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08- Deliberate and accept the proposal from McClanahan and Holmes, L.L.P. to perform and independent outside audit on the City's 2009-10 financial recordsCITY COUNCIL AGENDA ITEM BRIEFING SHEET Submittal Date: Originating Department: Presented By: Agenda Item No.: 08/04/10 Council Date: Finance Gene Anderson 8. 08/09/ 10 RECOMMENDED MOTION: Move to accept the proposal from McClanahan & Holmes, LLP to perform an independent outside audit on the City's 2009-10 financial records and authorizing the City Manager to negotiate and execute all necessary documents. POLICY ISSUE(S): Charter requirement; Fiscal management Section 35 of the City charter states that not less than 30 or more than 60 days prior to the end of the fiscal year the City Council will designate the certified public accountants that will perform an independent audit of the City's financial recards for the fiscal year about to conclude. Two ads were published in The Paris News requesting proposals by qualified accountants to perform these services. McClanahan & Holmes, LLP, was the only respondent. The estimated fee is $54,000.00 plus out-of- pocket expenses such as postage and printing. Out-of-pocket expenses normally run less than $300. BOARD/COMMISSION RECOMMENDATION: N/A EXHIBITS: Proposal letter ACTION: BUDGET INFO: ❑ Financial Report ~ Minute Order ❑ Department Report ❑ Resolution Budgeted Amt. $54,205 for 2010-11 ❑ Presentation ❑ Ordinance ❑ Public Hearing ❑ Other Acct. Name Audit Expenses Acct. Number 0605 in various departments FISCAL NOTES: None REVIEWED AND APPROVED BY: Z Administrarion Z City Clerk ❑ Communiry Development ❑ EMS/IT Z Finance ❑ Fire ❑ Municipal Court Z Legal ❑ Library ❑ Police ❑ Eng./Public Works ❑ Utiliries City of Paris Revised 2/04/08 - 57 CITY OF PARIS, TEXAS PROPOSAL LETTER YEAR ENDING SEPTEMBER 30, 2010 58 MCCLANAHAN AND HOLMES, LLP CERTIFIED PUBLIC ACCOUNTANTS R. FRANK RAY, CPA ZZg SIXTH STREET, S.E. R. E. BOSTWICK, CPA PARIS, TEXAS 75460 STEVEN W. MOHUNDRO, CPA 903-784-4316 GEORGE H. STRUVE, CPA FAX 903-784-4310 ANDREW B. REICH, CPA - RUSSELL P. WOOD, CPA 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 Paris, Texas August 3, 2010 Honorable Mayor and Members of the City Council City of Paris Paris, Texas 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 year ending September 30, 2010, we shall appreciate your consideration of McClanahan and Holmes, LLP, for the performance of the engagement. 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 fiuid information, which collectively comprise the financial statements of the City as of and for the year ended September 30, 2010. 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 fmancial 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 fmancial statements and for which our auditors' report will disclaim an opinion. AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 59 City of Paris August 3, 2010 Page 2 Audit Objectives The objective of our audit will be the expression of an opinion about whether your fmancial 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: 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 Single Audit Act Amendments of 1996 and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Oreanizations. The reports on internal control and compliance will each include a statement that the report is interided 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 Circular A-133 and will include tests of accounting records, a determination of major program(s) in accordance with Circular A-133, 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 fmancial statements or the Single Audit compliance opinion is other than unqualified, 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 ar to issue a report as a result of the engagement. Mana ement 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 fmancial position of the governmental activities, the business-type activities, the discretely presented component unit, each majar 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 fmancial 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 60 City of Paris August 3, 2010 Page 3 Management Responsibilities (Continued) Standards, you will be required to review and approve those fmancial statements prior to their issuance and have responsibility to be in a position in fact and appearance to make an informed judgment on those fmancial statements. Further, you are required to designate a qualified management-level individual to be responsible and accountable for overseemg 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. ManagemenYs responsibilities include adjusting the fmancial statements to correct material misstatements and for confuming to us in the representation letter that the effects of any uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented are irrunaterial, 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 fmancial 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 OMB Circular A-133, it is management's responsibility to follow up and take corrective action on reported audit findings and to prepare a sutnmary schedule of prior audit fmdings 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 finding and recommendations resulting from those audits ar other engagements or studies. You are also responsible for providing management's views on our current fmdings, 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 fmancial statements are free of material misstatement, whether from errors, fraudulent fmancial reporting, misappropriation of assets, or violations of laws or governmental regulations that are amibutable 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 OMB Circular A-133, 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. 61 City of Paris August 3, 2010 Page 4 Audit Procedures - General (Continued) 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 fmancial 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 period covered by our audit and does not extend to any later periods for which we are not engaged as auditors. 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 fmancial statements and to design the nature, timing and extent of further audit procedures. Tests of controls may be performed to the test of 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 fmancial 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 AuditinQ Standards. As required by OMB Circular A-133, 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 OMB Circular A-133. 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 Auditine Standards, and OMB Circular A-133. Audit Procedures - Compliance 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 62 City of Paris August 3, 2010 Page 5 agreements, including gant 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. OMB Circular A-133 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 OMB Circular A-133 Compliance Supplement 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 OMB Circular A- 133. 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 suminarizes our audit findings. We will provide copies of our reports to the City; however, it is management's responsi- bility to submit the reporting package (including fmancial 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 30 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 properly 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 far 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 fmd'mg, we will contact the party(ies) contesting the audit finding for guidance prior to destroying the audit documentation. 63 City of Paris August 3, 2010 Page 6 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 six partner limited liability partnership with operating offices in Paris, Bonham, and Denison. Our fum consists of twelve certified public accountants, three 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 engagement would not exceed $54,000 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 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. Position Rate Hours Partner $ 180 24 In-Charge $ 100 280 Staff $76 -100 480 Clerical $ 40 60 Total 844 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 2009 peer review report accompanies this letter. 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. ~-'~i~ l~~~v~,~ ~ , McClanahan and Holmes, LLP Certified Public Accountants 64 City of Paris August 3, 2010 Page 7 RESPONSE: This letter correctly sets forth the understanding of the City of Paris, Texas. By: Signature Title: Date: r 6J City of Paris August 3, 2010 Supplemental Information 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). He was employed by the firm in 1985, received his certificate in 1990, 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. Thomas Hensel graduated from Midwestern University (B.B.A.-Accounting 1966). He received his certificate in 1969, was employed by the firm in 1976, and was an officer from 1979 through 1996. From 1966 until 1976 he was employed by Peat, Marwick, Mitchell, & Co., Certified Public Accountants, in their Fort Worth and Austin offices in the audit area. He practices primarily in the audit area of the firm and has significant experience in governmental auditing, including formerly serving as engagement partner on the majority of our governmental audits. Tom would continue to serve as in-charge auditor for this audit. Rebecca L. Sikes graduated from Texas A& M University - Commerce (B. B.A. -Accounting 2000, M.B.A.- 2002). She was employed by the firm from 2000 through 2005, and she worked in private industry during the first half of 2006. She was re-employed by the fum in August 2006. Eric S. Teague, native of Borger, Texas, graduated from Texas Christian University (B.B.A, - Accounting 1995) and was employed by the firm in 2006. From 1995 through 2004, he was employed by Weaver and Tidwell, LLP as an auditor in the Fort Worth office. He worked in private industry from 2004 through 2005. Chandra D. Shelby graduated from Southeastern Oklahoma State University (B.B.A.-Accounting 2005 and M.B.A.- 2007) and joined our full-time professional staff in August 2009. Prior to joining our firm, she was employed in public accounting. 66 City of Paris August 3, 2010 Supplemental Information (Continued) We currently provide auditing services for the following governmental entities. Bonham Independent School District Paris Junior College City of Bells City of Bonham City of Cooper City of Denison City of Detroit City of Dodd City City of Honey Grove City of Leonard City of Pottsboro City of Roxton City of Savoy City of Trenton City of Windom Bois d' Arc Municipal Utility District Lamar County Water Supply District Lannius Municipal Utility District Southwest Fannin Special Utility District Texoma Council of Governments Texoma Housing Parlners Fannin County Appraisal District Other audit clients include financial institutions, manufacturing companies, cooperatives, escrow funds of title companies, non-profit organizations, and other types of entities. 67 a Quality. Integrity. Ko:owledge. System Review Report June 23, 2009 To the Partners of First Financial Bank Building 400 Pine St. Suite 600, Abilene, Texas 79601-5190 325.672.4000 / 800.588.2525 / £ 325.672.7049 www.dkcpa.com McClanahan and Holmes, LLP and the Peer Review Committee of the Texas Society of Certified Public Accountants We have reviewed the system of quality control for the accounting and auditing practice of MeClanahan and Holmes, LLP (the firm) in effect for the year ended March 31, 2009. Our peer review was conducted in accordance with the Standards for Performing and Reporting on Peer Reviews established by the Peer Review Board of the American Institute of Certified Public Accountants. The firm is responsible for designing a system of quality control and complying with it to provide the firm with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects. Our responsibility is to express an opinion on the design of the system of quality control and the firm's compliance therewith based on our review. The nature, objectives, scope, limitations of, and the procedures performed in a System Review are described in the standards at www.aicpa.org~prsummary_ As required by the standards, engagements selected for review included engagements performed under the Government Auditing Standards and audits of employee benefit plans. In our opinion, the system of quality control for the accounting and auditing practice of McClanahan and Holmes, LLP, in effect for the year ended March 31, 2009, has been suitably designed and complied with to provide the firm with reasonable assurance of perfornung and reporting in confornuty with applicable professional standards in all material respects. Firms can receive a rating of pass, pass with deficiency(ies) or fail. McClanahan and Holmes, LLP has received a peer review rating of pass. 1100000 DAVIS KINARD & CO, PC 68