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2024-01-11 Council Special Meeting Audit ExitEDMONDS CITY COUNCIL SPECIAL MEETING — AUDIT EXIT CONFERENCE APPROVED MINUTES January 11, 2024 ELECTED OFFICIALS PRESENT Mike Rosen, Mayor Vivian Olson, Council President Chris Eck, Councilmember Will Chen, Councilmember Michelle Dotsch, Councilmember Jenna Nand, Councilmember ELECTED OFFICIALS ABSENT Susan Paine, Councilmember Neil Tibbott, Councilmember 1. CALL TO ORDER STAFF PRESENT Dave Turley, Administrative Services Director Nicholas Falk, Deputy Clerk The Edmonds City Council meeting was called to order at 1:07 p.m. by Administrative Services Director Turley virtually and in the City Council Conference Room, 121 — 5th Avenue North, Edmonds. 2. STATE AUDITOR'S REPORT 2022 CITY OF EDMONDS AUDIT EXIT REPORT — STATE AUDITOR'S OFFICE Kristina Baylor, Program Manager; Wendy Choy, Assistant Director of Local Audit; Maggie Wallis, Audit Supervisor; Mayor Rosen; Council President Olson; and Councilmembers Chen, Nand, and Dotsch and Mr. Turley introduced themselves. Ms. Baylor advised the purpose of today's meeting is to share the draft results of the City of Edmonds 2022 Audit Exit Report and to answer questions before the results become final and the report is shared on the Auditor's website. The end goal is to ensure the results understood and the City has the necessary information to move forward. Ms. Baylor reviewed: • Results that Matter o Audit Goals ■ Increased trust in government ■ Independent, transparent examinations ■ Improved efficiency and effectiveness of government Ms. Wallis reviewed: Accountability Audit Results - January 1, 2022 through December 31, 2022 Edmonds City Council Approved Minutes January 11, 2024 Page 1 Results in Brief o In those select areas, City operations complied, in all material respects with applicable state laws, regulations and its own policies, and provided adequate controls over the safeguarding of public resources. o However, we noted certain matters related to payroll that we communicated to City management and the mayor and city council in a letter dated January 11, 2024. o In keeping with general auditing practices, we do not examine every transaction, activity, policy, internal control or area. As a result, no information is provided on the areas that were not examined. o Using a risk -based audit approach, for the City, we examined the following areas during the period: ■ Accounts payable - general disbursements, credit cards, and electronic fund transfer ■ Payroll - leave accrual and usage ■ Contract compliance - use of American Rescue Plan Act (ARPA) funds ■ Open public meetings and executive session requirements ■ Financial condition - reviewing for indications of financial distress Payroll - management letter (Management letters are not included in audit reports but are referenced. While it is a public document, it won't be published on the Auditor's website.) o Payroll testing focused on leave accrual and usage for the police department and department directors o No issues were found with testing of police department, but issues were found with directors' timesheets and leave usage ■ Three department directors and the payroll accountant's leave request were selected for review were selected. Based on testing, the following exceptions were noted: - Unable to obtain 8 timesheets for one employee. During this time the employee was on family medical leave and paid 70 regular hours. Unable to determine if the regular hours were valid as there were no approved timesheets for the period the hours were claimed. - Six timesheets were not in agreement with leave usage reports for two employees. We were unable to confirm whether 38 hours of leave should have been deducted from the leave balance. o We recommend the City ensure: ■ All employees complete and certify timesheets for each pay period ■ Timesheets are reviewed and approved and that leave recorded on the timesheets matches what is deducted from the leave usage system. ■ Review leave usage variances identified during the audit and take corrective action to ensure leave balances are adjusted as needed. o The SAO will follow up on this management letter as part of the next audit. Councilmember Chen asked if any overtime was selected for examination. Ms. Wallis answered their testing was focused on leave usage and accrual during this audit period. Councilmember Chen commented the police department is short staffed and has a significant amount of overtime. Ms. Wallis continued her review: Financial Condition & Sustainability o We evaluated the City's financial health as of 12/31/2022 and noted no warning indicators to bring to the City's attention. Fund Balance Policy Compliance o The City adopted a fund balance policy effective July 2019 that established a General Fund Operating Reserve and Contingent Reserve Fund o Our audit found the City met reserve requirements as of December 2022. Edmonds City Council Approved Minutes January 11, 2024 Page 2 o We also reviewed monthly activity in 2023 and on a monthly level, there were some instances where it did not appear the reserve requirements were met, however, the City's policy is unclear at what point in time reserve amounts need to be met, annually or monthly, and at what point council approval is needed for the use of reserve funds. o Recommendation: City consider clarifying at what point in time these benchmarks need to be met so staff can monitor and ensure compliance with the policy Accounts payable and contract compliance o Internal controls ■ Our audit found the City has adequate controls for the areas selected for review, including general disbursements, purchase cards and EFT/wires. o Accounts Payable ■ General disbursements, purchase cards and EFT/wires tested were for an allowable business purpose, approved and supported. ■ The City has not made any payments for the damaged guardrail and at the time of our audit there is no written contract to do so (Citizen Hotline Referral) o Contract Compliance ■ We determined the decision to reallocate ARPA funds from job retraining to the Edmonds School District authorized in Ordinance 4310 was allowable per the federal guidelines for ARPA funding. (Citizen Hotline Referral) Irina Frolova, Audit Lead, reviewed: Financial Audit Results - January 1, 2022 through December 31, 2022 • Unmodified Clean Opinion Issued o Opinion issued in accordance with U.S. GAAP o Audit conducted in accordance with Government Auditing Standards • Internal Control and Compliance over Financial Reporting o We reported significant deficiencies in internal control related to the Edmonds PFD o We identified no deficiencies that we consider to be material weaknesses o We noted no instances of noncompliance that were material to the financial statements of the City Financial Reporting — Finding o The Edmonds Public Facilities District, a component unit of the City of Edmonds, did not have adequate internal controls ensuring accurate reporting of its financial statements. The mimics a finding issued to the PFD. This issue has since been corrected. Councilmember Nand relayed the City receives an annual report from the PFD. She asked if there was anything the council could do to assist them with adopting adequate internal controls or did it require the City's finance department to work with the PFD's accountants. Ms. Baylor answered the PFD has its own finance department that is responsible for preparing and filing their own financial statements independent of the City. The City participates in PFD board meetings and assists wherever possible. She encouraged the council to further that communication with the PFD and remain involved, but ultimately it is separate from the City's process and the PFD is responsible for establishing its own controls. Council President Olson recalled receiving email regarding this topic prior to this meeting and wanted to ensure the council was aware this has been corrected and the audit team is satisfied with what the PFD is doing now. Ms. Baylor agreed the PFD corrected their financial statement which allowed the Auditor to issue an unmodified or clean opinion on their statements as well. She referred to the audit reports, explained whenever there is an audit finding, there is a response from the audited entity. Ms. Frolova continued: • Financial Audit Results Edmonds City Council Approved Minutes January 11, 2024 Page 3 o Required Communications ■ We did not identify any material misstatements during the audit. ■ No uncorrected misstatement have been identified. • The audit addressed the following risks, which required special consideration: o Management override of controls ■ We did not find any instances where the controls were overridden. Ms. Baylor reviewed: Federal Grant Compliance Audit Results - January 1, 2022 through December 31, 2022 • Triggered any time the City expends over $750,000 in federal grant funds during the fiscal year. Purpose of audit is to ensure City complied with requirements for receiving federal funding • Unmodified opinion issued - City complied in all material respects o Opinion issued on the City's compliance with requirements applicable to its major programs o Audit conducted in accordance with Government Auditing Standards and the Uniform Guidance • Internal Control and Compliance over Major Programs o We identified no significant deficiencies in internal control o We identified no deficiencies that we consider to be material weaknesses o We noted instances of noncompliance that are required to be reported • Major Programs Selected for Audit ALN Program or Cluster Title Total Amount Expended 21.027 COVID-19 CORONAVIRUS STATE AND LOCAL $1,371,952* FISCAL RECOVERY FUNDS *These costs amount to approximately 69% of the total federal expenditures for 2022 o Purpose of program was to provide relief for impacts of Covid-19 pandemic; there were a number of ways cities could utilize funding. We looked at grants to ensure the City complied with all major requirements of the programs. o Federal guidelines require the audit to test for six requirements. o Five of the six, no significant recommendations. o One area is reported as a management letter item ■ Subrecipient Monitoring - Management Letter (Management letters are not included in the audit report or on the website, but are public documents available for public inspection) - Of the $1.3 million the City expended in 2022, over $900,000 was passed onto subrecipients - As part of passing funds to subrecipients, the City is required to conduct monitoring activities to ensure the subrecipients spend funds on allowable activities, are aware of all the requirements they must adhere to, and ongoing compliance monitoring conducted to ensure they stay in compliance. - Three main elements auditors look for in subrecipient monitoring 1. Did the City communicate all the proper requirements to the subrecipient? • Audit found the contracts appropriately included all the required elements that need to be shared with the subrecipients 2. Did the City evaluate the risk of each subrecipient when deciding to make those awards • Risk assessments made in 2021 3. Monitoring the subrecipients' use of funds • Found the City has a process in place to review expenditures subrecipients make and request for reimbursement. An additional set of requirements that apply to subrecipient monitoring is not evident in the first year awards are made. Edmonds City Council Approved Minutes January 11, 2024 Page 4 • The City made awards in 2021 and in the second year the City is required to continue monitoring to ensure for subrecipients who are required to have a federal audit, if any significant recommendations are made, the City must conduct follow-up activities to ensure those are appropriately addressed. • We found the audit monitoring was not conducted in 2022 for the awards made in 2021 Does not appear any of the subrecipients who received funding in 2021 exceeded the threshold. • Recommend the City have a process to monitor subrecipients' use of funds to ensure they obtain an audit if required and the City review the audit reports. Councilmember Nand asked about the spend -down requirements for the remaining ARPA funds and the timeline for that and if the auditors had any recommendations for additional controls and accountability mechanisms as the City distributes those funds. Ms. Baylor answered there is an expiration date for spending the ARPA funds; she will research and share that with the City. With regard to additional recommendations, the requirements can be challenging and difficult, but they are all included in the federal requirements. She encouraged the City to pay close attention to the grant requirements and seek clarification from the grantor if needed. This does not apply to the City very often and was unique to 2022. Councilmember Nand agreed there is a historic nature to the funds. Treasury updated its final note on uses to liberalize it in hopes of having it spent down by the deadline. Councilmember Chen asked if there were any compliance issues with the recipient of the ARPA funds from the subrecipient. Ms. Baylor responded the audit is conducted solely on the City's responsibility to monitor the subrecipients and does not consider who the subrecipients provided the funds to. Mr. Turley advised the subrecipients would likely receive their own audit which would address that. Ms. Baylor continued: • Summary Schedule of Prior Audit Findings o Prior Audit Findings 2021-001: The City did not have adequate internal controls ensuring accurate reporting of grant funds received in advance and the elimination of interfund reimbursements in their financial statements ■ Status of City's corrective action taken: fully corrected o Prior Audit Finding 2021-002: The City's internal controls inadequate for ensuring compliance with federal requirements for allowable costs, suspension and debarment, and subrecipient monitoring: ■ Status of City's corrective action taken: fully corrected Closing remarks o Audit costs are in alignment with our original estimate o Next audit: Summer 2024 ■ Accountability for public resources ■ Financial statement ■ Federal programs ■ An estimated cost for the next audit has been provided in the exit packet Report publication o Audit reports are published on our website on January 18, 2024 o Sign up to be notified by email when audit reports are posted to the website: hllps:Hsao.wa.gov/about-sao/sign-Lip-for-news-alerts o Audit survey: When your audit report is released, you will receive an audit survey from us. We value your opinions on our audit services and hope you provide feedback. Edmonds City Council Approved Minutes January 11, 2024 Page 5 Ms. Frolova relayed their thanks to Dave Turley, Administrative Services Director, and Kimberly Dunscombe, Assistant Administrative Services Director, for their professionalism, timely responses and effort put into the audit which helped them be efficient. She also extended their appreciation to Accountants Debra Sharp, Sarah Mager and Marissa Cain for their assistance and collaborative attitude throughout the audit. Council President Olson expressed appreciation to the audit team and to the City's finance team for their hard work and professionalism. She asked if the cost of the audit was included in the 2024 budget or will a budget amendment be required. Mr. Turley answered it is included in the budget. Councilmember Nand thanked the SAO team and the City's finance department. This has been a very challenging year due to struggles with inflation and budget projections which she assumed the auditors saw in other cities. She thanked the auditors for allowing the taxpayers to have full faith and integrity in their governmental institutions during these challenging times. Councilmember Dotsch referred to page 49, the Exit Recommendation, which states "We may review the status of the following exit items in our next audit." She asked who determines whether the status of those items is reviewed. Ms. Baylor answered that is a general statement for exit level recommendations. Exit level items are considered housekeeping, minor items that come up during an audit that are shared with management. Because they are not considered significant, the "may" wording is included as the auditor may not follow up due to their minor nature. The general process is always to inquire of management regarding corrective action taken, but whether they do detailed testing will depend on what other risks are identified for inclusion in the next audit. Mr. Turley thanked the SAO for the work they do. He has been working with the SAO for approximately 15 years and recently noticed the SAO's effort to have more continuity from year to year which has been helpful. He thanked the audit team for their hard work and professionalism. 12. ADJOURNMENT With no further business, the Council meeting was adjourned at 1:49 p.m. cs:� SCOTT PASSEY, 0 CLERK Edmonds City Council Approved Minutes January 11, 2024 Page 6