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CCR2007204. . . COMMON COUNCIL - CITY OF MUSKEGO RESOLUTION #204-2007 APPROVAL OF VIRCHOW, KRAUSE & COMPANY, LLP 2007 CITY AUDIT ENGAGEMENT LETTER BE IT RESOLVED That the Common Council of the City of Muskego, upon the recommendation of the Finance Committee, does hereby approve the attached engagement letter submitted by Virchow, Krause & Company, LLP for the City's 2007 City audit. BE IT FURTHER RESOLVED That the Mayor is authorized to sign the engagement letter in the name of the City. DATED THIS 23RD DAY OF OCTOBER ,2007. SPONSORED BY: FINANCE COMMITTEE Ald. Bob Melcher Ald. Neil Borgman Ald. Keith Werner This is to certify that this is a true and accurate copy of Resolution #204-2007 which was adopted by the Common Council of the City of Muskego. 10/07jmb . CITY OF MUSKEGO Staff Report to Common Council Standing Committee (Finance, Public Works, Public Utilities) To: Finance Committee Re. Strategic Goal #: (for future use) From: Finance Department Presenter(s): Finance Department Supervisor Subject: Topic for Presentation/Report to Committee: 2007 City Audit Engagement Letter Date: October 23, 2007 Background Information: Annually, the City's financial statements are required to be audited by independent Certified Public Accountants. Historically, Virchow Krause & Company has provided the audit services. The attached engagement letter outlines the fees and audit services to be provided by Virchow Krause & Company for the audit of the 2007 financial statements. Key Points and/or Information for Discussion (Maximum of 5): . 1. The estimated fees for the 2007 audit have not increased as compared to the quote received for the 2006 audit. 2. As compared to the actual fees recognized for the 2006 audit, the 2007 estimated fees have increased to reflect an inflationary adjustment and additional audit work required under the new standards for internal control. 3. The Finance staff saved the City $ 7,737 in 2006 audit fees by preparing additional work papers and greater analysis of accounts which resulted in zero audit adjusting entries. Recommendation for Action by Committee: I am requesting the Finance Committee and Council approve the attached engagement letter from Virchow Krause & Company to conduct the 2007 City audit, which includes no increase over the quote received for the 2006 audit. (Is Common Council action required? Fiscal Note(s): Total $ Requested: $80,000 Yes Amount of Total Requested Budgeted: $80,000 Amount of Total Requested Unbudgeted: Expenditure Account(s) number recommended be used: . ( 10/19/07) . . . City of Muskego 2007 Audit Fees SUMMARY Quote for 2006 Audit Actual Fees for 2006 Audit $ 47,500 44,412 Estimated Fees for 2007 Audit $ 47,000 $ 11,900 $ 11,100 $ 10,000 $ 80,000 City $ $ Water $ 12,350 $ 10,150 $ $ Sewer Allocation to TFI #'s 8 & 9 $ 10,000 $ 80,000 $ COMPUTATION OF ESTIMATED 2007 AUDIT FEES Actual audit fees for the 2006 audit Adjustment for auditing retroactive reporting of infrastructure Adjusted 2006 audit base Inflation increase - 3.8% Increase for additional work required under the new standards Rounding Total Note: 10,521 9,830 9,000 73,763 $ 73,763 $ (1,500) $ 72,263 $ 2,746 $ 5,000 $ (9) $ 80,000 The estimated fees for 2007 do not include a provision for new borrowings in 2007. A fee scheule was included in the engagement letter. . . . ~ VirchOWKrause &company August 21, 2007 Common Council Members C/O Ms. Sharon Mueller, Finance Department Supervisor City of Muskego W182 S8200 Racine Avenue Muskego, WI 53150-0749 Dear Common Council Members: We are pleased to confirm our understanding of the services we are to provide to the City of Muskego. We will audit the basic financial statements of the City as of and for the year ended December 31, 2007. Upon completion of our audit, we will provide the City with our audit report on the financial statements referred to above. The document will also include the following supplemental information that will be subjected to the auditing procedures applied in relation to our audit of the basic financial statements: Combining and Individual Fund Statements and Schedules The document will also include the following required supplemental information on which we will apply certain limited procedures, and for which we will express no opinion: Management Discussion and Analysis Statement of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual - General Fund Audit Objectives The objective of a financial audit is the expression of an opinion as to whether your basic financial statements are fairly presented, in all material respects, in conformity with accounting principles generally accepted in the United States of America and to report on the fairness of any additional information included with the financial statements when considered in relation to the basic financial statements taken as a whole. Our audit will be conducted in accordance with auditing principles generally accepted in the United States of America and will include tests of the accounting records and other procedures we consider necessary to enable us to express such an opinion. If our opinion on the basic financial statements is other than unqualified, we will fully discuss the reasons with you in advance. If, for any reason, we are unable to complete the audit or are unable to form or have not formed an opinion, we may decline to express an opinion or to issue a report as a result of this engagement. Virchow, Krause & Company, LLP Certified Public Accountants & Consultants. An Independent Member of Baker Tilly International City Council August 21, 2007 Page 2 . Audit Approach - General . An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; therefore, our audit will involve judgment about the number of transactions to be examined and the areas to be tested. We will design our audit to obtain reasonable, but not absolute, assurance of detecting errors or fraud that would have a material effect on the financial statements as well as other illegal acts having a direct and material effect on financial statement amounts. Our audit is not required to be designed to detect error or fraud that did not cause a material misstatement of the financial statements. It is important to recognize that there are inherent limitations in the auditing process. Audits are based on the concept of selective testing of the data underlying the financial statements, which involves judgment regarding the areas to be tested and the nature, timing, extent and results of the tests to be performed. Audits are, therefore, subject to the limitation that material errors or fraud or other illegal acts having a direct and material financial statement impact, if they exist, may not be detected. Because of the characteristics of fraud, particularly those involving concealment through collusion, falsified documentation and management's ability to override controls, an audit designed and executed in accordance with auditing standards generally accepted in the United States of America may not detect a material fraud. Further, while effective internal control reduces the likelihood that errors, fraud or other illegal acts will occur and remain undetected, it does not eliminate that possibility. For these reasons, we cannot ensure that errors, fraud or other illegal acts, if present, will be detected. However, we will communicate to you, as appropriate, any such matters identified during our audit. We will also inform you of any violations of laws or governmental regulations that come to our attention, unless clearly inconsequential. Our responsibility as auditors is limited to the period covered by our audit and does not extend to matters that might arise during any later periods for which we are not engaged as auditors. Our procedures will include tests of documentary evidence supporting the transactions recorded in the accounts, and may include tests of the physical existence of inventories, and direct confirmation of receivables and certain other assets and liabilities by correspondence with selected individuals, creditors, and financial institutions. We will request written representations from your attorneys as part of the engagement, and they may bill you for responding to this inquiry. At the conclusion of our audit, we will also require certain written representations from you about the financial statements and related matters. We are also responsible for determining that the audit committee (or equivalent) is informed about certain other matters related to the conduct of the audit, including (i) any disagreements with management about matters that could be significant to the City's financial statements or our report thereon; (ii) any serious difficulties encountered in performing the audit; (Hi) information relating to our independence with respect to the City; (iv) other matters related to your financial statements including your accounting policies and practices; and (v) all significant deficiencies and material weaknesses identified during the audit, as previously mentioned. Lastly, we are responsible for ensuring that the audit committee receives copies of certain written communications between us and management including written communications on accounting, auditing, internal control or operational matters. The audit will not be planned or conducted in contemplation of reliance by any specific third party or with respect to any specific transaction. Therefore, items of possible interest to a third party will not be specifically addressed and matters may exist that would be assessed differently by a third party, possibly in connection with a specific transaction. . City Council August 21, 2007 Page 3 . Identifying and ensuring that the City complies with laws, regulations, contracts, and agreements, is the responsibility of management. As part of obtaining reasonable assurance about whether the basic financial statements are free of material misstatement, we will perform tests of the City's compliance with applicable laws and regulations and the provisions of contracts and agreements. However, the objective of our audit will not be to provide an opinion on overall compliance and we will not express such an opinion. Audit Approach - Internal Controls In planning and performing our audits, we will consider the internal control as a basis for designing our auditing procedures for the purpose of expressing our opinion on the City's basic financial statements. . An audit is not designed to provide assurance on the effectiveness of internal control over financial reporting or to identify deficiencies in internal control. However, we will communicate in writing to management and those charged with governance any deficiencies in internal control that are considered significant deficiencies or material weaknesses under standards established by the American Institute of Certified Public Accountants, including those previously communicated and not remediated. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented or detected by the entity's internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity's internal control. Management Responsibilities Management is responsible for making all financial records and related information available to us. We understand that you will provide us with such information required for our audit and that you are responsible for the accuracy and completeness of that information. We will advise you about appropriate accounting principles and their application and will assist in the preparation of your financial statements, but the responsibility for the financial statements remains with you. That responsibility includes the establishment and maintenance of adequate records and effective internal control over financial reporting, the selection and application of accounting principles, and the safeguarding of assets. You are responsible for (i) adjusting the basic financial statements to correct material misstatements and for confirming to us in the management representation letter that the effects of any uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the basic financial statements taken as a whole, and (ii) notifying us of all material weaknesses, including other significant deficiencies, in the design or operation of your internal control over financial reporting that are reasonably likely to adversely affect your ability to record, process, summarize and report external financial data reliably in accordance with accounting principles generally accepted in the United States of America. . City Council August 21,2007 Page 4 . You are responsible for the design and implementation of programs and controls to prevent and detect fraud, and for informing us about all known or suspected fraud affecting the government involving (a) management, (b) employees who have significant roles in internal control, and (c) others where the fraud could have a material effect on the financial statements. You are also responsible for informing us of your knowledge of any allegations of fraud or suspected fraud affecting the government received in communications from employees, former employees, regulators, or others. In addition, you are responsible for identifying and ensuring that the entity complies with applicable laws and regulations. As part of management's responsibility for the financial statements and the effectiveness of its system of internal control over financial reporting, management is responsible for making available to us, on a timely basis, all of your original account records and related information and for the completeness and accuracy of that information and your personnel to whom we may direct inquiries. As required by auditing standards generally accepted in the United States of America, we will make specific inquiries of management and others about the representations embodied in the financial statements and the effectiveness of internal control over financial reporting. Auditing standards generally accepted in the United States of America also require that we obtain written representations covering audited financial statements from certain members of management. The results of our audit tests, the responses to our inquiries, and the written representations, comprise the evidential matter we intend to rely upon in forming our opinion on the financial statements. Non-Attest Services . Prior to or as part of our audit engagement, it may be necessary for us to perform certain non- attest services including, but not limited to, preparing drafts of your financial statements and proposing general, adjusting, or correcting journal entries to your financial statements. You are responsible for reviewing the entries and understanding the nature of any proposed entries and the impact they have on the financial statements. 'n addition, you will be required to review and approve the financial statements and approve that document prior to its issuance and have a responsibility in fact and appearance to make an informed judgment on that document. We will not perform any management functions or make management decisions on your behalf with respect to any non-attest services we provide. In connection with our performance of any non-attest services, you agree that you will: . Continue to make all management decisions and perform all management functions including approving all journal entries and general ledger classifications when they are submitted to you. Designate a competent employee, preferably within senior management, to oversee the services we perform. Evaluate the adequacy and results of the non-attest services we perform. Accept responsibility for the results of our non-attest services. Establish and maintain internal controls, including monitoring ongoing activities related to the non-attest function. . . . . On a periodic basis, as needed, we will meet with you to discuss your accounting records and the management implications of your financial statements. We will notify you, in writing, of any matters that we believe you should be aware of and will meet with you upon request. . . . . City Council August 21, 2007 Page 5 It is our understanding that the City will internally prepare the Public Service Commission Annual Report for the Water Utility. We further understand that we will compile the City's Annual Financial Report Form filed with the Wisconsin Department of Revenue which has an extended due date of May 15, 2007. It will be the City's responsibilitv to obtain the filinn extension for the report filed with the Department of Revenue. A compilation is limited to presenting in the form of financial statements the representations of management. We will not audit or review the compiled reports. It is further our understanding that Virchow, Krause and Company, LLP will prepare drafts of the City's, Water Utility and Sewer Utility financial statements for the Finance Department Supervisor's review and approval. The Finance Department Supervisor will prepare the City's Management Discussion and Analysis report. Further, our fees quoted in this letter are based on the recognition that certain journal entries may be required during the audit process, however, if there are greater than a few entries, a separate charge will be made to cover the additional time required by us. Other Documents Auditing standards generally accepted in the United States of America require that we read any annual report that contains our audit report. The purpose of this procedure is to consider whether other information in the annual report, including the manner of its presentation, is materially inconsistent with information appearing in the financial statements. We assume no obligation to perform procedures to corroborate such other information as part of our audit. You may intend to reproduce or publish the financial statements, or a portion thereof, and make reference to our Firm name in connection therewith. If so, you agree to provide us, for our approval and consent, proofs before printing, and final materials before distribution. With regard to the electronic dissemination of audited financial statements, including financial statements published electronically on your Internet website, you understand that electronic sites are a means to distribute information and, therefore, we are not required to read the information contained in these sites or to consider the consistency of other information in the electronic site with the original document. You agree that you will notify us in advance whenever you intend to reproduce our report for any reason. This notification does not constitute an acknowledgment on our part of any party's intent to rely on the financial statements. Audit Administration Completion of our work is subject to, among other things, 1} appropriate cooperation from the City's personnel, including timely preparation of necessary schedules, 2} timely responses to our inquiries and 3} timely communication of all significant accounting and financial reporting matters. With regard to the preparation of necessary schedules, we understand that your employees will prepare all cash, accounts receivable and other confirmations we request. When and if for any reason the City is unable to provide such schedules, information and assistance, Virchow, Krause & Company, LLP and you will mutually revise the fee to reflect additional services, if any, required of us to complete the audit. . . . City Council August 21, 2007 Page 6 Our fees vary according to the degree of responsibility involved and the experience level of the personnel assigned to your audit. Invoices for these fees will be rendered each month as work progresses and are payable on presentation. A charge of 1.5% per month shall be imposed on accounts not paid within 30 days of receipt of our statement for services provided. In accordance with our firm policies, work may be suspended if your account becomes 30 days or more overdue and will not be resumed until your account is paid in full. If we elect to terminate our services for nonpayment, our engagement will be deemed to have been completed upon written notice of termination, even if we have not completed our report. You will be obligated to compensate us for all time expended and to reimburse us for all out-of-pocket expenses through the date of termination. An estimate of our fees is provided below: Summary of Services and Fees Services Audit of all funds in the City's basic financial statements (excluding individual audits of the Tax Increment Funds) including the preparation of the Annual Report filed with the Department of Revenue City Funds Water Sewer Audit costs allocated to Tax Increment Districts #'s 8 & 9 Total Estimated Fees $ 47,000 11,900 11 ,1 00 10,000 80,000 $ Positions and Hourlv Rates Position Partner Tax Manager Audit Manager In-charge Accountant Associate Accountants Hourlv Rates $ 245.00 200.00 184.00 125.00 110.00 The above fees are also based on conditions existing at December 31, 2006 with no significant changes in the scope of the engagement (i.e. new borrowings, major grant funds, new funds, etc.) from the prior year, except for the changes required by certain new accounting standards that are effective for 2007. If changes in scope are determined, we will consult with you on the change in fees. The fee estimate is based on anticipated cooperation from your personnel and the assumption that unexpected circumstances will not be encountered during the audit. We will consult with you on any scope changes that would result in more than a 5% change from the fees quoted above. Should circumstances change significantly during the course of this engagement, we will discuss with the Finance Department Supervisor or City Administrator our plans to revise our audit plan. This can result from changes at your organization, such as the turnover of key accounting staff, the addition of new funds or significant federal or state programs, receipt of federal funds sufficient to require compliance with Single Audit Act, significant borrowings for capital projects or debt refinancing, or changes that affect the amount of audit effort from external sources, such as new accounting and auditing standards that become effective that increase the scope of our audit procedures. This agreement currently includes all auditing standards through Statement on Auditing Standards No. 112 - "Communicating Internal Control Related Matters Identified in an Audit," all accounting standards through Governmental Accounting Standards Board (GASB) No. 47 - "Accounting for Termination Benefits," excluding GASB No. 45 - "Accounting and Financial Reporting by Employers for Postemployment Benefits other than Pensions," and the current federal and state single audit guidance. . . . City Council August 21, 2007 Page 7 Additional fees will also be charged for our audit effort related to the City's issuance of debt in 2007, if such should occur. The additional fees will be charged each year the debt proceeds are expended on project costs. Estimated audit costs related to debt issues are shown below: Amount of annual debt issues Additional fees for each year debt proceeds are expended Up to $3.0 million $3.0+ million to $5.0 million $5.0+ million to $7.0 million $7.0+ million to $9.0 million $9.0+ million and above $2,500 $3,500 $4,500 $5,500 To be negotiated It is our plan to issue a draft of the financial statements in early June 2008 and issue final reports by June 30, 2008. For us to meet this timing, it will be necessary for the City to be ready for us to begin our audit at the time we have scheduled with the Finance Department Supervisor and the timely completion of the City's Management Discussion and Analysis Report. Other Services We would expect to continue to perform our services under the arrangements discussed above from year to year, unless for some reason you or we find that some change is necessary. Annually we will provide the City changes to our estimated fees and current hourly rates. We will, of course be happy to provide the City with any other services you may find necessary or desirable. No action, regardless of form, arising out of the services under this agreement may be brought by either party more than three years after the act, event or service that is subject of such action or within one year of discovery of such act, error, or omission, whichever occurs last. Because of the importance of oral and written representations to an effective audit, the City releases Virchow, Krause & Company, LLP and its personnel from any and all claims, liabilities costs and expenses attributable to any knowing misrepresentation by management. Further, in no event shall Virchow, Krause & Company, LLP be liable to the City, whether a claim be in tort, contract or otherwise for any consequential, indirect, lost profit or similar damages relating to Virchow, Krause & Company, LLP's services provided under this engagement letter, except to the extent finally determined to have resulted from the professional misconduct or fraudulent behavior of Virchow, Krause & Company, LLP relating to such services. In addition, the City agrees to indemnify and hold harmless Virchow, Krause & Company, LLP and its personnel from any and all claims, liabilities, costs and expenses relating to Virchow, Krause & Company, LLP's services under this engagement letter, except to the extent finally determined to have resulted from the willful misconduct or fraudulent behavior of Virchow, Krause & Company, LLP relating to such services. Resolution of Disagreements . In the unlikely event that differences concerning our services or fees should arise that are not resolved by mutual agreement, to facilitate judicial resolution and save time and expense of both parties, the City and Virchow, Krause & Company, LLP agree not to demand a trial by jury in any action, proceeding or counterclaim arising out of or relating to our services and fees for this engagement. Rather, we both agree that the matter be submitted first to voluntary mediation and, if mediation is not successful, then to binding arbitration under the rules and procedures of the American Arbitration Association. City Council August 21, 2007 Page 8 . Other Matters Virchow, Krause & Company, LLP is owned by professionals who hold CPA licenses as well as by professionals who are not licensed CPAs. Depending on the nature of the services we provide, non-CPA owners may be involved in providing services to you now or in the future. Any additional services that may be requested and we agree to provide will be the subject of separate arrangements. In the event we are requested or authorized by the City, or required by government regulation, subpoena, or other legal process to produce our working papers or our personnel as witnesses with respect to our engagement for the City, the City will, so long as we are not a party to the proceeding in which the information is sought, reimburse us for our professional time and expenses, as well as the fees and expenses of our counsel, incurred in responding to such a request. The City agrees that it will not, directly or indirectly, agree to assign or transfer any claim against Virchow, Krause & Company, LLP arising out of this engagement to anyone. . Our dedication to client service is carried out through our employees who are integral in meeting this objective. In recognition of the importance of our employees to Virchow, Krause & Company, LLP, it is hereby agreed that the City will not solicit our employees for employment or enter into an independent contractor arrangement with any individual who is or was an employee of Virchow, Krause & Company, LLP for a period of twelve months following the date of conclusion of this engagement. If the City violates this non-solicitation clause, the City agrees to' pay to Virchow, Krause & Company, LLP a fee of 30% of the hired individual's new annual compensation within 30 days of such event. This engagement letter reflects the entire agreement between us relating to the services covered by this letter. It replaces and supersedes any previous proposals, correspondence and understandings, whether written or oral. If any provision of this letter is determined to be unenforceable, all the other provisions shall remain in force. The agreement contained in this engagement letter shall survive the completion or termination of this engagement. We appreciate the opportunity to be of service to the City of Muskego and believe this letter accurately summarizes the significant terms of our engagement. If you have any questions, please let us know. If you agree with the terms of our engagement as described in this letter, please sign the enclosed copy and return it to us. It is a pleasure to be of service to you. We look forward to many years of pleasant association with you and the City Please contact me if you have any questions or concerns. s~~. .~ --/?--Á~. VIRCHOW, KRAUSE & COM~ANY- LLP -------'-(31 (Ç5J~~ Ll-~ Donald N. Vilione, CPA Partner . CC: Ms. Jennifer Sheiffer, Administrator Accept:d' :~rié}(RS Date: I Ò/'L't I ð ì