CITY OF ORANGE
ACCOUNTANTS’ AGREED UPON PROCEDURES
REPORT
Orange International Street Fair
February 28, 2019
CITY OF ORANGE
ACCOUNTANTS' AGREED UPON PROCEDURES REPORT
Orange International Street Fair
TABLE OF CONTENTS
Page
Independent Accountants' Report on Applying Agreed‐Upon Procedures ........................................................................ 1
Basis for Procedures .................................................................................................................................................................................... 2
Vendor Participants ..................................................................................................................................................................................... 2
Vendor Maintenance and Wait List ....................................................................................................................................................... 3
Complaint Resolution .................................................................................................................................................................................. 3
Alcohol Service Rotation ............................................................................................................................................................................ 3
Booths and Sponsorships .......................................................................................................................................................................... 4
Wristband Sales ............................................................................................................................................................................................. 5
Cash Disbursements ..................................................................................................................................................................................... 5
Bank Reconciliations ................................................................................................................................................................................... 6
Financial Statements .................................................................................................................................................................................... 6
1 Independent Accountants’ Report on Applying
Agreed‐Upon Procedures
To the Management of
City of Orange
We have performed the procedures enumerated below, which were a greed to b y the Director of Fin ance at City of Orange (“the City”), to perform an operational and internal control analysis of the Orange International Street Fair (OISF). This agreed ‐upon procedures engagement was performed in accordance with attestation standards established by the American Institute of Certified Pub l i c A c c o u n t a n t s . T h e s u f f i c i e n c y o f t h e s e procedures is solely the responsibility of those parties specifi e d i n t h i s r e p o r t . C o n s e q u e n t l y , w e m a k e n o representation regarding the sufficiency of the procedures desc ribed below either for the purpose for which this report has been requested or for any other purpose.
In order to achieve our objectives, we performed the following procedures:
1. Gained an understanding of and tested key policies and procedur es created by OISF in the selection and maintenance of not for profit applicants
2. Gained an understanding of and tested selected account balances in the general ledger from QuickBooks
3. Reviewed supporting documentation for certain account balances
4. Interviews and questionnaires were conducted with OISF personnel in the course of our work
T h e r e s u l t s o f o u r e n g a g e m e n t i n d i c a t e d t h a t t h e r e a r e u n v e r i f iable procedures and deficient accounting practices and procedures as described in further detail in this r e p o r t . O u r r e p o r t d e t a i l s t h e r e s u l t s o f o u r procedures in detail over each area, with specific recommendati ons that should be implemented in order to improve financial reporting for OISF. Our major recommendation is that the City consider requiring OISF to engage a CPA to conduct an annual review or audit of their fina ncial statements and include an evaluation of internal control practices in that process.
We were not engaged to and did not conduct an examination, the objective of which would be the expression of an opinion on the accounting practices and procedures. Acco rdingly, we do not express such an opinion.
Had we performed additional procedures, other matters might hav e come to our attention that would have been reported to you.
This report is intended solely for the information and use of t he Finance Director, Assistant Finance Director, Mayor and City Council of Orange, and is not intended to be, an d should not be, used by anyone other than these specified parties.
February 28, 2019
Murrieta, California
2 CITY OF ORANGE
ACCOUNTANTS' AGREED UPON PROCEDURES REPORT
Orange International Street Fair
February, 2019
In 2014 Orange International Street Fair, Inc. (OISF) and the C i t y o f O r a n g e e n t e r e d i n t o a f o u r ‐ y e a r agreement for the production of the Orange International Street Fair. This agreement is part of a continuing arrangement between the parties going back until at least 1994. Our procedures focused on the calendar years 2016, 2017 and 2018 per direction of the City’s Director of Finance.
Basis for Procedures
OISF provided us with several policies concerning not for profi t entities and ‘Ethnic Streets’ contained in the documents “Ethnic Street Rules and Regulations” (ESR&R’s, 2/28/2017) and “Policies and Procedures for Participant Selection” (P&P, 1 /15/2019). These policies include d components on selection of street vendors, alcohol rotation on streets, complaint resolution and rules regarding distribution of funds to non‐profits from s t r e e t s p o n s o r s . O n c e a n u n d e r s t a n d i n g o f t h e s e p o l i c i e s w a s r ealized, we attempted to verify each using limited procedures to determine their effectiveness. OISF furth er provided three years of accounting records maintained in QuickBooks including the general ledger and trial balance. OISF also provided some of the requested documents that support the general ledger, including bank statements, bank reconciliations, deposit slips, invoices, receipts, copies of checks, cash count sheets, participant applications and other items.
Vendor Participants
In the ESR&R’s vendor participants are required to be recognize d non‐profit organizations (NPO) organized for charitable, youth development, cultural enrichment or civic i m p r o v e m e n t p u r p o s e s . I n o r d e r t o b e considered as an applicant, an ap plication must include evidenc e as an NPO by showing at least one specific document including Articles of Incorporation, tax exempt status letter from SBOE or IRS, or recent form 990 tax return. Each vendor, including those continuing from the pr ior year, is checked for eligibility. The policy also maintains that applicants have proof of viable structure, general liability insurance, no prior debts owed to OISF, are able to attend all mandatory ‘Ethnic Street’ meeti ngs and carry a valid State of California resale permit. We selected four applications for each year under our p rocedures for a total of twelve to verify that each requirement was being followed. Our selection was based on a listing provided by OISF.
Results: In our evaluation of twelve applications, four from each year, we noted that many of the requirements o f t h e E S R & R ’ s a r e m e t t h r o u g h e n t r i e s o n t h e o n l i n e a p p l i c a t i on, which allow for the applicant to upload supporting documents. We obtained copies of online applications which indicated that documents had been uploaded to OISF from the applicant, however we did not review any of the uploaded items specifically.
To verify the not for profit status of the applicants, we used an IRS search tool https://www.irs.gov/charities‐ non‐profits/tax‐exempt‐organization‐search. In our findings were able to verify six of the twelve applications recognized as not for profit organizations, three from 2016, two from 2017 and one from 2018. We were able to verify only four of twelve had submitted documentation to support possession of a California resale permit, one from 2017 and three from 2018, and that seven of twelve uploaded documentation with insurance information, two from 2016 and 2017 each, and three from 2018. Other requirements in the ESR&R’s such as viable structure, debts owed and attendance at mandatory meetings were not verified in this test.
Recommendations: We recommend that OISF implement and maintain an internal checklist that each required item uploaded or provided by the applicant meets the standard as s e t f o r t h i n t h e E S R & R a n d r e t a i n t h e supporting documentation received from the participant. We recommend this as an annual procedure as entities’ non‐profit status may change.
3 CITY OF ORANGE
ACCOUNTANTS' AGREED UPON PROCEDURES REPORT
Orange International Street Fair
February, 2019
Vendor Maintenance and Wait List
In the Policies and Procedures Participant Selection document, participants of the previ o u s y e a r h a v e f i r s t right of refusal in the next yea r’s fair, and any openings are to be filled from a wait list. The wait list is to be prioritized by City of Orange based organizations first, then b y date of submission. A committee chairman is to be a custodian of the applicant, review the application, and email and advise the applicant. The wait list is t o b e v e r i f i e d e v e r y t w o y e a r s t o c o n f i r m t h e a p p l i c a n t s ’ i n t e rest and the applicant organization is to be brought to the OISF Board of Directors for ultimate approval. A ccording to OISF, there has only been one new vendor between 2016 and 2018, which came from the wait list and was based in the City of Orange. In our discussion with OISF it was noted that the wait list typically consists of one to three vendors.
Results: We were provided a wait list that included the name of the en tity, contact information and whether they filled a booth and what year. The listing showed one appli cant listed twice for 2018, three applicants for 2016 and one applicant for 2015. The applicant for 2018 and one applicant from 2016 were noted to have filled a booth in that year, and both were City of Orange based organizations. We were able to identify invoices of one of the two applicants that filled a booth on the general ledger of OISF. We were not able to verify the acceptance of any wait list applicants in our review of OISF board minutes.
Recommendations: We recommend that OISF maintain a wait list and perform an an nual review. The waitlist procedure, points of contact and applicable contact persons wit hin OISF should be published on the website to avoid confusion among any non‐profits who may wish to participate.
Complaint Resolution
According to the Policies and Procedures, complaint procedures are to be addressed in a specific manner, including the complainant being contacted by a committee chairm a n w i t h i n 7 2 h o u r s , w h e r e u p o n t h e chairman gathers information and creates a memo for the Board of Directors. The complaint is to be reviewed at the next OISF board meeting where it is reviewed and an acti on is determined. The chairman is to notify the complainant of the action with an opportunity to appeal.
Results: During our review of board and committee meeting minutes, we noted that occasional complaints were discussed in general, however we could not verify the above process.
Recommendations: We recommend that complaint procedures are followed and the co u r s e o f a c t i o n i s documented so that goodwill can be established and adjustments in procedures and policies made where necessary.
Alcohol Service Rotation
OISF has 16 alcohol licenses that allow approved street partici pants to serve alcohol. According to the Beer Sales Booth Rotation Policies and Procedures, all ethnic street p a r t i c i p a n t s a r e e l i g i b l e f o r r o t a t i o n i f t h e y participate on an actively licensed street. The policy lists thirteen streets total, eleven streets with one license, one street with three licenses (American Street) and one street with two licenses (Mexican Street). No ethnic s t r e e t p a r t i c i p a n t i s p e r m i t t e d t o s e r v e b e e r f o r m o r e t h a n o n e y e a r i n a r o w u n l e s s a l l o t h e r s t r e e t participants decline to be in the rotation or the ethnic street participant is the only participant on the street. A lottery style rotation was created in 2014 that established a r otation. All participants wishing to be included in the rotation were part of the draw until no names remained, essentially setting up the order for the 2014 year and several years afterwards, depending on the number of participants and licenses on the street.
Should there be any new participants, they would be added to the end of the list for a particular street.
4 CITY OF ORANGE
ACCOUNTANTS' AGREED UPON PROCEDURES REPORT
Orange International Street Fair
February, 2019
Alcohol Service Rotation (continued)
Results: We were provided with a spreadsheet of the rotation order, which included the street name, year, and organization selected to serve alcohol. On American Street, although there are three licenses, only two participants rotate annually according to the schedule and the other license is given to one participant that has been allowed to serve alcohol each year. Five streets had one participant listed only for the 2016 year ( I t a l i a n , G e r m a n , S w i s s , P o l y n e s i a n a n d D u t c h ) a n d d i d n o t i d e nt i f y t h e s e r v i n g p a r t i c i p a n t i n p r i o r o r subsequent years. Mexican Street lists the same two participant s annually, including one participant from the same school district with different boosters for basketball, wrestling, and softball listed twice on American Street in 2016. The listing we were provided did not include a rotation for the following streets: Australian, English, Danish and Ginza Streets, which are each allowed one l icense. We attempted to verify the rotation by checking the listing against the general ledger and the OISF participant list on the website which indicates alcohol sales booths, but were not able to verify the rotation with any certainty.
Recommendation: We recommend that the rotation of alcohol serving participants be expanded to make all 16 licenses avail able each year and n ot be determined b y the stree t which a participant is located on. Further, the OISF should document and publish on the website the policy and rotation list for full transparency.
Booths and Sponsorships
OISF receives checks for booth d eposits and final payments and street sponsorships. No personal checks are allowed, only business checks and money orders or cashier’s checks are accepted. Sometimes OISF uses invoices with descriptions that show the participant name, paym ent type, and amount for booth deposits and final payments. Online applications also include a section for payment for booth and alcohol (if applicable).
Results: We evaluated a selection of dep osits fro m the QuickB o oks general ledger for each year 2016‐2018.
Twenty‐nine of thirty‐nine deposits tested could be traced to O ISF invoices, ten did not have accompanying invoices, eight of which came fr om 2016. Some invoice numbers w ere out of sequence on the general ledger, most notably in 2016. Other deposits were collected and recorde d on the general ledger without descriptions and could not be individually verified. Amounts received from Straub in the form of a check for the annual cup surcharges did not come with detail to demonstrate how they were calculated.
We attempted to verify deposits and total amounts for linear fo ot charges and beer booth fees on the twelve sampled applications referred to under vendor participants. Seven out of twelve sampled applications did not agree to the amount recorded in the general ledger and five could not be identified. Linear foot charges on the a p p l i c a t i o n w e r e s h o w n t o b e $ 7 5 p e r l i n e a r f o o t b u t $ 6 5 p e r l in e a r f o o t o n i n v o i c e s . S i m i l a r l y , b e e r b o o t h fees were $4,200 on applications but $3,200 on invoices and the re were no transactions or notations on the invoice or general ledger to indicate that the difference was from a deposit.
All of the checks sampled were either business checks, money orders, or cashier’s checks as required per OISF policy. Some checks received were dated several weeks before th e date on the bank statement or deposit slip,
indicating they were not deposited in a timely manner.
Recommendation: We recommend OISF develop a form or modify its invoices or onli ne application to include a deposit amount and balance remaining and ensure that their inv o i c e s m a t c h t h e s e a m o u n t s . C o n s i s t e n t handling of deposits through invoicing and consistent use of invoice numbers will improve tracking and ensure all participants have paid the required amount. Invoices charged to participants should be supported with itemized detail and signed by the committee chair or representative other than the treasurer.
5 CITY OF ORANGE
ACCOUNTANTS' AGREED UPON PROCEDURES REPORT
Orange International Street Fair
February, 2019
Wristband Sales
Wristbands are sold for $3 each out of eight different booths o perated by non‐OISF Organization members.
These are located at different points in the fair to attendees who wish to purchase alcohol. Wristband sales begin thirty minutes before opening on Friday and Saturday and at noon on Sunday. Each day, each booth is given 1,000 wristbands that are color coded but not prenumbered . Each booth is given instructions on pre‐ counting the cash and pickup times. The Organization member is escorted by an OISF representative and a police officer at the designated time. At the OISF office, four c o u n t e r s , t h e B o a r d T r e a s u r e r , S e c r e t a r y , a n d OISF representative are allowed in the office. The cash is counted twice on a counting machine by two separate counters and compared to a pre‐count sheet. In additio n, the representative will turn in the unused wristbands and any defective or ripped wristbands. After each of the eight organizations is finished, a deposit s l i p i s p r e p a r e d , t h e c a s h i s p l a c e d i n a d e p o s i t b a g a n d i s d ep o s i t e d i n a n i g h t d r o p . T h e T r e a s u r e r a n d Secretary are responsible to enter the cash collected and infor mation from the individual count sheets onto the wristband funds tracking sheet. Once all monies are counted and verified, the Treasurer issues a check to each organization that worked one of the eight different booths as a donation. All organizations are to receive the same donation, minus the missing wristbands.
Results: We reviewed OISF general ledger reports for 2016‐2017 to select a s a m p l e o f w r i s t b a n d s a l e s . W e requested backup including the bank statement, deposit slips, a nd cash count sheets with wristband reconciliation. We were able to identify bank deposits for the amount recorded in the general ledger, but we did not receive the cash pre‐count sheets completed by the organizations or the wristband funds tracking sheets and so were not able to verify that all cash collected w as properly deposited into the bank. We noted t h a t s i x d o n a t i o n p a y m e n t s f o r w r i s t b a n d s a l e s ( b o o t h s ) w e r e m ade in 2016, seven in 2017, and nine donation payments were made in 2018 (one from 2017, paid in Jan uary, 2018). We also noted that 19 of the 22 donations over the three years were for $2,000 while three other donations were $2,028, $2,336 and $2,780 respectively.
Recommendation: We recommend that OISF retain all cash receipt records so that a clear trail exists from the point of collection to the point of deposit. We also recommend each organization observes the cash count and s i g n s o f f o n t h e t a l l y s h e e t s . W e f u r t h e r r e c o m m e n d t h a t d u r i n g a f u t u r e r e v i e w , a u d i t , o r a g r e e d u p o n procedure, the process is observed by a qualified independent auditor over Labor Day weekend. Additionally, we recommend OISF use prenumbered wristbands for tracking purpo ses so that there is better control over sales and inventory. Finally, we recommend that the rationale for disbursing unequal donation amounts is documented and the calculation is retained.
Cash Disbursements
O I S F d i d n o t p r o v i d e u s w i t h w r i t t e n p o l i c i e s f o r c a s h d i s b u r s em e n t s , b u t t h r o u g h i n q u i r y w e d e t e r m i n e d some of their practices. Blank checks are kept locked, no cash is ever kept on site. To disburse payments, two s i g n a t u r e s a r e r e q u i r e d o v e r $ 2 , 0 0 0 , o n e s i g n a t u r e f o r u n d e r $ 2,000, and board approval for electronic payments over $2,000. OISF does not use purchase orders, but budgets for expenses are approved by the Board. Reimbursements to OISF members are allowed with original receipts. We randomly chose approximately twenty‐five transactions from the general ledger for each year to test for supporting documentation, such as an invoice or a bill. We separately reviewed handwritten checks to try to verify if they contained the required number of signatures.
Results: Receipts for expenses were not provided for many of the payment s. We were not provided supporting documentation such as an invoice or bill as follows:
2016: 13 of 26 disbursements
2017: 12 of 25 disbursements
2018: 6 of 26 disbursements
6 CITY OF ORANGE
ACCOUNTANTS' AGREED UPON PROCEDURES REPORT
Orange International Street Fair
February, 2019
Cash Disbursements (continued)
We were able to find documentati on of expenses being discussed and presented in the Treasurer’s report in s o m e o f t h e b o a r d m i n u t e s . F o r t r a n s a c t i o n s w h e r e w e w e r e a b l e t o o b t a i n c o p i e s o f c h e c k s , t h e t w o ‐ signature requirement is being handled inconsistently. We identified nine payments in 2016, seven payments in 2017 and five payments in 2018 of $2,000 or greater that did not have the required dual signatures.
Recommendation: OISF should have written policies for expenses and check writin g. We recommend dividing responsibilities between approving the payment and issuing the check among separate members to segregate those duties (see Financial Stat ements, below). We recommend th at the two‐signature policy be followed for all checks of $2,000 or more. We further recommend that OISF re tain all supporting documentation such as original receipts, indicating on the receipt or invoice that the service or product has been received and is suitable for payment. OISF should document and retain approval and budgets for expenses at monthly meetings.
Bank Reconciliations
Based on inquiry, the OISF Treasurer prepares bank reconciliations and an external CPA reviews them. We selected four bank statements and reconciliations each year for a total of twelve.
Results: The December 2016 bank reconciliation did not agree with the general ledger and was not performed by the external CPA until May of 2017. The majority of reconcil iations were not performed timely by the end of the following month. Some reconciliations were prepared by th e T r e a s u r e r a n d d i d n o t s h o w i n d i c a t i o n that they were reviewed by the external CPA.
Recommendation: We recommend that bank reconciliations are performed within two weeks after the end of the month. Timely bank reconciliations are prudent and necessar y to ensure that accounting records match the amounts held on deposit. Furthermore, the preparer of the r econciliation should be someone other than the Treasurer (see segregation of duties, below), or the extern al CPA should review and indicate this review in a manner such as initialing.
Financial Statements
OISF records financial transacti ons in QuickBooks using cash ba sis accounting and uses this recorded information to report its not‐fo r ‐ p r o f i t t a x r e t u r n s . P e r t h e agreement with the City of Orange, OISF is r e q u i r e d t o s u b m i t a w r i t t e n a n d oral report summarizing the ac t i v i t i e s o f O I S F i n c l u d i n g a f i n a n c i a l statement to the City council on or before the first Council mee t i n g i n A p r i l o f t h e f o l l o w i n g y e a r . W e u s e d QuickBooks general ledger reports to select transaction samples, and verify selected balances in the trial balance. We evaluated four bank statements and bank reconciliat ions for each month for the three years. We also compared general ledger accounts side by side for three years to provide perspective for our procedures.
D u r i n g i n q u i r y a n d r e v i e w o f p o l i c i e s , w e n o t e d t h a t t h e T r e a s urer has significant duties in each of the accounting cycles. Below is a listing of duties that the Treasurer performs:
Invoicing
Collecting deposits and fees
Recording all checks in the general ledger
Depositing checks
Reporting at each OISF board meeting
7 CITY OF ORANGE
ACCOUNTANTS' AGREED UPON PROCEDURES REPORT
Orange International Street Fair
February, 2019
Financial Statements (continued)
Signs checks (one signature required if under $2,000, two signa tures if over $2,000 or an electronic check)
Performs bank reconciliation (reviewed by independent CPA) Oversees wristband sales counting procedure
Results: We verified that amounts recorded on the trial balance of OISF agreed with not‐for‐profit tax returns filed for 2016 and 2017. We noted during our comparison of thre e years of unaudited financial data from QuickBooks several significant changes in general ledger accounts as follows:
Cup surcharge revenue was:
o 2016: $91,143.00
o 2017: $0.00
o 2018: $102,206.50
This variance was because cup surcharge revenue in 2016 included 2015 surcharge revenue, and 2017 surcharge revenue was received in January, 2018, and so was included in the 2018 ledger. Wristband sales were:
o 2016: $131,354.37
o 2017: $97,134.50
o 2018: $127,613.66
It is believed that weather factored into the decreased revenues for 2017. Payment for a salary was made in 2016 for a paid executive position which was discontinued in 2017 and 2018. During inquiry, it was explained that the Board confir m e d t h e p a y d u r i n g a m e e t i n g b u t there was no signed contract. We noted during a review of minut es the discussion of the executive director contract in March of 2016, pending legal review and th en the decision to end payments in December of 2016.
OISF office rental/lease payments were:
o 2016: $20,744.86
o 2017: $1,260.39
o 2018: $20,700.00
O I S F t h o u g h t t h a t t h e s e w e r e c o n s i s t e n t p a y m e n t s a n n u a l l y a n d the reason for the change was unknown.
Commercial booth fees were:
o 2016: $70,375.00
o 2017: $53,050.00
o 2018: $65,970.00
The expectation was that these f ees would be consistent from ye ar to year with the fair operating at full capacity.
The charge to the City of Orange was not recorded in the 2018 g eneral ledger for $256,198.95. This seems to be a timing difference and the difference in recording t h e e x p e n s e i n c a s h b a s i s v e r s u s accrual.
The accounts receivable aging summary at December 31, 2018, shows receivables over 90 days in the amount of $6,350.
8 CITY OF ORANGE
ACCOUNTANTS' AGREED UPON PROCEDURES REPORT
Orange International Street Fair
February, 2019
Financial Statements (continued)
Recommendations: We recommend that OISF fulfill the financial statement requirement with the City by submitting reviewed or audited financial statements annually, at a minimum, at the end of each contract period. We also recommend that the duties that the Treasurer is currently performing be segregated into the following groups and be performed by different members: authori zing transactions, rec ording transactions, and custody of assets. Proper segregation of duties is a key internal control that can protect or detect financial statement errors and can mitigate fraud or theft. The segregation of assignments should be part of OISF’s overall accounting policy and procedures.