HomeMy Public PortalAbout13) 10A Audit CommitteeCity Council
July 15, 2014
Page 2 of 4
5. On September 18, 2012, staff brought forward to the City Council the CGJ Report
and a draft letter responding to the recommendations.
6. In mid-June 2013, the portion of the 2012-2013 Los Angeles County Civil Grand Jury
Report (2012-2013 CGJ Report) entitled "CITIES OF LOS ANGELES COUNTY
Fiscal Health, Governance, Management and Compensation" was delivered to City
Hall.
7. On November 13, 2013, staff responded to the 2012-2013 CGJ Report.
8. On January 21, 2014, after receiving a report on the formation of an Audit Committee
from Administrative Services Director Hause, City Councilmember Chavez made a
motion to establish an Audit Ad Hoc Committee (Committee) to determine the
structure and scope of work for the Audit Standing Committee. The Committee was
directed to report back to full City Council within the next six months.
Councilmember Yu and Councilmember Chavez were appointed to the Committee.
9. On February 4, 2014, Councilmember Yu requested Mayor Sternquist and City
Council to consider appointing Planning Commissioner Curran to the City Council
Committee. Mr. Curran is a Certified Public Accountant (CPA). Mayor Sternquist
made the appointment.
10. On April 3 and May 30, 2014, the Committee met to consider a Audit Standing
Committee Charter, (i.e., Mayor Pro-Tem Chaves, Councilmember Yu and Steve
Curran). Mayor Pro Tern Chavez did not attend the May 30 , 2014, Committee
meeting.
ANALYSIS:
The main function of the Civil Grand Jury is to investigate county, city, and joint-power
agencies. The Grand Jury acts in a "watch-dog" capacity, by examining carefully and
completely, the operations of various government agencies within Los Angeles County.
The Civil Grand Jury cannot investigate state or federal agencies, which lie outside their
jurisdiction. Part of the investigation of governmental agencies includes the ability to
audit operations, accounts and records of officers and departments within the agency
under investigation. The Civil Grand Jury is further charged with investigating individual
complaints from citizens.
Due to problems in the last couple of years in the cities of Bell and Vernon, and fears of
bankruptcy in other cities in California, the Grand Jury undertook the "Charter Cities
Fiscal Health, Governance and Management Practices" investigation and issued a
report dated June 26, 2012. Of the 25 charter cities within Los Angeles County, 23
Charter Cities were chosen because their greater autonomy allows for greater potential
for abuse. None of the 63 "General Law" cities within Los Angeles County were
investigated in last year's report. The 2012-2013 CGJ Report decided to expand the
City Council
July 15, 2014
Page 3 of 4
investigation to all 88 cities within Los Angeles County including all Charter and General
Law cities as the economy has increased the risk of bankruptcies.
Temple City faired rather well in the Grand Jury's investigation in light of actions by
other cities within Los Angeles County. For greater transparency and accountability,
one recommendation made in the 2012-13 CGJ Report is that cities should formally
establish a City Council audit committee, making it directly responsible for the work of
the independent auditor. Temple City is one of the 59 out of 88 cities, in Los Angeles
County, that received this recommendation.
Recommended best practice audit committees structures from the Government Finance
Officers Association (GFOA) include:
• The governing body of every state and local government should establish an
audit committee or its equivalent;
• The audit committee should be formally established by charter, enabling
resolution of other appropriate legal means and made directly responsible for the
appointment, compensation, retention and oversight of the work of any
independent accountants engaged for the purpose of preparing or issuing an
independent audit report or performing other independent audit, review or attest
services;
• The audit committee should be established in such a manner that all accountants
thus engaged report directly to the audit committee. The written documentation
establishing the audit committee should prescribe the scope of the committee's
responsibilities, as well as its structure, processes, and membership
requirements; and
• The audit committee should itself periodically review such documentation, no
less than once every five years, to assess its continue adequacy.
Other structures of audit committees in California also exist, including finance and/or
budget committees, similar to the previous Budget Ad Hoc Committees in Temple City,
that assume the recommended audit committees' duties and responsibilities.
Options for structure were discussed by the Committee and they recommended that a
Audit Standing Committee be established and their duties be more "traditional" and
include the recommened best practices by GFOA as described above. Further, the
Committee developed a Charter that is recommended for adoption as part of this action.
The responsibilities of the Audit Standing Committee will include:
• Assisting the City Council in monitoring , overseeing, and assessing the City's:
>-Accounting and financial reporting processes;
City Council
July 15, 2014
Page 4 of4
~ The quality and integrity of the City's financial statements, including audits
of the financial statements;
~ The qualifications, independence and performance of the independent
auditor;
~ Compliance with applicable legal and regulatory financial accounting
requirements; and
~ Management's ability to evaluate adequacy of internal controls and
capably identify and control risks posed by its current and planned
activities.
• Provide an avenue for communication among the independent auditors, City
management and the City Council. The Committee shall have such other duties
as set forth in this charter and as directed by the City Council.
As directed by the City Council, the Committee has met and is returning to the City
Council with a recommendation for the structure and scope of work for the Audit
Standing Committee.
CONCLUSION:
It is recommended the City Council disband the Committee, appoint an Audit Standing
Committee, including a Chairman and Vice Chairman, and adopt an Audit Committee
Charter. A standing committee is recommended as the purpose and duties of this
committee are on-going, over multi fiscal years.
FISCAL IMPACT:
This action would have no fiscal impact to the Fiscal Year (FY) 2014-15 City Budget.
ATTACHMENT:
A. Audit Committee Charter
ATTACHMENT A
CITY OF TEMPLE CITY
AUDIT COMMITTEE CHARTER
Organizational Functional Area City of Temple City
Charter For: Audit Committee
City Council Approved: July 15, 2014
Last Revision Date: N/ A
Responsible Person for Maintaining/Updating Charter: Chairman of Audit Committee
I. Purpose
The purpose of the Audit Committee (the "Committee") of the City Council ("Council") (the
"City") is to (a) assist the Council in monitoring, overseeing, and assessing (i) the City's accounting
and financial reporting processes; (ii) the quality and integrity of the City's fmancial statements,
including audits of the financial statements; (iii) the qualifications, independence and performance of
the independent auditor; (iv) compliance with applicable legal and regulatory financial accounting
requirements; and (v) management's ability to evaluate adequacy of internal controls and capably
identify and control risks posed by its current and planned activities; and (b) provide an avenue for
communication among the independent auditors, City management and the Council. The Committee
shall have such other duties as set forth in this charter and as directed by the Council.
II. Composition of the Committee
The Committee shall be comprised of at least three members but no more than five, two of
which must be Councilmembers, each of whom shall be determined by the Council to meet the
independence requirements of applicable governmental or regulatory authorities. The Committee shall
also meet any applicable experience, expertise, financial literacy or other regulatory requirements.
The members of the Committee shall be appointed by the Mayor with concurrence from the
Mayor Pro Tern and other Councilmembers. The Council shall designate a Chairman and a Vice
Chairman of the Committee. If the Committee Chairman is not present at a meeting of the Committee,
the Vice Chairman shall preside.
III. Committee Meetings
The Committee shall meet three times a year or as reasonably necessary to accomplish the work of the
Committee as set forth in Sections I, III & IV of the Charter to:
• Discuss the scope of the planned engagement with the auditors at the beginning of their
field work;
'•'''
" M o n i t o r p r e l i m i n a r y r e s u l t s w i t h t h e a u d i t o r s a t t h e e n d o f t h e i r f i e l d w o r k ;
" R e v i e w f i n a l i z e d d r a f t o f t h e C o m p r e h e n s i v e A n n u a l F i n a n c i a l R e p o r t ( C A F R ) ; a n d
" T o c o m p l e t e t h e b u s i n e s s o f w o r k o f t h e C o m m i t t e e a s s e t f o r t h i n S e c t i o n s I , I I I & I V .
A m a j o r i t y o f t h e m e m b e r s o f t h e C o m m i t t e e s h a l l c o n s t i t u t e a q u o r u m .
T h e C o m m i t t e e C h a i r m a n , i n c o n s u l t a t i o n w i t h m a n a g e m e n t a n d o t h e r m e m b e r s o f t h e C o m m i t t e e ,
. s h a l l p r e p a r e a n d / o r a p p r o v e a n a g e n d a i n a d v a n c e o f e a c h m e e t i n g . M a t e r i a l s r e l a t e d t o a g e n d a i t e m s
s h a l l b e p r o v i d e d t o t h e C o m m i t t e e m e m b e r s s u f f i c i e n t l y i n a d v a n c e o f t h e m e e t i n g w h e r e n e c e s s a r y t o
a l l o w t h e m e m b e r s t o p r e p a r e f o r d i s c u s s i o n o f t h e i t e m s a t t h e m e e t i n g . T h e C o m m i t t e e s h a l l m a i n t a i n
w r i t t e n m i n u t e s o f i t s m e e t i n g s , w h i c h s h a l l b e m a i n t a i n e d w i t h t h e b o o k s a n d r e c o r d s o f t h e C i t y . T h e
C o m m i t t e e s h a l l r e p o r t i t s a c t i v i t i e s r e g u l a r l y a n d d i r e c t l y t o t h e C o u n c i l a n d s h a l l m a k e
r e c o m m e n d a t i o n s t h a t t h e C o m m i t t e e d e e m s a d v i s a b l e .
T h e C o m m i t t e e m a y r e q u e s t t h a t a n y m e m b e r o f t h e C o u n c i l , o f f i c e r o r s t a f f o f t h e C i t y , o r o t h e r
p e r s o n s w h o s e a d v i c e a n d c o u n s e l a r e s o u g h t b y t h e C o m m i t t e e , a t t e n d a n y m e e t i n g o f t h e C o m m i t t e e
t o p r o v i d e s u c h p e r t i n e n t i n f o r m a t i o n a s t h e C o m m i t t e e r e q u e s t s .
I V . A u t h o r i t y a n d R e s p o n s i b i l i t i e s
A . G e n e r a l
1 . T h e C o m m i t t e e s h a l l m o n i t o r t h e c o m p l e t i o n o f t h e C i t y p r e p a r e d f i n a n c i a l r e p o r t s
r e q u i r e d b y t h e r e g u l a t o r y a u t h o r i t i e s , i n c l u d i n g t h e r e v i e w o f f i n a n c i a l s t a t e m e n t s w i t h
m a n a g e m e n t , r e v i e w o f S A S 1 1 4 w i t h t h e i n d e p e n d e n t a u d i t o r , a n d r e v i e w o f t h e w r i t t e n
d i s c l o s u r e s a n d t h e l e t t e r f r o m t h e i n d e p e n d e n t a u d i t o r .
2 . T h e C o m m i t t e e s h a l l h a v e r e a s o n a b l e a c c e s s t o t h e A d m i n i s t r a t i v e S e r v i c e s D i r e c t o r ,
a s s t a f f s u p p o r t a n d d o c u m e n t s a s n e c e s s a r y ' i n a c c o r d a n c e w i t h t h e i r s c o p e o f w o r k . I t i s
e s t i m a t e d t h e s t a f f s u p p o r t t o t h e C o m m i t t e e ~ i l l n o t e x c e e d 3 0 h o u r s p e r f i s c a l y e a r . 3 . T h e
C o m m i t t e e s h a l l h a v e t h e a u t h o r i t y t o " r e c o m m e n d t o t h e C i t y C o u n c i l t h e e n g a g e m e n t o f
i n d e p e n d e n t c o u n s e l a n d o t h e r a d v i s o r s , a s i t d e t e r m i n e s n e c e s s a r y t o c a r r y o u t i t s d u t i e s . I f t h e
C i t y C o u n c i l d e e m s t h e h i r i n g o f a n i n d e p e n d e n t c o u n s e l o r o t h e r a d v i s o r s , t h e C i t y s h a l l s o l i c i t
t h e R e q u e s t f o r Q u a l i f i c a t i o n s ( R F Q ) o r R e q u e s t f o r P r o p o s a l s ( R F P ) . a n d p r o v i d e f o r
a p p r o p r i a t e f u n d i n g , a s d e t e r m i n e d b y t h e C i t y C o u n c i l , f o r p a y m e n t o f ( a ) c o m p e n s a t i o n t o t h e
i n d e p e n d e n t a u d i t o r e n g a g e d f o r t h e p u r p o s e o f p r e p a r i n g o r i s s u i n g a n a u d i t r e p o r t o r
p e r f o r m i n g o t h e r a u d i t , r e v i e w o r a t t e s t s e r v i c e s f o r t h e C i t y ; ( b ) c o m p e n s a t i o n t o a n y a d v i s o r s
e m p l o y e d b y t h e C i t y C o u n c i l ; a n d ( c ) t h e C o m m i t t e e s h a l l r e v i e w a n d r e a s s e s s a t l e a s t
a n n u a l l y t h e a d e q u a c y o f t h i s C h a r t e r a n d r e c o m m e n d a n y p r o p o s e d c h a n g e s t o t h e C o u n c i l f o r
a p p r o v a l . T h e C o u n c i l s h a l l a n n u a l l y r e v i e w t h e C o m m i t t e e ' s p e r f o r m a n c e .
B . Q u a l i t y a n d I n t e g r i t y o f F i n a n c i a l S t a t e m e n t s
P a g e 2
1. The Committee shall review and discuss with management, and the independent
auditor the City's annual fmancial report prior to December 151h of each fiscal year and prior to
its filing with the regulatory authorities· included in the City's Comprehensive Annual Financial
Report, the disclosures contained therein including management's discussion and analysis of
financial condition and results of operations, and any certification, report, opinion or review
rendered by management, or the independent auditor in connection with the foregoing. The
finalized draft is sent to all audit committee members for review and the Chairman will hold a
formal meeting with committee members, Management and outside financial auditors prior to
the required filing date to discuss any issues they may have about the report's financial
information.
2. The Committee shall, in a review and discussion with the City Manager and other
members of management, request them to address any significant financial reporting issues and
judgments made in connection with the preparation of the City's financial statements, including
any significant changes in the City's selection or application of accounting principles, any
special steps adopted in light of any material control deficiencies identified and the effect of
changes in law, regulations or accounting standards on the City's operations or financial
statements. Regarding the audited financial statements, in accordance with the matters required
to be discussed by Statement of Auditing Standards No. 114, the Committee will review and
discuss with the independent auditor the auditor's judgments as to the quality, not just the
acceptability, of the accounting principles, the reasonableness of significant judgments, the
clarity of disclosures in the financial statements,. and any other matters that are required to be
discussed with the Committee under generally accepted auditing standards.
C. Internal Controls and Procedures
1. The Committee shall, in consultation with management, the independent auditor,
review and discuss the adequacy and effectiveness of the City's (a) internal controls, (b)
management risk assessment evaluation process including its ongoing monitoring and periodic
reporting and (c) disclosure controls and processes, and management reports thereon.
2. The Committee shall review any disclosures made to the Committee by the City
Manager and Administrative Services Director (i.e., Management Letter) during their required
certification process regarding any significant deficiencies in the design or operation of internal
controls or material weaknesses therein and any fraud involving management or other staff who
have a significant role in the City's internal controls as appropriate given the protection and
privacy of certain Personnel matters. ·
D. Independent Auditor's Qualifications and Independence
1. The Committee shall be responsible for recommending to the City Council the
appointment, compensation, retention and oversight of the work of the independent auditor
Page 3
engaged (including resolution of any disagreements between management and the independent
auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or
performing other audit, review or attest services for the City, and each such independent auditor
must report directly to the Committee.
2. The Committee shall review the annual retention of the independent auditor, the
audit engagement letters, the scope of audit seryices, monitoring of audit results and review of
the independent auditor's performance and services. The Committee may recommend to the
City Council the appointment or replacement of the independent auditor, as the Committee
deems necessary or appropriate.
3. The Committee shall verify that the City does not engage, or otherwise permit the
City to engage, the independent auditor to provide any non-audit services prohibited such as (a)
bookkeeping or other services related to the accounting records or financial statements of the
audit client, (b) financial information systems design and implementation, (c) appraisal or
valuation services, fairness opinions, or contribution-in-kind reports, (d) actuarial services, (e)
internal audit outsourcing services, (f) management functions or human resources, (g) broker or
dealer, investment adviser, or investment banking services, (h) legal services and expert
services unrelated to the audit, and (i) any other service, which was established under Section
101 of the Sarbanes-Oxley Act of2002, determines, by regulation, is impermissible).
4. The Committee shall annually evaluate the qualifications, performance and
independence of the independent auditor. The Committee shall (a) receive written disclosures
and a written statement from the independent auditor delineating all relationships between the
auditor and the City, consistent with Independence Standards Board Standard 1, (b) discuss
with the independent auditor any disclosed relationships or services that might impact the
auditor's objectivity and independence iffid (c) take, or recommend that the Council take,
appropriate action, if warranted, to maiptail). the independence of the outside auditor.
5. The Committee shall verify that the independent auditor's lead audit partner having
primary responsibility for the audit and the audit partner responsible for reviewing the audit are
rotated as required by law.
6. The Committee shall verify that the City maintains written hiring policies for current
and former employees of the independent auditor in accordance with regulatory requirements
under Section 206 of the Sarbanes Oxley Act relating to Conflicts of Interest.
E. Independent Auditor's Audit
1. The Committee shall annually review and discuss with the independent auditors the
matters required to be discussed by Statement of Auditing Standards No. 114 including, (a) its
audit plans and audit procedures, including the scope, (b) the results of the annual audit
examination and accompanying management letters; and (c) the results of the independent
auditor's procedures with respect to any interim'periods audit work performed.
Page4
2. The Committee shall, review and discuss reports from the independent auditor on (a)
all critical accounting policies and practices to be used; (b) all alternative treatments of
financial information within generally accepted accounting principles that have been discussed
with management, ramifications of the use of such alternative disclosures and treatments, and
the treatment preferred by the independent auditor; and (c) other material written
communications between the independent auditor and management, such as any management
letter or schedule of unadjusted differences.
3. The Committee shall review the City's audited financial statements and recommend
to the Council that the audited statements be included in the City's Annual Report.
4. The Committee shall inquire into any accounting adjustments that were noted or
proposed by the independent auditor but were not recorded in the Comprehensive Annual
Financial Report.
F. Compliance with Laws and Regulations
l. The Committee shall review significant findings reported by regulators,
management's related responses and monitor corrective actions on any major deficiencies
noted.
2. The Committee shall, at least annually, review with the City's counsel any legal
matters that could have a significant impact on the City's financial statements, the City's
compliance with applicable laws and regulations, and any inquiries received from regulators or
governmental agencies.
3. The Committee shall review all "related party transactions" for potential conflicts of
interest situations on an ongoing basis. For purposes hereof, "related party transactions" shall
mean any transaction required to be disclosed by the City pursuant to regulations or best
practices. If the Committee has concerns with any "related party transactions", a formal report
will be made to the City Council.
4. The Committee shall ensure the City maintains procedures for (a) the receipt,
retention, and treatment of complaints received by the City regarding accounting, internal
accounting controls, or auditing matters; and (b) the confidential, anonymous submission by
employees of the City of concerns regarding questionable accounting or auditing matters.
The Committee shall also undertake such additional activities within the scope of its primary function
as the City Council or the Committee may from time to time determine or as may otherwise be required
by law, the City Council's or City's by-laws or charter.
The duties and responsibilities of a member of the Committee are, where applicable, in addition to
those duties set out for a member of the City Council. While the Committee has the responsibilities
and powers set forth by this charter, it is not the duty of the Committee to plan or conduct audits or to
Page 5
determine that the City's financial statements are complete and accurate in accordance with generally
accepted accounting principles. This is the responsibility of management.
Page 6