REDONDO BEACH, CA — Redondo Beach corrected years-old accounting errors after city finance employees discovered three material misstatements in previously issued financial statements, according to a draft audit that identified a "material weakness" in the city's internal financial controls.
Independent auditor CliftonLarsonAllen LLP (CLA) classified the prior-year error corrections as a material weakness in internal control over financial reporting, the most serious of three financial-control findings contained in the city's draft fiscal year 2024-25 Annual Comprehensive Financial Report.
The auditors also identified two "significant deficiencies" involving the city's year-end financial closing process and its handling of deposits payable. Both were repeat findings from the previous year's audit.
The draft financial report is scheduled to be presented to the city's Audit Committee at a 3 p.m. special meeting Tuesday.
Finance Director Stephanie Meyer told Patch the corrections involved transactions dating to 2018 and 2021 and said none of the errors resulted in city money being lost, missing or unaccounted for.
New Finance Department staff discovered the historical problems themselves while reviewing and reconciling previous transactions and internal procedures, Meyer said.
"This demonstrates the Finance Team's capability to improve accuracy and operational effectiveness when provided with adequate time and resources," Meyer told Patch.
She also noted that Redondo Beach received clean audits from its former auditors during the years in question and said the corrections reflect both the review undertaken by new Finance Department staff and the approach of a new audit firm reviewing the city's financial statements. CLA said significant staff turnover in the Finance Department in prior years made it difficult to maintain a sound internal-control structure over financial reporting.
"As the new staff were closing the books for the current year, they identified and corrected material errors that dated back several years," the auditors wrote.
Under auditing standards, a material weakness is a deficiency, or combination of deficiencies, that creates a reasonable possibility a material misstatement in financial statements will not be prevented, or detected and corrected, in a timely manner.
One error involved historical balances between the Successor Agency Redevelopment Fund and the Public Financing Authority. Certain amounts continued to be recorded as money due between the funds even though the related cash transfers had occurred in previous years, causing interfund receivables and payables to be overstated.
To correct the error, the city reduced the Public Financing Authority's beginning fund balance and net position by $3,254,988 and increased the Successor Agency Redevelopment Fund's by the same amount.
The correction had no effect on the city's total governmental activities net position, according to the audit. A second error involved transit vehicles that had been retired, sold or otherwise disposed of in previous years but remained in the city's capital asset records.
That caused capital assets to be overstated by $2,259,133 and accumulated depreciation to be overstated by $742,218 as of July 1, 2024, according to the report. The city removed the vehicles from its records, reducing beginning net position by $989,494. A third error involved $386,100 associated with the Aviation/Artesia Right Turn Lane Project.
The city had received reimbursement from a grantor for a right-of-way escrow deposit. After related eminent domain proceedings were settled, the escrow deposit was refunded to the city and determined to be payable back to the grantor.
The amount due and associated revenue had not been properly recorded, causing beginning fund balance and net position to be overstated. The city corrected the error by recording the $386,100 obligation. Meyer told Patch the city has since returned the money to the grantor.
Note 17 of the financial report shows the error corrections collectively reduced the city's government-wide beginning net position by $4,630,580. The audit does not say that amount represented money that was lost or missing, and Meyer said unequivocally that none of the errors resulted in city money being lost, missing or unaccounted for.
The report separately contains an $8.23 million restatement caused by implementation of a new accounting standard governing compensated absences. That change was an accounting-principle adjustment and was not one of the errors underlying the material-weakness finding.
The audit identified two additional problems with Redondo Beach's internal financial controls, although CLA classified them as significant deficiencies rather than material weaknesses. In the first, auditors said they continued to receive several unexpected adjusting journal entries after the city delivered what was supposed to be its final trial balance.
While the entries did not result in a material misstatement in the audited financial statements and auditors noted improvement since the previous year, CLA said their volume and timing showed there was still room to strengthen the city's year-end closing process.
The auditors attributed the issue in part to significant Finance Department turnover in previous years, saying certain adjustments and reconciliations had not been finalized before the audit began.
Meyer said several long-serving Finance Department employees retired during fiscal year 2023-24, with some vacancies continuing through fiscal year 2024-25 while the department reviewed its staffing needs and sought to increase its accounting capacity.
All key positions have since been filled, she said, including an experienced assistant director and two accounting positions. The second repeat finding involved deposits payable.
Auditors found several accounts that did not appear to have been reconciled in a timely manner, resulting in aged balances without adequate supporting documentation. The accounts had not been regularly reviewed and no formal reconciliation procedures appeared to be in place, according to the report.
CLA said the lack of oversight increased the risk of "errors, misstatements, or potential misappropriation of funds." The report does not say auditors found that any funds were actually misappropriated.
The city agreed with both findings and said it is strengthening internal controls through measures including staff training, documented work procedures and responsibility checklists, stronger supervisory reviews and comprehensive month-end and year-end closing procedures.
Despite the internal-control findings, Redondo Beach received an unmodified opinion on its fiscal year 2024-25 financial statements — what Meyer described as a "clean opinion."
The distinction is important: the audit opinion addresses whether the financial statements, after the corrections, fairly present the city's financial position in all material respects. The material-weakness finding concerns the city's internal controls and the risk that a material error might not be prevented, detected or corrected in a timely manner.
Meyer said the findings and restatements are not expected to affect the city's current finances, reserves, credit rating or ability to borrow.
"The City's audit received an unmodified opinion, which is the best opinion possible, communicating to rating agencies and other external parties that the City's financial statements are presented fairly in all material respects in accordance with US GAAP," Meyer said.
Auditors also reported finding no instances of noncompliance or other matters required to be reported under Government Auditing Standards.
The city said the historical corrections involved practices that predated current Finance Department staff and had been accepted by its previous auditor. Current employees identified the issues through what the city described as a proactive and detailed review and presented the problems and proposed corrections to the new auditors.
The city's Budget and Finance Commission reviewed the draft report in August and moved to receive and file it without comments. CLA is scheduled to present the audit results to the Audit Committee Tuesday afternoon. The City Council is scheduled to consider approval of the audited report Tuesday night as part of its consent calendar.
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