTHER MATTERS
2020-013 Filing Timely Grant Reimbursement Requests
Grant reimbursement requests should be filed shortly after the associated grant expenditures are incurred.

During the audit, we noted that the Fire Grants Special Revenue Fund had actual expenditures of $88 thousand and no revenue.

We understand that the City had incurred expenditures under the Staffing For Adequate Fire and Emergency Response (SAFER) grant, but no drawdowns were completed during fiscal year 2020 or subsequent. We also understand the grant reimbursement requests were not anticipated to be filed until fiscal year 2022.

City staff indicated that due to the turnover of employees in the Finance Department during the fiscal year, the City did not complete the reimbursement requests.

Late grant draws could jeopardize grant funding if the costs are not claimed during the period of performance specified in the grant agreement.

The City should develop procedures to ensure that grant reimbursement requests are filed on a monthly or at least quarterly basis, to ensure that grant funding is not jeopardized and to improve cash flow.

Management’s Response:

Staff recognizes grant reimbursement requests have not been timely. Staff turnover in key positions have left grant management without proper attention. Staff is assigning a new team to grant management to ensure reimbursement requests occur timely and documented thoroughly. 2020-014 Journal Entry Supporting Documentation
Supporting documentation should be attached to each journal entry that is prepared by City staff to ensure that each line item of the entry can be traced back to the supporting documents and to give the reviewer of the entry the information necessary to ensure the entry is correct.

We selected 40 journal entries for testing of accuracy and documentation of review and approval by an employee other than the preparer. During that testing, we noted the following:
 One journal entry related to investment interest income activity did not readily agree with the backup documentation provided. However, when we requested a copy of the associated bank statement and the supporting excel files, we were able to determine the source of the amounts noted, with the exception of purchased interest. The purchased interest included in the journal entry was $7,003 less than the backup provided due to the exclusion of two amounts in the associated worksheets.
 One journal entry included the support for all of the dollar amounts in the journal entry, but the credit amount of $28,220 did not contain an explanation for the correction. The City was able to provide us with additional information to agree with the amounts included, however the support that was originally provided did not.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF OTHER MATTERS
2020-014 Journal Entry Supporting Documentation (Continued) If the supporting documentation is not attached to the journal entry, accounting errors, misstatements and/or unauthorized activities may not be identified or corrected in a timely manner.

City staff indicated that the errors or omissions in the supporting documentation for the entries were due to the amount of staff turnover that was experienced in the Finance Department during the fiscal year.

The City should ensure that journal entry support clearly documents and supports the amounts reported in each entry.

Management’s Response:

Staff agrees that journal entries should have clear documentation supporting the amounts reported on each entry. Staff not only has procedures in place to ensure proper documentation, but also adequate staffing levels to monitor documentation is happening correctly. 2020-015 Monitoring Loans Receivable for Collectability The City should have a process in place to monitor the collectability of the City’s loans receivable to ensure payments are collected and recorded timely.

In our conversations with City staff during the audit, we noted that the City does not have procedures in place to monitor outstanding loans receivable balances for collectability, to make sure payments are collected and recorded timely or to monitor compliance with the terms of loan covenants.

Without procedures in place to monitor the activity and compliance of the loans receivable balances, loan activity may not be accurately recorded in the general ledger, loan payments may not be collected timely, and loans may be out of compliance with required covenants.

City staff stated that with the high amount of employee turnover in the Finance Department, the City had not been able to monitor the loans receivable balances.

The City should develop procedures to monitor the balances, activity and covenants associated with outstanding loans receivable balances. The procedures should be communicated to City staff and a process should be put in place for the monitoring to occur.

Management’s Response:

Staff agrees with the need to develop procedures to monitor balances, activities, and covenants associated with outstanding loans receivable balances. Staff will research best practices, establish a policy, and monitor activity.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF OTHER MATTERS
2020-016 Accounts Payable Subledger Reconciliation
The City should review the accounts payable subledger and reconcile it to the general ledger on a monthly, or at least quarterly, basis. The review should be prepared by two separate individuals and the preparation and review should be documented in some formal manner.

The City did not reconcile the accounts payable subledger to the general ledger during fiscal year 2020.

If the accounts payable subledger is not reconciled to the general ledger on a monthly basis, then accounting errors, misstatements and/or unauthorized activities may not be identified or corrected in a timely manner.

City staff stated that due to the amount of turnover of staff in the Finance Department the reconciliation was not completed until after the end of the fiscal year.

The City should develop procedures to implement a monthly review and reconciliation of the accounts payable subledger to the general ledger. In addition, the preparation and review of the reconciliation should be documented in some formal manner.

Management’s Response:

Staff acknowledges inadequate staffing and frequent turnover disrupted the City’s practice of reconciling subledgers to the general ledger. Staff has put procedures in place to review and reconcile accounts payable to the general ledger in a timely manner. 2020-017 Tracking and Recording Retentions Payable
The City should track and record the amount of retentions payable for ongoing City projects that have not been deposited into an escrow account.

As project costs are incurred, the City reduces the amount paid to each vendor at the time of invoicing by the applicable retainage amount (usually 5-10% of the gross invoice amount), however, we understand that City staff does not track the individual retentions payable and the retentions payable are not recorded in the general ledger until they are paid to the vendor at the end of the project.

If the City does not track and record the balance of retentions payable for ongoing City projects, the general ledger will be understated for the amount owed to vendors at any given time, which could be significant if many capital projects are in process.

City staff stated that due to the turnover of employees in the Finance Department during the fiscal year, the City did not track and record retentions payable.

The City should develop processes to track retentions payable for all applicable projects and record the balance of retentions payable in the City’s general ledger.

Management’s Response:

Staff acknowledges inadequate staffing and frequent turnover disrupted the City’s practice of tracking and recording retentions payable. Staff has put procedures in place to track and record retentions payable.

ATTACHMENT 2

CITY OF MANTECA

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 cite them here to keep you informed of developments:

EFFECTIVE FISCAL YEAR 2020/21:

GASB 84 – Fiduciary Activities
The objective of this Statement is to improve guidance regarding the identification of fiduciary activities for accounting and financial reporting purposes and how those activities should be reported.

This Statement establishes criteria for identifying fiduciary activities of all state and local governments.

The focus of the criteria generally is on (1) whether a government is controlling the assets of the fiduciary activity and (2) the beneficiaries with whom a fiduciary relationship exists. Separate criteria are included to identify fiduciary component units and postemployment benefit arrangements that are fiduciary activities.

An activity meeting the criteria should be reported in a fiduciary fund in the basic financial statements.

Governments with activities meeting the criteria should present a statement of fiduciary net position and a statement of changes in fiduciary net position. An exception to that requirement is provided for a business-type activity that normally expects to hold custodial assets for three months or less.

This Statement describes four fiduciary funds that should be reported, if applicable: (1) pension (and other employee benefit) trust funds, (2) investment trust funds, (3) private-purpose trust funds, and (4) custodial funds. Custodial funds generally should report fiduciary activities that are not held in a trust or equivalent arrangement that meets specific criteria.

A fiduciary component unit, when reported in the fiduciary fund financial statements of a primary government, should combine its information with its component units that are fiduciary component units and aggregate that combined information with the primary government’s fiduciary funds.

This Statement also provides for recognition of a liability to the beneficiaries in a fiduciary fund when an event has occurred that compels the government to disburse fiduciary resources. Events that compel a government to disburse fiduciary resources occur when a demand for the resources has been made or when no further action, approval, or condition is required to be taken or met by the beneficiary to release the assets.

GASB 90 - Majority Equity Interests—an amendment of GASB Statements No. 14 and No. 61) The primary objectives of this Statement are to improve the consistency and comparability of reporting a government’s majority equity interest in a legally separate organization and to improve the relevance of financial statement information for certain component units. It defines a majority equity interest and specifies that a majority equity interest in a legally separate organization should be reported as an investment if a government’s holding of the equity interest meets the definition of an investment. A majority equity interest that meets the definition of an investment should be measured using the equity method, unless it is held by a special-purpose government engaged only in fiduciary activities, a fiduciary fund, or an endowment (including permanent and term endowments) or permanent fund. Those governments and funds should measure the majority equity interest at fair value.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF OTHER MATTERS
GASB 90 - Majority Equity Interests—an amendment of GASB Statements No. 14 and No. 61) (Continued)
For all other holdings of a majority equity interest in a legally separate organization, a government should report the legally separate organization as a component unit, and the government or fund that holds the equity interest should report an asset related to the majority equity interest using the equity method. This Statement establishes that ownership of a majority equity interest in a legally separate organization results in the government being financially accountable for the legally separate organization and, therefore, the government should report that organization as a component unit.

This Statement also requires that a component unit in which a government has a 100 percent equity interest account for its assets, deferred outflows of resources, liabilities, and deferred inflows of resources at acquisition value at the date the government acquired a 100 percent equity interest in the component unit. Transactions presented in flows statements of the component unit in that circumstance should include only transactions that occurred subsequent to the acquisition.

The requirements of this Statement are effective for reporting periods beginning after December 15, 2019.

Earlier application is encouraged. The requirements should be applied retroactively, except for the provisions related to (1) reporting a majority equity interest in a component unit and (2) reporting a component unit if the government acquires a 100 percent equity interest. Those provisions should be applied on a prospective basis.

EFFECTIVE FISCAL YEAR 2021/22:

GASB 87 – Leases
The objective of this Statement is to better meet the information needs of financial statement users by improving accounting and financial reporting for leases by governments. This Statement increases the usefulness of governments’ financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. Under this Statement, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby enhancing the relevance and consistency of information about governments’ leasing activities.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF OTHER MATTERS
GASB 89 – Accounting for Interest Cost Incurred before the End of a Construction Period The objectives of this Statement are (1) to enhance the relevance and comparability of information about capital assets and the cost of borrowing for a reporting period and (2) to simplify accounting for interest cost incurred before the end of a construction period.

This Statement establishes accounting requirements for interest cost incurred before the end of a construction period. Such interest cost includes all interest that previously was accounted for in accordance with the requirements of paragraphs 5–22 of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, which are superseded by this Statement. This Statement requires that interest cost incurred before the end of a construction period be recognized as an expense in the period in which the cost is incurred for financial statements prepared using the economic resources measurement focus. As a result, interest cost incurred before the end of a construction period will not be included in the historical cost of a capital asset reported in a business-type activity or enterprise fund.

This Statement also reiterates that in financial statements prepared using the current financial resources measurement focus, interest cost incurred before the end of a construction period should be recognized as an expenditure on a basis consistent with governmental fund accounting principles.

GASB 92 – Omnibus 2020
The objectives of this Statement are to enhance comparability in accounting and financial reporting and to improve the consistency of authoritative literature by addressing practice issues that have been identified during implementation and application of certain GASB Statements. This Statement addresses a variety of topics and includes specific provisions about the following:
 The effective date of Statement No. 87, Leases, and Implementation Guide No. 2019-3, Leases, for interim financial reports
 Reporting of intra-entity transfers of assets between a primary government employer and a component unit defined benefit pension plan or defined benefit other postemployment benefit (OPEB) plan
 The applicability of Statements No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, as amended, and No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, to reporting assets accumulated for postemployment benefits
 The applicability of certain requirements of Statement No. 84, Fiduciary Activities, to postemployment benefit arrangements
 Measurement of liabilities (and assets, if any) related to asset retirement obligations (AROs) in a government acquisition
 Reporting by public entity risk pools for amounts that are recoverable from reinsurers or excess insurers
 Reference to nonrecurring fair value measurements of assets or liabilities in authoritative literature
 Terminology used to refer to derivative instruments.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF OTHER MATTERS
GASB 93 – Replacement of Interbank Offered Rates
Some governments have entered into agreements in which variable payments made or received depend on an interbank offered rate (IBOR)—most notably, the London Interbank Offered Rate (LIBOR). As a result of global reference rate reform, LIBOR is expected to cease to exist in its current form at the end of 2021, prompting governments to amend or replace financial instruments for the purpose of replacing LIBOR with other reference rates, by either changing the reference rate or adding or changing fallback provisions related to the reference rate.

Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, as amended, requires a government to terminate hedge accounting when it renegotiates or amends a critical term of a hedging derivative instrument, such as the reference rate of a hedging derivative instrument’s variable payment. In addition, in accordance with Statement No. 87, Leases, as amended, replacement of the rate on which variable payments depend in a lease contract would require a government to apply the provisions for lease modifications, including remeasurement of the lease liability or lease receivable.

The objective of this Statement is to address those and other accounting and financial reporting implications that result from the replacement of an IBOR.

GASB 97 – Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans–An Amendment of GASB Statements No. 14 and No. 84, and a Supersession of GASB Statement No. 32 The primary objectives of this Statement are to (1) increase consistency and comparability related to the reporting of fiduciary component units in circumstances in which a potential component unit does not have a governing board and the primary government performs the duties that a governing board typically would perform; (2) mitigate costs associated with the reporting of certain defined contribution pension plans, defined contribution other postemployment benefit (OPEB) plans, and employee benefit plans other than pension plans or OPEB plans (other employee benefit plans) as fiduciary component units in fiduciary fund financial statements; and (3) enhance the relevance, consistency, and comparability of the accounting and financial reporting for Internal Revenue Code (IRC) Section 457 deferred compensation plans (Section 457 plans) that meet the definition of a pension plan and for benefits provided through those plans.

EFFECTIVE FISCAL YEAR 2022/23:

GASB 91 – Conduit Debt Obligations
The primary objectives of this Statement are to provide a single method of reporting conduit debt obligations by issuers and eliminate diversity in practice associated with (1) commitments extended by issuers, (2) arrangements associated with conduit debt obligations, and (3) related note disclosures. This Statement achieves those objectives by clarifying the existing definition of a conduit debt obligation; establishing that a conduit debt obligation is not a liability of the issuer; establishing standards for accounting and financial reporting of additional commitments and voluntary commitments extended by issuers and arrangements associated with conduit debt obligations; and improving required note disclosures.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

SCHEDULE OF OTHER MATTERS
GASB 94 – Public-Private and Public-Public Partnerships and Availability Payment Arrangements The primary objective of this Statement is to improve financial reporting by addressing issues related to public-private and public-public partnership arrangements (PPPs). As used in this Statement, a PPP is an arrangement in which a government (the transferor) contracts with an operator (a governmental or nongovernmental entity) to provide public services by conveying control of the right to operate or use a nonfinancial asset, such as infrastructure or other capital asset (the underlying PPP asset), for a period of time in an exchange or exchange-like transaction. Some PPPs meet the definition of a service concession arrangement (SCA), which the Board defines in this Statement as a PPP in which (1) the operator collects and is compensated by fees from third parties; (2) the transferor determines or has the ability to modify or approve which services the operator is required to provide, to whom the operator is required to provide the services, and the prices or rates that can be charged for the services; and (3) the transferor is entitled to significant residual interest in the service utility of the underlying PPP asset at the end of the arrangement.

This Statement also provides guidance for accounting and financial reporting for availability payment arrangements (APAs). As defined in this Statement, an APA is an arrangement in which a government compensates an operator for services that may include designing, constructing, financing, maintaining, or operating an underlying nonfinancial asset for a period of time in an exchange or exchange-like transaction.

GASB 96 – Subscription-Based Information Technology Arrangements This Statement provides guidance on the accounting and financial reporting for subscription-based information technology arrangements (SBITAs) for government end users (governments). This Statement (1) defines a SBITA; (2) establishes that a SBITA results in a right-to-use subscription asset—an intangible asset—and a corresponding subscription liability; (3) provides the capitalization criteria for outlays other than subscription payments, including implementation costs of a SBITA; and (4) requires note disclosures regarding a SBITA. To the extent relevant, the standards for SBITAs are based on the standards established in Statement No. 87, Leases, as amended.

ATTACHMENT 2
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ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

MATERIAL WEAKNESSES
2019-001 Timely and Accurate Year-End Close
The year-end financial closing and preparation of the general ledger data should be completed timely and accurately. In addition, well-managed organizations should develop a plan to ensure that adequate resources will remain available in the event of employee departures. Part of that is ensuring there are resources available to be utilized on short notice to fill gaps in key positions, especially in the Finance Department. These resources need to be in place throughout the fiscal year to ensure accounting processes and procedures continue and allow time for analysis of account balances and activities.

Due to the staff turnover during the year, there is a significant strain on the City’s ability to maintain a good internal control environment and to produce accurate and timely financial data. As a result, the year-end audit was adversely affected. During the audit, we discovered and/or City staff proposed fiftyfour post-closing journal entries, including a number of material post-closing adjustment entries. City staff had difficulty completing material closing entries prior to providing the general ledger for audit for areas including recording the fiscal year 2018 closing entries related to the total OPEB liability and related deferred outflows/inflows of resources and claims payable and the fiscal year 2019 closing entries for debt service transactions, interfund activities, fair value of the swap derivative, accounts receivable, capital assets, contracts payable, pension liabilities and related deferred outflows/inflows of resources and OPEB liabilities and related deferred outflows/inflows of resources. In addition, the components of fund balance in the General Fund had not been adjusted to reflect the revised fund balance policy adopted during the fiscal year. These areas affected the year-end closing process and most of the City’s funds.

The above condition delayed the completion of the year-end closing process, which increases the risk that errors or misstatements may go undetected by staff and corrections may not be made in a timely manner.

Audit effort was substantially increased in response to these increased risks.

The City should analyze staff resources to determine what plans can or should be made to ensure that the financial data is processed properly and timely during staffing transitions. In addition, the City must develop procedures to ensure that accounts are analyzed throughout the fiscal year and after the year end close to ensure that additional closing entries are not required prior to providing the general ledger for audit.

Current Status:

See 2020-001.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

MATERIAL WEAKNESSES
2019-002 Accounting for Development Agreement Activities Development agreements often contain financial provisions that need to be reflected in the City’s general ledger or disclosed in the City’s financial statements.

The City entered into a Disposition and Development Agreement (DDA) with a Developer to construct a destination resort (Project), as well as a Development Agreement (DA), in April 2018 that included a number of provisions related to the sale of property to the developer and the deferred payment of various City development fees. The trigger point for recording the associated balances and activity for the DA was the sale of the property to the developer.

During the audit, we noted that the land sale had occurred in August 2018, but the general ledger did not contain any of the associated transactions, such as the retirement of the land sold to the developer and the related loan receivable for the sale ($675,000), and the deferred fees receivable from the developer ($10.7 million).

We understand that due to the complexity of the development agreement and turnover in the Finance Department and other City departments, accounting for the transactions in the development agreement were not assigned to any applicable City staff, and City staff did not determine the appropriate accounting for the transaction until December 2020.

If the City enters into agreements with third parties that include financial provisions that go unnoticed, it could result in a misstatement of the financial statements or an omission of a significant City commitment from the notes to the financial statements.

The City must develop procedures to ensure that all third party agreements are reviewed for financial impacts, so the proper accounting treatment can be applied, and any necessary financial statement disclosures are included.

Current Status:

Implemented
ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2019-003 Prior Year Recommendations Not Yet Implemented During the current year audit, we followed up on the status of Significant Deficiencies identified on the Status of Prior Year Significant Deficiencies. We found that the following deficiencies had either been partially or not mitigated at June 30, 2019. Therefore, they are deemed to be current year Significant Deficiencies. Details of these deficiencies and associated management’s responses are listed in the Status of Prior Year Significant Deficiencies.
• 2017-002 Golf Enterprise Fund Working Capital
• 2015-002 Timely Review and Approval of Journal Entries • 2015-003(b)iii Investment Reporting and Compliance
• 2015-004 Timely Filing of Continuing Disclosure Reports • 2012-02(a) Internal Controls – Segregation of Duties - Super-User Status in the General Ledger System
Current Status:

See Current Year comment 2020-006 and Management’s Response to Current Year Status for each of the above deficiencies as listed in the Status of Prior Year Significant Deficiencies below. 2019-004 Finance Personnel Super-User Rights
As noted in prior year comment 2012-02, good internal controls are based a segregation of duties, and no one finance employee should have access to an asset and the controlling documentation that supports that asset. Ideally, one employee should retain authorization to use an asset and another employee should maintain the records over that asset. Super-user rights give an individual the potential to obtain both of these functions. Due to the reasons mentioned above, Finance staff should not normally be allowed to have super-user rights in the City’s general ledger system.

We noted that three City employees (the Finance Director, the Accounting Manager, and the Deputy Director of Finance) continue to have super-user rights to the New World general ledger. When accounting staff have super-user rights, there is a potential risk of restricting or allowing access to other user’s abilities to access the different modules in the accounting system (i.e., unauthorized adjustments could be made to the general ledger). In addition, unauthorized transactions could be processed without proper review and approval.

While we understand the City has a limited number of staff available to provide system administration functions, the City should consider restricting super user rights to as few employees as possible. Until that is possible, the City should implement mitigating controls such as a review and approval of changes made to the system by the above employees.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2019-004 Finance Personnel Super-User Rights (Continued) Update for June 30, 2020 Audit:

For the year ended June 30, 2020, we noted that three City employees (the Finance Director, the Accounting Manager, and the Budget Manager) continue to have super-user rights to the New World general ledger.

Current Status:

We agree that the security of super users should be reviewed more thoroughly and that a procedure should be established for system changes. Internal controls for super users is currently being reviewed with IT and the ERP vendor. Because of the nature of the ERP system, other compensating controls will be necessary.
2019-005 Accounting for Sales of Components of Capital Assets Proceeds from the sales of capital assets should normally be recorded in the fund that owns title to the asset and/or funded the purchase of the asset.

During fiscal year 2019, the City sold a conservation easement to another government agency for $1 million and recorded the proceeds in the City’s General Fund. However, the property was owned by the Sewer Enterprise Fund and had been purchased with bond proceeds.

Although we understand Finance staff initially questioned whether the proceeds from the sale of the easement could be recorded in the General Fund when the land was owned by the Sewer Enterprise Fund, the proceeds remained in the General Fund in the general ledger provided for audit.

Subsequent to the fiscal year end, City staff continued to research the matter and determined that the land should instead be purchased by the General Fund at the original cost of the property, and it would then retain the easement sales proceeds, which was retroactively approved by the City Council in December 2020.

In the future, City staff should determine which fund owns any capital assets that are going to be sold, prior to the execution of a sale agreement, even if the sale involves only an easement or other component of the capital asset, to ensure that all sales proceeds are recorded in the correct fund. In addition, the City should ensure the Sewer Fund returns the sales proceeds from the General Fund to the bond proceeds account to be used on future bond-funded projects.

Current Status:

Implemented.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2019-006 Timely Posting of Budget Amendments to the General Ledger Budget amendments that are approved by the City Council or other applicable City staff during the fiscal year should be recorded in the general ledger in a timely manner.

We selected two budget amendment posting entries to test for proper review and approval and noted that although the entries were reviewed and approved, the entries were recorded in the general ledger long after the City Council approval dates as noted below:
 One entry in the amount of $387,500 was approved by the City Council in November 2018, but not recorded in the general ledger until January 2019.
 One entry in the amount of $175,760 that was to record three different budget amendments approved by City Council in July 2018, August 2018 and October 2018 was not recorded in the general ledger until April 2019.

We understand the delays in posting amendments to the general ledger was due to past staffing challenges in the Finance Department.

If budget amendments approved by the City Council are not recorded in the general ledger in a timely manner, it could result in misstatements in interim financial reports, or could even impact the expenditure authorization for goods or services disbursements.

Finance staff should develop procedures to ensure that all budget amendments approved by the City Council or other applicable City personnel are recorded in the general ledger in a timely manner.

Current Status:

Implemented.
2019-007 Determine Disposition of Lease Proceeds
Proceeds from the issuance of debt should be used for the project or other purchase in a timely manner, usually within one to two years, depending on the purpose of the issuance.

The City issued a lease in 2015 for the purchase of equipment and debt service on the lease began in June 2016. However, as of June 30, 2019, the City had not spent all of the proceeds from the lease and the escrow account balance was $562,263 as of that date.

We understand that the use of these funds for equipment purchases was expected to be considered as part of the funding plan during the preparation of the fiscal year 2020 budget.

If proceeds from the issuance of debt are not spent in a timely manner, the City may continue to make debt service payments on cash that is in the escrow account.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2019-007 Determine Disposition of Lease Proceeds (Continued) The City should determine if qualifying equipment purchases were made subsequent to the issuance of the lease that could be reimbursed from the escrow account, or determine whether the funds will be used for equipment purchases in the near future. If such purchases are not identified, the City should determine if the balance in the escrow account should instead be used to retire the outstanding lease payable balance, which was $160,253 as of June 30, 2019.

Update for June 30, 2020 Audit:

As of June 30, 2020, the escrow account balance was $564,082.

Current Status:

All proceeds from leases have been reviewed and appropriately drawn down by July 2021. 2018-001 Prior Year Recommendations Not Yet Implemented During the current year audit, we followed up on the status of Significant Deficiencies identified on the Status of Prior Year Significant Deficiencies. We found that the following deficiencies had either been partially or not mitigated at June 30, 2018. Therefore, they are deemed to be current year Significant Deficiencies. Details of these deficiencies and associated management’s responses are listed in the Status of Prior Year Significant Deficiencies.
• 2017-002 Golf Enterprise Fund Working Capital
• 2015-002 Timely Review and Approval of Journal Entries • 2015-003 Investment Reporting and Compliance
• 2015-004 Timely Filing of Continuing Disclosure Reports • 2014-002 Timely Preparation and Approval of Bank Reconciliation • 2012-02 Internal Controls – Segregation of Duties
Current Status:

See Current Year comment 2020-006 and Management’s Response to Current Year Status for each of the above deficiencies as listed in the Status of Prior Year Significant Deficiencies below. 2017-002 Golf Enterprise Fund Working Capital
The Government Finance Officers Association (GFOA) recommends that local governments adopt a target amount of working capital which indicates the level of funding needed to meet the obligations of the fund. Working capital is defined as the difference between current assets and current liabilities of the fund. In addition, the City’s policy for enterprise funds is that the target for working capital is that a baseline of 90 days of working capital or 25% of operating expenses is maintained.

As of June 30, 2017, the Golf Enterprise Fund had working capital that could only cover 19 days or 3% of the Fund’s operating expenses. In addition, the fund has incurred an operating loss for the past two fiscal years.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2017-002 Golf Enterprise Fund Working Capital (Continued) The City is not in compliance with the terms of its working capital policy.

The Golf Fund revenue as well as the annual play has declined over the past 10 years combined with the increase in expenditures for capital improvements necessary to keep the course in operating condition.

The City should develop a plan to analyze the operations of the Golf Enterprise Fund and develop a plan to fund the operations in a manner that would bring the fund into compliance with the City’s working capital policy.

Update for June 30, 2018 Audit:

As of June 30, 2018, the Golf Enterprise Fund had working capital that could only cover 23 days or 6% of the Fund’s operating expenses.

Update for June 30, 2019 Audit: For the year ended June 30, 2019, the Golf Enterprise Fund incurred an operating loss of $152,029 and as of June 30, 2019, the Golf Enterprise Fund had working capital that could only cover 20 days or 5.5% of the Fund’s operating expenses.

Update for June 30, 2020 Audit: For the year ended June 30, 2020, the Golf Enterprise Fund incurred an operating loss of $254,975 and as of June 30, 2020, the Golf Enterprise Fund had working capital that could only cover 37 days or 10.2% of the Fund’s operating expenses.

Current Status:

The revenue for the golf course was evaluated for the FY 22 budget and we believe the subsidy from the General Fund is sufficient to correct the working capital. This was further evaluated during FY 22 as a fee study took place which recommended increasing the overall user fees for the golf course.
2015-002 Timely Review and Approval of Journal Entries
This comment is an update of matters repeated in prior years as discussed in Significant Deficiency 2014- 003, which is not repeated in this report since it is substantially redundant with our comments below.

Journal entries should be prepared and reviewed in a timely manner for the period in which the entry is to be posted, in order to keep accounts up to date with the current information. In addition, to have a complete audit trail of the journal entry process, the dates of preparation and review should be documented for all journal entries.

We selected forty journal entries for testing of controls over the journal entry process and supporting documentation and noted thirteen of the journal entries were reviewed more than a month after the periods the entries were intended to adjust. The journal entries were reviewed from two to nine months after the date of preparation or the period in which they were being posted.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2015-002 Timely Review and Approval of Journal Entries (Continued) Two of the 40 journal entries tested did not have evidence of the date prepared and the date reviewed, which is typically indicated by date stamps used by the Finance Department. One of the two journal entries without a date stamp did have a date printed on the bottom of the page that reflected when the journal voucher may have been prepared, however, no date of review was noted.

During our testing of investments, we also noted December 2014 and March 2015 journal entries to record investments and interest, indicate they were prepared on April 23, 2015 and reviewed and posted on April 22, 2015 which is prior to when the Treasurer’s Reports themselves were prepared and reviewed.

Finally, we also noted that 5 of the 40 journal entries tested included the date stamp in accordance with City policy, but the date on the review stamp was prior to the date the document was prepared.

Without the timely preparation, review and approval of journal entries, there is an increased risk of unauthorized entries or an error going undetected, and interim financial reporting may be inaccurate.

We understand the delay in the review process was due to the shortage of staff in the Finance Department, and the date stamp differences were due to staff oversight.

The City should develop procedures to ensure that all journal entries are prepared, reviewed, approved and posted to the general ledger in a timely manner (within 30-45 days of the date of activity). And, the date stamps should be included in that review process to ensure the process is accurately documented.

Update for June 30, 2016 Audit:

We selected forty journal entries for testing of controls over the journal entry process and supporting documentation. We noted eleven of the entries were reviewed from two to six months after the date of preparation or the period to which they were being posted.

One of the forty journal entries tested did not have evidence of the date prepared, which is typically indicated by date stamps used by the Finance Department.

Update for June 30, 2017 Audit:

We selected 40 journal entries for testing of controls over the journal entry process and supporting documentation. We noted four of the forty entries were reviewed and posted more than 45 days after the date they were prepared.

Additionally, it was noted that three of the forty journal entries tested were posted to the general ledger more than 2 to 5 months after the transactions occurred.

Update for June 30, 2018 Audit:

We again selected 40 journal entries for testing of controls over the journal entry process and supporting documentation. We noted that the journal entries were prepared, reviewed, approved and posted to the general ledger in a timely manner. However, we noted two journal entries that had review dates stamped on them that were prior to the preparation date of the entries.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2015-002 Timely Review and Approval of Journal Entries (Continued) Update for June 30, 2019 Audit:

During this year’s audit, we again selected 40 journal entries for testing of controls over the journal entry process and supporting documentation. We noted that the thirty-nine of the journal entries were prepared, reviewed, approved and posted to the general ledger in a timely manner. However, we noted one of the journal entries was prepared and posted to the general ledger in a timely manner, but the review indication included what appears to be the reviewers date stamp, but not the sign-off of approval by the reviewer.

Update for June 30, 2020 Audit:

During this year’s audit, we again selected 40 journal entries for testing of controls over the journal entry process and supporting documentation. We noted that thirty-seven of the journal entries were prepared, reviewed, approved and posted to the general ledger in a timely manner. However, we noted three of the journal entries were prepared and posted to the general ledger in a timely manner, but the review of the journal entries did not take place until two to four months later. In addition, one of the journal entries was posted to February 2020 instead of September 2019, when the transaction occurred.

Current Status:

The City has procedures in place for all journal entries to be reviewed before they are posted to the general ledger, and these entries are initialed by the reviewer. The review and approval of journal entries is being done with the posting of these entries beginning July 15, 2020. 2015-003 Investment Reporting and Compliance
During our review of timely preparation of the Treasurer’s Reports and compliance with the requirements of the City’s Investment Policy, we noted the following:
a. Timely Preparation and Approval of Treasurer’s Reports This comment is an update of matters repeated in prior years as discussed in Other Matters 2014- 007 and 2012-07, which are not repeated in this report since they are substantially redundant with our comments below.

To be an effective control, Treasurer’s Reports and the associated review should be completed in their entirety as soon as reasonably possible after each month or quarter-end, typically within thirty to forty-five days of the bank statement month end. In addition, Section XX, Reporting, of the City’s Investment Policy requires that the City Treasurer review and make available the monthly investment reports to the City Manager and City Council.

We reviewed the City’s December 31, 2014 and March 31, 2015 Treasurer’s Reports and noted that they were not prepared until May 31 and June 1, respectively, and there was no indication of the date when they were reviewed. We reviewed the City’s Treasurer’s Report and Successor Agency Treasurer’s Report for the month of June 2015, and noted that both of the Treasurer’s Reports were reviewed and approved on September 15, 2015.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2015-003 Investment Reporting and Compliance (Continued) With such delays, any errors, misstatements and/or unauthorized activities may not be identified or corrected in a timely manner.

We understand the delay in preparing the Treasurer’s Reports was due to the Finance Department being short staffed from July 2014 through March 2015 and that an employee was hired in March 2015 to help alleviate the workload.

The City should implement procedures to ensure the timely preparation of the monthly Treasurer’s Reports and ensure that preparation and review are documented in a formal manner, including the date of which each takes place.
b. Treasurer’s Report Accuracy and Compliance with Government Code During our review of the January 2015 Treasurer’s Report, we noted the following issues:
i. Correct Identification of Investments
The Treasurer’s Report and Investment Reconciliation should accurately identify each investment based on information provided by the trustee/fiscal agent statement.

During our review of the January 2015 Summary of Account Activity in the Treasurer’s Report, we noted CAMP investments were properly classified, however on the Fund Summaries page of the Treasurer’s Report, they were reported as Certificates of Deposit.

We also noted the City’s Certificates of Deposit, which were correctly identified in the Summary of Account Activity page of the Treasurer’s Report, were classified as Commercial Paper in the Investment Schedule page of the Treasurer’s Report. And, the total Certificates of Deposit reported on the Investment Schedule did not agree to the total on the Union Bank Statement as of January 31, 2015.

In addition, this error in reporting the CAMP investments as Certificates of Deposits caused the actual balance of Certificates of Deposit of $25 million to be excluded from the Fund Summaries page of the Treasurer’s Report.

City staff indicated that when they were preparing the Treasurer’s Report, they forgot to update the categories.

Each page of the Treasurer’s Report should be reviewed in detail each month and reconciled to both the investment statements and the general ledger to ensure accurate reporting.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2015-003 Investment Reporting and Compliance (Continued) ii. Fiscal Agent Investment Reporting
Treasurer’s Reports should be updated monthly, or they should denote the date of the information reported if it does not correspond with the statements as of the reporting date.

In our review of the January 2015 fiscal agent statements, we noted that there were variances between the January 2015 Treasurer’s Report and the fiscal agent statements.

The Treasurer’s Report did not indicate that the reported balances were accurate as of another date other than the January 2015 statements.

We understand the City only updates the activity for the fiscal agent investments on a semi-annual basis in the Treasurer’s Report, but the Report does not include such an indication.

As a result, the City is incorrectly reporting investments in the Treasurer’s Report on a month to month basis – they are only accurate semi-annually.

City staff should include the actual month-end balances of the fiscal agent statements in the Treasurer’s Report, or include an indication that the information is updated only semiannually. Another option would be to exclude the fiscal agent account balances from the Treasurer’s Report, since the Investment Policy excludes funds subject to bond indentures.
iii. Compliance with Government Code Section 53607 Reporting Requirements The Reporting Section of the City’s Investment Policy indicates that the monthly investment reports are to be made available to the City Council. However, the Resolution adopting the annual Investment Policy and the Budget Policy delegate the authority to invest the funds of the City under California Government Code Section 53607, which requires monthly reporting of transactions to the legislative body.

We understand the monthly reports are not submitted to City Council and the Treasurer’s Reports are only submitted when they are requested by City Councilmembers.

The City should determine whether the current reporting requirement in the Investment and Budget Policies is sufficient under the Government Code, or if the Investment and Budget Policies and reporting method should be revised to conform to the Code requirements.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2015-003 Investment Reporting and Compliance (Continued) iv. Compliance with Government Code Section 53646 – Updating Reference to Investment Policy
Government Code Section 53646 requires that the Treasurer’s Report state compliance of the portfolio to the statement of investment policy, or the manner in which the portfolio is not in compliance.

We reviewed the December 2014, January 2015 and March 2015 Treasurer’s Reports and noted that the statement of certification of compliance to the City’s Investment Policy references the Investment Policy adopted by City Council dated September 18, 2006, when the City’s most recent Investment Policy is dated August 6, 2013.

Staff indicated that during the preparation of the Treasurer’s Report, staff copied over the incorrect date of the adoption of the Investment Policy.

The date in the certification should be updated or it could even be removed.

City staff should review and compare the Treasurer’s Report to all investment/trustee statements in detail each month and not just update the balances, to ensure information is being presented correctly. City staff should also ensure that investments are classified correctly by investment type and amount. Finally, the City should determine whether the current reporting requirement in the Investment Policy is sufficient under the Government Code, or if the Investment Policy and reporting method should be revised to conform to the Code requirements.

Update for June 30, 2018 Audit:
a. Timely Preparation and Approval of Treasurer’s Reports We again reviewed the Treasurer’s Reports for timely preparation and proper approval and noted the following:
 The October 31, 2017 Treasurer’s Report was prepared and reviewed on April 17, 2018 almost six months after the end of the period.
 The November 30, 2017 Treasurer’s Report was prepared and reviewed on April 20, 2018 almost five months after end of the period.
 The February 28, 2018 Treasurer’s Report was prepared and reviewed on May 15, 2018 almost three months after the end of the period.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2015-003 Investment Reporting and Compliance (Continued) b. Treasurer’s Report Accuracy and Compliance with Government Code i. Correct Identification of Investments
Implemented
ii. Fiscal Agent Investment Reporting
Implemented
iii. Compliance with Government Code Section 53607 Reporting Requirements Not implemented. The City did not submit monthly investment reports to the City Council in fiscal year 2017-2018.
iv. Compliance with Government Code Section 53646 – Updating Reference to Investment Policy
Implemented
Update for June 30, 2019 Audit:
a. Timely Preparation and Approval of Treasurer’s Reports Implemented during fiscal year 2019. However, see current year comment 2020-008. b. Treasurer’s Report Accuracy and Compliance with Government Code iii. Compliance with Government Code Section 53607 Reporting Requirements Not implemented. The City did not submit monthly investment reports to the City Council in fiscal year 2017-2018.

Update for June 30, 2020 Audit:
a. Timely Preparation and Approval of Treasurer’s Reports See 2020-008.
b. Treasurer’s Report Accuracy and Compliance with Government Code iii. Compliance with Government Code Section 53607 Reporting Requirements Not implemented. The City did not submit monthly investment reports to the City Council in fiscal year 2019-2020.

Current Status:

The City began formal quarterly investment reporting to the Council and the public in November 2020, for the period ending September 2020. In addition, the investment policy was updated in December 2020 and including investment reporting as a quarterly requirement in the policy.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2015-004 Timely Filing of Continuing Disclosure Reports The covenants of the City’s 2012 Water Refunding Bonds and 2012 Sewer Refunding Bonds require them to prepare an Annual Report no later than seven months after the end of the City’s fiscal year. The Report should be filed with the Municipal Securities Rule-making Board (MSRB) by either the City or the bond trustee.

During our review of the filing of continuing disclosure, we noted that as of October 21, 2015, the City had not filed any Annual Reports to date for the 2012 Water Refunding Bonds or the 2012 Sewer Refunding Bonds.

The City is not in compliance with the annual reporting requirements of the Bond covenants.

Although the City does make annual filings for other bond issues, we understand the failure to report was due to City staff not being aware of the disclosure requirements for these debt issues.

The City should ensure that the delinquent Annual Reports are filed with MSRB and future Reports are filed timely. If the Trustee is responsible for the filing, the City should make sure that the filing is completed by the deadline.

Update for June 30, 2018 Audit:

During our review of the filing of continuing disclosure reports, we noted that the City did not file the annual reports for the fiscal year ended June 30, 2017 until May 2, 2018 for the 2012 Water Refunding Bonds and the 2012 Sewer Refunding Bonds.

Update for June 30, 2019 Audit:

During our review of the filing of continuing disclosure reports due on December 31, 2018 for the year ended June 30, 2018, we noted that the City did not file the June 30, 2018 annual reports for the 2012 Water Refunding Bonds and the 2012 Sewer Refunding Bonds until July 26, 2019.

Update for June 30, 2020 Audit:

During our review of the filing of continuing disclosure reports due on December 31, 2019 for the year ended June 30, 2019, we noted that the City did not file the June 30, 2019 notice stating that the annual reports for the 2009 and 2012 Sewer Refunding Bonds would be filed once the fiscal year 2019 financial statements were issued until May 10, 2021, and the 2012 Water Refunding Bonds until May 3, 2021.

Current Status:

The City has contracted out all continuing disclosure reporting. We anticipate this to be a reoccurring issue until such time that the Financial Statements are filed timely and the required information is available for disclosure, estimated to be June of 2021.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2014-002 Timely Preparation and Approval of Bank Reconciliations Bank reconciliations are one of the most important internal controls a city can have, and the bank reconciliation cannot be considered complete until it has been reviewed and approved. To be an effective control, bank reconciliations and the associated review should be completed in their entirety as soon as reasonably possible after each month-end, usually within thirty to forty-five days of bank statement month end.

We reviewed the City’s December 2013 bank reconciliations and noted they were not completed until late February 2014 as follows: Payroll Account - February 27, Section 125 (Aflac) Account - February 24, Police Account - February 24 and Workers Compensation Account - February 20. We were unable to determine the completion or review date of the General Account, as there was no date noted, however it appears to have been mid-February due to the print date on the paper backup.

We reviewed the City’s January 2014 bank reconciliations for the same accounts and it is also unclear as to when they were completed as the preparer and reviewer sign-offs are not dated, however it appears they were completed in mid-March due to the print dates on the paper backup.

Finally, we noted that the April 2014 bank reconciliations for the accounts were not completed as of June 10, 2014. With such a delay, any errors, misstatements and/or unauthorized activities may not be identified in a timely manner or corrected accordingly.

We understand the delay in preparing the bank reconciliations was due to the implementation of the utility billing module of the New World System on January 1, 2014 impacting all Finance staff. In addition, we understand there was a turnover in staff during the month of February 2014 and the transition period impacted the timely preparation of the bank reconciliations.

The City should implement procedures to ensure the timely preparation of the bank reconciliations and ensure that preparation dates and signatures are visible on the reconciliations.

Update at June 30, 2015: We reviewed the City’s December 2014 bank reconciliations for the following accounts and noted there was no indication of the date they were prepared, and they were not reviewed until March 2015 as follows: Section 125 (Aflac) Account – March 21, Police Account – March 13 and Workers Compensation Account – March 21. The December 2014 General Account and Payroll Account reconciliations were not prepared or reviewed until May 6 and April 16, respectively.

We also reviewed the City’s January 2015 bank reconciliations for the following accounts and noted there was no indication of the date they were prepared, and they were not reviewed until March 2015 as follows: Section 125 (Aflac) Account – March 21, Police Account – March 21 and Workers Compensation Account – March 31. The January 2015 General Account and Payroll Account were not prepared or reviewed until May 12 and May 6, respectively. And, during our review of the General Checking account June 2015 reconciliation, we noted it was not prepared and reviewed until September 10, 2015 and September 15, 2015, respectively.

We understand the delay in preparing the bank reconciliations was due to the Finance Department being short staffed from July 2014 through March 2015 and that an employee was hired in March 2015 and is in training to assume the bank reconciliation duties.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2014-002 Timely Preparation and Approval of Bank Reconciliations (Continued) Update for June 30, 2016 Audit:

In June 2016, we reviewed the City’s December 2015 bank reconciliations and noted they were not prepared and reviewed until late February or early March 2016 as follows: General Checking Account - February 29, Section 125 (Aflac) Account – March 1 and Workers Compensation Account - February 29.

We understand the delay in preparing the bank reconciliations was due to the turnover of staff and new employees being trained to complete the process which impacted the timely preparation and review of the bank reconciliations.

In October 2016, we reviewed the City’s June 2016 bank reconciliations for the same accounts. We found that the reconciliation for the General Checking account was prepared and reviewed on a timely basis. As for the Section 125 and Worker’s Compensation Accounts bank reconciliations, they were prepared timely and reviewed by October 2016. However, we could not determine when the preparation or review took place as the preparers and reviewers did not indicate such on the reconciliations.

Update for June 30, 2017 Audit:

We again selected bank reconciliations for testing for timely preparation and proper approval and noted following:
 The City’s November 2016 bank reconciliation for the General Checking Account was not prepared until March 7, 2017 and were not reviewed until March 15, 2017. Additionally, the Payroll Section 125 Reimbursement Account was signed off as prepared and reviewed, although there is no indication of the date it was prepared and reviewed.  The City’s March 2017 bank reconciliations for the General Checking, Payroll Checking, Section 125 Payroll Reimbursement Account, and Workers Compensation Account were not prepared and reviewed until June 2, 2017 and June 5, 2017, respectively.  During our testing of the City’s June 2017 bank reconciliations, it was noted that the City’s reconciliation of the general checking account was not prepared and reviewed until October 1, 2017. Additionally, it was noted that there was no indication of who prepared or reviewed the June 2017 Successor Agency bank reconciliation, or the date that it was prepared or reviewed.

Update for June 30, 2018 Audit:

We again selected bank reconciliations for testing for timely preparation and proper approval and noted following:

The City’s December 2017 bank reconciliations for the General Checking, Payroll Checking, Successor Agency Check, and Workers’ Compensation Checking Accounts were not prepared or reviewed until March 5, 2018. Additionally, the Payroll Section 125 Reimbursement Account December 2017 bank reconciliation was not prepared and reviewed until March 9, 2018.

Furthermore, the City’s February 2018 bank reconciliation for the General Checking Account was not prepared and reviewed until May 14 and 15, 2018, respectively.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2014-002 Timely Preparation and Approval of Bank Reconciliations (Continued) According to City staff, the reason for the delay was due to staff changes in the Finance Department during the current year.

Update for June 30, 2019 Audit:

We again selected four months for testing of timely preparation and review and noted the bank reconciliations for August 2018, November 2018, March 2019 and June 2019 were prepared and reviewed within thirty to forty-five days of bank statement month end.

Current Status:

See 2020-002.
2012-02 Internal Controls – Segregation of Duties
This comment is an update of matters repeated in prior years as discussed in Significant Deficiency 2010- 03, which is not repeated in this report, since it is substantially redundant with our comments below.

During our review of the City’s internal controls for proper segregation of duties and procedures, we noted areas in which controls need to be improved and employee’s access and/or duties revised. Good internal controls require that employees with access to the City’s assets not have access to the City’s accounting records for the same assets.
a. Super-User Status in the General Ledger System
Accounting staff should not normally be allowed to have Super-User rights in the City’s general ledger system. We noted that three City employees (the Finance Director, the Accounting Manager, and the Deputy Director of Finance) have super-user rights to the HTE SunGard System. When accounting staff have super-user rights, there is a potential risk of restricting or allowing access to other user’s abilities to access the different modules in the accounting system (i.e., unauthorized adjustments could be made to the general ledger). In addition, unauthorized transactions could be processed without proper review and approval. While we understand the City has a limited number of staff available to provide system administration functions, the City should consider restricting super user rights to as few employees as possible. Until that is possible, the City should implement mitigating controls such as a review and approval of changes made to the system by the above employees.
b. Reviewing Changes to Vendor Database
The Accounts Payable Senior Accounting Technician processes accounts payable, mails the checks, and has access to the vendor database. Although the check registers are reviewed, there is no review of the vendor database for additions or modifications. An employee other than the Senior Accounting Technician should review the vendor database periodically and approve all additions and modifications.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2012-02 Internal Controls – Segregation of Duties (Continued) c. Reviewing Changes to Employee Database
The Payroll Clerk processes payroll, and although she cannot add new employees to the employee database, she can modify data within the database. Although the payroll registers are reviewed, there is no review of the employee database for modifications. An employee other than the Payroll Clerk should review the employee database periodically and ensure all modifications have been approved.

Update for 2013, 2014 and 2015 Audits –We again noted the lack of segregation of duties associated with super users and reviewing changes to the vendor and employee databases.

With such access to the databases, there is a risk of unapproved changes being made to the vendor or employee databases. Ideally, the access to the various databases should be removed from the employees involved with processing the above transactions. In the event that is not possible, another appropriate employee should review the applicable databases periodically to ensure all additions, deletions and modifications have been approved.

We understand the New World System accounting software does not currently have the capability of producing reports of changes made to the various databases. Again, if the access to the databases cannot be removed from the employees noted, when these database changes reports are available, they should be generated during the review process for each applicable area and reviewed in detail to ensure all modifications were accurate and approved.

Update for June 30, 2018 Audit:
a. Super-User Status in the General Ledger System
Not implemented. We noted that same three City staff positions still have super-user rights to the New World System.
b. Reviewing Changes to Vendor Database
Implemented.
c. Reviewing Changes to Employee Database
Although the payroll registers are now reviewed, if changes to the employee database are completed without backup being provided, the change may go unnoticed. The City should develop a process to ensure that the Accounting Manager is alerted to any changes that are made to the employee database.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

SIGNIFICANT DEFICIENCIES
2012-02 Internal Controls – Segregation of Duties (Continued) Update for June 30, 2019 Audit:
a. Super-User Status in the General Ledger System
Not implemented. We noted that same three City staff positions still have super-user rights to the New World System.
b. Reviewing Changes to Vendor Database
Implemented.
c. Reviewing Changes to Employee Database
Implemented.

Update for June 30, 2020 Audit:
a. Super-User Status in the General Ledger System
Not implemented. We noted that three City staff positions still have super-user rights to the New World System.
b. Reviewing Changes to Vendor Database
Implemented.
c. Reviewing Changes to Employee Database
Implemented.

Current Status:
a. See 2019-004
b. Implemented.
c. Implemented
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ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

OTHER MATTERS
2019-008 Treasurer’s Report Investment Categorization
The Treasurer’s Report should accurately identify each investment based on the information provided by the applicable account statement.

During our review of the March 2019 Summary of Cash and Investments in the Treasurer’s Report, we noted that Asset Backed Securities were incorrectly classified as Collateralized Mortgage Obligations.

Investments that are not properly classified in the monthly Treasurer’s Report lead to inaccurate reporting.

City staff must develop procedures to ensure the Summary of Cash and Investments in the Treasurer’s Report accurately identifies each investment based on the information provided by the account statement.

Update for June 30, 2020 Audit:

During the audit, we noted that the Treasurer’s Report had not been prepared and reviewed since January 2020. As a result, we were unable to determine if the above issue had been corrected.

Current Status:

We agree with the Auditors concerns. The City began formal quarterly Investment Reporting to the Council and the public in November 2020 for the period ending September 2020. The report format includes each of the City’s holdings and is generated by the City’s investment management firm, leaving no room for error or misinterpretation by City staff. We will be drafting a Reporting Policy and including Investment Reporting as a quarterly requirement in the policy.
2016-003 Information Technology Best Practices Recommendations We conducted an Information Systems Review with our audit which encompassed the City’s financial information system and the network environment that houses it. Our work goes beyond simply looking at financial information systems as a result of greater risks of unauthorized access caused by overall industry growth of web-based commerce and internet based financial systems. Internal controls that are present in the overall network environment have become more important and relevant to understanding the internal controls over the financial system. We believe Information System controls must be continuously improved and enhanced to stay ahead of the ever increasing sophistication of hackers and criminals.

ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

OTHER MATTERS
2016-003 Information Technology Best Practices Recommendations (Continued) Currently, there are no Information Technology standards to which local governments are required to conform. Indeed, there are a wide variety of informal guidelines and suggested controls from many different organizations which local governments can use to implement appropriate controls to ensure adequate security over information technology. Our Information Technology staff have reviewed these informal guidelines and concluded that the certification and accreditation framework developed by the National Institute of Standards and Technology (NIST) for the Federal Information Security Management Act (FISMA) are the most appropriate for local government1 . NIST and FISMA represent the minimum
security requirements for federal government agencies information systems. NIST recommends these for state and local governments. Our procedures included performing an external network scan based on NIST criteria and in determining that internal control provides for:
 Internet access defenses including hacker prevention, detection and deterrent systems  Security of data from physical or network access
 Adequately protecting data from unauthorized internal access  Reasonable measures to ensure continuation of service While the results of our work did not indicate material weaknesses, we noted a few areas which could be improved. A summary of these recommendations which we believe are “best practices” are as follows:

Payment Card Industry Compliance
The City is not in compliance with the Payment Card Industry Data Security Standard (PCI-DSS). Any organization that processes credit cards is required to comply with PCI-DSS, even if the processing is outsourced. Failure to meet compliance requirements results in higher transaction fees and liability if a security breach is found. Because the City accepts credit cards as a form of payment, the City must be compliant with the applicable controls.

Update for June 30, 2017, 2018, 2019 and 2020 Audits:

We again conducted an Information Systems Review and noted that City is still not in compliance with the Payment Card Industry Data Security Standard.

Current Status:

The City was PCI compliant for part of FY 22, but a subsequent scan revealed additional vulnerabilities that we are working with IT to correct. 1 "State, local, and tribal governments, as well as private sector organizations are encouraged to consider using these guidelines, as appropriate." NIST SP 800-37 Rev 1 pg 11
ATTACHMENT 2

CITY OF MANTECA

MEMORANDUM ON INTERNAL CONTROL

STATUS OF PRIOR YEAR

OTHER MATTERS
2015-008 Compliance with Health and Safety Code Reporting Requirements for the Housing Successor
This comment is an update of matters repeated in prior years as discussed in Other Matter 2014-008, which is not repeated in this report, since it is substantially redundant with our comments below.

Senate Bill No. 341 (SB341) was approved on October 13, 2013 and amended and added to the Health and Safety Code (HSC) effective January 1, 2014 to change provisions relating to the functions performed by a Housing Successor. Part of SB341 added HSC Section 34176.1 that imposes annual reporting requirements related to the housing assets of the former Redevelopment Agency held by the Housing Successor.

The City serves as Housing Successor for the housing activities of the former Manteca Redevelopment Agency and the activities of the Housing Successor are reported in the Low and Moderate-Income Housing Assets Special Revenue Fund.

Under the reporting requirements, the Housing Successor is required to include eleven points of information for the previous fiscal year in the City’s annual report of the General Plan Administration due each April 1 (Government Code Section 65400) and post the same eleven points of information on the City’s website. In addition, certain information included in Section 34176.1(a)(3) is to be included in the report every five years.

The reporting information began with fiscal year 2014 reporting that was due to the Department of Housing and Community Development (HCD) and to be posted to the City’s website by April 1, 2015.

However, the City did not prepare the required report for submission to HCD or posting to the City’s website.

The City, as Housing Successor, should file the fiscal year 2014 report as soon as possible and develop procedures to ensure ongoing compliance with the annual reporting requirements of HSC Section 34176.1 Update for June 30, 2016, 2017 and 2018 Audits:

During the audits, we followed up on the status of the above condition. We noted that the deficiency had not been mitigated.

The City serves as Housing Successor for the housing activities of the former Manteca Redevelopment Agency and the activities of the Housing Successor are reported in the Low and Moderate-Income Housing Assets Special Revenue Fund.

Update for June 30, 2019 Audit:

We noted that the City filed the required report for the year ended June 20, 2018 in April 2019, but we understand the other delinquent reports were not filed. The City should work with HCD to determine if the delinquent reports are required to be prepared and filed.

Current Status:

City staff will make an inquiry to HCD to determine if the prior year reports need to be prepared and filed.

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