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HomeMy WebLinkAbout- - Independent Accounants Report Attach. 1 - 10/18/2011CITY OF COSTA MESA Independent Accountant's Report on Agreed -Upon Procedures on the Internal Control Policies and Procedures over Payroll September 19, 2011 CITY OF COSTA MESA Independent Accountant's Report on Agreed -Upon Procedures on the Internal Control Policies and Procedures over Payroll September 19, 2011 ��' LSE • CERTIFIED PUBLIC ACCOUNTANTS Brandon W. Burrows, CPA David E. Hale, CPA, CFP A Professional Corporation Donald G. Slater, CPA Richard K. Kikuchi, CPA Susan F. Matz, CPA Shelly K. Jackley, CPA Bryan S. Gruber, CPA September 19, 2011 To the Honorable Mayor and Members of the City Council City of Costa Mesa, California INDEPENDENT ACCOUNTANT'S REPORT ON APPLYING AGREED-UPON PROCEDURES We have performed the procedures enumerated below which were agreed to by the management of the City of Costa Mesa, California (the City), solely to assist the City in reviewing the internal control policies and procedures over payroll. This engagement to apply agreed-upon procedures was performed in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of the procedures is solely the responsibility of the management of the City. Consequently, we make no representation regarding the sufficiency of the procedures described below, either for the purpose for which this report has been requested, or for any other purpose. The specific procedures performed and the results obtained from the performance thereof were as follows: Procedures Performed: We selected a sample of 50 employees of the City and each member of the City Council to analyze payroll transactions within the last calendar year (2010). The sample was determined using a risk based approach with factors including the degree of complexity, level of compensation, and the potential for fraud. We selected employees from the executive group and each of the bargaining groups for our sample. Our tests covered a review of personnel files and hiring documents, Memorandum of Understandings (MOU's), side letter of agreements, timecards, paychecks, pay journals, leave balances, labor distributions, W-2 reporting, and verification of internal control policies and procedures governing payroll transactions. Findings: No findings were noted as a result of the procedures performed. 2. Procedures Performed: We tested the accuracy of the employee's total pay exclusive of pensions as reported in the 2010 Employee Compensation Report for the sample we selected in the procedure above. Findings: When comparing the compensation report's total pay amount to the 2010 payroll records we noted three deviations. There were two employees whose total pay on the compensation report was understated by auto allowance pay in the amounts of $9,911 and $6,963. The other employee's total pay on the compensation report was understated by an instructional fee pay for firefighters in the amount of $8,800. Lance, Soil & Lunghard, LLP 203 North Brea Boulevard Suite 203 Brea, CA 92821 TEL: 714.672.0022 Fax: 714.672.0331 www.islepas.com 41185 Golden Gate Circle Suite 103 Murrieta, CA 92562 TEL: 951.304.2728 Fax: 951.304.3940 LSE�: CEOTI FIE' PUBLIC ACCOUNTANTS Honorable Mayor and Members of City Council City of Costa Mesa Page 2 3. Procedures Performed: We reviewed the City -prepared manuals, memorandums, MOU's, Administrative Regulations, letters or other documents setting forth the City's payroll policies and procedures. Findings: The City currently does not have all of its key internal control policies and procedures in written form. The City follows certain procedures based on verbal understandings, however, we recommend these should be documented in writing and formalized. This will further communicate the importance of internal control within the City and hold employees accountable for following such procedures. The documented procedures should outline key risks to the process and the compensating control procedure in place to mitigate the risk. The procedures should address the five components of internal control developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) which include control environment, risk assessment, control activities, information and communication, and monitoring. We also noted that currently the City does not have a formal fraud and ethics policy. We recommend that the City implement such policies, and in addition, implement a hotline for anonymous tips from employees to report issues or concerns within the City. We recommend that these policies be provided to employees upon hire and in addition be presented and discussed with employees on a periodic basis. 4. Procedures Performed: We analyzed procedures for internal control weaknesses and for the segregation of duties related to payroll. Findings: The City has provided its Payroll Coordinator, the employee processing the City's payroll, the ability to make certain changes to employee information in the payroll system including changes to pay rates and status which creates an internal control weakness. To create an optimal segregation of duties, this access should be limited to the applicable personnel in the Human Resources Department and not given to any employee preparing payroll. However, for practical considerations and due to available staffing resources, if the step is not considered practical, a formal process should be developed to have someone outside of payroll review and approve all changes made to employee information as a compensating control. From our discussion with City personnel, the Assistant Finance Director periodically performs a similar review procedure however not on a consistent basis. While reviewing system access rights for payroll, we noted that the Assistant Finance Director has access to the payroll system. We recommend that this access be limited to inquiry only, as the Assistant Finance Director is responsible for reviewing changes in the payroll system under the current procedure as mentioned above. We also noted other employees have varying access levels and also the City's Information Technology Department (IT) who has made certain approved changes in the payroll system on an as needed basis. We recommend that these changes only be performed if considered necessary and that all changes are formally reviewed and that access is formally monitored for all employees with any access level. LSL 0 LEBTIFIEB PNBLIL AB6BNNTANTS Honorable Mayor and Members of City Council City of Costa Mesa Page 3 Conclusion We were not engaged to, and did not conduct an audit, the objective of which would be the expression of an opinion on the specified elements, accounts or items. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to the City. This report is intended solely for the use of the specified users listed above and is not intended to be, and should not be, used by anyone other than those specified parties. Brea, California September 19, 2011