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External auditors outline FY2006—607 plans; controller flags nearly $5 billion GASB 45 exposure
Summary
External auditors and the controller presented audit timelines and issues including interim/final fieldwork, a risk-based audit approach, a possible preliminary $5 billion GASB 45 retiree health liability, and planned GASB 49 pollution-remediation analysis; the committee discussed audit prioritization and next steps.
City controller Ed Harrington and external auditors briefed the Government Audit and Oversight Committee on audit plans for the comprehensive annual financial report and single-audit work, and highlighted emerging accounting standards the committee should track.
Caroline Walsh, audit director, said interim fieldwork would run through July and final fieldwork once the city closes the books, with a goal of issuing the CAFR in the November timeframe. She described a risk-based approach to focusing audit effort and said auditors would perform a fraud-risk assessment, controls testing and a review of federal grant compliance.
On GASB Statement No. 45 (retiree health), Harrington said preliminary actuarial work shows a large unfunded liability. —If the city puts the money aside the way that we do with the retirement system and then invest therefore you get no benefit of interest income...it's about almost $5,000,000,000,— Harrington said. Auditors said they will review the underlying data and use a consulting actuary to evaluate assumptions before GASB 45 disclosures are finalized.
Auditors also flagged GASB Statement No. 49 (pollution remediation obligations) for future reporting and urged departments to identify potential remediation liabilities ahead of implementation. The single-audit review covered 19 federal programs and returned five immaterial findings (late financial reports, certified payroll documentation delays and similar matters); auditors said they did not identify material weaknesses in internal control over financial reporting.
Individual audit firms described specific coverage: KPMG will audit San Francisco International Airport, PUC, Muni, HSS and Finance Corp.; Williams Adley will audit the retirement system and the redevelopment agency (with attention to property held for resale and the Moscone lease); Hood & Strong will audit the Port of San Francisco. KPMG cited a Muni inventory write-down of roughly $1.3 million and described remedial reconciliation controls planned for warehouses.
Peg Stephenson (controller's City Services Auditor division) presented a quantitative risk model used to prioritize management and performance audits (factors include budget size, FTE, previous audits, findings). She said police, MTA and public health rank high and described an organizational development analysis of the Police Department (staffing, district boundaries and foot-patrol effectiveness) expected to last 18—24 months and funded in part by the mayor's office of criminal justice and controller allocations.
Severn Campbell (Budget Analyst Office) said BAO has roughly 6,000 hours to allocate for audits and special projects in the fiscal year and that a focused audit of a small department or program takes approximately 2,500—3,000 hours. Chair Sean Ellsburn said he would circulate a letter to supervisors urging a shift toward more targeted, cross-departmental or issue-specific audits and planned a motion on June 11 to direct audit priorities.
No formal committee votes were taken on audit plans; auditors invited the committee to meet periodically during the audit cycle and to request presentations at milestones.
