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07 - Independent Outside Audit proposal for periods ending September 2020-20201-20202Item No. 7 TO: City Council FROM: Gene Anderson, Interim City Manager and Finance Director SUBJECT: INDEPENDENT OUTSIDE AUDIT FOR FISCAL YEARS 2019-20,2020-21, AND 2021-22 DATE: February 3, 2020 BACKGROUND: Article III Section 35 of the City Charter states that the City Council will designate the certified public accountants to perform the annual independent audit of the City's financial records. STATUS OF ISSUE: The City requested, by two published advertisements in the Paris News, proposals by qualified public accountants to perform audit services. Notice was also emailed to both local firms that have performed the audit in past years. One proposal was received from McClanahan & Holmes, LLP. BUDGET: The estimated fee is $64,000 plus out-of-pocket expenses such as postage and printing. Out-of-pocket expenses normally run less than $300. Subsequent year fee increases will be limited by the change in the annual average of the consumer price index published by the U.S. Department of Labor (CPI -U). RECOMMENDATION: Motion to accept the proposal from McClanahan & Holmes, LLP to conduct the annual financial audit for fiscal years 2019-20, 2020-21, and 2021-22. CITY OF PARIS, TEXAS PROPOSAL FOR PROFESSIONAL SERVICES YEARS ENDING SEPTEMBER 30, 2020, 2021, 2022 McClanahan and Holmes, LLP CERTIFIED PUBLIC ACCOUNTANTS STEVEN W. MOHUNDRO, CPA GEORGE H. STRUVE, CPA ANDREW B. REICH, CPA RUSSELL P. WOOD, CPA DEBRA J. WILDER, CPA TEFFANY A. KAVANAUGH, CPA APRIL J. HATFIELD Paris, Texas January 27, 2020 Honorable Mayor and Members of the City Council City of Paris Paris, Texas 228 SIXTH STREET S.E. PARIS, TEXAS 75460 903-784-4316 FAX 903-784-4310 304 WEST CHESTNUT DENISON. TEXAS 75020 903-465-6070 FAX 903-465-6093 1400 WEST RUSSELL BONHAM, TEXAS 75418 903-583-5574 FAX 903-583-9453 In response to your request for a proposal for the audit of the financial statements of the City of Paris, Texas (the City), for the years ending September 30, 2020, 2021, and 2022, we shall appreciate your consideration of McClanahan and Holmes, LLP, for the performance of the engagements. This proposal is based on a report format in accordance with the financial reporting described in the GASB Statement No. 34 and information for a Comprehensive Annual Financial Report. If engaged, we will audit the financial statements of the governmental activities, the business -type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information, which collectively comprise the financial statements of the City as of and for the years ended September 30, 2020, 2021, and 2022. Also, the document we submit to you will include the following additional information that will be subjected to the auditing procedures applied in our audit of the financial statements: combining and individual fund and account group financial statements and schedules; supplemental data; and the schedule of expenditures of federal awards. Accounting standards generally accepted in the United States of America provide for certain required supplementary information (RSI), such as management's discussion and analysis, to accompany the City's basic financial statements. If engaged, we will apply certain limited procedures to the City's RSI. These limited procedures will consist principally of inquiries of management regarding the methods of measurement and presentation, which management will be responsible for affirming to us in its representation letter. Unless we encounter problems with the presentation of the RSI or with procedures relating to it, we will disclaim an opinion on it. The following RSI is required by generally accepted accounting principles and will be subjected to certain limited procedures, but will not be audited: management's discussion and analysis. The document will also include statistical data that will not be subject to the auditing procedures applied in our audit of the financial statements and for which our auditors' report will disclaim an opinion. Audit Objectives The objective of our audit will be the expression of an opinion about whether your 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 financial statements taken as a whole. The objective will also include reporting on: City of Paris January 27, 2020 Page 2 Audit„Objectives (Continued) Internal control related to the financial statements and compliance with laws, regulations, and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements in accordance with Government Auditing Standards. Internal control related to major programs and an opinion (or disclaimer of opinion) on compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a direct and material effect on each major program in accordance with the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). The reports on internal control and compliance will each include a statement that the report is intended for the information and use of management, specific legislative or regulatory bodies, federal awarding agencies, and if applicable, pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. If engaged, 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; the Single Audit Act Amendments of 1996; and the provisions of the Uniform Guidance and will include tests of accounting records, a determination of major program(s) in accordance with the Uniform Guidance, and other procedures we consider necessary to enable us to express such an opinion and to render the required reports. If our opinion on the financial statements or the Single Audit compliance opinion is other than unmodified, 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 the engagement. Management. Responsibilities Management is responsible for establishing and maintaining internal controls, including monitoring ongoing activities; for the selection and application of accounting principles; for the fair presentation in the financial statements of the respective financial position of the governmental activities, the business -type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the City and the respective changes in financial position and, where applicable, cash flows in conformity with accounting principles generally accepted in the United States of America; and for federal award program compliance with applicable laws and regulations and provisions of contracts and grant agreements. Management is responsible for the financial statements and all accompanying information as well as all representations contained therein, including preparation of management's discussion and analysis. You are responsible for management decisions and functions. If engaged, we will prepare a draft of your financial statements, schedule of expenditures of federal awards, and related notes. In accordance with Government Auditing Standards, you will be required to review and approve those financial statements prior to their issuance and have responsibility to be in a position in fact and appearance to make an informed judgment on those financial statements. Further, you are required to designate a qualified management -level individual to be responsible and accountable for overseeing our services. Management is responsible for making all financial records and related information available to us, including identifying significant vendor relationships in which the vendor has the responsibility for program compliance and for accuracy and completeness of that information. Management's responsibilities include adjusting the 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 City of Paris January 27, 2020 Page 3 Management Res)onsibilities (Continued) to the latest period presented are immaterial, both individually and in the aggregate, to the 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 or illegal acts affecting the government involving management, employees who have significant roles in internal controls, and others where the fraud or illegal acts have a material effect on the financial statements. Your responsibilities include informing us of your knowledge of any allegations of fraud or suspected fraud affecting the City received in communications from employees, former employees, grantors, regulators, and others. In addition, you are responsible for identifying and ensuring that the City complies with applicable laws, regulations, contracts, agreements, and grants. Additionally, as required by the Uniform Guidance, it is management's responsibility to follow up and take corrective action on reported audit findings and to prepare a summary schedule of prior audit findings and a corrective action plan. This summary schedule should be available for our review. Management is responsible for establishment and maintenance of a process for tracking the status of audit findings and recommendations. Management is also responsible for identifying for us previous audits or other engagements or studies related to the objectives discussed in the Audit Objectives section of this letter. This responsibility includes relaying to us corrective actions taken to address significant findings and recommendations resulting from those audits or other engagements or studies. You are also responsible for providing management's views on our current findings, conclusions, and recommendations, as well as your planned corrective actions, and the timing and format related thereto. 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 City or to acts by management or employees acting on behalf of the City. As required by the Single Audit Act Amendments of 1996 and the Uniform Guidance, our audit will include tests of transactions related to major federal award programs for compliance with applicable laws and regulations and the provisions of contracts and grant agreements. 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 or noncompliance 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 and material effect on the financial statements or major programs. However, we will inform you of any material errors and any fraudulent financial reporting or misappropriation of assets that come to our attention. We will also inform you of any violations of laws or governmental regulations that come to our attention, unless clearly inconsequential. We will include such matters in the reports required for a Single Audit. Our responsibility as auditors is limited to the periods covered by our audit and does not extend to any later periods for which we are not engaged as auditors. City of Paris January 27, 2020 Page 4 Audit,,. Procedures ® General (Continued) 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. Audit Procedures - Internal Controls If engaged, our audit will include obtaining an understanding of the City and its environment, including internal control, sufficient to assess the risks of material misstatement of the financial statements and to design the nature, timing, and extent of further audit procedures. 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 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 financial statements. Our tests, if performed, will be less in scope than would be necessary to render an opinion on internal control and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to Government Auditing Standards. As required by the Uniform Guidance, we will perform tests of controls to evaluate the effectiveness of the design and operation of controls that we consider relevant to preventing or detecting material noncompliance with compliance requirements applicable to each major federal award program. However, our tests will be less in scope than would be necessary to render an opinion on those controls and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to the Uniform Guidance. An audit is not designed to provide assurance on internal control or to identify significant deficiencies. However, during the audit, we will communicate to management and those charged with governance internal control related matters that are required to be communicated under professional standards, Government Auditing Standards, and the Uniform Guidance. Audit Procedures -CorntAiance If engaged, our audit will be conducted in accordance with the standards referred to in the section titled Audit Objectives. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we will perform tests of the City's compliance with applicable laws and regulations and the provisions of contracts and agreements, including grant agreements. However, the objective of those procedures will not be to provide an opinion on overall compliance and we will not express such an opinion in our report on compliance issued pursuant to Government Auditing Standards. The Uniform Guidance requires that we also plan and perform the audit to obtain reasonable assurance about whether the City has complied with applicable laws and regulations and the provisions of contracts and grant agreements applicable to major programs. Our procedures will consist of the applicable procedures described in the Uniform Guidance for the types of compliance requirements that could have a direct and material effect on each of the City's major programs. The purpose of those procedures will be to express an opinion on the City's compliance with requirements applicable to each of its major programs in our report on compliance issued pursuant to the Uniform Guidance. City of Paris January 27, 2020 Page 5 Audit Administration Fees,, and Other We encourage our clients to adopt the procedure of having their personnel prepare working papers and analyses for use during the audit in order to minimize the clerical activities of our professional staff and resulting added cost. If engaged, a list of workpapers will be furnished which can be prepared by your personnel prior to the final field work. At the conclusion of the engagement, we will complete the appropriate sections of and sign the Data Collection Form that summarizes our audit findings. We will provide copies of our reports to the City; however, it is management's responsibility to submit the reporting package (including financial statements, schedule of expenditures of federal awards, summary schedule of prior audit findings, auditors' reports, and a corrective action plan) along with the Data Collection Form to the designated federal clearinghouse and, if appropriate, to pass-through entities. The Data Collection Form and the reporting package must be submitted within the earlier of thirty days after receipt of the auditors' reports or nine months after the end of the audit period, unless a longer period is agreed to in advance by the cognizant or oversight agency for audit. At the conclusion of the engagement, we will provide information to management as to where the reporting packages should be submitted and the number to submit. The audit documentation for this engagement will be the property of McClanahan and Holmes, LLP, and will constitute confidential information. However, pursuant to authority given by law or regulation, we may be requested to make certain workpapers available to a federal or state agency providing direct or indirect funding, or the United States General Accounting Office for purposes of a quality review of the audit, to resolve audit findings, or to carry out oversight responsibilities. We will notify you of any such requests. If requested, access to such workpapers will be provided under the supervision of McClanahan and Holmes, LLP personnel. Furthermore, upon request, we may provide photocopies of selected workpapers to the aforementioned parties. These parties may intend, or decide, to distribute the photocopies or information contained therein to others, including other governmental agencies. The audit documentation for this engagement will be retained for a minimum of five years after the report release or for any additional period requested by the cognizant or oversight agency for audit or pass-through entity. If we are aware that a federal awarding agency, pass-through entity, or auditee is contesting an audit finding, we will contact the party(ies) contesting the audit finding for guidance prior to destroying the audit documentation. McClanahan and Holmes, LLP originated from the public accounting practice opened in Paris in 1952 by Mr. F. I. McClanahan. The firm has grown to a seven partner limited liability partnership with operating offices in Paris, Bonham, and Denison. Our firm consists of ten certified public accountants, eight professional personnel, and several para -professionals and clerical personnel who have extensive experience. Attachments list current clients for which we provide similar audit services and provide the education and experience of professional audit personnel most likely to be assigned to the audit. Based on our understanding of the audit work required and our evaluation of your books and records, we would estimate that the fee for the year ending September 30, 2020, would not exceed $64,000 plus out-of- pocket expenses (such as report reproduction costs, postage, etc). As competitive bidding by licensed certified public accountants is not permitted by state law, this is considered a fee estimate and as such, we will not be bound to provide the proposed services for the estimated amount. Our estimated fee for these services is based on the following rates and estimated hours of professional time. It should be noted that this fee is an City of Paris January 27, 2020 Page 6 Audit Administration, Fe,es,,,and.Other (Continued) estimate and the actual fee billed will be based on our standard billing rates and the number of hours necessary to complete the required scope of work. For the years ending September 30, 2021 and 2022, we propose to limit increases to the change in the annual average of the consumer price index published by the U.S. Department of Labor (CPI -U). Position Hours Partner 20 In -Charge 300 Staff 470 Clerical 60 Total 850 Matters That Can Cause Work in Excess of Fee Estimate We want you to receive the maximum value for our professional services and to perceive that our fees are reasonable and fair. However, in seeking to provide you with such value, we find there are various matters that can cause us to perform work in excess of that contemplated by our fee estimate. The following explains the matters that arise most frequently. Changing Requirements Today, there are numerous governmental or rule-making bodies that regularly add or change various requirements. Although we attempt to plan our work to anticipate the requirements that will affect our engagement, three types of situations make this difficult. Sometimes, these new requirements are not communicated in time for us to anticipate their effects in our preliminary planning. Secondly, in spite of our anticipation and planning, the work necessary to comply with new requirements may be underestimated. Finally, in some instances, you may decide that it is advantageous to you to have the new requirements applied immediately. Incorrect Accounting Applications or Errors in Records We generally form our fee estimates on the expectation that your accounting records are in good order so that our work can be completed based upon our normal testing and other procedures. However, should we find numerous errors, incomplete records, or disorganized bookkeeping methods, we will have to do additional work to determine that the necessary corrections have been made and are properly reflected in the financial statements. Lack ofAudit Facilitation or Timely Preparation To minimize your costs, we plan the means by which your personnel can facilitate the audit (for example, what schedules they will prepare, how to prepare them, the supporting documents that need to be provided, and so forth). We also discuss matters such as availability of your key personnel, deadlines, and working conditions. Indeed, the information concerning these matters that you furnish to us is a key element in our fee quotation. Therefore, if your personnel are unable, for whatever reasons, to provide these materials on a timely basis, it may substantially increase the work we must do to complete the engagement within the established deadlines. Moreover, in some circumstances, this may require a staff withdrawal, as discussed below. City of Paris January 27, 2020 Page 7 Matters That Can Ca _ mate (Continued) use Work in Excess of Fee Estimate Staff Withdrawal A staff withdrawal consists of our removing one or all staff because the condition of your records or the inability of your personnel to provide agreed upon materials within the established timetable, which makes it impossible for us to perform our work in a timely, efficient manner, as established by our engagement plan. Sometimes, a complete staff withdrawal is necessary to permit an orderly audit approach. A staff withdrawal is not necessarily an adverse reflection on your personnel. However, it involves additional costs, as we must reschedule our personnel, incur additional start-up costs, and so forth, to prevent total engagement costs from increasing significantly. Unforeseen Events Even though we communicate frequently with clients and plan our engagement with management and their staff, unforeseen events can occur. Examples include accounting problems, litigation, changes in your business or business environment, contractual or other difficulties with suppliers, third -party service providers, customers, and so forth. When those circumstances occur, additional time is needed to provide you with assistance and to complete our engagement in accordance with professional standards. If the City requests additional work or services not within the general scope of this proposal, that work would be billed at our normal rates. Requests for additional work or services beyond the general scope of this proposal must be made in writing before the beginning of field work, and appropriate rates would be negotiated. If engaged, we expect our preliminary work to begin prior to year-end and our final field work to begin shortly after your records are closed out for the year. We will make every effort to deliver our report in time to comply with bond and other reporting requirements, and will bill for the entire engagement after the report is delivered. We will provide as many copies of the report as needed. Government Auditing Standards require that we provide you with a copy of our most recent external peer review report and any letter of comment, and any subsequent peer review reports and letters of comment received during the period of the contract. Our 2015 peer review report accompanies this letter. City of Paris January 27, 2020 Page 8 Should you want additional information or should you want us to appear before the City Council, please let us know. If you agree with the terms of the engagement as described in this proposal, please sign the second copy and return it to us. Sincerely, 9W,r-&-nahan and ylolmes, LL(P Certified Public Accountants RESPONSE: This letter correctly sets forth the understanding of the City of Paris, Texas. B Signature Title: Date: McClanahan and Holmes, LLP CERTIFIED PUBLIC ACCOUNTANTS STEVEN W. MOHUNDRO, CPA GEORGE H. STRUVE, CPA ANDREW B. REICH, CPA RUSSELL P. WOOD, CPA DEBRA J. WILDER, CPA TEFFANY A. KAVANAUGH, CPA APRIL J. HATFIELD, CPA Paris, Texas January 27, 2020 Honorable Mayor and Members of the City Council City of Paris Paris, Texas Supplemental Information 228 SIXTH STREET S.E. PARIS, TEXAS 75460 903-784-4316 FAX 903-784-4310 304 WEST CHESTNUT DENISON, TEXAS 75020 903-465-6070 FAX 903-465-6093 1400 WEST RUSSELL BONHAM, TEXAS 75418 903-583-5574 FAX 903-583-9453 Following is a brief resume of our professional personnel most likely to be assigned to the engagement. All Certified Public Accountants in the firm are members of the American Institute of Certified Public Accountants, the Texas Society of Certified Public Accountants, and the Dallas Chapter of the TSCPA. The firm is also a member of the Texas Management Group, a consortium of public accounting firms organized for the purpose of sharing expertise and ideas with like-minded firms. Andrew B. Reich graduated from East Central Oklahoma State University (B.S. — Accounting 1985) and was certified in 1990. He was employed by the firm in 1985 and became a partner in 1992. He practices primarily in the audit area of our firm and has several years of governmental audit experience. Andy would serve as engagement partner for this audit. Brittany Martin graduated from Texas A&M University—Commerce (B.B.A. — Accounting 2011 and M.S.A. — Accounting 2013) and was originally employed by the firm in December 2011. She rejoined our firm in January 2017. She is a Certified Public Accountant. Brittany would serve as engagement in -charge for this audit. Victoria E. Bethea graduated from Texas A & M University — Commerce (B.B.A. — Accounting 2014) and was employed by our firm in October 2014. Samantha Cooper graduated from Texas A & M University — Commerce (B.B.A. — Accounting 2019) and was employed by the firm in December 2019. City of Paris January 27, 2020 Page 2 Supplemental Information (Continued) We currently provide auditing services for the following governmental entities: Bonham Independent School District Paris Junior. College City of Bonham City of Cooper City of Dodd City City of Honey Grove City of Savoy City of Trenton Bois d' Arc Municipal Utility District Lamar County Water Supply District Southwest Fannin Special Utility District Fannin Central Appraisal District Grayson Central Appraisal District Other audit clients include financial institutions, manufacturing companies, cooperatives, escrow funds of title companies, non-profit organizations, and other types of entities.