the financial statements. To do this, the CPA firm needs to obtain reasonable assurance that

As a result of The American Recovery and Reinvestment Act passed by Congress on February 13, 2009 state and local governments may be able to qualify for significant financial aid. Control procedures over Federal expenditures are required and they must be properly working to prevent unallowable expenditures. Management would be subjected to significant responsibility upon receipt of these funds. To bring 14 2010-2011 San Bernardino County Grand Jury Final Report accounting systems up to these standards, new internal controls may need to be established to meet the stringent reporting requirements of the federal agencies. An analysis of how Federal expenditures are currently handled by the Controller’s Division is explained in Management Letters to the Board of Supervisors dated March 28, 2011, FYE June 30, 2010, and dated March 19, 2010, for FYE June 30,

In a December 4, 2009 Management Letter for fiscal year ended June 30, 2009 from the County’s outside auditors to the Audit Committee, “It was noted that the county had not recorded a loan receivable that resulted from an agreement approved by the Board of Supervisors in fiscal year 1998 between the County and the City of Adelanto. The principal amount of the loan was approximately $11 million with accumulated accrued interest of approximately $6 million” The auditors noted that although the loan was being tracked in the property tax section of the Auditor- Controller/Recorder Office, the loan was never communicated to the general accounting section of the ACR for recording in the County’s general ledger. While the CPA firm states it believes this to be an isolated incident, they recommended all county departments need to be notified that any loans that the County enters into during the fiscal year should be immediately reported to the ACR, along with the supporting documentation to properly book the loan or keep track of the loan at the ACR. Also, at year-end the departments should be proactive on reporting the ending balances as of June 30 of the fiscal year on the accrual packages (if they are keeping track) that are submitted to the ACR. The response from the County was to concur and staff stated that the “ACR will notify the Clerk of the Board to include ACR-General Accounting on the 15 2010-2011 San Bernardino County Grand Jury Final Report distribution list of board agenda items approving loans, advances, investments or repayment schedules crossing years.” The 2010 management letter reported that no new situations like this had been discovered.

The standards for conducting government internal audits are set by the US Government Accounting Office (GAO) and the Institute of Internal Auditors (IIA). GAO and IIA state that the combination of auditing and controllership responsibilities impair the independence of the audit function and as such disqualify any resulting audit report as not meeting the independence and objectivity standards in fact or appearance. In San Bernardino County, the chief financial officer is the Auditor-Controller. Thus the combination of these two functions does not meet this standard of independence and objectivity. IAS staff agrees that this is a de facto conflict. Statements from more than one member of the auditing staff, reporting on Treasurer’s Investments as of September 30, 2009 and December 31, 2009, stated that “On February 25, 2010 the Board of Supervisors consolidated the elected offices of the Treasurer-Tax Collector and the Auditor-Controller/Recorder. As a result, the auditor, auditee, and subject matter of this report are within the same department”. These reports with this wording were distributed to both the Board of Supervisors and the Grand Jury with apparently no alarm expressed of the conflict the BOS created by allowing the consolidation after the prior Treasurer-Tax Collector vacated his elected office and an elected position was eliminated by assigning the tasks of Treasurer/Tax Collector to the elected position of Auditor-Controller/Recorder. The Grand Jury however, finds this situation problematic.

According to our investigation the IAS performs financial statement audits to develop staff and increase the reliability of the County’s audited financial statements. In two situations internal audits were performed by employees in the 16 2010-2011 San Bernardino County Grand Jury Final Report office of the Auditor/Controller-Recorder who hold Certified Public Accounting (CPA) credentials; these were printed on county letterhead stating that the audit is an “Independent Auditor’s Report.” On the face of it, this is misleading. An employee has duties to his employer and is directed by the employer; but an independent auditor cannot be obligated in any manner to the client or independence is lost. The words “Independent Auditor’s Report” do not per se make the auditor independent. The Grand Jury commends the IAS department for using an employee with expertise as a CPA to develop staff but there is potential here for misunderstanding of independent functions.

Our research of the organization of internal audit departments in other California counties shows that in Ventura and Riverside Counties the internal auditor reports to the Auditor-Controller as we do in San Bernardino County. Twenty-four of the fifty- eight California Counties have combined Assessor-Recorder’s, and at least 10 Counties including Sacramento, Fresno and Santa Clara have combined Auditor- Controller/Treasurer/Tax Collector, functions. It is notable that the Grand Jury found no county where as many important positions are held concurrently by one person as is the case with the San Bernardino County Auditor-Controller/Treasurer/Tax Collector/ and County Clerk. The combining of tasks occurred on the February 25, 2010 consolidation when the offices of Auditor- Controller/Recorder and Treasurer/Tax Collector were made into a single office. While the combination of offices is allowable under Government Code §24300, the Grand Jury finds, in practice, in San Bernardino County the Controller’s Office, not the Auditor’s Office, does the risk assessment that determines which departments are to be audited. This chain of authority may not have been anticipated when the consolidation was deemed to be beneficial to the County. San Bernardino County is not out of the norm in combining the Controller/Auditor function. However, we are not the first Grand Jury to point out the inherent problems in this and to recommend a separation of the Auditor’s function from the 17