DISCUSSION
City of San Bernardino
Request for Council Action
Date: October 7, 2026
To: Honorable Mayor and City Council Members
From: Zuyva Ruiz, Acting Director of Finance & Management Services Department: Finance & Management Services Department
Subject: Discussion and Direction Regarding an Independent Phase One Financial Process Assessment (All Wards)
Recommendation:
It is recommended that the Mayor and City Council of the City of San Bernardino, California:
1. Approve the proposed Phase One independent financial process assessment described in this report, subject to completion of the City’s applicable procurement process and finalization of a professional services agreement;
2. Select review period, with staff presenting the following alternatives:
a. Fiscal Years 2024 through 2026, consistent with Eadie Payne LLP’s preliminary proposal and estimated cost of $140,000 to $150,000; or b. Fiscal Years 2023 through 2026, if Council determines that an additional fiscal year is appropriate, with Eadie Payne LLP estimating approximately 900 to 950 hours and an estimated $180,000 to $190,000 for the expanded period.
3. Determine whether any specific financial process, fund, contract transaction, project, or other matter should be added to the Phase One scope, recognizing that a specific allegation or transaction requiring forensic investigation may require a separately defined scope and additional resources;
4. Direct that Community Facilities District (CFD) and Landscape Maintenance District (LMD) matters be excluded from the Phase One financial process assessment, consistent with Eadie Payne LLP's recommendation that matters involving legal questions concerning district formation, authorization, boundaries, assessments, or service obligations be evaluated through a separate engagement using appropriate specialized legal or technical expertise;
5. Provide direction regarding the public reporting and presentation of the assessment, including the preparation of a public final report to the extent permitted by law, with legally protected or confidential matters handled separately as appropriate;
6. Direct staff to complete the appropriate procurement process and return to the Mayor and City Council for consideration of the proposed professional services agreement, final scope, funding, and schedule.
City Manager's Comments
The City Manager requests approval by the City Council for the contract creating an extensive financial review of the City’s operation and then would bring back specific findings that could require a more extensive (specific forensic audit) review in any specific areas that irregularities are identified.
Executive Summary
On June 5, 2024, the Mayor and City Council directed the City Manager to pursue a forensic audit and assessment in response to concerns regarding the City’s budget assumptions, expenditure levels, internal controls, and the use and accounting of City funds. Following that direction, City staff consulted with the current City auditing firm, Eadie Payne LLP regarding the appropriate structure and methodology for an independent review. Based on that consultation, staff proposed a defined, independently performed Phase One Financial Process Assessment focused on the City’s principal financial processes and related internal controls. The assessment is intended to determine whether key financial processes are appropriately designed, authorized, documented, monitored, and operating as intended. The proposed engagement is not a financial statement audit and is not a forensic investigation of an unidentified allegation, individual, project, or transaction. The proposed Phase one scope would address budget and spending authority; procurement and contracting; contract administration and vendor payment controls; payroll and position control; restricted funds, grants, and other special funding sources; financial reporting and reconciliations; manual journal entries; and corrective action associated with prior audit findings. The preliminary proposal recommends a review of Fiscal Years 2024 through 2026, requiring an estimated 700 to 750 professional hours at an estimated cost of $140,000 to $150,000. The anticipated schedule is approximately 14 to 18 weeks from project kickoff through issuance of the final report and presentation to the Mayor and City Council. If Council elects to include Fiscal Year 2023, Eadie Payne estimates approximately 900 to 950 professional hours and an estimated cost of $180,000 to $190,000.
The firm also recommends that the Community Facilities District (CFD) and Landscape Maintenance District (LMD) matters be excluded from the Phase One engagement because those matters may require specialized legal, financial, engineering, or other technical analysis concerning district formation, authorization, boundaries, assessments, and service obligations. Staff recommends that any such review be considered through a separate engagement. Therefore, Council is being requested to determine the review period, confirm the proposed Phase One scope, identify any additional matters for consideration, and direct staff to complete the appropriate procurement process and return to Council with a proposed professional services agreement, final scope, funding, and schedule.
Background
During the June 5, 2024, budget meeting, members of the Mayor and City Council raised concerns regarding budget assumptions, expenditure levels, vacant positions, line-item changes, and whether projected spending was consistent with available revenues. Council then directed the City Manager to pursue a forensic audit and assessment. Following that direction, City staff consulted with Eadie Payne LLP, the City’s current audit firm, regarding the distinctions among a financial statement audit, a forensic investigation, and a financial-process or internal-control assessment. Those different types of engagements all serve very different purposes.
A financial statement audit is primarily designed to provide an opinion regarding the City’s financial statements. It does not ordinarily examine every financial process, contract, payment, budget actions, project, or management decision. This engagement typically takes samples and tests those samples accordingly.
A forensic investigation is generally directed toward a specifically identified allegation, transaction, activity, or other matter and is designed to follow specific evidence relating to that clearly defined allegation. If Council identifies a particular allegation, transaction, contract, project, or other matter requiring forensic investigation, a separate scope can be developed based on the exact nature of the matter and the specialized expertise required.
An internal-control or financial-process assessment instead evaluates how financial processes are designed, operated, and executed. This type of assessment may examine authorization, segregation of duties, documentation, reconciliation, monitoring, compliance with applicable requirements, and corrective-action procedures.
The proposed Phase One assessment is intended to address the City’s broader concerns regarding financial processes and internal controls while preserving the City’s ability to conduct separate forensic or specialized reviews if specific matters warrant additional examination requiring a specific forensic audit.
Discussion
Proposed Phase One Financial Process Assessment
The purpose of Phase One is to independently assess whether selected City financial processes comply with the applicable Municipal Code provisions, Council actions, adopted budgets, City policies, delegated authority, and contractual requirements, and whether those processes are supported by appropriately designed and functioning internal controls.
The assessment would also consider whether financial processes are adequately documented, consistently applied, and capable of providing management and Council with reliable and timely financial information. Where material control deficiencies are identified, the review would evaluate the condition, applicable requirement or control expectation, cause, effect, and associated risk and would recommend practical corrective actions. The engagement is not intended to make a predetermined finding that fraud, misconduct, or legal violations occurred. The proposed scope includes the following areas:
1. Budget Development, Monitoring, and Spending Authority The reviewer will assess controls governing development, adoption, amendment, monitoring, and reporting of the City budget. The proposed work includes:
• Review of budget documents for the selected fiscal years; • Review of budget-to-actuals information;
• Review of selected management presentations to Council; • Review of documented budgetary controls;
• Testing of selected budget actions to determine whether they were appropriately authorized and documented;
• Review of the accuracy and consistency of budget information entered into the financial system; and
• Consideration of whether budgetary actions were consistent with Council authorization.
The assessment may consider revenue and expenditure assumptions, one-time and ongoing resources, fund-level and department-level appropriations, budget amendments and transfers, reserves and restricted resources, year-end projections, and variance reporting.
2. Procurement and Contracting
The reviewer will assess the City’s financial controls over procurement and contracting. Eadie Payne proposes reviewing the City’s contract listings for the selected fiscal years and selecting 15 contracts for each fiscal year on a risk-based basis. For the selected contracts, the review would include, as applicable:
• Procurement method;
• Competitive bidding or solicitation;
• Bid or proposal evaluation;
• Contract authority;
• Amendments and change orders;
• Supporting documentation;
• Purchase orders;
• Invoices;
• Evidence that goods or services were received;
• Payment approval;
• Contract balances;
• Contract expiration;
• Closeout; and
• Compliance with applicable procurement and contracting requirements.
The objective is to determine whether procurement and contracting controls are appropriately designed, documented, authorized, and followed.
3. Contract Administration and Vendor Payment Controls
The contract review will also consider whether departments and Finance appropriately verify contractual performances before vendor payments are approved.
Testing may include:
• Matching invoices to contracts and purchase orders;
• Confirming availability of funds;
• Verifying approval authority;
• Reviewing evidence that goods or services were received; • Reviewing milestones and deliverables;
• Evaluating monitoring of contract balances;
• Identifying payments made after contract authority was exhausted; and • Reviewing documentation supporting payment approval.
4. Payroll and Position Control
Because personnel expenditure represents a substantial component of the City’s budget, the reviewer will assess financial controls over authorized positions and payroll transactions. Eadie Payne proposes selecting 15 employees for each fiscal year, with departments selected on a risk basis. The review will consider:
• Authorization of positions;
• Salary and benefits;
• Segregation of duties;
• Employee status changes;
• Documentation supporting changes;
• Payroll controls;
• Reconciliation of payroll records to the adopted position schedule and budget; and
• Personnel expenditure trends.
This component is limited to financial authorization and position control. It is not a review of employee performance, discipline, hiring decisions, labor relations, or other personnel matters unless separately authorized.
5. Restricted Funds, Grants, and Special Funding Sources The reviewer should assess controls over a risk-based selection of restricted funds, grant funds, bond proceeds, and other funds subject to specific legal, contractual, or Council-imposed restrictions. For selected funds, the review may include:
• Applicable restrictions and commitments;
• Assignments and reserves;
• Grant agreements;
• Municipal Code provisions;
• Council resolutions;
• Eligibility of expenditures;
• Expenditure approval;
• Transfer between funds;
• Related internal and external reports;
• Reconciliations;
• Grant reporting and closeout; and
• Subrecipient monitoring, where applicable.
The specific funds and programs selected for testing should be based on materiality, risk, prior findings, transaction volume, and Council direction.
6. Financial Reporting, Reconciliations, Journal Entries, and Corrective Action The reviewer will assess selected financial reporting and reconciliation processes. The proposed work includes review of selected:
• Bank reconciliations;
• Investment reconciliations;
• Interfund balances and transfers;
• Accounts receivable reconciliations;
• Accounts payable reconciliations;
• Capital asset and project records;
• Other account reconciliations; and
• Documentation of management review and resolution of discrepancies.
Eadie Payne also proposed obtaining all manual journal entries for the selected fiscal years and selecting a risk-based sample for examination of supporting documentation and authorization. The reviewer will also examine applicable audit findings and corrective action plans and assess the status of identified corrective actions.
7. Review Methodology and Independence
The selected firm should:
• Review applicable Municipal Code provisions, Council actions, policies, administrative directives, procedures, contracts, financial-system records, and other relevant documentation;
• Document the expected process and control structure for each area reviewed; • Conduct interviews with appropriate City personnel and designated elected officials as determined by the firm’s methodology;
• Develop and document a risk-based testing methodology; • Select transactions, contracts, employees, funds, journal entries, reconciliations, and other items for testing based on risk, materiality, transaction volume, unusual activity, prior findings, and other relevant factors; • Independently perform the testing and determine whether identified exceptions represent isolated issues or broader control weaknesses; • Identify the condition, applicable requirement or control expectation, cause, effect, and risk associated with each material finding; • Recommend practical corrective actions and, where appropriate, identify responsible parties and target implementation dates;
• Provide designated City representatives with an opportunity to review factual accuracy before issuance of the final report but management does not approve or direct the firm’s professional conclusions;
• Disclose any actual or potential independence issue;
• Any additional advisory services that could affect the firm’s independence must be disclosed before being undertaken; and
• Maintain responsibility for the firm’s professional conclusions and findings independent of City management.
Scope Limitations
The Phase One engagement is not intended to:
• Provide a financial statement audit or opinion;
• Conduct a forensic investigation of unidentified allegations; • Determine whether fraud occurred;
• Evaluate individual employee performance;
• Provide legal opinions;
• Conduct a citywide organization or operational assessment; • Evaluate land-use or entitlement processes;
• Conduct detailed engineering or technical reviews of capital projects; • Review every City contract or financial transactions; or • Replace the City’s annual financial statement audit or Single Audit.
Testing will be risk-based and will not constitute a review of every transaction or activity. The absence of an identified exception should not be interpreted as establishing that no other exceptions, control deficiencies, or misconduct exist. Any specific allegations, transaction, project, contract, or other matter identified by Council that requires forensic investigation or specialized expertise may require a separate scope, procurement process, cost, and schedule.
CFD and LMD Matters
Eadie Payne LLP recommends excluding Community Facilities District and Landscape Maintenance District matters from Phase One. The recommendation is based on the potential for the requested reviews to involve specialized legal analysis concerning district establishment and authorization, district boundaries, assessments, and service obligations. Staff recommends that those matters be addressed separately if Council wishes to pursue them. A separate engagement could identify the appropriate legal, financial, engineering, or other specialized expertise; scope; procurement method; estimated cost; and schedule. Excluding CFD/LMD matters from Phase One does not prevent Council from directing a subsequent review.
Review Period and Deliverables
Eadie Payne LLP recommends a three-fiscal-year review covering:
• Fiscal Year 2024
• Fiscal Year 2025
• Fiscal Year 2026
For this three-year scope, the firm estimates 700 to 750 professional hours, a cost of $140,000 to $150,000 and a schedule of approximately 14 to 18 weeks from project kickoff through the final report and Council presentation. The firm has further advised that inclusion of Fiscal Year 2023 would increase the estimated effort to approximately 900 to 950 hours and increase the estimated cost to $180,000 to $190,000.
Council may therefore determine whether the additional fiscal year provides sufficient value to justify the additional estimated cost and time. Before execution of any agreement, the selected firm should confirm the final scope, review period, independence, staffing, testing methodology, estimated hours, cost, and schedule.
Deliverables
The engagement should produce, at minimum:
• A written work plan identifying final scope; review period; documents requested; interview plan; testing methodology; project schedule; City staff support requirements; and applicable professional or control framework. • Interim communications such as periodic communications regarding significant observations, missing records, scope limitations, or matters requiring immediate attention.
• Draft report that identifies objective and scope; review period; procedures performed; limitations; findings; supporting facts; applicable requirements or control expectations; cause and effect; risk classification; recommendations; and management responses.
• Final public report that is suitable for presentation to the Mayor and City Council and public release to the extent permitted by law.
• Corrective action matrix identifying recommendations, responsible department or officials, target completion dates, and follow-up status. • Council presentation that summarizes the work performed, principal findings, recommendations, management responses, and recommended next steps.
Reporting, Confidentiality, and Procurement
The City’s objective is to provide Council and the public with a clear and useful final report. The final report should be prepared as a public document to the extent permitted by law. Information that is legally exempt from disclosure, confidential by statue, protected by applicable privilege, or otherwise required to be handled confidentially should be addressed separately as determined by the City Attorney.
The engagement should not state or imply that the entire assessment, the auditor’s working papers, or the final report is protected by attorney-client privilege or attorney work-product protection. Whether particular communications or records are protected depends on the circumstances and applicable law. The professional services agreement should address:
• The contracting party and client;
• Direction and oversight of the engagement;
• Access to City records;
• Treatment of confidential and legally protected information; • Working papers;
• Document retention;
• Document preservation;
• Draft and final reports;
• Factual review by City management;
• Management responses; and
• Public presentation of the final report.
The City Attorney should advise staff regarding the appropriate treatment of particular matters that may involve pending claims, litigation, personnel matters, contract disputes, procurement challenges, or other legal issues.
Procurement Selection
Eadie Payne LLP provided the preliminary proposal attached to this report at the City’s request. The preliminary proposal is not an award of a professional services agreement and does not constitute authorization to begin the engagement.
The Purchasing Division and City Attorney should determine the appropriate procurement method and whether the proposed engagement requires a competitive process or additional Council authorization. Any procurement should be structured to ensure that all qualified firms are evaluated under consistent requirements and that the City’s selection process addresses professional qualifications, relevant government experience, independence, methodology, staffing, cost, schedule, and ability to complete the engagement.
If Eadie Payne LLP participates in any subsequent procurement, the City should ensure that its prior involvement in discussing the preliminary scope does not create an actual or perceived procurement or independence concern. The final agreement should be presented to Council for approval if required by applicable City purchasing authority as well as the necessary budgetary action needed.
Strategic Goals and Priorities
This item aligns with Key Target No. 1: Improved Operational & Financial Capacity.
Fiscal Impact
Council discussion and direction on the item has no immediate fiscal impact. The final cost will depend on the scope approved by Council, procurement process, final testing methodology, record availability, staff availability, and any additional matters added to the engagement. Any agreement exceeding existing administrative authority or available appropriation will be returned to Council with an identified funding source and any required budget amendment.
Conclusion
It is recommended that the Mayor and City Council of the City of San Bernardino, California:
1. Approve the proposed Phase One independent financial process assessment described in this report, subject to completion of the City’s applicable procurement process and finalization of a professional services agreement;
2. Select review period, with staff presenting the following alternatives:
a. Fiscal Years 2024 through 2026, consistent with Eadie Payne LLP’s preliminary proposal and estimated cost of $140,000 to $150,000; or b. Fiscal Years 2023 through 2026, if Council determines that an additional fiscal year is appropriate, with Eadie Payne LLP estimating approximately 900 to 950 hours and an estimated $180,000 to $190,000 for the expanded period.
3. Determine whether any specific financial process, fund, contract transaction, project, or other matter should be added to the Phase One scope, recognizing that a specific allegation or transaction requiring forensic investigation may require a separately defined scope and additional resources;
4. Direct that Community Facilities District (CFD) and Landscape Maintenance District (LMD) matters be excluded from the Phase One financial process assessment, consistent with Eadie Payne LLP's recommendation that matters involving legal questions concerning district formation, authorization, boundaries, assessments, or service obligations be evaluated through a separate engagement using appropriate specialized legal or technical expertise;
5. Provide direction regarding the public reporting and presentation of the assessment, including the preparation of a public final report to the extent permitted by law, with legally protected or confidential matters handled separately as appropriate;
6. Direct staff to complete the appropriate procurement process and return to the Mayor and City Council for consideration of the proposed professional services agreement, final scope, funding, and schedule.
Attachments
Attachment 1: Eadie Payne LLP Preliminary Scope Comments, Cost Estimate, and Schedule
Ward:
All Wards
Synopsis of Previous Council Actions:
June 26, 2024 The Mayor and City Council directed the City manager to conduct a forensic audit and assessment.
CC
Eric Levitt, City Manager