COUNCIL AGENDA: 12/06/2022
FILE: 22-1796
ITEM: 3.6
TO: HONORABLE MAYOR
AND CITY COUNCIL
FROM: Julia H. Cooper
SUBJECT: SEE BELOW DATE: November 18, 2022
Approved Date
11/18/2022
SUBJECT: EXTERNAL AUDITOR’S REPORT: REPORT TO THOSE CHARGED WITH GOVERNANCE FOR THE YEAR ENDED JUNE 30, 2022
RECOMMENDATION
Accept the Report to Those Charged with Governance for the year ended June 30, 2022 as issued by Macias Gini & O’Connell LLP, the City’s external auditor.
OUTCOME
Provide an overview of the recommendations from the external auditors on the City’s internal control over financial reporting and compliance for the year ended June 30, 2022.
BACKGROUND
The City’s external auditor (Auditor) is responsible for communicating significant matters related to the audit that are relevant to City Council’s responsibility in overseeing the financial reporting process. The Report to Those Charged with Governance is presented concurrently with the Annual Comprehensive Financial Report (ACFR).
ANALYSIS
Attached for the City Council’s review is the Report to Those Charged with Governance for the Year Ended June 30, 2022.
HONORABLE MAYOR AND CITY COUNCIL
November 18, 2022
Subject: 2022 External Auditor’s Report to Those Charged with Governance
Report to Those Charged with Governance
During the course of the audit, the Auditor conducted a limited examination of the City’s internal controls and management practices. The Auditor looked for material weakness or reportable conditions that would require immediate disclosure to the City Council in accordance with generally accepted auditing standards. A deficiency 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.
• Material weakness is a deficiency in internal control, such that there is a reasonable possibility that a material misstatement of the City financial statements will not be prevented, or detected and corrected, on a timely basis.
• Significant deficiency is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
• Control deficiency is the least severe deficiency in that potential misstatements are not material. Control deficiencies still warrant identification and remediation.
The Auditor’s Report to Those Charged with Governance for the Year Ended June 30, 2022 contains no reportable conditions.
Additionally, the Auditor’s Report provides a status of prior year findings for Council consideration. A summary of that status follows:
Finding #
Title
Material
Weakness
Significant
Deficiency
Control
Deficiency
Status
2021-001 Internal Controls Over the
Financial Reporting Process X Corrected
It is important to note that this is the first time in 12 years the City has received a Report to Those Charged with Governance with no new findings and fully corrected prior year findings.
There are several factors that contributed to the favorable audit results:
• The Accounting Division has benefited from lower staff turnover.
• The addition of the Finance Recovery and Grants Team has provided critical, subject matter expertise and support on a Citywide basis to Departments with grant funding.
While much of the Finance Recovery and Grants Team activities are currently focused on the reporting, compliance, and documentation of COVID-19 federal and state grants, the team also has provided Citywide support to Departments with non-COVID grant funding.
The Finance Recovery and Grants Team consists of seven (7) dedicated team members currently funded on a limit-dated basis through June 30, 2023. This unit has made a marked improvement in the City’s grants accounting compliance area, as is demonstrated by no new findings in the financial reporting of grants, an area with multiple audit findings over the past 12 years. While this unit provides temporary relief for the additional work assumed by the Accounting Division and many Citywide grants
HONORABLE MAYOR AND CITY COUNCIL
November 18, 2022
Subject: 2022 External Auditor’s Report to Those Charged with Governance
management functions, the continued success of the City in maintaining clean audits will depend on retaining skilled accounting professionals on a permanent basis.
• The Finance Department planned and executed citywide fiscal year-end close training on the following modules:
Kick-off and General Ledger
Receipts
Purchasing
Disbursements
Travel Policy
• Management from the Accounting Division and Finance Recovery and Grants Team presented information and training on proper grants accounting and revenue recognition, an area of frequent audit findings in the past, to Citywide staff.
• The Finance Department implemented a new ACFR documentation management software to assist with consistent and transparent mapping of financial data from the City’s Financial Management System to the financial statements.
CONCLUSION
Acceptance of the Report to Those Charged with Governance for the Year Ended June 30, 2022, as issued by Macias Gini & O’Connell, LLP, provides status on the recommendations from the external auditors on the City’s internal controls over the financial reporting process.
EVALUATION AND FOLLOW-UP
The Single Audit is currently being prepared and the final report will be issued by the federal reporting deadline of March 31, 2023. Once complete, an informational memorandum regarding the Single Audit Report will be prepared for the City Council to highlight any additional audit findings, as well as include a link to the final report.
CLIMATE SMART SAN JOSE
The recommendation in this memorandum has no effect on Climate Smart San José energy, water, or mobility goals.
PUBLIC OUTREACH
This item will be posted to the City Council Agenda website for the December 6, 2022 meeting.
HONORABLE MAYOR AND CITY COUNCIL
November 18, 2022
Subject: 2022 External Auditor’s Report to Those Charged with Governance
COORDINATION
This staff report has been prepared by the Finance Department in coordination with the City Attorney’s Office and the City Manager’s Budget Office.
COMMISION RECOMMENDATION/INPUT
No commission recommendation or input is associated with this action.
CEQA
Not a Project, File No. PP17-010, City Organizational and Administrative Activities resulting in no changes to the physical environment.
/s/
JULIA H. COOPER
Director of Finance
For questions, please contact Julia H. Cooper, Director of Finance, at (408) 535-7011 or via email at [email protected]
Attachment
.
CITY OF SAN JOSE
Report
to Those Charged With Governance
For th
e Year Ended June 30, 2022
CITY OF SAN JOSE
Report to Those Charged With Governance
For the Year Ended June 30, 2022
Table of Contents
Page
Transmittal .................................................................................................................................................... 1
Required Communications ............................................................................................................................ 3
Status of Prior Year’s Finding .................................................................................................................... 10
Schedule of Uncorrected Financial Statement Misstatements .................................................................... 12
www.mgocpa.com
Macias Gini & O’Connell LLP
2121 N. California Boulevard, Suite 750
Walnut Creek, CA 94596
1 Honorable Mayor and City Council
City of José, California
In planning and performing our audit of the basic financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information, of the City of San José, California (C ity), as of and for the year ended June 30, 2022, 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 Comptrolle r General of the United States, 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 entity’s internal control. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control over financial reporting.
In addi
tion t o the City’s basic financial statements, we audit and separately report on the following financial statements as of and for the year ended June 30, 2022. These entities are included in the City’s basic financial statements:
• Succe
ssor Agency to the Redevelopment Agency of the City of San José; • Norman Y. Mineta San José International Airport;
• Parks and Recreation Bond Projects Fund;
• Branch Library Bond Projects Fund;
• Library Parcel Tax Special Revenue Fund;
• Neighborhood Security Bond Projects Fund;
• Pedestrian/Bicycle Facilities Grant;
• Public Safety and Infrastructure Bond Projects Fund;
• San José Clean Energy Enterprise Fund;
• South Bay Water Recycling Program and System; and
• City of San José Deferred Compensation Plans.
We did n
ot audit the financial statements of the City of San José Federated City Employees’ Retirement System and the City of San José Police and Fire Department Retirement Plan (collectively, “the Pension Trust Funds”). Those statements were separately reported on by other auditors and the required communications related to those audits were presented to the respective Retirement Boards.
A def
iciency in internal control exists when the design or operation of a control do es 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 entity’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:
• Reasonab
ly 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.
2 Our consideration of internal control was for the limited purpose described in the first paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses. Given these limitations, du ring our audit we did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.
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.
Walnut Creek, California
November 17, 2022
CITY OF SAN JOSE
Report to Those Charged With Governance
For the Year Ended June 30, 2022
3 We have audited the financial statements of City of San José, C alifornia (City) as of and for the year ended June 30, 2022, and have issued our report thereon dated November 17, 2022. T he City’s basic financial statements include the other entities we audited as d escribed in the transmittal letter of this communication. Professional standards require that we advise y ou of the following matters relating to our audit.
Our Responsibility in Relation to the Financial Statement Audit
As communicated in our engagement letter dated July 21, 2022, o ur 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 accordance 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 f inancial statements are free of material misstatement. An audit of financial statements includes conside ration of internal control over financial reporting as a basis for designing audit procedures that are ap propriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of th e entity’s internal control over financial reporting. Accordingly, as part of our audit, we considered the internal control of the City solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control.
We are also responsible for comm unicating significant matters r elated to the audit that are, in our professional judgment, relevant to your responsibilities in ove rseeing the financial reporting process.
However, we are not required to design procedures for the purpose of identifying other matters to communicate to you.
Planned Scope and Timing of the Audit
We conducted our audit consistent with the planned scope and ti ming we previously communicated to you.
Compliance with All Ethics Requirements Regarding Independence
The engagement team, others in our firm, as appropriate, our fi rm, and our network firms have complied with all relevant ethical requirements regarding independence.
CITY OF SAN JOSE
Report to Those Charged With Governance
For the Year Ended June 30, 2022
4 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 is included in Note I to the financial statements. As described in Note I.E. to the financial statements, during the fiscal year, the City implemented the following Governmental Accounting Standards Board (GASB) Statements:
GASB Statement No. 87 – Leases
This statement establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. A lease is defined as a contract that conveys control of the right to use another entity’s nonfi nancial asset as specified in the contract for a period of time in an exchange or exchange-like transaction. Under this statement, a lessee is required to recognize a lease liability and an intang ible right to use lease asset, and a lessor is required to recognize a lease receivable and a deferr ed inflow of resources. The required changes are reflected in the City’s financial statements and no tes to those statements. Adoption of the new standards resulted in restatement of beginning balan ces for assets, deferred inflows of resources, and liabilities for those funds and activities with leases under the scope of GASB Statement No. 87; however, the only beginning net position rest atement was for $271,000 in the Norman Y. Mineta San José International Airport fund.
G A S B S t a t e m e n t N o . 8 9 – Accounting for Interest Cost Incurred before the End of a Construction Period
This statement requires that interest costs incurred before the end of a construction period be recognized as an expense in the period in which the cost is inc urred for financial statements prepared using the economic resources measurement focus. As a result, interest cost incurred before the end of a construction period will not be included in the historical cost of a capital asset reported in a business-type activity or enterprise fund, and fi duciary fund. The City previously updated the Capitalized Interest policy to no longer capitalize interest for the Wastewater Treatment System Fund which had an immaterial impact to the fin ancial statements. This statement did not have any effect on the City’s financial statements.
GASB Statement No. 92 – Omnibus 2020
This statement is to enhance comparability in accounting and fi nancial reporting and to improve the consistency of authorita tive literature by addressing pract ice issues that have been identified during implementation and application of certain GASB Statement s. This statement addresses a variety of topics and includes specific provisions about the fo llowing: The effective date of Statement No. 87, Leases, and Implementation Guide No. 2019-3, Leases, for interim financial reports; Reporting of intra-entity transfers of assets between a primary government employer and a component unit defined pension plan or defined benefit other postemployment benefit (OPEB) plan; the applicability of Statements No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 , as amended, to reporting assets accumulated for postemployment benefits; the applicability of certain requi rements of Statement No. 84, Fiduciary Activities, to postemployment benefits; the applicability of certain requir ements of Statement No. 84, Fiduciary Activities, to postemployment benefits arrangements; measurement of liabilities (and
assets, if any) related to asset retirement obligations (AROs) in a government acquisition; reporting by public entity risk pools for amounts that are recoverable from reinsurers
CITY OF SAN JOSE
Report to Those Charged With Governance
For the Year Ended June 30, 2022
5 or excess insurers; reference to nonrecurring fair value measur ements of assets or liabilities in authoritative literature; and terminology used to refer to deri vative instruments. This statement did not have any effect on the City’s financial statements.
GASB Statement No. 93 – Replacement of Interbank Offered Rates This statement addresses those and other accounting and financi al reporting implications that result from the replacement of an Interbank Offered Rate (IBOR) . The City did not have any direct exposure to derivative contracts tied to London Interbank Offered Rate (LIBOR) as of June 30, 2022. This statement did not have any effect on the City’s financial statements.
GASB Statement No. 99 – Omnibus 2022
This statement addresses the following and did not have any eff ect on the City’s financial statements: (i) extension of the period during which LIBOR is c onsidered an appropriate benchmark interest rate for the qualitative evaluation of the e ffectiveness of an interest rate swap that hedges the interest rate of taxable debt, (ii) disclosures related to nonmonetary transactions, (iii) pledges of future revenues when resources are not receive d by the pledging government, (iv) accounting for the distribution of benefits as part of the Supp lemental Nutrition Assistance Program, (v) classification of provisions in Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – For State and Local Governments, as amended, related to the focus of the government-w ide financial statements, (vi) terminology used in Statement 53 to refer to resource flows statements, and (vii) terminology up dates related to certain provisions of Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position.
No matters have come to our attention that would require us, un der 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 whic h there is a lack of authoritative guidance or consensus.
Significant Accounting Estimates
Accounting estimates are an integral part of the financial stat ements prepared by management and are based on management’s current judgments. Those judgments are no rmally 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 are:
Measurement of investments at fair value
Estimated allowance for losses on accounts receivable Estimated allowance for losses on loans receivable
Depreciation estimates for capital assets, including depreciati on methods and useful lives assigned to depreciable property
Accrual of compensated absences
Accrual and disclosure of self-insurance claims liabilities Accrual and disclosure of pollution remediation obligations Measurement of the pension cont ributions, net pe nsion liability , pension expense, and pension- related deferred outflows and inflows of resources
CITY OF SAN JOSE
Report to Those Charged With Governance
For the Year Ended June 30, 2022
6 Measurement of the other postemployment benefits (OPEB) contrib utions, net OPEB liability, OPEB expense, and OPEB-related deferred outflows and inflows of resources Measurement of the lease liability and leases receivable
Management’s estimates were based on the following:
The City’s investments are accounted for in accordance with the provisions of GASB Statement No. 72, Fair Value Measurement and Application , and accordingly, its fair value measurements are categorized within the fair value hierarchy established by the standard. The following levels indicate the hierarchy of inputs used to measure fair value and the primary valuation methodologies used for financial instruments measured at fair value on a recurring basis:
o Level 1 – Investments whose values are based on quoted prices ( unadjusted) for identical assets in active markets that a government can access at the measurement date. o Level 2 – Investments whose values are based on inputs – other than quoted prices including prices included within level 1 – that are observable for an asset, either directly or indirectly. o Level 3 – Investments whose values are based on unobservable inputs for an asset and may require a degree of professional judgment.
Estimated allowance for losses on accounts receivable was based on historical experience. Estimated allowance for loans receivable is comprised of an all owance for risk and an allowance for present value discount. The allowance for risk was based o n the consideration of the changes in the portfolio character, evaluation of current economic cond itions and such other factors that, in management’s judgment, deserve recognition in estimating pot ential loan losses. The allowance for risk takes into c onsideration maturity dates, int erest rates, and other relevant factors. The allowance for present value discount gives recogni tion to the economic cost of providing loans at interest rates below market and represents m anagement’s estimate of the present value of projected net cash flows to the City from the loan portfolio. Useful lives for depreciable property were determined by manage ment based on the nature of the capital asset. Depreciation was calculated based on the straight-line method. Accrual of compensated absences was based on accrued eligible h ours of vacation, sick leave and other compensatory time at current pay rates for eligible employees. Estimated liabilities for workers’ compensation claims were based on management’s estimate obtained from information derived from Intercare’s (a third-par ty administrator) claims database system adjusted for a discounted projection of the ultimate cos t of known claims and unreported claims at 1.5%. Estimated liabilities for general liability an d other claims were determined by the City Attorney’s judgment about the ultimate outcome of the claims. Accrual and disclosures of pollution remediation obligations we re determined by the City’s engineers and its environmental consultants’ judgments about th e ultimate outcome of the obligations.
Pension plans’ employer and employee contributions requirements, net pension liability, and related deferred outflows and in flows of resources were based o n actuarial valuations prepared by the Pension Trust Funds and CalPERS.
OPEB plans’ employer and employee contributions requirements, net OPEB liability, and related deferred outflows and in flows of resources were based o n actuarial valuations prepared by the Pension Trust Funds.
CITY OF SAN JOSE
Report to Those Charged With Governance
For the Year Ended June 30, 2022
7 The discount rate used for the calculation of the lease liabili ty and leases receivable are based on the City’s estimated incremental borrowing rate using the natio nal average fixed-rate loan on July 1, 2021 for the implementation date and on the date of lease commencement thereafter.
Except for the fair value of the Pension Trust Funds investments and the pension and OPEB plans information based on actuarial valuations, we evaluated the key factors and assumptions used to develop these accounting estimates in determining that they are reasona ble in relation to the basic financial statements taken as a whole and in relation to the applicable o pinion units. The fair value of the Pension Trust Funds investments and the pension and OPEB plans informat ion based on actuarial valuations were agreed to the separately audited financial statements of the Pe nsion Trust Funds, which were reported on by other auditors.
Financial Statement Disclosures
Certain financial statement disclosures involve significant judgment and are particularly sensitive because of their significance to financial statement users. The most se nsitive disclosures affecting the City’s financial statements relate to:
• The City’s Defined Benefit Retirement Plans and Postemployment Benefit Plans Other than Pension Plans described in Note IV.A.
• Disclosures regarding the Successor Agency to the Redevelopment Agency of the City of San José described in Note IV.C.
Significant Difficulties Encountered during the Audit
We encountered n
o significant difficulties in dealing with management relating to the performance of the audit.
Uncorrected M
isstatements
For purposes of this communication, p rofessional standards also require us to accumulate all known and likely misstatements identified during the audit, other than those that we believe are trivial, and co
mmunicate them to the appropriate level of management. Further, professional standards require us to also communicate the e ffect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances or disclosures, and the financial statements as a whole and each applicable opinion unit. The attached schedule summarizes uncorrected financial statement misstatements
whose effects in the current and prior periods, a s determined by management,
are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. Uncorrected misstatements or matters underlying those uncorrected misstatements could potentially cause future-period financial statements to be materially misst
ated, even though the uncorrected misstatements are immaterial to the financial statements currently under 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’s financial statements or the auditor’s report.
No such disagreements arose during the course of the audit.
CITY OF SAN JOSE
Report to Those Charged With Governance
For the Year Ended June 30, 2022
8 Representations Requested from Management
We have requested certain writte n representations from manageme nt, which are included in the attached letter dated November 17, 2022.
Management’s Consultations with Other Accountants
In some cases, management may d ecide to consult with other acco untants about auditing and accounting matters. Management informed us that, and to our kno wledge, there were no consultations with other accountants regarding auditing and accounting matters.
Other Significant Matters, Findings, or Issues
In the normal course of our professional association with the C ity, we generally discuss a variety of matters, including the application of accounting principles and auditing standards, significant events or transactions that occurred during the year, operating and regul atory conditions affecting the entity, and operational plans and strategies that may affect the risks of m aterial misstatement. None of the matters discussed resulted in a condition to our retention as the City’s auditors.
Other Information in Documents Containing Audited Financial Statements
Pursuant to professional standards, our responsibility as audit ors for other information, whether financial or nonfinancial, included in the City’s audited finan cial statements, does not extend beyond the information identified in the audit report, and we are not required to perform any procedures to corroborate such other information. However, in accordance with such standards, we have we have applied certain limited procedures to the management’s discussi on and analysis; the schedules of revenues, expenditures and changes in fund balance – budget and actual for the General Fund, Housing Activities Fund, and Low and Moderate Income Housing Asset Fund ; the schedule of employer contributions – defined benefit pension plans; the schedule of changes in the employer’s net pension liability and related ratios for the measurement periods ended June 30 – defined benefit pension plans; the schedule of investment returns – defined benefit pension pl a n s ; t h e s c h e d u l e o f t h e C i t y ’ s proportionate share of the net pension liability and related ra tios – CalPERS; the schedule of employer contributions – CalPERS; the schedule of changes in the employe r’s net OPEB liability and related ratios for the measurement periods ended June 30 – postemployment healthcare plans; and the schedule of employer contributions – postemployment healthcare plans, wh ich are required supplementary information (RSI) that supplement the basic financial statements. Our procedures and the other auditors procedures for the Pension Trust Funds consisted of inquiries o f management regarding the methods of preparing the information and comparing the information for con sistency with management’s responses to our inquiries, the basic financial statements, the separately audited financial statements of the Pension Trust Funds, and ot her knowledge we obtained during our audit of the basic financial statements. We did not audit the RSI and do not express an opin ion or provide any assurance on the RSI.
CITY OF SAN JOSE
Report to Those Charged With Governance
For the Year Ended June 30, 2022
9 We were engaged to report on combining and individual fund fina ncial statements and schedules listed as supplemental information, which accompany the financial statements but are not RSI. With respect to this supplemental information, except for the supplemental i nformation for the Pension Trust Funds, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of prepari ng it has not changed from the prior period, and the information is appropriate and complete in rela tion to our audit of the financial statements. We compared and reconciled the supplemental informa tion to the underlying accounting records used to prepare the financial statements or to the fina ncial statements themselves. The supplemental information for the Pension Trust Funds was agreed to the separately audited financial statements of the Pension Trust Funds, which were reported on by other auditors.
We were not engaged to report on the introductory and the stati stical sections, which accompany the City’s basic financial statements but are not RSI. We did not a udit or perform other procedures on this other information and we do not express an opinion or provide any assurance on it.
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.
Modification of the Auditor’s Report
Our report includes an emphasis of matter paragraph to reference to Note 1.E. to the financial statements for the City’s implementation of GASB Statement No. 87, Leases. Our opinion is not modified with respect to this matter.
CITY OF SAN JOSE
Report to Those Charged With Governance
For the Year Ended June 30, 2022
10 STATUS OF PRIOR YEAR’S FINDING
Finding 2021-001 – Material Weakness
Internal Controls Over the Financial Reporting Process
Internal control is an integral process that is designed by the City’s governing body, management and personnel and is designed to address risks and to provide reaso nable assurance that in pursuit of the organization’s goals, the following general objectives are being achieved:
Executing orderly, ethical, economical, efficient and effective operations; Fulfilling accountability obligations;
Complying with applicable laws, regulations, contracts and grant agreements; and Safeguarding resources against loss, misuse and damage.
Internal control is a dynamic integral process that should be continuously adapting to the changes the City is facing. The City started to address its staffing challenges by filling vacant positions and adding new personnel in the Finance Department.
While the City has been successful in recruiting professionals to fill vacant positions over the past four years, it has been challenged with retaining these professional s. As such, the City has been continuously training and integrating new personnel into the City’s complex accounting and financial reporting process. This rebuilding of staff has increased the workload of the remaining seasoned professionals, which contributed to errors or proposed audit adjustments to the financial reporting such as the following:
In fiscal year 2019-20, the City’s Housing Activities Fund was awarded a State grant in the amount of $23.8 million. The award was received upfront as an advance, and $14.9 million was recognized as grant revenue in fiscal year 2019-20. However, only $2.5 million should have been recognized as revenue in fiscal year 2019-20. The City should only recognize revenue as it incurs eligible costs, and report unear ned revenue for the award amoun t where eligible costs are not yet incurred. An adjustment to the Housing Activities Fund in the a mount of $12.4 million was necessary to properly report fund balance and governmental acti vities net position and unearned revenue at the beginning of the year for the fiscal year 2020-21. Errors made in accounts payable for end of year cut-off analysi s, in the amounts of $5.8 million and $2.7 million in its governmental and proprietary funds, respectively. Errors made in the classification between unearned revenue and deferred revenue in the amount of $12.9 million in a nonmajor governmental fund.
Proper asset classification for cash received as of end of year by decreasing accounts receivable and increasing cash for the Low and Moderate Income Housing Ass et Fund in the amount of $7.9 million.
In addition, there were numerous adjusting entries made by the City after the initial close of its financial records for financial statement presentation. This resulted in increased staff effort in re-performing reconciliations to substantiate account balances. This continu ed practice could cause possible irregularities, delays, and errors without timely identification.
CITY OF SAN JOSE
Report to Those Charged With Governance
For the Year Ended June 30, 2022
11 We recommend that the City conti nue evaluating the causes for t he deficiencies reported above and to incorporate the necessary tasks during its closing process to p revent these types of errors in the future.
This includes minimizing manual reconciliations to the General Ledger and manual adjusting entries for financial statement presentation. In addition, the City should continue to develop the skills and experience of its new personnel assigned to key roles in the pr eparation of the annual financial statements to improve the efficiency of its financial reporting process, i ncluding cross-training to minimize the impacts of further turnover.
Status: Corrected.
CITY OF SAN JOSE
Report to Those Charged With Governance
For the Year Ended June 30, 2022
SUMMARY OF UNCORRECTED FINANCIAL STATEMENT MISSTATEMENTS 12 Debit Cre dit
Account / Adjustment Description
1 Governmental Activities Allowance for Uncollectibles 2,565$ Governmental Activities Expenses 2,565$
Low and Moderate Income Housing Asset Allowance for Uncollectibles 2,565$ Low and Moderate Income Housing Asset Loans Reserve 2,565$ (Dollars in thousands)
To decrease the overstated loan loss reserves balance for the Low and Moderate Income Housing Asset Fund (Fund 346) and for the impact to the Governmental Activities opinion unit.