MEMORANDUM
Finance and Administrative
Services Department
DATE: February 28, 2022
TO: Council Finance Committee
FROM: Jesse Takahashi, Finance and Administrative Services Director SUBJECT: Extend the City’s External Auditors’ Contract and Amend the Contract to Include GASB 87 Consultation Service
PURPOSE
This memorandum discusses the contract for external audit services and staff’s intention to extend the contract up to two years. This memorandum also discusses amending the auditing contract to include consulting services related to the implementation of Governmental Accounting Standard Board Statement No. 87 (GASB 87).
BACKGROUND
Section 1106 of the City Charter states that the City Council shall employ an independent certified public accountant to examine the City’s books, records, inventories, and reports.
In 2015, in accordance with the City Charter and C ouncil Policy No. B-6 (Attachment 1), Selection of External Independent Auditor, the City Council appointed Macias Gini & O’Connell, LLP (MGO) , to serve as the City’s independent certified public accountant.
The contract period with MGO was for four years with an option to extend for two 1-year periods. In April 2020, the City exercised the option to extend the contract for two years, Fiscal Years 2019-20 and 2020 -21. The contract extension period end ed with the completion of the audit for Fiscal Year 2020-21.
In addition to the annual financial audits, the Council’s external independent auditors also conduct other audit-related assignments, including special agreed-upon procedures regarding compliance review for certain aspects of the City’s operations.
6.1 Attachment 1
Extend the City’s External Auditors’ Contract and Amend the Contract to Include GASB 87 Consultation Service
February 28, 2022
ANALYSIS
Contract Extension
The Government Finance Officers Association (GFOA) has issued a best practices recommendation for procurement of audit services. This best practice memo randum is attached (Attachment 2).
The GFOA recommends a full -scale competitive bidding process after the end of each contract term. While they recognize that ideally, auditor independence would be enhanced by a change in auditors at the end of the term, it may be counterproductive to make a mandatory change in the public sector. The private sector often changes auditors at the end of each term; however, there are a limited number of firms that are fully qualified to perform public-sector audits, and a frequent lack of competition among those firms may not result in lower costs. Costs will also increase for the disruption and time it takes the new auditor to become familiar with the City's operations and controls.
The City of Mountain View has used a four -year term with the optional extensions for the last three audit contracts. The GFOA recommends that multi -year agreements for audit services be for a period of at least five years. This allows for greater continuity and helps minimize the potential for disruption. It can also reduce the overall cost of audits by allowing auditors to recover “start-up” costs over several years.
The GFOA best practice memorandum also addresses the issue of an automatic renewal of an audit contract. It indicates that an automatic renewal for a second term would be consistent with their recommendations if the auditor's performance is satisfactory.
Additionally, since this is the first yea r of implementing GASB 87, it will be a challenge for staff to handle implementing both GASB 87 and changing auditors, which would be a significant undertaking.
MGO’s performance over the past six years has proven satisfactory. MGO has submitted a proposal extending the current contact for two more years and proposed a 3 % cost-of- living adjustment for the first year (Fiscal Year 2022-23) and NO price increase for the second year (see Attachment 1 for details). This is particularly noteworthy given the recent increase in inflation.
If the CFC does not recommend extending the contract, then the external auditor selection process described in City Council Policy B-6 should begin right away.
Extend the City’s External Auditors’ Contract and Amend the Contract to Include GASB 87 Consultation Service
February 28, 2022
GASB 87 Consultation Service
Governmental Accounting Standards Board Statement No. 87, Leases (GASB 87), was issued in June 2017 and is effective for reporting periods beginning after June 15, 2021.
GASB 87 substantially changes the way government entities account for leases. The City has many complex lease agreements, including Google leases, MV 101 Devel opment, LLC (Ameswell) leases, RGC Mountain View I, and LLC (Hope Street) leases. All of these leases will need research and review as well as computations to determine the required information needed to report annually.
Considering the complexity and workload of the GASB 87 implementation project, many governmental entities have retained consultation services of accounting firms to help them with the implementation. Because MGO has been the City’s auditor for the past six years and is familiar with the City’s numerous land leases, staff believes procuring MGO’s GASB 87 consulting services will greatly facilitate the process and ensure this important GASB statement is implemented successfully.
MGO proposed a not-to-exceed amount of $20,000 for its GASB 87 consultation services (Attachment 3). The actual amount may be lower than this amount based on the actual time spent by the MGO staff. A budget appropriation was approved by the City Council as part of the midyear budget update on February 22, 2022.
Based on the complexity of the GASB 87, it is a significant challenge to implement the new GASB standard and, at the same time, change auditors. Changing auditors results in a substantial workload increase as staff will need to take additional time to provide historical documents and educate the new auditors on the City’s processes, financial system records, accounts, and statements.
RECOMMENDATION
Staff recommends:
1. Extend the contract of Macias Gini & O’Connell, LLP (MGO) an additional two years for Fiscal Years 2021-22 and 2022-23.
2. Amend the auditing contract to include consulting services for GASB 87 implementation. The total audit contract amount, including additional services, will be $167,974 for Fiscal Year 2021-22 and $147,974 for Fiscal Year 2022-23.
Extend the City’s External Auditors’ Contract and Amend the Contract to Include GASB 87 Consultation Service
February 28, 2022
ALTERNATIVES
1. Recommend to the City Council an extension of the contract with MGO for only one year.
2. Recommend to the City Council to initiate the Council Policy B-6 process to issue an RFP and select the external independent auditors.
3. Recommend to the City Council not to amend the audit contract to include GASB 87 consultation services.
JT/HH/1/FIN
546-02-28-22M
Attachments: 1. Council Policy B-6, Selection of the External, Independent Auditor
2. GFOA Best Practices Audit Procurement
3. MGO’s Proposed Fee Schedule
CITYCOUNCILPOLICY
SUBJECT: SELECTIONOFTHEEXTERNAL, INDEPENDENT NO.: B-6
AUDITOR
PURPOSE:
City CharterSection1106requirestheCity Councilto annuallyemployanindependent, externalauditorto performanauditof therecordsof financialtransactionsattheendof eachfiscalyearandto reporttheconclusionsof theauditto theCouncilandotherCity officers. An independentauditalsoconfirmstheadequacyof controlsuponandproper accountingfor theuseof publicfunds. In additionto therequirementsof the City financialstatementspresentfairly thefinancialpositionof theCity in accordancewith generallyacceptedaccountingprinciples.
Thispolicyspecifiestheprocessfor selectingtheindependentauditor, or auditfirm, by theCity Council. It alsorequirestheindependentauditorto presenttheresultsof the annualauditandanyfindingsto theCouncilFinanceCommittee (CFC) prior to being formallyacceptedbytheCityCouncil.
POLICY:
1. SelectionProcess:
a. TheCFCwill meetwith FinanceandAdministrativeServicesDepartmentstaff to reviewandapprovetheevaluationcriteriaandothercomponentsof the Requestfor Proposals (RFP) to be usedin selectingthe recommended independentauditoror auditfirm. Staffwill thenfinalizeanddistributeto qualifiedauditfirms a Requestfor Proposals (RFP) to conducttheannual financialauditandotherspecialprocedurereviews.
b. Staff will evaluateproposalssubmittedby interestedfirms anddetermine thosemosthighlyqualifiedbasedupontheevaluationcriteriaapprovedbythe CFCandthecomparativemeritsof eachfirm. Referenceandbackground checkswill beconductedandthemostqualifiedfirmsforwardedto theCFC alongwiththereasonsfor notrecommendingotherproposers.
c. The CFC andstaff will interview the firms forwardedto the Committee.
Followinginterviews, theCFCwill determinethefirm to berecommendedto theCityCouncilto serveastheindependentauditor.
Attachment 1
CITYCOUNCILPOLICY
SUBJECT: SELECTIONOFTHEEXTERNAL, INDEPENDENT NO.: B-6
AUDITOR
2. Presentationof AuditResults:
a. Annually, at theconclusionof theaudit, theindependentauditorwill present theirobservations, conclusions, andanyfindingsdiscoveredduringthecourse of theauditto theCFC.
b. TheCFCwill makearecommendationto theCity Councilwhetherto accept theauditresultswhichwill thenbepresentedto theCity Councilfor their considerationandformalacceptance.
Revised: November10, 2020, ResolutionNo. 18516
EffectiveDate: December2, 2003
RFL/CNLPOL
B06-533CP
Page2 of 2
Attachment 1
Audit Procurement
https://www.gfoa.org/materials/audit-procurement[2/17/2022 2:05:36 PM] The Government Finance Officers Association (GFOA) has long recommended that state and local governmental entities obtain independent audits of their financial statements, and single audits, if required based on the entity’s use of federal or state grant funds, performed in accordance with the appropriate professional auditing standards. Properly performed audits play a vital role in the public sector by helping to preserve the integrity of the public finance functions, and by maintaining citizens’ confidence in their elected leaders.
GFOA makes the following recommendations regarding the selection of auditing services:
The scope of the independent audit should encompass not only the fair presentation of the basic financial statements, but also the fair presentation of the financial statements of individual funds and component units. Nevertheless, the selection of the appropriate scope of the independent audit ultimately remains a matter of professional judgment. Accordingly, those responsible for securing independent audits should make their decision concerning the appropriate scope of the audit engagement based upon their particular Home / Best Practices / Audit Procurement
BEST PRACTICES
Audit Procurement
Select services that include a broad scope of financial presentations and perform their audits in accordance with the Generally Accepted Government Auditing Standards. Governments should enter into multiyear agreements and undertake a full-scale competitive selection process.
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Attachment 2
Audit Procurement
https://www.gfoa.org/materials/audit-procurement[2/17/2022 2:05:36 PM] government’s specific needs and circumstances, consistent with applicable legal requirements.
Governmental entities should require in their audit contracts that the auditors of their financial statements perform their audits in accordance with the audit standards promulgated in the U.S. Government Accountability Office’s Government Auditing Standards. Government Auditing Standards, also known as Generally Accepted Government Auditing Standards (GAGAS), provide a higher level of assurance with regard to internal control than Generally Accepted Audit Standards (GAAS), which are fully incorporated into GAGAS.
Governmental entities should enter into multiyear agreements of at least five years in duration when obtaining the services of independent auditors. Such multiyear agreements can take a variety of different forms (e.g., a series of single-year contracts), consistent with applicable legal requirements. Such agreements allow for greater continuity and help to minimize the potential for disruption in connection with the independent audit. Multiyear agreements can also help to reduce audit costs by allowing auditors to recover certain "startup" costs over several years, rather than over a single year.
Governmental entities should undertake a full-scale competitive process for the selection of independent auditors at the end of the term of each audit contract, consistent with applicable legal requirements. While there is some belief that auditor independence is enhanced by a policy requiring that the independent audit firm be replaced at the end of each multiyear agreement, unfortunately, the frequent lack of competition among audit firms fully qualified to perform public-sector audits could make a policy of mandatory audit firm rotation counterproductive. In such cases, it is recommended that a governmental entity actively seek the participation of all qualified firms, including the current auditors, assuming that the past performance of the current auditors has proven satisfactory. Where audit firm rotation does not result from this process, governments may consider requesting that senior engagement staff, such as engagement partners and senior managers, be rotated to provide a fresh perspective. Except in cases where a multiyear agreement has taken the form of a series of single-year contracts, a contractual provision for the automatic renewal of the audit contract (e.g., an automatic second term for the auditor upon satisfactory performance) is inconsistent with this recommendation.
Professional standards allow independent auditors to perform certain types of nonaudit services for their audit clients. Any significant nonaudit services should always be approved in advance by a governmental entity’s audit committee. Furthermore, governmental entities should routinely explore the possibility of alternative service providers before making a decision to engage
Audit Procurement
https://www.gfoa.org/materials/audit-procurement[2/17/2022 2:05:36 PM] their independent auditors to perform significant nonaudit services.
The audit procurement process should be structured so that the principal factor in the selection of an independent auditor is the auditor’s ability to perform a quality audit. Price should not be allowed to serve as the sole criterion for the selection of an independent auditor, rather an independent auditor should have a demonstrated commitment to the state and local government audit practice.
Notes:
Contract Issues for Governmental Audits - The AICPA State and Local Government Expert Panel and GFOA worked together to develop this joint article intended to educate both governments and their auditors about clauses in contracts and engagement letters in the governmental environment that may not meet AICPA professional standards and that may create uncertainty about the auditor’s independence.
References:
CPA Audit Quality: A Framework for Procuring Audit Services, U.S. Government Accountability Office, August 1987.
Governmental Accounting, Auditing and Financial Reporting (GAAFR), Stephen J.
Gauthier, GFOA, 2012.
Board approval date: Friday, March 8, 2019
Additional resources
Attachment 3
Audit Cost Proposal By Deliverable
Task or Report to be Completed 2019-20 2020-21 2021-22 2022-23 Total Annual Comprehensive Financial Report (ACFR), including Compilation 82,390$ 84,862$ 87,408$ 87,408$ 342,068$ Single Audit Report (up to 2 major programs) 16,429 16,922 17,430 17,430 68,211 Shoreline Regional Park Community Report 7,993 8,233 8,480 8,480 33,186 Compliance Audit - Transportation Development Act 3,265 3,363 3,464 3,464 13,556 Gann Appropriation Limit Calculation 1,123 1,157 1,192 1,192 4,664 Subtotal (All-inclusive Maximum Price) 111,200$ 114,537$ 117,974$ 117,974$ 461,685$ Electable Options:
CAFR Compilation - - - - -
Grant Total (All-inclusive Maximum Price) 111,200$ 114,537$ 117,974$ 117,974$ 461,685$ Audit Staff Hourly Billing Rates by Classification
Classification Hours 2019-20 2020-21 2021-22 2022-23
Engagement Partner 44 333$ 343$ 353$ 364$
Professional Standards Reviewer 10 333$ 343$ 353$ 364$ Engagement Director 87 279$ 287$ 296$ 305$
IT Consulting Manager 20 203$ 209$ 215$ 221$
Senior Assurance Associates 182 136$ 140$ 144$ 148$ Staff and Experience Assurance Associates 362 110$ 113$ 116$ 119$ Administrative Assistants 5 88$ 91$ 94$ 97$ Total Hours (including CAFR Compilation) 710
Fiscal Year
Billing Rates for Fiscal Year:
GASB 87 Implementation - Staff Hourly Billing Rates and Estimated Fee by Classification Classification Hours
Engagement Partner 30 360$ 10,800$ Engagement Manager 26 219$ 5,694$ Senior Associates 15 147$ 2,205$ Staff and Experience Assurance Associates 11 119$ 1,301$ Total 82 20,000
Hourly Billing
Rates Estimated Fee