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2008-04-01 Audit/Finance Committee MinutesAUDIT/FINANCE CO ITTEE MINVTES April 1, 2008 �fter determining that a quorurrt was present, the �udit/Finance Committee of the City of Denton, Texas canvened in a regu(ar tneeting, Tuesday, �pril 1, 2608, at 2:30 p.m. in the City Council Work Session room, at City Haff, 215 E. McKinney Street, Dentan, Texas. PRESENT: Deputy Mayor Pro Tem Joe Mulroy, Chair; Mayor Per�y R. McNeill, Council Member Chris Watts S'I'AFF PRF.SENT: George Campbell, City Manager; Jan Fortune, Assistant City Manager; Fred Greene, Assistant City Manager; Howard Martin, Assistant City Manager; Steve Shepherd, lnternal Audito�; Bryan Langley, Director of Finance; Ed Snyder, City Attorney OTHERS PRESENT: Dee Niles, Partner, KPMG; Dipesh Patel, Manager, KPMG The meeting was called to order at 2:42 p.m. 1. Consider approval of Audit/Finance Committee minutes of September 19, 2007. McNeill motioned to approve the min��tes, with a secand by Watts. The minutes were approved (3-0), 2. Management Report — a. Audit/Finance Commrttee Action Ttem atr'rx McNeill asked a questian regarding item # 80, items approved under City Manager Settlement Authority, if they had received on(y one quarterly report? Mulroy responded that they had received two. He said to make sure they are receiving tl7e quarterly reports and tlley also need a report from Ris[c Management on insurance claims that they have approved. McNeill stated that regarding item #31, Fngineecing Charges - analysis of multipliers of actual cost of service, it has been a source of concern over the years and he wants to make sure they continue to monitor it. Mulroy stated that last yaar they did a good evaluation. Tracl< the rate this year with the actuals. When we get into budget sessions and are discussing capital projects, they wil! want to see how the multiplier is working. � 11 . I' C , � • Langfey pointed out some of the key dates. At the next Audit/Finance Committee meeting on April 15, they will present some key assumptions for the 5-year Financial Forecast and look at how we are comparing now with what was adopted in the 2007-08 budget. On June 3'd they will discuss the 2008-09 budget. At the July ] 5 meeting they will discuss the budget and 5-year Forecast. On July 25 they will receive the Certified Appraised Value from the Appraisal District. The fina( budget will be provided to City Council on July 315`. On August 7 staff will present it to full Catmcil. Mulroy asfced ifi there had been any substantial change regarding income expectations and the sales tax. Langley said they are monitoring sales tax and are concerned about it flattening out. They will have a look at their assumptians including the Rayzor Ranch development pians. Mulroy asl<ed how many years we've been doing 5-year forecast? Fortune responded that this is the 3'� year at fhis level. It has proved to be a very valuabfe to�l. 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 7a 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 8% 88 89 90 91 92 93 94 95 96 97 98 99 1oa 101 saz 103 104 1Q5 106 107 �as McNeill said for planning pu�poses that another Budget Worlcshop should be scl�eduled between August 7 and 19 a,1d to mal<e sure it is listed on each Council Worlc Session after August 7. Fai-tune responded that staff will inclLede a b�adget discussion iteil� at each Council meeting followrng August 7 and until budget adoption. �� � � n+ � i .,, �, � � ' �� - - Dee Niles, Part�ler and Dipesh Patel, Managei° of KPMG gave a short p�°esentation on the external audit. Niles stated that they issued a Yellow Boak opinion on the financial statements of the City and also the A133 Opinion. Niles discussed the objectives of the audit. They focused their attention on high risk and sig�irficant ae-eas. The res�elt af the audit was ar1 unqualified 66CI�CtI�99 apinion. They did issue a few audit adjustments and they had a fcw comments. There were na scope limitations'•elated to audit work. There were four proposed and correcteci audit ad,j�estments, and �r�anagement had �pen corrrm�mication with the firm. Mulroy 1sl<ed a questian i-egao°ding the lease adjustment that was made, how fiar d►d it ga back, was itjust this yeai•? Nifes said it was the computea° equipmeilt f�rom this year. Niles said there is certain criteria under GASB that eoenes in ta play and it is te-eated as a eapital lease as if you are buying it. Patel discussed the key areas of testing they lool<ed at — Cash and Investments; Receivables; Capital Assets; Accrtded Liabilities; Debt; Majoi• revenue and expenditure/expense items; and Financial Reporting. McNeill asked Niles to define "test„ 1'hey test controls, analytical review, or may loolc at vouchei° iterns. McNeill asked if they had used different techniq�ees fo�• ti�e ar°eas tested. Niles respnnded yes they had. • - � r - � -� . -w �• � � s � • ♦ • -� - - � �- - �� : r . ♦ • . . - • - . - + s � s, � . • •' s , - • . r . - Foe•tune said that the Community Development Black Grant program is managed by Barbara Ross. The Police CI11Cf dlla FICe Chief manage tl�e Homeland Sec�u°ity Cirants. Mulroy said we need ta memorialize their C011tl'1�7Ut10115. Ml1ICOy said it was outstanding perfarmance and aslced that the Audit/Finance Committees' appr°cciatian be fa'-warded ta staff'. McNeill said oui• Congressman is always pleased witl� how Denton ti•eats tl�ose funds. Niles said that KPMG is pretty striilgent an federal funds; they audit it hard. Patel stated there was a conte°ol de�ciency in the financial reporting process, but it wasn't significant. Other observations were IT Access coiltrols, and IT Program change controls. Mulroy asked what they are talking about regarding contro[ deficiency. Niles stated tllat the financial reporting process had struggles th'ts year. There were no material ad,justments, but the timing was really slow; getting the numbers pulled together, getting the CAFR put together. It was not as timely as they would have liked. Mulroy said it must have been cari°ected alang the way. Niles said that when they got the numbers they were not bad, that is why it �vas a contral deficiency. It was just the process. 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 13 Fi 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 M�elroy asked if she wa�ald rathe�• the p,-ocess be slow and i°ight oi° fiast arld wi•ong. Mufroy told he,• that we IZave new persnnnel and would olot expect it to came at the same s�eed as in the past. The new pe'°sonnel have to become acclimated with the Iilf01'IYl1t1011. H2 WOUICI cather it be accurate and take t��ore time than to force sometl7ing ai7d have ta do it oveo°. McNeifl askcd wflethee� the intei•na( contro[ review was jl�st for iT, Niles said no, they laoked at the entire argaal ication. McNeilf asl<ed abaut the Chec6c Signing Authority — if they had any COCI11110B1t5 OBl that. What is the gene�•al pracess on wl�o can w,°ite checks and how are they verified? Niles said they looked at the policy and if it is being follawed. You have to balance the cost of doi�tg it versus tlot doing it. Langley painted aut the faur sections of the CAFR, the Inti°oductory Section; the Financial Section; tlle Statistical Section; and the Regulated Section. T11e CAFR has a lot �rroi°e information than you may be used to seeing ►n otller annual reparts. Tl�e reason far that is we follow GASB rules and tlle GFOA recommended criteria. Tltere are two types of accounting methods presented 'u� the CAFR — goverrlmental funds are reported using the current �nancial resources measurement facus and the modified accrual basis of accaunting. Proprietary fiinds are reported using the econom►c resaurces measurement facus and the fiell accrual basis of accaunting. Mulo°oy indicaCed that I_,angley llad forwarded a draft of tl�e CAFR ta the Committee in early March and that questions had been sent to staff regarding this draft. He pointed aut that responses to the questions had been (orwarded to the Co�7�i��iftee in twa separate memos and he aslced ifthere were any additional questions. Mulr�7y rcquestcd that both mcmos received firom staff be attached to the minutes and be provided to remaining Council so they will know tl�e process that il�e Cammittee has been th'°ough and understands tl�e questians that have been asl<ed. Mulroy asked if there wei•e aily questions on the March 28 inemo and response f'°om staff. Mu(roy 11ad a questiatt abotat iransfers to debt service for the Airport Gas Wel( fund — is it for Airpart debt p'°ojects? Fortune responded that it was to reimburse the debt service fund for debt issttes on Airport capital projects. McNeill asl<ed if the Airport radar is for this year or last year. Martin responded that it is our intent to fund the Airport radar fi�om gas well revetli�es. Mul,°oy asked, what is the timeline for it to be up and running? Martin said he would have to get back with hirn. McNeill thought it was the falf. Mulray said if we are stumbling because of maney bring it back so we can get it expedited. Action Item: F►nd out the timeline for the Airport radar to be up and runnfng. Watts asked a question regarding the noti-airport gas well revenue transfei• from general fund, and what it represents. Fortune stated tl�at it represents the value of property taxes generated from gas wells. Mulroy asked for an overview on questiai7 # 2. Langley stated that the p,•emium/discount is based on when the debt is actually issued compared to the stated interest rate on tl7e bonds. Mulray asl<ed if there is a difference in the intei•est rate from what is appi-oved by Council when we sell bonds. Fo�•t�ane said there is a pi°emium/discount already built into debt service for the bonds approved by Council, McNei(l asked if we owe $32,921, 211 in debt service payments for next year. Langley indicated yes. Mufroy asked ifthere were any questions on the March 31S' memo. Mulroy stated that regarding #3 it is his understandii7g that we've been conservative and as a result, the reserve balance has been increased. � Legal provided a memo with potential litigation claim information. Mulroy asked that Fortune and Langley lool< at the cost benefit of purchasing insurance with claim protectian for aggregate liability coverage. There may be ways to get more protection for relatively less money. Action Item: Evaluate the cost benefit of' stop loss insurance coverage with aggregate liability coverage versus per incident coverage. McNeili asked a question regarding questian #5. Are the amounts that are transferred to various departments for cost of service? Langfey said that is correct. McNeill asked if there is a mechanism to rrrake sure departments are paying for the cost of the services. Langley said yes, they use Maximus, a cost allocation firm and they lool< at a number of' factors for allacating the costs. McNeill said there has been a strong effort among the departments to define that data; to make sure it really indicates the cost of the service. Langley said they continue to refine it every year to make it better and more accurate. Mulray stated that questian #9 ties in with item #7 on matrix regarding vacation and sick leave accruals. Are we accounting for everything as we should by your accounting standards? He wauld like to explore amortizing some of this out to be more conservative. Now that Campbell is in his second budget year and we have some more cansiderations with TMRS, we need to come bacl< with a holistic plan and be as conservative as possible going forward, Mulroy requested the questions and answei•s be attached to the minutes to forward to Council. Mulroy congratulated them an a very good report. Sl�epherd requested ta discuss item 5 beiore item 4. 5. Receive a report, hold a cliscussion, and give staff direction regarding the 2008 Audit Plan. McNeill stated that regardi�lg the Risk Analysis Recoilciliation, it is not accurate to run them out to 5 decimal places. "I�hey are not accurate in particular when dealing with the survey. He tl7inks 2 decimal places will be sufficient. Shepherd said he will make that adjustment. Watts said he was glad to see that Custamer Service billing was a high priority. Mulroy asked Shepherd to recap the process we went through this year and haw he came up with the final numbers. Shepherd stated that tlle original ranicing was inclusive of Council and upper level management's input to tlie Risk Analysis Model. At the September 2007 meeting, he was asked to include Council and management's input, sa the ranks changed sornewhat from the September presentation. Mulroy said formalizing your audit planning on an annual basis you need feedback from the parties involved — management and staff and City Councif and scoring what they feel is higher risk. Shepherd said he included the original rank and the revised rank. Regardii�g adi��inist`•atian pu�•chases approved by the City Manager that are under $100,000, do we want to incfude tl7at in a proposcd audit plan or is tl�at going to become more of a reporting relationship from Finance`? Mulroy asked haw tl�e questioni7airc rcad. �1'here iziay be some confusion of ti7e overall processes that we have. Now that wc are upgrading the Legaf process; the}� wilf enter a purchase order far their e�:penditures to be matched up and sent to the Purchasing department. The high priority was that we need ta lool< at our systems and procedures an these purchases. _ _ , ••s -� . . . • _ • , . . - .. -. . _ y .. .. � . � 4: � � .'.. ': � ... �. ' � �. '.. �� I 1 � ' '�. # 1 '. . # # . ! � '... # ' _ • '. . r '� �� s � . ��. � �� '. •. ' ' � .. ' . # �,,, .. * . • :r � # � t �. . ., '. � �. ! " �:�. � � �.' # �.� ► _ • �*.�' ...:.�� .. .# '... �� � '�, ! � .�'.. ' ,l�,...' '...�. '. � '. ' � - •. �� • � . Based on the revised ranking, if time allows and they don't have any more special projects, they have included �ve more areas in the Audit Plan: Periy Cash; Police Seizure Fund; Fleet Services - Parts; Drainage Fees, and Airport FBO. Mulroy stated tl�at because of the past I�istory of tl7e P-Card Program and the Police Property Roam those need to stay on the Audit Plan. Shepl7erd stated that the Risk Analysis mode! is lil<e any other tool; at some point judgment will have ta enter into it. Mulroy staled that regarding the P-Card program, until we have some sequence of successful audits, we don't need to bacic off oF it. Shepherd stated that based an what we've seen sa far we need to bump special projects from 330 hours ta 780 hours. s , -• , r � - . - �-- �� - - - � . - . - � _� • - i �• - - , - - � : � + � � . * - - - � - • - - � • � - _ • . �' . _ _. . . ._� � �� • - s s : - s � ��� - r- w _ �1�, • t� r- • • - s w w � � � � •. - + �. ��- . . � ' - � � : � � - � - � + � • w - s - • ; . . • _ •• �- '- • • � • . ♦ . �r . -� . ■ s � * , r-- w '� � w - ♦ . ♦ - a • ' • w ♦- -. - - . . - - •- , _ �. # � • * - �- , � w - -, _ Mulroy said as we're lac�king at FT�'s, going forward loofc at the different scenarios of where we could be in year 2, year 3, year 4 we may be looking at having 3, 4, 5, or more on the Audit staff to ensure adequate coverage for a$300 million organization. McNeill clarified tl�at 60% of time ►nternal Audit's time would be spent an Co�mcil proiects and 40% an City Manager pro_jects. Muleoy stated that the administrative purchases a.��dit should f�cus on the systems and procedures. McNeill said that regarding the Alternative Audits and the Drainage Fees Fund, he wants to make sure we're moving forwai°d, � � 1 � � � ..{'�� ' � ' � � Shepherd stated that the P-card audit is done and the Committee will get the report soon. The Police Property Raom a�rdit is haif done. They are just beginning the EMS audit. They are awaiting responses from the State Auditor's group to determine if any of Denton's hotels have be�n audited by the State befare they select their own sample of hotels to review. Muleoy asked when the EMS audit would be done. Shepherd replied probably in May or June. Mulroy would lil<e to see it sooner, so that once they lool< at the numbers, they can have a worlc session with Council and tell them exactly what we are doing with EMS. This is a source of confusion throughout the community. He would lilce it ta be ready at the June 3 meeting. Action Itcm: Providc results of thc EMS audit at the June Audit/Finance Committee meeting. 6. Receive a report, hold a discussion, and give staff direction regarding the DME Administratian L'uilding. Mulroy asked each Committee member to bring up wilat critical data they wou{d lilce to see. Mulroy wants to see the three things in a matrix form: (1) Usage of materials - verify item by item if everything that was chargetl ta that jab was used for that job. (2) Comparative pricing -- did we pay a reasonable price for materials given the circumstances? (3) line up the facts on major purchase items, whether they were over or under $25,000 — did we have bid sheets provided with three quotes; how did we establish that we got three quotes? � McNeill wants to I<now, were all the procedures appropriately followed. Watts asl<ed how the departments arrived at the initial estimate that was presented to Council. What was the process to construct that estimate and what are Campbell's expectations? Mulroy said in the future we need to malce sure we are asking services from the appropriate people in aur organication. Action Item: Prepare a response to Audit/Finance Comm'rttee member questions regarding the DME Administration I3uild'rng project. 7. Receive a report, hald a discussion, and give staff direction regarding payment authoriZation of check req uisitions. � Langley stated that payments were made for legal services that exceeded the contract amount. He discussed the various ways invoices are paid and the strategy that they have gaing forward. There are four ways that we can pay vendors; with a Purchase Order, a Procurement Card, Petty Cash, and a Check Requisition. A Check Requisition is a document that allows a department head to receive an invoice, sign off on it and forward it to Accotmts Payable to pay it. That is how the fegal services have been paid in the past. Mulroy asked about the approval thresllold for department heads and directors and how it was established. Langley stated that directars and department heads may have different threshold amounts and that it depends on the nature and type of business being conducted. Mulroy asked if there is a published schedule of wl�o can sign off an pui•chases. Langfey said that documentation is soinething that staff needs to work on. Mulroy asl<ed if that was in place when l�e came on board. Langley said, not to his knowledge. Fortune said tl,ere is an expendit�n•e approval level. With positions changing it is a continuing pracess to I<eep that up. Mulray asked when the levels are spot checiced or reviewed. Fartune said tl�ere is no standard routine, but this needs to be done in the future. Langley said that not all of their procedures are written down; they need to have more documentation. The Purchase Orders are more formalized and inore documented t}ian the requisitions are. Mulroy said it woti�ld be healthy then to tip the scales for a purchase order system rather than check requisitions. Langley said that is what they are p(anning to do. Checl< requisitions do not encumber funds in the financial system, and as a result, the Accounts Payable person who is entering it doesn't know haw much has been spent toward that contract. We need an automated way to deal with that process, and the purchase arder system will do this. Mulroy asl<ed if their intention going forward is ta move toward a purchase order system and a check requisition would be an exception and not the rule. Langley said yes. They met with the Legal department and they think they can make that work and decided ta use purchase orders far all legal services payments. Mulroy asked Snyder if he saw any proble�ns with that. Snyder said no a�ld tliat they have spoken with Tom Shaw. McNeill asl<ed who maf<es the determinatian of who carl sign the checl< requisitions. Langley said they work with purchasing and the dififierent departments. McNeilf said that as we try ta correct the challenge in the process don't tl�row out somctl7ing we might need, [.angley said that checl< requisitions are not used for all p�n�pases; they have detined p�u•poses. "I�here was some logic as to why the Legal department needed to use checl< requisitians. McNeill said there needs to be a mechanism for checl< & bafance. Mulroy said that right now we're going to tip the scales for more stringent controls. Then come back and reintroduce check requisitians for xy&z operations because of a timeliness factor. The marching arder today is ta go to a purchase order system as mucl� as possible. Action Item: Use Purchase Orders to process payments of contracted legal services. $. New 13usiness — This item provides an oppartunity for the Committee members to suggest items for future agendas or to request information for future meetings. 9. Subsequent Meeting Schedule — Discuss subseqaent meeting needs and schedules. The next meeting is scheduled for April 15, 2008, at 2:30 p.m. The meeting was adjourned at 4:08 p.m,