Office of the Auditor-Controller
Responses to Grand Jury Report
Audit and Finances of County Government
Released March 5, 1999

Finding #3

Grand Jury Finding:
The recording of the acquisition or disposal of a fixed asset remains a cumbersome manual process.

Auditor-Controller Response:
The Auditor-Controllerís office agrees with the finding.

Recommendation #3 (a)

Grand Jury Recommendation:
The Auditor-Controller should ensure that policies and procedures regarding the acquisition and disposal of fixed assets are implemented county-wide and monitored for compliance on a regular basis.

Auditor-Controller Response:
The recommendation has not been implemented but will be implemented in the future. The Internal Audit Division has begun an audit of the fixed assets process and the general fixed assets account group. A new fixed assets policy has been drafted and corresponding procedures will be developed. The draft should be ready for distribution within 90 days. The audit of acquisitions and disposal should be completed in 120 days. Resolution of potential findings from the audit will take an additional 60-90 days.

Recommendation #3 (b)

Grand Jury Recommendation:
The Auditor-Controller should take action to replace the manual method of reporting acquisitions and disposal of fixed assets with efficient, software driven system.

Auditor-Controller Response:
The recommendation will be implemented over the next fiscal year. Currently the Internal Audit Division is conducting an audit of the process. As the final part of that audit, Internal-Audit will evaluate the process for the best opportunities to automate the process. We should be able to improve these cumbersome processes during FY 99-00.

Finding #4:

Grand Jury Finding:
Unfunded capital improvements and liabilities have been identified but not presented in a manner that is easily available to the public.

Auditor-Controller Response:
The Auditor-Controllerís office disagrees with the finding, the Comprehensive Annual Financial Report (CAFR) includes the disclosures required by the Governmental Accounting Standards Board for Workers Compensation liabilities, the unfunded retirement liability, uncompensated absences, and litigation reserves and related disclosures. The CAFR is a public document available for distribution, copies are available at local libraries and the document is available on the Auditor-Controller website. This publication is the appropriate place for these comprehensive liability disclosures. The County Capital plan appears to be the appropriate place for the unfunded capital improvements.

Audit and Finances of County Government
Recommendation #4:

Grand Jury Recommendation:
The Board of Supervisors should identify all unfunded liabilities and capital improvements each year in the annual budget document in a single, concise table.

Auditor-Controller Response:
The recommendation should not be implemented because it may be misleading to include these complex liabilities and the projected long-term unfunded capital improvements in a simple table without the comprehensive disclosure currently required by the Governmental Accounting Standards Board. The GASB recognizes the complexity of the liabilities and requires comprehensive disclosure standards for inclusion in the CAFR. With regard to unfunded capital liabilities extending beyond the five year CIP Plan footnote disclosure in the Plan would appear to be appropriate.

Finding #5:

Grand Jury Finding:
Significant errors in calculating revenues due the County of Santa Barbara from the State may require the County to return revenue to the State.

Auditor-Controller Response:
The Auditor-Controller office disagrees partially with the finding. Each case cited in the Jury report involves good faith differences in the interpretation of complex legal issues. As of this writing, no determination of error exists in any instance cited. However, we agree that we may have to return money to the State if legal decisions or interpretations do not favor the County or Fire Districts.

The findings by the State Controllerís Office (SCO) are of a legal nature. The Fire shift ERAF finding is still under additional review by the State Controllerís Chief Legal Counsel. In addition, legislative relief is currently proposed in AB 236 for the Fire Districts. The Teeter calculation SCO finding has two parts: $1.2 million will probably be corrected by legislative change currently proposed by AB 284, the bill would essentially validate an existing interpretation and practice by most counties; at a recent audit exist conference with the SCO, the remaining $2.0 million will be reclassified from a finding to an observation not requiring repayment at this time.

Trial Court funding provides exposure because of the construction of the legislation. The County has had a team working on the effect of the legislative changes, but control of court functions is transitioning to the State and Courts. We agree that the vagaries of the legislation and transition require extra effort by all parties to prevent misinterpretations or errors.

 

The obligation to reduce taxes because of Proposition 62 does not arise until there is a determination that a tax was illegal. The $5.3 million referred to in the report is disclosed in the CAFR as a contingency, however, there is no legal determination that the County is not entitled to continue to collect the taxes.

Recommendation #5:

Grand Jury Recommendation:
The Auditor-Controller and the County Administrator should institute procedures and provide adequate resources to test and verify the formulas used for revenue calculations as they are changed by the State.

Auditor-Controller Response:
The recommendation has not been implemented, but may be implemented in the future. Additional resources of one Cost Analyst is recommended as part of a budget expansion in FY 99-00 for the Auditor-Controllerís office.

Audit and Finances of County Government
 
Finding #6

Grand Jury Finding:
There is no external audit procedure in place to audit and report on procedures in the Treasurer-Tax Collectorís Office or other agencies that routinely handle large funds.

Auditor-Controller Response:
The Auditor-Controllerís office disagrees in part with the finding. As part of the external audit of the Countyís CAFR, the Countyís external auditor examines the Countyís cash balances. This includes at a minimum that the auditors study the internal control structure to gain an understanding of the processes, and that they notify the County of any material weaknesses that they find. No indication has ever been presented that material weaknesses exist in the processes surrounding the recording and safeguarding of cash. In addition, the Internal Audit Division audits the Treasurerís Cash and Investments on a quarterly basis in accordance with Government Code Section 26920 (b). However, it is true that the County does not contract with its external auditors specifically for an operational audit or internal control audit of the Treasurer or other agencies that "handle large funds."

Recommendation #6 (a)

Grand Jury Recommendation:
The Board of Supervisors should expand the annual independent audit to include an examination of the Treasurer-Tax Collectorís office and other agencies where appropriate, to assure that funds are being handled properly and opportunities do not exists for misuse or theft.

 Auditor-Controller Response:
This recommendation will not be implemented. The purpose of an external audit is to express an opinion on the financial statements. It is the responsibility of management to ensure that internal controls exist to ensure that County assets are safeguarded. The Internal Audit Division is one tool that management has to ensure that those controls exist. Internal Audit is a much more cost effective way of ensuring that adequate internal controls exist. Currently, Internal Audit conducts county-wide cash handling audits approximately every two to four years. Additionally, a question exists of what level of control and audit coverage is adequate. It is impossible to ensure that "opportunities do not exist for misuse or theft." There are always such opportunities. The responsibility of management is to reduce the risk to a level that is cost effective. It is never recommended to eliminate all risk of theft or misuse because the level of internal controls would not be cost effective to implement and would decrease the efficiency of business operations beyond a level of cost effectiveness.

Recommendation #6 (b)

Grand Jury Recommendation:
The Auditor-Controller should, at a minimum, perform operational audits bi-annually in those departments that routinely handle large funds.

Auditor-Controller Response:
This recommendation has been implemented in part. Currently, the Internal Audit Division conducts county-wide cash handling audits every two to four years. The Internal Audit Divisionís long-range plans call for an annual county-wide audit of basic level internal control processes (as an example for this next cycle we will look at county-wide revenue controls and in future cycles county-wide expenditure controls or safeguarding assets, etc.). It has not proved feasible to perform in-depth operational audits of all or even half of the County departments biennially given current resources. However, the internal audit division also plans to complete annually at least 2 performance or business improvement audits of specific business processes within County departments.

Audit and Finances of County Government

Finding #7

Grand Jury Finding:
The Grand Jury was not automatically informed of the independent auditorís progress during the course of the annual audit.

Auditor-Controller Response:
The Auditor-Controller office disagrees partially with the finding. The Grand Jury audit committee received flash reports from the outside audit firm KPMG that document audit progress and interim audit findings and they attended the audit exit conference. In addition, it is our understanding that they met directly with KPMG.

Recommendation #7

Grand Jury Recommendation:
The Auditor-Controller should ensure that each Grand Jury automatically receives all information regarding the annual audits including but not limited to, copies of correspondence, meeting notifications and flash reports.

Auditor-Controller Response:
The recommendation will not be implemented. This recommendation could be implemented contingent on the Grand Jury being more specific in lieu of requesting all information. An audit consists of numerous correspondence, meetings, and work papers. Providing them to the Grand Jury would be burdensome to the auditors and the Grand Jury. We will continue to provide the Jury with KPMG flash reports, in addition we will invite the Jury to entrance and exit meetings.