Sunday, February 2, 2014

"Material Weaknesses" in Accounting?

As many have focused on the financial reports for Costa Mesa’s 60th Anniversary kickoff celebration, the City’s Comprehensive Annual Financial Report has been released.  It can be viewed here .

The good news is that total revenues of $121,363,178 exceeded expenditures of $111,012,567 by $10,350,611.  Unfortunately, the City also took an unusual loss of over $10 million, mostly due to writing off the long term debt owed the city by the Costa Mesa Redevelopment Agency which, due to State legislation, no longer exists.  The debt has been deemed unrecoverable.

The Single Audit Report is also available and may be viewed here.   

The auditors, White Nelson Diehl Evans LLP, found no evidence of any wrong doing but had this to say in their cover letter dated December 26, 2013:

…as described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control that we considered to be material weaknesses.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the City’s financial statements will not be prevented, or detected and corrected on a timely basis [emphasis added].  A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiencies described in the accompanying schedule of findings and questioned costs as Finding Numbers 2013-01 and 2013-02 to be material weaknesses.

In another letter, also dated December 26, 2013, the auditors urged that the City adopt an ethics policy, stating that:

"a structured ethics policy establishes organizational standards for ethics, morals, and an overall 'regard for the rules' … within an entity."

I will definitely be looking into this further, and encourage local residents to continue to monitor City spending.


Moon said...

How does one fix a process that one has no visibility into?

Sherry Kallab said...

Sounds like a good audit job. I really like the ethics recommendation. I hope this opens some eyes.

Terry Koken said...


Welcome back, Sandy. High time some intellect got applied to these matters, both yours and the accountants'.