County of Humboldt*

Continued diligence, cooperation, and teamwork among the Auditor-Controller, the County Administrative Office, and all Department Heads is vital in balancing the financial sources and revenues in the budget. Response to F1: I agree with this finding.

The County lacks a year-end reporting process established to guarantee that all Generally Accepted Accounting Practices (GAAP) entries are made for financial reporting. Response to F2: I agree with this finding. The Auditor-Controller department is investing in training staff on topics related to GAAP - Revenue recognition, interfund activity, accruals of receivables and payables, distinction of accounting basis, distinction of fund types, and reconciliations of fund balance. To immediately address the lacking year-end process, the Auditor-Controller department has distributed to county departments a "Year-end Memo" to notify county staff of processing deadlines for year-end activity as well as to notify county staff of our intention to enforce the deadlines. A copy of the Year-end Memo is included with this letter.

The financial reports currently available to the County Administrative Office and Auditor- Controller are inadequate to produce a balanced budget. Response to F3: I agree with this finding. A reorganization of the account structure in our financial software combined with enforcement of appropriate accounting practices would address the challenge of generating correct and consistent information with existing reports.

The tracking of the funding sources and uses are not being adequately documented for numerous programs and departments. Response to F4: I agree with this finding. "Other Funding Sources (Uses)" is a category separate from "Revenues" and "Expenditures". Its purpose is to display activity that does not directly relate to the generation of revenue and expenditures such as cash transfers between funds and budget units, interfund transfers between different departments, and nonreciprocal contributions. Historically, the activity that is appropriately described ŧ as "Other Financing Sources (Uses)" was erroneously comingled with "Revenues" and "Expenditures", thus overstating the County's earned revenues and incurred expenditures. As of January 2019, the Auditor- Controller department has increased its level of scrutiny over accounting activity and has adjusted the posting of interfund transactions and transfers on a real-time basis.

Identification and reclassification of County trust funds are essential to improve transparency and accountability. Response to F5: I agree with this finding. In May of this year, I reassigned all of the County's existing funds to the 21 existing departments for inclusion on the County's budget. That work was undone by an external consultant at the direction of the County Administrative Office as the change was too close to the deadline to submit the budget and resulted in significant changes to the budget as presented. I have requested of the County Administrative Office to reassign the funds for inclusion in the first quarter's budget update presentation to the Board of Supervisors and the public to improve transparency and accountability.

The miscellaneous revenue account has been used, and is continuing to be used, to include revenues that should be posted in specific accounts. Response to F6: I disagree with this finding, though it may have been true during the grand jury's active investigation. As of July 1, 2019, the Auditor-Controller department is intervening in the posting of revenue to "Miscellaneous Revenue" when it can be appropriately classified and posted elsewhere. We are examining the sources of, and reasons for, revenue received and ensuring that it gets posted to the right account by overriding requested postings when necessary.

Improved diligence, cooperation, and teamwork are vital in determining the appropriate object code listings required for the proper management of Inter-Fund transfers. Response to F7: I agree with this finding. The Auditor-Controller department has provided all departments reference to the State Controller Office's Accounting Standards and Procedures (ASP) manual that outlines how we will post interfund activity as well as hosted trainings specifically geared towards object codes. Several departments have invested their staff time by attending these trainings and participating in discussions related to accounting for internal activity.

The Accounting Services Improvement Working Group was formed to develop the Auditor- Controller Policies and Procedures for all County departments. This committee is not functioning as envisioned by the consultants. Response to F8: I agree with this finding and I disagree with the consultant's recommendation. The Auditor- Controller's Policies and Procedures are outlined for the Auditor-Controller in Federal government code, State government code, Health and Safety code, County Code, Internal Revenue Code, Generally Accepted Accounting Principles, Government Auditing Standards, etc., and in most cases, are not negotiable. The consultants from CPS HR Consulting that came to Humboldt County had no prior experience in auditing. accounting, or finance and were therefore unqualified to make such a recommendation. I contend that they were unqualified to assess the Auditor-Controller department in general as they made misinformed and potentially dangerous recommendations in their report. Most notably, they recommended that we reduce the number of internal controls in place, thus undermining the function of the Auditor-Controller as the public's watchdog.

The County has adopted a Capital Asset Policy but has not implemented this policy. Response to F11: I agree with this finding. The Capital Asset Policy was passed by the Board of Supervisors but was not understood by most departments outside of the Auditor-Controller department. The Auditor- Controller department is actively trying to train departments on the Capital Asset Policy but because there is no county-wide agreement or messaging that immediate implementation of the board-approved policy is necessary, the Auditor-Controller department is struggling to implement it.

The Auditor-Controller's Office lacks the staff to provide and implement training plans for its employees. Response to F12: I agree with this finding. With only 12 employees, sending multiple staff to training results in significant impact to the staff remaining in the office. Sending just 3 employees to a training results in immediate lost productivity of at least 25%. In spite of this inadequate staffing, I am continuing to invest in staff's training because the benefit of improved employee morale and improved services in the long-run outweigh the cost of the immediate loss of productivity. Ideally, the Auditor-Controller department would be allocated sufficient staffing to allow for regularly scheduled, continuing professional education for all of its staff.

Proper training is lacking in most County Departments regarding the government accounting requirements related to the responsibilities of their office. Response to F13: I agree with this finding. Accountants and auditors are trained to follow prescribed accounting and auditing guidelines that govern their work. Departments do not hire accountants because it is difficult to attract accounting staff at the low salary the county offers for the accountant job classification. To attract more applicants for fiscal-related positions, departments allocate staff for different positions, such as "Budget Specialist", "Administrative Analyst", or "Business Manager". These positions get paid more than Accountants and don't require the same formal, long-term, technical accounting theory training. Governmental Accounting is usually offered as an advanced class in specific accounting programs and is not generally offered for general finance and management studies.

The Auditor-Controller Office has encountered a lack of cooperation from County staff in its efforts to carry out its legal responsibilities, and has raised specific concerns about its working relationship with the Human Resources Payroll Office. Response to F14: I agree with this finding. The Auditor-Controller department has successfully collaborated with several departments in implementing corrections to past accounting practices and we very much look forward to continuing that work. Despite multiple attempts to carry out my duties as Auditor-Controller with regard to the oversight of Payroll transactions, there has been no resolution. Despite multiple attempts by Auditor-Controller staff to resolve communication issues and missing internal controls, there has been no resolution. It is my opinion that the Board of Supervisors should reconsider their decision to move Payroll staff into the Human Resources department and either 1) put Payroll staff back under the oversight of the Auditor- Controller or 2) outsource the entire Payroll function to an external third party, such as Paychex or ADP.

Assets in the County Treasury are not being audited on a regular schedule due to a significant lack of staffing in the Auditor-Controller's Office. Response to F15: I agree with this finding.

There is a high risk of fraud in a number of County departments due to their poor cash handling policies and procedures, improper accounting, and lack of accountability. Response to F16: I agree with this finding. In compliance with subdivision (b) of Section 933, which provides the form and content in which I am to respond, I am providing the following responses to the grand jury's recommendations. Please note that responses were not requested for recommendations R8, R9, and R12.