CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
FOR THE YEAR ENDED JUNE 30, 2024
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CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
FOR THE YEAR ENDED JUNE 30, 2024
Table of Contents
Page
Memorandum on Internal Control ................................................................................................................... 1 Schedule of Significant Deficiency ......................................................................................................... 3 Schedule of Other Matters ....................................................................................................................... 5 Status of Prior Year Significant Deficiency .......................................................................................... 11
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MEMORANDUM ON INTERNAL CONTROL
To the City Council of
the City of San Pablo, California
In planning and performing our audit of the basic financial statements of the City of San Pablo (City) as
of and for the year ended June 30 , 2024, 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 statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal contro l. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control.
Our consideration of internal control was for the li mited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and, therefore material weakne sses or significant deficiencies may exist that were not identified. In addition, because of inherent limitations 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 identified certain deficien cies in internal control that we consider to be a significant deficiency.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable po ssibility that a material misstatement of the City’s financial statements wi ll not be prevented, or detected an d corrected on a timely basis. We did not identify any deficiencies in internal control that we consider to be material weaknesses.
A significant deficiency is a deficiency, or a combinati on of deficiencies, in internal control that is less severe than a material weakness, yet important en ough to merit attention by those charged with governance. We consider the deficiency in internal 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 limited procedures on the City’s response to the findings identified in our au dit and described in the accompanying Schedules. The City’s response was not subjected to the other auditing procedures ap plied 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 5, 2024
2 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF SIGNIFICANT DEFICIENCY
2024-01: Accuracy of Bank Reconciliation
Criteria:
Bank reconciliations are an important element of a City ’s internal control structure. In order to be an effective control, the book balance in the bank reconciliations should match the general ledger balance.
Furthermore, the bank reconciliation should include any applicable reconciling items and general ledger cash accounts, such as payroll-related items.
Condition:
During our audit, we noted that there was varian ce of $1,232,897 between the June 30, 2024 general checking bank reconcilia
tion and the City’s general ledger. U pon further investigation, the City determined that the variance was due to a payroll accr ual that was in the general ledger, but not reflected in the City’s general checking bank reconciliation.
Effect:
If reconciling items are not properly included on the bank reconciliation each month, the balance of cash recorded in the City’s general ledger may not be ac curate. There is an increased risk that a material misstatement would not be presented, or detected and corrected on a timely basis.
Cause:
We understand that it is not the City’s practice to include payroll reconcili ation items on the bank reconciliation.
Recommendation:
We recommend that the City review reconciling items each month to ensure they are current, investigated and included or cleared from the bank reconciliation once the activity has been completed. In addition, the City should include all reconcilin g items and general ledger cash ac counts on the bank reconciliation to ensure accuracy in the reconciliation process.
Management’s Response:
The City will be implementing a bank reconciliat ion protocol, per the Auditor’s findings. This action will address variances due to payroll accruals in the general ledger. 3 This Page Left Intentionally Blank
CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
NEW GASB PRONOUNCEMENTS OR PRONOUNCEMENTS NOT YET EFFECTIVE
The following comment represents new pronouncements ta king affect in the next few years. We have cited them here to keep you informed of developments.
EFFECTIVE FISCAL YEAR 2024/25:
GASB 101 – Compensated Absences
The objective of this Statement is to better meet the information need s of financial statement users by updating the recognition and measurement guidance for compensated absences. That objective is achieved by aligning the recognition and measurem ent guidance under a unified model and by amending certain previously required disclosures.
Recognition And Measurement
This Statement requires that liabilities for compensate d absences be recognized for (1) leave that has not been used and (2) leave that has been used but not yet paid in cash or settled through noncash means. A liability should be recognized for leave that has not been used if (a) the leave is attributable to services already rendered, (b) the leave accumulates, and (c) the leave is more likely than not to be used for time off or otherwise paid in cash or settled through noncas h means. Leave is attributable to services already rendered when an employee has performed the services required to earn the leave. Leave that accumulates is carried forward from the reporting period in which it is earned to a future reporting period during which it may be used for time off or otherwise paid or settled. In estimating the leave that is more likely than not to be used or otherwise paid or settled, a gove rnment should consider relevant factors such as employment policies related to compensated absenc es and historical inform ation about the use or payment of compensated absences. However, leave that is more likely than not to be settled through conversion to defined benefit postemployment benefi ts should not be included in a liability for compensated absences.
This Statement requires that a li ability for certain types of compen sated absences—including parental leave, military leave, and jury duty leave—not be recognized until the leave commences. This Statement also requires that a liability for specific types of co mpensated absences not be recognized until the leave is used.
This Statement also establishes gu idance for measuring a liability fo r leave that has not been used, generally using an employee’s pay rate as of the date of the financial st atements. A liability for leave that has been used but not yet paid or settled should be measured at th e amount of the cash payment or noncash settlement to be made. Ce rtain salary-related payments that are directly and incrementally associated with payments for leave also should be included in the measurement of the liabilities.
With respect to financial statemen ts prepared using the current fina ncial resources measurement focus, this Statement requires that expenditures be recognize d for the amount that norm ally would be liquidated with expendable available financial resources.
5 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
GASB 101 – Compensated Absences (Continued)
Notes To Financial Statements
This Statement amends the existing requirement to disclose the gross increases and decreases in a liability for compensated absences to allow governments to disclose only the net change in the liability (as long as they identify it as a net change). In addition, governments are no l onger required to disclose which governmental funds typically have been used to liquidate the liability for compensated absences.
How the Changes in this Statement Will Improve Financial Reporting
The unified recognition and measurement model in this Statement will result in a liability for compensated absences that more appropriately refl ects when a government incurs an obligation. In addition, the model can be applied consistently to any type of compensated absence and will eliminate potential comparability issues between governments that offer different types of leave.
The model also will result in a more robust estimat e of the amount of compen sated absences that a government will pay or settle, which will enhance the relevance and reliability of information about the liability for compensated absences.
GASB 102 – Certain Risk Disclosures
State and local governments face a va riety of risks that could negatively affect the level of service they provide or their ability to meet obligations as they come due. Although governments are required to disclose information about their expo sure to some of those risks, esse ntial information about other risks that are prevalent among state and local governments is not routinely disclosed because it is not explicitly required. The objective of this Statement is to pr ovide users of government financial statements with essential information about risks related to a government’s vulnerabilities due to certain concentrations or constraints.
This Statement defines a concentration as a lack of dive rsity related to an aspect of a significant inflow of resources or outflow of resources. A constraint is a limitation imposed on a gov ernment by an external party or by formal action of the go vernment’s highest level of decisi on-making authority. Concentrations and constraints may limit a government’s ability to acquire resources or control spending.
This Statement requires a government to assess whet her a concentration or constraint makes the primary government reporting unit or other reporting units that report a liability for revenue debt vulnerable to the risk of a substantial impact. Additionally, this Statement requires a government to assess whether an event or events associated with a concentration or constr aint that could cause the substantial impact have occurred, have begun to occur, or are more likely than not to begin to occur with in 12 months of the date the financial statements are issued.
6 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
GASB 102 – Certain Risk Disclosures (Continued)
If a government determines that those criteria for di sclosure have been met for a concentration or constraint, it should disclose information in notes to financial statements in sufficient detail to enable users of financial statements to understand the nature of the circumstances disclosed and the government’s vulnerability to the risk of a substantia l impact. The disclosure should include descriptions of the following:
• The concentration or constraint.
• Each event associated with the concentration or constraint that could cause a substantial impact if the event had occurred or had begun to occur prior to the issuance of the financial statements.
• Actions taken by the government prior to the is suance of the financial statements to mitigate the risk.
How the Changes in This Statement Will Improve Financial Reporting
The requirements of this Statement will improve fina ncial reporting by providing users of financial statements with essential information that currently is not often provided. The disclosures will provide users with timely informat ion regarding certain concentrations or constraints and related events that have occurred or have begun to occur that make a government vulnerable to a substantial impact. As a result, users will have better information with which to understand and anticipate certain risks to a government’s financial condition.
7 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
EFFECTIVE FISCAL YEAR 2025/26:
GASB 103 – Financial Reporting Model Improvements
The objective of this Statement is to improve key components of the financial reporting model to enhance its effectiveness in providing information that is essential for decision making and assessing a government’s accountability. This Statement also addresses certain application issues.
Management’s Discussion and Analysis - This Statement continues th e requirement that the basic financial statements be preceded by management’s discussion and anal ysis (MD&A), which is presented as required supplementary information (RSI). MD&A pr ovides an objective and ea sily readable analysis of the government’s financial activities based on curr ently known facts, decisi ons, or conditions and presents comparisons between the current year and the prior year. This Stat ement requires that the information presented in MD&A be limited to the rela ted topics discussed in five sections: (1) Overview of the Financial Statements, (2) Financial Summary, (3) Detailed Analyses, (4) Significant Capital Asset and Long-Term Financing Activity, and (5) Curren tly Known Facts, Decisions, or Conditions.
Furthermore, this Statement stresses that the detailed analyses should explain why balances and results of operations changed rather than simply presenting th e amounts or percentages by which they changed.
This Statement emphasizes that the analysis provided in MD&A should avoid unnecessary duplication by not repeating explanations that may be relevant to multiple sections and that “boilerplate” discussions should be avoided by presenting only the most relevant information, focused on the primary government.
In addition, this Statement continues the requiremen t that information included in MD&A distinguish between that of the primary government and its discretely presented component units.
Unusual or Infrequent Items - This Statement describes unusual or infrequent items as transactions and other events that are either unusual in nature or in frequent in occurrence. Furthermore, governments are required to display the inflows and outflows related to each unusual or infrequent item separately as the last presented flow(s) of resources prior to the net change in reso urce flows in the government-wide, governmental fund, and proprietary fund statements of resource flows.
Presentation of the Proprietary Fund Statement of Revenues, Expenses, and Changes in Fund Net Position - This Statement requires that the proprietary fund statement of revenues, expenses, and changes in fund net position continue to distinguish between operating and nonoperating revenues and expenses.
Operating revenues and expenses are defined as revenues and expenses other th an nonoperating revenues and expenses. Nonoperating revenues and expenses are defined as (1 ) subsidies received and provided, (2) contributions to permanent and te rm endowments, (3) revenues and e xpenses related to financing, (4) resources from the disposal of capital assets and inventory, and (5) investment income and expenses.
In addition to the subtotals currently required in a proprietary fund statement of revenues, expenses, and changes in fund net position, this Statement requires that a subtotal for operating income (loss) and noncapital subsidies be presented before reporting other nonoperating revenues and expenses. Subsidies are defined as (1) resources received from another part y or fund (a) for which the proprietary fund does not provide goods and services to th e other party or fund and (b) that directly or indirectly keep the proprietary fund’s current or future fees and charges lower than they would be otherwise, (2) resources provided to another party or fund (a) for which th e other party or fund does not provide goods and services to the proprietary fund and (b) that are r ecoverable through the proprietary fund’s current or future pricing policies, and (3) all other transfers.
8 CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
GASB 103 – Financial Reporting Model Improvements (Continued) Major Component Unit Information - This Statement requires go vernments to present each major component unit separately in the reporting entity’s st atement of net position and statement of activities if it does not reduce the readability of the statements. If the readabi lity of those statements would be reduced, combining statements of major component units should be presented after the fund financial
statements.
Budgetary Comparison Information - This Statement requires go vernments to present budgetary comparison information using a single method of communication—RSI. Governments also are required to present (1) variances between original and final budget amounts and (2) variances between final budget and actual amounts. An explanation of significant variances is required to be presented in notes to RSI.
How the Changes in This Statement Will Improve Financial Reporting The requirements for MD&A will improve the quality of the analysis of changes from the prior year, which will enhance the relevance of that informatio n. They also will provide clarity regarding what information should be presented in MD&A.
The requirements for the separate presentation of unusual or infrequent items will provide clarity regarding which items should be reported separately from other inflows and outflows of resources.
The definitions of operating revenues and expenses and of nonoperating revenues and expenses will replace accounting policies that vary from government to government, thereby improving comparability.
The addition of a subtotal for operating income (loss) and noncapital subsidies will improve the relevance of information provided in the proprietary fund statem ent of revenues, expenses, and changes in fund net position.
The requirement for presentation of major component unit information will improve comparability.
The requirement that budgetary comparison information be presented as RSI will improve comparability, and the inclusion of the specified variances and the explanations of significant variances will provide more useful information for making decisions and assessing accountability. 9 This Page Left Intentionally Blank
CITY OF SAN PABLO
MEMORANDUM ON INTERNAL CONTROL
STATUS OF PRIOR YEAR SIGNIFICANT DEFICIENCY
2023-01: Springbrook System Access Permissions and Review of Access Current Status:
Completed.
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