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Scope and Methodology
In February 2020, the Audit Committee approved a proposal by the State Auditor to perform an audit of West Covina under the local high risk program. We conducted an initial assessment of West Covina in January 2020, in which we reviewed the city’s financial and operating conditions to determine whether it demonstrated characteristics of high risk pertaining to the following six risk factors specified in state regulations:
- The local government agency’s financial condition has the potential to impair its ability to efficiently deliver services or to meet its financial or legal obligations.
- The local government agency’s ability to maintain or restore its financial stability is impaired.
- The local government agency’s financial reporting does not follow generally accepted government accounting principles.
- Prior audits reported findings related to financial or performance issues, and the local government agency has not taken adequate corrective action.
- The local government agency uses an ineffective system to monitor and track state and local funds it receives and spends.
- An aspect of the local government agency’s operation or management is ineffective or inefficient; presents the risk for waste, fraud, or abuse; or does not provide the intended level of public service.
Based on our initial assessment, we identified concerns about West Covina’s financial condition and financial stability as well as aspects of its operations that were ineffective or inefficient. Further, West Covina could not demonstrate having taken adequate corrective action to address certain prior audit findings, including those addressing weaknesses that could expose it to increased risk of fraud or financial mismanagement. The Table lists the resulting audit objectives and related procedures that address these risk factors. We did not identify concerns during our initial assessment pertaining to the remaining two risk factors.
|Review and evaluate the laws, rules, and regulations significant to the audit objectives.
|Reviewed relevant state laws, regulations, municipal code, and other background materials applicable to the city.
|Evaluate West Covina’s current financial condition and ability to meet its short‑term and long‑term financial obligations while continuing to provide services to its residents.
|Identify the causes of West Covina’s financial challenges and determine whether the city has developed an adequate plan for addressing those challenges. This will include assessing the city’s efforts to improve its financial condition by increasing revenue and reducing expenditures.
|Determine whether West Covina’s budgeting processes comply with best practices. In addition, evaluate the city’s procedures and underlying assumptions for projecting future revenue and expenditures and determine whether they result in balanced budgets and accurate financial forecasts.
|Assess West Covina’s process for setting, increasing, or decreasing fees or rates to ensure that it complies with applicable laws, rules, regulations, and best practices. For a selection of these fees and rates, determine whether they cover the city’s costs of providing services.
|Examine West Covina’s efforts to fill key management and staff positions and maintain organizational and leadership continuity within city operations.
|Evaluate West Covina’s efforts to address the deficiencies the SCO identified in its 2015 report.
|Review and assess any other issues that are significant to the audit.
|Analyzed quarterly revenue and expenditure data from fiscal years 2015–16 through 2019–20 to identify trends and to evaluate the possible impact of the pandemic on West Covina’s financial condition.
Assessment of Data Reliability
In performing this audit, we relied on data from West Covina’s financial accounting system to review its revenue and expenditures for fiscal years 2015–16 through 2019–20. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that is used to support our findings, conclusions, and recommendations. We verified the accuracy of these data by selecting revenue and expenditure categories from the data and tracing the amounts reported to the city’s audited financial statements and other supporting documentation. We verified the completeness of these data by comparing total revenue and expenditures for fiscal years 2015–16 through 2018–19 to the totals reported in the audited financial statements. Accordingly, we found the city’s financial accounting system to be sufficiently reliable for the purpose of reviewing its financial condition.
The State Auditor’s Local High Risk Program
Government Code section 8546.10 authorizes the State Auditor to establish a local high risk program to identify local government agencies that are at high risk for potential waste, fraud, abuse, or mismanagement or that have major challenges associated with their economy, efficiency, or effectiveness. Regulations that define high risk and describe the workings of the local high risk program became effective July 1, 2015. Both statute and regulations require that the State Auditor seek approval from the Audit Committee to conduct high risk audits of local entities.
To identify local entities that may be high risk, we analyzed audited financial statements and pension‑related information for more than 470 California cities. This detailed review included using financial data to calculate indicators that may be indicative of a city’s fiscal stress. These indicators enabled us to assess each city’s ability to pay its bills in both the short and long term. Specifically, the indicators measure each city’s financial reserves, debt burden, cash position or liquidity, revenue trends, and ability to pay for employee retirement benefits. In most instances, the financial indicators rely on information for fiscal year 2016–17.As we describe earlier in this report, we conducted our initial assessment of West Covina in January 2020 based on this detailed review. In November 2020, we updated our financial indicators to include information through fiscal year 2018–19.
Based on our analysis from 2019, we identified several cities, including West Covina, which appeared to meet the criteria for being at high risk. We visited each of these cities and conducted an initial assessment to determine the city’s awareness of and responses to these issues as well as to identify any other ongoing issues that could affect our determination of whether the city was at high risk. After conducting our initial assessment, we concluded that West Covina’s circumstances warranted an audit. In February 2020, we sought and obtained approval from the Audit Committee to conduct an audit of West Covina.
If a local agency is designated as high risk as a result of an audit, it must submit a corrective action plan. If it is unable to provide its corrective action plan in time for inclusion in the audit report, it must provide the plan no later than 60 days after the report’s publication. It must then provide written updates every six months after the audit report is issued regarding its progress in implementing its corrective action plan. This corrective action plan must outline the specific actions the local agency will perform to address the conditions causing us to designate it as high risk and the proposed timing for undertaking those actions. We will remove the high‑risk designation when the agency has taken satisfactory corrective action.