Page | 1 15105 Concord Circle, Ste. 130, Morgan Hill, CA 95037 Tel: 408-217-8749 • E-Fax: 408-872-4159
[email protected] • www.cnallp.com
City of Point Arena
451 School St.,
Point Arena, CA 95468
To the Honorable Mayor, Members of the City Council and Management of the City of Point Arena:
Introduction
In planning and performing our audit of the financial statements of City of Point Arena as of and for the year ended June 30, 2023, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, we considered City of Point Arena’s internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of City of Point Arena’s internal control. Accordingly, we do not express an opinion on the effectiveness of City of Point Arena’s internal control over financial reporting.
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 significant deficiencies or material weaknesses and therefore, significant deficiencies or material weaknesses may exist that have not been identified. However, as discussed in the attached schedule of findings and responses, we identified certain deficiencies in internal control that we consider to be material weaknesses.
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 over financial reporting, 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.
A reasonable possibility exists when the likelihood of an event occurring is either reasonably possible or probable as defined as follows:
Reasonably possible: The chance of the future event or events occurring is more than remote but less than likely.
Probable: The future event or events are likely to occur.
We consider the items noted in the attached schedule of findings and responses to be material weaknesses.
Page | 2 15105 Concord Circle, Ste. 130, Morgan Hill, CA 95037 Tel: 408-217-8749 • E-Fax: 408-872-4159
[email protected] • www.cnallp.com
We also note the following conditions during the audit:
Condition 2023-C01 – Lack of Going Concern:
Description
The accompanying financial statements have been prepared assuming that the City will continue as a going concern. The City has suffered recurring losses from operations, significant declines in fund balances and net position, a reduction of operating cash, budget overages, deficit spending, and has stated that substantial doubt exists about the City's ability to continue as a going concern. Cause
The City has not monitored capital projects properly and determined the proper funding for those projects. In addition, no reserve or financing component was included in these projects and consultants continually exceeded project budgets without proper authorization.
Effect
Without restructuring of the City’s debt and proper budget monitoring of expenditures, the City’s ability to continue as a going concern is threatened. Recommendation
In order to cure these deficits and reestablish operating cash reserves, the City may incur additional debt to rehabilitate City-owned property so the rental income derived from the property can be dedicated to the debt repayment. This will require a market valuation of the property, improvement cost analysis and rental value to determine the feasibility of the plan. The City will also need to acquire a proper fund accounting system to account for all activities and institute purchase orders to manage both vendor purchases and consultant costs.
Views of Responsible Official(s) and Planned Corrective Actions The City agrees with the conditions noted and has been considering its options, including the above recommendation, in an effort to implement a plan of action.
Page | 3 15105 Concord Circle, Ste. 130, Morgan Hill, CA 95037 Tel: 408-217-8749 • E-Fax: 408-872-4159
[email protected] • www.cnallp.com
Purpose of Communication
The purpose of this communication, which is an integral part of our audit, is to describe, for management and those charged with governance, the scope of our testing of internal control and the results of that testing. Accordingly, this communication is not intended to be and should not be used for any other purpose
March 22, 2024
Morgan Hill, California
City of Point Arena
Schedule of Findings and Responses
June 30, 2023
Page | 4 15105 Concord Circle, Ste. 130, Morgan Hill, CA 95037 Tel: 408-217-8749 • E-Fax: 408-872-4159
[email protected] • www.cnallp.com
Finding 2023-001: Cash Receipts and Lack of Segregation of Duties (Material Weakness) Criteria
The segregation of duties and responsibilities between different individuals for custody of assets, recordkeeping for those assets, and reconciliation of those asset accounts is an important control activity needed to adequately protect the City’s assets and ensure accurate financial reporting.
Condition
During our cash receipts testing, we found that the City does not complete cash receipts forms for every transaction and revenue collection is not routinely monitored at the Pier by a person that is independent of Pier operations.
Cause
The City should review and update their written procedures for processing cash receipts at the Pier. There is also a lack of segregation of duties due to the size of the City and a general lack of resources.
Effect
There is an increased risk that Pier transactions may take place without proper accountability and that revenue may go uncollected or unreported. Without sufficient segregation of duties, the risk significantly increases that errors and fraud related to collection activities, including misappropriation of assets, could occur and not be detected within a timely basis.
Recommendation
Management and the Council should consider a formal evaluation of their risks associated with this lack of duties segregation over Pier cash collections. In response to the identified risks, consideration should be given to identifying and implementing controls that could help mitigate the risks associated with lack of segregation of duties, such as providing increased management oversight and an independent reconciliation of accounts. For example, the city might consider soliciting the assistance of independent consultants to perform certain functions including daily balancing and monthly reconciliations.
Views of Responsible Official(s) and Planned Corrective Actions The City agrees with the conditions noted and will implement the recommendations noted.
City of Point Arena
Schedule of Findings and Responses
June 30, 2023
Page | 5 15105 Concord Circle, Ste. 130, Morgan Hill, CA 95037 Tel: 408-217-8749 • E-Fax: 408-872-4159
[email protected] • www.cnallp.com
Finding 2023-002: Budget Tracking and Monitoring (Material Weakness) Criteria
The City Council establishes budgets for the General Fund and all Special Revenue Funds and budgetary control is legally maintained at the fund level for these funds.
Condition
During our review of the budget to actual reports, we noticed that the City’s actual expenditures exceeded appropriations in several different government functions and at the fund level.
For the fiscal year ended June 30, 2023, the City exceeded legally adopted budget appropriations as follows:
General Fund $364,719
Revolving Loan Special Revenue Fund $161,913
Cause
The city did not monitor actual expenditures during the year to ensure expenditures did not exceed budgeted appropriations.
Effect
Expenditures incurred in the fund with excess expenditures over appropriations, could be considered invalid or void claims and, pursuant to state law, could result in personal liability for those individuals authorizing those expenditures.
Recommendation
We recommend the City establish and follow internal controls that include requiring accountability from employees responsible for individual budgets to ensure that budget appropriations are not exceeded in the future. We also recommend that management develop procedures to review actual expenditures as compared to budget at least every quarter with the Council and monthly with a finance committee established by the City Council.
Views of Responsible Official(s) and Planned Corrective Actions The City agrees with the conditions noted and will implement the recommendations noted.
City of Point Arena
Schedule of Findings and Responses
June 30, 2023
Page | 6 15105 Concord Circle, Ste. 130, Morgan Hill, CA 95037 Tel: 408-217-8749 • E-Fax: 408-872-4159
[email protected] • www.cnallp.com
Finding 2023-003: Change Orders (Material Weakness)
Criteria
Capital construction projects generally have a higher inherent risk because of their size and complexity. Key risks include implementing unnecessary change orders, unauthorized change orders, or over-priced change orders. Other risks include significantly changing the nature of the project, changing the original scope of work specifications without appropriate justification, and not ensuring change order requirements were properly monitored through completion. These risks can significantly impact the cost, quality, or time to complete the project. For local governments to mitigate the risks associated with change orders, their policies and procedures play a critical role.
Condition
It was noted during our audit that many City projects significantly exceeded estimates and budgets and that change orders were not utilized to document and approve the excesses.
Cause
The City’s Change order policies and procedures do not address commencement of work prior to approval, use of a third-party advisory body, use of root cause analysis, use of independent cost estimates, documentation of cost analysis, written record of explanation of differences between negotiated price and independent cost estimates, and verification of assumptions supporting independent cost estimates.
Effect
The City’s capital projects realized cost overruns and project delivery delays.
Recommendation
We recommend that the City implements a policy that requires change orders for all significant project specifications and cost changes. The City can define what changes are significant within the policy, but we recommend starting with any cost increases of $10,000 or more. The policy should require a review of change orders with significant cost adjustments against independent cost estimates. This practice serves to determine if there are differences between the independent cost estimates and the contractor estimate, which could prevent the overpricing of work. In addition, the City’s policy should prohibit construction work from starting, in relation to the increased scope, until change orders have been reviewed and approved. Finally, the City may want to consider creating an advisory committee that approves change orders, which would enhance project oversight and accountability.
Views of Responsible Official(s) and Planned Corrective Actions The City agrees with the conditions noted and will implement the recommendations noted.
City of Point Arena
Schedule of Findings and Responses
June 30, 2023
Page | 7 15105 Concord Circle, Ste. 130, Morgan Hill, CA 95037 Tel: 408-217-8749 • E-Fax: 408-872-4159
[email protected] • www.cnallp.com
Finding 2023-004: Grant Reimbursements (Material Weakness) Criteria
Best practices dictate that the City has processes in place to ensure that grant reimbursements are filed in a timely manner and available grant funding is utilized to its fullest extent.
Condition
In review of the supporting documentation for expenditures, we noted that the City has incurred allowable expenditures that meet the condition for reimbursement under certain grants, but the City did not submit reimbursement claims for those grants.
Cause
The monitoring of grant projects and expenditures was insufficient.
Effect
The City may not be able to recover resources that would have otherwise been available had timely grant reimbursement claims been submitted.
Recommendation
We recommend that the City establish procedures to ensure requirements are met with regard to grant claims for reimbursement and that claims are submitted timely.
Views of Responsible Official(s) and Planned Corrective Actions The City agrees with the conditions noted and will implement the recommendations noted.
Page | 1 115105 Concord Circle, Ste. 130, Morgan Hill, CA 95037 Tel: 408-217-8749 • E-Fax: 408-872-4159
[email protected] • www.cnallp.com
To the City Council of the
City of Point Arena
We have audited the basic financial statements of the City of Point Arena as of and for the year ended June 30, 2023, and have issued our report thereon dated March 22, 2024. Professional standards require that we advise you of the following matters relating to our audit.
Our Responsibility under Generally Accepted Auditing Standards and Government Auditing Standards
As communicated in our engagement letter, our responsibility, as described by professional standards, is to form and express an opinion(s) about whether the financial statements that have been prepared by management with your oversight are presented fairly, in all material respects, in conformity with accounting principles generally accepted in the United States of America. Our audit of the financial statements does not relieve you or management of your respective responsibilities.
Our responsibility, as prescribed by professional standards, is to plan and perform our audit to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, as part of our audit, we considered the internal control of the City of Point Arena solely for the purpose of designing our audit procedures and not to provide any assurance concerning such internal control.
We are also responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures for the purpose of identifying other matters to communicate to you.
Other Information in Documents Containing Audited Financial Statements Pursuant to professional standards, our responsibility as auditors for other information in documents containing City of Point Arena’s audited financial statements does not extend beyond the financial information identified in the audit report, and we are not required to perform any procedures to corroborate such other information. Our responsibility also includes communicating to you any information which we believe is a material misstatement of fact. Nothing came to our attention that caused us to believe that such information, or its manner of presentation, is materially inconsistent with the information, or manner of its presentation, appearing in the financial statements.
Planned Scope and Timing of the Audit
We conducted our audit consistent with the planned scope we previously communicated with management. However, the issuance of the report was delayed because of management turnover and since additional time was needed to evaluate the City as a going concern.
Page | 2 115105 Concord Circle, Ste. 130, Morgan Hill, CA 95037 Tel: 408-217-8749 • E-Fax: 408-872-4159
[email protected] • www.cnallp.com
Qualitative Aspects of the Entity’s Significant Accounting Practices Significant Accounting Policies
Management has the responsibility to select and use appropriate accounting policies. A summary of the significant accounting policies adopted by the City of Point Arena is included in Note 1 to the financial statements. There have been no initial selection of accounting policies and no changes in significant accounting policies or their application during June 30, 2023. No matters have come to our attention that would require us, under professional standards, to inform you about (1) the methods used to account for significant unusual transactions and (2) the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus.
Significant Accounting Estimates
Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s current judgments. Those judgments are normally based on knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments.
The most sensitive accounting estimates affecting the financial statements include estimates for depreciation of capital assets.
We evaluated the key factors and assumptions used to develop the identified estimates and determined that it is reasonable in relation to the basic financial statements taken as a whole and in relation to the applicable opinion units.
Financial Statement Disclosures
Certain financial statement disclosures involve significant judgment and are particularly sensitive because of their significance to financial statement users. The most sensitive disclosures affecting City of Point Arena’s financial statements relate to cash and investments, capital assets, and expenditures in excess of budget.
Significant Difficulties Encountered during the Audit
We encountered no significant difficulties in dealing with management relating to the performance of the audit.
Page | 3 115105 Concord Circle, Ste. 130, Morgan Hill, CA 95037 Tel: 408-217-8749 • E-Fax: 408-872-4159
[email protected] • www.cnallp.com
Uncorrected and Corrected Misstatements
For purposes of this communication, professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that we believe are trivial, and communicate them to the appropriate level of management. None of the misstatements identified by us as a result of our audit procedures and corrected by management were material, either individually or in the aggregate, to the financial statements taken as a whole or applicable opinion units. In addition, professional standards require us to communicate to you all material, corrected misstatements that were brought to the attention of management as a result of our audit procedures.
There were no material, corrected misstatements noted during the audit.
Disagreements with Management
For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter, which could be significant to the City of Point Arena’s financial statements or the auditor’s report. No such disagreements arose during the course of the audit.
Representations Requested from Management
We have requested certain written representations from management, which are included in the attached letter dated March 22, 2024.
Management’s Consultations with Other Accountants
In some cases, management may decide to consult with other accountants about auditing and accounting matters. Management informed us that, and to our knowledge, there were no consultations with other accountants regarding auditing and accounting matters.
Other Significant Findings or Issues
In the normal course of our professional association with the City of Point Arena, we generally discuss a variety of matters, including the application of accounting principles and auditing standards, operating and regulatory conditions affecting the entity, and operational plans and strategies that may affect the risks of material misstatement. None of the matters discussed resulted in a condition to our retention as the City of Point Arena’s auditors.
This report is intended solely for the information and use of the Board and management of the City of Point Arena and is not intended to be and should not be used by anyone other than these specified parties.
March 22, 2024
Morgan Hill, California