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Brea, CA 92821
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The Woodlands, TX 77380
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Sacramento, CA 95833
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Laguna Hills, CA 92653
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INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON
COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN
ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS
To the Honorable Mayor and Members of the City Council
City of Orange, California
We have audited, in accordance with the auditing standards gene rally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund i nformation of the City of Orange, California (the “City”), as of and for t he year ended June 30, 2023, and t he related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated March 27, 2024.
Report on Internal Control over Financial Reporting
In planning and performing our audit of the financial statement s, we considered the City’s internal control over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control.
Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control that we consider to be material weaknesses and significant deficiencies.
A deficiency in internal control exists when the design or operation of a control does not allo w 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 mate rial misstatement of the ent ity’s financial statements will not be prevented, or detect ed and corrected, on a timely b asis. We consider the deficiency described in the accompanying schedule of findings and responses as item 2023-001 to be a material weakness.
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiency described in the accompanying schedule of findings and responses as item 2023-002 to be a significant deficiency.
Report on Compliance and Other Matters
As part of obtaining reasonable assurance about whether the City’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and ma terial effect on the financial statements.
However, providing an opinion on compliance with those provisio ns was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed an instance of noncompliance
To the Honorable Mayor and Members of the City Council
City of Orange, California
or other matters that is required to be reported under Government Auditing Standards and which is described in the accompanying schedule of findings and responses as item 2023-003.
City of Orange’s Response to Findings
Government Auditing Standards requires the auditor to perform limited procedures on the City ’s response to the findings identified in our audit and described in the accompany ing schedule of findings and responses. The City’s response was not subjected to the other auditing procedures app lied in the audit of the financial statements and, accordingly, we express no opinion on the response.
Purpose of This Report
The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the e ffectiveness of the City’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City’s inter nal control and compliance. Acco rdingly, this communication is not suitable for any other purpose.
Brea, California
March 27, 2024
To the Honorable Mayor and Members of the City Council
City of Orange, California
SCHEDULE OF FINDINGS AND RESPONSES
Reference Number: 2023-001 – Failure to Accrue Liabilities
Evaluation of Finding
Material Weakness
Criteria
Management is responsible for the preparation and fair presenta tion, as well as the accuracy of its financial statements, including disclosures in accordance with accounting principles generally accepted in the United States of America. This includes the design, implementation, and maint enance of internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to error or fraud. This includes proper recording of expenses in a ccordance with Generally Accepted Accounting Principles (GAAP).
Condition
As a result of our audit procedures over accounts payable and a ccrued liabilities, a corre cting entry of $437,128 was required to accrue liabilities.
Cause of Condition
The City has an additional review process over purchase orders, and the rollover of the purchase orders was delayed. The purchase order was opened on May 30, 2023 but was carried over into fiscal year 2023-2024. The invoice was dated August 24, 2023 but was not paid until October 3, 2023.
Effect or Potential Effect of Condition
Accounts payable and expenses were factually understated by $437,128 in fiscal year 2022-2023.
Recommendation
We recommend that the City incre ase oversight over the Departments to ensure that invoices are submitted on a timely basis to allow time for Finance review and ensure invoic es are paid on time. We also recommend that the City review and implement internal controls designed to add the appropriate level of review to ensure invoices paid after fiscal year end are recognized and accrued to the appropriate fiscal year they were incurred.
Client Response
Finance will implement the following steps/process citywide:
1. Finance will monitor departm ent folders and notify them when invoices have not been taken from their folders in a timely manner.
2. Finance will send out reminders to the departments prior to yearend to contact vendors to request all invoices and during yearend closing continue to follow up on delinquent invoices.
3. Finance will review and accrue invoices pertaining to the prior fiscal year for services/goods received prior to June 30.
To the Honorable Mayor and Members of the City Council
City of Orange, California
SCHEDULE OF FINDINGS AND RESPONSES
(CONTINUED)
Reference Number: 2023-002 – Failure to track and maintain capital assets
Evaluation of Finding
Significant Deficiency
Criteria
Management is responsible for the preparation and fair presenta tion, as well as the accuracy, of its financial statements and disclosures in ac cordance with accounting princi ples generally accepted in the United States of America. This includes the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to error or fraud.
This includes proper recording of capital assets in accordance with GASB 34.
Condition
As a result of our audit procedures and inquiries over capital assets, we noted improper tracking of capital asset items. The result is items capita lized that did not qualify as capital assets and capital assets disposed of, but not removed from the capital asset listing; specifically water and sewer lines.
Cause of Condition
The error resulted from miscommunication between the Water and Sewer Department and the Finance Department.
The Water and Sewer Department failed to report assets that wer e replaced during the year resulting in only additional capital asset recording by finance. In addition, the Finance Department failed to review cost capitalized in the past to ensure only eligible items were recorded as capital assets.
Effect or Potential Effect of Condition
The City identified $1,146,316 of assets in the water fund that should not have been capitalized in prior fiscal years.
This resulted in an accumulative effective overstatement of cap ital assets/net position at June 30, 2022 and understatement of expenses during those respective fiscal years. There is a possibility there are other assets with a remaining book value no longer in service remain on the books that cannot be easily verified without specialized assistance. The effect is an overstatement of capital assets at June 30, 2023.
Recommendation
We recommend that the City document and enforce controls over the recording of capital assets to ensure all items are reviewed by finance to ensure only eligible items that meet the definition of a capital asset under GASB 34 are capitalized. In addition, to identify assets no longer in service, we recommend the City perform a survey of capital assets at the City and remove any disposed assets from the asset listing.
Client Response
The City proposes implementing a series of corrective measures to enhance our capital asset tracking procedures which may include:
Conducting a thorough review of expenditures to ensure the qua lification of capitalizing an asset and disposals.
Establishing clear guidelines a nd protocols for the acquisition, disposal, and depreciation of capital assets. Providing comprehensive training and clear communication to st aff members on proper asset tracking procedures especially in the water and sewer department. Regularly reviewing and update asset records to reflect any changes or additions accurately.
By implementing these measures, we can streamline our capital a sset tracking processes, minimizing errors, and ensure compliance with regulatory requirements.
To the Honorable Mayor and Members of the City Council
City of Orange, California
SCHEDULE OF FINDINGS AND RESPONSES
(CONTINUED)
Reference Number: 2023-003 – Housing and Community Development (HCD) Annual Report Not Filed Timely
Evaluation of Finding
Material Noncompliance
Criteria
Section 65400 of the Government Code states if the Housing Succ essor is a City of County it will provide by April 1 of each year an Annual Pro gress Report to the legislative body, the Office of Planning and Research, and the Department of Housing and Community Development (HCD).
Condition
Housing and Community Development (HCD) Annual Report was not filed by the April 1st deadline.
Cause of Condition
The City of Orange did not submit the HCD report electronically by April 1, 2023.
Effect or Potential Effect of Condition
The City is out of compliance.
Recommendation
We recommend that the City implement a process to ensure that the report is submitted timely each year.
Client Response
The Community Development Department has implemented the following steps for FY 2024.
1. The Planning Department promptl y started working on the Annual Progress Report in February when they received the APR instructions from HCD.
2. Several staff meetings wer e scheduled and held in which the team worked collaboratively on this report.
3. The FY 2024 report is alread y completed and is currently being reviewed.
4. The report will be shared with Finance by March 28, 2024, an d filed by April 1, 2024.
5. Finance will request an update from Planning each March 1 st to ensure the report is filed by April 1st each
year.