CI
TY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
FOR THE YEAR ENDED JUNE 30, 2022
CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
FOR THE YEAR ENDED JUNE 30, 2022
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morandum on Internal Control .................................................................................................................... 1 Schedule of Material Weakness ................................................................................................................ 3 Schedule of Significant Deficiency .......................................................................................................... 5 Schedule of Other Matters ........................................................................................................................ 7 Status of Prior Year Material Weaknesses ............................................................................................. 17 Status of Prior Year Significant Deficiencies ......................................................................................... 19
MEMORA
NDUM ON INTERNAL CONTROL
To the City Council of
the City of San Pablo, California
In planning and performing our audit of the basic fina ncial statements of the City of San Pablo (City) as of and for the year ended June 30, 2022, in accordance with auditing standards generally accepted in the United States of America, 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 statemen ts, 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 inte rnal control that might be material weaknesses or significant deficiencies and, therefore material weaknesses or significant deficiencies may exist that were not identified. In addition, because of inherent limitati ons in internal control, including the possibility of management override of controls, misstatements due to error or fraud may occur and not be detected by such controls. However, as discussed below, we identif ied certain deficiencies in internal control that we consider to be a material weakness and other deficiency that we consider to be a significant deficiency.
A deficiency in internal control exists when th e design or operation of a control does not allow management or employees, in the normal course of performing their assigned func tions, 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 material misstatement of the City’s financial statements will not be preven ted, or detected and corrected on a timely basis. We consider the deficiency in internal control included on the Schedule of Material Weakness 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 e nough to merit attention by those charged with governance. We consider the deficiency in intern al control included on the Schedule of Significant Deficiencies to be a significant deficiency.
Included in the Schedule of Other Matters are recommendations not meeting the above definitions that we believe are opportunities for strengthening internal controls and operating efficiency.
Government Auditing Standards require the auditor to perform lim ited procedures on the City’s response to the findings identified in our audit and described in the accompanying Schedules. The City’s response was not subjected to the other auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on the response.
1 This communication is intended solely for the inform ation and use of management, City Council, others within the organization, and agencies and pass-through entities requiring compliance with Government Auditing Standards, and is not intended to be and should not be used by anyone other than these specified parties.
Pleasant Hill, California
December 13, 2022
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MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF MATERIAL WEAKNESS
2022-01: Year-End Close Difficulties Due to Finance Staff Turnover Criteria:
Well-managed organizations shoul
d develop procedures that are well-documented, and have a plan in place to ensure that adequate resources will remain av ailable in the event of employee departures. Part of that plan is ensuring there are r esources available to be utilized on short notice to fill gaps in key positions, especially within the Finance Department. The procedures should be well-documented so that when there is turnover, the background, information a nd data are all available to anyone that comes in to fill the vacant positions, as these reso urces need to be in place througho ut the fiscal year to ensure accounting processes and procedures continue and a llow time for analysis of account balances and activities.
Condition:
The City’s Finance Department has experienced a si gnificant amount of turnover in the Director and Accounting Manager positions over the last several years. This caused there to be significant control weaknesses from July 2021 to January 2022 before the new finance team was brought in.
While the current year’s closing procedures were significantly improved from the previous year, due to the lack of documentation of procedures and backgr ound information performed historically, we have noted it has been difficult for incoming personnel to reconcile prior year and current year balances. This required the current finance team to look deeper in to the City’s finances which did require additional cleanup to ensure accuracy.
Areas that had control issues between July 2021 and January 2022 are noted below. Journal entries – not properly reviewed
or reviewed timely by personnel possessing the adequate level of skills and knowledge to determine if they are accurate and for the correct time period Bank and investment reconciliations are not being prepared and reviewed in a timely manner (see Finding 2022-02)
Investments – fair market value of investment s has not been adjusted correctly, requiring significant reclassifications and adjustments
Successor Agency transactions not properly recorded prior to the audit, including debt transactions and transactions between the City and the Successor Agency Land and debt transactions between the City and the EDC not properly recorded prior to audit Lack of documentation of review of check and payroll registers (see Finding 2022-02) 3 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF MATERIAL WEAKNESS
Effect:
The above condition required the current finance staff to extensively review additional information in the City’s financial system to ensure the accuracy of the information. This resulted in a significant amount of audit adjustments that required following the year-end close as City staff worked to clean up the issues discussed above. During the extensive review and due diligence, the current finance staff discovered the following:
1) $3.30 million transferred back to the General Fund from Fund 320 2) $1.472 million of previously recorded Unearned Revenue related to Rumrill 3) Settlement with DOF in the amount $1,996,683 which paid back the General Fund for the advances it made to the Successor Agency
Cause:
The additional work has been impacted by the following:
Turnover within the Accounting Manager and Director positions Lack of capacity due to vacant positions or staff leave Lack of effective review of reconciliations and jo urnal entries when the City was in the transition between July 2021 and January 2022.
Recommendation:
We understand that beginning February 2022 and with the new Finance team, the City has implemented new procedures during the last half of the fiscal year ended June 30, 2022 and has corrected the issues mentions above. The due diligence work performed by the new Finance staff has resulted to $6.7 million in favor of the General Fund but we recommend that the City continue to analyze staff resources to determine what additional plans can be made to ensu re that the financial data is processed properly and timely during staffing transitions.
We understand that the City is currently doing monthl y soft close of the financials which includes the bank and investment reconciliations, journal entries and monthly general le dger review. In addition, the City has also implemented new policies and procedur es for ensuring the timeliness and accuracy reviews of significant accounting functions.
Management’s Response:
With the new Finance staff, the City will con tinue to implement “best practice” policies and procedures to ensure timeliness and accuracy in the recording and reporting of all City transactions and activities.
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SCHEDULE OF SIGNIFICANT DEFICIENCY
2022-02: Bank and Investment Reconciliations, Accounts Payable and Payroll Controls – Review/Approval and Documentation
Criteria:
Bank and investment reconciliations are an important el ement of a City’s internal control structure. In order to be an effective control, the City shoul d complete bank reconciliations as soon as possible after each month-end, usually within thirty to forty-five days of receiving the statement, and the reconciliations should be subsequently reviewed by another party for accuracy and/or unusual items.
Furthermore, there should be segregation of dutie s for all transaction cycles, so that the personnel performing duties related to processing transactions , such as accounts payable and payroll, are not involved in the review process. In order to maintain a proper audit trail, there should be documentation of segregation of duties, including the date in which the control activities occurred.
Condition:
During our audit, we noted that the July 2021 th rough September 2021 bank r econciliations were not prepared and reviewed until January 2022 for the general checking, credit card, payroll, asset seizure and investment accounts.
Furthermore, during our review of the City’s check a nd payroll registers, we noted we noted that there was no audit trail documenting review of payroll registers, check l ogs, and accounts payable registers from July 2021 through December 31, 2021.
We noted that once the current finance team star ted at the City in January 2022, they got the reconciliations current and have ma intained timely reconciliations and review for the remainder of the fiscal year.
Cause:
Per City staff, the above conditions were due to staff oversights dur ing the timeframe of July 2021 through December 31, 2021 but MOIC was mitigated w ith the new finance team starting in January 2022.
Subsequent reviews were done timely and accurately.
Effect:
When there is a lack of segregation of duties and la ck of detailed review, it increases the likelihood that material misstatement, unauthorized transactions, errors, or potential fraud may occur and not be prevented or detected and corrected timely.
Recommendation:
We noted that the City developed timely processes of preparation and review from January 2022 through June 2022 over bank reconciliations, check registers and payroll registers, we recommend the City continue to ensure that these pro cesses are completed timely going forward. Furthermore, we recommend that the City document these processes internally to ensure that there is a backup process in place during periods of staff turnover.
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MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF SIGNIFICANT DEFICIENCY
2022-02: Bank and Investment Reconciliations, Accounts Payable and Payroll Controls – Review/Approval and Documentation (Continued)
Management’s Response:
With the new Finance staff, the City will con tinue to implement “best practice” policies and procedures to ensure timeliness and accuracy in the recording and reporting of all City transactions and activities.
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SCHEDULE OF OTHER MATTERS
2022-03: Timeliness of Grant and Reimbursement Billings
Criteria:
The City has a number of projects that are fully or partially funded by grants on a reimbursement basis.
As the City incurs related project costs, timely gran t reimbursement requests should be prepared and filed with the grantor to minimize the time between dis bursement and reimbursement. Cash management of grant funded projects is vital to the continuation and successful completion of the projects. If grant funds are not requested timely, the funding source may no longer have available funds for reimbursement or funds may be deprogrammed from the grantor.
Condition:
During our audit, we noted that grant reimbursement s filed by the Public Works Department were being filed every quarter, semi-annually or annually, depending on the project.
Potential Effect:
Costs may not be associated with revenues in the same period. Furthermore, cash flow may be decreased without filing reimbursements more frequently and timely.
Cause:
Staff turnover.
Recommendation:
We recommend that the City develop procedures to ensure grant reimbursement requests are prepared on a timely basis, at least monthly, as costs are in curred not only to improve cash flow but to match expenditures with associated revenues in the same period.
Management’s Response:
The City will review the recommendation closely and will implement “best practice” policies and procedures to ensure timeliness of grant and reimbursement billings.
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SCHEDULE OF OTHER MATTERS
2022:04: NEW GASB PRONOUNCEMENTS OR PRONOUNCEMENTS NOT YET EFFECTIVE
The following comment represents ne w pronouncements taking affect in the next few years. We have cited them here to keep you informed of developments:
EFFECTIVE FISCAL YEARS 2022, 2023 and 2024:
GASB 99 – Omnibus 2022
The objectives of this Statement are to enhance comparability in accounting and financial reporting and to improve the consistency of author itative literature by addressing (1) practice issues that have been identified during implementation and application of certain GASB Statements and (2) accounting and financial reporting for financial guarantees. The practice issues addressed by this Statement are as follows:
Classification and reporting of deri vative instruments within th e scope of Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, that do not meet the definition of either an investment derivative instrument or a hedging derivative instrument
Clarification of provisions in Statement No. 87, Leases, as amended, related to the determination of the lease term, classification of a lease as a s hort term lease, recognition and measurement of a lease liability and a lease asset, and identification of lease incentives
Clarification of provisions in Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements, related to (a) the determination of the public-private and public-public partnership (PPP) term and (b) recognition and measurement of installment payments and the transfer of the underlying PPP asset
Clarification of provisions in Statement No. 96, Subscription-Based Information Technology Arrangements, related to the subscription-based information technology arrangement (SBITA) term, classification of a SBITA as a short term SBITA, and recognition and measurement of a subscription liability
Extension of the period during which the London In terbank Offered Rate (L IBOR) is considered an appropriate benchmark interest rate for the qualitative evaluation of the effectiveness of an interest rate swap that hedges the interest rate risk of taxable debt
Accounting for the distribution of benefits as part of the Supplemental Nutrition Assistance Program (SNAP)
Disclosures related to nonmonetary transactions
Pledges of future revenues when resources are not received by the pledging government
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GASB 99 – Omnibus 2022 (Continued)
Clarification 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-wide financial statements
Terminology updates related to certain provisions of Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position
Terminology used in Statement 53 to refer to resource flows statements.
The Requirements of this Statement are Effective as Follows:
The requirements in paragraphs 26–32 related to ex tension of the use of LIBOR, accounting for SNAP distributions, disclosures of nonmonetary transacti ons, pledges of future revenues by pledging governments, clarification of certain provisions in Statement 34, as amended, and terminology updates related to Statement 53 and Statement 63 are effective upon issuance.
The requirements in paragraphs 11 –25 related to leases, PPPs, and SBITAs are effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter.
The requirements in paragraphs 4– 10 related to financial guarantees and the classification and reporting of derivative instruments within the scope of Stat ement 53 are effective for fiscal years beginning after June 15, 2023, and all reporting periods thereafter.
Earlier application is encouraged and is permitted by individual topic.
How the Changes in This Statement Will Improve Financial Reporting
The requirements of this Statement will enhance co mparability in the application of accounting and financial reporting requirements a nd will improve the consistency of authoritative literature. Consistent authoritative literature enables governments and other stakeholders to more easily locate and apply the correct accounting and financial reporting provisions , which improves the consistency with which such provisions are applied. The comparability of financia l statements also will improve as a result of this Statement. Better consistency and comparability improve the usefulness of information for users of state and local government financial statements.
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EFFECTIVE FISCAL YEAR 2022/23:
GASB 91 – Conduit Debt Obligations
The primary objectives of this Statement are to provide a single method of reporting conduit debt obligations by issuers and eliminate diversity in practice associated with (1) commitments extended by issuers, (2) arrangements associated with conduit debt obligations, and (3) related note disclosures. This Statement achieves those objectives by clarifying the existing definition of a conduit debt obligation; establishing that a conduit debt obligation is not a liability of the issuer; establishing standards for accounting and financial reporting of additional commi tments and voluntary commitments extended by issuers and arrangements associated with conduit debt obligations; and improving required note disclosures.
A conduit debt obligation is defined as a debt instrument having all of the following characteristics:
There are at least three parties involved:
(1) an issuer
(2) a third-party obligor, and
(3) a debt holder or a debt trustee.
The issuer and the third-party obligor are not within the same financial reporting entity.
The debt obligation is not a parity bond of the issu er, nor is it cross-collateralized with other debt of the issuer.
The third-party obligor or its ag ent, not the issuer, ultimately receives the proceeds from the debt issuance.
The third-party obligor, not the issuer, is primarily obligated for the payment of all amounts associated with the debt obligation (debt service payments).
All conduit debt obligations involve the issuer making a limited commitment. Some issuers extend additional commitments or voluntary commitments to support debt service in the event the third party is, or will be, unable to do so.
An issuer should not recognize a conduit debt oblig ation as a liability. However, an issuer should recognize a liability associated with an additional commitment or a voluntary commitment to support debt service if certain recognition criteria are met. As long as a conduit debt obligation is outstanding, an issuer that has made an additional commitment should evaluate at least annually whether those criteria are met. An issuer that has made only a limited commit ment should evaluate whether those criteria are met when an event occurs that causes the issuer to reevaluate its w illingness or ability to support the obligor’s debt service through a voluntary commitment.
This Statement also addresses arrangements—often characterized as leases—that are associated with conduit debt obligations. In those arrangements, ca pital assets are constructed or acquired with the proceeds of a conduit debt obligation and used by th ird-party obligors in the course of their activities.
Payments from third-party obligors are intended to cover and coincide with debt service payments.
During those arrangements, issuers retain the titles to the capital assets. Those titles may or may not pass to the obligors at the end of the arrangements.
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GASB 91 – Conduit Debt Obligations (Continued)
Issuers should not report those arrangements as leases, nor should they recognize a liability for the related conduit debt obligations or a receivable for the paymen ts related to those arrangements. In addition, the following provisions apply:
If the title passes to the third-party obligor at th e end of the arrangement, an issuer should not recognize a capital asset.
If the title does not pass to the third-party obligor and the third party has exclusive use of the entire capital asset during the arrangement, the issuer should not recognize a capital asset until the arrangement ends.
If the title does not pass to the third-party obligor and the third party has exclusive use of only portions of the capital asset during the arrangement, the issuer, at the inception of the arrangement, should recognize the entire capital as set and a deferred inflow of resources. The deferred inflow of resources should be reduced, a nd an inflow recognized, in a systematic and rational manner over the term of the arrangement.
This Statement requires issuers to disclose genera l information about their conduit debt obligations, organized by type of commitment, including the ag gregate outstanding principal amount of the issuers’ conduit debt obligations and a description of each ty pe of commitment. Issuers that recognize liabilities related to supporting the debt service of conduit debt obligations also should disclose information about the amount recognized and how the liabilities changed during the reporting period.
How the Changes in this Statement will Improve Financial Reporting
The requirements of this Statement will improve fina ncial reporting by eliminating the existing option for issuers to report conduit debt obligations as their own liabilities, thereby ending significant diversity in practice. The clarified definition will resolve stakeholders’ uncertainty as to whether a given financing is, in fact, a conduit debt obligation. Requiring issuer s to recognize liabilities associated with additional commitments extended by issuers and to recognize assets and deferred inflows of resources related to certain arrangements associated with conduit debt obligations also will eliminate diversity, thereby improving comparability in reporting by issuers. Revised disclosure requirements will provide financial statement users with better information regarding the commitments i ssuers extend and the likelihood that they will fulfill those commitments. That information will inform users of the potential impact of such commitments on the financial resources of issuers a nd help users assess issuers’ roles in conduit debt obligations.
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GASB 94 – Public-Private and Public-Public Partnerships and Availability Payment Arrangements
The primary objective of this Statement is to improve financial reporting by addressing issues related to public-private and public-public part nership arrangements (PPPs). As used in this Statement, a PPP is an arrangement in which a government (the transferor) contracts with an operator (a governmental or nongovernmental entity) to provide p ublic services by conveying control of the right to operate or use a nonfinancial asset, such as infrastructure or other capital asset (the underlying PPP asset), for a period of time in an exchange or exchange-like transaction. Some PPPs meet the definition of a service concession arrangement (SCA), which the Board defines in this Statement as a PPP in which (1) the operator collects and is compensated by fees from third parties; (2) the transferor determines or has the ability to modify or approve which services the operator is required to provi de, to whom the operator is required to provide the services, and the prices or rates that can be charged for the services; and (3) the transferor is entitled to significant residual interest in the service utility of the underlying PPP asset at the end of the arrangement.
This Statement also provides guidance for accounti ng and financial reporting for availability payment arrangements (APAs). As defined in this Statement, an APA is an arrangement in which a government compensates an operator for services th at may include designing, constructi ng, financing, maintaining, or operating an underlying nonfinancial asset for a period of time in an exchange or exchange-like transaction.
PPPs - This Statement requires that PPPs that meet the definition of a lease apply the guidance in Statement No. 87, Leases, as amended, if existing assets of the transferor that are not required to be improved by the operator as part of the PPP arrangement are the only underlying PPP assets and the PPP does not meet the definition of an SCA. This St atement provides accounting and financial reporting requirements for all other PPPs: those that either (1) m eet the definition of an SCA or (2) are not within the scope of Statement 87, as amended (as clarified by this Statement). The PPP term is defined as the period during which an operator has a noncancellabl e right to use an underlying PPP asset, plus, if applicable, certain periods if it is reasonably certain, based on all relevant factors, that the transferor or the operator either will exercise an option to extend the PPP or will not exercise an option to terminate the PPP.
A transferor generally should recognize an underl ying PPP asset as an asset in financial statements prepared using the economic resources measurement focus. However, in the case of an underlying PPP asset that is not owned by the transferor or is not the underlying asset of an SCA, a transferor should recognize a receivable measured based on the operator’s estimated carrying value of the underlying PPP asset as of the expected date of the transfer in ownership. In addition, a transferor should recognize a receivable for installment payments, if any, to be received from the operator in relation to the PPP.
Measurement of a receivable for installment payments should be at the present value of the payments expected to be received during the PPP term. A tran sferor also should recognize a deferred inflow of resources for the consideration received or to be received by the transfer or as part of the PPP. Revenue should be recognized by a transferor in a systematic and rational manner over the PPP term.
This Statement requires a transferor to recognize a receivable for installment payments and a deferred inflow of resources to account for a PPP in financia l statements prepared using the current financial resources measurement focus. Governmental fund reve nue would be recognized in a systematic and rational manner over the PPP term.
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GASB 94 – Public-Private and Public-Public Partnership s and Availability Payment Arrangements (Continued)
This Statement also provides specific guidance in financial statements prepared using the economic resources measurement focus for a government that is an operator in a PPP that either (1) meets the definition of an SCA or (2) is not within the scope of Statement 87, as amended (as clarified in this Statement). An operator should report an intangible right-to-use asset related to an underlying PPP asset that either is owned by the transferor or is the underlying asset of an SCA. Measurement of the right-to- use asset should be the amount of consideration to be provided to the transferor, plus any payments made to the transferor at or before the commencement of the PPP term, and certain direct costs. For an underlying PPP asset that is not owned by the transfer or and is not the underlying asset of an SCA, an operator should recognize a liability measured based on the estimated carrying value of the underlying PPP asset as of the expected date of the transfer in ownership. In addition, an operator should recognize a liability for installment payments, if any, to be made to the transferor in relation to the PPP. Measurement of a liability for installment payments should be at the present value of the payments expected to be made during the PPP term. An operator also should r ecognize a deferred outflow of resources for the consideration provided or to be provided to th e transferor as part of the PPP. Expense should be recognized by an operator in a systematic and rational manner over the PPP term.
This Statement also requires a government to account for PPP and non-PPP components of a PPP as separate contracts. If a PPP involves multiple underlying assets, a transferor and an operator in certain cases should account for each underlying PPP asset as a sep arate PPP. To allocate the contract price to different components, a transferor and an operator should use contract prices for individual components as long as they do not appear to be unreasonabl e based on professional judgment or use professional judgment to determine their best estimate if there are no stated prices or if stated prices appear to be unreasonable. If determining the best estimate is not practicable, multiple components in a PPP should be accounted for as a single PPP.
This Statement also requires an amendment to a PPP to be considered a PPP modification, unless the operator’s right to use the underlying PPP asset decreases, in which case it should be considered a partial or full PPP termination. A PPP termination should be accounted for by a transferor by reducing, as applicable, any receivable for installment payments or any receivable related to the transfer of ownership of the underlying PPP asset and by reducing the related deferred inflow of resources. An operator should account for a termination by reducing the carrying value of the right-to-use asset and, as applicable, any liability for installment payments or liability to transfer ownership of the underlying PPP asset. A PPP modification that does not qualify as a separate PPP should be accounted for by remeasuring PPP assets and liabilities.
APAs - An APA that is related to designing, constructi ng, and financing a nonfinancial asset in which ownership of the asset transfers by the end of the contract should be accounted for by a government as a financed purchase of the underlying nonfinancial asset. This Statement requires a government that engaged in an APA that contains multiple components to recognize each component as a separate arrangement. An APA that is relate d to operating or maintaining a no nfinancial asset should be reported by a government as an outflow of resources in the period to which payments relate.
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GASB 96 – Subscription-Based Information Technology Arrangements
This Statement provides guidance on the accounti ng and financial reporting for subscription-based information technology arrangements (SBITAs) for gove rnment end users (governments). This Statement (1) defines a SBITA; (2) establishes that a SBIT A results in a right-to-use subscription asset—an intangible asset—and a corresponding subscription liab ility; (3) provides the capitalization criteria for outlays other than subscription payments, including implementation costs of a SBITA; and (4) requires note disclosures regarding a SBITA. To the extent re levant, the standards for SBITAs are based on the standards established in Statement No. 87, Leases, as amended.
A SBITA is defined as a contract that conveys cont rol of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction.
The subscription term includes the period during which a government has a noncancelable right to use the underlying IT assets. The subscription term also incl udes periods covered by an option to extend (if it is reasonably certain that the government or SBITA vendor will exercise that option) or to terminate (if it is reasonably certain that the government or SBITA vendor will not exercise that option).
Under this Statement, a government generally should recognize a right-to-use subscription asset—an intangible asset—and a corresponding subscriptio n liability. A government should recognize the subscription liability at the commencement of the subscription term, —which is when the subscription asset is placed into service. The sub scription liability should be initially measured at the present value of subscription payments expected to be made during the subscription term. Future subscription payments should be discounted using the interest rate the SBITA vendor charges the government, which may be implicit, or the government’s incremental borrowing rate if the interest rate is not readily determinable. A government should recognize amortization of the disc ount on the subscription liability as an outflow of resources (for example, interest expense) in subsequent financial reporting periods.
The subscription asset should be initially measured as the sum of (1) the in itial subscription liability amount, (2) payments made to the SBITA vendor before commencement of the subscription term, and (3) capitalizable implementation costs, less any incentives received from the SBITA vendor at or before the commencement of the subscription term. A government should recognize amortization of the subscription asset as an outflow of resources over the subscription term.
Activities associated with a SBITA, other than making subscription payments, should be grouped into the following three stages, and their costs should be accounted for accordingly:
Preliminary Project Stage, including activities such as evaluating alternatives, determining needed technology, and selecting a SBITA vendor. Outlays in this stage should be expensed as incurred. Initial Implementation Stage, including all anc illary charges necessary to place the subscription asset into service. Outlays in this stage genera lly should be capitalized as an addition to the subscription asset.
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GASB 96 – Subscription-Based Information Technology Arrangements (Continued)
Operation and Additional Implementation Stag e, including activities such as subsequent implementation activities, maintenance, a nd other activities for a government’s ongoing operations related to a SBITA. Outlays in this stage should be expensed as incurred unless they meet specific capitalization criteria.
In classifying certain outlays into the appropriate stage, the nature of the activity should be the determining factor. Training costs should be expensed as incurred, regardless of the stage in which they are incurred.
If a SBITA contract contains multiple components, a government should account for each component as a separate SBITA or nonsubscription component and allocate the contract price to the different components. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, a government should account for those components as a single SBITA.
This Statement provides an exception for short-te rm SBITAs. Short-term SBITAs have a maximum possible term under the SBITA contract of 12 mont hs (or less), including any options to extend, regardless of their probability of being exercised. Subscription payments for short-term SBITAs should be recognized as outflows of resources.
This Statement requires a government to disclose descriptive information about its SBITAs other than short-term SBITAs, such as the amount of the s ubscription asset, accumulated amortization, other payments not included in the measurement of a subscr iption liability, principal and interest requirements for the subscription liability, and other essential information.
How the Changes in this Statement will Improve Financial Reporting
The requirements of this Statement will improve financial reporting by establishing a definition for SBITAs and providing uniform guidance for accounting and financial reporting for transactions that meet that definition. That definition and uniform guidan ce will result in greater consistency in practice.
Establishing the capitalization criteria for implementa tion costs also will reduce diversity and improve comparability in financial reporting by governments. Th is Statement also will e nhance the relevance and reliability of a government’s financial statements by requiring a government to report a subscription asset and subscription liability for a SBITA and to disclo se essential information about the arrangement. The disclosures will allow users to understand the scal e and important aspects of a government’s SBITA activities and evaluate a government’s obligations and assets resulting from SBITAs.
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EFFECTIVE FISCAL YEAR 2023/24:
GASB 100 – Accounting for Changes and Error Corrections
The primary objective of this Statement is to enha nce accounting and financial reporting requirements for accounting changes and error corrections to provide mo re understandable, reliable, relevant, consistent, and comparable information for making decisions or assessing accountability
This Statement defines accounting changes as changes in accounting prin ciples, changes in accounting estimates, and changes to or within the financial re porting entity and describes the transactions or other events that constitute those changes. As part of those descriptions, for (1) cer tain changes in accounting principles and (2) certain changes in accounting estim ates that result from a change in measurement methodology, a new principle or methodology should be justified on the basis that it is preferable to the principle or methodology used before the change. That preferability should be based on the qualitative characteristics of financial reporting—understandability, reliability, rele vance, timeliness, consistency, and comparability. This Statement al so addresses corrections of errors in previously issued financial statements.
This Statement prescribes the accounting and financia l reporting for (1) each type of accounting change and (2) error corrections. This Statement requires th at (a) changes in accounting principles and error corrections be reported retroactively by restating pr ior periods, (b) changes to or within the financial reporting entity be reported by adju sting beginning balances of the curre nt period, and (c) changes in accounting estimates be reported prospectively by recognizing the change in the current period. The requirements of this Statement for changes in accoun ting principles apply to the implementation of a new pronouncement in absence of specific transition provisions in the new pronouncement. This Statement also requires that the aggregate amount of adjustments to and restatements of beginning net position, fund balance, or fund net position, as applicable, be displayed by reporting unit in the financial statements.
This Statement requires disclosure in notes to fina ncial statements of descriptive information about accounting changes and error corrections, such as th eir nature. In addition, information about the quantitative effects on beginning balances of each acc ounting change and error correction should be disclosed by reporting unit in a tabular format to re concile beginning balances as previously reported to beginning balances as restated.
Furthermore, this Statement addresses how informa tion that is affected by a change in accounting principle or error correction should be presented in required supplementary information (RSI) and supplementary information (SI). For periods that ar e earlier than those included in the basic financial statements, information presented in RSI or SI should be restated for error corrections, if practicable, but not for changes in accounting principles.
16 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
STATUS OF PRIOR YEAR MATERIAL WEAKNESSES
2021-01: Timeliness and Accuracy of Year-End Close Due to Finance Staff Turnover
Criteria:
Well-managed organizations should develop procedures that are well-documented, and have a plan in place to ensure that adequate resources will remain ava ilable in the event of employee departures. Part of that plan is ensuring there are r esources available to be utilized on short notice to fill gaps in key positions, especially within the Finance Department. The procedures should be well-documented so that when there is turnover, the background, information a nd data are all available to anyone that comes in to fill the vacant positions, as these reso urces need to be in place througho ut the fiscal year to ensure accounting processes and procedures continue and a llow time for analysis of account balances and activities. In addition, when recruiting for Finance, it is imperative to seek candidates that have the appropriate skills, knowledge and experience to perform the functions for the position they are filling.
Especially in smaller organizations with minimal Finance staff, it is particularly beneficial if each position has municipal accounting depth.
Condition:
The City’s Finance Department has experienced a significant amount of turnover in the Accounting Manager position over the last several years, and just th is last year, in the Director position as well. This has put a significant strain on the City’s ability to ma intain a good internal control environment and to produce accurate and timely financial data.
While the current year’s closing procedures were dr amatically improved with the hiring of a Finance Director that had the skills, knowledge and experi ence in municipal accounting, due to the lack of documentation of procedures and background informati on performed historically, we have noted it was difficult for incoming personnel to reconcile prior year and current year balances, causing the City’s staff to seek past reconciliations and information from the a uditors. As the auditors are not a party to the City’s internal controls, it is imperative that documentation of procedures and financial activities be made a priority. We also understand that there will on ce again be turnover within the City’s Finance Department, and therefore, we wanted to summarize some of the significant issues that we have noted in the past, in order to assist the incoming personnel with prioritization of accounting concerns.
Areas that we have noted over the last few years that have suffered include:
Journal entries – not properly reviewed by personnel possessing the adequate level of skills and knowledge to determine if they are accurate and for the correct time period Capital assets – spreadsheets are cumbersome and not adequately updated, requiring restatements and/or significant reclassifications
Land and debt transactions between the City and the EDC not properly recorded prior to audit Loans receivable – lack of communication from othe r departments to address the need to record the loans on the general ledger
Accruals for receivables and payables not properly recorded prior to the audit Schedule of Expenditures of Federal Awards – not properly updated for expenditures incurred during the fiscal year
17 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
STATUS OF PRIOR YEAR MATERIAL WEAKNESSES
2021-01: Timeliness and Accuracy of Year-End Close Due to Finance Staff Turnover (Continued)
Review of Financial Statements – not completed timely or accurately, causing restatements in subsequent years
Delays in preparation for audit fieldwork, causing delays in issuance of financial statements Lack of review of vendor and employee databases (see Finding 2021-02) Lack of documentation of review of check and payroll registers (see Finding 2021-02)
Effect:
The above condition has caused delays in the City ’s preparedness for audit, and significant audit adjustments, restatements and reclassifications requi red following the year-end close. These conditions have increased the risk that errors or misstatements may go undetected by sta ff and corrections may not be made in a timely matter. As a result, audit e fforts have been significantly increased in response to these increased risks.
Cause:
The errors and timeliness have been impacted by the following:
Turnover within the Accounting Manager and Director positions Lack of municipal accounting depth
Lack of capacity due to vacant positions or staff leave Lack of effective review of reconciliations and journal entries
Recommendation:
The City should analyze staff resources to determine what plans can or s hould be made to ensure that the financial data is processed properly and timely during staffing transitions. The City must also develop procedures to ensure that accounts are analyzed throughout the fiscal year and after the year end close to ensure that additional closing entries are not required prior to providing the general ledger for audit. This analysis should include an assessment of the muni cipal accounting depth required for each position, or a consideration of updated and/or ad ditional positions needed to ade quately process all of the City’s transactions.
Current Status: See current year comment 2022-01.
18 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
STATUS OF PRIOR YEAR SIGNIFICANT DEFICIENCIES
2021-01: Accounts Payable and Payroll Controls – Review/Approval and Documentation
Criteria:
Ideally, there should be segregation of duties and ac cess for all transaction cycles, so that the personnel performing duties related to processing transactions, su ch as receipts, accounts payable and payroll, do not also have access to the databases related to these transaction cycles. When access cannot be restricted due to capacity, there should be a procedure in place fo r another party to periodically review and approve any changes made to the database(s). In addition, the review of the databases, as well as the review of any correlating registers should be formally documented, including the date of the review and approval.
Condition:
During our review of City staff’s access to the fina ncial system, we noted that multiple staff have access to the vendor and employee databases, including the staff person who processes accounts payable, and the staff person who processes payroll. We were informed that Finance does not currently have a process to periodically review and approve changes made to the vendor database and employee database.
Furthermore, during our review of the City’s check and payroll registers, we noted the following:
Check logs and check registers dated December 3, 2020, February 18, 2021, and April 8, 2021, had documentation of review, however, the date of review was not documented. Payroll registers for pay periods ending Oct ober 15, 2020, March 15, 2021 and April 30, 2021 had no documentation of review.
Cause:
Per City staff, the access to the databases was changed, and the reviews were not being completed and/or not documented due to significant turnover in Finance a nd IT staff, as well as staff leave, which impacted the City’s day-to-day operations, including the processes noted above.
Effect:
When there is a lack of segregation of duties and access, and lack of detailed review, it increases the likelihood of unauthorized transactions, errors, or potential fraud.
Recommendation:
We recommend the City designate a staff, who is not involved in the accounts payable and payroll processes, to periodically review and approve the changes to the vendor and employee databases, for each check run, making sure to formally document that th e review was performed, including the date of the review. In addition, as changes are made to Finan ce personnel, access should be reviewed and updated to ensure adequate controls and restrictions are in place.
Current Status: Partially implemented – see current year comment 2022-02.
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