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- Appendix A—Scope and Methodology
- Appendix B—Lynwood’s Implementation Efforts to Address Financial Audit Recommendations
- Appendix C—The State Auditor’s Local High‑Risk Program
Scope and Methodology
In May 2018, the Audit Committee approved a proposal by the State Auditor to perform an audit of Lynwood under the local high‑risk program. We conducted an initial assessment of Lynwood in October and November 2017, in which we reviewed Lynwood’s financial and operating condition to determine whether it demonstrated characteristics of high risk pertaining to the following six risk factors specified in state regulations:
- The local government agency’s financial condition has the potential to impair its ability to efficiently deliver services or to meet its financial or legal obligations.
- The local government agency’s ability to maintain or restore its financial stability is impaired.
- The local government agency’s financial reporting does not follow generally accepted government accounting principles.
- Prior audits reported findings related to financial or performance issues and the local government agency has not taken adequate corrective action.
- The local government agency uses an ineffective system to monitor and track state and local funds it receives and spends.
- An aspect of the local government agency’s operation or management is ineffective or inefficient; presents the risk for waste, fraud, or abuse; or does not provide the intended level of public service.
Based on our initial assessment, we identified concerns about Lynwood’s financial condition and financial stability as well as aspects of its operations that were ineffective or inefficient. Further, we identified that Lynwood has not taken adequate corrective action to address several prior audit findings, including those identifying weaknesses that could expose Lynwood to increased risk of fraud or financial mismanagement. Table A lists the resulting audit objectives and related procedures that address these risk factors. We did not identify concerns during our initial assessment pertaining to the remaining two risk factors.
|1||Review and evaluate the laws, rules, and regulations significant to the audit objectives.||Reviewed relevant laws, regulations, and other background materials applicable to Lynwood.|
|2||Determine the causes for the fiscal year 2016–17 decline in Lynwood’s general fund balance, as well as the reasons for the significant discrepancy between the estimated and actual fund balance.||
|3||Assess whether Lynwood’s departmental structures and staff levels are sufficient to effectively provide city services. Determine how changes in staffing levels and compensation will affect future personnel costs. Identify options for Lynwood to improve the efficiency and effectiveness of its staffing model.||
|4||Assess Lynwood’s processes for projecting revenue and expenditures, including whether those processes follow best practices. In doing so, also assess Lynwood’s ability to meet future costs and obligations, including increasing salary and pension costs. Identify opportunities to increase the accuracy and transparency of Lynwood’s budgeting processes and to sustainably align Lynwood’s revenue and expenditures.||
|5||Review Lynwood’s implementation of its plans to address internal control deficiencies identified in its fiscal year 2015–16 financial audit. Also, to the extent possible, review other areas of controls not directly related to financial reporting but for which insufficient controls may create a risk of waste or abuse, such as procurement and contracting practices.||
|6||Examine Lynwood’s efforts to fill key management positions and maintain organizational and leadership continuity within city operations.||
|7||Review and assess any other issues significant to the audit.||
Source: Analysis of documents, interviews, and data obtained from Lynwood.
As a part of our audit fieldwork, we determined the status of Lynwood’s efforts to address the recommendations from its fiscal year 2015–16 financial audit. As we discuss in our report, Lynwood has not fully addressed several recommendations even though they were reported more than a year ago. Table B shows the status of Lynwood’s corrective action for each finding.
|Lack of Claims Payable Tracking: The city did not perform an analysis and accrual of insurance claims payable incurred but not reported (IBNR).||The claims payable liability might be understated without IBNR analysis and accrual.||Lynwood should perform IBNR analysis on an annual basis and accrue the additional liability if necessary.||✓|
|Lack of Payroll Control: There is a lack of internal controls over payroll and human resources.||Lack of internal control over payroll and human resources‑related processes may lead to financial statement misstatements.||Lynwood should adopt a formal policy on the internal control over overall financial reporting. The policies should include the payroll and human resources‑related procedures.||✓|
|Lack of Approval of Federal Requests: U.S. Department of Housing and Urban Development (HUD) drawdown requests were missing proper approvals.||Without a review process, the city may not comply with the grant requirements.||Lynwood should establish a formal policy on review procedures over federal grant drawdown requests.||✓|
|Lack of IT Access Control: Janitors had full access to the information technology (IT) server room and the cabinets were not locked. Employees are able to log in to the utility-billings terminal using other employees’ user names and passwords.||Lack of IT control in the city might result in unauthorized access to financial data.||Lynwood should adopt policies and procedures to monitor user rights and prohibit shared login.||✓|
|Lack of Vendor Credential Verification: The city did not have documentation to support it had verified that its vendors were not debarred or suspended from federally funded purchases.||Without verifying whether vendors are suspended or debarred from working on federally funded projects, the city could be contracting with vendors that are prohibited from working on federally funded projects.||Lynwood should establish proper internal control procedures to monitor compliance requirements to ensure vendors are not suspended or debarred from federally funded purchases.||✓|
|Missed Federal Deadlines: The city did not meet deadlines for Form HUD 60002 reporting.||Because of the delay in filing Form HUD 60002, a report the federal government requires the city to submit every year, the city was not in compliance with the requirements.||Lynwood should establish comprehensive policies and procedures that specify the deadlines for all required reporting.||✓|
|Federal Grant: The city did not obtain HUD’s approval of a request for release of funds nor did it perform an environmental review prior to the street improvement project’s commencement.||Because the city did not obtain HUD’s approval of a request for release of funds or complete environmental reviews prior to commencement of the street improvement projects, the city was not in compliance with federal regulations.||Lynwood should establish a comprehensive grant management policy to ensure all compliance requirements are met.||✓|
|Turnover in the Finance Department: The city has significant turnover in the finance department that resulted in inadequate review, analysis, and reconciliation of financial statements to the accounting records.||The turnover caused a significant burden to the remaining finance staff, increased the risk for error and noncompliance, and caused a delay in closing the financial books.||Lynwood should reestablish a well-structured finance department and clearly define responsibilities among staff.||X|
|Delayed Bank Reconciliations: All four bank reconciliations selected for testing were not completed in a timely manner. The finance department has no method for ensuring that timely and complete year‑end closing procedures are in operation.||Delays in processing transactions in a timely manner and delays in closing accounting periods can create accounting errors that could go undetected. This may lead financial statements to be materially misstated and create further delays in the release of audited financial statements.||Lynwood should establish effective monthly and year‑end closing procedures that reduce the risk of accounting errors and the need for correcting journal entries after the year‑end closing. These procedures would include timely review and approval by management of account reconciliations, sub-ledger transactions, cutoff review for account balances at a fund and overall government‑wide level, and revenue and expenditures review. Revenue and expenditures should be compared to the prior year or prior year trends and to the budget.||X|
|Lack of Purchase Order Control: Internal control testing over procurement found that some purchase orders were issued after the purchase occurred, procurement was completed without a valid contract between the city and the vendor in one instance, and vendor invoices were held at the department level resulting in the need to rush payments through prepaid checks rather than regular check runs.||Lack of internal control over procurement and cash disbursement processes may lead to financial misstatements. It may also lead the city to enter into unauthorized transactions.||Lynwood should adopt a formal policy regarding the internal control over the overall financial reporting and each transaction class. The policies should include the procurement and cash disbursements process. Lynwood should make procurements with qualified contracts or purchase orders to prevent incurring unauthorized purchases. Furthermore, Lynwood should limit the use of prepaid checks for payments in order to make sure all disbursements go through proper review and approval.||X|
|Lack of Capital Asset Tracking: The city does not have a capital assets list at the department level and does not perform a capital asset count or tag equipment. Some assets were not recorded properly.||Commingling capital assets between governmental activities and business‑type activities and expensing capital‑related expenditures might result in material financial misstatements. Not capitalizing the infrastructure expenditures could also lead to financial misstatements and is inconsistent with standard industry practice.||Lynwood should adopt a capital assets policy and also perform a capital‑asset expenditure analysis on an annual basis to determine whether the capital‑related expenditures should be expensed or capitalized in order to fairly present the financial statements. Lynwood should also review historical records of capital assets purchased by the city in order to determine their proper classification.||X|
|Unsupported Grant Allocations: Payroll allocations to federal grants were not properly calculated, reviewed, or documented.||Without a review process in place to detect miscalculations and clerical errors, the city incorrectly charged payroll costs to a grant. In addition, the city did not have formal policies and procedures over the payroll process, which resulted in missing supporting documentation and incorrect payroll allocations charged to the program.||Lynwood should establish a proper internal control to ensure payroll allocations charged to federal grants are properly calculated, reviewed, and documented.||X|
Source: Lynwood’s fiscal year 2015–16 single audit and independent auditor’s report, interviews with relevant Lynwood staff, and analysis of policy documents maintained by Lynwood.
✓ = Completed prior to June 2018
✓ = Completed after June 2018
X = Not completed
The State Auditor’s Local High‑Risk Program
California Government Code section 8546.10 authorizes the State Auditor to establish a local high risk program to identify local government agencies that are at high risk for potential waste, fraud, abuse, or mismanagement, or that have major challenges associated with their economy, efficiency, or effectiveness. Regulations that define high risk and describe the workings of the local high risk program became effective July 1, 2015. Both statute and regulations require that the State Auditor must seek approval from the Audit Committee to conduct high risk audits of local entities.
To identify local entities that may be high risk, we analyzed publicly available information, such as financial reports and prior audit reports or analyses, for more than 450 California cities. Using this analysis, we identified various cities for which we performed a more detailed financial analysis. This detailed analysis included using the financial data to calculate fiscal indicators that may be indicative of a city’s fiscal stress. We also reviewed publicly available information, including financial and budgetary reports and other information that could affect the city’s operations, to assess the city’s fiscal outlook over the next several years. We then analyzed the results to determine whether each city is at risk for potential waste, fraud, abuse, and mismanagement, or has major challenges associated with its economy, efficiency, or effectiveness.
Based on our most recent analyses in 2017, we identified several cities, including Lynwood, which appeared to meet the criteria for being at high risk. To better understand the factors that led us to this determination, we visited each of these cities and conducted an initial assessment to determine the city’s awareness of and responses to those issues, as well as to identify any other ongoing issues that could affect our determination of whether the city is high risk. After conducting our initial assessment, we concluded that Lynwood warranted an audit. In May 2018, we sought and obtained approval from the Audit Committee to conduct an audit of Lynwood.
If the local agency is designated as high risk as a result of the audit, it must submit a corrective action plan. If it is unable to provide its corrective action plan in time for inclusion in the audit report, it must provide the plan no later than 60 days after the report is published. It must then provide written updates every six months after the audit report is issued regarding its progress in implementing the corrective action plan. This corrective action plan must outline the specific actions the local agency will perform to address the conditions causing us to designate it as high risk and the proposed timing for undertaking those actions. We will remove the high risk designation when the agency has taken satisfactory corrective action.