Carson, City of - Internal Control System

CITY OF CARSON Review Report INTERNAL CONTROL SYSTEM July 1, 2018, through June 30, 2020 M M. C ALIA OHEN California State Controller February 2023 M M. C ALIA OHEN California State Controller February 8, 2023 David C. Roberts Jr., City Manager City of Carson 701 E. Carson Street Carson, CA 90745 Dear Mr. Roberts: The State Controller’s Office reviewed the City of Carson’s internal control system to determine the adequacy of the city’s controls for conducting operations, preparing financial reports, safeguarding assets, and ensuring proper use of public funds. Our review found deficiencies in the city’s internal control system. Our evaluation of the internal control system was based on conditions that existed during the review period of July 1, 2018, through June 30, 2020. The city should develop a comprehensive plan to address these deficiencies. The plan should identify the tasks to be performed, as well as milestones and timelines for completion. The City Council should require periodic updates at public meetings of the progress in implementing this plan. Furthermore, we request that the city provide the State Controller’s Office with a progress update of its plan six months from the issuance date of final report. We would like to express our thanks to the city staff and management, who were helpful throughout the review process. If you have any questions, please contact Efren Loste, Chief, Local Governments Audit Bureau, by telephone at (916) 324-7226, or by email at eloste@sco.ca.gov. Sincerely, Original signed by KIMBERLY TARVIN, CPA Chief, Division of Audits KT/ac David C. Roberts Jr., City Manager -2- February 8, 2023 cc: The Honorable Lula Davis-Holmes, Mayor City of Carson Jawane Hilton, Mayor Pro Tempore City of Carson Tarik Rahmani, Deputy City Manager City of Carson Jim Dear, Councilmember City of Carson Cedric L. Hicks, Sr., Councilmember City of Carson Arleen Bocatija Rojas, Councilmember City of Carson City of Carson Internal Control System Contents Review Report Summary ............................................................................................................................ 1 Background ........................................................................................................................ 1 Review Authority ............................................................................................................... 1 Objective, Scope, and Methodology ................................................................................. 1 Conclusion .......................................................................................................................... 2 Views of Responsible Officials .......................................................................................... 2 Restricted Use .................................................................................................................... 2 Findings and Recommendations ........................................................................................... 3 Attachment—City of Carson’s Response to Draft Review Report City of Carson Internal Control System Review Report Summary The State Controller’s Office (SCO) has completed a review of the City of Carson’s internal control system for the period of July 1, 2018, through June 30, 2020 (fiscal year [FY] 2018-19 and FY 2019-20). When information obtained from city officials, independent auditors, and other audit reports merited further review, we expanded our testing to include prior-year and current-year transactions. Our review found deficiencies in the city’s internal control system, as described in the Findings and Recommendations section of this review report. Background The City of Carson is a charter city in Los Angeles County, California. The city has a total area of 19.2 square miles, with a population of approximately 93,000 as of 2019. The city operates under Council-Manager form of government. The city’s Mayor is elected to a four-year term, and Councilmembers are elected to four-year, staggered terms with two Councilmembers elected every two years. The City Council is responsible for, among other things, setting city policies, adopting ordinances and resolutions, adopting the budget, appointing committees, and hiring the City Manager and the City Attorney. The City Manager is responsible for carrying out the policies and directives of the Council, for overseeing the day-to-day operations of the city, and for appointing the directors and officers of the city’s departments. We conducted this review pursuant to Government Code section 12422.5, Review which authorizes the Controller to “audit any local agency for purposes of Authority determining whether the agency’s internal controls are adequate to detect and prevent financial errors and fraud.” Objective, Scope, The objective of our review was to evaluate the city’s internal control system for FY 2018-19 and FY 2019-20 to determine the: and Methodology  Effectiveness and efficiency of operations;  Reliability of financial reporting;  Compliance with applicable laws and regulations; and  Adequacy of public-resource safeguards. To achieve our objective, we performed the following procedures:  We evaluated the city’s formal internal policies and procedures.  We conducted interviews with city employees and observed the city’s business operations to evaluate the city’s internal control system. -1- City of Carson Internal Control System  We reviewed the city’s supporting documentation, including financial records.  We performed tests of transactions on a non-statistical sample basis to ensure adherence with prescribed policies and procedures, and to test and validate effectiveness of controls.  We evaluated various aspects of the city’s internal control system in accordance with the Standards for Internal Control in the Federal Government, issued by the United States Government Accountability Office. Conclusion Our review found deficiencies in the city’s internal control system, as described in the Findings and Recommendations section of this review report. These deficiencies include the following:  Lack of controls over the city’s contracts (Finding 1);  Outdated policies and procedures (Finding 2); and  Lack of an established audit committee (Finding 3). Views of We issued a draft report on November 4, 2022. The city responded by letter dated November 22, 2022, agreeing with the audit results. The Responsible city’s response is included as an attachment to this report. Officials Restricted Use This report is solely for the information and use of the City of Carson and the SCO; it is not intended to be and should not be used by anyone other than these specified parties. This restriction is not intended to limit distribution of this review report, which is a matter of public record and is available on the SCO website at www.sco.ca.gov. Original signed by KIMBERLY TARVIN, CPA Chief, Division of Audits F ebruary 8, 2023 -2- City of Carson Internal Control System Findings and Recommendations FINDING 1— During our review of the city’s contracting process from July 1, 2018, through December 31, 2020, we noted numerous contracts and Lack of controls transactions that appear questionable. over the city’s contracts No contract limit for amendments We sampled 42 contracts, and identified 21 contracts that the city amended to significantly increase the contract amounts. Of the 21 amended contracts that we identified, 11 had original contract amounts less than $25,000 and were not procured using a competitive process. The city’s municipal code requires all contracts between $5,000 and $25,000 to be procured using informal bids. Although the city’s Municipal Code states that contracts must undergo a competitive procurement process, it does not impose limits on the total sum of amended contracts. As a result, when the city significantly increased contracts through later amendments, it may have avoided using an open, competitive procurement process. The following table shows the 21 contracts and the total contract sums after amendments were made: Original Amended Vendor Name Contract Sum Contract % Increase Contracts under $25,000 Interwest Consulting Group Inc. $ 24,999 $ 249,999 900% CTI Environmental, Inc. 7 ,000 5 0,000 614% Norman A. Traub and Associates 2 4,000 1 59,769 566% Kosmont Transaction Svcs. 24,990 134,990 440% iWorQ Systems, Inc. 2 1,000 1 08,160 415% Star-Dust Tours 2 4,750 9 5,000 284% The Counseling Team International 25,000 7 5,900 204% Chicago Title Company 1 0,000 3 0,000 200% Kelly Associates Management Group LLC 2 4,000 7 5,000 213% RKA Consulting Group 2 4,990 4 9,990 100% David L. Gruber & Assoc. 20,250 3 8,250 89% Contracts over $25,000 CSG Consultants Inc. 300,000 1,876,000 525% Nationwide Cost Recovery Services 105,000 521,620 397% DHA Consulting 35,000 169,000 383% Environmental Science Associates 750,000 2,116,210 182% Dudek 750,000 1,350,000 80% Michael Baker International Inc. 750,000 1,350,000 80% MRS Environment Inc. 750,000 1,350,000 80% Dyett & Bhatia Urban & Regional Planners 1 ,110,194 1,672,164 51% Hill International 3 ,778,778 4,918,765 30% Nationwide Environmental Services 731,420 921,645 26% -3- City of Carson Internal Control System City Attorney’s contract On June 17, 2008, the city entered into a contract with Aleshire & Wynder, LLP, for City Attorney legal services. The contract specified hourly rates but did not limit total compensation or specify a term ending date. Although the original legal services contract was competitively procured, the city did not provide documentation to support that it had considered other options or sought bids from other legal firms in the last 14 years. During FY 2018-19 and FY 2019-20, the city paid Aleshire & Wynder, LLP an aggregate amount of $8,670,700 from the following four different funds: Funds1 FY 2018-19 FY 2019-20 Total General $ 3,800,316 $ 3,403,985 $ 7,204,301 Housing 5,275 - 5,275 Carson Reclamation Authority 1,084,860 364,868 1,449,728 Successor Agency 11,396 - 11,396 Total Per FY $ 4,901,847 $ 3,768,853 $ 8,670,700 1Housing, Carson Reclamation Authority, and Successor Agency are separate legal entities whose operations are performed and accounted for by city staff. Contract payments not approved by Council The city’s Municipal Code states that the City Manager may approve expenditures of $25,000 or less, and that all expenditures of greater than $25,000 shall be approved by the City Council. We noted two instances in which consultants were paid amounts exceeding the City Manager’s approval limit. The payments were solicited by the City Attorney and were not approved by the City Council. The City Attorney’s contract contains a clause that allows him or her to hire consultants and bill the city for the consultants’ fees and charges. In February 2019, city management approved a $24,999 contract with Alkinson, Andelson, Loya, Ruud & Romo to provide investigative services for the Director of Human Resources and Risk Management. By the end of 2019, the consulting firm had been paid $21,887 and continued to perform investigative services for the city. On January 2020, the City Attorney submitted a special cost-only invoice to the city and requested that the city pay the consulting firm $8,203 for investigative services. As a result, the city exceeded the contract by $5,090. Another consulting firm, Fairbank, Maslin, Maullin, Metz & Associates, was paid over its original contract amount of $24,950, without City Council approval, for a total of $34,950. -4- City of Carson Internal Control System Questionable use of sole-source contracts The city circumvented its normal purchasing procedures by awarding sole- source contracts. The city’s Procurement Policy and Procedures manual contains exceptions to normal purchasing procedures, one of which is when supplies, equipment, or services can be obtained only from a single source. In such cases, the city should document how it determined that a vendor or contractor was the sole source of the supplies, equipment, or service. Out of the 42 contracts we sampled, we noted five sole-source contracts that did not include justification for why a competitive process was not used. By awarding sole-source contracts without providing adequate written documentation of why the providers were chosen, the city was able to circumvent normal purchasing procedures. Per our discussion with city management, these consulting firms were awarded sole-source contracts because the city had worked with them in the past, not necessarily because they were the only service providers in the area. The city approved the following sole-source contracts without justifications: Vendor Description FY 2018-19 FY 2019-20 Total Paid DHA Consulting, LLC Financial analysis and housing $ 12,746 $ 25,328 $ 3 8,074 consulting services Mediastar, Inc. Maintenance, programming, equipment 199,185 - 1 99,185 repair, and replacement of the audio- visual system Superion, LLC Financial software 5 9,491 6 2,911 1 22,402 Kosmont & Associates Financing district consulting 2 4,601 4 4,088 68,689 Electrosonic, Inc. Maintenance, programming, equipment 133,981 1 3,125 1 47,106 repair, and replacement of the audio- visual system Recommendation We recommend that the city:  Ensure that it follows its policies requiring informal bids for small contracts, and provides written justification when informal bids are not practical;  Establish policies and procedures to ensure that contracts follow a competitive procurement process;  Ensure that, when contract amendments, renewals, or extensions significantly exceed original contract amounts, it document why it decided not to seek competitive bids from other service providers;  Re-evaluate its current legal services contract with Aleshire & Wynder, LLP to ensure that it is still competitive; -5- City of Carson Internal Control System  Develop policies and procedures to ensure that contracts and contract amendments exceeding certain limits are approved by the City Council; and  Adhere to the established Procurement Policy and Procedures. City’s Response Pursuant to Carson Municipal Code § 2611 informal bids are required for any contract between $5,000 and $24,999.99 and not required for services under $5,000. . . . The City is already reviewing this matter and will expedite the appropriate updates to our process. SCO Comment We amended this finding as presented in the draft report to provide clarity to the finding. We also updated the report to provide clarity concerning the city’s contract for legal services. FINDING 2— The city does not routinely review and update its policies and procedures. The city’s policies and procedures were last updated in June 2014. The Outdated policies city’s documentation is incomplete, inaccurate, and inconsistent with its and procedures existing processes. We identified the following topics for which the city does not have policies:  Limits on contract amendments, renewals, and extensions;  Recruitment procedures for unclassified management executives, such as department heads; and  Preparation of bank reconciliations. A well-designed and properly maintained system of policies and procedures enhances both accountability and consistency. The resulting documentation can also serve as a useful training tool for staff. Incomplete and outdated policies and related internal controls result in unclear roles and responsibilities, and can lead to improper handling of administrative functions. Monitoring is an essential element of internal control; it includes periodic risk assessments, and verification by management that policies and procedures are regularly updated to address the new challenges identified by those risk assessments. Recommendation We recommend that the city perform periodic review of administrative policies and procedures to ensure completeness, accuracy, and consistency with its existing processes. -6- City of Carson Internal Control System City’s Response The City is already reviewing this matter and will expedite the appropriate updates to our process. SCO Comment Our finding and recommendation remain unchanged. FINDING 3— On June 28, 2013, the Los Angeles County Civil Grand Jury (Grand Jury) issued a final report of its findings and recommendations pertaining to Lack of an county government matters during FY 2012-13. In this report, the Grand established audit Jury recommended that the city formally establish an audit committee to committee provide independent review and oversight of the city’s financial reporting processes, internal control system, and independent auditors. In May 2013, the city approved the formation of a two-member ad hoc Audit Committee. The Mayor Pro Tem and another city council member were appointed to serve for the FY 2012-13 term. It was proposed that all five city council members would take turns serving an annual term. The current committee members were appointed on May 3, 2016. No meetings have been held since May 3, 2017. The purpose of an audit committee is to oversee all aspects of the financial reporting process, including preparation and filing of financial statements, internal control over financial reporting, and related risks. An audit committee’s major areas of responsibility include oversight of the internal control system, oversight of the internal audit function and external auditors, review of financial filings, and establishment and oversight of a “whistleblower” process. Recommendation We recommend that the city formally establish a standing audit committee to provide independent review and oversight to the city’s financial reporting processes, internal control system, and independent auditors. The audit committee should be formally established through a city resolution. City’s Response Previously the City had a Controller position on staff and had an Audit Committee. The City will consider expanding the role of the Audit Committee to include review of internal control systems. SCO Comment Our finding and recommendation remain unchanged. -7- City of Carson Internal Control System Attachment— City’s Response to Draft Review Report State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 http://www.sco.ca.gov S21-LGO-9000