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In one of the Measure Q threads Councilmember Donna Neville and I have been having a dialogue about whether the City’s most recent financial audit by their independent auditors was “clean.” The dialogue starts here.
As you can see from the comments in the dialogue, Donna asserts that the audit was “clean,” and I believe the audit was not.
For those of you who prefer not to wade through long threads, here are the reasons I believe what I do. In the interests of transparency, I have sent this to Donna as a personal email as well as posting it here.
Donna, reasonable people can agree to disagree reasonably. I have always found you to be very very reasonable, and this is no different. And I the spirit of that reasonability let me explain why I do not believe the audit is “clean.”
When the 2021 audit arrived in January 2024, the concerns the auditor had raised in the 2020 audit were no longer 4 “Significant Deficiencies,” but rather 5 even more serious “Material Weaknesses” plus 5 “Significant Deficiencies.”
Even more concerning was the fact that the City had made no meaningful progress in addressing 3 of the 4 Significant Deficiencies in the three years between audits. So, with the carry over of those 3 unaddressed Significant Deficiencies there really were 6 Significant Deficiencies in the January 2024 Audit’s Memorandum.
Those factual realities appear to indicate that the Auditor and the City were having conflicts getting the 2021 audit done because (1) the City didn’t appear to be taking the Auditor’s 2020 concerns seriously, and (2) in three years the situation had gotten significantly worse, both in the gravity of the problems and their quantity.
That is what the auditor’s written report tells anyone who reads it, and it is impossible for me to see that as a “clean” audit.
Response from Donna Neville:
Matt Williams incorrectly claims that the 2020-21 City of Davis Annual Comprehensive Financial Report (ACFR) is not a “clean” audit. I spent more than half of my legal career working as counsel to the California State Auditor, so I understand what it means for a public agency to have a “clean” audit.
The audit, which you can find on the City of Davis website, contains the following statement:
“We are pleased to present the Annual Comprehensive Financial Report (ACFR) of the City of Davis, California, for the fiscal year ended June 30, 2021. Information in this ACFR is prepared in accordance with generally accepted accounting principles (GAAP) and includes an unmodified opinion on the report by the City’s independent certified public accounting firm.” (Emphasis added.)
Admittedly, the term “unmodified opinion” hardly rolls off the tongue. However, it is the technical term used in the Generally Accepted Government Auditing Standards (GAGAS) to refer to what is commonly called a “clean” audit. A “clean” or “unmodified opinion” audit is one where the auditor found no “material misstatements” in an agency’s financial statements and where the auditor believes that the agency’s financial statements are fairly presented, and that the agency is in compliance with generally accepted accounting principles (GAAP).
To support his claim, Mr. Williams points to findings (aka conclusions) contained in a related memo, called the Memorandum of Internal Controls (MOIC). This memorandum is something the auditors are required to prepare as part of their compliance with the audit standards. Mr. Williams has drawn his own conclusion regarding the significance of the findings in this memo and has decided that the findings related to internal controls override the auditor’s overarching conclusion that the audit was a “clean” or “unmodified opinion” audit.
By calling into question whether the audit was “clean” Mr. Williams is literally second-guessing the professional judgment and competence of the City’s external auditors, who are certified to make such a determination. The independent audit firm, which is certified to draw a conclusion on the City’s financial statements, determined that the City had followed applicable accounting standards. There is no question that the 2020-21 ACFR was a “clean” or “unmodified opinion” audit.
Donna Neville’s comment above misses the mark in three significant ways:
(1) She conveniently glosses over the reality that “clean” is a public relations term, not a term of financial health or financial integrity, which is what really matters in this community dialogue about the election process.
The respectful and collaborative dialogue the Davis community has been conducting over the past few weeks, has illuminated for me just how opaque the City’s financial communications are with its constituents. If it weren’t for the confidence/esteem Donna has earned in our time working together on the Finance and Budget Commission, I would be even more worried.
I’m all the more convinced that the City needs to step back and do a honest and transparent assessment of just how bad the financial situation is, and then formulate a plan to address that whole situation, not just apply a band aid to what is clearly a ruptured artery.
(2). The City’s own legal documents do not support Donna’s claim that the Memorandum of Internal Control is not part of the audit, and therefore should be glossed over. Here is what the Engagement Letter agreement between the auditor and the City says:
Audit Objectives
The objective of our audit is the expression of opinions as to whether your financial statements are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles and to report on the fairness of the accompanying supplementary information when considered in relation to the financial statements as a whole. The objective also includes reporting on:
— Internal control over financial reporting and compliance with the provisions of laws, regulations, contracts and award agreements, noncompliance with which could have a material effect on the financial statements in accordance with Government Auditing Standards.
— Internal control over compliance related to major programs and an opinion (or disclaimer of opinion) on compliance with federal statutes, regulations, and the terms and conditions of federal awards that could have a direct and material effect on each major program in accordance with the Single Audit Act Amendments of 1996 and Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance).
The Government Auditing Standards report on internal control over financial reporting and on compliance and other matters will include a paragraph that states that (1) the purpose of the report is solely to describe the scope of testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of internal control or on compliance, and (2) the report is an integral part of an audit performed in accordance with Government Auditing Standards in considering internal control and compliance.
(3) Donna in her comment tells us, “The audit, which you can find on the City of Davis website …”. I have extensively combed through the City website, and I can not find the audit. Donna would help all her constituents if she would provide the link to the audit. I suspect what Donna believes is the auditor’s documents (competing the Audit Objectives, is actually a City document that excerpts a small portion of the auditor’s full submission.
Bottom-line, I stand 100% behind everything I have said in the post that started this thread … and all my comments made in this ballot consideration process.
Respectfully,
Matt Williams