In 2016, the City awarded a contract to perform independent financial auditing services for fiscal years 2015-16 through 2019-20.  Davis Farr LLP was selected based on excellent qualifications, relevant experiences and competitive cost.  The City then exercised its options to extend their services by two years.  The most recent services provided was for the Fiscal Year 2021-22 annual financial audit, which was successfully completed in January 2023.

Davis Farr LLP is a well-known accounting firm headquartered in Orange County, and has been providing audit and consulting services for state and local governments, special purpose governments, nonprofit organizations, service organizations and commercial entities for over 40 years.

The City has been using Davis Farr LLP since 2016, and since then, the City implemented a brand new Enterprise Resource Planning (ERP) system.  The new ERP system redesigned the entire chart of accounts, redefined the majority of the transaction posting strategies, and revamped most of the financial accounting reports.  The internal control structure, including user security, has also been revised to achieve better control and to ensure efficiency.  The implementation period covered more than three years and two annual audits.  During this period, Davis Farr worked alongside the City staff and remodeled their audit approach and strategy to best achieve the goals established by the various auditing standards.

The implementation of the core modules of the new ERP system was successfully completed by January 2022, and Fiscal Year 2022-23 transactions will be the first full fiscal year recorded and reported using the new system. Using a new auditor during this transitional period will negatively impact the City for the following reasons:

1. The amount of work for the staff will significantly increase if a new auditor is selected within the next two years.  As we are still deploying new functions of the system, we already face challenges due to much increased workload.  Streamlining processes has always been one of Finance Department’s top priorities; however, changes take time and resources.  While staff is perfecting the system, consistency with using our current auditing service provider will provide much needed relief.
2. The efficiency of the audit will decrease as the newly selected auditor will need to learn our system while we are making improvements.  The existing auditor, on the contrary, will be able to contribute valuable input based on their in depth understanding of our old system as well as the industry standards.
3. The effectiveness of the audit will be impacted, and the value of an audit goes beyond the auditor’s opinion letter.  Annual audits are great opportunities for the City to review its financial reporting structure, internal control framework, as well as operational efficiencies.  These cannot be achieved without the auditor’s deep understanding of the City’s financial accounting practices. As we make many positive changes to our existing practices, it is instrumental that our auditor can make connections between the past and current processes to effectively test and review transaction posting and financial statement preparation.

Best practice recommends cities rotate auditors every six years for three main reasons: to ensure auditor’s independence, to obtain a new perspective, and to keep fees competitive.   Davis Farr LLP has provided the attached quotes for their auditing services for the next two fiscal years, which reflects a 3% increase from the existing fees.  This is much lower than the current inflation rate.  The current fees were established in 2016 through a competitive process.  Based on the above, we believe it is in the City’s best interest to award the annual financial audit service contract to Davis Farr LLP, our current auditor for another two years.  Staff will evaluate within the next two years to determine if it is necessary to exercise the option years as described in the attached contract.

The costs for the annual financial audit services for fiscal years 2022-23 and 2023-24 are $97,300 and $100,220 respectively.  There is a 3% per year escalation factor for the option years.  The audit fee for Fiscal Year 2022-23 is included in the City’s current operating budget, and future years’ fees will be incorporated into the City’s budget accordingly.

It is recommended that the City Council:

• Authorize to dispense with bidding in the best interest of the City pursuant to Garden Grove Municipal Code 2.50.060(G);

• Award a contract to Davis Farr for annual auditing services for fiscal years 2022-23 and 2023-24; and

•  Authorize the City Manager or her designee to execute the contract, approve minor modifications as needed, and exercise the option to extend the contract up to three years.