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AC 02-27-2023 PresentationsCity of Cupertino: Internal Audit Overview February 27, 2023 01 02 03 04 05 Agenda 01 02 03 04 05 City of Cupertino: Internal Audit Overview2 INTERNAL AUDIT BACKGROUND PURPOSE AND ROLE OF INTERNAL AUDIT AUDIT COMMITTEE BEST PRACTICES FY 22-23 WORK PLAN RESOURCES •Different perspective than financial audit •Objective and independent are not mutually exclusive of collaborative and constructive •Prioritize opportunities for reducing risks, strengthening controls, and enhancing performance •Goes beyond the finance department •Government code requirement to evaluate the need •Best practices •Alignment with strategic goals Why Internal Audit? City of Cupertino: Internal Audit Overview3 Role of Internal Audit City of Cupertino: Internal Audit Overview4 Source: IIA Holistic Internal Audit Program Components Tracking & ReportingCOpportunitiesBProgram InputsA •Enterprise Assessments •Employees and Residents •Performance Metrics •Risks •Controls •Compliance •Performance •Findings & Recommendations •Corrective Actions •Implementation •Validation City of Cupertino: Internal Audit Overview5 Key Inputs ANNUAL AUDIT PROGRAM PERFORMANCE METRICS EMPLOYEES & STAKEHOLDERSENTERPRISE ASSESSMENTS City of Cupertino: Internal Audit Overview6 Enterprise Assessments Enterprise Risk Assessment Enterprise Internal Controls Review Asset Management and Capital Program Payroll Operations/Service Delivery Monthly Account Reconciliation and Closing Risk Management and Internal Controls Budgeting Governance, Management, and Organization Cash Receipts and Cash Handling Funding and Economics Revenues and Billings Human Resources Accounts Receivables and Write-offs Technology Grants Management and Compliance Safety and Security Information Technology Access Accounting, Financial Reporting, and Procurement Accounts Payable Fraud, Waste, and Abuse Overall Control Environment City of Cupertino: Internal Audit Overview7 Assessing Risks 8 City of Cupertino: Internal Audit Overview •Program development •Training at all levels •Follow up and follow through •Confidentiality protection •Protection from retaliation •Quarterly reporting Administering FWA Program & Ethics Hotline City of Cupertino: Internal Audit Overview9 •Objective •Independent •Collaborative •Constructive •Comprehensive Sustaining Philosophy & Approach City of Cupertino: Internal Audit Overview10 •To review the annual audit report and management letter •To recommend appointment of internal/external auditors •To review the monthly treasurer’s report •To recommend a budget format •To review City investment policies and internal controls of such policies •To review internal audit reports •To review quarterly Fraud, Waste, and Abuse program reports Cupertino Audit Committee Powers & Functions City of Cupertino: Internal Audit Overview11 •Independent review and oversight of the City’s financial reporting process, internal controls, and audit functions •Ensure management properly develops and adheres to a system of internal controls, procedures are in place to assess management practices, and independent auditors objectively assess financial reporting practices •Understand and monitor City risks, mitigation strategies, and corrective actions •Understand and oversee the FWA program •Shape the internal audit program by directing areas of focus and approving work plans Audit Committee Oversight Functions City of Cupertino: Internal Audit Overview12 •Align audit committee meeting agendas and meetings with priority areas •Distribute materials in advance to enable review •Highlight issues and critical discussion points •Encourage open dialogue and candid discussion to promote improvements Audit Committee Meeting Effectiveness City of Cupertino: Internal Audit Overview13 The City retained Moss Adams to serve as the designated Internal Auditor and conduct projects focusing on: •Risks •Internal controls •Efficiency and effectiveness •Best practices •Compliance Work is being completed under appropriate industry standards (IIA, GAGAS, AICPA) Introduction to Moss Adams City of Cupertino: Internal Audit Overview14 Internal Audit Program Components Internal Audit Plan Risks Internal Controls Compliance Performance Accounting and financial reporting, asset management, capital programs, compliance, economics and funding, fraud, governance, human resources, internal controls, maintenance and operations, management, operations and service delivery, organization and staffing, processes and procedures, procurement, public safety, risk management, and technologyFu n c t i o n s C o m p o n e n t s P l a n Ci t y I n t e r n a l A u d i t A n n u a l City of Cupertino: Internal Audit Overview15 FOCUS ACCOMPLISHMENTS Enterprise Risk Assessments 2021 Internal Controls Projects Completed 1 Performance/Efficiency Projects Completed 2 Policies Reviewed To Come Recommendations Delivered 27 Ethics Hotline Program Development 2022 Recommendations Validated To Come Internal Audit Program Review City of Cupertino: Internal Audit Overview16 Department Projects Administrative Services Procurement (22), Finance P&Ps (22) City Clerk City Manager’s Office FWA Program (22) Community Development Communications Innovation & Technology Parks & Recreation Public Works Capital Program (22) Internal Audit Departments Covered Enterprise Projects: Risk Assessment (21) City of Cupertino: Internal Audit Overview17 FY 22-23 Internal Audit Program City of Cupertino: Internal Audit Overview18 Budget Process Review Policy Review Ongoing Support Library Construction Audit Ongoing Internal Audit Program Management Enterprise Leadership Effectiveness Study July Oct Jan Apr •Government Finance Officer’s Association (GFOA) •GFOA Best Practices Guide on Audit Committees •Institute of Internal Auditors •IIA Publication “The Audit Committee: Internal Audit Oversight” •U.S. Government Accountability Office (GAO) •American Institute of Certified Public Accountants •Association of Certified Fraud Examiners City of Cupertino: Internal Audit Overview19 Resources Questions? City of Cupertino: Internal Audit Overview20 The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Assurance, tax, and consulting offered through Moss Adams LLP. ISO/IEC 27001 services offered through Cadence Assurance LLC, a Moss Adams company. Investment advisory offered through Moss Adams Wealth Advisors LLC. ©2022 Moss Adams LLP City of Cupertino: Internal Audit Overview21 City of Cupertino Budget Process Review February 27, 2023 01 02 03 04 Agenda Budget Process Review PROJECT OVERVIEW SCOPE AND APPROACH KEY THEMES AND FINDINGS COMMENDATIONS 2 Project Overview Budget Process Review As identified in its 2022 annual internal audit workplan, the City requested a review of its processes for budget development and ongoing monitoring practices. The goal of this engagement is to identify opportunities to improve workflows, strengthen communication, and confirm alignment with industry standards. 3 INITIATION •This phase concentrated on comprehensive project planning and management, including: •Identifying staff to interview •Identifying documents to review •Establishing regular reports on project status Timing and Approach Budget Process Review FIELDWORK •Interviews: with budget and finance staff. •Document review: including policies, procedures, reports, guides, etc. •Survey: soliciting feedback from cross- functional stakeholders. •Best practice research: GFOA standards and best practices. ANALYSIS •Information gathered during fieldwork was assessed against GFOA standards and best practices. •Staffing, available guidance, tools, and other key factors, such as volume and timeline for key activities were also evaluated. REPORTING •Results were presented in a draft report and provided for the City validate facts and confirm the practicality of recommendations. •Feedback was incorporated before finalizing the report. TIMING This project occurred between October 2022 and December 2022 and consisted of the following four phases. 4 Aligned with 95% OF GFOA BEST PRACTICE CRITERIA (76 OF 80) Key Themes and Results-GFOA Alignment Budget Process Review Observations •Develop a Policy on Balancing the Operating Budget. The City currently follows the state requirement to balance the operating budget but does not have its own policy. •In the Budget Monitoring Process, Program Performance Measures Are Linked to Financial Outcomes.At least one departmental performance measure for Administrative Services, Parks and Recreation, and Public Works is clearly linked to City financial outcomes. •In the Budget Monitoring Process, Stakeholder Satisfaction Is Monitored, Measured, and Evaluated. Cupertino’s Citizen Survey would have fulfilled this best practice criterion but does not appear to have been implemented since 2017. •During the Budget Period, the Government’s Broad Goals Should Be Adjusted, if Appropriate. If this process exists informally, it should be documented in policies and procedures. 5 Topic Recommendation Training Develop regular training and refresher courses for staff engaged in budget development and monitoring across City departments. Document Consolidation A.Create a dedicated space on the HUB to consolidate budget guides, instructions, and tools. B.Create a budget lifecycle overview outlining each phase of the budget development and monitoring process with links to tutorials or systems used to support deliverables across each phase. Automation Evaluate opportunities to provide more relevant status indicators in OpenGov, and train staff on OpenGov’s budget status and notifications features. Key Themes and Recommendations-Process Budget Process Review6 Commendations Budget Process Review7 GFOA DISTINGUISHED BUDGET AWARD The City received the GFOA’s Distinguished Budget Presentation Award for the FY21- 22 budget. This award recognizes excellence in both the development of the budget and the organization of the budget document. ENGAGEMENT AND INNOVATION The City’s Resident Tax Calculator and the Budget Forecast Tool, earned the 2022 Innovation Award issued by the California Society of Municipal Finance Officers (CSMFO) . CUSTOMER SATISFACTION Between 72% and 90% of survey respondents rated the level of professionalism, communication, and assistance provided by Finance staff as satisfactory or extremely satisfactory. The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Assurance, tax, and consulting offered through Moss Adams LLP. ISO/IEC 27001 services offered through Cadence Assurance LLC, a Moss Adams company. Investment advisory offered through Moss Adams Wealth Advisors LLC. ©2023 Moss Adams LLP Budget Process Review8 February 27, 2023 Treasurer’s Investment Report Month ending January 31, 2023 2 Cash and Investments –General Ledger Balance As of January 31, 2023 Beginning Balance Ending Balance % of Portfolio Cash in banks and on hand Operating Checking (Wells Fargo)32,892,228 41,750,685 18% Workers' Compensation Checking (Wells Fargo)31,453 31,453 0% Payroll Checking (Wells Fargo)--0% Restricted for Bond Repayments1 (BNY Mellon)--0% Petty Cash and Change 5,000 5,000 0% Cash Equivalents Local Agency Investment Fund 21,131,545 21,242,141 9% Investments Investments (Chandler)149,354,513 149,354,513 65% Restricted for Pension (PARS)17,240,051 17,240,051 8% Total Cash and Investments $220,654,789 $229,623,842 100% Cash and Investments –General Ledger Balance As of January 31, 2023 1 Cash held by fiscal agent for bond repayments 3 Beginning Balance Ending Balance % of Portfolio Cash in banks1 Operating Checking (Wells Fargo)33,821,218 42,673,289 18% Workers' Compensation Checking (Wells Fargo)33,538 25,873 0% Payroll Checking (Wells Fargo)--0% Restricted for Bond Repayments2 (BNY Mellon)8,333 -0% Cash Equivalents Local Agency Investment Fund 21,170,973 21,281,569 9% Investments Investments (Chandler)147,282,846 148,742,480 64% Restricted for Pension (PARS)17,395,501 18,507,647 8% Total Cash and Investments $219,712,409 $231,230,858 100% Cash and Investments –Bank Balance As of January 31, 2023 1 Unadjusted balance from the bank statement. Does not reflect outstanding checks or deposits in transit. 2 Cash held by fiscal agent for bond repayments 4 1.All of the City’s investments are in compliance with state law and the City’s Investment Policy 2.In compliance with California Government Code 53646 (b)(3), the City has sufficient funds to meet its expenditure requirements for the next six months Compliance 5 Questions? February 27, 2023 Treasurer’s Report Month ending January 31, 2023 2 Receipts, Disbursements, and Cash Balance Beginning Balance Ending Balance Fund Type Fund Number/Name as of December 31, 2022 Receipts Disbursements Journal Adjustments as of January 31, 2023 General Fund 100 General Fund 115,008,062 16,646,536 (7,987,551) 31,994 123,699,041 General Fund 130 Investment Fund 79,400 - - 110,596 189,996 Special Revenue Funds 210 Storm Drain Improvement 2,155,411 - - - 2,155,411 Special Revenue Funds 215 Storm Drain AB1600 1,822,937 4,723 - - 1,827,660 Special Revenue Funds 230 Env Mgmt Cln Crk Strm Drain 459,305 860,146 (93,656) - 1,225,795 Special Revenue Funds 260 CDBG 653,438 1,324 (16,658) - 638,104 Special Revenue Funds 261 HCD Loan Rehab 221,894 - - - 221,894 Special Revenue Funds 265 BMR Housing 5,549,370 3,060 (33,689) - 5,518,741 Special Revenue Funds 270 Transportation Fund 11,157,220 714,965 (154,191) - 11,717,995 Special Revenue Funds 271 Traffic Impact 761,839 - - - 761,839 Special Revenue Funds 280 Park Dedication 19,791,103 16,767 (95,818) - 19,712,052 Special Revenue Funds 281 Tree Fund 72,355 481 - - 72,836 Debt Service Funds 365 Public Facilities Corp 2,322,250 - - - 2,322,250 Capital Project Funds 420 Capital Improvement Fund 27,360,860 - (479,940) - 26,880,920 Capital Project Funds 427 Stevens Creek Corridor Park 161,581 - - - 161,581 Capital Project Funds 429 Capital Reserve*11,620,392 - - - 11,620,392 Enterprise Funds 520 Resource Recovery 5,649,354 205,147 (277,204) - 5,577,296 Enterprise Funds 560 Blackberry Farm 1,112,205 1,896 (42,435) 25,758 1,097,424 Enterprise Funds 570 Sports Center 1,627,599 - (58,676) 131,379 1,700,302 Enterprise Funds 580 Recreation Program 3,291,010 - (50,445) 51,948 3,292,513 Internal Service Funds 610 Innovation & Technology 4,212,330 - (354,582) - 3,857,748 Internal Service Funds 620 Workers' Compensation 3,758,016 - (3,302) - 3,754,714 Internal Service Funds 630 Vehicle/Equip Replacement 1,233,117 - (73,717) - 1,159,400 Internal Service Funds 641 Compensated Absence/LTD 1,235,962 - 794 - 1,236,756 Internal Service Funds 642 Retiree Medical (662,223) - (116,596) - (778,819) Total 220,654,789$ 18,455,044$ (9,837,667)$ 351,676$ 229,623,842$ 3 Fund Balances/Net Position Beginning Fund Balance Ending Fund Balance Fund Type Fund Number/Name as of December 31, 2022 Revenues Expenditures as of January 31, 2023 General Fund 100 General Fund 103,479,047 10,259,485 5,015,403 108,723,129 General Fund 130 Investment Fund 229,425 - - 229,425 Special Revenue Funds 210 Storm Drain Improvement 2,155,411 - 75 2,155,336 Special Revenue Funds 215 Storm Drain AB1600 1,822,937 4,723 - 1,827,660 Special Revenue Funds 230 Env Mgmt Cln Crk Strm Drain 527,284 806,855 120,612 1,213,528 Special Revenue Funds 260 CDBG 1,179,909 331 16,658 1,163,582 Special Revenue Funds 261 HCD Loan Rehab 221,894 - - 221,894 Special Revenue Funds 265 BMR Housing 5,548,470 3,060 34,153 5,517,377 Special Revenue Funds 270 Transportation Fund 11,497,633 371,517 150,300 11,718,851 Special Revenue Funds 271 Traffic Impact 761,839 - - 761,839 Special Revenue Funds 280 Park Dedication 19,791,103 16,767 95,818 19,712,052 Special Revenue Funds 281 Tree Fund 72,355 481 - 72,836 Debt Service Funds 365 Public Facilities Corp 2,322,250 - - 2,322,250 Capital Project Funds 420 Capital Improvement Fund 24,351,580 462,480 529,423 24,284,637 Capital Project Funds 427 Stevens Creek Corridor Park 161,581 - - 161,581 Capital Project Funds 429 Capital Reserve*11,620,392 - - 11,620,392 Enterprise Funds 520 Resource Recovery 4,779,280 205,147 357,047 4,627,379 Enterprise Funds 560 Blackberry Farm 819,181 28,665 41,434 806,411 Enterprise Funds 570 Sports Center 1,968,077 180,889 84,365 2,064,601 Enterprise Funds 580 Recreation Program 2,916,315 75,062 50,445 2,940,932 Internal Service Funds 610 Innovation & Technology 2,985,759 - 479,636 2,506,123 Internal Service Funds 620 Workers' Compensation 2,128,820 - 3,302 2,125,518 Internal Service Funds 630 Vehicle/Equip Replacement 2,446,272 - 72,920 2,373,352 Internal Service Funds 641 Compensated Absence/LTD 1,235,962 8,837 8,043 1,236,756 Internal Service Funds 642 Retiree Medical (662,223) - 116,596 (778,819) Total 204,360,552$ 12,424,300$ 7,176,231$ 209,608,622$ Questions?