Annual Financial Audit

INTRODUCTION

The Grand Jury of the County of Santa Barbara is required by the California Penal Code Section 925 to "...investigate and report on the operations, accounts, and records of the officers, departments, or functions of the county...". California Government Code section 25250 requires the County Board of Supervisors to audit, or cause to be audited, the financial accounts and records of the County. These requirements are satisfied via the County of Santa Barbara and the Grand Jury contracting the service of an independent auditor.

The selection of the independent auditor is made by the Auditor's Selection Committee consisting of a representative of the Grand Jury, a representative of the Auditor-Controller's office and the County Administrator. This is a multiple year contract with an option to re-negotiate and/or renew, subject to the annual review and recommendation of the Selection Committee.

OBJECTIVE

In addition to meeting the statutory requirements of the Penal Code Section 925 as cited in the introduction, the Grand Jury investigated two specific issues. The first was for a review of the Auditor-Controller's responses to recommendations of the 1993-94 Grand Jury. The Grand Jury also, in light of the Orange County financial problems, probed some of the investment practices of the Santa Barbara County Treasurer.

APPROACH

The independent auditor, Deloitte & Touche, began field work in May of 1994, and issued its opinion of the financial statements of the County of Santa Barbara on August 26, 1994. The Grand Jury collected data, reviewed internal memoranda and conducted meetings with the Auditor-Controller, members of his staff and the Deloitte & Touche partners in charge of the engagement.

The Grand Jury representative on the Auditor Selection Committee reviewed proposals, bids and contracts, participated in interviews and voted on behalf of the Grand Jury for the incoming independent auditors--a joint venture consisting of the public accounting firms of KPMG, Peat Marwick LLP (a national corporation) and Nasif, Hicks & Company (a local firm).

The Grand Jury collected and reviewed the past two years of Grand Jury recommendations, outside auditor recommendations and Auditor-Controller responses to the recommendations. The Grand Jury met with the Auditor-Controller specifically to address implementation of prior recommendations.

The Grand Jury reviewed the Santa Barbara County Treasurer's investment policy, the pertinent sections of the 1994 financial statements and Deloitte & Touche's recommendation regarding investment regulations. Interviews were held with the Auditor-Controller and the Assistant Treasurer of the County of Santa Barbara.

OBSERVATIONS

The Auditor-Controller's Office

The Auditor-Controller's office has a Statement of Principles and Values pledging to provide quality service to the public. One such pledge is "...to maintain an effective financial accounting and reporting system that will communicate information to the public in an accurate and timely manner."

The Grand Jury was provided evidence that this pledge is being honored and further it was indicated that other counties look to Santa Barbara as a model to improve their own Auditor-Controller's Offices.

This commitment to excellence was further evidenced by the awarding of the Achievement for Excellence in Financial Reporting to the County of Santa Barbara by the Government Financial Officers Association of the United States and Canada in 1994.

Another pledge from the Statement of Principles and Values is "to continuously seek ways to improve the effectiveness and efficiency of our processes and to assist other departments to do the same." The Grand Jury was provided evidence of such efforts when investigating the responses to prior Grand Jury (as well as the outside auditor) recommendations. Responses were thorough, addressed the issues and, moreover, implemented. An improved reconciliation system and a Board of Supervisor's adopted Audit Plan for financial and management audits are two examples of the implementation of recommendations as well as the honoring of their pledge.

The Independent Auditor

Historically, the Santa Barbara County Grand Jury has issued the outside auditors letter as a supplement to its audit report. The outside auditor (Deloitte & Touche) finished its field work and dated its opinion August 26, 1994. Its management letter was received by the Auditor-Controller's Office on December 10, 1994, and was not sent directly to the Grand Jury to whom it was addressed. This delay hindered the Grand Jury in its mandated role in the audit process. There were a number of other instances wherein the independent auditor DID NOT strictly adhere to its contract with the county (see Appendix "A").

The County of Santa Barbara's Financial Investment Policies

The Grand Jury investigated the County's investments due to the highly publicized problems in the County of Orange, State of California. The Grand Jury reviewed the investments disclosure in the notes to the June 30, 1994 Financial Statements with the Auditor-Controller. The Assistant Treasurer outlined and discussed the investment types and investment strategies that are at the core of Orange County's problems which are not permitted by Santa Barbara's policies.

The investments disclosed in the Financial Statements were in agreement with the County's investment policy. It should be noted that the Grand Jury investigated neither the accuracy of the dollar amount nor the correctness of the composition of the investments disclosed in the Financial Statements. It is the responsibility of the independent auditor to attest to the reliability and accuracy of the financial statements as a whole. Penal Code Section 925 prohibits the Grand Jury from duplicating the independent auditor's examination.

In their letter of recommendation, the independent auditor addressed the issue of compliance with California Government Code Section 53601 regarding the types of investments allowed. They recommended that the internal auditors include an audit of compliance with Code 53601 in their quarterly cash count. The Grand Jury concurs with this recommendation.

FINDINGS AND RECOMMENDATIONS

FINDING #1: Although it was found that the Auditor-Controller's Office did in fact maintain an effective financial accounting and reporting system, it was somewhat remiss in overseeing the independent auditor's COMPLETE compliance with their contract (see Appendix A).

RECOMMENDATION #1: A periodic review of the audit contract should be made by the Auditor-Controller's internal audit staff to ensure that compliance is being met by the CONTRACTOR.

FINDING #2: Investigating and following an audit trail at years' end is a monumental task even with trained financial personnel on Staff.

RECOMMENDATION #2: The Grand Jury should establish a year-round standing Financial Audit Committee to work with the Auditor-Controller's Office in an on-going manner to ensure that appropriate corrections are made so that what has occurred during the year contains no surprises at year's end.

FINDING #3: The County's investments are governed by California Statutes and further restricted by the County's own investment policies, but reviewed only annually by the independent auditor. This is not sufficient.

RECOMMENDATION #3: An audit of compliance with Government Code Section 53601 and the County's published investment policy should be conducted by the independent auditor quarterly and reported to the County Board of Supervisors in order to ensure compliance.

REFERENCES CONSULTED

California Penal Code Sections 925 and 926

California Government Code Section 25250

Contract with former independent auditor (Deloitte & Touche) dated March 15, 1994

Contract with current independent joint venture auditors KPMG, Peat Marwick LLP, and Nasif, Hicks and Company, dated February 21, 1995

Santa Barbara County Treasurer's Office "STATEMENT OF INVESTMENT POLICY"

Santa Barbara County's Investment and Retirement Manager's Job Description

List of Santa Barbara County's "INVESTMENTS OUTSTANDING"

Santa Barbara Treasurer's Investment Portfolio - "Fund Balance Trends - July 13, 1994 through

December 31, 1994"

Santa Barbara County Auditor-Controller's "STATEMENT OF PRINCIPLES AND VALUES"

Santa Barbara County Auditor-Controller's "INTERNAL AUDIT-FIVE YEAR PLAN"

AFFECTED AGENCIES: (California Penal Code Section 933c requires that comments to Findings and Recommendations be made in writing within 60 days by all affected agencies except governing bodies, which are allowed 90 days.)

1. Santa Barbara County Board of Supervisors- response

2. Santa Barbara County Administrator- response

3. Santa Barbara County Auditor-Controller's Office- response

4. Santa Barbara County Treasurer's Office- response

5. Santa Barbara County Grand Jury - (no response needed)

APPENDIX A

The Grand Jury felt that several sections of their contract with the independent auditor for 1994-1995 were not honored. Among these are:

"CONTRACTOR shall file the original of each report and letter of recommendations with the Clerk of the Board of Supervisors and GRAND JURY, and make a presentation to the Board of Supervisors and/or GRAND JURY if requested."

"CONTRACTOR shall meet with and discuss its report and letter of recommendation with the County Auditor-Controller and GRAND JURY."

"CONTRACTOR shall correspond with the County Audit Coordinator and GRAND JURY at least once each month during the audit to discuss the audit process. A written status report on audit progress will be provided by CONTRACTOR and discussed at this time."

"CONTRACTOR shall schedule an exit interview with appropriate officials (including GRAND JURY) to discuss the report and recommendations at the completion of the field work and prior to filing its report."

The Grand Jury attempted to schedule an interview with the independent auditors assigned to the Santa Barbara County engagement. After two phone calls to the engagement partner went unanswered, a staff member in the Auditor-Controller's Office volunteered to arrange the meeting. Four of her phone calls to the independent auditor went unreturned. None of the Grand Jury's meeting dates were agreed to, and the meeting took place according to the independent auditor's schedule on August 8, 1994. The contract states:

"CONTRACTOR agrees to appear in person before the GRAND JURY and/or its Audit Committee and/or before the County Board of Supervisors at mutually convenient times during the performance of this contract.."