HomeMy WebLinkAboutAgenda Report - November 5, 2003 I-08�y OF a
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COUNCIL COMMUNICATION
AGENDA TITLE: Discussion Regarding Proposed Audit (Agreed -Upon Procedures) of
Envision Law Group by the City's Auditor
MEETING DATE: November 5, 2003
SUBMITTED BY: Janet S. Keeter, Deputy City Manager
RECOMMENDATION: That Council Member Hansen lead the Council in a discussion
regarding his proposed "audit" of the Envision Law Group's billings
and take appropriate action.
BACKGROUND INFORMATION: During the October 15, 2003 City Council meeting, Council Member
Larry Hansen requested that Council consider conducting an "audit'
of the Envision Law Group's billings for the PCE/TCE litigation
matter. His request was made during Council Comments and is now coming before Council for
discussion as an agendized item.
Council Member Hansen will lead the discussion regarding his request and has prepared background
information (Exhibit A) and a copy of e-mail correspondence between Finance Director Vicky McAthie and
Scott Brunner, Director of the City's auditing firm Macias, Gini & Company (Exhibit B) for Council's
information.
Funding: Not applicable
Attachments
Respectfully submitted,
Ja et S. Keeter
Deputy City Manager
City Manager
zixon Flynn
J
EXHIBIT A
BACKGROUND INFORMATION: One of the issues raised by the media and many concerned
citizens is the approved expenditures of the Envision Law Firm and the many questions about how the City's
money is being spent. At the October 15th Council meeting, Council Member Larry Hansen requested that the
City fmd a means to have the City financial records audited. It was discussed whether to use an attorney or to
use the City auditors to conduct the audit.
On October 16th, our Finance Director, Vicky McAthie sent an e-mail to Scott Brunner, a CPA and Director of
our current auditing firm. The original e-mail from Ms. McAthie and Mr. Brunner's response are attached to
this communication. Mr. Brunner suggested that rather than an audit per se, we might want to consider an
"Agreed Upon Procedures Engagement". This type of procedure is one in which the auditor is engaged to
perform specific procedures and report the findings. The auditor does not perform an examination or provide an
opinion. Rather the auditor reports only procedures and findings which are very specific and concise. The
procedure should generally meet the following two tests:
oo They should address the nature, timing and extent.
oo They should result in findings that are capable of reasonably consistent estimation or measurement.
An agreed upon procedure might focus on the following three specific areas of concern: related documents,
expenditures and receipts.
Related documents:
oo Review agreement signed with Envision Law and USF&G re: reimbursement for expenditures, agreed
upon rates and agreed upon deductions.
oo Review agreement with Lehman financing and quarterly caps set forth in the Program Receipts Sale and
Repurchase Agreement.
oo Review Court's February 28, 2003 agreed order re: USF&G's duty to defend and to whom payments
should be made.
oo Review where Wells Fargo Bank statements are going.
Expenditures:
oo Review expenditures vs. industry standard.
oo Review expenditures and invoices sent to USF&G.
Receipts:
oo Review receipts received from USF&G focusing on:
o Ongoing defense costs or recoveries subject to Lehman Financing Agreement.
o What parsing out is done to make sure the City of Lodi meets its obligations to the holders of the
COP under the Lehman financing and Envision Law Group, LLP.
oo Review payments received by Envision Law: when received and when released to the City, and
determine any interest due to the City.
oo Review advance from USF&G for the Environmental Site Investigation and how that is associated with
Lehman financing receipts applied to DTSC reserve.
oo Review any non-cash payments received and the impact that they would have on the Lehman financing.
Submitted by Council Member Hansen
Message
Subj. RE:
Date: 10116/03 4:42:00PM Pacific Daylight Time
From: sOrunnqr@rOaDas ' '
To: vlrKat jP@)o.d1i.gQV
CC: C_AFQpqncls &
Ht Vicky.
Page I of 3
In know this is long, but the more informabon you have the greater the likelihood that we get this process off on
the right foot.
This type of engagement isn't really an audit, per se. It sounds as though what you're looking for is what's
called an agreed-upon procedures engagement. I know it's only a technicality as. non-auditQns qenerally call an
agreed-upw procedures engagement an edit as it's conducted by auditors, but I want to make the distinction
clear, As an audit report states, "an audit includes examining, on a test basis, evidence supporting the
ascents and disclosures in the financial statements. An audit also includes assessing the aocounting
principles us ed and significant estimates made by management, as well as evaluating the overall flnan0a�
statement presentation," An agreed-upon procedures engagement is one in which the auditor is engaged to
pe;lQrm %pecific procedures and report findings, The auditor does riot perform, an examination or provide an
opinkjfi. Rather, the auditor reports only procedures and findings.
In other words, an audit is very broad and not absolute or exact, hence an opinion is given. In an audit, it !s, up
to the auditor's dis-crefiap of what procedures to perform in order to provide the opinion, An agreed-upon
procedures angagement is very specific and concise. The client provides the auditor with the very specific
pcocedures they'd like performed, and the auditor reports what exactly they did or did not find. Nothing's left up
to the auditor for interpretation, riot even materiality,
11 iowever, betore we can quate you a fee. we need to know how long the engagement will take. And before we
can determinehow 'long the engagement will take, we need to know very specifically the procedures you'd fike
performed. The f0owinq are some quideiines you should follow in developing the procedures you'd like
Performed,
Examples of procedures that would generally be considered appropriate for an agreed-upon procedures
en,gagement wing:
include the foilo '
• Inspectfinq specific documents for evidence of certain types of transactions or characteristics.
• Comparing certain documents, schedules, or analyses with specific attributes.
• Performing agreed-upon mathmatica; cors PLItations.
• Executing a sample application after agreeing on relevant parameters.
,k Confirming specific information with third parties.
To be appropriate, procedures should generally meet the fo0owing two tests:
• They should address natkire, timing, acid extent.
• They should result in findings that are capable of reasonably consistent estimation or measurement. In
other words, for a procedure to be approprIate, the auditor should be able to demonstrate ffiat they
acQorr ipfished it.
in an agreed-upon procedures engagement, the auditor may generaHy perform any procedures requested
,provided the procedures are not overly subjective, de*cvibed in an unclear manner, or open to varying
interpretation. This is because the auditor's report should clearly list and describe the procedures perfomned,
Examples of procedures that are not sufficient! y clear incfude�
• Pefforming a „general m�vlew" of the company's accounts receivatab e.
• "Checking" the company's inventory balances.
• "Reconcifing" the company's cash accounts,
• 7&56ng" the company's accounts payable balances.
Si day, October 19, 2003 America Online: POLCHF-
Message Page 2 of 3
Performing a 1irriit d review," of the company's cacti accounts.
Use of vague terms such as these should generally be avoided. d. if they must be used, they should b
accompanied by an explanation of what procedures are meant by the terms, in addition to procedures that are
described in a. vague or unclear manner, the following procedures would norm lly also be considered
inappr priate because they. do not result in findings that are meaningful:
* Mere reading of the subject manner, (However, reading the subject manner r is appropriate if it is
performed in addition to other procedures. I
Mere reading of the work performed y others solely to describe their findings,
Evaluating th comp ntency or objectivity of another paw
* Obtaining an understanding about a particular subject.
* interpreting doc urnents outside the scope of the auditors professional xp €tise
Th€s should give you some good information to take back to the City Council to determine what exactly you'd
like us to do. Once that's determined, we cin determine what it will take and cast, please let us know if w
can be of any further help.
Thank you;
Scott . Brunner, CPA
Director
,acids, Gini:& Company LLP
3927 Lennane Drive, uitea 200
Sacramento,: CA 95834
direct - (916 )774v3542.
main - (916) P28 -4600.
fax _ (9 1 928-2755
5brunner@maciasgini..com
--_ orig€n i Message----
From
s g m..__mFro m Vicky McAlthie.[mailtovmcathieCd1odi,govI
.ffhor day,&tuber 16, 2003 :14 AM
To- sbruriner4maciasqini.com
€ r Council; Susan 1 1Cston; Janet Keeteri bandy Hays
Scutt,
As you are aware triers has been a lot of discussion on the PCEff GE legal issue. Last night at the
Council meeting, one of the Council members asked about the feasibility of the city audit firm
auditing the out side legal firm's books for reasonableness of the bills they cub it to the City for
payment, Questions have been raised about what the industry practice is for charges for €teras such as
mo, t eMs etc.
This of course was not part of the scope of our annual audit so we would also like to get an estimate of
charg s for this type..of audit. The scope of the audit may also include auditing of payments received by
Envision Law for the City of Lodi, the audit of any reduction of those payments for Envision Law invoices
that are above the cap allowable by the formula used for the request for funds from the financing, the
timing of those payments to the City, and any interest accruedidue the City, i have a copy of guest ions
of this nature that 1 have. asked Envision Law and the responses they have writ me, f can make this
availableavaitable to you for your audit work papers.
Please let me know if this is something your audit firm would be able to take on, and if so what an
estimate of the charges for this type of audit would be. if your firm is not able to take this on currently,
please let ire know if you can recommend another r audit firm with expertise in this area.
SUDday, October 19, 2003 America Online: POLCHF