CITY OF SOUTH SAN FRANCISCO
MEMORANDUM ON INTERNAL CONTROL
FOR THE YEAR ENDED
JUNE 30, 2023
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CITY OF SOUTH SAN FRANCISCO
MEMORANDUM ON INTERNAL CONTROL
For the Year Ended June 30, 2023
Table of Contents
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Memorandum on Internal Control ................................................................................................................... 1 Schedule of Other Matters ....................................................................................................................... 3 This Page Left Intentionally Blank
1 MEMORANDUM ON INTERNAL CONTROL
To the City Council of
The City of South San Francisco, California
We have audited the basic financial statements of the City of South San Francisco, California, for the year ended June 30, 2023, and have issued our report thereon dated December 27, 2023. Our opinions on the basic financial statements and this report, insofar as they relate to the South San Francisco Conference Center Authority, are based solely on the report of other auditors. In planning and performing our audit of the basic financial statements of the City as of and for the year ended June 30, 2023, 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 our 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 control. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control.
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 possibility that a material misstatement of the City’s financial statements will not be prevented, or detected and corrected, on a timely basis.
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. 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. Given these limitations during our audit, we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.
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 or other informational items.
Government Auditing Standards require the auditor to perform limited procedures on the City’s response to the findings identified in our audit and described in the accompanying Schedule of Significant Deficiencies and Schedule of Other Matters. 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.
This communication is intended solely for the information 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 27, 2023
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CITY OF SOUTH SAN FRANCISCO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
2023-01 Timely Escrow Retention Account Reconciliations Certain arrangements with construction contract vendors require that the City deposit the retentions payable into an escrow account. At the end of the project, the retention is then released to the vendor and withdrawn from the account. The balance in the escrow account should be recorded in the general ledger and agree to the balance of the retention payable.
The City had five escrow accounts recorded in the general ledger when we started the audit. After we asked for the associated June 2023 bank statements and account reconciliations in October 2023, City staff determined that transactions in four of the accounts had not been recorded in the general ledger and the balances did not agree to the retentions payable.
One account had been closed in December 2022 when the retention was released to the vendor, but the balance in the general ledger provided for audit was $244,715, and one account had been closed in June 2023, but the balance in the general ledger provided for audit was $434,324. In addition, two other accounts required adjustments to the cash and retentions payable in the amounts of $258 and $1,401.
Although we understand that Finance staff attempted to obtain the retention account information from other departments well before the year-end closing, the final information was not provided to the Finance Department until October 2023 and the final reconciliation and adjustment was completed after the yearend audit began. We also understand that the Finance department performs these reconciliations on an annual basis and relies upon other departments to notify Finance when retentions are released and to provide the escrow account statements.
When bank account activity is not reconciled to the general ledger and recorded in a timely manner, errors or unauthorized transactions could go undetected. And, when retention escrow account activity is not recorded in the general ledger, the cash and retentions payable balances could be over- or understated.
The City should develop procedures to ensure that the escrow account statements are provided to the Finance Department throughout the fiscal year and when accounts are opened and closed, and the City should consider adjusting the balance in the general ledger on a more frequent basis, such as monthly or quarterly.
Management’s Response:
The City will work with Public Works department to establish process to ensure that Finance will be notified when retention to contractor is released. Finance will also request to receive a monthly statement from each trustee account. City agreed that the reconciliation should be done on a regular basis to avoid delay in recording the transactions in future. 3 CITY OF SOUTH SAN FRANCISCO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
2023-02 Timely Journal Entry Posting
Journal entries should be prepared and reviewed in a timely manner for the period in which the entry is to be posted, in order to keep accounts up to date with the current information. Generally, journal entries should be posted within 30-45 days of the transaction. In addition, to have a complete audit trail of the journal entry process, the dates of preparation and review should be documented for all journal entries.
And, the post date of journal entries should normally be the date when the transactions occurred.
We selected forty journal entries for testing of controls over the journal entry process and supporting documentation and noted 13 of the journal entries were prepared and posted to the general ledger more than a month after the activity of the transaction took place. Although once the journal entries were prepared, they were reviewed and approved in a timely manner, the posting dates of the journal entries ranged from two to four months after the transaction dates.
Without the timely preparation, review and approval of journal entries, there is an increased risk of errors going undetected and inaccurate interim reporting.
The City should develop procedures to ensure that all journal entries are prepared, reviewed, approved and posted to the general ledger in a timely manner (generally within 30-45 days of the date of activity).
Management’s Response:
The City agrees that the journal entries should be prepared and posted to General Ledger within reasonable time. Due to significant staff turnover in FY 2022-23, City is aware of posting delays and have implemented measures to have other staff to help with the review and approval. 2023-03 Unrecorded Loan Receivable
Loans issued by the City to outside agencies should be recorded in the general ledger.
During our review of the City Council minutes for fiscal year 2023, one action item mentioned a prior loan to a nonprofit agency and we noted that the loan was not recorded in the general ledger and was not included in the City’s loans inventory listing.
City staff determined that the loan in the amount of $100,000 had been expensed when the loan was issued in fiscal year 2018.
Although the loan has a forgiveness provision and the City historically offsets such loans with an allowance for collectability, which means the net impact on the general ledger is zero, the City should develop procedures to ensure that all loans are recorded in the general ledger as a receivable when issued.
Management’s Response:
The City agrees with this finding. The loan receivable happened in 2018 and our Economic and Community Development Department (ECD) had experienced a high staff turnover. Finance will review all the outstanding loans with ECD staff to ensure that all the loans receivable that have a forgivable clause will be reflected properly in the general ledger. 4 CITY OF SOUTH SAN FRANCISCO
MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
2023-04 Develop Policy for Processing Terminated Employees The City should process terminated employees in a timely manner. This includes terminating the employee from both the payroll and general ledger systems upon issuance of their last check, or shortly thereafter.
We selected twenty terminated employees for testing of proper and timely cutoff in the City’s computer system and noted seven were not terminated from the payroll system from four months to up to four years after their last check date, as follows:
Termination
Date
Last Check
Date
10/14/2022 11/21/2018
11/28/2022 7/28/2022
1/5/2023 3/18/2022
2/17/2023 8/26/2021
2/17/2023 10/7/2021
3/31/2023 7/16/2020
3/31/2023 9/9/2021
The majority of the employees were part-time seasonal employees, and the department did not determine they would be separated from employment until fiscal year 2023. And, although we understand the City’s departmental staff like the flexibility of being able to utilize the employees for special events, keeping inactive employees in the payroll and accounting system for extended periods of time could lead to unauthorized payroll payments or unintended access to the City’s accounting system.
We also understand the City’s payroll system does not have an option for deactivating employees, so seasonal employees will remain active in the system until the department submits a Personnel Action Form (PAF) to the Human Resources department to terminate them. Therefore, the City should work to develop a policy to define a reasonable timeframe for which employees may be inactive in the system before they are terminated.
Management’s Response:
Finance has discussed the issue with the Human Resources Department during the audit. We will follow up with the Human Resources Department to develop a policy to define a reasonable timeframe for which employees may remain active in the system before they are terminated. We would discuss the process of reviewing inactive employee status by department annually to determine their employment status.
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MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
NEW GASB PRONOUNCEMENTS OR PRONOUNCEMENTS NOT YET EFFECTIVE The following comment represents new pronouncements taking affect in the next few years. We have cited them here to keep you informed of developments:
EFFECTIVE FISCAL YEARS 2021/22, 2022/23 and 2023/24:
GASB 99 – Omnibus 2022
The objectives of this Statement are to enhance comparability in accounting and financial reporting and to improve the consistency of authoritative 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 derivative instruments within the 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 short 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 Interbank Offered Rate (LIBOR) 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 • 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
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MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
GASB 99 – Omnibus 2022 (Continued)
• 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 extension of the use of LIBOR, accounting for SNAP distributions, disclosures of nonmonetary transactions, 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 Statement 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 comparability in the application of accounting and financial reporting requirements and 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 financial 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.
EFFECTIVE FISCAL YEAR 2023/24:
GASB 100 – Accounting for Changes and Error Corrections The primary objective of this Statement is to enhance accounting and financial reporting requirements for accounting changes and error corrections to provide more understandable, reliable, relevant, consistent, and comparable information for making decisions or assessing accountability.
This Statement defines accounting changes as changes in accounting principles, changes in accounting estimates, and changes to or within the financial reporting entity and describes the transactions or other events that constitute those changes. As part of those descriptions, for (1) certain changes in accounting principles and (2) certain changes in accounting estimates 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, relevance, timeliness, consistency, and comparability. This Statement also addresses corrections of errors in previously issued financial statements.
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MEMORANDUM ON INTERNAL CONTROL
SCHEDULE OF OTHER MATTERS
GASB 100 – Accounting for Changes and Error Corrections (Continued) This Statement prescribes the accounting and financial reporting for (1) each type of accounting change and (2) error corrections. This Statement requires that (a) changes in accounting principles and error corrections be reported retroactively by restating prior periods, (b) changes to or within the financial reporting entity be reported by adjusting beginning balances of the current 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 accounting 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 financial statements of descriptive information about accounting changes and error corrections, such as their nature. In addition, information about the quantitative effects on beginning balances of each accounting change and error correction should be disclosed by reporting unit in a tabular format to reconcile beginning balances as previously reported to beginning balances as restated.
Furthermore, this Statement addresses how information 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 are 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.
EFFECTIVE FISCAL YEAR 2024/25:
GASB 101 – Compensated Absences
The objective of this Statement is to better meet the information needs of financial statement users by updating the recognition and measurement guidance for compensated absences. That objective is achieved by aligning the recognition and measurement guidance under a unified model and by amending certain previously required disclosures.
Recognition And Measurement
This Statement requires that liabilities for compensated 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 noncash 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 government should consider relevant factors such as employment policies related to compensated absences and historical information 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 benefits should not be included in a liability for compensated absences.
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GASB 101 – Compensated Absences (Continued)
This Statement requires that a liability for certain types of compensated 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 compensated absences not be recognized until the leave is used.
This Statement also establishes guidance for measuring a liability for leave that has not been used, generally using an employee’s pay rate as of the date of the financial statements. A liability for leave that has been used but not yet paid or settled should be measured at the amount of the cash payment or noncash settlement to be made. Certain 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 statements prepared using the current financial resources measurement focus, this Statement requires that expenditures be recognized for the amount that normally would be liquidated with expendable available financial resources.
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 longer 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 reflects 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 estimate of the amount of compensated absences that a government will pay or settle, which will enhance the relevance and reliability of information about the liability for compensated absences.
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