HomeMy WebLinkAboutR09-RDA Item
Redevelopment Agency * City of San Bernardino
300 North "0" Stree~ Fourth Floor . San B<rnll'dino, CoIifamia 92418
(714) 384-5081 FAX (714) 888.9413
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APRIL 6, 1990
APPROVE AN AGREEMENT HITH KPMG PEAT MARHICK
FOR THE PERFORMANCE OF AUDIT SERVICES
Synopsis of Previous Commission/Council/Committee Action:
06-15-78 Reso1 ution 3651 - Agreement with Eadie and Payne - $12,000 FY 77-78
05-07-79 Resol ution 3909 - Agreement with Eadie and Payne - $13,000 FY 78-79
05-19-80 Resolution 4076 - Agreement with Eadie and Payne - $15,000 FY 79-80
04-06-81 Resolution 4166 - Agreement with Eadie and Payne - $20,000 FY 80-81
07-06-82 Resolution 4339 - Agreement with McG1adrey, Hendrickson - $12,400 FY
81-82
06-06-83 Approved Agreement with Porter, Hagner and Beebe - $16,000 FY 82-83
SYNOPSIS OF PREVIOUS COMMISSION/COUNCIL ACTION CONTINUED:
Recommended Motion:
(COMMUNITY DEVELOPMENT COMMISSION)
Move to approve the attached Agreement with KPMG Peat Marwick for
the examination of the Agency's financial statements for the fiscal
years July 1, 1989 through June 30, 1990, July 1, 1990 through June
30, 1991 and July 1, 1991 through June 30, 1992.
Respectfully Submitted,
Supporting data attached: Yes
Funding requirements: $33,000
Hard: All
Project: All
Commission Notes:
1242A
Agenda of: April
Item No.:
9, 1990
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SYNOPSIS OF PERVIOUS COMMISSION/COUNCIL ACTION CONTINUED:
06-13-84 Approved Agreement with Porter, Hagner and Beebe - $18,500
FY 83-84
02-13-85 Approved CDBG Agreement with Thomas, Byrne and Smith -
$14,000 FY 83-84
05-30-85 Resolution 4766 - Agreement with Eadie and Payne - $21,800
FY 84-85
06-05-86 Resolution 4891 - Agreement with Eadie and Payne - $22,900
FY 85-86
05-18-87 Resolution 5016 - Agreement with Eadie and Payne - $25,800
FY 86-87
04-18-88 Resolution 5104 - Agreement with Eadie and Payne - $28,500
FY 87-88 and $28,200 FY 88-89
S T A F F R E P 0 R T
The two year agreement with the auditing firm of Eadie and Payne, Certified
Public Accountants, expired after the audit services were performed for the
fiscal year 1988-89. In accordance with the Agency's purchasing policy, on
February 14, 1990 Agency staff mailed a Request for Proposal for Audit
Services to ten qualified professional accounting firms on the Agency's
Consolidated Vendor List, and advertised in The Sun on February 17, 1990.
The firm chosen is to examine the Agency's financial statements, and report on
their findings, for the fiscal years July 1, 1989 through June 30, 1990, July
1, 1990 through June 30, 1991 and July 1, 1991 through June 30, 1992. The
firm is to prepare a Combined Audit Report, with separate supplementary
financial statements for each of the Agency's Redevelopment Project Areas and
Special Projects, prepare the Annual Report of Financial Transactions of
Special Districts to be sent the State Controller and perform a Compliance
Audit in accordance with the guidelines established by the State Controller's
Office of the State of California. All reports are to be received by the
Agency no later than November 30 of each year.
The Request for Proposal asked each firm to submit to the Agency, by March 9,
1990, a statement of total maximum fees and hourly rates by categories of
services rendered for the each of the three years. Also, the firms were
requested to submit a summary of past auditing experience and specific
experience with redevelopment agencies. The firms were notified that the
contract would not necessarily be awarded to the lowest bidder, but would be
based upon experience.
Four of the ten firms contacted submitted a proposal. A complete list of the
ten accounting firms, and a brief summary of the proposed cost for each year,
is as follows:
Firm 1989-90 1990-91 1991-92
Eadie and Payne, CPA $42,000 $44,500 $47,000
KPMG Peat Marwick 33,000 33,000 35,400
Diehl, Evans & Company 29,875 31,750 33,900
Simpson & Simpson, CPA 30,000 30,000 30,000
Price Haterhouse Declined to submit.
Ernst & Young Declined to submit.
McGladrey & Pullen Declined to submit.
Fleming, Reiss & Co No response.
Kenneth Leventhal & Co No response.
Arthur Young No response.
S T A F F R E P 0 R T
For several years, Eadie and Payne has performed a thorough and satisfactory
examination of the Agency's financial statements, and an advantage to rehiring
Eadie and Payne is their experience with the Agency, eliminating the
retraining and reeducating of the auditors. Eadie and Payne lists experience
with three Redevelopment Agencies (including the City of San Bernardino), the
City of Colton and the City of Redlands and other local governmental agencies.
The firm of Simpson and Simpson lists experience with the Community
Redevelopment Agency of the City of Los Angeles, various City audits and
audits of various departments of the U. S. Federal Government.
The firms of KPMG Peat Marwick and Diehl, Evans and Company have the most
extensive experience of the four firms with Redevelopment Agency audits. KPMG
Peat Marwick lists experience with seventeen City Redevelopment Agencies, the
County of Los Angeles Redevelopment Agency and various State, City and County
audits, including the current audit of the City of San Bernardino. Diehl,
Evans and Company lists experience with thirteen Redevelopment Agencies,
various City audits and they offer a wide variety of financial management
advisory services.
After reviewing all Proposals received, staff is recommending that a three
year agreement be entered into with the audit firm of KPMG Peat Marwick. The
recommendation is based upon redevelopment experience, understanding of
redevelopment law and familiarity with the Agency. After contacting KPMG Peat
Marwick, their fee is 40% of their standard rates and only slightly above
their cost of performing the audit. KMPG Peat Marwick was able to lower their
fee by $3,000 by preparing separate supplementary financial statements for
each project area instead of preparing individual audit reports for each
project area. The audit report issued will be a combined audit report, which
is standard practice, and all other auditing procedures will remain the same.
KPMG Peat Marwick Is currently responsible for the audit of the City of San
Bernardino, and must include the Agency's audit as part of the City's audit,
thus simplifying the process if the same auditor is used for both the City and
the Agency. For this reason, staff is recommending KPMG Peat Marwick over
Diehl, Evans and Company.
Based upon the good quality of past audits, normally, staff would recommend
that an agreement be entered into with Eadie and Payne, but their proposed fee
for the first year Is $12,125 higher than Diehl, Evans and Company, $12,000
higher than Simpson and Simpson and $9,000 higher than KPMG Peat Marwick, and
the spread Increases over the three year period. Audits contracts should
never be awarded on consideration of fees alone (see attached United States
House of Representatives Report), but Eadie and Payne, in this case, is
considerably higher than the other proposals.
AGREEMENT FOR PROFESSIONAL SERVICES
Agreement No,
THIS AGREEMENT made and entered into this day of ,
1990, by and between the COMMUNITY DEVELOPMENT COMMISSION OF THE CITY OF
SAN BERNARDINO, on behalf of the REDEVELOPMENT AGENCY OF TBE CITY OF SAN
BERNARDINO, a public agency, ("Agency"), and KPMG PEAT HARWICK
("Consultant"):
RECITAL
1. Purpose
The purpose of this Agreement is to allow the Agency to procure the
service of an experienced professional accounting firm for the
examination of the Agency's financial statements for the fiscal
years July 1, 1989 through June 30, 1990, July 1, 1990 through June
30, 1991 and July 1, 1991 through June 30, 1992.
TERMS AND CONDITIONS
2. Mission
Agency hereby retains Consultant for the provision of services
described in Attachment I. Consultant hereby accepts such
responsibility as described herein.
3. Terms
This Agreement shall commence as of the day and year first above
shown and shall remain in full force and effect until the services
described in Attachment I have been completed, unless sooner
termination is provided herein.
4. Consultant Responsibilities
Upon the request of Agency's Executive Director or his or her
designee, Consultant shall complete the work program described in
Attachment I, Consultant commits the principal personnel listed
below to the project for its duration:
Page 2
Mr, Tom Snow, Engagement Partner
Mr. Steve Kay, Engagement Preissuance Partner
Mr. Derek Banway, Engagement Manager
Engagement In-Charge Accountant
Staff
5. Replacement of Named Personnel
It has been determined that the individua1(s) named in this
Agreement are necessary for the successful performance of this
Agreement. No diversion or replacement of these individua1(s) shall
be made by Consultant without written consent of the Agency. The
Agency may ratify, in writing, within ten (10) days of said
diversion or replacement and such ratification shall constitute the
consent of Agency required by this clause. If Agency fails to
respond to Consultant within ten (10) days of notification by
Consultant, said personnel diversion or replacement shall be deemed
approved,
6. Release of News Information
No news release, including photographs, public announcements or
confirmation of same, of any part of the subject matter of this
Agreement or any phase of any program hereunder shall be made
without prior written approval of Agency's Executive Director or his
or her designee.
7. Confidentiality of Reports
Consultant shall keep confidential all reports, information and data
received, prepared or assembled pursuant to performance hereunder
and that Agency designates as confidential, Such information shall
not be made available to any person, firm, corporation or entity
without the prior written consent of Agency,
8. Compensation
During the term of this Agreement, Agency shall pay Consultant, the
fixed, not to exceed, fee described in Attachment I. Said
compensation shall be considered full and complete reimbursement for
all of Consultant's costs associated with the services provided
hereunder. The maximum compensation for services, including all
Consultant's costs, under the terms of this Agreement, shall not
exceed $33,000 for fiscal year 1989-90, $33,000 for fiscal year
1990-91 and $35,400 for fiscal year 1991-92,
Page 3
Consultant shall be paid in accordance with Agency's standard
accounts payable system and as described in Attachment I. Invoices
submitted by the Consultant must indicate the separate cost for each
Redevelopment Project Area and Special Project audited by the firm.
9. Right to Audit
Agency or any of its duly authorized representatives shall have
access to any books, documents, papers and records of Consultant
and/or its subcontractors which are pertinent to the specific
program hereunder for the purpose of making an audit, an
examination, excerpts and transcriptions, All books, 'records and
supporting detail shall be retained for a period of five (5) years
after the expiration of the term of this Agreement, or any extension
thereof, or for any longer period of time as required by law.
10. Agency Support
Agency shall provide Consultant with any plans, publications,
reports, statistics, records or other data or information pertinent
to the services to be provided hereunder which are reasonably
available to Agency and as indicated in Attachment I.
11. Independent Contractor
Consultant shall perform the services as contained herein as an
independent contractor and shall not be considered an employee of
Agency or under Agency supervision or control. This Agreement is by
and between Consultant and Agency, and is not intended, and shall
not be construed, to create the relationship of agent, servant,
employee, partnership, joint venture, or association, between Agency
and Consultant.
12. Conflict of Interest
Consultant represents, warrants and agrees that it does not
presently have, nor will it acquire during the term of this
Agreement, any interest direct or indirect, by contract, employment
or otherwise, or as a partner, joint venturer or shareholder (other
than as a shareholder holding a one percent (1%) or less interest in
publicly traded companies) or affiliate with any business or
business entity that has entered into any contract, subcontract or
arrangement with Agency. Upon execution of this Agreement and
Page 4
during its term, as appropriate, Consultant shall upon written
request, disclose in writing to Agency any other contractual or
employment arrangement from which it receives compensation.
Consultant agrees not to accept any employment during the term of
this Agreement by any other person, business or corporation which
employment will or may likely develop a conflict of interest between
Agency's interests and the interests of third parties.
13. Successor and Assignment
The services as contained herein are to be rendered by Consultant
whose name is as appears first above written and said Consultant
shall not assign nor transfer any interest in this Agreement without
the prior written consent of Agency,
14. Indemnification
Consultant agrees to indemnify, defend (upon request by Agency) and
save harmless Agency, its agents, officers and employees from and
against any and all liability, expense, including defense costs and
legal fees, and claims for damages of any nature whatsoever,
including, but not limited to, bodily injury, death, personal injury
or property damage arising from or connected with Consultant's
negligent operations, or its services hereunder, including any
workers' compensation suit, liability or expense, arising from or
connected with the services performed by or on behalf of Consultant
by any person pursuant to this Agreement.
15. Insurance
Without limiting Consultant's indemnification of Agency, Consultant
shall provide and maintain at its own expense during the term of
this Agreement the following program(s) of insurance covering its
operation hereunder, Such insurance shall be provided by insurer(s)
satisfactory to Agency and evidence of such programs satisfactory to
Agency shall be delivered to the Executive Director of Agency or his
or her designee within ten (10) days of the effective date of this
Agreement,
General Liability: A program including, but not limited to,
comprehensive general liability including automobile coverage
with a combined single limit of not less than $500,000.00 per
occurrence. Such insurance shall name Agency and the City of
San Bernardino as additionally insured.
Workers' Compensation: A program including workers'
compensation insurance, where necessary, with statutory limits,
Page 5
Failure on the part of Consultant to procure or maintain required
insurance shall constitute a material breach of this Agreement upon
which Agency may immediately terminate this Agreement.
16. Compliance with Laws
The parties agree to be bound by applicable federal, state and local
laws, regulations and directives as they pertain to the performance
of this Agreement,
17. Non-Discrimination
In the fulfillment of the program established under this Agreement,
either as to employment, upgrading, demotion, transfer, recruitment
or recruitment advertising, layoff or termination, rates of payor
other terms of compensation, selection for training, including
apprenticeship or participation in the program or the receiving of
any benefits under the program, Consultant agrees not to
discriminate nor to allow any subcontractor to discriminate on the
basis of race, color, creed, religion, natural origin, ancestry,
sex, marital status or physical handicap,
18. Severability
In the event that any provision herein contained is held to be
invalid, void or illegal by any court of competent jurisdiction, the
same shall be deemed severable from the remainder of this Agreement
and shall in no way affect, impair or invalidate any other provision
contained herein. If any such provision shall be deemed invalid due
to its scope or breadth, such provision shall be deemed valid to the
extent of the scope or breadth permitted by law,
19. Interpretation
No provision of this Agreement is to be interpreted for or against
either party because that party or that party's legal representative
drafted such provision, but this Agreement is to be construed as if
it were drafted by both parties hereto.
20. Entire Agreement
This Agreement supersedes any and all other agreements, either oral
or in writing, between the parties hereto with respect to the
retention of Consultant by Agency and contains all the covenants and
agreements between the parties with respect to such retention.
Page 6
21. Waiver
No breach of any provision hereof can be waived unless in writing.
Waiver of anyone breach of any provision shall not be deemed to be
a waiver of any other breach of the same or any other provision
hereof.
22. Contract Evaluation and Review
The ongoing assessment and monitoring of this Agreement is the
responsibility of Agency's Executive Director or his or her designee.
23. Termination
This Agreement may be terminated by either party by giving written
notice at least five (5) days prior to the effective termination
date in the written notice.
24. Notice
Notices, herein shall be presented in person or by certified or
registered U. S. mail, as follows:
To Consultant:
KPMG Peat Marwick, Certified Public Accountants
725 South Figueroa Street
Los Angeles, California 90017
To Agency:
Robert J. Temple, Executive Director
Redevelopment Agency of the City of
San Bernardino
300 North "0" Street, Fourth Floor
San Bernardino, California 92418
Nothing in this paragraph shall be construed to prevent the giving
of notice by personal service.
25, Entire Agreement
This Agreement with attachments constitutes the entire understanding
and agreement of the parties,
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above shown.
COMMUNITY DEVELOPMENT COMMISSION OF
THE CITY OF SAN BERNARDINO, on behalf
of the REDEVELOPMENT AGENCY OF THE
CITY OF SAN BERNARDINO
By:
Robert J. Temple, Executive Director
CONSULTANT
By:
Title:
Approved as to form and
legal content:
By:
Agency Counsel
Approved as to program:
REDEVELOPMENT AGENCY OF THE
CITY OF SAN BERNARDINO
By:
~ivision Manager
Page 7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above shown,
Approved as to form and
legal content:
"'~
/ Agency' unse1
Approved as to program:
REDEVELOPMENT AGENCY OF THE
CITY OF SAN BERNARDINO
By: lr,,-<~(; ,,,C:c/~')rIsY-
-' Division Manager ~
COMMUNITY DEVELOPMENT COMMISSION OF
TBE CITY OF SAN BERNARDINO, on behalf
of the REDEVELOPMENT AGENCY OF THE
CITY OF SAN BERNARDINO
By:
Robert J. Temple, Ex~cutive Director
CONSULTANT
By:
Title:
kPMG Peat Marwick
Certified Public Accountants
725 South Figueroa Street
Los Angeles, CA 90017
Telephone 213 972 4000
Telex 6831572 PMMLA
Cable Address VERIT A TEM
Telecopier 213 622 1217
March 9, 1990
VIA MESSENGER
Mr. Robert J. Temple
Executive Director
Redevelopment Agency of the Oty
of San Bernardino
300 North D Street, Fourth Floor
San Bernardino, California 92418
Dear Mr. Temple:
Enclosed are three copies of KPMG Peat Marwick's proposal to provide audit services to the
Redevelopment Agency of the Oty of San Bernardino.
If you have any questions, please feel free to give me a call.
Very truly yours,
KPMG Peat Marwick
1:7 .tAti1-/-r~"~~7. =- ~
Derek Hanway
Senior Manager
DH:fmr
Enclosures
[....~_..."'
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,;,: Membe,F,rmol
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Attachment I
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] Proposal for
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] March 1990 Attacl,ment I
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PROPOSAL FOR AUDIT SERVICES
TO TIlE REDEVELOPMENT AGENCY QF
TIlE CITY OF SAN BERNARDINO .
Contact persons:
Thomas W. Snow, Client Service Partner
(213) 955-8439
Derek Hanway, Senior Manager
(213) 955-8430
PeatMarwick
725 South Figueroa Street
Los Angeles, California 90017
Submitted on March 9, 1990 and
effective for the 1990 through 1992 fiscal years
Attachment I
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REDEVEWPMENT AGENCY OF TIlE mY OF
SAN BERNARDINO
PROPOSAL FOR AUDIT SERVICES
Table of Contents
Pa~e
LETTER OF TRANSMIlTAL
EXECUTIVE SUMMARy..................................................................,............... 1
PROFILE OF KPMG PEAT MARWICK
General........................................................................................................... 8
Engagement Staffing................................................................................... 8
Accounting and Auditing Services ......................................................... 9
Tax Services - State and Local Government Perspective................... 10
Management Consulting Capabilities..................................................... 10
Compliance, Performance, Program and Management
Auditing.................................................................................................... 12
Commercial Practice ................................................................................... 12
Securities Offerings ..................................................................................... 12
Innovative Approaches ............................................................................. 13
EDP Speciallsts.............................................................................................. 20
Accounting Advice, Counsel and Education ........................................ 20
Implementation of Technical Pronouncements.................................. 20
Our Audit Philosophy................................................................................ 21
SUMMARy OF KPMG PEAT MARWICK'S QUALIFICATIONS
Client Service Partner................................................................................. 22
Preissuance Partner ..................................................................................... 23
Engagement Manager................................................................................. 23
Engagement In-charge Accountant........................................................ 23
Staff ................................................................................................................. 23
Resource Group ........................................................................................... 24
Our Engagement..........................................................................................
Professionalism/Training ......................................................................... 24
Industry Involvexnent................................................................................ 26
National Governmental Practice............................................................. 26
Local Governmental Practice.................................................................... 28
Our Experience .............................................................................................
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Attachment I
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REDEVEWPMENT AGENCY OF THE mY OF
SAN BERNARDINO
PROPOSAL FOR AUDIT SERVICES
Table of Contents. Continued
SCOPE OF SERVICES
I - Understanding of the Engagement....................................................
Basic Requirements.....................................................................,...............
Agency Staff Assistance..............................................................................
IT - Audit Approach................................:...................................................
Management Letters ...................................................................................
Communications.........................................................................................
PROPOSED FEES.................................................................................................
APPENDIX
Resumes of Proposed Engagement Staff ................................................
ii
Attachment I
Page
33
33
35
35
41
42
43
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kPMG Peat Marwick
Certified PubUc Accountants
725 South Figueroa Street
Los Angeles. CA 90017
Telephone 213 972 4000
Telex 6831572 PMMLA
Cable Address VERIT A TEM
Telecopier 213 622 1217
March 9, 1990
Mr. Robert J. Temple
Executive Director
The Redevelopment Agency of
the City of San Bernardino
300 North "0" Street, Fourth Floor
San Bernardino, California 92418
Dear Mr. Temple:
I<PMG Peat Marwick is pleased to respond to your Request for Proposal to Provide
Audit Services to the Redevelopment Agency of the City of San Bernardino
(Agency). As the foremost firm in Southern California providing audit services to
units of local government, including the City of San Bernardino, we appreciate the
opportunity the Agency has given us to present our professional qualifications.
Peat Marwick occupies a leadership role in serving the accounting and auditing
needs of Southern California municipalities. In this regard, our commitment to
serve the needs of the Agency is indeed very strong. Accordingly, the Agency's
management can be assured that our audit team will be staffed from among our
best, most experienced governmental auditors.
The Agency's Request for Proposal indicates the importance the Agency places in
the selection of its auditing firm. It is apparent that the Agency desires to select
auditors that possess excellent technical expertise as well as the proven ability to
deliver superior client service. Naturally, it goes without saying that such services
need to be provided at a competitive rate. We believe that Peat Marwick has
consistently demonstrated each of these attributes.
Peat Marwick's services to redevelopment agencies like San Bernardino are
fundamental to our overall Governmental Audit practice. In this regard, we have
demonstrated that we have the personnel resources to "step right in" to not only
assist the Agency's staff in discharging its financial reporting responsibilities, but
also to provide timely consultation assistance. We are prepared to meet the
Agency's established time frame as outlined in the Request for Proposal. As
discussed in detail in this proposal, Peat Marwick's audit team is very familiar
[~.....~-'
'..,..:a..&.i..,,"_.~..
Member FlrrTl 01
KlvnImldP8.11tM.lI~k(''''''r'''''lP'
Attachment I
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5iMG Peat Marwick
Mr. Robert J. Temple
The Redevelopment Agency of
the City of San Bernardino
March 9, 1990
2
with the underlying concepts, if not the very details, of every area of the Agency's
operations by virtue of our existing professional relationship with the City of San
Bernardino and our extensive municipal client base that we have built in
Southern California. Thus. our "start-up time" will be minimized. and the
timeliness of our efforts can be assured.
.. .. .. .. .. .. ..
We look forward to discussing our qualifications and audit capabilities with the
Agency at the earliest opportunity. If we can be of further assistance or answer any .
questions you may have, please do not hesitate to contact me at (213) 955-8439.
Very truly yours,
I<PMG Peat Marwick
~~w.k
Thomas W. Snow, Client Service Partner
Attachment I
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EXECUTIVE SUMMARY
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OUR FIRM
KPMG Peat Marwick (Peat Marwick) is the largest multinational public accounting
firm. Currently, we maintain over 100 offices in the United States, 12 of which are
within California. Our Los Angeles area offices serve as the hub for our Public
Sector Accounting, Auditing and Consulting practice in Peat Marwick's Western
Region as well as California. Our Los Angeles office employs over 1,000
professionals, including over 80 partners and 150 managers. Ap,proximately 160 of
these individuals have specific experience in auditin~ units of local ~overnment.
Because our Los Angeles office serves as the keystone office in our Firm's Western
Region, we have developed an extensive array of capabilities to enable us to serve
our clients better. We are confident that we can serve most if not all of the needs
of the Agency through the utilization of our experienced, locally based staff.
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OUR PERSONNEL
While Peat Marwick's division of services - accounting, auditing, tax and
consulting - is more or less comparable to other accounting firms, we believe that
any similarity between Peat Marwick and other firms ends at this point.
We truly believe that our people are our most important resource. Their highly
developed skills have been accumulated through the successful performance of
work for numerous local government clients and through Peat Marwick's
comprehensive and formal professional staff training programs.
In our Public Sector practice, we use a team approach. Our Redevelopment
Agency of the City of San Bernardino engagement team will be coordinated
through our designated client service partner, Tom Snow. Tom will be charged
with the responsibility of bringing to bear all of Peat Marwick's collective resources
to address/solve the auditing and/or operational problems facing the Agency.
Tom will work hand in hand with the staff and management of the Agency to.
provide the superior level of audit and accountin~ service that is desired by the
Agency.
We have found our team concept to be the most effective means of serving the
needs of our clients, particularly in the public sector. Each member of our
proposed team possesses a level of experience that is directly relatable to the tasks
that he/she will perform. Our work is segmented to permit the most efficient use
of individual technical skills and to streamline definition of tasks. Our audit
administration structure provides for a depth of experience and technical skills
from our management personnel. This ensures that our clients will always have
access to an appropriate, knowledgeable representative of the engagement team.
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Attachment I
We believe that the ability to maintain continuity of personnel is a key element in
the selection and engagement of any accounting firm. In addition to continuity at
the partner/manager level, our engagement team concept provides for "familiar
faces" from year to year at the staff level. To provide this continuity, we have
taken careful steps to ensure that members of the 1990 audit team will be back to
serve on subsequent years' engagements.
1
We have staffed our Redevelopment Agency of the City of San Bernardino
engagement team from among our very best people; these people have already
made a long-term commitment to Peat Marwick and to public sector auditing.
This commitment to continuity will enable us to perform our audits in a more
efficient manner from one year to the next and will also help eliminate the
extensive "retraining" process that the Agency's accounting' and administrative
personnel must necessarily undertake each year to refamiliarize new auditors with
the Agency's methods and procedures.
The personnel proposed for assignment to this engagement are all actively
involved in California public sector auditing and consulting. All members of our
management team are active members of professional organizations that establish
evaluation policies for the application of generally accepted accounting principles
as they relate to government. Almost all proposed engagement team members
have addressed professional organizations on topics of current interest.
While we have deliberately stressed our local government expertise, it is also
important to note that our people possess considerable commercial experience.
includinf; real estate experience. We believe that it is imperative that the team we
assign to serve the Agency be well-rounded in their perspective. not only to
successfully audit the Agency's various operations. but also to introduce a "fresh
point of view" to any business situation.
In summary, we believe that each professional that we propose to assign to the
Redevelopment Agency of the City of San Bernardino engagement possesses the
multifaceted combination of technical skills necessary to successfully complete the -
task of auditing the various financial statements of the Redevelopment Agency of
the City of San Bernardino.
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OUR CLIENTS
Peat Marwick is the leading public sector auditing and consulting firm in the
country. Currently, we serve more than 5.000 public sector clients. including most
of the largest cities in the nation. Our National practice reflects extensive diversity
and serves to furnish Peat Marwick with the background and specialized resources
to better meet the needs of our clients.
2
Attachment I
Locally, our public sector clients range from one of the most newly incorporated
cities in the state to some of the largest, most diverse and complex entities in the
nation. The extent and growth of our local Government practice is best
demonstrated by the fact that the majority of our proposed engagement service
team members spend over 70% of their yearly working time in public Sector
accountinS- auditing and consulting work.
Our qualifications can be illustrated through reference to the many clients for
whom we have successfully provided, or are currently providing, professional
services similar to those the Redevelopment Agency of the City of San Bernardino
desires. Our understanding of the requirements of this engagement is based, in
part, upon our past experience gained from similar audits of existing clients.
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SUMMARY OF RELEVANT EXPERIENCE
We are familiar with redevelopment agency operations similar to those of the
Agency. Through our performance of audits for other California redevelopment
agencies, we have developed an understanding of the Agency's concerns and
problems. illustrations of our extensive public sector experience are contained
under the proposal heading "Summary of Proposer's Qualifications."
For convenience, we have summarized certain key points concerning the Agency's
operations and have associated some of our relevant experience, with each point,
as follows:
Area
Relevant experience
Overall Commitment
Local government is not merely "filler time" to us.
Our locally based audit practice is a vital, integral part
of our overall accounting practice. It is a practice that
we have trained over 150 professionals to serve. This
commitment of personnel and training cost is
indicative of the value we place upon service to local
government.
\1
Our local government audit practice has increased
steadily in each of the last ten years. This is yet another
indication of our continuing commitment to serve
Southern California local governmental units. Such
consistent growth is also a strong indication of the high
value public officials place on our work.
3
Attachment I
-
Area
Relevant experience
General Government
Peat Marwick's Los Angeles office currently audits
approximately 40 Southern California cities, special
districts and authorities - far more than any other
firm's entire statewide practice. We currently serve as
the auditor for the City of San Bernardino. As a result
of our association with the City, we are familiar with
the activities of the Agency.
Redevelopmen t
Agencies
As a Firm, Peat Marwick is a leader in performing
audits of redevelopment agencieS. Locally, we have
performed audits of most of the prominent
redevelopment agencies in Southern California. To
name but a few of our more active redevelopment
agency audit clients:
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· County of Los Angeles - Community Development
Commission
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· Cities of:
- Burbank
- Commerce
- Chino
- Compton
- Culver City
- Glendale
- Inglewood
- Long Beach
- Los Angeles
- Paramount
- Pico Rivera
- San Buenaventura
- San Luis Obispo
- Santa Barbara
- Santa Monica
- Thousand Oaks
- Upland.
(]
A complete list of redevelopment agency audit clients
is located elsewhere in the Summary of Proposer's
Qualifications.
4
Attachment I
..--~~"--
Area
Implementation of
Technical Pronounce-
ments
Relevant experience
Peat Marwick is in the forefront of developing practical
implementation solutions to current accounting
developments. Our success is evident in that ill of our
public sector clients (currently over 20> choosing to
apply for CSMFO/GFOA financial reporting award
recognition have received such awards - the vast
majority on their first submission.
Data Processing
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As a Firm, Peat Marwick is a leader in the audit of data
processing services, as evidenceq by the fact that we
currently audit some of the nation's largest computer
service bureaus.
Key members of our engagement staff possess
considerable experience in computer auditing.
Retirement/Employee
Benefit/Deferred
Compensation
r'
Peat Marwick is one of the few accounting firms that
maintains a staff of employee benefits consulting
experts. Our local complement of people also includes
qualified pension actuaries. They are of assistance to
many of our clients in truly analyzing our clients'
relative PERS positions and, in general, employee
benefits and deferred compensation plans.
Securities Offerings
\,1
As discussed elsewhere, we have assisted several
governmental entities in issuing bonds or certificates
of participation. Of these, many were nonclients who
needed the very specialized accounting assistance that
only Peat Marwick can provide. The types of issues
that we have been involved in include some unique
and novel means of financing, including:
· Variable Rate Bonds
· Certificates of Participation
· Taxable Bonds
· Energy Cogeneration financings
5
Attachment I
Area
Relevant experience
· Multiple issue advance refundings
· Industrial Development Bonds
· Mortgage Revenue Bonds.
Our personnel are also up to date with the latest effects
of the Tax Reform Act and how such act affects the
issues' taxability and general conditions of local
government bonding.
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WHY KPMG PEAT MARWICK?
Throughout this proposal for audit services, we have expressed our desire to add
the Redevelopment Agency of the City of San Bernardino to our list of valued
clients. We sincerely believe that we can furnish the Agency with superior
professional service. In essence, we believe that our qualifications demonstrate:
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Our substantial local expertise - Our local, continuing governmental
audit practice has increased substantially each of the last ten years.
Such growth is a direct reflection of the Quality of our work and of the
confidence public officials place in our services. Such growth could
not have been possible were it not backed by the favorable references
that our current clients have given others who have engaged us.
We have the personnel resources - Each responsible engagement
team member possesses in-d~th experience in governmental as well
as commercial accounting and auditing. We pledge year-tcryear
continuity of our staff. These people know how redevelopment
agencies operate. They will apply this knowledge to the Agency's
operations. We shall provide the Agency with Qualified auditors at
all levels of en~a~ement staffin~.
Our commitment to the public sector has enabled Peat Marwick to _
develop an extensive base of public sector-oriented personnel
resources from which to draw. Accordingly, we can serve the needs
of the Redevelo.pment Aienc;y of the City of San Bernardino without
having to assign inexperienced people to the enga~ement.
We have developed applicable. advanced. yet time-proven. audit
techniques for use on our public sector audits to increase efficienc;y
and ensure comprehensiveness of audit procedures. We pride
ourselves on efficient and effective auditing procedures, starting with
a thorough planning and preparation phase and culminating in the
timely delivery of our reports.
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6
Attachment I
We are flexible - Our work shall be scheduled in a manner that will
minimize the time pressures already placed on the Agency personnel.
We are competitive - When the overall level of service delivered is
considered, we believe that our fees are very competitive and include
many services that are not ordinarily considered by other firms.
Whv KPMG Peat Marwick? Because we believe we have the resources, the
experience, the reputation and the imagination to perform the work requested in
the best interest of the Redevelopment Agency of the City of San Bernardino.
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We are practical- We pride ourselves on a "businessman's"
approach to our work We emphasize significant management
involvement early in the engagement to "set the pattern" for our
audit effort and to resolve any potential audit problem areas that face
the Redevelopment Agency of the City of San Bernardino. Our audit
attention will be focused on the truly significant matters confronting
the audit/financial statement process through an audit approach that
is uniquely tailored to the needs of the Redevelopment Agency of the
City of San Bernardino.
Our "hands-on" administrative structure eliminates much of the
hierarchy of authority found in many CPA firms: therefore, we are
responsive to our clients' needs, and we maintain flexibility in our
approach while still retaining needed professional discipline.
We communicate - Our engagement approach is specifically designed
to maximize timely client/auditor involvement and communi-
cation. We shall emphasize prompt communication in working
with Agency personnel at all levels.
Peat Marwick will become fully cognizant of the accounting, auditing
and operational problems and concerns of the Redevelopment
Agency of the City of San Bernardino. The understanding of the
Agency's concerns will enable us to effectively coordinate our
engagement efforts and focus our attention on the critical operational
areas.
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Attachment I
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PRO~EOFKPMGPEATMAR~CK
GENERAL
, ,
KPMG Peat Marwick is the largest multinational certified public accounting firm.
Founded over 100 years ago, Peat Marwick achieved its present status as a result of
developing a solid reputation for responsiveness to client needs and for
consistently rendering top-quality professional services to clients engaged in all
segments of business activity.
Peat Marwick's services to iovernmental or&anizations represent one of the lar&est
se&ments of our total practice. Our services have become widely diversified as the
needs of our clients have expanded. To ensure that designated professional staff
attain maximum proficiency in specialized areas, specialized industry departments
have been organized within the Firm, one of which is the Government Services '
Department. This department is responsible for keeping abreast of new
developments and current accounting and auditing problems pertaining to state
and local governmental entities. Its findings are made available to all offices, thus
enabling the entire Firm to benefit from the combined experience gained in
dealing with this field.
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ENGAGEMENT STAFFING
The engagement will be staffed from among our most experienced governmental
auditors. The audit team assigned to the Redevelopment Agency of the City of
San Bernardino will be based in Los Angeles. Our Los Angeles offices employ over
1,000 professionals, including over 80 partners and 150 managers. Ap,proximately
160 of these individuals have specific experience in auditini and consultin~ for
units of local iovernment. This ability to place a number of locally available
qualified personnel at the disposal of the RedevelO"pment Agenc: of the Cii of
San Bernardino is especially important when the total auditing accountin_ and
advisory needs of the A~ency are considered.
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Attachment I
Our success locally in taking a leadership position in providing service to
government entities can be attributed to our professional staff members, who
spend a significant amount of their time working in the public sector. A break-
down of our staff who work extensively serving public sector clients follows:
I
Partners Managers Seniors Staff Total
Audit 3 9 36 81 129
Management
Consulting 4 7 10 9 30
Tax. 1 1 1 1 4
Total 8 17 47, 91 163
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· Limited to determination of tax-exempt status/not-for-profit corporation
work. Additional tax personnel are available for employee benefits and
other tax issues.
The Summary of Proposer's Qualifications section of this proposal describes in
more detail the engagement service team to be assigned to the engagement.
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ACCOUNTING AND AUDITING SERVICES
Peat Marwick's reputation has been built on our quality accounting and auditing
services to our clients for over 100 years. Peat Marwick has a broad range of
experience in nearly all types of business enterprises, including real estate,
financial institutions, manufacturing, high technology and insurance entities, to
name a few, as well as extensive experience in the governmental, not-for-profit
and educational institutions fields.
Peat Marwick's local staff has a thorough understanding of the latest .
developments in auditing technology; namely, the use of the latest electronic
tools, microcomputers and computer auditing software. SEACAS, our
microcomputer-based auditor assistance tool, is used by professionals for on-site .
work at our clients' offices. We believe the use of personal computers is having a
dramatic effect on the audit process and the overall type of service rendered by our
Firm.
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The auditors who comprise our client service team are highly trained and are
backed by the professional support of Peat Marwick nationally and worldwide.
These combined resources provide clients with the best possible assistance that
will enable them to grow and prosper.
9
Attachment I
I
TAX SERVICES - STATE AND LOCAL
GOVERNMENT PERSPECTIVE
The Tax Department is involved in tax planning and consulting and compliance
engagements for a diversity of clients, ranging from private companies to
multinational corporations, not-for-profit and government entities and
individual income tax assignments.
Recent tax developments such as the Tax Reform Act of 1986 have had a
significant impact on tax-exempt indebtedness and employee benefits. Arbitrage
regulations, employee benefit rules and other continuously changing legislation
demand that our tax experts be on top of tax issues affecting local government as
they emerge. In addition to the experience of Peat Marwicks local tax
professionals, we have a network of highly trained specialists in Washington, D.C.
to provide the most up-to-date information on our changing tax laws, including
those which impact governmental entities.
t,
MANAGEMENT CONSULTING CAPABILITIES
r~
Our ability to provide management consulting services is extensive and varied in
scope. As a combined Firm, we stress the need to focus directly on our clients'
unique problems. To solve those problems, we believe that an effective manage-
ment consulting department requires both industry and technical specialists. Peat
Marwick's local offices have over 140 professional consultants, each of whom
specializes in one or more areas.
Our consultants have the necessary skills in all areas where the Agency may need
assistance. For example, approximately JQ of our consultants devote substantially
all of their time to serving public sector clients.
A sample of the kinds of public sector-oriented consulting engagements that Peat
Marwick routinely undertakes follows:
· Financial Management - In a variety of engagements, Peat Marwick
has assisted financial managers in meeting accountability
requirements, legal and political, and in broadening their expertise in
general management. Some of the areas in which we have assisted
are:
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Design of billing and information systems
Design and implementation of data processing systems
Cash forecasts and cash flow analysis
Short- and long-range financial planning
Annual operations and capital budgeting
Program budgeting
Design and implementation of accounting systems
Cost-effectiveness studies
10
Attachment I
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Redevelopment projects feasibility studies
Integration of operations and systems into a total financial
management system
Improved purchasing procedures and techniques
Design of overhead cost allocation plans required by Federal
Management Circular FMC 74-4 (A-87)
Federal Government contract management and negotiations
Federal grants management systems.
Automated Accounting Systems - Peat Marwick has developed and
implemented FAMIS, an automated financial management system,
in a variety of cities and counties throughout the nation. FAMIS is
an integrated fund accounting system providiflg planning,
programming and budgeting with the functions of reporting and
measuring performance.
General Operations - Organization surveys and studies; writing of
organizational manuals and policies and procedures statements;
design of planning, programming, budgeting systems (PPBS); reviews
of administrative codes; studies of organizational goals and objectives
and the capacity of staff to achieve them; and evaluation of the
validity of goals
Personnel Management - Position classification and job evaluation
studies; wage and salary surveys; pension and employee benefit
planning; actuarial studies; personnel record procedures and systems;
personnel administration programs; and training and development
seminars
Relations with Federal Agencies - Studies of grants-in-aid; cost
reporting procedures; and utilization of matching funds
Human Resources Systems - Planning and evaluation of social
services, housing, health, education and related social programs;
cost-effectiveness and feasibility studies; design of information
systems; actuarial services for employee benefit plans such as
pensions, and the like; and financial, organizational and
management assistance to state and local government agencies
Analytical Methods - Design and implementation of analytical
models in such areas as transportation analysis, urban and regional
planning, plan evaluation, health systems planning, education,
financial and economic planning
Physical and Economic Development Systems - Studies in land use
and housing, transportation modeling, demographic data analysis
and forecasting, environment analysis, industrial development, labor
market analysis and related information systems support
.
.
.
.
.
.
11
Attachment I
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Social Services - For a variety of social services-related clients,
including state public welfare departments, national and local
councils, county departments and Federal agencies, Peat Marwick has
been involved in program effectiveness and impact analysis studies.
This has included client utilization, evaluation of service/delivery
systems and management reviews. Other major engagements have
included the design and implementation of purchase of service
systems in a number of states.
Urban and Re~ional Plannin~ - Development of procedures for
evaluating the regional fiscal implications associated with alternative
regional development patterns. Another recent engagement
involved the design of a countywide procedure relating to the
economic and environment evaluation of major development
proposals.
.
COMPUANCE, PERFORMANCE, PROGRAM
AND MANAGEMENT AUDITING
Peat Marwick is a leader in nonfinancial auditing. As experts in Federal program
auditing, we are intimately familiar with the GAO auditing standards. These
standards have universal applicability in all facets of compliance, performance,
program and management auditing. Such standards are observed in all of our
Federal program audits. Many are also carried through to our non-Federal public
sector management audits.
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COMMERCIAL PRACIlCE
While we have emphasized our Public Sector Audit practice in presenting our
qualifications, it is important to realize that, locally, we have a significant public
accounting practice covering virtually every facet of business enterprise. As can be
seen from the resumes of our proposed engagement staff in the accompanying
Appendix A, our people are well-rounded professionals who have had in-depth ,
exposure to a number of industries.
I
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SECURITIES OFFERINGS
We wish to take this opportunity to discuss our leadership position with respect to
the issuance of public sector bonded indebtedness. Locally, our auditors have
recently assisted the following agencies with their bond issues:
City of San Bernardino
City of Baldwin Park
The Community Redevelopment Agency of the City of Los Angeles
Glendale Redevelopment Agency
Pasadena Redevelopment Agency
12
Attachment I
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Community Redevelopment Agency of the City of Compton
City of Glendale
City of Los Angeles, Department of Airports
City of Riverside
City of San Buenaventura
State of Hawaii
Airport Authority of Washoe County, Nevada
Imperial Irrigation District
City of La Mesa
City of San Pablo
Santa Margarita Water District
City of Ontario
County of Los Angeles
City of Commerce
Westmont College
City of Anaheim
City of Long Beach
City of Brea
City of Santa Barbara
City of Torrance
We also are up to date with respect to the impact of the Tax Reform Act of 1986
upon state and local governments. We are well equipped to advise our clients of
the potentially adverse effects of municipal bonding and frequently do so.
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INNOVATIVE APPROACHES
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Peat Marwick is dedicated to providing our clients with innovative and insightful
approaches to auditing. It is only through such means that we can render our
clients the most efficient and cost-effective audit services. Some of the more
prominent innovative techniques we intend to employ are described as follows:
· "SEADOC" - SEADOC resulted from our research efforts. After two,
years of field testing in over 16 countries, SEADOC emerged as the
answer for consistent cost-effective evaluations of internal
accounting controls. SEADOC significantly reduces the volume of
documentation required to describe an internal accounting control
system while simultaneously producing thorough documentation.
The documentation is easy to prepare and to review because
SEADOC's language and logic are precise.
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13
Attachment I
...;;.... - ....
, I
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Working papers and flowcharts are structured to assure consistency
and also force the preparer to focus on areas where strong controls are
present and weak or nonexistent controls need improvement or
implementation. Also, SEAOOC's simplicity makes it flexible.
SEADOC can be implemented on all sizes of entities and industries
with any mix of manual and electronic data processing systems.
SEADOC saves considerable time. - Under other approaches, transac-
tion documents are traced from their origin to their disposition. The
problem with this approach is that there is almost never a single fate
for a document. Numerous copies are widely distributed for many
reasons. Tracing the copies, from an audit perspective, is simply not
cost-effective. SEADOC eliminates this problem by tracing informa-
tion instead of documents. SEADOC also reverses the order of the
tracing procedures. Instead of commencing from the origin of the
documentation, SEADOC first concentrates on the data directly
affecting financial statements. Only relevant information is
documented and no time is wasted on irrelevant information or
documents. SEAOOC introduces four basic concepts into reviews of
internal accounting control.
The first concept is control environment. As defined within the
Agency, the control environment may consist of the attitudes,
training and understanding which influence control responsibilities.
Without a proper environment, controls will not be operative.
The remaining three concepts involve sets of controls:
Boundary controls are sought where exchanges between
departments, agencies and outside entities occur. Boundaries
are crossed when the Agency receives services in exchange for
a commitment to pay. Boundary controls receive first and
highest attention. Boundary controls are necessary to ensure
that all exchanges are known and proper consideration is
received.
Processing controls are necessary to capture accurate data for
transactions occurring within an organization. SEA DOC
focuses on areas where data is changed or transferred to
another form. These areas are termed control points.
Identification of control points is accompanied by control
procedures descriptions, assuming the accuracy and integrity of
new or changed data.
Safeguard controls over physical assets which may be removed
are documented by SEADOC, ensuring prevention and
detection of unauthorized relocation of movable assets.
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Attachment I
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Under the standardized SEADOC working papers and flowcharts, all
of these controls are reviewed and evaluated, thus providing a
thorough in-depth review of internal accounting control.
Once the Agency's systems have been reviewed using the SEADOC
approach, Peat Marwick will be in a position to provide positive,
concrete recommendations on internal accounting control. The
report will indicate if the systems are meeting the Agency's objectives
and will describe any material exceptions.
Generally accepted auditing standards require the review of internal
accounting control. Over 20 years ago, we developed a systems
approach to reviewing internal accounting control. In the 1970s, we
refined the approach to cover significant oper~ting cycles through
detailed flowcharts. Our continuing efforts to simplify and improve
the evaluation process led us to further research.
"SEACAS" - Peat Marwick's commitment to utilizing/developing
audit technology to assist us in performing our professional
responsibilities is unsurpassed. We are leaders in accounting firm
automation and utilize microcomputers in our everyday work in
everything from electronic mail to the audit applications discussed
below.
SEACAS is a logical application of existing technology to our unique
SEADOC approach to auditing. SEACAS (an acronym for Systems
Evaluation Approach - Computerized Audit Support) is a Macintosh
microcomputer-based audit tool that assists in gathering, analyzing
and distributing information, primarily for auditing and reporting on
financial statements. The system is not computer auditing, or the
auditing of automation, as Peat Marwick's System 2190 is; rather,
SEACAS automates many audit procedures that have been
performed manually up until now.
SEACAS is designed to be easily transported and used at client
locations. The system significantly improves audit productivity
through automating such tasks as posting audit adjustments,
providing analytical review data, updating trial balances and
preparing financial statements. This frees the Peat Marwick audit
professional from many time-consumin~ nonjudlPIlental clerical
~. Instead, the auditor can devote more time to solving audit and
accounting problems, analyzing financial data and offering advice on
how to improve financial accounting and reporting systems. Services
to the client can often be improved or increased without a
corresponding increase in fees. All of Peat Marwick's engagements
utilize SEACAS to some extent.
15
Attachment I
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Currently available on SEACAS is the Financial Statement Subsystem
(FSS), which can provide:
Draft financial statements
Trial balance processing
Year-to-year comparisons at trial balance and financial
statement levels
Transmission of draft financial statements to word processing
systems
Transmission of trial balance data to spread sheets or other
oommercia1 software
SEADOC
System 2190 "backup" .
SEADOC backup and initial detail print work
Data base retrieval
Accessing information directly from client computers
Financial statement consolidation
Spread sheet working papers
Templates and drafts of standard working papers
Statistical sampling
Audit programming
Financial modeling and analytical review.
Because SEACAS is a "stand-alone" computer system for use by Peat
Marwick's auditors and clients, it does not require any oonnection
with a client's computer system. It is a tool used to accumulate,
analyze and evaluate data and does not require that the client have
any accounting operations computerized.
Our Commitment to Microcomputers - Microoomputers have
beoome an intrinsic part of every engagement and has greatly
increased the amount of information that will be available to the
auditor in the field. The introduction of microoomputer technology
to the audit of the Redevelopment Agency of the City of San
Bernardino provides us the opportunity to utilize the power of
today's microoomputer and telecommunications technology in
providing uniform, high-quality service to the Agency. Some
examples will illustrate the benefits of our using the Macintosh
microcomputer:
Communication network - Detail audit instructions or
oommunications can be in "hard copy" form transmitted to
our engagement team within the Agency. The Macintosh also
provides the ability to easily transmit data files from one site to
another. This will significantly reduce report preparation time
and result in timely receipt of the various financial statements
in accordance with the Agency's reporting guidelines.
16
Attachment I
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Technical support - Through the microcomputers, our
auditors have the ability to quickly access key libraries of
technical literature. The quality of our technical support and
our ability to respond and resolve problems quickly will be
greatly enhanced.
Project mana~ement - Our audit engagement personnel are
able to monitor the progress of the team in the field and are
able to easily identify potential problem areas where extra audit
resources are needed to meet completion dates. Our ability to
effectively manage the audit engagement is improved, thus
ensuring timely completion of the audit work.
Perfonnance of audit procedures - The Macintosh can
facilitate the preparation of supporting schedules, lead
schedules and the Agency's financial statements. Efficiency is
increased when the need to make a change on a number of
related schedules will be replaced by reflecting the change
through the Macintosh on one schedule and letting the audit
software reflect the changes on the other schedules. Analytical
review will be more comprehensive and easier to perfonn.
Accounting infonnation on the Agency's microcomputers can
potentially be accessed and retrieved. Flowcharting, systems
evaluation and workpaper review will all be affected in a
positive way.
Auditin~ through the Computer/Computer Capabilities - A
Computer Controls Specialist will be designated to review the
Agency's internal controls over its computer applications.
In our Firm, a Computer Controls Specialist is an auditor who,
because of special aptitudes and demonstrated abilities as an auditor,
has received intensive training to become knowledgeable and
experienced in electronic data processing procedures and equipment..
Our responsible engagement personnel are capable of operating and
programming computers, as well as evaluating existing internal .
controls over computerized record-keeping.
We expect to use our computer audit techniques to the maximum
extent possible, in order that we may audit "throu~h the Agency's
BDP-produced records. rather than around them."
Computer Disciplines - In this age of the computer, it is difficult to
find an accounting finn that is not well versed in computer tech-
nology at some level within the finn. This fact notwithstanding,
insofar as we are aware, Peat Marwick is the only finn that has
irrevocably committed itself to this new technology.
.
17
Attachment I
1
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Not only have we made this commitment from a policy standpoint
but also from a financial resource standpoint. Our commitment to
train all our professionals in computer technology is best illustrated
by a brief description of the computer training courses we conduct for
our professionals, as shown on the following page.
Statistical Auditini - The use of statistical sampling techniques has
been commonplace in auditing for many years, but has only recently
advanced to its current state, primarily as a result of computerized
applications. Highly sophisticated statistical sampling programs
involving complex mathematics have been feasible to the field
auditor only through the use of computerized software packages.
18
Attachment I
Level
IV.
a.u.e
t.
Basi<: <UII'f'Uler Inining - """"" work
includ... basics 01 CXIIIlpUIer technology
with emphuis on minialmputer_,
II.
System 2190 <UII'f'Uler Inining - how 10
we our proprietary ooftwore.
Emphuis on pradiaol .pplication to
inaeale .udit efficiency,
m.
Computer proceRng spedaIist
training. lntenaified training 10 Ieam
10 program and operate mainframe
<IlmpUIen. perfonn _tory oontrol
reviews, as well as UIist Raft
_in wriIiDg/~System
2190_
Computer oontro1a opeciaIist training.
DotaiIed training in teriewing and
IooIiDg BOP controls in more """",lex
_Is. lPrenoqWsit. _ CXIIIlpUIer
-ing opeciaIist training.)
ED!' conoulting. HIring hosed on
working etperience with .ctuaI
hardware/1oItware and general
bad<growod, Our_lu,e_..
oI-the-art oriented and current as to
- tecllDoIogical developments.
v.
5wnmaJy 01 Computer Training
Provided to Our ProIESSional Staff
i'Rquen<v
All profeuional staff
AII.udilpersonneJ
Seiected., hued on
.ptitud./int.....t
Advanced .ptitud...,
demonstrated abilities as
auditor
Whenever technological need
arises
19
Criteri.
None
None
Nomination by an audit
partDer
Nomination by an audit
partner
Dornon.s~_ industry
c.p.bility
AttAC'.hmpnt T
Namberinolfiao
All ltaH
All audil Ilafl
50
30
Well over 50~ of our
COMUItants uve extensive
ED!' bodcgrounds
Peat Marwick recognizes the value of statistical sampling for
governmental audits and has identified specific audit areas where it
can be used to increase audit efficiency without reducing effective-
ness.
EDP SPEOALlSTS
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In order to determine the effect that computer processing has on the audit
approach and to assist, where necessary, in achieving audit objectives, Peat
Marwick has available, in every office, qualified EDP specialists. Our local offices
have over 30 of these EDP specialists on the staff. The engagement team, however,
always retains ultimate responsibility for all aspects of the audit and, therefore,
participates directly in all work performed by an EDP specialist.
To assist the EDP specialists and the engagement team in reviewing computerized
accounting systems, the Finn has issued our "Computer Audit Guide" to all senior
auditors and management personnel. The Guide provides detailed guidance in
evaluating the controls in computer environments, ranging from complex
computer systems to micro- and minicomputer systems, testing EDP controls, and
the design and use of computer-assisted audit techniques.
r'1
ACCOUNTING ADVICE. COUNSEL AND EDUCATION
, I
A comment we often hear during our proposal efforts is that municipal financial
and operating personnel frequently do not have timely access to their outside
auditors when questions or problems arise. Our enga~ement administration
Structure provides timely response from a knowledgeable member of the Peat
Marwick audit staff. We pride ourselves in our ability to promptly respond to
client questions and needs.
LI
IMPLEMENTATION OF TECHNICAL PRONOUNCEMENTS
.
Our Finn is fully capable and experienced in assisting our clients in implementing'
new pronouncements of both the GASB and the FASB. We are at the forefront of
developing practical implementation solutions to current accounting develop-
ments. The Agency will need to implement pronouncements of the GASB such as
Statement No. 10 relating to accounting and financial reporting for risk financing
and related insurance issues and the GASB's final statement on measurement
focus and basis of accounting for governmental funds. The transition date
tentatively established for these pronouncements is for financial statements for
periods beginning after June 15, 1993.
20
Attachment I
--..------
OUR AUDIT PHILOSOPHY
(
Our basic audit philosophy has been developed from our many years of experience
in providing audit services to local governments. We stress the efficiency and
timeliness of our procedures; therefore, we also place heavy emphasis on early
planning, communications and coordination of the efforts of our people with your
personnel.
Because our approach stresses early resolution of audit, accounting and related
problems and questions, much of our preliminary work will deal with seeking out
and resolving potential problems before year-end, when alternatives for their
resolution are more flexible and available. In this manner, we have consistently
proven that we can render more effective client service and.-meet your objectives
of timely and accurate financial reporting.
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SUMMARY OF KPMG PEAT MARWICK'S OUALlFICATIONS
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The success of any audit engagement depends on the people selected to actually
conduct the audit. We consider it imperative that these people:
· Possess and demonstrate the necessary technical skills to perform
their assigned tasks in an efficient fashion
· Establish a "track record" of effective coordination among each other
and with the client in order to meet the stated audit objectives
· Establish continuity of effort from year to year and amon~ each other
in order to avoid "retrainin~" our personnel in subsequent years.
This action certainly reduces our audit inefficienc;y and streamlines
the audit process for the A~enc;y as well.
The selection of personnel we propose for assignment to the engagement has been
based on the above criteria. Each person to be assigned to the engagement will be
experienced in public sector auditing, and in selecting our personnel, we shall
place particular emphasis on selecting people whose experience includes audits of
redevelopment agencies. Further, as mentioned before, the people to be assigned
to the engagement have been chosen for their ability to repeat on future years'
engagements.
A brief description of the responsibilities of each of the individuals we propose to
assign to our engagement team to serve the Redevelopment Agency of the City of
San Bernardino is set forth in the following paragraphs. A resume of each
member of our engagement team appears in the accompanying Appendix A.
r"
CLIENT SERVICE PARmER
LJ
Mr. Tom Snow will serve as the engagement partner and will have the responsi-
bility for the coordination of quality professional services to the Agency. Tom will
have the responsibility for the overall performance of our people and for the
timely completion of our work. In this regard, Tom will closely coordinate our
activities with the appropriate Agency officials and monitor the audit planning
and fieldwork phases of the engagement to ensure satisfactory performance on
Peat Marwick's part. He will assist in coordinating the timely, final field review of
our audit working papers and the financial reports upon which Peat Marwick will
render its opinions.
22
Attachment I
PREISSUANCE PARTNER
Mr. Steve Kay will serve as the engagement preissuance partner and will have the
responsibility for performing a review of all financial statements and accompany-
ing audit reports prior to the issuance of such reports. This gives additional
assurance that such audit reports and related financial statements are clear,
concise, understandable and in compliance with Firm and professional standards.
ENGAGEMENT MANAGER
I
Mr. Derek Hanway will serve as the engagement manager for our audit of the
Redevelopment Agency of the City of San Bernardino. Derek also serves as the
engagement manager of the City of San Bernardino. Derek;will coordinate and
direct the technical performance of all Peat Marwick personnel participating in the
audits and will participate in all audit activities to ensure that Peat Marwick has
met its client service responsibilities to the Redevelopment Agency of the City of
San Bernardino.
o
ENGAGEMENT IN-CHARGE ACCOUNTANT
[
Our designated engagement in-charge accountant will be responsible for
conducting the day-to-day audit fieldwork. Our in-charge accountant will
continuously direct and supervise the work of the audit staff. In this capacity, our
in-charge accountant is responsible for keeping our engagement management
informed as to the status of the engagement.
The Agency may be assured that our designated in-charge accountant possesses
intimate knowledge of the compliance/disclosure requirements relating to
redevelopment agencies.
In the accompanying Appendix A to this proposal, we have provided the resumes
of some of our in-charge accountants, whose experience we believe to be repre-
sentative of the abilities of our in-charge accountants specializing in the public
sector.
i
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STAFF
As suggested previously, we have ample public sector auditing capabilities at the
staff level. All other people assigned to the Agency engagement will possess
specific blends of municipal/public sector audit experience necessary to
successfully conduct the audits to be performed.
23
Attachment I
RESOURCE GROUP
In any engagement of a multifaceted governmental entity such as the
Redevelopment Agency of the City of San Bernardino, the talents and expertise of
several individuals not normaIly associated with the day-te-day work occasionaIly
need to be caIled upon to effectively meet client needs. Peat Marwick is dedicated
to providing quality client service; accordingly, we commit all of our technical and
professional resources to each client. Agency management can be assured that Peat
MarwickwiII bring to bear our personnel resources on their unique problems.
Examples of the kinds of professionals that we believe could be a valuable resource
to the Agency are presented below. Their resumes are presented in Appendix A:
I
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Tax Consultin~ Support - Mr. Robert Goldsteitl will function as our
designated tax specialist. Robert is a Partner with an extensive
background in employee fringe benefit plans, income tax reporting
(Le., W-2 and 1099 reports) and COBRA tax-related requirements. He
will be available to Agency personnel to research and respond to all
tax-related questions. He will coordinate all such activities on behalf
of our audit team.
Economic Development - Mr. Don Moyer is Peat Marwick's Director
of Economic Development. Don's expertise in economic
development has served as a tremendous resource to our public
sector clients. As a member of our Resource group, he will be
available to assist the Agency in evaluating its economic
development activities.
Real Estate Development - Mr., Paul Garity is Peat Marwick's Los
Angeles office director of our real estate consulting services. Paul's
expertise in real estate consulting has been a tremendous resource to
our redevelopment agency clients. As a member of our resource
group, he wiIl be available to assist the Agency in evaluating the
feasibility of potential projects.
.
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PROFESSIONALISM/TRAINING
Our chief assets are the skiIls of our people - a trite but very true statement. To
ensure the highest level of professional performance, Peat Marwick engages
graduates with records of high academic achievement and demonstrated
leadership experience. To keep all personnel current with advanced techniques,
the Firm conducts many general and specialized training programs.
24
Attachment I
. !
, ,
1.1
One of the best measures of a firm's commitment to a governmental practice is the
depth of specialized training provided to its professionals. In terms of public sector
audit training, we are certain that no other accounting firm offers comparable
governmental audit training to its professional staff. We have developed a very
sophisticated training program for our people. Such training is provided to our
staff on the average of over 80 hours per year and consists of two phases.
The first phase is a structured hierarchy of complex yet broad auditing and
accounting programs given to all of our personnel according to their position in
the Firm.
The second phase is specialized industry training. It is in this specialized industry
training that Peat Marwick truly excels. illustrative of this is Peat Marwick's
governmental training programs as follows: :
· Government Audit Trainins Level I - Explains the principles of
governmental accounting and the procedures used for auditing
governments to assistant and staff accountants assigned to audits of
governmental units for the first time
· Government Audit Trainin~ Level II - Provides in-charge
accountants with an understanding of the requirements for planning
and directing the audit of a governmental unit in an efficient and
effective manner
· Advanced Government Auditin~ Trainin~ - Discusses special
auditing techniques and approaches to assist in planning and
directing the audits of governmental units
· State and Local Government Roundtable.f! - Provides an update on
the latest professional and Firm developments concerning the audits
of state and local government units
· Audits of Federally Assisted Pro~ams/Sin~le Audit Seminar-
Develops the skills necessary to undertake the unique financial and
compliance audit procedures required under the Single Audit
concept. Appropriate practice aids are discussed and thoroughly
digested. Also included are reviews of specific grant programs that
our professionals are occasionally required to audit separately.
In addition to formal training programs, our public sector specialists receive Peat
Marwick's bimonthly State and Local Government Bulletin. which describes the
latest developments, requirements and procedures pertaining to public sector
accounting, auditing, reporting and financial management. Our public sector
specialists are also provided with a three-volume State and Local Government
Practice Guide specifically developed to guide them in the conduct of audits of
public sector entities. This guide covers all aspects of governmental accounting
and auditing, including "Single Audit." It also focuses on such matters as special
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25
Attachment I
accounting practices, audit planning, potential problems/suggested solutions,
advanced auditing techniques, model financial statements, special independent
auditors' reports, management letters, administrative review programs and
Federal program audits.
INDUSTRY INVOLVEMENT
i I
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Our management and staff are charged with a responsibility to be active in the
industry and professional organizations that they serve. This involvement serves
to keep our people up to date on current developments and also permits us to
participate in the development of new financial, accounting and reporting
practices. Accordingly, we encourage our people to serve on the committees that
influence public sector operating and financial reporting prilctices, as evidenced by
our strong local participation on the GFOA and CSMFO Review Committees. (As
discussed elsewhere in this proposal, Tom Snow and Derek Hanway serve on both
the GFOA's Special Review Committee for Certificate of Conformance and the
CSMFO Review Committee.)
Our personnel are backed by an extensive resource pool of talent and expertise
upon which to draw when a specific need arises. As suggested previously, our
people stay abreast of all significant developments as they occur through our
seminars, newsletters, practice bulletins and specialized industry accounting and
auditing manuals.
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NATIONAL GOVERNMENTAL PRACTICE
I!
The Redevelopment Agency of the City of San Bernardino understandably desires
that its auditors have proven experience, in-depth knowledge and technical
expertise in dealing with the unique issues facing California redevelopment
agencies. The continuation of the GASB and their new accounting
pronouncements serve to heighten the need for auditors who can serve in an
advisory capacity and keep the Agency abreast of current developments.
Our client list includes literally thousands of public sector clients from all 50 states
for whom we are presently performing or have recently performed professional
accounting, auditing and consulting services. A very brief summary of some of
the more prominent of these public sector clients is as follows:
· Cities
\..1
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Akron, Ohio
Albuquerque, New Mexico
Anchorage, Alaska
Boston, Massachusetts
Chicago, lllinois
Columbus, Ohio
Dallas, Texas
26
Attachment I
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Detroit, Michigan
Fort Lauderdale, Florida
Fresno, California
Greenwich, Connecticut
Independence, Missouri
Juneau, Alaska
Kansas City, Missouri
lincoln, Nebraska
Memphis, Tennessee
New Orleans, Louisiana
New York, New York
Oakland, California
Omaha, Nebraska
Pittsburgh, Pennsylvania
Providence, Rhode Island
Roanoke, Virginia
Rochester, Minnesota
San Diego, California
San Francisco, California (City and County)
San Jose, California
Scottsdale, Arizona
Shreveport, Louisiana
Stamford, Connecticut
Sunnyvale, California
Tampa, Florida
Texarkana, Arkansas
Topeka, Kansas
Counties
Alameda, California
Allegheny, Pennsylvania
Baltimore, Maryland
Contra Costa, California
Dallas, Texas
DeI<alb, Georgia (Atlanta area)
Fairfax, Virginia
Guilford, North Carolina
Hennipin, Minnesota
Howard, North Carolina
LosAngde~CaIHo~
Onondaga, New York
Prince Georges, Maryland (suburban Washington, D.C.)
Riverside, Califo~
Roanoke, Virginia
Sacramento, California
27
Salt Lake, Utah
San Bernardino, California
San Francisco, California
San Mateo, California
Santa Clara, California
Santa Cruz, California
Sonoma, California
St. Louis, Missouri
.
States
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Hawaii
Kansas
LOuisiana
Maine
Massachusetts
New York
Utah.
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LOCAL GOVERNMENTAL PRACTICE
Not only does Peat Marwick maintain a national Government Services
Department which monitors current accounting and regulatory developments, but
our large California Government practice requires that local government services
specialists be knowledgeable of local issues and regularly notify our governmental
clients of items relevant to their operations. The following four pages present our
Los Angeles office public sector client matrix, indicating the types of services Peat
Marwick has provided, and the extent to which these clients have received
CSMFO/GFOA awards.
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We encourage you to contact any of our clients regarding the satisfactory delivery
of our services. '
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SCOPE OF SERVICES
I - UNDERSTANDING OF mE ENGAGEME.Nl
OUr understanding of the work to be performed has been gained from:
· Our many years of experience in performing auditing and consulting
engagements for redevelopment agencies
· Our in-depth understanding of Redevelopment Agency Audit
Guidelines and other professional and legal literature relevant to the
Redevelopment Agency of the City of San Bernardino
· Other relevant information accumulated from'many sources.
We firmly believe that our prior experience with redevelopment agencies and
with the City of San Bernardino, coupled with our unique approach to auditing,
will result in a timely. efficient and cost-effective audit for the Redevelopment
Agency of the City of San Bernardino with a minimum of disruption to ongoing
day-to-day operations. The proposed transition audit year timetable is shown on
the facing page.
BASIC REQUJR~MENTS
Minimum Scope
We understand that we shall be expected to perform the following audits and
professional work:
.
"Overall Level" - Annual Financial Report - Our primary auditors'
report will be directed at the Agency's general purpose financial
statements but will also include our auditors' opinion on the
supplemental financial information in the Annual Financial Report.
We will also type and print the Annual Financial Report.
"Supplementaty Level" - We will prepare, type and indude in the
Agency's annual financial statements separate supplementary
financial statements of the following redevelopment project areas
and programs of the Agency:
Administration
State College Redevelopment Project Area
Central City North Redevelopment Project Area (incluliing an
audit of the Main Street Program) .
Operation Second Chance
Central City West Redevelopment Project Area
Southeast Industrial Park Redevelopment Project Area
.
33
. ,
---- - _._-~
Parking District - Parking District Expansion
Northwest Redevelopment Project Area
Mortgage Finance Issue of 1979 - City Wide Mortgage
Revenue Issue of 1980 (Refunded this year)
Industrial Development Bonds
Tri City Redevelopment Project Area
Uptown Redevelopment Project Area
South Valle Redevelopment Project Area
Central City Projects Redevelopment Project Area
Mt. Vernon Proposed Project Area
Low IModerate Housing Fund (20% set aside)
Central City Security.
These statements will be covered by a standard supplemental
information paragraph in our auditors' report.
. Redevelopment Asenc;y Compliance Report - We will perform
sufficient procedures relative to applicable California redevelopment
agency law in order for us to issue a report on compliance with such
law,
. Deadlines - We will produce all required reports according to the
deadlines outlined in your Request for Proposal, unless delays beyond
our control postpone their issuance.
. Manaeement Letters - Additionally, we shall prepare our customary
letters to management addressed to the Agency's Board of Directors,
which shall address our observations concerning the systems of
internal accounting control as well as areas of potential economy and
efficiency. In conjunction with our evaluation of the systems of
internal accounting control, we shall perform an evaluation of the
accounting controls within the Agency's data processing systems,
Any comments arising from this evaluation shall be addressed in our
management letter.
. State Controller's RllJ'Orts - We will prepare the annual State
Controller's financial transactions report for the Agency.
We understand that if we are engaged, we will be contracting for professional
services for the fiscal years ending June 30, 1990 through June 30, 1992.
The primary purpose of our audits will be, of course, to be able to render our
opinions as to the fairness of presentation of the various financial statements of
the Redevelopment Agency of the City of San Bernardino.
34
A J I
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Management can be assured that our audits will be conducted in accordance with
generally accepted auditing standards and will include those auditing procedures
that we consider necessary in the circumstances. Our opinions will state whether
or not the financial statements discussed previously have been prepared in
accordance with generally accepted accounting principles.
AGENCY STAFF ASSISTANCE
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In developing our testing approach, we will arrange for assistance in typing of
confirmation requests, obtaining supporting documents and the like. Specifics of
such assistance will be agreed upon and confirmed in writing well in advance of
our needs so that Agency personnel will have ample time to complete agreed-
upon work, thereby avoiding inefficiency and day-to-day ineffectiveness. We
assume that the Agency prepares and retains account reconciliations and we will
request and use copies for these schedules for our audit working papers. Thus, the
preparation of additional, special "auditor only" schedules and analyses by Agency
staff will be kept at a minimum. It is our earnest intent to minimize disruption of
the Agency's accounting routine.
II - AUDIT APPROACH
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Peat Marwick utilizes a systems-based, control-oriented audit technique which we
call SEADOC, "Systems Evaluation Approach - Documentation of Controls." The
use of SEADOC allows our auditors to obtain an overall understanding of the
Agency and its operating environment, while at the same time considering how to
most efficiently utilize the Agency's accounting information system. The result of
using SEADOC is that appropriate personnel resources can be directed to devote
audit attention to the critical points in the transaction cycle, rather than to
spending significant time examining transactions that have little importance to
the financial statements.
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With SEADOC, working papers and flowcharts are structured to assure co~sistency
and also force the preparer to focus on areas where strong controls are present and .
weak or nonexistent controls need improvement or implementation. Thus, we
shall be in a position to assist the Agency in identifying control weaknesses and
developing practical corrective measures.
The implementation of our audit approach to the Agency can be divided into the
following phases:
· Phase I - Planning
· Phase II - Interim Audit Work
· Phase III - Final Audit Work
· Phase IV - Reporting.
35
Attachment I
[!
Phase I - Planning
The planning phase lays the foundation for the direction of our audit efforts. It
encompasses the following steps:
· Review Prior Audit Activities - We will review reports and audit
working papers relating to the prior year audit, interim and year-end
test work and reports issued by state auditors, if any. This review
process will focus on:
Areas of audit concern
Potential reliance on work of other auditors to eliminate
duplication of procedures
Status of prior year findings contained i.n management letters,
compliance reports and external audit reports.
Expand Our Understanding of the Agency and the Qperating
Environments - We will promptly gain an understanding of the
Agency and the conditions under which it is presently operating. We
will do this by accumulating and reviewing applicable background
information pertinent to the Agency, its fund structure. A sample of
such background items includes:
Applicable state legislation
Organization structure
Minutes of the Board of Directors
Ordinances and bond covenants
Policies and procedure manuals, administrative codes, rules
and regulations
Long-range plans of the Agency
Operational and capital budgets
Description of the Agency's financial and other information
systems
Recent financial statements and key operating statistics
Contracts and major commitments
Grant agreements
Cost allocation plans
Possible effects on the Agency of the actions of regulatory
agencies.
.
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· Develop Auditor Transition Plan - The product of these planning
efforts in the first year will be the development of a smooth audit
transition plan that minimizes any "start-up" concerns that the
Agency may have. In subsequent years, this procedural phase shall be
modified to serve as an update of the preceding year.
36
Attachment I
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Develop a More In-Depth Understanding of Areas of Concern _
Through our background knowledge of the Agency, and as a result of
our fact-finding process, we will be in a position to meet with Agency
management to discuss areas that might have a significant impact on
timing and completion of the audits or that may be of special concern
to management. We will review such areas in-depth to obtain an
early understanding and resolution of any "problem" areas that may
impede our progress and to develop our overall approach so that the
Agency will have sufficient time to develop the data necessary for
completion of the audit with a minimum amount of disruption of
the day-ta-day routine.
Conduct Detailed Meetings with Agency Officials - At this point, we
would have a detailed planning meeting(s) with appropriate Agency
officials. The agenda would include, but need not be limited to, the
following:
The application of generally accepted accounting principles
Initial audit concerns
Concerns of Agency management
Report requirements, refinements and deadlines
Initial audit approach and timing schedule
Assistance by Agency personnel
Establishment of principal contacts
Space and equipment needs
Progress reporting process.
Review Data Processing Activities - Our planning process will
include a specific review of computer activities performed by Agency
personnel. We will review the internal controls and operations in
order to accomplish the following:
Determine the organization and operational controls over the
data being processed
Evaluate the degree of "control consciousness" among
personnel
Determine the potential impact of general control strengths
and weaknesses
Consider the possibility of management override of controls.
The review would also encompass the building of an electronic data
collection profile, listing such things as capabilities, output and uses
of the derived information. We would then review the following
general controls as they specifically relate to the Agency:
Organization and operation of the data processing function
System development and maintenance controls
.
.
37
Attachment I
Hardware controls
Access controls
Data and procedural controls.
Our principal sources of information for this review would be interviews with
responsible accounting personnel and personnel from computer operations,
reviews of program documentation for the Agency's system as well as direct
observations made by our personnel.
Conduct Analytical Reviews - At this point, the audit team will use
our analytical review techniques to identify other areas that might
require attention. Until the year-end account balances are finalized,
our review will focus on the budget compared to actual/projected
information. We can thus identify certain of the more sensitive areas
to determine whether they are indeed areas requiring extra attention.
We will also focus on unusual fluctuations occurring within
individual funds to identify accounts and areas which merit further
investigation.
Identify Maior Areas of Audit Concern and Define the Major Audit
Objectives - Based on our understanding of the Agency's operating
environment, our analytical review and other planning procedures,
we will meet with Agency personnel to highlight areas to be
emphasized during the audit, concentrating on the identified areas of
audit concern and areas we know are important to Agency officials.
Some of our preliminary audit concerns are elaborated as follows:
Material correctness of prior year reported financial position
Proper accounting for and disclosure of joint venture activities
The accounting for self-insurance
All matters of compliance with GASB statements and
interpretations
Only authorized personnel properly hired are on the payroll
Purchases are authorized and within budgetary limitations
Encumbrances and liabilities are recorded and charged to
proper budgetary accounts
Proper accounting for equipment and building leases
Proper recording of outstanding obligations.
· Discuss and Agree Upon Financial Statement Formats - We will
work directly with senior finance personnel to discuss financial
statements and footnotes for the year ended June 30, 1990, in
accordance with all authoritative accounting statements and
interpretations. Accordingly, we would meet with senior officials at
the end of the planning phase to discuss and agree upon the format
for the individual and general purpose financial statements and any
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38
Attachment I
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additional requirements that may be relevant because of recent or
pending professional pronouncements. (See "Phase IV - Reporting"
for a more in-depth discussion of our financial reporting capabilities.)
· Develop Audit Plan - It is our policy to prepare a formal memoran-
dum or audit plan for each of our engagements. Considering the
diversity of this particular engagement, a formal audit plan is
especially needed to inform all parties as to our intent, deadlines and
the like. We intend to develop a plan that is capable of distribution to
senior management of the Agency and engagement team members.
With this plan in hand, our progress can be periodically evaluated
and assessed. Also, client/auditor communication can be greatly
facilitated.
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Phase II - Systems Evaluation
The steps included in this phase are as follows:
· Obtain Understanding of Each Transaction Cycle and Audit Area _
Our systems evaluation approach enables us to obtain a better
understanding of the various transaction cycles and subcycles and
how they relate to each other. By using flowcharting techniques for
each cycle, we will identify the critical points in the flow of financial
information. Our flowcharting technique, SEADOC, was only
recently enhanced to become the simplest yet most advanced method
of systems documentation utilized in the public accounting
profession today. Our basic technique begins with information
contained in the financial statements and traces such information
back to source data. This process is infinitely better than the
traditional tedious method of going from source data to financial
statements.
· Implement SEADOC and Flowchart Significant Accounting Cycles _
Our audit team will apply our SEAOOC procedures discussed earlier .
to the Agency's significant financial transaction cycles.
· Develop SEACAS Ap,plications - SEACAS (Systems Evaluation
Approach - Computerized Audit Support) is a microcomputer-based
audit support system developed by Peat Marwick to assist our field
auditors in doing their jobs faster and more thoroughly.
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39
Attachment I
Phase III - Testing
The third phase of our audits will be the testing, or traditional fieldwork, phase.
The testing phase consists of two types of tests - compliance and substantive:
· Compliance Testing - The purpose of the compliance tests will be to
determine whether the expected strengths within the systems are
functioning as described.
· Substantive Testing - The purpose of the substantive tests will be to
provide reasonable assurance of the validity of the information
produced by the accounting system.
· Statistical Auditing - The use of statistical sampling techniques has
been commonplace in auditing for many years, but has only recently
advanced to its current state, primarily as a result of computerized
applications. Highly sophisticated statistical sampling programs
involving complex mathematics have been feasible to the field
auditor only through the use of computerized software packages.
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Identify Internal Control Strengths and Weaknesses - We will
identify the strengths and weaknesses in each of the transaction
subcycles and subaudit areas that have a bearing on the audit
objectives. This identification of internal control strengths and
weaknesses will enable the audit team to determine the emphasis to
be placed on audit testing. It will also serve as a basis for the
development of conclusions and recommendations regarding
weaknesses in the systems of internal accounting control and
opportunities for improving efficiency and effectiveness.
Develop Tailored Audit Programs - Our engagement service team
will develop tailored audit programs based upon applicable single
audit guidelines, the identification of internal.control strengths and
reference to our comprehensive "State and LOcal Government
Practice Guide." Our audit programs are adapted from our
comprehensive governmental audit program with additions,
deletions and revisions made as necessary to tailor the program into
an efficient and effective document addressing the audit objectives,
issues and systems unique to the Redevelopment Agency of the City
of San Bernardino. Our audit program will encompass auditcprocedures applicable to utilities, redevelopment agencies and
financing authorities and will include appropriate single audit as well
as normal compliance tests for determining if the controls are
properly functioning. Substantive tests for testing account balances
will be modified, if necessary, once the results of the compliance tests
are evaluated.
.
40
Attachment I
Cognizant agencies prefer a statistical approach to auditing. We, in
turn, recognize the value of statistical sampling for governmental
audits and have identified specific audit areas where it can be used to
increase audit efficiency without reducing effectiveness. We plan to
use statistical sampling techniques in our audit of the Agency's
financial statements to the maximum extent feasible.
I
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Phase IV - Re,portini
The last phase of our audit cycle is, of course, the reporting phase. Because of our
emphasis on early problem resolution in the planning phase of the audit and
extensive interim test work, our final audit fieldwork will be mainly concerned
with reviewing the fair presentation of the final numbers t1).at will appear in the
annual financial reports. Throughout the final phase, the engagement partner
and manager will monitor and review the work. The critical audit areas of each
fund audited will be reviewed in the field by the en~a~ement partner.
We will work closely with Agency personnel to prepare the annual financial
statements. Prior to signing of our independent auditors' reports, a second Peat
Marwick partner will "cold" review the draft reports and other documents in
order to evaluate the professional excellence of the examination. He will then
give his concurrence as to the propriety of the independent auditors' reports.
Every effort will be made for early delivery of the reports to ensure prompt and
satisfactory professional service.
As suggested previously, two factors enable the timely completion of our audit
efforts. The first is the way we have planned the audit, especially during the
critical testing phase. The second factor is our commitment that by the time we
enter the reporting phase of our audits, we will have already discussed and
reached an agreement on the format of each report we shall be called upon to
issue.
u
The final reporting element is, of course, our auditors' reports. It is premature at
this time to speculate on the content of the auditors' reports. However, we expect.
to be able to discuss the tentative content of the auditors' reports well in advance
of the issuance of such reports. In short. we expect no sw:prises.
MANAGEMENT LElTERS
We feel that management letters are of eQual importance with our opinion on the
financial statements: accordingly, we devote considerable attention to developing
meaningful comments to management. As auditors for the Agency, we will be
interested in the Agency's overall success as an efficient, properly controlled and
cost-effective unit of local government. Therefore, you can expect us to offer
constructive suggestions regarding your operations. Indeed, while the profit
motive is not the paramount objective of governmental units, this does not lessen
41
Attachment I
the need to view the Agency as a business - and one that should be effectively and
efficiently operated. Thus, we prefer to view management letters as more than a
vehicle for citing and eliminating weaknesses in the system of internal accounting
control. Our management letters place heavy emphasis on the operations side of
the governmental unit, and our suggestions for improvement are designed to
improve overall management and result in a better use of resources.
Our general approach to the preparation of a management letter includes the
following:
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A meaningful management letter does not just appear at the end of
an audit; its preparation is a continuing process throughout the
course of the audit. Indeed, to be most beneficial, the letter to
management should be issued while the audit'is in proceSs, not well
after the fact, as is often the case. We emphasize the importance of
the management letter with the entire audit team and believe this
continual awareness encourages the audit team to view audit
situations in terms of constructive management letter comments.
Our partners and mana~ers devote a si&nificant amount of time to
our mana~ement letters to help ensure that events are properly
interpreted and that suggestions are practical and cost-effective. In
addition, we utilize specialists from our Management Consulting
Department to fully develop a comment when necessary.
All sug~estions are reviewed in draft form first with the individual
who would be immediately responsible for implementing the
suggestion and then with the top financial official of the Agency.
.
.
COMMUNICA nONS
The final element in our work plan is the reporting to Agency officials overseeing
the audit in order to apprise them of our progress. We obviously believe
communication is vital. We have stressed the importance of continuous close
relationships throughout this proposal and have indicated the various points
where we will meet for specific discussions and decisions.
Thus. we believe we should have regular progress meetings between our top
engagement personnel and the Agency's officials. It is our intent to use these
meetings to report:
· Accomplishments
· Outlook
· Problems that have to be resolved.
Further, the engagement partner and manager will keep appropriate Agency
personnel updated on a continuing basis.
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42
Attachment I
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PROPOSED FEES
BACKGROUND
We know from experience that our cost structure is comparable to that of other
major accounting firms. We believe that our rates are competitive, and we
constantly strive to maintain the lowest possible fee consistent with quality
professional services. A key factor, therefore, is the efficiency with which our
work is to be performed and how our time is spent. From the foregoing proposal,
the following features have been incorporated into our approach to achieve audit
efficiency and, therefore, serve to keep our fees to a minimum:
· Audit Approach - The use of our systems evaluation audit approach
and analytical review and statistical auditing techniques allows us to
maximize audit service at a reasonable cost.
n
r1
L
.
Team Approach - The engagement service team will be coordinated
under a formalized, precise audit plan that allows all engagement
participants to review the entire audit perspective to minimize audit
hours expended. The team will be closely coordinated and monitored
by the engagement partner and manager. The experience gained in
the 1990 audit will be used to our advantage in subsequent audits
through the continuity of personnel assigned.
Caliber of Personnel- KPMG Peat Marwick's policy dictates
employing and training outstanding individuals. Our training
programs are extensive and ongoing and lead to greater experience
and efficiency in conducting our services.
Coordination with Agency Personnel - Our approach includes, to the
maximum extent possible, coordinating our efforts with those of the
Agency's personnel to avoid the disruption of the Agency's daily
ongoing accounting operations. Such emphasis on effective
communication will facilitate meeting our scheduled deadlines.
.
.
AUDIT EMPHASIS AND OUR VALUE-ADDED APPROACH
As indicated in our proposal, our client service approach to the Redevelopment
Agency of the City of San Bernardino audit goes beyond the traditional audit
emphasis. We truly believe that our purpose is to help and to add a measure of
value to the Agency. Because of this, we see the need to structure an audit
approach that recognizes the unique nature of the Agency.
43
Attachment I
fr
IJ
First, in rendering our independent auditors' opinions on the various financial
statements of the Agency (including Single Audit), we must measure audit risk.
This is accomplished by assessing the materiality of financial transactions in
relation to the financial statements taken as a whole. Thus, our efforts are truly
focused on determining the fairness of the financial statements.
Such a traditional singular approach, however, is inadequate for the Agency,
considering the exposure and potential negative public opinion that could result
from even the smallest misuse of funds. Thus, we believe that in assessing audit
risk, we must also consider such public exposure as the second purpose of our
examination. Accordingly, we believe that we should balance our value-added
approach to extend beyond traditional audit efforts to assess the transactions,
systems and controls side of the operations of the Agency and thereby provide
increased assurance that financial activities are appropriate.
i
\'
~I
FEE ANALYSIS
I
I'
It is apparent that Agency's management are cognizant of their responsibilities to
manage the Agency's resources and to obtain value in exchan~e for such resources.
Value is much more than out-of-pocket costs. It includes the effective use of
Agency personnel, it includes qualitative evaluations of advice, counsel and
service, and it includes a return of investment. In evaluating our fees, we ask that
the Agency also consider the following factors in establishing the degree of value
we might add to the Agency:
[1
The Agency's needs when compared with our engagement team's
demonstrated redevelopment agency experience
Our efficient audit methodolo~. precise audit focus and degree of
audit coverage
The current state of our audit technology. its attendant efficiencies
and the degree to which that technology can be placed in the hands of
the Agency for its own use in the future
Our proven abilities to deliver timely, quality advice, counsel and
service
· Our demonstrated commitment to local government in general and
to the City of San Bernardino in particular.
The Redevelopment Agency of the City of San Bernardino will be a "Valued
Client" to KPMG Peat Marwick. It goes without saying, therefore, that we shall
establish our rates as low as possible, consistent with providing the quality service
that is KPMG Peat Marwick's trademark.
.
.
! ,
.
u
.
.
44
Attachment I
FEE COMMITMENT
We believe that our performance will dictate the establislunent of a multiyear
relationship with the Redevelopment Agency of the City of San Bernardino. Our
estimates of the time we shall spend (and the fees we shall charge) anticipate this
long-term relationship. We are prepared to commit to a fixed fee on all work
undertaken by KPMG Peat Marwick. on behalf of the Redevelopment Agency of
the City of San Bernardino. Such fee includes all out-of-pocket expenses and is
summarized as follows:
1990
1991
1992
29-500
3,soo
33;000
31,500
3,900
Annual audit, including compliance opinion $ 29,500
Stale Controller's report 3-500.
$ 33,000
35,400
Our fees have been substantially discounted from our standard rates as an
indication of our sincere desire to obtain the Agency as a client. Shouig our actual
hours be less than antici.pated. such savinss wiU be passed along to the Aieney.
We will bill the Agency monthly based upon the percentage of the audit
completed to date, with a final bill submitted upon final report delivery.
The above fee estimates for the annual audit, including the compliance opinion,
are based on the following anticipated distribution of hours per staff classification:
Partners
Managers
Senior accountants
Staff accountants
Assistant accountants
30
60
240
200
180
710
,
,
45
Al-lo.cAl'YJe,,+ T
Should the Agency request accounting and auditing services for other special
services rendered (not in connection with the aforementioned services), our fees
will be estimated using the hourly rates as follows:
Partners $ 125
Senior Managers 85
Managers 70
Supervising Senior
Accountants 45
Senior Accountants 40
Staff Accountants 34
Assistant Accountants ' 30
l
I
nl
Fees for services utilizing our management consulting personnel (not in
connection with the aforementioned services) will be negotiated at such time as
they are requested. Prior to commencing any special work, we would meet with
appropriate Agency personnel to review the scope of the proposed work and
provide an estimate of our fees.
n
"
I
lJ
1
I
46
Attachment I
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Appendix A
RESUMES OF PROPOSED ENGAGEMENT STAFF
Attachment I
~ -
-
THOMAS W. SNOW - En~agement Partner
Firm Position
Mr. Snow is a Partner in the Los Angeles office of KPMG Peat Marwick.
Client Experience
Mr, Snow has extensive experience with and responsibility for a variety of public
sector and commercial clients. He is a Computer Controls Specialist responsible
for administering the public sector auditing and computer auditing programs in
the Los Angeles office. He also serves as the Regional Public Sector Audit
Coordinator and Technical Adviser to our other offices in the 11 western states. A
partial list of Mr. Snow's engagement responsibilities includes:
Public Sector Clients
.
.
rl .
.
.
.
.
.
.
.
.
.
.
City of San Bernardino
City of Burbank, including redevelopment agency.
City of Carson, including redevelopment agency.
City of Culver City, including redevelopment agency.
City of EI Segundo
City of Inglewood, including redevelopment agency
City of Long Beach, including redevelopment agency.
City of Paramount, including redevelopment agency.
City of San Luis Obispo, including redevelopment agency.
City of Santa Barbara, including redevelopment agency.
City of Santa Clarita
City of Solvang
City of South Pasadena - including redevelopment agency.
· City of Upland, including redevelopment agency.
· County of Imperial
· Grand Juries of the Counties of Los Angeles, Orange, Ventura,
Riverside and Santa Barbara
· Los Angeles County Transportation Commission.
A-I
Attachment I
[I
Private Sector Clientele Industry Groupings
· Computer service bureaus - operational/control reviews
· Insurance (life and property/casualty)
· Banking
· Real estate development
· Import/export
· Manufacturing.
Professional and Educational Background
Mr. Snow is a member of the American Institute of Certified Public Accountants,
the California Society of Certified Public Accountants, the EDP Auditors
Association, the Government Finance Officers Association (GFOA) and the
California Society of Municipal Finance Officers (CSMFO). Mr. Snow has served
on the GFOA's Special Review Committee for the Certificate of Conformance
Program for a number of years. Mr. Snow has served as an instructor for KPMG
Peat Marwick's governmental auditing staff training programs and currently
serves as a member of the California Society of CPA's Statewide Committee on
Governmental Accounting and Auditing. He has also spoken on numerous
occasions to public sector and commercial accounting groups on auditing and
accounting topics and has instructed a course at UCLA in governmental
accounting.
Mr. Snow has a bachelor of science degree in accounting from Weber State College
and a master's degree in business administration from the University of Utah.
· CSMFO/GFOA award winner.
A-2
Attachment I
-
STEVEN R. KAY - Preissuance Review Partner
Firm Position
r
Mr, Kay is a Partner in our Los Angeles office. He is a designated Computer
Controls Specialist and a Statistical Audit Specialist in KPMG Peat Marwick's local
offices. Mr. Kay has been with KPMG Peat Marwick for over ten years.
Client Experience
Mr, Kay has extensive experience in several industry groupings, including the
following public sector and not-for-profit institutions:
Public Sector Clients
· City of San Buenaventura - all aspects*
· City of Thousand Oaks - all aspects*
· City of Camarillo - all aspects*
· City of Commerce - all aspects*
· City of Glendale - all aspects
· City of Monterey Park - all aspects*
· City of Redondo Beach - all aspects*
· City of Santa Monica - all aspects*
· Los Angeles Council of the Boy Scouts of America (one of the largest
Boy Scout Councils in the world).
Private Sector Clientele Industry Groupings
· Insurance - all types
· Heavy manufacturing
· International trade
· Securities broker/dealer operations.
Professional and Educational Background
Mr, Kay is a Certified Public Accountant in the state of California. He is a member
of the Government Finance Officers Association (GFOA), the California Society of
Municipal Finance Officers (CSMFO) and serves as an instructor in KPMG Peat
Marwick's local government staff training programs, He also serves as a member
on the GFOA Special Review Committee and CSMFO Review Committee.
A-3
Attachment I
-
Mr. Kay received a bachelor of science degree from the University of California,
Riverside and a master's degree in business administration from the University of
California, Los Angeles.
.. GFOA/CSMFO award winner.
I
l
A-4
Attachment I
-
DEREK HANWAY - En~agement Manager
Firm Position
Mr, Hanway is a Senior Manager and Computer Controls Specialist in the Los
Angeles office of KPMG Peat Marwick.
Experience
Mr. Hanway has extensive experience in several industries, including the
following:
Public Sector Clients
r
City of San Bernardino
City of Burbank, including redevelopment agency.
City of EI Segundo
Oty of Inglewood, including redevelopment agency
City of Palos Verdes Estates.
City of Paramount, including redevelopment agency
City of Rancho Palos Verdes, including redevelopment agency.
City of Rolling Hills Estates
Oty of Upland, including redevleopment agency.
Sanitation Districts of the County of Los Angeles.
Los Angeles County Transportation Commission
Community Development Commission of the County of Los
Angeles, including redevelopment agency"
· Burbank-Glendale-Pasadena Airport Authority,
.
.
.
.
.
.
.
.
.
.
.
.
Commercial Clientele IndustJ:y Groupings
· Computer service bureaus
· Heavy manufacturing
· Nonprofit organizations
· International trade.
A-5
Attachment I
~
Professional Activities
n
Mr. Hanway is a Certified Public Accountant in the state of California and a
member of the American Institute of Certified Public Accountants, the California
Society of Certified Public Accountants, the Government Finance Officers
Association and the California Society of Municipal Finance Officers. He is also a
member of the Professional and Technical Standards Committee of the California
Society of Municipal Finance Officers, the Los Angeles Chapter of the California
Society of CPA's Committee on Governmental Accounting and Auditing and the
GFOA's Special Review Committee. He has served as an instructor for the
AICPA's course on Single Audit and governmental accounting training courses
conducted for the City of Los Angeles' accounting staff and internal audit
personnel.
Mr. Hanway has served as an instructor for KPMG Peat Marwick's Government
Audit Training Level II program. He has spoken at the California Society of
Municipal Finance Officers, Southern Chapter meeting on the subject of Single
Audit. He has served as an instructor for governmental accounting at California
State University, Los Angeles.
Education and Continuing Education
Mr. Hanway received a bachelor of science degree in accounting from Ambassador
College and a master of business administration degree from California State
University, Los Angeles.
· CSMFO/GFOA award winner.
A-6
Attachment I
SCOTT SMITH - In-Char~e Accountant
Firm Position
Mr, Smith is a Senior Accountant in the Los Angeles office of KPMG Peat
Marwick.
Client Experience
Mr. Smith has experience in public sector and commercial engagements. A
sample of these clients includes:
Public Sector Clients
n
,
· City of Long Beach, including redevelopment 'agency"
· City of Bellflower - all aspects"
· City of Burbank, including redevelopment agency"
· City of Paramount, including redevelopment agency".
Private Sector Clientele Industr.y Groupings
· Banking
· Real estate
· Savings and loans
· Airlines.
Education
Mr. Smith has a bachelor of science degree in accounting from California State
University, Long Beach.
" CSMFO/GFOA award winner.
A-7
~
-
- -
---
-
--
--
SALLY KAWANA - In-Char~e Accountant
Firm Position
Ms. Kawana is a Senior Accountant in the Los Angeles office of KPMG Peat
Marwick.
Client Experience
Ms. Kawana has in-charge experience in public sector and commercial
engagements. A sample of these clients includes:
Public Sector Clients
/l
· City of San Bernardino
· Community Development Commission of the County of
Los Angeles, including redevelopment agency~
· United Community and Housing Development Corporation.
Private Sector Clientele Industry Groupings
· Construction
· Real estate
· Savings and loans.
Education
Ms. Kawana has a bachelor of science degree in accounting from California State
University, Los Angeles.
~ CSMFO/GFOA award winner.
1
A-8
Attachment I
-
-
--
-
~
--
ROBERT E. GOLDSTEIN - Resource Pool
Firm Position
r I
Mr. Goldstein is a Tax Partner in the Los Angeles office of KPMG Peat Marwick.
He is one of a small group of KPMG Peat Marwick tax professionals nationwide
who provide the Firm's clients with extensive technical resources for the
Employee Retirement Income Security Act of 1974 (ERISA) and related compen-
sation issues. He transferred to Los Angeles in September 1983 from KPMG Peat
Marwick's Washington, D.C.-based National Tax Practice.
Mr, Goldstein frequently addresses business groups on tax issues affecting qualified
plans, executive compensation and fringe benefits, and he has published many
articles on these subjects.
Prior to joining KPMG Peat Marwick, he spent two and one-half years in the
National Office of the Internal Revenue Service, Employee Plans Division, where
he drafted regulations and issued private letter rulings.
Professional and Community Activities
Mr. Goldstein is a member of the American Bar Association, the District of
Columbia, Connecticut and Florida Bar Associations, and the Washington, D,C.
Society of Certified Public Accountants.
Education
He received a bachelor of arts degree from the University of Connecticut, a juris
doctor degree from Suffolk University and a master of law degree in taxation from
the University of Miami.
A-9
Attachment I
Firm Position
-
-
DONALD D. MOYER - Resource Pool
Mr. Moyer is the Firm's National Director of Economic Development, resident in
Houston, Texas. He has more than 20 years of results-oriented, top executive
leadership in economic development in four states and nationally. His
performance is marked by creative solutions for regions, communities or
companies beset by economic crisis or growth problems. He is a team builder,
program innovator, cutting edge international and domestic marketer, persuasive
salesman and leader.
Client Experience
KPMG Peat Marwick
[I
.,.1
August 1, 1988 to Present
.
Assisted an Asian company in locating a U.s. site, which
optimized its profit potential
Assisted a Latin American financial institution with a
feasibility study and strategy to expand operations in the
United States
Conducted an economic development study, strategic plan and
action agenda for a Texas city of 30,000
Assisted in the reorganization and development of a strategic
plan for a new policy board of a public economic development
authority in a Louisiana metropolitan area of 250,000
Delivered the keynote policy address to the annual meeting of
the State of Florida Economic Development Association
Lecturer and seminar leader for annual Pennsylvania Basic
Economic Development Course conducted by Penn State
University
Assisted with economic development credentials and
proposals for prospective KPMG Peat Marwick team
engagements in Arizona, Arkansas, California, Florida,
Georgia, Louisiana, Maryland, Michigan, Minnesota, New
Jersey, North Carolina, Pennsylvania, Texas and Utah.
.
.
.
.
.
.
Donald D, Moyer and Associates
President
January 1987 to August 1, 1988
· Prepared innovative international marketing strategy for
major southeastern city
· Caused the management of a large real estate firm to redefine
and refinance international marketing strategy
A-lO
Attachment I
~
,.
~
· Produced economic impact report, development strategy
agenda and an approved and funded targeted marketing
project for a major national health services and research
institu tion
· Designed a bistate, public/private export trading and marketing
corporation,
Houston Economic Development Council (HEDC)
President and Chief Executive Officer
n
1985 to 1987
.
Initiated programs providing Houston's first comprehensive
economic development effort
Created unusual three-tiered, domestic ,and international
marketing strategy (multilingual professional staff, 800
business volunteers and a massive community price
organization)
Generated constant volume of 120 to 140 qualified business
growth prospects, many of which have closed location or
expansion decisions in favor of the Houston area
Created innovative Japanese business marketing strategy
involving 150 local Japanese business firms; produced 10
qualified projects during 2 weeks in Japan; and helped close 5
new manufacturing and high tech investments in Houston
Exceeded fund-raising goal by $1.2 million in 1986 campaign
($7.2 million vs. $6 million goal)
Produced Houston's first strategic agenda for economic
development and won agreements for implementation.
.
.
.
.
.
I
Maryland Economic Growth Associates, Inc. (MEGA)
Director
1978 to 1985
.
Created effective statewide private sector organization for
economic development with dramatic results in marketing,
promotion and creation of competitive public policies.
Doubled annual private sector financial support and won
involvement by the CEOs of the state's largest corporations and
professional firms
Directed state-of-the-art, multimedia briefing and marketing
center for state, city and business community
Helped win $10 million annual increase in state funding for
economic development marketing
Marketed the final prime site and participated in most phases
of Baltimore's Inner Harbor development
.
.
.
A-ll
Attachment I
~
· Did enterprise zone investigations in England and Scotland to
support passage of Maryland State Enterprise Zone law
· Managed the Baltimore funding and corporate participation in
the Washington/Baltimore Regional Association
· Created innovative public/private international marketing
projects in Europe, using the Baltimore Symphony Orchestra,
and in Japan, using the Baltimore Orioles baseball organization
· While heading MEGA, the "private partner" in Maryland's
recent surge of economic growth and diversification,
supervised a two-year, $400,000 national competitiveness study
testing Maryland's development policies and programs against
those of the other 47 contiguous states. ,
Governor's Office of Economic and Community 1976 to 1978
Development, State of West Virginia
Director
[I
.
Totally reorganized state development activities into high-
impact, strategic and operating organization
Prepared and steered passage of all development legislation,
including the innovative "Community Partnership" program
and coal conversion technology incentive program
Negotiated state ownership and operating rights for all
property of branch of Western Maryland Rai1road, saving
thousands of jobs and opening new development along a 60-
mile rural valley
Created innovative industrial finance packages as Chairman of
West Virginia Economic Development Authority
Created and served on Governor's Economic Advisory
Council, West Virginia Labor Management Advisory Council,
West Virginia Water Development Authority and as Vice
Chairman of the West Virginia Housing and Development
Fund
Created Japan-targeted investment strategy and opened the
state's first marketing and sales office in Tokyo,
.
.
.
.
.
The J,L. Hudson Company (Detroit)
Vice President, Civic Affairs
· Introduced profitable CBD real estate strategy and management
system for $2 million annual company contributions
· Represented J.L. Hudson and retail interests in state capital and
Washington,
1975 to 1976
A-12
At-t.::lrhm""nt- T
The Greater Scranton Chamber of Commerce,
Scranton, Pennsylvania
Lackawanna Industrial Fund Enterprises (UFE)
Scranton Lackawanna Industrial Building Co. (SUBCO)
Lackawanna County Industrial Development
Authority (LCIDA)
Chief Executive Officer
I'
1973 to 1975
.
Reorganized and redirected the four related community
economic development companies which provided voluntary
organization and marketing, private financing, industrial park
and building sales, and leases and industrial bond financing
($35 million balance sheet)
"Business Newsmaker of the Year" award in 1975 by the "The
Scranton Times" for successfully recruiting 10 new industrial
projects
Created marketing campaigns for targeted domestic industries
and established a successful direct marketing strategy to Europe
Helped establish a foreign trade zone at the Wilkes-
Barre/ Scranton International Airport,
.
.
.
West Virginia Wesleyan College
Vice President for Development and Public Affairs
· Served under President John D. Rockefeller, IV with major
reorganization responsibilities, including: recruitment of
Academic V-P, Deans and key administrators; reorganization
of student recruiting and annual and special fund-raising;
founding of the Rural Development Institute; and teaching of
classes and leading of seminars in economic development and
community organization.
I
" I
1973
John D. Rockefeller, IV
Associate and Senior Economic Advisor
1970 to 1972
· Prepared "The Rockefeller Plan," a detailed statewide West
Virginia strategy for economic growth and diversification
· Managed Mr. Rockefeller's discretionary personal investment
portfolio.
A-13
Attachment I
Economic Development Council for
Northeastern Pennsylvania
Executive Director
1967 to 1970
· First full-time professional to head multifunction, volunteer
member staff organization and prepared first regional
development strategy. Basic directions and program continue
to present.
Professional and Education Background
Mr. Moyer has the following professional affiliations:
r:
Member, Emerging Opportunities Committee - American Economic
Development Council
Principal Staff Advisor to Chairman - White House Conference on
Balanced National Growth and Economic Development
Curriculum Advisory Board, Economic Development Institute,
University of Oklahoma
Member, National Council on Urban Economic Development
Represented CUED on one-week, on-site economic
development strategy consultation in Los Angeles County,
California
· Member, Urban Land Institute
· Associate, Academy for Contemporary Problems
· Member, Southern Industrial Development Council
· Member, Board of Trustees and Chairman of Finance Committee,
University of Scranton.
.
.
.
.
I I
He has made frequent presentations to regional, national and international
meetings on business and economic development. '
Mr. Moyer holds the following degrees:
· M.S.s. - Bryn Mawr College (highest honors in community
organization)
· B.D. - Lutheran Theological Seminary
· A.B. - Muhlenberg College.
A-14
Attachment I
PAUL 1. GARITY
Firm Position
Mr. Garity is a Principal in the Los Angeles office of KPMG Peat Marwick with
extensive experience in consulting engagements for public sector organizations.
He is currently the partner in charge of general management consulting for
private and public sector organizations.
Client Experience
Among the not-for-profit consulting clients that Mr. Garity is responsible for are
the:
Los Angeles Department of Regional Planning
Community Redevelopment Agency of the City of Los Angeles
Community Development Commission of the County of Los Angeles
Department of Water and Power
San Diego Unified School District
Scottsdale Unified School District
West Valley Community College
Southern California Rapid Transit District.
Among the client services which Mr. Garity has been responsible for are the
following:
.
.
.
.
n .
.
.
.
.j, I
.
Assistance in analyzing the justification for and in establishing
special assessment districts
Review of asset management organization, operations and strategies
of private and not-for-profit clients
Management audits of city and county agencies
Contracting out studies for county agencies interest in reducing direct
head count
Assisting not-for-profit clients in issuing request for proposals for
ground lease developments on underutilized properties
Litigation support on a number of cases involving analysis of damage
claims for lost profits for condemnation cases.
.
.
.
.
.
A-IS
Attachment I
Education
Prior to joining KPMG Peat Marwick, Mr. Garity was a financial analyst for IBM
Corporation, designing improved methodologies for pricing products and services
and monitoring the development and planning of a new computer system. His
previous work experience also includes strategic planning at Continental Group
and distribution control at a Ford Motor Company parts warehouse. Mr, Garity
holds a master of business administration from the Amos Tuck School of Business
at Dartmouth College and a bachelor of business administration degree from the
University of Massachusetts.
r
A-16
Attachment I
99th Congnou. 2d Sea;O" _
I
Union Calendar No. 580
- - - - - - - Ho... Report 99-970
SUBSTANDARD CPA AUDITS OF FEDERAL
FINANCIAL ASSISTANCE FUNDS: THE PUBLIC
ACCOUNTING PROFESSION IS FAILING THE
TAXPA VERB
FIFTY-NINTH REPORT
BY THE
COMMITI'EE ON GOVERNMENT
OPERATIONS
together with
ADDITIONAL VIEWS
\\If
OcToBER 7, 1986.--COmmitted to the Committee of the Whole House on
the State of the Union and ordered. to be printed
91-08J 0
U.s. GOVERNMENT PRIN11NG OFFICE
WASHINCTON : 1986
COMMITI'EE ON GOVERNMENT OPERATIONS
DON FUQUA, Florida
JOHN CONYERS, JR.. Michigan
CARDISS COWNS. IJljnoil
GLENN ENGUSH. Oklahoma
HENRY A. WAXMAN, California
TED WEISS. N.w YOI'k
MIKE SYNAR, Oklahoma
STEPHEN L, NEAL. North Carolina
DOUG BARNARD. Ja.. Georgia
BARNEY FRANK. M...chUMttl
TOM LANTOS. Calirorn~
ROBERT E, WISE, Ja.. Weal Vq;nia
BAIlBARA BOXER, California
SANDER M, LEVIN. Michilan
MAJOR R. OWENS. New YOI'k
EDOLPHUS TOWNS, New YOI'k
JOHN M, SPRA IT. Ja" South Carolina
JOE KOLTER, Penrwylvania
BEN ERDREICH. Alabama
GERALD D. KLECZKA. WiIconsin
ALBERT G, BUSTAMANTE, T....
MATl'HEW G. MARTINEZ. California
WIWAN M. JONIS, Grrwrol CoulIMl
8RPHEN M. DANJJ:l8, MitUJrity Stoff DiIYdor and Counul
JACK BROOKS, Texu, Chairman
FRANK HORTON. New York
THOMAS N, KINDNESS. Ohio
ROBERT S. WALKER. Pennsylvania
WlWAM F. CUNGER, Ja., Pennaylvania
ALFRED A. (ALl McCANDLESS. Ca.lifomia
LARRY E CRAIG, Idaho
HOWARD C, NIELSON. Utah
JIM SAXTON. New Jeney
PATRICK L, SWINDALL. Georria
THOMAS D, lTOM11lzLA Y, T....
JOSEPH J, llIoGUARDI. New York
RICHARD K. AIlMEY. T....
JIM UGHTFOOT. Iowa
JOHN R, M/1J.EJl. Waahinclon
BEAU BOULTER, Te...
JOHN E, GROTBERG. nIinoia
l.&GISLATlON AND NATIONAL SICUIUTY SUBCOMMIn'EE
DON FUQUA. Florida
HENRY A. WAXMAN, California
STEPHEN L. NEAL. North C.rolina
TOM LANTOS, California
JOHN CONYERS, .I.., Michigan
RICKARD C. BARNII, Sklff Dirwtor
CHRIS P.. Coona, Prof~i'NUd Staff M~mMr
JACK BROOKS. TeU&, Chairman
FRANK HORTON, New York
JIM SAXTON. New Jeney
JOSEPH J, llIoGUARDI. New Yo,k
THOMAS D. tTOMI DELAY. Texas
(II)
LETTER OF TRANSMITTAL
Hon. THOMAS P. O'NEILL, Jr.,
Speaker of the House of Representatives,
Washi"8ton, DC.
DEAR MR. SPEAKER: By direction of the Committee on Govern-
ment Operations, I submit herewith the committee's fifty-ninth
report to the 99th Congress. The committee's report is based on a
study made by its Legislation and National Security Subcommittee,
JACK BROOKS, Chairman.
HOUSE OF REPRESENTATIVES,
Washi"8ton. DC, October 7. 1986,
(JIB
CONTENTS
I, Summary ,.................,...............,............,........,......,....,...............,.........,........'........,
II, H.arings ',.....,....,',...,',.............,..............."............,...",.,.........,...'.....,...,......,..........
III, Introduction ....,............,....,',..,',...,....,...........".........,............................,.....".........,
IV. DiscUB&ion ...............................................................................................................
A. Generally accepted Government auditing atandarda .......................
B. Inspector ,eneral reviews of CPA audita-MrioUl deficiencies
are found with appalling frequency..................................................
Inspector general quality review procedures ....._...................
ReSults of inspector leneral desk reviews ................................
Results of inspector general quality control reviews..............
The need to revise audita undennines the audit procea ......
C, GAO's ......m.nt or CPA audita-34 percent laillo comply with
generally accepted Government auditing ltanclarda......._.............
D, CallIeS orsubotand.rd CPA audita,....,.................,....,.,..,.......,.,...,.,....,
Unfamiliarity with governmental .uditing..............................
Failure to undentand the duaJ client relationahip in gov.
ernmental auditing ...................................................................
Lax attitude towarell governmental auditing ..........................
Inadequate disciplinary procedures ...........................................
Weak audit procurement procedures ........................................
E. Current and proposed efforts to improve CPA audit quality..........
Inspectors general .........................................................................
General Accounting Office ..........................................................
National Association of State Boards of Accountancy...........
American Institute of ('..ertified Public Accountants ..............
F, Improving CPA audit quality through th. Singl. Audit Act.......,..
V. Conclusion...............................................................................................................
V/. Findings",.",....".."..,...."............,.............,.,............",...,',......'...........'...,.,..,..........,
VII. Recommendations..................................................................................................
VIEWS
Additional views of Hon. Joseph J. DioGuardi .......................................................... 30
lVI
....
1
2
2
3
3
4
4
5
5
8
8
10
11
12
12
13
17
18
18
20
21
22
25
'n
'n
28
Union Calendar No. 580
99TH CoNGRESS I
2d Session
HOUSE OF REPRESENTATIVES I
REPORT
99-970
SUBSTANDARD CPA AUDITS OF FEDERAL FINANCIAL AS-
SISTANCE FUNDS: THE PUBLIC ACCOUNTING PROFES-
SION IS FAILING THE TAXPAYERS
OcTo... 7. 1986,-<:Ommitted 10 the Committee of the Whole HOUle on the State of
the Union and ordered 10 be printed
Mr. BROOKS, from the Committee on Government Operations,
submitted the following
FIFTY-NINTH REPORT
together with
ADDmONAL VIEWS
BASED ON A STUDY BY THE LEGISLATION AND NATIONAL SECURITY
SUBCOMMl"ITEE
On September 23, 1986, the Committee on Government Oper-
ations approved and adopted a report entitled "Substandard CPA
Audits of Federal Financial Assistance Funds: The Public Account-
ing Profession Is Failing the Taxpayers." The chairman was direct-
ed to transmit a copy to the Speaker of the House,
1. SUMMARY
Audits performed by certified public accounting firms play a
vital role in efforts to assure accountability in the use of the more
than $100 billion in Federal financial assistance provided to State
and local governments each year, It is, therefore, absolutely essen-
tial that these audits be of high quality. Unfortunately, all too
often they are not, The committee's recent review documents that
an estimated 34 percent of CPA audits of Federal financial assist-
ance funds fail to meet generally accepted government auditing
standards,
The public accounting profession is not fulfilling its responsibil-
ity to the taxpayers. Congress will not tolerate continued sloppy,
unprofessional, substandard CPA audits of Federal tax dollars.
91-081
~
--
-
~
~
2
Dramatic improvements must be made in the quality of these
audits,
The public accounting profession, the General Accounting Office,
and the Federal Inspectors General have all undertaken efforts to
improve CPA audits of Federal financial assistance funds, While
these initiatives appear promising and are to be commended, add;,
tional corrective actions are needed. Above all, the accounting pro-
fession must impose Iltrict sanctions on CPAs who perform sub-
standard audits and make these disciplinary actions public knowl-
edge. Failure to take these steps could very well result in greater
Federal Government regulation of the profession.
D. H~NGS
On November 13, 1985 and March 19, 1986, the ~lation and
National Security Subcommittee held hearings to reVIew the qual-
ity of audits of Federal financial assistance funds performed by cer-
tified public accounting firms.' Witnesses in the first hearing in-
cluded Frederick D. Wolf, Director, Accounting and Financial Man-
lIgement Division, U.S. General Accounting Office; James B.
Thomas, Jr" Inspector General, U.S, Department of Education;
Richard p, Kusserow, Inspector General, U.S. Department of
Health and Human Services; and Paul A. Adams, Inspector Gener-
al, U.S. Department of Housing and Urban Development. Wit,
nesses in the second hearing included Charles A. Bowsher, Comp-
troller General, U.S. General Accounting Office; Herman J. Lowe,
Chairman of the Board of Directors, American Institute of Certified
Public Accountants; and Thomas lino, President, National Associa-
tion of State Boards of Accountancy.
m. INTRODUCTION
Over the past decade the Government Operations Committee has
devoted considerable time and effort to Improving Federal audit
policies and procedures, For example, it has played a lead role in
the establishment of the statutory Offices of Inspector General, in
the strengthening of audit resolution systems, and in the enact-
ment of the Single Audit Act of 1984."
In this report the committee turns its attention to another criti-
cal aspect of the audit function-the quality of audits of Federal fi,
nancial assistance funds performed by certified public accounting
firms.
The Federal Government provides State and local governments
more than $100 billion per year in financial assistance, Federal In,
spectors General aOa) and program managers rely heavily on
audits done by CPA firms to help them assure accountability in the
use of these tax dollars. In addition, this reliance on CPA audits
will increase as the Single Audit Act is implemented.
I Hean"" on "Quality or CPA Auditl of Federal Financial Aaiatance Funds," before the Leg_
illation and National Security Subcommittee of the Committee on Government OperatiON, No-
Yembet 18, 1985. and March 19. 1986. 99th Conar- (hereinafter cited u Hearings) Since the
hearina record will be pubJilheel .net the iIIuanc:e 01 thiI: report., refereneee ate to b. .teno-
paphic lranKTipt
t Under thf' Slngl.. Audit Act or 1984. 31 UB.C. 7501 ... 1Ilq., State and local rovernmenta R-
~ivilll $100.000 or more p.r year in Federal financial ..i.tance are required to obtain en inde-
ppnd~nl, OI'Ianizationwicle audit of their operationl, UIUaII)' 011 an annyal buia
3
In July 1984, committee Chairman Jack Brooks requested that
the General Accounting Office <GAOl conduct a comprehensive
review of the quality of CPA audits. This request was prompted by
earlier GAO reports identifying problems in CPA audits as well as
by concerns over CPA firms' ability to perform successfully the
major role envisioned for them under the Single Audit Act.
GAO's review represents the most extensive assessment of CPA
audit quality ever undertaken. The evaluation was done in two
phases. In the first phase GAO gathered and analyzed data on the
problems the lOa have identified in CPA audits; it also evaluated
the quality review systems used by Ileven lOa to monitor such
audits.' In the second phase, GAO conducted its own detailed qual-
ity review of a statistically Ilelected sample of 120 CPA audits.
IV. DIscuSSION
A. GENERAU.Y ACCEPTED GOVERNMENT AUDmNG STANDARDS
The Federal Government's auditing standards are specified in
the GAO publication, "Standards for Audit of Governmental Orga-
nizations, Programs, Activities, and Functions." These standards
are commonly referred to as "generally accepted government audit-
ing standards" or GAGAS. First issued in 1972, revised in 1974 and
1981, and currently under revision once again, the standards
"relate to the scope and quality of audit effort and to the charac-
teristics of professional and meaningful audit reports,'" The In-
Spector General Act of 1978, as amended, requires the lOa to
comply with GAGAS and to assure that non-Federal auditors in-
mlved in auditing Federal funds comply as welL In addition, the
Single Audit Act includes provisions requiring auditors performing
single audits to adhere to these standards.
The AICPA has issued standards applicable to audits of an orga-
nization's fmancial statements, and GAO has incorporated these
standards into GAGAS. However, GAO's standards for financial
statement audits-or financial and compliance audits as they are
referred to under GAGAS-eontain requirements that go beyond
those ~ified br the AICPA. An important difference is that
GAGAS require, m addition to an opinion on the auditee's fman-
cial statements, a statement on its internal accounting controls as
well as a statement on its compliance with applicable laws and reg_
ulations.
While there are differences between the AICPA's standards and
those issued bJ' GAO, Frederick D. Wolf, Director of GAO's Ac-
counting and Financial Management Division, explained in the
subcommittee's November 1985 audit quality hearing that these
differences are not as great as they might appear to be:
In regard to the issue of internal control and compliance
work and the difference between 80 called "commercial"
J GAO', review encompuled 46 regional officet of the Office of Iftlpector General at the fol.
lowing d!p8rtmenla and agencies: Department of Arric:ulture. Department of Education, Depart.
ment of Health and Human Services. Oeptlrtrnent of HOUIifll and Urban Development. DePart.
ment of t.bor. Oepertment of Trarwportation, and the Environmental Protection Alfney.
. "Standarda for Audit of Governmental Organizatiofll, Prop-atnI, Activitiel and Function....
Comptroller General of the United Stata, 1981 Revilion. p. 1.
- ~
-
~---
~
4
audit standards and any "government" audit standards, it
should be noted that the primary di&ti.nction i& in reporting
requirements-not audit requirements. All auditing stand-
ards require that important internal controls be evaluated
either directly through internal control reviews or indi.
rectly through expanded substantive testing, Likewise, if
significant funds are received under a contract, grant or
other similar arrangement which requires compliance with
specific contractual or legal terms, then compliance testing
is required since noncompliance can result in a significant
impact on the entity being audited.' [Emphasis added.]
B. INSPEcTOR GENERAL IlEVIEWs OP CPA AUD1T8-lIERIOUS
DEnClENCIES AIlE POUND WITH APPAU.lNG PIlEQUENCY
Testimony in the subcommittee's first audit quality hearing doc-
umented that Federal Inspector General reviews of audits per-
formed by CPA firms identify serious deficiencies with appalling
frequency. About 45 percent of the CPA audits that undergo de-
tailed quality control reviews are found to have quality problems,
and about one-half of these "problem audits" are not accepted by
the IGs until the firms: (1) clarify their reports, (2) provide addi-
tional documentation, or (3) do additional audit work. Some audits
are never accepted,' These fmdings prompted Chairman Brooks to
observe, "All too often, the Federal Government simply does not
get what it paid good money for-a quality audit done right the
first time.". The results of the lOs' reviews are discussed in great-
er detail below.
1118pector general quality review procedures
While CPA firms are ultimately responsible for the quality of
their work, the Inspectors General also play a vital role in assuring
that CPA audits of fmancial assistance funds meet required stand,
ards. The Inspector General Act of 1978. as amended, requires IGs
to "take appropriate steps to assure that any work performed by
non-Federal auditors complies with the standards established by
the Comptroller General. . .".
Inspectors General monitor the quality of CPA audits through
two types of reviews: (1) desk reviews, and (2) quality control re-
views. A desk review is a fairly limited examination primarily in-
tended to determine whether an audit report complies with applica-
ble standards. While the results of such reviews are often used to
identify audits requiring a more extensive evaluation, the desk
review process is not designed to provide a direct 8118e8Sment of the
actual audit work performed. A quality control review (QCR), on
the other hand, i& intended to provide such an 8118e8Sment, It in-
volves a detailed examination of an auditor's working papers to de-
termine whether the audit was performed properly.
. Hurinp.
-Ibid
'Ibid
. 6 U.S,C, App, 8.80<, 4(bKSI.
-
Ii
While QCRa are the more reliable indicator of audit quality, they
al80 entail far more time and effort on the part of the IOs. Thus,
while nearly all CPA audita submitted to the IOs undergo desk re-
views, only a relatively small percentage are sub.iected to QCRa, In
f18Cal year 1984, the 46 regional IG offices included in tbe first
phase of GAO's study performed desk reviews on 9,530 audit re-
' ports and QCRa on 885, or 9.3 percent, of these audita,'
The selection of audita for quality control reviews is generally
not done on a random basis, Instead, the IOs focus their attention
on audita they believe may have problems. Among the criteria used
in sel~ audita for QCRa are the quality of previous audita per-
formed by a particular firm, the amount of experience a firm has
in conducting audita under contract with an 10, and as noted
above, the resulta of desk reviews.
Results of inspector general desk relliews
The IOs identified problems in about 25 percent of the CPA
audita subjected to desk reviews in fISCal year 1984. In reviewing a
as.mple of 328 desk reviewed audit reports, GAO found that the IOs
had discovered problems in 84 of them. The deficiencies involved
the auditors' failure to comply with GAGAS provisions requiring
them to:
(1) Identify grantees' 'noncompliance with applicable laws
and regulati0ns-42 re~rts;
(2) Identify grantees internal controls studied and evaluat-
ed-19 reports;
(3) Exercise due professiOnal care in preparing audit re-
ports-65 reports; and
(4) State that their audita were performed in accordance
with GAGAS-18 reports.'.
Mr. Wolf testified that the resulta of the lOs' desk reviews, "indi-
cate a lack of !Iwareness by CPAs of GAGAI'? re~rting standards
and other reqwrementa for govenunental audita.' 11
Results of inspector general qU4lity control relliews
The Inspectors General found problems in about 45 percent of
the CPA audita that underwent quality control reviews in fISCal
year 1984. Furthermore, about one-half of these problem audits-22
percent of the total number reviewed-were not accepted by the
10s until CPA firms involVed (1) "clarified" the work they had
done; (2) provided additional documentation for the work done; or
(3) performed additional audit work. A few audit reports were
never accepted." According to Mr. Wolf, these resulta "indicate
that serious problems OCcur in substantial numbers of governmen-
tal audita" performed by CPA firms." On a similar note, James B.
Thomas, Jr., Inspector General at the Department of Education, ex-
pressed concern over the resulta of quality control reviews his
office performed on non-Federal audita of student financial assist-
. H!AJinp.
10 Hearinp. The .um of' NporU cited here exceedl 84 ..\IM many had probletDI related to
more than one atandard.
II He.rillp.
Ulbid.
Ulbid.
----
~
~
--
6
ance programs in fl8C8! year 1985. Pointing out that 30,7 percent of
the audits subjected to detailed review were rejected, Mr. Thomas
stated:
. . , I am very_concerned about the high rate of reports
rejected from QCRs. Our desk reviews serve as a broad
gauge by which we judge the basic acceptability of a
report. But, QCRs are our best measure of non-Federal
audit quality. In my opinion, we must all be deeply con-
cerned about the high rejection rate that this Department
has experienced. I believe this reflects a significant prob-
lem in the level of audit performance. . ."
The most common deficiency in CPA audits initially rejected by
the IGs was a lack of evidence to support the auditors' conclusions
and opinions. Such evidence is required by GAGAS. In his state-
ment, Mr. Wolf noted that in reviewing CPAs' working papers the
Regional Inspectors General (RIGs):
. . . found audits where there was little or no evidence
showing that the auditors properly planned the audit or
8upervised and reviewed the audit. RIGs found audits
where there was little or no evidence showing testing of
compliance with laws and regulations. At least two-thirds
of the audits with evidence problems involved problems in
the compliance area; either the evidence was lacking or,
more significantly, no or inadequate testing of compliance
was done. RIGs also found audits where there was insuffi-
cient evidence documenting the auditors' study and eval,
uation of internal controls; again, either the evidence was
lacking or the work was not performed. In addition, RIGs
found audits where there was insufficient evidence of audi-
tors' testing of fmancial operations or transactions,"
These fmdings are very disturbing, Furthermore, the situation is
probably even worse than Mr. Wolfs statement indicates. While in
many instances of inadequate evidence the auditors claim that the
required work was performed but simplr not documented properly,
the committee views this explanation WIth considerable skepticism,
As the following exchange from the hearing's question and answer
period indicates, GAO shares this skepticism:
Mr. BROOKS. Does the serious lack of documentation in
BOme of these audits raise doubts as to whether the, re-
quired internal control and compliance work was done at
all?
Mr. WOLF. No question, Standards require that work
performed be documented in the working papers, and
there is no question that many times when it is not docu-
mented, that the work has, in fact, not been done."
Examples of substandard CPA audit work identified by the IGs
are provided below:
It Ibid
"Ibid
I. Ibid.
7
An IG found that the CPA firm auditing a grantee in Colora-
do hired the grantee's bookkeeper to help with the audit. This
action raised serious doubts as to the audit's "independence."
In addition, the IG discovered that the firm had not reviewed
the grantee's internal controls and had performed only limited
compliance testing. (The CPA firm's staff member contended
that since he had personally designed and implemented the
grantee's internal control system, there was no need to test it.)
Before issuing the report, the IG required the firm to do addi-
tional compliance work. Even then, the IG cautioned program
officials against placing too much reliance upon the report be-
cause of the bookkeeper's involvement in the audit.
An audit of a city housing authority in Tennessee was reject-
ed by the IG involved because a review of the working papers
revealed: (1) no evidence of proper supervision, (2) insufficient
support for the auditors' findings and conclusions, and (3) in-
sufficient evidence of required internal control and compliance
work.
The review of an audit of an educational institution in New
York State revealed that the CPA failed to provide adequate
documentation of his internal control and compliance work. In
addition, the audit report falsely claimed that the audit was
performed in accordance with applicable professional stand-
ards. The CPA never submitted proper documentation and a
subsequent audit of the grant recipient by the IG found poor
internal controls and significant noncompliance with Federal
requirements, The IG rejected the CPA's report and referred
him to the New York State Board of Accountancy and the
AICPA for disciplinary action,
A Single Audit of a city in Texas was initially rejected be-
cause the IGs review found: (1) no evidence of supervision, (2)
insufficient evidence of required compliance testing, (3) inad-
equate documentation of internal control work, and (4) discrep-
ancies in the financial information included in the report. The
report was accepted only after the CPA firm performed addi-
tional work, which delayed issuance of the report several
months. 17
As noted earlier, in order to make the most efficient use of limit-
ed resources, the IGs usually focus their QCR efforts on audits they
have reason to believe may be substandard, Mr, Wolf testified that
while this use of judgmental sampling techni~es produces BOme-
what of a bias in the statistical results of the process, it does
not undermine the basic message of the IGs' fm . gs:
- , . the results of RIGs' quality control reviews are not
necessarily indicative of the frequency of problems in the
universe of audits performed by CPAs as a whole. Rather,
they are skewed toward a higher level of problem audits,
DeSpite this, we believe that the results of RIGs' quality
control reviews indicate that serious problems occur in a
substantial number of governmental audits.'.
" All eumpJe. aft from Hearinp.
.. Hearinp.
8
The committee agrees that the results of the IGs' quality control
reviews are solid evidence of serious and widespread deficiencies in
CPA audits of Federal financial assistance funds. Further, it note.
that the IGs' findings may not, in fact, be "skewed" at all; the de,
tailed examination of a statistically selected sample of CPA audits
that GAO performed in the second phase of its review also found
that a very high percentage failed to meet generally accepted gov,
ernment auditing standards. (The results of GAO's second phase
are discussed in greater detail later in this report.)
The need to revise audits undermines the audit process
As noted earlier, while only a ~mall number of CPA audits are
never accepted, a great many are accepted only after problems
identified by the IGs have been corrected. This frequent failure of
CPA firms to produce an acceptable product the first time around
undermines the efficiency and effectiveness of the audit process,
According to Mr, Wolf:
. , . the RIGs spent much of their audit quality review
time working with CPAs where their work Wa~ initially
deemed unacceptable. Although some auditors were very
responsive, we found several examples where the auditors
took more than .4 months to satisfy the RIGs' concerns and
caused the RIGs to expend resources tracking or re-review-
ing auditors' reports. In these cases, we believe the useful,
ness of a subsequent report diminishes greatly as time
passes, especially if the grantee, federal program manager,
or the public relied on an earlier incorrect or incomplete
version of the audit report. II [Emphasis added.]
Similarly, Paul A. Adams, Inspector General at the Department
of Housing and Urban Development, testified that when an audit's
acceptance is delayed "the user loses the benefit of a timely
report." Mr. Adams also noted that the time the IGs spend working
with CPA firms to correct audit deficiencies represents a "diversion
of (lG) staff . . . that might otherwise be utilized to perform ongo-
ing work . , ,....
C. GAO'S ASSESSMENT OF CPA AUDrrs-S4 PERCENT FAIL TO COMPLY
WITH GENEIlALLY ACCEPTED GOVERNMENT AUDmNG STANDARDS
In the subcommittee's hearing on March 19, 1986, GAO present-
ed the fmdings of its own detailed assessment of CPA audits, Comp-
troller General Charles A. Bowsher testified that 3.4 percent of a
statistically selected sample of audits failed to comply with general,
Iy accepted government auditing standards, Furthermore, more
than one-half of these substandard audits had "severe standards
violations," 11 Commenting on these findings, Chairman Brooks
stated that "These results remove any possible doubt about the
extent and seriousness of CPA audit quality problems,""
I'lbid
10 Ibid
IIlbid.
"Ibid.
--
9
GAO examined the reports and working papers for 120 audits,
Thirty-eight of theae audits failed to meet GAG AS; 21 of the 38
substandard audits fell into the "lIevere standards violations" cate-
gory. At the request of Chairman Brooks, GAO referred the CPAs
who performed the severely deficient audits to the appropriate
state boards of accountancy, the cognizant Federal Inspectors Oen,
eral, and the AICPA for review and disciplinary action. The 17 less
lIerious cases were referred only to the lOe and the AICP A..'
While the rate of substandard audits was unacceptably high for
all sizes of CPA firms in GAO's sample, it was especially high for
smaller firms. Of the audits performed by large firms, 14.5 percent
failed to comply with GAGAS, The corresponding rlgUre for
medium and small firms, however, was 25.8 percent and 64.7 per-
cent, respectively, ("Large" firms were dermed as those with 50 or
more of their staff being members of the AICPA, "medium" as
those with between 10 and 50 professional staff, and "small" as
those with 10 or fewer professional staff.) ..
The two major deficiencies identified by GAO were: (1) insuffi-
cient audit work or working paper documentation of testing for
compliance with Federal reqUirements, and (2) insufficient audit
work or working paper documentation of internal control evalua-
tions. As noted by Comptroller General Bowsher, these are critical
weaknesses:
The two predominant problem areas, namely testing for
compliance and reviewing internal controls, are two areas
of greatut importance to tM llolJemment and the tozpayer
in providing reasonable assurance that IlOlJemnwnt funds
are not misspent..' [Emphasis added.]
Several exllJtlples of substandard CPA audits identified by GAO
are provided below;
An audit of $270,000 in Federal funds provided to a Utah
state health agency was seriously deficient in the area of com-
pliance testing, The CPA firm reported that its audit was per-
formed in accordance with GAGAS and that the recipient had
complied with applicable grant requirements. The rmn'. work-
ing papers, however, provided documentation of compliance
testing for only 1 of 18 grant requirements, The firm acknowl-
edRed that it hod, in fact, failed to test for compliance with tM
otlier 17 requinments.
An audit of' $130,000 provided to a regional planning com-
mission in Texas by several Federal agencies also had lIerious
deficiencies concerning compliance testing. While the firm re-
ported that its audit conformed to GAGAS and that the grant-
ee had comtllied with Federal requirements, its working papers
contained virtually no evidence of compliance te.Jting. The firm
acknowledged that it had failed to perform ony compliance
work.
II "CPA Audit Quality: Many Govemmental Audit. Do Not Compry- With Prof'_ional Stand.
a." GAOl AFMD-86-J3. March 1986 (hereinafter cited .. GAO Repnrt), p. 31. (Note: GAO
u.ed weighted .ve~ CO edimate the frequency or.ua.t.andard audita!. The attual number of
lIUb8ta.ndard auditl in GAO'Iu.mple .... not ....ht.ed.'
at GAO Report. p. 21.
II Hearinp.
~~
....
10
A CPA firm's audit of $330,000 in Federal funds received by
an airport district in California was deficient in Rveral areas,
While reporting that the audit was performed in accordance
with GAGAS and that the recipient had complied with all Fed,
eral reqllirements, the firm's working papers contained no evi,
denee of compliance testing, In addition, there was leant evi-
dence of rmancial testing or of proper planning and supervi-
.ion for the audit. Finally, the firm failed to report whether it
had reviewed the grantee's internal controls.
An audit of a '740,000 education grant received by a univer-
sity in Texas was also deficient in Rveral respects. While the
CPA firm reported that the audit was done in accordance with
GAGAS, the working papers contained little evidence of com-
pliance testing, They also provided little evidence of any
review of internal controls. In addition, the firm failed to refer-
ence generally accepted accounting principles in its opinion on
the grantee's rmancial statements, as ~uired by GAGAS.
The working papers for an audit of $540,000 received by a
New York vocational training institute failed to provide ade-
quate documentation to support the CPA's claim that he had
performed the required audit work. While he reported that the
audit conformed to GAGAS, his working papers contained
little or no .evidence of compliance testing. In addition, the
working papers contained little or no evidence to support the
CPA's report on the grantee's financial statements and inter-
nal controls.
A CPA rll1ll auditing a Colorado city's 'I million in general
revenue sharing funds based its compliance report on work
done six years prior to the year being audited. In issuing its
report for the year ending December 31, 1983, the firm stated
that its review had found the city in compliance with applica,
ble requirements, In fact, however, the firm conducted almost
no compliance testing for 1983. Instead, it relied on testing per-
formed in a 1977 audit of the city. The firm claimed that there
was no need to test oompliance for 1983 because there had
been no changes in the City'S accounting systems or key per-
sonnel since the 1977 audit.
An audit of '180,000 in revenue sharing funds provide!! to
another Colorado city was also deficient in the area of compli-
ance testing. While the CPA firm reported that its audit Con-
formed to GAGAS and that the ~antee had complied with ap-
plicable requirements, its working papers contained no evi-
dence of testing for compliance with specific laws and regula-
tions. The firm claimed that it had performed at least some of
the required work but had simply not provided sufficient docu-
mentation."
D. CAUSES OF SUBSTANDARD CPA AUDITS
The quality of audits is influenced by a myriad of factor&, As a
result, it is difficult to pinpoint the reasons why such a high per,
centage of CPA audits fail to meet generally accepted government
.. All eumpl. aft (rom GAO Report.. p. 27.
11
auditing standards. Nevertheless, during the subcommittee's hear-
ings a handful of faetol'll emerged as perhaps the key call8e8 of sub-
standard work, These faetol'll are discuased below.
Unfamiliarity with I/Ouemmental auditing
Witn_ consistently identified CPA.' unfamiliarity with the
unique aspects of governmental auditing as a m~or cause of sub-
standard audits, Comptroller General Bowsher summarized this
problem as follows:
We observed, through discuasions with the CPA. and re-
views of their work, that many CPA. did not undel'lltand
the nature and importance of testing and reporting on
compliance with laws and regulations, nor did they under-
stand the importance of properly reporting on internal
control evaluations. 27
GAO's report to Chairman Brooks discussed the problem in
greater detail:
. . . Governmental auditing has a different emphasis
than commercial auditing with respect to the more specific
rules and regulations. In both commercial and governmen-
tal auditing, the CPA is concerned with the effect of any
noncompliance on the fair presentation of the fmancial
statements, particularly With respect to liabilities that
may result from noncompliance. In governmental audits,
however, more in-depth transaction testing may be re-
quired, both by GAGAS as well as through contractual
terms which often require the use of federal agency audit
guides or other procedures. For example, when transac-
tions selected for testing include grant transactions, the
auditol'll should determine whether costs were charged to
the proper grant and allocated equitably among grants
and other benefiting activities, . ,
In auditing commercial entities, CPA. do not usually in,
elude a statement on internal control in the auditor's
report. In governmental auditing, however, GAGAS re-
quire the CPA to include a statement on internal control
in the auditor's report. GAGAS also require the CPA to
report whether he or she performed a study and evalua-
tion of internal control, and if only a preliminary review
was made, the reasons why. The CPA is further required
to report any material weakn_ identified,"
While the differences between "commercial" auditing and gov-
ernmental auditing may help explain the high incidence of sub-
standard CPA audits of Federal financial assistance funds, they in
no way excuse it. CPA. have both a legal and ethical responsibility
to produce high quality audits, Firms contemplating bidding for
government audit contracts must make certain that they have the
training necessary to perform governmental audits. Those incapa,
., Hearing.
.. GAO Report. pp. 22 and 23.
99-970 0 - 87 - 2
~~
.....
12
ble of performing quality work mould simply Btay out of the busi-
ness of governmental auditing.
Failure to understand the dual clil!nt relatiollBhip in governmental
auditing
When a CPA firm audits Federal fmancial assistance funds
under contract to an Inspector General, it is clear that the fmn's
client is the Federal Government. The Bituation is, however, more
complicated if the firm audits thoee same funds under contract to
the recipient. The recipient is certainly the firm's client, but so is
the Federal Government. It is, after all, the Federal Government
which provided the assistance funds and which is generally paying
for at least a ~rtion of the audit. Unfortunately, testimonr, in the
subcommittee s hearings indicates that CPAs frequently fall to un-
derstand this dual client relationship. The following is an exchange
between Chairman Brooks and Richard P. Kusserow, Inspector
General at the Department of Health and Human Services:
Mr. BROOKS. To what extent are CPA firms aware that
when they contract with a grant recipient to audit Federal
funds, they have two clients-the grantee and the Federal
Government?
Mr. KU88EROW. I don't think in many cases they really
realize that. They are so conditioned to look at the person
who contracts for their services as their client that they
sometimes forget that there are also (Federal) program of-
ficials with whom they have a client relationship."
This dual client relationship clearly puts CPA firms in a difficult
position. Reporting a recipient's noncompliance with Federal re-
quirements can result in the recipient having to repay misspent
funds; it can also potentially hurt a firm's chances of being selected
by the recipient for subsequent audits. On the other hand, failing
to report noncompliance hampers efforts to assure accountability
in the use of the taxpayers' money.
While recognizing the dilemma posed by this dual client relation,
ship, the committee believes that CPAs must put the taxpayers' in,
terests first. Failure to do so undermines the integrity of the audit
process.
Lax attitude towards governmental auditing
CPAs performing substandard "commercial" audits can be ex-
posed to enormous financial liabilities. For example, between 1980
and early 1985 the eight largest accounting firms paid out over
$175 million in settlements and judgements in cases involving al-
legedly substandard "commercial" work.l. On the other hand,
firms are seldom, if ever, sued as a result of performing substand-
ard governmental audits. Testimony in the subcommittee's hear-
ings indicates that this limited liability has led to a lackadaisical
attitude on the part of some CPA firms. In discussing the causes of
substandard work, Inspector General Thomas Btated:
.. Hearinp
10 "How A~unt.abl~ the Accountant.!" Fortune MaRuine. Auc-t 18. 1986. In(ormation in
article obtained from t.M U.s. BKuritiel.nd Ezehllna. Commw.ion.
13
. . . Lastly, I believe that BOme practitionel'll may consider
government audita as having less liability exposure and
thus they did not uercise the same degree of professional-
ism as they would in the performance of other audita.31
Comptroller General Bowsher expressed the same view:
. . . Further, such (audit quality) problems may exist be-
cause . . . governmental audita may not always be per-
ceived to be as high a risk or receive the same level of at-
tention as coJDmercial audita. II
A particularly egregious example of a cavalier attitude towards
governmental auditing was discovered in a CPA firm's working
papel'll for an audit of a county in California. The working papel'll
stated that the county's valuation of ita fIXed asseta was "close
enough for government work." ..
While the committee believes that the majority of CPA firms ap-
proach governmental audita with a professional attitude, it is ex-
tremely concerned about the problem described by Mr. Thomas and
Mr. Bowsher. CPAs viewing government audit contracts as
"lIeCond.dass" enpgementa will not be tolerated. Finns unwilling
to put their best effort into government work should simply sell
their services elsewhere,
ltuMkquate disciplinary procedures
The public accounting profession has long taken pride in ita ef-
forts to assure public confidence in the integrity of its work
through a system of self-regulation. A potentially important compo-
nent of this System is the disciplining of CPAs who perform sub-
standard work. (Indeed, strong sanctions for CPAs who perform
substandard government work could help eliminate the notion that
governmental audits are low-risk engagements,) Witnesses at the
subcommittee's hearings, however, sharply criticized the profes-
sion's current disciplinary procedures. These criticisms are perhaps
best summarized by Comptroller General Bowsher's remark that
". , . one of the great problems of the accounting profession over
the years has been that its disciplinary procedures . , . have not
been very good." 34
The state boards of accountancy are the principal regulatory
bodies for the accounting profession. The boards range in size from
3 to 24 membel'll, with an average of about 7, and are generally
composed of practicing CPAs, other licensed accountanta, and
public Or consumer representatives, They are assigned the responsi-
bility of administering state laws governing various aspects of the
accounting profession such as certification, licensing, professional
conduct, and continuing professional education.
Thomas lino, President of the National Association of State
Boards of Accountancy (NASBA), explained to the subcommittee
the "unique role" of the state boards in regulating the profession:
II Hearinp.
'I Ibid.
II Ibid.
... Ibid.
~
14
It is important to emphasize that Wite boards of account-
ancy are governmental agencies with the authority to
issue and revoke licenses to practice public accountancy,
The Wite boards of accountancy, like NASBA, should not
be confused with voluntary professional accounting soci-
eties which have no governmental authority and which
have jurisdiction over only their own members. Not all
CPAs are members of the American Institute of CPAs or
their local state society, and not all licensed public ac-
countants are CPAs. State boards of accountancy, there-
fore, are the = entities that have jurisdiction over all
who are lice to practice public accountancy in the
United States.so
The boards are empowered to take a wide range of disciplinary
action against CP As performing aubstandard work. According to
)4r, Iino: '
Depending upon the authority granted to them by statute,
Wite boards may revoke, suspend or refWle to renew certif-
icates or licenses; reprimand, censure, or limit the scope of
practice of licensees (including fmns); impose adminIstra-
tive fines or place licensees on probation, all with or with-
out terms, conditions, and limitations, for failure to
comply with professional standards and for acts involving
dishonesty, fraud, or gross negligence in the practice of
public accountancy.s.
)4r. lino noted, however, that the strongest II8Ilctions are very
rarely imposed in cases involving substandard work:
In the present legal environment, it is extremely difficult
to revoke or suspend an individual's license when dishon-
esty or fraud are not in evidence. Attempts to do 80 are
frequently overturned by the courts on appeal. And be-
cause most instances of substandard work stem from igne>-
ranee rather than malice, rehabilitative II8Ilctions are
more frequently imposed."
An example of a state board's mild penalty for substandard work
is discussed in the following exchange between Chairman Brooks,
Comptroller General Bowsher, and John Cronin, Director of GAO's
Audit Quality Task Force:
)4r. BROOKS. . . , In the subcommittee's hearing on audit
quality last November, GAO testified that a substandard
CPA audit had been before the New York State Board of
Accountancy for five years. Has that case ever been decid,
ed?
)4r. BOWSHER. It has been decided, but it is a disappoint-
ment. )4r. Cronin, who has been following and reviewing
that case, can describe what happened.
)4r. CRONIN, Yes, sir, That was a case that we referred
in April 1980 . . . The audit was another audit {ailuN'
Ulbid
"Ibid
:u Ibid.
-
15
where the auditor did not do the work, did not have the
workill( papel'll to support the audit report that he submit-
ted, and there were glaring errol'll in the audit report. The
day after your last (audit quality) hearing , . . the New
York State Board of Public Accountancy issued a decision
on the case. They found the public accountant guilty of
practicing the profl!8llion with gross negligence. gave him a
censure and reprimand and three years probation. I asked
the State Board what that meant, and they sent me the
documents on it. During the probationary period the audi-
tor is ~ui~ to take 12 credit houl'll of continuing educa-
tion,.e [Emphasis added.]
The AICP A is a nationwide, voluntary profl!8llionalll88OCiation of
240,000 CPAs in the United States, Among its principal activities
are the development and issuance of auditing standards, quality
control standards for CPA firms, and a code of profl!8llional ethics.
In addition, the Institute operates a disciplinary program through
its Profl!8llional Ethics Division. The sanctions that may be imposed
on AICPA membel'll performinK substandard work range from a
letter of "constructive comment to an "administrative reprimand"
to expulsion from the Institute. As explained below, however, the
expulsion sanction is almost never imposed.
In late 1979, the AICPA agreed to review a large sample of CPA
audits submitted to it by the Federal Inspectol'll General. Between
February 1980 and September 1980, the IGs submitted 199 cases;
the institute investigated 106 of these. According to the AICP A's
(mal report on this review-which was not issued until October
1984-the membel'll involved were disciplined as follows:
4 were referred to the AICPA's Trial Board-one was ex-
Jll!lled from the Institute, while the other three were "admon-
IShed" and required to attend continuing professional educa-
tion (CPE) classes;
23 were issued administrative reprimands, of which 21 were
required to take CPE-12 of the 21 must submit examples of
their work to the AIPCA for review after completion of the
CPE;
64 were sent lettel'll of "constructive comment"; and
15 had no action taken on their cases,"
Despite the high frequency of substandard CPA audits, the IGs
have made very few referrals to the state boards and the AICPA in
recent yeai'll, From late 1980 until the subcommittee's November
1985 hearing, the IGs referred about eleven cases to the AICPA,'.
While the number of referrals to the state boards over that period
is unknown, Mr. Wolf testified that, "we believe it is not a substan-
tial number." OJ
The limited number of referrals is due, in part, to the fact that
the IGs place a high priority on correctill( the deficiencies found in
..lbid.
.. Ibid. (Note: In two or U. CUeI in the Iut ca&e,ory no action hu been taken __uee the
membe,.. are involved in litil'ation.l
t. Ibid. Tbe AlCPA received a total or 11 nrerrq duri~ thia period. A few of lheee. however.
...y have been.lrom State Auditorw rather than FederallGt.
o'Ibid.
16
substandard audits. As a result, in thoee cues in which the firms
involved are willing to take corrective action, the 105 have often
been reluctant to refer them for disciplinary action. In addition,
however, many IGs have been frustrated with the referral process,
Their principal complaints have been: (1) the amount of documen,
tation required in referring a case, and (2) the lack of feedback on
their referrals due to the confidentiality policies of the state boards
and the AICPA. For example, until June 1986, the AICPA would
provide information to the 105 only on cases which resulted in a
guilty verdict by its Trial Board, (As the statistics cited earlier il-
lustrate, this represents only a very small percentage of the total
number of cases referred,) \
Paul Adams, Inspector General at the Department of Housing
and Urban Development described the 105 frustration:
Many staff hours are devoted to preparing referrals to
the AICPA and the State Boards. Unfortunately, we
leldom are advised of the results of their reviews, We un-
derstand the concern for confidentiality and due rrocess,
but some feedback is necessary to make the referra system
meanindul.
. . . the AICPA and State Boards must impose timely
-sandions on those who perform substandard work and
communicate the results of their rellUlws to Federal Inspec,
tors General and the public. .. [Emphasis added.]
Inspector General Thomas expressed a similar view:
. . . many of us (the 105) have been ciiscouraged by the
lack of action or the lack of knowledge of action that is
taken based on referrals.
. . . until the Institute and the state boards are willing to
share the results of those referrals and make them a matter
of public record and public knowledge, then the mere proc'
ess of making the referral will continue to be a frustrating
process for most of us." [Emphasis added.]
The committee wholeheartedly agrees with the Inspectors Gener-
al. In addition, it wishes to underscore the need for the AICPA and
the state board to make all disciplinary actions against CPAs a
matter of public record_imply sharing such information with the
105 is not enough, Public disclosure is Decessary for at least two
reasons. First, it will serve as a strong deterrent against substand-
ard work by other CP As, Second, it will provide recipients procur-
ing audit services with information needed to lelect a firm capable
of producing a quality product.
In summary, the committee believes that more frequent referrals
to the state boards of accountancy and the AICPA could rlay an
important role in improving the quality of governmenta audits
performed by CPAs. At the same time, however, it realizes that
this step, in and of itself, would have limited effect. The IGs' efforts
must be accompanied by sincere efforts on the part of the state
boards and the AICPA to improve their disciplinary procedures,
.'lbid.
.. Ibid
17
Above all, the boards and the Institute must impose strict sanc-
tions on CPAs who produce substandard audits and make those dis-
ciplinary actions public knowledge. Failure to do so could very wen
result in greater Federal Government regulation of the accounting
profession,
Weak audit procurement proceduru
In testimony before the subcommittee, Herman J. Lowe, Chair-
man of the Board of Directors of the AICPA, identified the froce-
dures used by government officials to procure the services 0 CPA
firms as a cause of poor quality audits. "We believe that the pro-
Curement process often focuses too much on the fee and not enough
on quality," he said," In materials submitted after the hearing in
response to a question from Congressman Frank Horton, the com-
mittee's ranking minority member, Mr. Lowe elaborated on his tes-
timony, According to Mr. Lowe:
The individuals who contract for the auditing services
often anow the cost element of the proposal to take prece-
dence over the need for consideration of the technical
qualifications of the auditor. .
The contracts are often awarded on a one-time basis,
thereby lasing many of the benefits of having the same
firm do the audit more than once. These benefits include
the value of knowledge gained from a prior audit in
making a subsequent audit more effective and efficient.
At times, auditors are not permitted access to the enti-
ty's accounting records before the contract is awarded.
Such access is necessary if the fee charged for the engage-
ment is to have a reasonable relationship to the work per-
formed. As a result of this type of policy, many firms capa-
ble of providing quality professional services may be reluc-
tant to make a proposal.
The request for proposal <RFP) is not always clear as to
the desired scope of the audit and frl!Cjuently insufficient
time is provided for a response to the RFP.
Preparation of the required proposal is time-consuming
and expensive.41
The committee agrees with Mr. Lowe that the procurement proc-
ess is a key step in assuring qUality audits. Chairman Brooks has,
therefore, requested that GAO evaluate current audit procurement
procedures and recommend necessary revisions. <The Chairman's
request is discuased in greater detail later in this report.) At the
same time, however, Mr. Lowe's comment about audit quality _prob-
lems resulting from government officials fOCUSing on CPA firms'
fees rather than their qualifications represents only one side of the
story, The committee believes that a significant number of sub-
standard audits are performed by qualified CPA firms who have
won contracts with unrealistically low bids and then failed to
produce the promised product because they have "cut comers" in
an effort to miftirni'7.fl costs.
..lbid.
Ulbid.
18
While government officials must make eve!)' effort to select
qualified CPA firms, the firms must realize they are responsible for
producing a quality product-regardless of the price they bid.
Comptroller General Bowsher emphasized this point before the sub-
committee:
. , . when a professional firm takes an audit, even if the
bid is too low, even if the money is not there, they ha ve a
professional respo1l8ibility to do a complete audit and not
to do Bome of the sloppy work that we Baw in this review. ..
[Emphasis added,]
Chairman Brooks warned that firms must fulfill their contrac-
tual commitments:
. . . CPA firms are going to have to get out and do it right
or else don't do it. I do not care what the bidding price is,
Whether they bid $10,000 or half a million dollars, they
better deliver. If they cannot do it . . . (for the bid
price) , . . they shouldn't bid, because when they bid, they
are going to be obligated to produce; and if they do not,
they are going to get into difficulties."
E. CURRENT AND PIlOPOSED EFFoRTS TO IMPROVE CPA AUDIT QUALITY
The witnesses ilt the subcommittee's hearings-the Inspectors
General, GAO, NASBA, and the AlCPA-are all very active in ef-
forts to improve CPA audits of Federal financial assistance funds,
A discussion of their work in this area is provided below.
1118pectors general
Under the auspices of the President's Council on Integrity and
Efficienc)' (PCIE) the IGs last year revised the publication "Federal
Cognizant Agency Audit Organization Guidelines," The guidelines
spell out the role of cognizant Federal agencies under the Single
Audit Act, including their responsibility to perform dE'Sk reviews
and quality control reviews of audits submitted by recipients,
At the Department of Education, the IG's office has developed
and distributed an "audit readiness brochure" which advises recipi,
ents of Federal financial assistance on how to prepare for an audit,
According to Inspector General Thomas, use of the broch ure
"should lead to more effective and less expensive audits." His office
has also "presented numerous training sessions to state auditors
and public accounting associations." In addition, the office is plan,
ning to send colleges and universities receiving Federal funds a
"Dear Colleague" letter alerting them to CPA audit quality prob-
lems and suggesting corrective actions they can take."
Inspector General Kusserow's office at the Department of Health
and Human Services has developed a computerized audit quality
monitoring system, According to Mr, Kusserow, the Computerized
Cognizant Agency Management Package or "CAMP," will:
Ulbid.
., Ibid
.. Ibid
i
I
19
. . . permit us to: (1) maintain an inventory of all reports
due, (2) track all reports received, (3) accumulate auditor
performance statistics by firm and by office within multi-
ple firm offices, and (4) track and code audit findings."
Mr. Kusserow also told the subcommittee that his office was con-
sidering working with the larger national and regional accounting
firms to establish a single contact penon within each firm who
would be responsible for 888uring that corrective action is taken on
the firm's substandard audits. He said that under this approach:
We would transmit the reports to this individual and it
would be their responsibility to deal with their local offices
to bring the report up to standards. We believe that such a
process would: (1) make the national offices more aware of
quality control problems in their local offices and (2) put
intense pres&ure on the local offices to get the report right
the first time.o.
The committee understands that this concept was subsequently
revised by the PCIE and developed for use by all Inspectol1l Gener-
al. Under the revised vel1lion, local offices of firms would retain
primary responsibility for correcting audit deficiencies but copies of
correspondence concerning substandard work would be sent to the
contact penon for the firm involved, Twenty-three firms have des-
ignated a contact person.
At the Department of Housing and Urban Development (HUD),
Inspector General Adams' office is developing bulletins for distribu-
tion to CPAs, HUn program managel1l, and grantees on the need
to,improve audit quality. Mr, Adams also told the subcommittee
'tat in addition to making referrals to the AICPA and the state
.-!<l8rds of accountancy, his office has been involved in HUD's impo.
sition of direct sanctions on CPAs performing substanc!ard work.
The sanctions available include "debarment, sus~nsion, and tem-
porary denial of participation in HUn programs.' According to Mr,
Adams, over the past six yeal1l HUD has, based on his office's rec-
ommendation, debarred five CP As.O'
All these actions are commendable. In addition, in testimony
during the subcommittee's November 1985 audit quality hearing,
Fred Wolf of GAO discussed ways in which the Inspectol1l General
could "be more effective in identifying and combating poor audits."
According to Mr. Wolf:
Specifically, we believe the IGs could do more to:
Provide accurate written guidance to JrIlDtees and CP As
to 888ure compliance with GAGAS standards , . .
Improve desk and quality control review programs, spe-
cifically in the scope and format of the checklist guidance
the RIGs use to identify quality problems, . .
Take more frequent actions against CPAs to increase the
reliability of audit reports . . .
"'lbid.
.0 Ibid.
.1 Ibid.
20
Compile and analyze the results of audit quality reviews
at the regional level to identify and take action to prevent
recurring qUality problems. . . and
Require regional offices to report on problem audits to
headquarters 10 that headquarters can advise the Congress
on its efforts to monitor audit quality. . ."
GAO made aeveral specific recommendations to the statutory In-
lpectors General on these issues. In its March 19, 1986, report to
Chairman Brooks, GAO noted that the seven lOa whoee audit qual-
ity review lIy8tems had been evaluated "generally concurred" with
the intent of the recommendations and IOme were taking steps to
implement them.
A GAO recommendation of particuJar interest to the committee
calla on the lOa to include in their aemi-annual reports to Congress
information on (1) the results of their reviews of non-Federal
audits, and (2) their efforts to improve such audits. Inspectors Gen-
eral Thomas, Kuaaerow, and Adams supported this recommenda-
tion in testimony before the subcommittee, and each of them in-
cluded an audit quality aection in his March 81, 1986, aemi-annual
report. The committee applauds their leadership on this issue and
recommends that the Inspectors General of all agencies that re-
ceive CPA audits of Federal fmancia1 assistance funds implement
the GAO propoaaI.
GeMral Accountin.f OffICe
During its evaluation of the Pi-ocedures uaed by the Inspectors
General to assure quality CPA audits of Federal fmancial assist-
ance funds, GAO found that the IGs review only a POrtion of such
audits. At least 25,000 CPA audits of Federal funds are aent direct-
ly to either State Government officials or Federal program manag-
ers, and thus receive little or no review from the Inspectors Gener,
al," Concerned about POSSible deficiencies in these audits, GAO is
currently reviewing Federal agencies' procedures for determining
the quality of audits received directly by Federal program manag-
ers,
Through the audit procurement Process, recipients can {lIay an
important role in assuring quality audits of Federal funds, Proper-
ly designed procurement procedures enable a recipient to specify
the requirements of an audit, as well as to "''''''';ne the qualifica-
tions of bidding rums.
Concerned that weakn_ in current procurement procedures
have contributed to the audit quality problem, Chairman Brooks
has requested that GAO evaluate the methods uaed to obtain the
aervices of CPA fJrms and recommend necesaary changes, One
product of GAO's study is expected to be a handbook containing
guidance for officials responsible for procuring audits of Federal fi-
nancial assistance funds.
In an effort to clarify certain issues and to reflect recent develop.
ments in governmental auditing_uch as the Single Audit Act-
GAO is currently revising "Standards for Audit of Governmental
Organizations, Programs, Activities, and Functions." The Comptrol-
.'Jbid.
I' Ibid
21
ler General has appointed an "Auditing Standard. Advisory Coun-
cil" comPCllted of Federal, State, and local government audit offi.
cials and members of the accounting profession to l188ist in this
project. The revi&ed ltandards are expected to be issued in 1987.
Finally, to the eztent the confidentiality policies of the AICP A
and the state boards of accountancy pl!rmit, GAO is monitoring the
c:ues of the CPA. it referred for di8clplinary action.
NatioNJl ABBoCiation of Sta~ Boards of Aceountancy
Most state boards of accountancy Operate on what is general1,
referred to .. a "Complaint-based" IyBtem of enforcement and discI-
pline. Under this approach, a boaid will examine a CPA's work
only in resPOnse to a specific complaint against the accountant.
Thomas lino, President of NASBA, explained that complaint-based
IyBtema are inherently limited in their ability to improve audit
quality:
. . , relatively few complaints about substandard audit
work are received by state boards of accountancy. Unfortu-
nately, the nature of the auditing process is such that
many recipients of auditors' reports are not qualified to
judge compliance with professional ltandards, and many
others-beCauae of COnfidentiality or for other rea&ona-
are reluctant to file complaints with state boards of ac-
countancy even when substandard work is identified."
Mr. lino told the subcommittee that in recent years IeVeral
states, having recognized the limitations of the complaint.based ap-
proach, have begun to monitor CPA's work through "positive en.
forcement ~~." While a board with a POSitive enforcement
Program still lIlvestigates complaints rued against accountants, it
also "actively seeks out substandard work that h.. not been the
subject of a fOrmal complaint." ..
Over the past decade, NASBA h.. promoted the POSitive enforce-
ment concept, and it is currently developing a "Model Positive En-
forcement Program." This most recent effort is intended to encour-
age the adoption of!1 uniform J!OSitive enforcement program by all
state boardS, According to Mr. lino:
The Model Positive Enforcement Program will require
that all flr111ll practicing public accountancy, including IOle
Practitioners, undergo on either a uniform or random
basis, a quality review acceptable to the board as a condi-
tion to the renewal of their permits to practice public ac-
counting, The program will Provide for the periodic review
of audit reports and, when deemed appropriate, review of
the suppo~ work pal'8rs to determine compliance with
professional standards. The jrogram is designed to ferret
out substandard practice an to impose rehabilitative and
disciplinary measures .. appropriate. Depending on the se-
verity of the case, such measures .. supervised education
and training, limitations on scope of practice, preissuance
reviews of reports and workpapers, fines, assessment of in.
.4 Ibid.
"Ibid.
22
vestigating costs, and suspension or revocation of licenses
would be imposed,"
Fourteen States either already have IOme type of positive en-
forcement program or are currently establishing one, and another
22 have expressed interest in pursuing the positive enforcement ap-
proach.57
Earlier this year, NASBA initiated efforts to develop and main-
tain comprehensive information on disciPlinary actions taken by
the various state boards of accountancy, These efforts will be made
in COOperation with the Clearinghouse on Licensure, Enforcement
and Regulation (CLEAR)-an organization afflIiated with the Coun-
cil of State Governments. On a quarterly basis, NASBA will collect
data on m~XRnary actions taken' by the state boards and send
them to for computer processIng. CLEAR will then provide
NASBA a quarterly report on all disciplinarr. actions taken by the
boards. According to NASBA, "This report will be distributed to all
state boards of accountancy and we hope will be made available in
the future to others with a legitimate interest in such informa-
tion." .8
Finally, in an effort to improve the referral process, NASBA has
appointed a Special Committee on Relations with Governmental
Agencies, Mr, lino described the committee's role as that of serving
"as a coordinating body to Tacilitate and expedite the process of
handlin~ the referrals that will be forthcoming from the GAO's in-
vestigation and subsequently from the Inspectors General." ..
American In.stituU! of Certified Public Accountants
In February 1986, the AICP A published a revised edition of its
audit and accounting guide, "Audits of State and Local Govern-
mental Units," Included in the guide is information on performing
audits under the Single Audit Act of 1984. In addition, the Institute
and various state societies of CPAs have held numerous single
audit training sessions around the country.'.
In 1977, the AICPA established its Division for CPA Firms, Mem,
bership is voluntary, but according to Herman J. Lowe, Chairman
of the Board of Directors of the AICPA, nearly 1,600 firms have
joined. Member firms are required to undergo a peer review of the
quality controls Over their accounting and audit practice once
every three years, Mr. Lowe testified that, "We believe peer relliew
has been effective in helping firms improve their quality control
systems, thereby minimizinlI instances of substandard work." II
The effectiveness of the Institute's peer review program has, how-
ever, been hampered by two factors. According to GAO:
. , . Many firms do not. . . join the AICPA Division for
CPA firms and are thus not obligated to undergo a peer
review, Further, governmental audits often are not includ-
.'lbid
., Ibid
"Ibid
.'lbid.
10 Ibid. Thf. State lOC'ieties are voluntary pror..ional a.oc:iatioftl or CPA'.. While not di~ly
.mliated with 1M AtCPA. tht'y work with Uw lnatitule on prof_ionaJ d.velopment _uet and
other activities.
.1 Ibid
23
ed in the scope of a peer review because greater weight is
given to fublicly-held clients, large and complex clients,
and initia audit engagements."
With respect to the scope of a peer review, the AICPA has re-
vised its peer review standards to include the following provision:
- . . because of the public interest in audits conducted pur-
suant to the Single Audit Act of 1984, the sample of en-
gagements selected for review should include one or more
such engagement..'
Relrarding the lack of full participation in the peer review proc-
ess, the AICPA has proposed that all firms auditing Federal finan-
cial assistance funds be required to undergo peer reviews. That pro-
posal is discussed in greater detail later m this section of the
report.
As discussed earlier, in the subcommittee's first audit quality
hearing the Inspectors General testified that the large amount of
documentation required to refer a CPA to the AICPA for discipli-
nary action has discouraged the IGs from utilizing the referral
process. In an effort to address this problem, the AICPA has re-
vised its policies and advised the IGs that their referrals "need not
be volummous and detailed." ..
In mid-1985, the AICPA established a task force to develop rec-
ommendations for upgrading the quality of non-Federal audits of
Jovernmental units. Composed of representatives of public account-
mg firms, the State auditors, and the Inspectors General, the task
force is expected to issue its (mal report next year.
Finally, in testimony before the subcommittee, Mr. Lowe present-
0:1 a three-part AICP A proposal for improving CPA audits of Feder-
, financial assistance funds. The Institute recommends that the
!,'ederal Government require CPAs involved in auditing Federal
funds under the Single Audit Act to (1) complete continuing educa-
tion courses in governmental auditing, and (2) waive their right to
confidentiality when they are referred to the AICP A for discipli-
nary action by the Inspectors General. It also recommends that the
Federal Government require CPA firms auditing Federal assistance
funds to undergo peer reviews. Under the AICPA's proposal, the
three requirements would be incorporated in GAO's "Standards for
Audit of Governmental Organizations, Programs, Activities, and
Functions." The proposal is 3iscussed below.
According to Mr, Lowe, continuing professional education is an
invaluable source of training in the unique aspects of auditing re-
cipients of Federal financial assistance. He noted, however, that
"although most CPAs are required to obtain continuing education,
no state board, Federal agency, or professional body mandates edu-
cation in this specific area." While noting that CPE requirements
are generally prescribed by either state laws or the regulations of
state boards of accountancy, Mr. Lowe said that Federal require-
ments would be more appropriate in this case because, "We do not
.. GAO Report. p. 14.
.. Hl'arinp.
... Letler to Junes B. Thoma, Jr.. JMpector General. Oepllrtment of Education. from Philip
8, Che.... _.t. AICPA. Man:h 11. 1986,
24
believe our recommendation could be implemented by . , . (the
Btate boards) . . . on a timely basis and It _InS likely that at-
tempts to implement the recommendation in at least some jurisdic-
tions might fai1." II
NASBA's President Thomas lino expressed support for a Federal
CPE requirement:
It would seem entirely appropriate for the Federal Govern,
ment to require specified education or training for CP As
performing governmental audits. We believe any purchas-
er of auditing services has a right, if not an obligation, to
establish the criteria it will follow in selecting an auditor,
and we think a requirement for lQlecia1ized education
would improve audit quality. it would seem inappropriate
for Btate boards to establish such a requirement because
governmental auditing is only one of many specialized
areas of auditing in which CPAs are engaged."
The committee ~ that a requirement for CPE in governmen-
tal auditing would lDlprove the quality of CPA audits of Federal fi.
nancial assistance. Further, it believes that since nearly all CP As
are currently required to take CPE under Btate accountancy laws,
web a requirement would not impose a burden on CPAs; at most
they may simply have to change the type of CPE courses they take.
The committee, therefore, recommends that GAO revise its audit.
ing standards to include a standard that CPAs auditing Federal fi-
nancial assistance funds must complete a specified amount of CPE
in governmental auditing.
Mr. Lowe acknowledged the frustration felt by the Inspectors
General "when they are denied specific information about the dis-
position of most of the cases they refer to the AICP A for investiga,
tion." The Institute's proposed solution to this problem is to have
the Federal Government require CPAs auditing recipients of Feder,
al financial assistance to waive their right to confidentiality on
such cases. According to Mr, Lowe:
CP As are not forced to undertake audits of Federal assist-
ance programs-they elect to do so, In undertaking such
engagements, they should be aware, as we are, of the sig.
nificant public interest in their work. Therefore, the Insti-
tute believes it is reasonable to rlllluire such CPAs to
waive their traditional right to confidentiality. The most
effective and timely way to achieve this end is through, the
audit contract.01
The AICP A has recently taken unilateral action to correct at
least some of the problems caused by its confidentiality policy. On
June 6, 1986, the Institute advised Comptroller General Bowsher
that it had reinterpreted its Joint Ethics Enforcement Program in-
vestigation procedures as permitting disclosure to GAO and the IGs
of information concerning the "status and disposition" of cases re-
ferred for disciplinary action. Despite this step, however, the
.1 Hearinp
II Ibid.
.t Ibid,
25
AICPA believee that ita recommendation for a Federal Government
waiver of confidentiality ~uirement "8til1 reflecta a desirable and
appropriate way to proc-d. II
The committee applauc18 the AICPA's efforts to provide GAO and
the IOe the feedback II~..P)' to improve the referral and discipli-
nary proc It does not, however, believe that a Federal waiver of
confidentiality requirement is "desirable and appropriate." Since
the AICPA may impose sanctions only on ita own members,
changes in ita procedures should be made by the Institute, not the
Federal Government.
While the AICPA'" revision of ita confidentiality policy to permit
disclClllure to GAO and the IGs is a aignilicant ate,P in the right di-
rection, it does not go far enough. As noted earher, public disclo-
sure of sanctions is needed to achieve the maximum benefit from
the referral and disciplinary process. The committee recommencl8,
therefore, that the AICP A make public the resulta of all caaes in
which diaciplinary action is taken,
In discua8ing the third part of the AICPA's proposa1-mandatory
peer review-Mr. Lowe recommended that such a requirement be
patterned after regulations iaaued earlier this year by the Depart-
ment of Agriculture's Rural Electrification Administration <REA).
The REA regu1ations_require CPA rU"DUl that audit entities borrow-
ing lunda frOm the REA to participate in either the peer review
program operated by the AICPA's Division for CPA Finne or "inde-
pendent peer review ~ approved by REA." ..
The committee beheves that mandatory peer review could play
an important role in improving the quality of CPA audita of Feder-
al rmancia1 assistance funcl8. It understands, however, that many
"mailer firms have ezpressed concern that obtaining such reviews
,uld impose unreasonable cost burdens on them. The committee
.ekes these concerns very seriously. It has no desire to saddle
smaller firms with an ezpense that could put them at a competi-
tive disadvantage vis-a-vis larger rU"DUl, or even drive them out of
the business of governmental auditing altogether.
The committee recommenc18 that GAO revise ita auditing stand-
ards to include a standard that CPA firms auditing Federal rman-
cia1 assistance lunc18 must undergo periodic peer reviews. Before es-
tablishing such a standard, however, GAO should determine
whether current peer review procedures are ezcessively ezpen-
sive especially for llmaller rU"DUl. If such is found to be the case,
GAO should work with the public accounting 'profession and the In-
spectol'll General to develop reasonably pnced alternative peer
review procedures.
P. IIIPIlOVING CPA AtID1T QUALITY THllot1GH THE SINGLE AUDIT ACT
The Single Audit Act contains a provision that provides a strong
lever for asstUing quality audita by CPA firms. Section 7505 re-
quires the Office of Management and Budget (OMB) to "prescribe
policies, procedures, and guidelines" to implement the Act. It also
requires that such policies, procedures, and guidelines include cri-
.. 1-. Ia a...too A, _. Oomplrvllor GoneraI of the United -. fnlm Plli1ip 8,
a..no... _n.. A1CPA. J.... e. 1986,
.. F..... ....... Vol, 51. No, 13. p, 27112. J......,. 21. 1986,
--- --
--
26
teria prohibiti1llf State and locol 6OlJef"1l1Mnts from chargi1llf their
Federal financiallJ88istance P~m8 for the cost of any audit that
foils to meet the requirements of the Act.
This provision provides a strong incentive for a grant recipient to
assure that it has selected a qualified CPA firm. In addition, it
should provide CPA firms at least two incentives to perform qual,
ity audits. First, a firm whose substandard work results in a recipi-
ent's audit costs being disallowed is unlikely to win additional con-
tracts from the recipient. Second, while the COlt disallowance BaDC-
tion would be imposed on the recipient and not its auditor, it seems
likely that recipients will begin including claUBes in their audit
contracts requiring the fInD to bear at least BOme of the financial
burden in cases where an audit is found to be unacceptable.
On April 12, 1985, OMB issuell its implementation document,
Circular A-I28 "Audits of State and Local Governments," In addi-
tion to the COlt disallowance I8Dction included in the Act, Circular
A-I28 diSCU88es a wide range of other penalties for substandard
work:
. . . In cases of continued inability or unwillingness to '
have a proper audit, Federal agencies mUBt consider other
appropriate sanctions including:
Withholding a percentage of assistance payments
until the audit is completed BBtisfac1orlly,
Witholding or disallOwing overhead C06ts, and
Suspending the Federal assistance agreement until
the audit is made.'.
In testimony before the subcommittee, however, Comptroller
General Bowsher said that Circular A- 128 should be revised to pro-
vide more explicit guidance on imposing such sanctions. He ex,
plained that:
. , . in light of the discUBSion at (the subcommittee's) No-
vember hearing on audit quality and of the provisions in
the Single Audit Act prohibiting the cost of a substandard
audit from being charged to federally assisted programs,
we asked the inspectors general for their views on how to
best implement these provisions. Their responses included
a number of diverse suggestions on the role of the entities,
OMB, and the Federal awarding agencies. This indicated
to us the need for a clearly defmed and uniform procesS
for the actions to be taken when a substandard audit is
first identified. We are, therefore, recommendi", that the
Director of the Office of Manaeement and BUdget (OMB)
revise OMB cirrular A-Ji8 to provide more definitive crite,
ria for the disallowance PTYJCe8S, includi1llf appropriate
revuw procedures." [Emphasis added.]
On April 29, 1986, OMB Deputy Director Joseph R. Wright, Jr.,
advised the Comptroller General of the actions being taken to Cor,
Teet the problems identified by GAO. According to Mr. Wright:
u CircuJ.r 1.-128. "Auditl of Slatt- and Local Go.errunenu," 0fI'"K'e 0( Management and
Budget. April 12. J985
'I Henlnp
..
27
To effect a uniform and consistent approach to handling
substandard audits, the President's Council on Integrity
and Efficiency, which I chair, has llIItablished a talk force
to: (1) deflDe substandard audit work; (2) Pl'llllCribe a uni-
form l)'ltem for recording and reporting substandard
work; (3) prescribe uniform penaltillll; (4) develop uniform
referral procedul"llll; (5) track disciplinary actions; and (6)
maintain a dialogue with the American Institute of Certi-
fied Public Accountants on matters of common intel"llllt.
We will use the information developed by the talk force to
make any neceuary Changllll to the CircUlar."
V. CoNCLUlION
The problem of poor quality CPA audits was perhaPl best sum-
marized by Chainiian Brooks in the subcommittee's second hear-
ing:
. . . the public lICCOunting profllll8ion is facing a crisis
situation. Congress simply will not tolerate continued
sloppy, unprofllll8ional. substandard CPA audits of Federal
grant funds . . .
Decisive corrective actions are. needed to dramatically
improve the quality of these audits. Failure to achieve
such improvements would force the Federal Government
to reconsider its policy of relying on audits performed by
CPA firms."
Many different organizations-COngress, GAO. OMB, the Inspec-
tors General, the state boards of accountancy. the state societies of
CPAs. the AlCPA, and recipients-have a role to play in improving
the quality of CPA audits of Federal flDancial assistance. Ultimate
I'llIIponsibility for audit quality, however. I'llIIts with the individual
certified public lICCOuntant. Each CPA involved in governmental
auditing, whether a BOle practitioner or a partner in a "Big Eight"
firm, must make a personal commitment to producing a quality
product. Nothing IllII8 will do.
Finally, CPAs performing substandard audits mUlt be held ac-
countable for their actions. The committee believes it is possible to
achieve this goal through the accounting profllll8ion's l)'ltem of
self-regulation. The profllll8ion, however, must improve its current
disciplinary procedul'llll, Above all, it mUlt be willing to impose
Itrict sanctions on CPAs who produce substandard work and make
those disciplinary actions public knowledge,
VI, FDmINGS
1. The frequency of substandard audits by certified public ac-
counting firms is unacceptably high. An estimated 34 percent of all
audits of Federal financial assistance funds performed by CPA
firms fail to meet generally accepted government auditing stand-
ards. These poor quality audits serioUll1 erode efforts to assure ac-
countability in the use of the taxpayers money.
'I Ibid.
Ulbid.
-- ~
28
2. Many CPA firms auditing Federal fmancial 888istance funds
are unfamiliAr with generally accepted government auditing stand,
ards.
3. When a CPA firm audits Federal financial usistance funds
under contract to a recipient, it has two clients-the recipient and
the Federal Government. Many fums, however, view only the re-
cipient as the client. The failure to understand the dual client rela-
tionship in~"Olved in wch audits undermines the integrity of the
audit process.
4. CPA firms face limited fmancial liability for performing sub-
standard audits of Federal fmancial 888istance funds, As a result,
IOme firms fail to put the eame level ,of effort into governmental
audits as they do "commercial" audits"
6. Weaknesses in current audit procurement procedures may be
undermining efforts to 888ure high quality CPA audits of Federal
fmancial assistance funds.
6. The public accounting profession'8 ByBtem of self-regulation
can play an important role in improving CPA audit quality. The
current disciplinary procedures of the state boards of accountancy
and the AICPA, however, are inadequate.
7. The public accounting profession, GAO, and the Inspectors
General are all working to improve the quality of CPA audits of
Federal fmancial assistance funds. While these efforts appear
promising and are to be commended, additional corrective actions
are needed. Improving audit quality will require a strong, long-
term commitment from all parties involved.
vn. REcoMMENDAnoNs
1. The public accounting profession, GAO, and the Inspectors
General 8hould take appropriate actions to assure that CP As audit-
ing Federal fmancial assistance funds are properly trained in gov-
ernmental auditing.
2. The state boards of accountancy and the AICPA should impose
strict Banctions on CPAs who perform 8Ubstandard audits. In addi-
tion, the state boards and the Institute should make public the re-
wIts of all C88e8 in which disciplinary action is taken. They 8hould
also provide GAO and the Inspectors General with status reports
on C88e8 under investigation, .
3. The In8pectors General of all agencies that receive CPA audits
of Federal fmancial assistance funds should 8trengthen their qual-
ity review 8Ystems for monitoring such audits. In addition to other
measures deemed n_o.ry they 8hould:
(a) Be more aggressive in referring CPAs performing 8Ub-
standard work to the AICPA and the state boards of account-
ancy for disciplinary action; and
(b) Include in their semi-annual reports to Congress informa-
tion on (1) the results of their reviews of CPA audits, and (2)
their efforts to improve 8uch audits.
4. The General Accounting Office should revise "Standards for
Audit of Governmental Organizations, Programs, Activities. and
Functions" to include:
29
(a) A standard that CPAa involved in auditing Federal fman-
cia! aasistance funds must complete a lpecified amount of con-
tinuing professional education in governmental auditing; and
(b) A ltandard that CPA flrlllll auditing Federal fmancial II&-
aistance funds must undergo periodic peer reviews,
Before establishing a peer review standard, however, GAD
mould determine whether current peer review procedures are ex-
cessively expensive-especially for amaller firms. If luch is found
to be the case, GAD Ihould work with the public accounting profes-
lion and the Inapectors General to develop reaaonably priced alter-
native peer review procedures.
ADDITIONAL VIEWS OF HON, JOSEPH J. DIoGUARDI
The two hearings held by the Legislation and National Security
Subcommittee of the Government Operations Committee and the
reports issued by the General Accounting Office demonstrate that
significant improvements need to be made in the quality of audits
of Federal financial assistance funds.
As a Certified Public Accountant, I am pleased to note that the
American Institute of CPAs [AICPA] and the National Association
of State Boards of Accountancy [NASBA] are facing up to the chal-
lenge identified by this Committee. The recommendations that the
AlCPA has made with respect to mandatory peer review and con-
tinuing education for CPAs conducting those audits go right to the
"earl of the problem, The Committee's support of those recommen-
dations will truly aid in their implementation which will signifi-
cantly improve the quality of work. NASBA's actions relating to
the "Model Positive Enforcement Program" and other initiatives
discussed in this report are also an indication of the profession's
concerns and efforts to improve the quality of audits of governmen-
tal units.
I am also pleased that the AlCPA has changed its procedures
and will inform appropriate government agencies of the results of
its investigations into complaints filed by those agencies. This is a
major change in a sensitive area, but I have been told that the
members of the profession have expressed their support for it.
It is clear that the Committee's work has made the-profession
aware of the problem. Now, there is a need to make recipients of
Federal financial assistance and contracting officers more sensitive
to the importance of quality audits, and the study being conducted
by the GAO at the request of Chairman Brooks will help achieve
that. Further, the additional recommendations being developed by
the AlCPA Task Force on the Quality of Audits of Governmental
Units and other projects currently underway within the profession
will benefit the public by better safeguarding the use of taxpayer
dollars,
JOSEPH J. DIoGUARDI.
(30)
o
Redevelopment Agency · City or San Bernardino
300 Nanh "D's-r. Foanh Floor . 1m IItnadino. Cllifamia 92418
(714) 384-5081 'AX (714) 888-9413
February 14, 1990
Hr. Derek. Hanway
Peat HarwIck. Haln and Company
CertIfIed PublIc Accountants
725 South FIgueroa Street
Los Angeles, CalIfornIa 90017
Request for Proposal of AudIt ServIces
The Redevelopment Agency of the CIty of San BernardIno Is Interested
In receIvIng proposals for the servIces of a professIonal accountIng
fIrm for the examInatIon of the Agency's fInancIal statements for
the fIscal years July I, 1989 through June 30, 1990, July I, 1990
through June 30, 1991 and July 1, 1991 through June 30, 1992.
The examInatIon wIll be made In accordance wIth generally accepted
audItIng standards and accountIng princIples, In accordance wIth the
AICPA's publicatIon PublIc Audit of State and Local Governmental
UnIts, and wIll Include such tests of the accountIng records and
such other audItIng procedures as consIdered necessary to allow for
the expressIon of an opinIon on the fInancIal statements of the
Agency. All notes to the fInancial statements contaIned In the
audIt reports are to be complete and accurate.
The examInatIon Is to cover all Redevelopment Project Areas of the
Agency with separate audIt reports to be prepared by the AudItor on
each Area and a separate Combined Agency report. The AuditIng FIrm
wl11 supply the Agency wIth two (2) orIgInal audIt reports on each
Area, and SpecIal Projects, by November 30, In accordance wIth the
covenants set forth on the various Tax Allocation Bond Issues, and
the Firm wIll supply the Agency with fIfteen (IS) origInal CombIned
Agency audit reports. The Auditing Firm wIll complete and submit to
the Agency by November 30 of each year the Annual Report of
FInancial TransactIons of SpecIal DIstricts to be sent to the State
PrIde .f
\:;~--
Redevelopment Agency
Controller per Health and Safety Code SectIon 33641 and SectIon
33670. In addItIon, a ComplIance AudIt wIll be performed on the
Redevelopment Agency In accordance wIth the guIdelInes establIshed
by the Controller's OffIce of the State of CalIfornIa per SectIon
33080.1. A separate report on the Agency's complIance wIll be
Issued by the AudItIng FIrm, due by November 30 of each year.
The Redevelopment Agency Project Areas, or SpecIal Projects, to be
covered by the audIt for each fIscal year are as follows:
1. AdminIstratIon
2. State College Redevelopment Project Area
3. Central CIty North Redevelopment Project Area
(includIng an audIt of the MaIn Street Prpgram)
4. OperatIon Second Chance '
5. Central City West Redevelopment PrOject Area
6. Southeast IndustrIal Park Redevelopment PrOject Area
7. ParkIng District - Parking DIstrIct ExpansIon
8. Northwest Redevelopment PrOject Area
9. Mortgage Finance Issue of 1979 - City WIde Mortgage
Revenue Issue of 1980 (Refunded thIs year)
10. IndustrIal Development Bonds
11. Trl CIty Redevelopment Project Area
12. Uptown Redevelopment Project Area
13. South Valle Redevelopment Project Area
14. Central CIty Projects Redevelopment PrOject Area
15. Mt. Vernon Proposed PrOject Area
16. Low/Mod HousIng Fund (201 set aside)
17. Central CIty Security
The request for proposals requIres that the proposal submItted to
the Agency contaIn a statement of total maxImum fees and hourly
rates by categorIes for servIces rendered for the fOllowIng:
1. The maxImum fee for audit servIces for the fIscal year
July 1. 1989 through June 30. 1990.
2. The maximum fee for audit services for the fIscal year
July 1, 1990 through June 30, 1991.
3. The maxImum fee for audIt services for the fIscal year
July I, 1991 through June 30, 1992.
The contract for audit servIces will not necessarIly be awarded to
the lowest bIdder.
Redevelopment Agency
The Redevelopment Agency requests that each Firm submit a summary of
past audltlng experlence, speclflcally on Redevelopment Agencies and
20~ Low/Mod Housing Funds. The Agency requlres that the audlt for
each flscal year be performed by quallfled persons havlng sultable
experlence. The Agency may also wlsh to contract wlth the Audltlng
Flrm for any other speclal audlts that may be necessary.
The Redevelopment Agency expects the audlt to commence ln a tlmely
manner, after the awarding and slgnlng of the contract, to allow for
the completion and recelpt of the audlt reports, State Controller's
Report and the Compliance Report. The Agency deslres that the
Audltlng Flrm bill the Agency for servlces rendered at the
completlon and acceptance by the Agency of the audit reports. A
separate statement must be submltted for each Redevelop~ent Project
Area, or Speclal Project, that has been audlted.
Three (3) coples of the proposal must be received by the
Redevelopment Agency no later than March 9, 1990, 4:30 p.m. at the
Redevelopment Agency, 300 North D Street, San Bernardlno, 92418,
Fourth Floor. Proposals recelved after this tlme wl11 not be
consldered.
All proposals received will become property of the Redevelopment
Agency regardless of award, and the cost of preparatlon of the
proposal will be the responslblllty of the proposers. This request
does not constltute an offer of employment or a contract for
servlce. The Redevelopment Agency reserves the rlght to reject any
and all proposals.
Questions regarding this Request for Proposal should be referred to
Barbara Llndseth, Accountlng Manager, telephone (714) 384-5081.
Slncerely,
~,,*y~L
Robert J. Temple
Executive Dlrector
RJT:bl
0823A