Audit Committee Meeting

MINUTES Audit Committee Meeting Wednesday, May 17, 2023 at 3:00 PM Carnegie Town Hall, 235 West 10th St., Sioux Falls, South Dakota 57104 1. Call To Order Present: Committee Member David Barranco, Committee Member Dean Buckneberg, Committee Member Tony Goettsch, Committee Member Rose Grant, Committee Member Rich Merkouris, Committee Member Greg Neitzert Absent: Committee Chair Alex Jensen Councilor David Barranco called the meeting to order at 3:04 p.m. and noted that there was a quorum. 2. Approval of Minutes A. Wednesday, March 1, 2023 A motion was made by Committee Member Neitzert and seconded by Committee Member Goettsch to approve the minutes. Voice vote to approve. 6 Yes: Barranco, Buckneberg, Goettsch, Grant, Merkouris, Neitzert; 0 No: (None). Motion Passed. Due to technical difficulties Barranco adjourned the meeting at 3:06 p.m. Barranco reconvened the meeting at 3:07 p.m. 3. Reports and Updates Due to technical difficulties Item 3B was heard before Item 3A. A. External Audit Results: City of Sioux Falls 2022 Financial Statements by Eide Bailly, LLC Brian Stavenger, Eide Bailly Engagement Partner, presented the audit results. He began by reviewing the criteria they have to follow for the audit. In order to obtain an opinion, the criteria is designed to obtain reasonable, not absolute, assurance about whether the financial statements are free of material misstatements. Planning for the audit began in November 2022; and the opinion was issued on April 25, 2023. Due to newly implemented standards, regarding leasing, the opinion was  reported a little later than usual. During the Audit Recap, Stavenger spoke about the responsibilities of Management and Auditors, for Financial Statement Audits. Overall, the auditor's responsibility is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud or error, and to issue an auditor's report that includes their opinions. In the opinion, there was a finding of one significant deficiency in internal control over the reporting of retainage payable. An $875,000 unrecorded retainage payable was discovered during the audit. The item was tied to the Water Reclamation expansion project. Stavenger and Tom Huber, Assistant Director of Finance, briefly discussed retainage payables. Debt limits and leases were also discussed. Stavenger provided a brief review of the Federal Audit from 2020 and 2021 and noted some issues that were found. It was discovered that some funding from the State was actually provided by a Federal source. This caused additional program testing. It lead to one material weakness internal control finding; and one significant deficiency internal control and noncompliance finding. This led to the reissuance of two audits. The material weakness finding 2020-002 and 2021-002 were over not including the federal funds in the original Schedule of Expenditures of Federal Awards. The significant deficiency and noncompliance finding 2020-003 and 2021- 003 were over procurement in the Clean Water Program. The contract did not contain all required contract provisions under uniform guidance. A question was raised regarding looking at old pass throughs to see if they were in compliance with Title II of the U.S. Federal Regulations. Another question was raised in regards to what it means to have an audit with unmodified opinions yet significant deficiencies. Stavenger provided an explanation. Councilor Greg Neitzert inquired if some changes were made based on the audit findings. A new system has been created regarding State and Federal grants. A checklist has also been created regarding contract provisions. Federal Audit - 2022 revealed one significant deficiency internal control finding. In Finding 2022-22-002 there was over Procurement in the ARPA program. The contract did not contain all required contract provisions under uniform guidance. The last part of the audit discussion focused on a Governance Letter, which included: significant accounting estimates; significant financial statement disclosures; and passed adjustment. B. Co-Source Internal Audit Recommendation by City Councilor Rich Merkouris Due to technical difficulties, there was no sound from time stamp 5:33 to 6:12. Councilor Rich Merkouris began the discussion by providing a brief history of the Internal Audit Office. Due to persistent staff vacancies, the Audit Committee on March 1, 2023, discussed supplementing its existing audit work by contracting with an external audit firm. Merkouris said this is a chance to consider different opportunities to accomplish audit goals. He added, the goal has been to continue with our Internal Audit functions but to look at different strategies to accomplish the same goals. He stated that Internal Audit will still want to make sure that we are reviewing systems, and structures, and appropriate accountabilities are put into place. They questioned if it is best to do that by having our own internal staff members or should we consider outsourcing some of that work to an external firm? The next step was to survey a variety of peer communities regarding Internal Audit. The information varied. Cities, who co-sourced their audits, and audit firms were also contacted. After reviewing the information, it was decided to co-source the  City's Internal Audit Office. The plan would be to have an external audit firm work with the City's Internal Auditor. Merkouris mentioned three things that would come from this arrangement: a three year contract with an outside qualified audit firm, which would be done through an RFP process; the Audit Committee would be the RFP selection committee; next would be to modify the role of the existing Internal Auditor; and then to amend the City ordinances to reflect co-source arrangements. He said, the Audit Committee would recommend that the City Council support a co- sourcing Internal Audit approach and approve any necessary initiatives that accomplish this goal. An executive summary document was provided, which detailed responsibility and a proposed Internal Audit budget. Merkouris said this was an opportunity to bring in some external eyes and perspective to help develop the annual Audit Plan; risk assessment perspective; and audits would be occurring regardless of staff or Council turnover. Discussion followed regarding: a history of the Audit department; the challenges of Internal Audit productivity; value of an external audit firm; value of small audits; where to place the Internal Audit department; hard to hire Internal Auditors; wages for Internal Auditors; challenges for one Internal Auditor; managing a co-source audit; rewriting the Internal Auditor's job description and adjusting their wage; budget for audits; the importance of audits; and other financial concerns. A motion was made by Committee Member Merkouris and seconded by Committee Member Buckneberg to recommend that the City Council support a co-sourcing Internal Audit approach and approve any necessary initiatives that accomplish this goal. Voice vote to recommend. 6 Yes: Barranco, Buckneberg, Goettsch, Grant, Merkouris, Neitzert; 0 No: (None). Motion Passed. 4. Committee Member Remarks Neitzert thanked the committee for indulging his questions and the long meeting. He then spoke about subscriptions. 5. Public Comment There was none. 6. Adjournment A motion was made by Committee Member Neitzert and seconded by Committee Member Grant to adjourn at 4:56 p.m. Voice vote to adjourn. 6 Yes: Barranco, Buckneberg, Goettsch, Grant, Merkouris, Neitzert; 0 No: (None). Motion Passed. Denise D. Tucker, MMC, Assistant City Clerk