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2010 Single Audit ReportCITY OF ROSEMEAD Rosemead, California Single Audit Report on Federal Awards Year ended June 30, 2010 CITY OF ROSEMEAD Single Audit Report on Federal Awards k Year ended June 30, 2010 TABLE OF CONTENTS Page Report on Compliance and Other Matters and on Internal Control over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Report on Compliance with Requirements that Could Have a Direct and Material Effect on Each Major Program, Internal Control over Compliance and on the Schedule of Expenditures of Federal Awards in Accordance with OMB Circular A -133 3 Schedule of Expenditures of Federal Awards 6 Notes to the Schedule of Expenditures of Federal Awards 7 Schedule of Findings and Questioned Costs 8 Summary Schedule of Prior Audit Findings 13 Mayer Hoffin.din McCann PC. An Independent CPA Firm 2301 Dupont Drive, Suite 200 Irvine, California 92612 949 - 474.2020 ph 949 - 263 -5520 fx www.mhm-pc.com Honorable Mayor and City Council City of Rosemead Rosemead, California REPORT ON COMPLIANCE AND OTHER MATTERS AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS We have audited the financial statements of the governmental activities and each major fund and the aggregate remaining fund information of the City of Rosemead, California, (the City) as of and for the year ended June 30, 2010, which collectively comprise the City's basic financial statements and have issued our report thereon dated December 20, 2010. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no material instances of noncompliance or other matters that are required to be reported under Government Auditing Standards, Internal Control Over Financial Reportin In planning and performing our audit, we considered the City's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. Honorable Mayor and City Council City of Rosemead Page Two Our consideration of the internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all the deficiencies in the internal control that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. However, we identified certain deficiencies in internal control over financial reporting, described in the accompanying Schedule of Findings and Questioned Costs as items 2010 -01 through 2010 -04 that we consider to be significant deficiencies in internal control over financial reporting. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit the attention of those charged with governance. The City's written responses to the significant deficiencies identified in our audit have not been subjected to the audit procedures applied in the audit of financial statements and, accordingly, we express no opinion on them. This report is intended solely for the information and federal awarding agencies and pass - through entities, be, used by anyone other than those specified parties use of the City Council, management and and is not intended to be, and should not 1;74'0. / * mom geL 40 0 ( 7 . Irvine, California December 20, 2010 2 Mayer Hof#ia,'.An McCann PC. An Independent CPA Firm 2301. Dupont Drive, Suite 200 Irvine, California 92632 949 -474 -2020 ph 949- 263 -5520 fx www.mhm-pc.com Honorable Mayor and Members of the City Council City of Rosemead j Rosemead, California REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM, INTERNAL CONTROL OVER COMPLIANCE AND ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS IN ACCORDANCE WITH OMB CIRCULAR A -133 Compliance We have audited the compliance of the City of Rosemead, California, (the City) with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A -133 Compliance Supplement that are applicable to its major federal programs for the year ended June 30, 2010. The City's major federal programs are identified in the summary of auditors' results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to its major federal programs are the responsibility of the City's management. Our responsibility is to express an opinion on the City's compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally' accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States and OMB Circular A -133, Audits of States, Local Governments, and Non - Profit Organizations. Those standards and OMB Circular A -133 require that we plan and perform audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on the City's compliance with those requirements. In our opinion, the City of Rosemead complied, in all material respects, with the requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2010. However, the results of our auditing procedures disclosed one instance of noncompliance with those requirements, which is required to be reported in accordance with OMB Circular A -133 and which is described in the accompanying Schedule of Findings and Questioned Costs as items 2010 -05. Internal Control Over Compliance The management of the City is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts and grants applicable to federal programs. In planning and performing our audit, we considered the City's internal control over compliance with requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in infernal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable a possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. Our consideration of the internal control over compliance was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. However, we consider the deficiency in internal control over compliance described in the accompanying Schedule of Findings and Questioned Costs as item 2010 -05 to be a significant deficiency. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Schedule of Federal Awards We have audited the basic financial statements of the governmental activities, each major fund and the aggregate remaining fund information of the City as of and for the year ended June 30, 2010, which collectively comprise the City's basic financial statements, and have issued our report thereon dated December 20, 2010. Our audit was performed for the purpose of forming our opinions on the financial statements that collectively comprise the City's basic financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis in accordance with the requirements of OMB Circular A -133 and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. 4 Honorable Mayor and Members of the City Council City of Rosemead Page Three The City of Rosemead's responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. We did not audit City of Rosemead's responses and, accordingly, we express no opinion on the responses. This report is intended solely for the information of the City Council, management, federal awarding agencies and pass- through entities and is not intended to be and should not be used by anyone other than these specified parties. Irvine, California December 20, 2010 5 U.S. Department of Transportation Pass - through State Department of Transportation: ARRA - Highway Planning and Construction Total Federal Awards Expended 07 -53588 20.205 434,721 $ 2,661,852 116,808 * Denotes a Major Program CFDA = Catalog of Federal Domestic Assistance See accompanying notes to the schedule of expenditures of federal awards 6 Federal Amount Federal Grantor /Pass- through Pass - through CFDA Federal Provided to Grantor /Program Title Number Number Expenditures Subrecipients U.S. Department of Housing and Urban Development Direct Programs: Community Development Block Grant NIA 14218 $ 1,116,376 * 116,808 ARRA - Community Development Block Grant - R NIA 14.253 306,851 - HOME NIA 14.239 675,344 - Subtotal 2,098,571 116,808 U.S. Department of Justice Pass - through City of Los Angeles: Edward Byrne Memorial Justice Assistance Grant C- 117929 16.738 26,044 * - ARRA - Edward Byrne Memorial Justice Assistance Grant C- 117668 16.738 102,516 * - Subtotal 128,560 - U.S. Department of Transportation Pass - through State Department of Transportation: ARRA - Highway Planning and Construction Total Federal Awards Expended 07 -53588 20.205 434,721 $ 2,661,852 116,808 * Denotes a Major Program CFDA = Catalog of Federal Domestic Assistance See accompanying notes to the schedule of expenditures of federal awards 6 Notes to the Schedule of Expenditures of Federal Awards Year ended June 30, 2010 1 Summary of Significant Accounting Policies Applicable to the Schedule of Federal Awards (a) Scope of Presentation The accompanying schedule presents only the expenditures incurred by the City of Rosemead that are reimbursable by agencies providing federal assistance. For the purposes of this schedule, federal financial assistance includes both federal financial assistance received directly from a federal agency, as well as federal funds received indirectly from a non - federal agency or other organization. Only the portion of program expenditures reimbursable with such federal funds are reported in the accompanying schedule. Program expenditures in excess of the maximum federal reimbursement authorized or the portion of the program expenditures that were funded with state, local or other non- federal funds are excluded from the accompanying schedule. (b) Basis of Accountin The expenditures included in the accompanying schedule were reported on the modified accrual basis of accounting. Under the modified accrual basis of accounting, expenditures are recognized when the agency becomes obligated for payment as a result of the receipt of the related goods and services. Expenditures reported include any property or equipment acquisitions incurred under the federal 1 program. (c) Subrecipient Expenditures Payments to subrecipients totaled $116,808 for the Community Development Block Grant for the fiscal year ended June 30, 2010. 7 CITY OF ROSEMEAD Schedule of Findings and Questioned Costs Year ended June 30, 2010 A Summary of Auditors' Results 1. An unqualified report was issued by the auditors on the financial statements of the auditee. 2. There were no material weaknesses in internal control over financial reporting. There were four significant deficiencies in internal control over financial reporting that we described as items 2010 -01 through 2010 -04. 3. The audit disclosed no noncompliance which is material to the financial statements of the auditee. 4. There was one significant deficiency in internal control over the major programs that we described as item 2010 -05. 5. An unqualified opinion was issued by the auditors on compliance for major programs. 6. The audit disclosed no audit finding that is required to be reported under paragraph .510(a) of OMB Circular A -133. 7. The major programs of the auditee were U.S. Department of Housing and Urban Development, Community Development Block Grants, CFDA No. 14.218, Community Development Block Grants — Recovery, CFDA No. 14.253, U.S. Department of Justice, Edward Byrne Memorial Justice Assistance Grant, CFDA No. 16.738 and U.S. Department of Transportation, Highway Planning and Construction Grant, CFDA No. 20.205. 8. The dollar threshold used to distinguish Type A and Type B programs was $300,000. 9. The auditee did not qualify as a low risk auditee, as defined by OMB Circular A- 133, paragraph .530, for the year ended June 30, 2010 for the purpose of determining major programs. B Findings Related to the Financial Statements which are Required to be Reported in Accordance with GAGAS 2010 -01 Establishment of System Access Rights During our review of the internal control structure of the City, we noted that all finance personnel have the ability to perform the following functions: C CITY OF ROSEMEAD Schedule of Findings and Questioned Costs (Continued) B Findings Related to the Financial Statements which are Required to be Reported in Accordance with GALAS, (Continued) 2010 -01 Establishment of System Access Rights Continued • Establish vendors and process invoices for payment • Make changes to the payroll master file (adding and deleting employees, making pay rate changes, etc.) • Process payroll • Post adjustments to the general ledger Recommendation We recommend that the City restrict system access rights for each individual in the Finance Department with respect to that individual's capability to process invoices, make changes to payroll and post adjustments to the general ledger, in order to adequately safeguard City assets. Management's Corrective Actions Planned In January 2011 the City will begin implementing a new finance software system. Defining access rights, along with work -flow authorizations is an integral part of the overall finance system implementation; it has been in the planning stage for the past year and is a high priority with staff. Full implementation, including the auditor's recommendations, is expected to be complete by July 2011. 2010 -02 Adiustments Detected Through the Audit Process Auditing standards require that the auditor include in the report of deficiencies any material adjustments detected by the audit process. For the year ended June 30, 2010, material adjustments detected by the audit process were as follows; • An adjustment to properly record a new capital lease agreement entered into by the City during the current year. • An adjustment to remove an interfund borrowing established between two special revenue funds that had not been approved by the City Council. • An adjustment to record construction in progress for the year ended June 30, 2010. • An adjustment to correct accumulated depreciation. • An adjustment to move CDBG activity recorded in a capital projects fund into the City's CDBG fund. 9 CITY OF ROSEMEAD Schedule of Findings and Questioned Costs (Continued) B Findings Related to the Financial Statements which are Required to be Reported in Accordance with GAGAS, (Continued)_ 2010 -02 Adiustments Detected Through the Audit Process Continued Recommendation We recommend that the City develop and implement procedures to assist Finance Department staff in the process of closing the accounting records at the end of each fiscal year to ensure all material accounting entries have been prepared prior to the auditors conducting the audit. These procedures could involve checklists of processes to be completed and accounts to be reviewed and/or analyzed. Management's Corrective Actions Planned We recommend that the City develop and implement procedures to assist Finance Department staff in the process of closing the accounting records at the end of each fiscal year to ensure all material accounting entries have been prepared prior to the auditors conducting the audit. These procedures could involve checklists of processes to be completed and accounts to be reviewed and/or analyzed. 2010.03 Need for Improved Accounting Over Capital Assets During our testwork over the City's capital asset records for the year ended June 30, 2010, the following discrepancies were noted: • Construction in progress in the amount of $383,536 was not recorded by the City in the capital asset spreadsheet. This reflects capital projects that were in progress and not yet completed as of .tune 30, 2010. • Additions to the City's infrastructure in the amount of $125,670 were not recorded by the City in the capital asset spreadsheet. This amount represents capital projects that had been completed during fiscal year ended June 30, 2010, but had not been recorded by the City. • The City's schedule to track accumulated depreciation contained several errors within the formulas that included over depreciating City assets. Recommendation We recommend that the Finance Department review all capital outlay expenditures each year to determine if any of the projects should be capitalized. 10 (Continued) B Findings Related to the Financial Statements which are Re uired to be Reported in Accordance with GALAS, (Continued) (2010-03) Need for Improved Accounting Over Capital Assets, (Continued) Management's Corrective Actions Planned The City's new financial software, which will be implemented in January 2011, includes a capital asset module. Capital assets are flagged as a capital asset at the time they are purchased and that information flows to the capital asset module. This reduces the likelihood of not posting a capital asset in the capital assets module. Further, proven depreciation formulas are hardcoded into the capital asset module and will be tested for accuracy at the time of implementation. (2010 -041 _ � Community Development Commission Allocations Total Community Development Commission (CDC) expenditures are approximately 20% of total City expenditures. However, administrative salaries charged for certain individuals are up to 55% of those individual's total salary. The City provided explanation of duties performed to justify these charges; however these allocations were based on estimates of time spent working on CDC activities, not actual time spent. Recommendation Health & Safety Code §33334.6 states "The Agency shall determine annually that the planning and administrative expenses are necessary for the production, improvement or preservation of low -and moderate - income housing." The code also says "Planning and general administrative costs which may be paid with moneys from the Low and Moderate Income Housing Fund are those expenses incurred by the Agency which are directly related to the programs and activities authorized under the Code." We recommend that the City personnel perform a time study of those administrative employees that charge time directly to the CDC to support future charges or require employees to track their time on timesheets and record direct charges based on actual time incurred. Management's Corrective Actions Planned During the next budget preparation cycle staff will take into consideration the time worked to be allocated to the CDC. Also, included with the new financial software is an employee self service feature which will permit staff to input hours worked to the appropriate cost center. 11 (Continued) (C) Findings and Questioned Costs for Federal Awards as Defined in Paragraph .510(a) of OMB Circular A-133 (2010 -05) Highway Planning and Construction — Reporting Federal Agency: Department of Transportation CFDA No.: 20.205 Federal Program Income: Highway Planning and Construction Federal Award Program No.: 07- 933512 Federal Award Year: 2009 Control Category: Reporting Questioned Costs: $0 The City of Rosemead received a Highway Planning and Construction grant from the Department of Transportation under the American Recovery and Reinvestment Act (ARRA). One of the new reporting requirements for this grant under ARRA is for the City to submit a Monthly Employment Report to the granting agency. This report is used to show the number of jobs created as a result of the project funded with the grant. For the year ended June 30, 2010, the City had not submitted any Monthly Employment Reports to the granting agency. Recommendation We recommend that each time the City receives a new grant, that the grant agreement and all reporting requirements are closely reviewed to ensure the City is fully complying with all the requirements of the grant. Management's Response Regarding Corrective Action Taken or Planned Subsequent to June 30, 2010 all monthly employment reports have been filed. Staff is now filing reports on any existing projects in a timely manner. 12 CITY OF ROSEMEAD Summary Schedule of Prior Audit Findings Year ended June 30, 2010 The following is the status of the prior audit finding for the year ended June 30, 2009: (09 -01) Establishment of System Access Rights Matter was not resolved and therefore was repeated as a current year finding. See accompanying Schedule of Findings and Questioned Costs as item 2010 -01. 13