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Cmd062520 spec mtgEDMONDS CITY COUNCIL VIRTUAL ONLINE SPECIAL MEETING APPROVED MINUTES June 25, 2020 ELECTED OFFICIALS PRESENT Mike Nelson, Mayor Adrienne Fraley-Monillas, Council President Luke Distelhorst, Councilmember Diane Buckshnis, Councilmember Vivian Olson, Councilmember Susan Paine, Councilmember 1. CALL TO ORDER/INTRODUCTIONS ELECTED OFFICIALS ABSENT Kristiana Johnson, Councilmember Laura Johnson, Councilmember STAFF PRESENT Dave Turley, Interim Finance Director Scott Passey, City Clerk The Edmonds City Council virtual online special meeting was called to order at 3:32 p.m. by Mayor Nelson. Elected officials, City staff and members of the audit team, Kristiana Baylor, program manager for the local office of the Washington State Auditor's Office; Kirk Gadbois, audit supervisor for the City of Edmonds audit; and Maggie Wallis, lead auditor; introduce themselves. 2. SAO RESOURCE - BEWARE CYBERSECURITY FRAUDS TARGETING DIRECT DEPOSIT PAYROLL. Ms. Baylor advised this is the entrance conference for the fiscal year 2019 audit of the City of Edmonds. The purpose of today's meeting is to share what they plan to cover in the audit, discuss the type of audits that will be performed, the specific areas they plan to look at and answer any questions. In addition, they also like to take the opportunity to share resources that the Auditor's Office has published and provide information that may be helpful as the City conducts its operations. Ms. Baylor displayed the Entrance Conference packet that had been provided to the City. The Auditor's Office is tasked by the legislature to conduct audits on a regular cycle where they look at the use of public funds as well as financial examination to ensure financial statements are fairly stated and accurately presented. They do a number of different types of audits and each audit has a slightly different focus depending on the size of the local government or audit risk or history. The types of audits that will be conducted in Edmonds are the same type that have been done on a consistent basis. Ms. Baylor reviewed the audit scope, explaining they plan to perform the following audits: • Accountability audit for January 1, 2019 through December 31, 2019 o Objective: look at City's compliance with state law, regulations contracts, agreements, grants, etc. as well as the City's own policies and procedures Edmonds City Council Approved Minutes June 25, 2020 Page 1 o Evaluate whether the City has adequate safeguarding of public funds, whether there is any potential that funds could be misappropriated or misused or assets that go missing o Utilize a risk based audit approach ■ Financial Statement Audit for January 1, 2019 through December 31, 2019 o City is required under state law to prepare an annual financial report, due to the Auditor's Office within 150 days after year-end. ■ Deadline extended this year due to COVID - Edmonds met deadline o Review prepared financial statements to ensure they are fairly stated and materially correct o Issue an audit opinion on financial statements o Comprehensive Annual Financial Report is part of the Financial Statement Audit ■ Government Finance Officers Association (GFOA) offers an award program whereby local and state governments can apply for a certificate in financial reporting (CAFR award program). ■ Edmonds typically pursues that award; eligibility for the award has additional requirements in addition to typical financial statement preparation such as additional schedules and other information that must be included in financial reporting package - Auditors will review additional information prepared by the City and preview all questions that the GFOA reviewers consider in determining whether to issue an award • Federal Grant Compliance Audit for January 1, 2019 through December 31, 2019 o Objective: Examine federal funds the city receives through federal grant awards. Federal government mandates anytime a state or local government expends over $750,000 in federal funds in one fiscal year, a Federal Grant Compliance Audit is required. o Plan to test the Highway Planning & Construction grant to ensure federal requirements for receiving those funds were met Ms. Wallis reviewed the five areas selected for the Accountability Audit for 2019: • Accounts payable - general disbursements, credit cards, electronic finds transfers and employee reimbursements o In 2019, the City had approximately $40 million in accounts payable o Will review general disbursements, credit cards, electronic fund transfers, employee reimbursements, etc., anything that represents cash going out of the city o Gain understanding of city's process to make disbursements, policies and procedures to ensure practices match the policy • Financial condition o Look at ratios to ensure cash balance sufficiency, the number of days the city has cash on hand to pay its bills, and other ratios o Gain understanding of what city is doing to address impacts of COVID-19 ■ Ensure city is actively reviewing its condition so it will be sustainable going forward • Licenses and permit software conversion o Ensure all information from old system was converted over to new system o Ensure new system is working properly and security and user access is setup properly ■ Payroll - leave cash outs and separation agreements o Ensure -cash outs -are calculated correctly, match -payroll -agreements and properly -approved • Budget compliance o Many governments have had to make adjustments due to COVID o Ensure adjustments and transfers due to COVID-19 were approved and are in compliance Councilmember Buckshnis asked how the Auditor's Office was handling work during COVID such as whether it was all done electronically. She asked if there would be a supplemental response to the 2019 audit related to COVID since that actually occurred in 2020. Although the audit is regarding 2019, the auditors will look at financials related to COVID and budget compliance and movement of funds. Mr. Edmonds City Council Approved Minutes June 25, 2020 Page 2 Gadbois said the main focus is fiscal year 2019. Accountability audits sometimes look up to the present and provide guidance; if there are ways the city can improve operations, they do not want to wait an entire year to make a recommendation. This year with COVID-19, they are not looking into the nitty gritty details of how funds are being spent; it is high level looking at budget actions and whether there is anything that should be corrected or highlighted. With regard to how auditing is working during COVID-19, Mr. Gadbois said for the most part they are teleworking/off-site auditing and have been since about February. That has presented new challenges with obtaining reports, but they have been able to make things work through scanning or dropping by the city to pick up documents. Councilmember Buckshnis asked if the audit will need to be extended due to COVID-19. Mr. Gadbois answered he did not think the dates would need to be extended. Their timelines will hopefully remain about the same. The goal is to wrap up the Financial Audit in July and the Accountability Audit by the beginning of August and exit late August/early September to meet the federal deadline for federal grant reporting. Council President Fraley-Monillas asked if the Auditor's Office planned to go back and look at the finding in 2019 for the 2018 audit and the plan of correction. Ms. Wallis answered yes, they are required to review that as part of the audit and she has already begun working on that. Ms. Baylor added the report will include the status of prior year's findings so the public can see the status of that item. With regard to the Financial Statement Audit, Ms. Wallis explained they ensure the statements are fairly presented in all material respects as well as additional procedures to issue the Comprehensive Annual Financial Report for the GFOA Certificate of Achievement. She has completed her review of the single audit and that is going through her management review. With regard to the status of the other audit areas, the Financial Statement Audit is in progress and is approximately 40-50% complete. As soon as that is completed, they will focus on the Accountability Audit to ensure they meet the deadline to issue the CAFR letter to the city. Ms. Wallis advised an engagement letter has been provided that confirms both management and auditor responsibilities, cost of the audit and estimated timeline. She reviewed levels of reporting: + Findings o Included in the audit report o Report significant deficiencies and material weaknesses + Management Letters o Less severe than findings o Communicate control deficiencies o Referenced in audit report but not included • Exit Items o Less severe than findings or management letters o Address best practice or ways to improve Mr. Gadbois highlighted important information provided in the packet: Confidential Information o Our Office is committed to protecting your confidential or sensitive information. Please notify us when you give us any documents, records, files, or data containing information that is covered by confidentiality or privacy laws. • Audit Costs o The cost of the audit is estimated to be approximately $86,000, plus estimated costs of $10,000 for travel and other expenses. • Expected Communications Edmonds City Council Approved Minutes June 25, 2020 Page 3 o During the course of the audit, we will communicate with Dave Turley, Assistant Finance Director, on the audit status, any significant changes in our planned audit scope or schedule and preliminary results or recommendations as they are developed. o Let us know if, during the audit, any events or concerns come to your attention of which we should be aware. We will expect Mr. Turley to keep us informed of any such matters. Audit Dispute Process o Contact the Audit Manager or Assistant Director to discuss any unresolved disagreements or concerns you have during the performance of our audit. At the conclusion of the audit, we will summarize the results at the exit conference. We will also discuss any significant difficulties or disagreements encountered during the audit and their resolution Loss Reporting o State agencies and local governments are required to immediately notify our Office in the event of a known or suspected loss of public resources or other illegal activity. These notifications can be made on our website at www.sao.wa.gov/report-a-concern/how-to-report-a- concern/fraud-program/. Peer Reviews of the Washington State Auditor's Office o To ensure that our audits satisfy Government Auditing Standards, our Office receives external peer reviews every three years by the National State Auditors Association (NSAA). The most recent peer review results are available online at www.sao.wa.gov/about-sao/who-audits-the- auditor/. Our Office received a "pass" rating, which is the highest level of assurance that an external review team can give on a system of audit quality control. Mr. Gadbois advised when the audit report is released, the city will receive an audit survey. He encouraged the city to circulate the survey and provide feedback. In addition to the audit team conducting the audit, there are other teams to assist local government • Local Government Support Team o Purpose is to provide resources and answer accounting questions • The Center for Government Innovation o Purpose is to make government more efficient and transparent and operate more efficiently Mr. Gadbois referred to information in the packet regarding the audit team's qualifications. He also highlighted cybersecurity frauds targeting direct deposit payroll where the city receives a fraudulent email requests to change the bank account for direct deposit payroll or to change the bank account information � r a vendor. The auditors will work with payroll and AP staff to ensure theme are sufficient controls to avoid this. 3. SAO COMMUNICATION - APRIL 15 2020 LETTER FROM STATE AUDITOR PAT MCCARTHY TO ALL GOVERNMENTS Mr. Gadbois referred to a letter in the packet from the State Auditor Pat McCarthy; during the pandemic, the Auditor's Office has received a lot of questions about activities and purchases related to the pandemic. They are not providing legal advice but the most important advice they are sharing is to document everything so that during next year's audit, the city has rationale for why programs were funded. Another issue that has arisen recently is governments are receiving federal funds before guidance on how to spend the money is finalized. The Auditor's Office's advice is for cities that receiving federal funds to save/document the guidance related to how those funds can be spent. 4. SAO RESOURCE -OFFICE OF WASHINGTON STATE AUDITOR 2019 ANNUAL REPORT Mr. Gadbois referred to the Office of the Washington State Auditor's annual report that describes what the Auditor's Office did last year: Edmonds City Council Approved Minutes June 25, 2020 Page 4 ■ 2,785 audits in 2019 0 1,346 accountability audits 0 365 federal audits 0 790 financial audits a 90 unauditable governments • 24 fraud investigations • 32 whistleblower investigations • 188 other engagements • 8 performance audits * 7 cybersecurity audits • New in 2019 o Segregation of Duties Guide o CPE credits o Financial Intelligence Tool • Key fraud reports o Largest misappropriation of funds on record in Washington o County risk management payments • SAO Spotlight o Shining a light on troubled governments ■ City of Wapato ■ Unauditable governments + $51.5 million total budget for 2019 o Where does SAO's money come from? r $31.9 million from local governments for their audits ■ $12.9 million from sales tax for performance and cybersecurity audits ■ $6.7 million from state agencies for their audits o Where does the money go? ■ $44.6 million - salaries and benefits ■ $4.5 million - goods, services and equipment • $3.2 million — contracting ■ $1.5 million - travel • Map of SAO offices Mr. Gadbois encouraged Councilmembers, the Mayor or staff to reach out to him, Ms. Wallis or Ms. Baylor with any questions. He looked forward to meeting again in September to review the results of the audit. Mayor Nelson thanked the team for their presentation, commenting it was very helpful. 5. ADJOURN The meeting was adjourned at 4:10 p.m. MICHAEL NELSON, MAYOR SCOTT PASSEY, CITY CLERK Edmonds City Council Approved Minutes June 25, 2020 Page 5 • 2,785 audits in 2019 a 1,346 accountability audits 0 365 federal audits 0 790 financial audits • 90 unauditable govemnents • 24 fraud investigations • 32 whistleblower investigations • 188 other engagements ■ 8 performance audits • 7 cybersecurity audits • New in 2019 n Segregation of Duties Guide o C.PE credits e Financial Intelligence 'fool • Key fraud reports c Largest misappropriation of funds on record in Washington o County risk management payments • SAO Spotlight o Shining a light on troubled governments • City of Wapato • Unauditable governments • $51.5 million total budget for 2019 o Where does SAO's money come froth? • $31.9 million trorn local governments for their audits ■ $12.9 million from sales tax for performance and cybersecurity audits IP $6.7 million irons state agencies for their audits o Where does the money go? ■ $44.6 million - salaries and benefits • $4.5 million - goods, services and equipment ■ $3.2 million —contracting • $1.5 million - travel • Map of SAO offices Mr. Gadbois encouraged COLInCifine[ribers, the Mayor or staff to reach out to him, Nis. Wallis or Ms. Baylor with any questions. Ile looked forward to meeting again in September to review the results of the audit. Mayor Nelson thanked the tear for their presentation, commenting it: was very helpful. 5. ADJOURN The meeting was adjourned at 4: 10 p.m. M �-�-AiEL NELSON MAYOR . PASSEY, C .: ERK Edmonds City Council Approved 1%,tinutes Jude 25, 2020 Page 5