AUDIT AND FINANCE
Released: April 16, 1996
California Penal Code Section 925 requires the Grand Jury to “investigate and report on the operations, accounts, and records of the officers, departments, or functions of the county.” California Government Code Section 25250 mandates the Board of Supervisors to audit, or cause to be audited, the financial accounts and records of the county. The county and the Grand Jury meet these requirements by contracting the service of an independent auditor and monitoring that auditor’s work.
The outside auditor is chosen by a selection committee consisting of representatives from the Grand Jury and the Auditor-Controller’s office, plus the County Administrator. This is a contract with an option to renew for the fiscal years 1995-96 and 1996-97, subject to the annual review and recommendation of the selection committee.
To meet the statutory requirements of Penal Code Section 925.
In our approach, the Grand Jury members:
OUTSIDE AUDITOR CONTRACT
In early February 1995, the County of Santa Barbara and the 1994-95 Grand Jury contracted with KPMG Peat Marwick LLP, for the annual audit of its financial accounts and records.1 The contract also refers to the requirement of Section 925 of the Penal Code that directs the Grand Jury to investigate and report on operations, records, and accounts. The contract scope of services identified 18 specifications for the contractor work and 10 reports to be issued.2 The Grand Jury inspected the KPMG reports and services.
The outside auditor’s contract provides for a renewal option for the fiscal year 1995-96.3 Based on the performance for fiscal year 1994-95, the Grand Jury agreed on January 29, 1996, with the County Administrator and County Auditor-Controller to extend the contract for the fiscal year 1995-96 work.
MONITORING OF COUNTY TREASURER’S INVESTMENTS
The 1994-95 Grand Jury recommended that the Auditor-Controller should conduct quarterly audits of compliance with Government Code Section 53401 and of the county’s published investment policy and report to the Board of Supervisors.4 This Grand Jury followed up on the recommendation and obtained copies of the quarterly audits.
MANAGEMENT LETTER AND COUNTY RESPONSE
As a standard industry practice, an outside auditor provides a Management Letter to the client after completing the audit of the general purpose financial statements. This letter addresses observations noted during the audit that involved the organization’s internal control structure and other operational matters. The KPMG Management Letter for the fiscal year ended June 30, 1995, is attached to this report (Exhibit A).
With input from other affected departments, members of the Auditor-Controller’s office compile a response and present it to the Board of Supervisors and the Grand Jury. A copy of the response for this year is attached to this report as Exhibit B. Note that the recommendation to the Board was to receive, to file and to respond. The Board accepted this response.
Grand Jury members reviewed Exhibit A and three prior Management Letters and responses listed in this report.5 One common thread in these Management Letters was the outside auditor’s recommendation that the county develop a formal disaster recovery plan to include computer system operations. This problem was reported as early as fiscal year 1988-89, when the Grand Jury reported a finding that, “There is no contingency plan, except to order new equipment from IBM, in the event that the mainframe computer is damaged by a disaster.”6
In the review of the three prior years’ Management Letters, the Grand Jury found that the subjects of Federal Grants, Claims Management, and Fixed Assets were reported in the 1993-94 Management Letter; they were reported again in this year’s letter.
The Grand Jury tried to understand the rationale for not taking corrective action in problem areas highlighted by the outside auditors. After considerable study and inquiry the Grand Jury concluded that subjects appear repetitively because they are not given the priority attention needed for resolution.
EMPLOYEE COMPENSATED ABSENCES
During the Grand Jury’s review of the CAFR, the Grand Jury observed that the General Long-Term Debt for employee compensated absences was $13,436,000.7 The 1994-95 Grand Jury recommended a series of actions aimed at bringing the growth of this county liability under control.8 The county response to the Grand Jury recommendation indicates actions may be taken; however, it will be some time before the results can be evaluated.
USE OF CREDIT CARDS
The county credit card program includes a provision for general use MasterCards available in departments. The county also issues the MasterCard or American Express card to individuals in some cases. Individuals having a county card are responsible for paying the credit card invoices. They are reimbursed for business expenses after department manager approval. The manager approval provides a control measure and this is the standard practice in business and industry. The general use card accounts for most county credit card expenditures. Expenditures for May through September 1995 were as follows:9
Total MasterCard $401,150 Individual MasterCard $7,557 Individual American Express $80,946
FINDINGS AND RECOMMENDATIONS
FINDING 1: KPMG delivered the products and services required under the contract for the fiscal year 1994-95 audit.
FINDING 2: The compliance audit of the county’s investment policy recommended by the 1994-95 Grand Jury is being conducted.
FINDING 3: The county needs to take advantage of the outside auditor’s recommendations in the Management Letter.
FINDING 4: The county response to the KPMG Management Letter (Exhibit B) contains statements of actions to be completed.
FINDING 5: The 1994-95 Grand Jury made recommendations regarding employee compensated absences that are being considered by county management. The effect of any policy changes cannot yet be measured.
FINDING 6: The issuance of credit cards to individual staff provides an automatic supervisory control mechanism for monitoring expenditures.
AFFECTED AGENCIES. (California Penal Code Section 933c requires that comments to Grand Jury Findings and Recommendation be made in writing within 60 days by all affected agencies except governing bodies, which are allowed 90 days. The Grand Jury requires all responses be submitted on computer disc along with the printed response):