Staff Report 5.1

Analysis

Background

Since becoming an independent agency in 2001, the Commission has contracted with other entities for biennial audits of the Commission’s financial operations. For more than 10 years, the Commission contracted with the Audit Division of the Sonoma County Auditor-Controller-Treasurer-Tax Collector. After potential conflicts arose regarding the Commission’s maintaining funds in the County Treasury and using the County’s financial accounting system, staff recommended and the Commission directed the hiring of an outside Certified Public Accounting firm to conduct the audit.

For the last two audit cycles, covering a five-year period, at the Commission’s direction, staff has engaged the services of R.J. Ricciardi, Inc., Certified Public Accountants, a company from San Rafael that has conducted audits for a number of LAFCOs and other governmental agencies.

Upcoming Audit

The most recent audit covered the period from July 1, 2014 – June 30, 2016. The upcoming audit will cover the period from July 1, 2016 to June 30, 2018.

In contemplating a recommendation to the Commission, staff considered developing a full Request for Proposal to solicit bids from various CPA firms. This would entail evaluation of proposals received, interviews, and recommendation to the Commission as well as final selection by the Commission; staff determined that the process would take a substantial amount of time. As an alternative and to facilitate the conduct of the audit, staff reflected on both the professional work and positive level of interaction with the Ricciardi firm, which were impressive, and sought to determine any barriers that would preclude working with that firm once again.

The two issues identified related to whether adequate transparency would exist if the same firm were engaged for the next cycle of audit and whether the cost would be within budget parameters.

Regarding the first issue, staff discussed limitations in using the same outside firm with County Auditor’s Office staff, conversed with staff from other LAFCOs about their experiences in contracting with audit firms, and accessed information from the State Controller’s Office relating to auditor rotation requirements of public accounting firms providing audit services to local agencies.

Staff determined that, in 2012, the State Legislature approved and the Governor signed, Assembly Bill 1345, which included language that is applicable to this situation. (The bill was the result of exposure of unethical and illegal financial practices by numerous officials in the City of Bell, in Southern California, and included sections intended to protect taxpayers from waste, fraud, and abusive practices.)

 Regarding audits and audit firms, the bill – now part of the California Government Code - stipulates the following:

      …a local agency shall not employ a public accounting firm to provide audit services to a local agency if the lead audit partner or coordinating audit partner having primary responsibility for the audit, or the audit partner responsible for reviewing the audit, has performed audit services for that local agency for six consecutive fiscal years. For purposes of calculating the six consecutive fiscal years, the local agency shall not take into account any time that a public accounting firm was employed by that local agency prior to the 2013-14 fiscal year.

Even though local agency formation commissions are typically not included within the definition of “local agency” (generally, counties, cities, and districts), staff supports use that guideline for Commission practices relating to an audit.

Given the above language, R.J. Ricciardi’s conducting the Commission’s audit for FYs 2017 and 2018 would mean that the company will have performed audits for us for five years (2013-14 – 2017-18). Michael O’Connor would continue to be the “engagement partner” for this audit, similar to his role in past audits. It is likely that different staff would be involved in the work, under Mr. O’Connor’s direction. In subsequent years, should the Commission wish to continue working with R.J.Ricciardi, Inc., to conduct its audits, a different engagement partner in the company would oversee Sonoma LAFCO’s audit.

Regarding the second issue: the cost of the two-year audit, Ricciardi estimates that the cost, including expenses, would be $8,400. This is less than the current $10,000 budget. In that the audit work is likely to extend into next fiscal year, any funds unused this year will be encumbered into 2019-20.

With the assurance that some staff rotation will occur and the projected cost will work within the Commission’s budget, staff feels confident in recommending a contract with R.J. Ricciardi, Inc., Certified Public Accountants, for an audit of the Commission’s financial operations for the period July 1, 2016 – June 30, 2018.

Environmental Analysis

In the California Environmental Quality Act (CEQA) Guidelines, “project” is defined as “the whole of an action, which has a potential for resulting in either a direct physical change in the environment or a reasonably foreseeable indirect physical change in the environment….”

Administrative activities and government fiscal activities, such as the upcoming audit, that do not involve a commitment to a specific project which may result in a potentially significant physical impact on the environment are not considered to be projects subject to CEQA.

Recommendation

Staff recommends that the Commission direct the Executive Officer to sign a letter of engagement with R.J. Ricciardi, Inc., Certified Public Accountants, to conduct an audit of Commission financial operations for the period July 1, 2016 – June 30, 2018. 

Alternative Recommendation 

The Commission could direct staff to initiate a Request for Proposal; solicit, and subsequently evaluate, bids for audit work; provide a recommendation to the Commission and facilitate the processing of the selected contractor. 

Attachments 

1. Letter of Engagement from R.J. Ricciardi, Inc., Certified Public Accountants