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1n. Extension of Audit ContractCITYOF CHANHASSEN 7700 Wlarket Boule, yard PO Box 147 (}har~Dassen I~l!q 55317 Administration PiiDne; 952227 1100 Fax: 9s~ 2~, 1 Building Inspections Ph,::::/e 952 227 1180 Fa~:: 952 2271190 Engineering Prone 952 2271160 Fax: 952 227 !170 Finance Pqor e: 9522271140 Fax(5© ')27 o Park & Recreation Pnome 9522271120 Fax: 952 227 1110 Recreaiion Cer ter 23!0 Oou :er Boulevard P!/or'i!: 9522271400 Fax: 952227 1404 Planning & Nalural Resources P~ioue 9522271130 Fax 952 2271110 Public Works 1591 Pt:k Road Phone: 9522271300 Fax 952227 1310 Senior Center P~'c, ne: 952227 t!25 Fax 952227 1! 10 Web Site MEMORANDUM TO: Mayor City Council FROM: DATE: Bruce M. DeJong, Finance DirectorF,)~ January 18, 2001 ' SUBJECT: Authorize Extension of Audit Contract with HLB Tautges, Redpath for Fiscal Years 2003-2005 Three years ago, we selected HLB Tautges, Redpath (HLBTR) to provide audit and consulting services for three fiscal years, with the option for an extension of three years. I have asked them for a quotation for extending that contract. Dave Mol, the partner in charge of our audit, has responded with a proposal that seems fair and reasonable with the amount of additional work that is required due to changed auditing and financial reporting standards. Staff is recommending that we extend the contract with HLB Tautges, Redpath for an additional three years as anticipated in the Request for Proposal at the rates listed on the enclosed proposal. When we evaluated firms, several factors were given weight in the decision- making process. The first was the amount of expertise available in each firms' staff for auditing and the amount of focus that it takes of their practice. Another was the expertise related to Tax Increment Financing (TIF) at each firm. The other factor given significant weight was the number of hours and costs for performing the work. HLB Tautges, Redpath has performed many municipal audits and have a significant portion of its CPA's who have focused in the governmental accounting arena. Their TIF expertise is the area that most significantly differentiates them from the other firms. HLBTR has significantly more experience in this area. They are also intimately familiar with our current situation and have already provided significant consulting services to us in this area. It would be extremely difficult to bring another team up to the level of familiarity that is necessary to bring our Downtown TIF district to a successful conclusion. When we interviewed firms, the hourly rates charged were closely grouped. The increase in total costs comes more from increased number of hours than in hourly rates. This is born out by the comparison included with this item. The additional hours are necessary to comply with Statement of Auditing Standards (SAS) 99 and Governmental Accounting Standards Board (GASB) Statement 34. The The Cily of Chanhassen · ,~ growing commurdty wilh clean lakes quality schools a charmin0 do',,,¢ntc,,~'r~ thriving businesses v~indiqg trails and beatJtiful par~s ,'~ :1~ r~'~, [)la{:r ',' !~e ~,vc ~( an'd r)ia',, Authorize Extension of Audit Contract with HLB Tautges, Redpath November 5, 2003 Page 2 CITYOF CHANHASSEN 77(-}0 t.&rket Bouie,ard PO Box S47 O!na~ I,assen P,,dN 55317 Administration P s.)r e: 952 227 1100 Fax: 952 227 1110 Building Inspections Phc, ne 952 227 1! 80 Fax: 9522271190 Engineering Phor e 952 227 1!60 Fax 9522271170 Finance P~c;,r~s 9522271140 Fax ~.,~ z4~ 10 Park & Recreation Phor~e: 952227 1120 Fa;< 952 227 1110 Recreation Oen!er 2310 Coulter Boulevard Phone: 952 2271400 Fax 952227 1404 Planning & Natural Resources P'or ~: 9522271130 Fax: 952 227 1110 Public Works 1591 Park Road Phone 952 2271300 Fax 952 227 1310 Senior Cenler P?one 9522271125 Fax: 952227 1110 Web Site w.~,,,,., s!, ~ar~,~assen mn us contract increase is 13.4% over the amount for 2002 which reflects the additional work, but then increases by only 2.2% which is the current Consumer Price Index (CPI) rate of inflation. Based on the foregoing analysis, staff believes it is in the city's best interest to continue the relationship with HLB Tautges, Redpath. Staff recommends that the City Council extend the contract with HLB Tautges, Redpath for an additional three years. This vote requires a simple majority of those present. Enc: HLBTR Proposal dated 10/31/03 Hourly cost comparison The City of Chanhassen · A gro'.~iqg corot';unit?' with clea[1 lakes aality schools a charming downtown !hriw~lO businesses ~.41xJing trails and beakJtif.JI [)ar~<s A great [)lac;~: r:)!~x,,e ,wcr;~ al,rs pla? October 31, 2003 Mr. Bruce DeJong, Finance Director City of Chanhassen 7700 Market Blvd. P.O. Box 147 Chanhassen, MN 55317 Dear Bruce: Enclosed are two copies of our standard engagement letter for auditing services for the years ending December 31, 2003 through 2005 for the City of Chanhassen, Minnesota. Scope ol Services The scope of services is as follows: We will audit the basic financial statements of the City of Chanhassen, Minnesota as of and for the years ending December 31, 2003, 2004 and 2005. We understand that the financial statements will be presented in accordance with the financial reporting model described in GASB Statement No. 34. We will provide an "in-relation-to" opinion on the combining and individual fund financial statements and schedules, supplementary information except for that portion marked "unaudited." The statistical section will not be subjected to the auditing procedures applied in our audit of the basic financial statements. With regard to required supplementary information (RSI), we will apply certain limited procedures, which will consist principally of inquiries of management regarding methods of measurement and presentation of supplementary information. However, we will not audit the information nor express an opinion on it. · Copying and binding the Annual Financial Report. · State Legal Compliance Audit. · Preparation of separate Audit Management Letter. Chanqes in Accountinq and Audit Standards There were two recent changes that have a significant impact on the level of effort required for both auditors and finance departments: · GASB No. 34 - Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments. · SAS No. 99 - Consideration of Fraud in a Financial Statement Audit. Mr. Bruce DeJong, Finance Director City of Chanhassen, Minnesota October 31, 2003 Page 2 SAS 99 In a continuing effort to improve audit quality and meet public expectations, the professional standards for audit engagements have changed. Auditors are now required to perform additional, substantial audit procedures aimed at detecting material misstatements caused by fraud. The new audit procedures include the following: Brainstorming session among all audit team members to discuss the potential for material misstatements due to fraud. Interviews with management and non-accounting personnel within the city (department heads and others). · Increased testing of journal entries and other adjustments, accounting estimates and unusual transactions. · Incorporate an element of unpredictability in audit procedures from year-to-year. The above procedures are not a complete list of the additional steps now required, but provides a synopsis of the changes to audit procedures. Many of the new audit procedures require the experience of an audit in-charge or partner. The combination of the additional procedures and the need for an experienced auditor to complete them, increases audit fees. GASB 34 GASB 34 is, to date, the most comprehensive governmental accounting standards change. GASB 34 impacts both auditors and finance department staff two ways: 1. Implementation of the new accounting standard. 2. Increased annual effort required to comply with this standard. The City is required to implement this new accounting standard for the fiscal year ended December 31, 2003. Implementation of this standard requires significant effort by the finance staff. GASB 34 also increases audit effort during the implementation phase. The additional effort required is in the following areas: · Including infrastructure assets. · Depreciation of all capital assets. · Reporting governmental activities in two bases of accounting (modified accrual and full accrual). · Elimination of internal service fund net income. · Reporting program revenue by department. 353996.1 Mr. Bruce DeJong, Finance Director City of Chanhassen, Minnesota October 31, 2003 Page 3 Inclusion of the Management's Discussion and Analysis (MD&A). Fees A summary of proposed fees, including an estimate of the impact of the new accounting and audit standards is as follows: CAFR Audit Preparation Total Base fee $30,800 $8,000 $38,800 SAS 99/GASB 34 5,200 5,200 Total - 2003 audit $36,000 $8,000 $44,000 Total - 2004 audit $45,000 Total - 2005 audit $46,000 The scope of this letter does not include GASB 34 implementation assistance. The amount presented above is based on anticipated cooperation from your personnel, completion of audit schedules by City staff and the assumption that unexpected circumstances will not be encountered during the engagement. If significant additional time is necessary, we will discuss it with you and arrive at a new fee estimate before we incur the additional costs. We appreciate the opportunity to be of service to the City of Chanhassen, Minnesota and believe this letter accurately summarizes the significant terms of our engagement. If you have any questions, please let us know. If you agree with the terms of our engagement as described in this letter, please sign the enclosed copy and return it to us. Sincerely, HLB TAUTGES REDPATH, LTD. David J. Mol, CPA DJM/clg Enclosure 353996.1 October 31, 2003 City of Chanhassen 7700 Market Blvd. P.O. Box 147 Chanhassen, MN 55317 We are pleased to confirm our understanding of the services we are to provide the City of Chanhassen, Minnesota for the years ending December 31, 2003, 2004 and 2005. The scope of services includes the following: · We will audit the basic financial statements of the City of Chanhassen, Minnesota as of and for the years ending December 31, 2003, 2004 and 2005. We understand that the financial statements will be presented in accordance with the financial reporting model described in GASB Statement No. 34. We will provide an "in-relation-to" opinion on the combining and individual fund financial statements and schedules, supplementary information except for that portion marked "unaudited." The statistical section will not be subjected to the auditing procedures applied in our audit of the basic financial statements. With regard to required supplementary information (RSI), we will apply certain limited procedures, which will consist principally of inquiries of management regarding methods of measurement and presentation of supplementary information. However, we will not audit the information nor express an opinion on it. · Preparation, copying and binding Comprehensive Annual Financial Report. · State Legal Compliance Audit · Preparation of separate Management Report. Audit Objectives The objective of our audit is the expression of an opinion as to whether the basic financial statements are fairly presented, in all material respects, in conformity with accounting principles generally accepted in the United States of America and to report on the fairness of the additional information referred to in the first paragraph when considered in relation to the basic financial statements taken as a whole. Our audit will be conducted in accordance with auditing standards generally accepted in the United States of America, the standards for financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and the minimum procedures for auditors as prescribed by MS 6.65, and will include tests of the accounting records of the City of Chanhassen, Minnesota City of Chanhassen Contract for Auditing Services October 31, 2003 Page 2 and other procedures we consider necessary to enable us to express such an opinion. If our opinion on the basic financial statements is other than unqualified, we will fully discuss the reasons with you in advance. If, for any reason, we are unable to complete the audit, or are unable to form or have not formed an opinion, we may decline to express an opinion or to issue a report as a result of this engagement. We will also provide reports (that do not include opinions) on internal control related to the financial statements and compliance with laws, regulations, and the provisions or grant agreements, noncompliance with which could have a material effect on the basic financial statements as required by Government Auditing Standards. Management Responsibilities Management is responsible for establishing and maintaining internal control and for compliance with laws, regulations, contracts and agreements. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of the controls. The objectives of internal control are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, that transactions are executed in accordance with management's authorizations and recorded properly to permit the preparation of basic financial statements in accordance with accounting principles generally accepted in the United States of America. Management is responsible for making all financial records and related information available to us. We understand that you will provide us with such information required for our audit and that you are responsible for the accuracy and completeness of that information. We will advise you about appropriate accounting principles and their application and will assist in the preparation of your financial statements, but the responsibility for the financial statements remains with you. That responsibility includes the establishment and maintenance of adequate records and effective internal control over financial reporting, the selection and application of accounting principles, and the safeguarding of assets. Management is responsible for adjusting the basic financial statements to correct material misstatements and for confirming to us in the representation letter that the effects of any uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the basic financial statements taken as a whole. You are responsible for the design and implementation of programs and controls to prevent and detect fraud, and for informing us about all known or suspected fraud affecting the government involving (a) management, (b) employees who have significant roles in internal control, and (c) others where the fraud could have a material effect on the financial statements. You are also responsible for informing us of your knowledge of any allegations of fraud or suspected fraud affecting the government received in communications from employees, former employees, regulators, or others. In addition, 353996.1 City of Chanhassen Contract for Auditing Services October 31, 2003 Page 3 you are responsible for identifying and ensuring that the entity complies with applicable laws and regulations. Audit Procedures - General An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; therefore, our audit will involve judgment about the number of transactions to be examined and the areas to be tested. We will plan and perform the audit to obtain reasonable rather than absolute assurance about whether the financial statements are free of material misstatement, whether from errors, fraudulent financial reporting, misappropriation of assets, or violations of laws or governmental regulations that are attributable to the entity or to acts by management or employees acting on behalf of the entity. Because an audit is designed to provide reasonable, but not absolute assurance and because we will not perform a detailed examination of all transactions, there is a risk that material misstatements may exist and not be detected by us. In addition, an audit is not designed to detect immaterial misstatements or violations of laws or governmental regulations that do not have a direct effect on the financial statements. However, we will inform you of any material errors that come to our attention and we will inform you of any fraudulent financial reporting or misappropriation of assets that comes to our attention. We will also inform you of any violations of laws or governmental regulations that come to our attention, unless clearly inconsequential. Our responsibility as auditors is limited to the period covered by our audit and does not extend to matters that might arise during any later periods for which we are not engaged as auditors. Our procedures will include tests of documentary evidence supporting the transactions recorded in the accounts, and may include tests of the physical existence of inventories, and direct confirmation of receivables and certain other assets and liabilities by correspondence with selected individuals, creditors, and financial institutions. We will request written representations from your attorneys as part of the engagement, and they may bill you for responding to this inquiry. At the conclusion of our audit, we will also request certain written representations from you about the financial statements and related matters. Identifying and ensuring that the City of Chanhassen, Minnesota complies with laws, regulations, contracts, and grant agreements is the responsibility of management. As part of obtaining reasonable assurance about whether the basic financial statements are free of material misstatement, we will perform tests of the City of Chanhassen, Minnesota's compliance with applicable laws and regulations and the provisions of contracts and agreements. However, the objective of our audit will not be to provide an opinion on overall with such provisions, and we will not express such an opinion. 353996.1 City of Chanhassen Contract for Auditing Services October 31, 2003 Page 4 Audit Procedures - Internal Controls In planning and performing our audit we will consider the internal control sufficient to plan the audit in order to determine the nature, timing and extent of our auditing procedures for the purpose of expressing our opinion on the City of Chanhassen, Minnesota's basic financial statements. We will obtain an understanding of the design of the relevant controls and whether they have been placed in operation, and we will assess control risk. Tests of controls may be performed to test the effectiveness of certain controls that we consider relevant to preventing and detecting errors and fraud that are material to the basic financial statements and to preventing and detecting misstatements resulting from illegal acts and other noncompliance matters that have a direct and material effect on the basic financial statements. (Tests of controls are required only if control risk is assessed below the maximum level.) Our tests, if performed, will be less in scope than would be necessary to render an opinion on the internal control and, accordingly, no opinion will be expressed. An audit is not designed to provide assurance on internal control or to identify reportable conditions. However, we will inform the governing body or audit committee of any matters involving internal control and its operation that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control that, in our judgment, could adversely affect the entity's ability to record, process, summarize, and report financial data consistent with the assertions of management in the basic financial statements. Audit Administration, Fees and Other We understand that your employees will prepare all cash or other confirmations we request and will locate any invoices selected by us for testing. The workpapers for this engagement are the property of HLB Tautges Redpath, Ltd. and constitute confidential information. However, we may be requested to make certain workpapers available to certain regulators or grantor agencies pursuant to authority given to it by law or regulation. If requested, access to such workpapers will be provided under the supervision of HLB Tautges Redpath, Ltd. personnel. Furthermore, upon request, we may provide photocopies of selected workpapers to regulators or grantor agencies. The regulator or grantor agency may intend, or decide, to distribute the photocopies of information contained therein to others, including other governmental agencies. 353996.1 City of Chanhassen Contract for Auditing Services October 31, 2003 Page 5 Our fee for these services will be at our standard hourly rates plus out-of-pocket costs (such as report reproduction, typing, postage, travel, copies, telephone, etc.). Our estimate of fees is as follows: CAFR Audit Preparation Total Base fee $30,800 $8,000 $38,800 SAS 99/GASB 34 5,200 5,200 Total - 2003 audit $36,000 $8,000 $44,000 Total - 2004 audit $45,000 Total - 2005 audit $46,000 Our standard hourly rates vary according to the degree of responsibility involved and the experience level of the personnel assigned to your audit. Our invoices for these fees will be rendered each month as work progresses and are payable on presentation. If we elect to terminate our services for nonpayment, you will be obligated to compensate us for all time expended and to reimburse us for all out-of-pocket expenditures through the date of termination. 353996.1 City of Chanhassen Contract for Auditing Services October 31, 2003 Page 6 CIo$inq Government Auditing Standards requires that we provide you with a copy of our most recent quality control review report. Our 2001 peer review report accompanies this letter as Appendix A. We appreciate the opportunity to be of service to the City of Chanhassen, Minnesota and believe this letter accurately summarizes the significant terms of our engagement. If you have any questions, please let us know. If you agree with the terms of our engagement as described in this letter, please sign the enclosed copy and return it to us. Very truly yours, HLBTAUTGESREDPATH, LTD. David J. Mol, CPA RESPONSE This letter correctly sets forth the understanding of the City of Chanhassen, Minnesota: By:. By:. Title: Title: Date: Date: 353996.1 Appendix A Memt~er: Arizona Sodety of Certified Public ACCOuntan~ y A. Liem P.C. Private Companies Practice Section. Dk4slon of Firms. American Institute of Certified Public Accountants To the Shareholders HLB Tautges, Redpath, Ltd. We have reviewed the system of quality control for the accounting and auditing practice of HLB Tautges, Redpath, Ltd. in effect for the year ended September 30, 200t. A system of quality control encompasses the firm's organizational structure and the policies adopted and procedures established to provide it with reasonable assurance of complying with professional standards. The elements of quality control are described in the Statements of Quality Control Standards issued by the American Institute of Certified Public Accountants (AICPA). The design of the system and compliance with it are the responsibilities of the firm. Our responsibility is to express an opinion on the design of the system, and the firm's compliance with that system based on our review. Our review was conducted in accordance with standards established by the Peer Review Board of the AICPA. In performing our review, we obtained an understanding of the system of quality control for the firm's accounting and auditing practice. In addition, we tested compliance with the firm's quality control policies and procedures to the extent we considered appropriate. These tests covered the application of the firm's policies and procedure on selected engagements. Because our review was based on selective tests, it would not necessarily disclose all weaknesses in the system of quality control or all instances of lack of compliance with it. Because there are inherent limitations in the effectiveness of any system of quality control, departures from the system may occur and not be detected. Also, projection of any evaluation of a system of quality control to future periods is subject to the risk that the system of quality control may become inadequate because of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate. In our opinion, the system of quality control for the accounting and auditing practice of HLB Tautges, Redpath, Ltd. in effect for the year ended September 30, 2001, has been designed to meet the requirements of the quality control standards for an accounting and auditing practice established by the AICPA and was complied with during the year then ended to provide the finn with reasonable assurance of conforming with professional standards. Phoenix, Arizona March 29, 2002 Certified Public Accountant 2777 East Camelback Road Suite 325 Phoenix, Arizona 85016-4302 Telephone (602) 760-2920 Fax (602) 760-2~)17