Southern California Regional Rail Authority. Report to the Executive Management and Audit Committee

Transcription

1 Southern California Regional Rail Authority Report to the Executive Management and Audit Committee February 29, 2012

2 February 29, 2012 To the Executive Management and Audit Committee Southern California Regional Rail Authority Los Angeles, California We are pleased to present this report related to our audit of the financial statements and compliance of the Southern California Regional Rail Authority (SCRRA) for the year ended June 30, This report summarizes certain matters required by professional standards to be communicated to you in your oversight responsibility for the SCRRA s financial reporting process. This report is intended solely for the information and use of the Executive Management and Audit Committee, the Board of Directors and management, and is not intended to be, and should not be, used by anyone other than these specified parties. It will be our pleasure to respond to any questions you have regarding this report. We appreciate the opportunity to be of service to SCRRA.

3 Contents Required Communications 1-3 Summary of Accounting Estimates 4-6 Exhibit A Certain Written Communications Between Management and Our Firm Representation Letter Exhibit B Communication of Significant Deficiency on Accounting, Auditing or Operational Matters Exhibit C Other Control Deficiencies on Accounting, Auditing or Operational Matters Communicated to Management Exhibit D Summary of Recorded Audit Adjustments

4 Required Communications Statement on Auditing Standards No. 114 requires the auditor to communicate certain matters to keep those charged with governance adequately informed about matters related to the financial statement audit that are, in our professional judgment, significant and relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. The following summarizes these communications: Area Auditor s Responsibility Under Professional Standards Comments Our responsibility under auditing standards generally accepted in the United States of America; Government Auditing Standards, issued by the Comptroller General of the United States; the provisions of the Single Audit Act, OMB Circular A-133 and OMB s Compliance Supplement, has been described to you in our arrangement letter dated September 20, Accounting Practices Adoption of, or Change in, Accounting Policies Management has the ultimate responsibility for the appropriateness of the accounting policies used by SCRRA. SCRRA did not adopt any significant new accounting policies nor have there been any changes in existing significant accounting policies during the current period. Significant or Unusual Transactions We did not identify any significant or unusual transactions or significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. Alternative Treatments Discussed With Management We did not discuss with management any alternative treatments within generally accepted accounting principles for accounting policies and practices related to material items during the current audit period. Management s Judgments and Accounting Estimates Summary information about the process used by management in formulating particularly sensitive accounting estimates and about our conclusions regarding the reasonableness of those estimates is in the attached Summary of Accounting Estimates. Financial Statement Disclosures In our meeting with you, we will discuss with you the following item as it relates to the neutrality, consistency and clarity of the disclosures in the financial statements: Reclassify deferred revenue for advances from member agencies that relate to capital purchases 1

5 Area Audit Adjustments Comments Audit adjustments recorded by SCRRA were discussed with management and included adjustments identified by management subsequent to the original trial balances provided to us and adjustments identified by us and are attached as Exhibit D. Uncorrected Misstatements There were no uncorrected misstatements to the original trial balance presented to us by management to commence the audit. Disagreements With Management We encountered no disagreements with management over the application of significant accounting principles, the basis for management s judgments on any significant matters, the scope of the audit or significant disclosures to be included in the financial statements. Consultations With Other Accountants We are not aware of any consultations management had with other accountants about accounting or auditing matters. Significant Issues Discussed With Management Following is a description of significant issues arising from the audit that were discussed with management: Accounting for inactive inventory purchased in prior years with no verifiable documentation to support the purchase price of the inventory items. Implementing policies and processes to document unusual and/or significant transactions. Difficulties Encountered in Performing the Audit We did not encounter any difficulties in dealing with management during the audit. Letter Communicating Internal Control and Compliance Matters We have separately communicated a significant deficiency identified related to the audit of SCRRA s financial statements that is required to be communicated in accordance with Government Auditing Standards and OMB Circular A-133, and this communication is attached as Exhibit B. We have separately communicated other control deficiencies and other matters not deemed to be significant deficiencies or material weaknesses identified during our audit of the financial statements and major awards, as required by the Government Auditing Standards and OMB Circular A-133. This communication is attached as Exhibit C. 2

6 Area Certain Written Communications Between Management and Our Firm Comments Copies of certain written communications between our Firm and the management of SCRRA are attached as Exhibit A. 3

7 Southern California Regional Rail Authority Summary of Accounting Estimates Year Ended June 30, 2011 Accounting estimates are an integral part of the preparation of financial statements and are based upon management s current judgment. The process used by management encompasses its knowledge and experience about past and current events, and certain assumptions about future events. You may wish to monitor throughout the year the process used to compute and record these accounting estimates. The following describes the significant accounting estimates reflected in SCRRA s June 30, 2011 financial statements: Area Accounting Policy Estimation Process Comments Useful Lives of Long- Lived Assets The estimated useful lives of assets generally have the following ranges: building and improvements 10 to 30 years; rolling stock 30 years; fare collection 10 years; other equipment (except vehicles) three to 10 years; support vehicles seven years. These assets are depreciated using the straight-line method. Land and Easement Intangible Assets are not depreciated and construction in process is not depreciated until ready for service and capitalized. Infrastructure assets consisting primarily of the SCRRA Railroad Network are accounted for under the modified approach. Management reviews for changes in the useful lives of longlived assets by evaluating prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred. A capital asset is considered impaired if both the decline in the service utility of the capital asset is large in magnitude and the event or change in circumstance is outside the normal life cycle of the capital asset. Common indicators of impairment include evidence of physical damage where effort is needed to restore service utility, enactment or approval of laws and regulations setting standards that the capital asset would not be able to meet, technological development or evidence of obsolescence, a change in the manner or expected duration of use of a capital asset or construction stoppage. We tested the reasonableness of information underlying management s estimate. Based on our procedures, we concluded that assigned useful lives of capital assets are reasonable. 4

8 Area Accounting Policy Estimation Process Comments Accounts Receivable Record accounts receivable net of the allowance for estimated uncollectible accounts. In estimating SCRRA s allowance for doubtful accounts, management specifically identifies receivables that are believed to be uncollectible based on relevant facts, such as bankruptcy filings and customer financial outlooks. We tested the propriety of information underlying management s estimate. Based on our procedures, we concluded that management s approach is reasonable. The change in allowance is supported by the accounts receivable records. Pension Obligations and Postemployment Benefits Other Than Pensions Pension and postemployment benefits other than pensions (OPEBs) are recorded at cost based on an estimated annual contribution rate. A pension or OPEB asset is recorded if contributions exceed the annual required contribution. A pension or OPEB liability is recorded if contributions are less than the annual required contribution. For postemployment benefits other than pensions, management utilizes an actuarial consulting firm to perform an evaluation using the entry age normal actuarial cost method. Management reviewed and approved the actuarial assumptions and calculations used to determine the postemployment benefit costs. For pension obligations, management utilizes CalPERS actuaries for its miscellaneous single employer plan. The miscellaneous single employer plan is a contributory plan deriving funds from employee and employer contributions and earnings from investments. We tested the reasonableness of the information underlying the actuarial evaluations. Based on our procedures, we concluded that the pension and postemployment benefits other than pension costs recorded are reasonable. 5

9 General Liability Claims Area Accounting Policy Estimation Process Comments Record general claims liability claims for estimated self-insured portion of incurred claims. Management estimates general liability based on loss run reports, litigated claims, historical data and current year experience. We tested the propriety of information underlying management s estimate. Based on our procedures, we concluded that costs recorded are reasonable. Modified Approach for Reporting the SCRRA Railroad Network Infrastructure Record infrastructure assets under the modified approach as long as SCRRA manages the eligible infrastructure assets using an asset management system with certain characteristics and documenting that the eligible infrastructure assets are being preserved at a condition level established and disclosed by SCRRA. Management annually estimates the amount to maintain and preserve the eligible infrastructure assets at the condition level established and disclosed by SCRRA (SCRRA adopted a condition rating of 75 points as the minimum acceptable railroad condition index for the entire Railroad Network). We tested the propriety of information underlying management s estimate. For each of the last three fiscal years ended June 30, 2011, 2010 and 2009, management has determined the minimum funding needed to maintain this condition level to be approximately $44,549,000, $50,213,000 and $49,617,000, respectively. However, actual maintenance costs incurred for each of the last three fiscal years ended June 30, 2011, 2010 and 2009 was $10,001,000, $23,802,000 and $31,103,000, respectively. We have included this observation and recommendation to management in our letter as included in Exhibit C. 6

10 Exhibit A Certain Written Communications Between Management and Our Firm

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22 Exhibit B Communication of Significant Deficiency on Accounting, Auditing or Operational Matters

23 Southern California Regional Rail Authority Schedule of Findings and Questioned Costs Year Ended June 30, 2011 II. Financial Statement Findings A. Internal Control Deficiencies # Documentation for Unusual Transactions Criteria: The Authority is responsible for implementing and maintaining an effective system of internal controls over financial reporting. This includes establishing policies and procedures that enable the preparation of financial statements in accordance with Accounting Principles Generally Accepted in the United States of America (GAAP). Condition: The Authority does not have a formal policy in place to document unusual and/or significant transactions. Effect: The Authority did not have an accounting policy in place to adequately document the accounting and recording for the lease/leaseback transaction entered into in prior years and certain transactions with its member agencies. Recommendation: We recommend that the Authority implement and maintain policies and processes to document unusual and/or significant transactions as long as those transactions impact the financial statements. View of Responsible Officials and Planned Corrective Action: The Authority will develop policies and procedures to address unusual and/or significant transactions by December 31, B. Compliance Findings None reported. III. Findings and Questioned Costs for Federal Awards A. Internal Control Deficiencies None reported. B. Compliance Findings None reported.

24 Southern California Regional Rail Authority Summary Schedule of Prior Year Audit Findings Year Ended June 30, 2011 I. Financial Statement Findings A. Internal Control Deficiencies # Incurred but Not Reported Claims Condition: During our review of claims payable, we noted that the Authority does not evaluate its incurred but not reported (IBNR) claims for a determination as to whether any amounts should be recorded as additional claims payable. Government Accounting Standards Board (GASB) Codification Section C50, Claims and Judgments, paragraph.113 indicates that when there are incidents that occur before the balance sheet date but a claim has not yet been asserted, if the amounts can be reasonably estimated, than a liability for this incurred but not reported claim should be recorded. The calculation for any incurred but not reported claims is often performed by an agency s claims administrator. This condition was previously communicated as part of the audit for the year ended June 30, Recommendation: We recommend that the Authority, in conjunction with its claims administrator, evaluate whether incurred but not reported claims should be recorded as part of claims payable. Management Response: The Authority management concurs and is working with its risk managers to develop an agreeable means to properly estimate and track unasserted claims and judgments payable. Current Status: This deficiency was fully remedied during the year ended June 30, # Timely Audit Information Condition: An audit plan and schedule was established at the outset of the audit, but was not met. We encountered significant difficulties and delays in obtaining supporting schedules as part of conducting the annual audit. Some critical items were not provided until March 2011, including the final Schedule of Expenditures of Federal Awards worksheet, and schedules related to accounts receivable and deferred revenue. The result was an inefficient audit process. Once the schedules were completed and provided to us, they were accurate and adequately supported the amounts reported in the financial statements. This condition was previously communicated as part of the audit for the year ended June 30, Recommendation: We recommend that the Authority evaluate its process of compiling pertinent data from its various departments and closing the books so that documentation and schedules can be prepared and provided to the auditors in accordance with agreed-upon timeframes. Management Response: The Authority management concurs. Although staff developed a work plan for the FY10-11 CAFR to be completed within the statutory time requirements, several unanticipated factors negatively impacted staff s ability to meet the planned work schedule. Improvements made to several accounting processes will facilitate the completion of key yearend close processes for FY11-12, thereby shortening the timeframe required to develop and provide documentation to future auditors. An aggressive, yet realistic FY11-12 CAFR work plan will be in place well in advance of the fiscal year-end. The plan will include action items with firm due dates for the entire year-end close process which will allow for appropriate accountability. Current Status: This deficiency was partially remedied during the year ended June 30, 2011.

25 Southern California Regional Rail Authority Summary Schedule of Prior Year Findings Year Ended June 30, 2011 II. Findings and Questioned Costs for Federal Awards # Effectiveness of Records Maintained by Grants Department Condition: Grants Management within the Authority was not able to readily provide documentation to support that it had met the matching requirements as required by its various federal grants. Specifically, the Authority accounts for multiple grant agreements under the Federal Transit Administration Cluster and Job Access-Reverse Commute major programs. The Authority maintains separate monthly expenditures details for each project. However, there were no reports readily available which summarized total fiscal year project expenditures, both federal and non-federal, and demonstrated compliance with matching requirements. A significant amount of time was necessary to compile amounts before being able to determine whether or not the Authority s funding percentage met the match required by the separate agreements. Grant recipients are required to maintain reports showing how the funds they receive are spent. In order to track the information to be reported, the grantee has to set up a record keeping/records management system that organizes this information in a manner that allows it to be easily retrieved, understood and reported. Recommendation: We recommend that the Authority revise its grants accounting practices to provide an improved audit trail and facilitate the monitoring of project fund matching, and retention of evidence thereof. Management Response: The Authority management concurs. Staff created an interim grants tracking database that provides the information necessary to more effectively monitor grant requirements and allow for improved reporting. This was completed fall This is designed as a short term solution to be used until the Grants Accounting module of the Oracle reimplementation project is completed. The current schedule plans for a go-live date of October Current Status: This deficiency was partially remedied during the year ended June 30, 2011.

26 Exhibit C Other Control Deficiencies on Accounting, Auditing or Operational Matters Communicated to Management

27 To the Board of Directors Southern California Regional Rail Authority Los Angeles, CA In connection with our audit of the basic financial statements of the Southern California Regional Rail Authority (SCRRA) as of and for the year ended June 30, 2011, we identified deficiencies in internal control over financial reporting (control deficiencies). 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 and correct, misstatements on a timely basis. A deficiency in design exists when a control necessary to meet the control objective is missing, or when an existing control is not properly designed so that even if the control operates as designed, the control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or qualifications to perform the control effectively. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We have separately communicated, to you and the Executive Management and Audit Committee, through the issuance of SCRRA s Single Audit report, an identified deficiency that we determined to be a significant deficiency. Control Deficiencies Following are descriptions of identified control deficiencies that we determined did not constitute significant deficiencies or material weaknesses: Bank Reconciliations Condition: The book balance noted on the June 30, 2011 bank reconciliation for the payroll account did not agree to the June 30, 2011 general ledger. This was due to certain manual payroll checks totaling $38,469 that were issued on June 30, 2011 and noted on the bank reconciliation as outstanding checks (a reconciling item) but not recorded as a reduction to the cash account and a reduction of accrued payroll on the general ledger. Recommendation: We recommend SCRRA review the policies and procedures over the recording of manual checks to ensure that manual checks are recorded through the general ledger on a timely basis. In addition, we recommend that SCRRA reconcile all bank reconciliations to the general ledger on a monthly basis.

28 Southern California Regional Rail Authority Page 2 View of Responsible Officials and Planned Corrective Action: Policies and procedures documented by December 31, Reconciliation of all bank statements has been completed monthly since mid However, manual payroll checks were not recorded at the time of issuance, but rather when the payroll was issued, which could be in a subsequent month. Manual checks will be posted as they are issued effective February Local Agency Investment Fund (LAIF) Condition: SCRRA s investment in the Local Agency Investment Fund (LAIF), as reported on the financial statements, was not adjusted to fair market value at June 30, Generally accepted accounting principles require investments be reported at fair market value, which is the amount that a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. LAIF provides the fair market value adjustment factor monthly and is accessible through its website. Recommendation: We recommend that SCRRA record is investment in LAIF at fair market value on the financial statements. View of Responsible Officials and Planned Corrective Action: We have already changed to this method for FY11. We will modify monthly booking of investment to reflect this method. In addition, quarterly investments reports provided to SCRRA Board members will be modified to reflect this mention. Review of Federal Grant Invoices Condition: The following are control deficiencies related to expenses incurred under federal grants observed during the audit: SCRRA personnel do not clearly memorialize their approval for grant expense allowability on the Contract Payment Voucher and/or related grant expense supporting documentation. Per our understanding of the Authority s policies and procedures and from testing certain federal grant expenses, we noted that the respective Project Manager(s) reviews the expense for appropriateness and completeness and that Grants Management also reviews and approves the expense prior to submission for reimbursement to the respective grantor. However, it is not clearly denoted on the supporting documentation which person is assuming responsibility for the grant allowability review. The accounting system does not prevent expenses from being posted to a grant that is past the period of grant availability. We identified one accrual recorded for approximately $1,600 under grant # 75LX077 for the Railroad Safety grant (Catalog of Federal Domestic Agency #20.301) after the period of availability ended on March 31, 2011 and the grant close-out documents were submitted to the federal funding source. This resulted in an adjustment to the general ledger and the Schedule of Expenditures of Federal Awards. Recommendation: We recommend SCRRA clarify its review and approval process for grant expenses.

29 Southern California Regional Rail Authority Page 3 View of Responsible Officials and Planned Corrective Action: The efforts to improve internal processes and procedure, and the implementation of financial systems are ongoing. SCRRA documents how Grant expenditures are reviewed, verified, processed, and reported to ensure compliance with all Federal, state, and local regulations. Organizational changes are expected as well as improved management and documentation on roles, responsibilities and accountability on Grants. Inventory Condition: Supporting acquisition cost information was not available for inactive inventory items for track and structures, communication and signals, and equipment selected for testing by us. The lack of documentation was due to these items being purchased in years past by the respective vendors responsible for acquiring and maintaining these assets. Management determined it was appropriate to write off this inactive inventory in the amount of $4.8 million during the year ended June 30, Recommendation: We understand that management has undertaken a number of actions over the last 12 months to better monitor and record inventory based on an assessments performed by internal audit. In addition to following through with this process, we recommend that inactive inventory items be monitored and written off when no longer useable. Furthermore, as purchasing of inventory is brought inhouse, the issue on not having supporting cost information should be alleviated. View of Responsible Officials and Planned Corrective Action: An internal group composed of operations, finance and the chief auditor (once hired) will consider the recommendation and determine an appropriate future action plan. Capital Assets Condition: Costs incurred to rehabilitate and renovate specific engine locomotives are capitalized and depreciated over their estimated useful lives as a separate capital asset category. Recommendation: We recommend that costs for rehabilitation and renovation which extend the useful life be identified with the specific asset renovated as a sub-category and depreciated over its expected useful life. Another concept that could be considered is that if a capital asset consists of separate components which have significantly different useful lives, that upon initial capitalization the asset s cost would be allocated to the separate components with each being depreciated over its estimated useful life. View of Responsible Officials and Planned Corrective Action: An internal group composed of operations, finance and the chief auditor (once hired) will consider the recommendation and determine an appropriate future action plan. Revenue Recognition Condition: We noted that revenue recognition is not recorded in accordance with generally accepted accounting principles for the monthly passes (excluding the corporate passes) and 10-trip passes. SCRRA begins selling monthly passes on the 15th day of the month preceding when the pass is valid (i.e. June 15th and after for July monthly passes). SCRRA recognizes the revenue when the pass is sold rather than for the month that the pass relates to. Additionally, the 10-trip passes, which are currently being phased out, are valid for 45 days from the date of purchase and the revenue is recorded when the

30 Southern California Regional Rail Authority Page 4 pass is sold, not when the 45-day period has expired. Generally accepted accounting principles require that revenue be recognized in the period earned. The current policy of recording of revenue resulted in a passed adjustment of approximately $2 million to increase deferred revenue and approximately $300,000 to decrease revenue for the year ended June 30, Recommendation: We recommend that SCRRA establish policies and procedures to recognize revenue for its monthly passes in the period the pass is valid. View of Responsible Officials and Planned Corrective Action: Incorporated into FY11 CAFR, implemented into monthly and close process and incorporated into financial reporting process effective January Comments and Suggestions In addition to the above internal control matters, the following are comments and suggestions with respect to matters that came to our attention in connection with our audit of the basic financial statements of SCRRA for the year ended June 30, These items are offered as constructive suggestions to be considered as part of the ongoing process of modifying and improving SCRRA s practices and procedures: Deposit Liabilities Condition: SCRRA receives deposits from various sources for projects or activities utilizing SCRRA resources that are either refunded or applied (converted) as a fee for service. These deposits are initially recorded as a deposit liability within the financial statements and totaled approximately $3,800,000 as of June 30, 2011, including over $1,600,000 that is greater than one year old. We noted that SCRRA has not conducted a thorough review of these deposits to determine whether the underlying project or activity the deposit applies to have been performed or completed, requiring the deposit to be either applied to the project/activity or refunded to the respective source. Recommendation: We recommend that SCRRA conduct a periodic review of these deposit liabilities, emphasizing the age of the deposits and the systems or means to support the recorded amounts to determine if the respective projects/activities have been completed. If deposits have aged significantly, it may require further investigation to determine if the deposit had previously been refunded or applied. View of Responsible Officials and Planned Corrective Action: Effective quarter ending March 31, 2012, a quarterly review will be conducted on deposit liabilities for appropriate action. Treatment as Abandoned Property Condition: In SCRRA s operating account and ticket refund account, there are numerous checks outstanding that have been outstanding more than a year. Checks that have been outstanding for at least three years totaled approximately $45,000 as of June 30, 2011.

31 Southern California Regional Rail Authority Page 5 Recommendation: To simplify the monthly reconciliation process and to ensure compliance with the State s escheat laws governing abandoned property, we recommend that SCRRA reissue new checks if the payees can be contacted or found. If not, we recommend that legal counsel be consulted regarding the state escheat laws and requirements to remit unclaimed assets to the appropriate governmental agency. View of Responsible Officials and Planned Corrective Action: As part of the reimplementation of the FIS system a review of the checks will be conducted to determine appropriate action to be taken. Reconciliations Conditions: The following are matters we identified from the various reconciliations SCRRA performs in the normal course of preparing the month-end close and year-end close of the accounting records: The daily cash deposits are not being reconciled with the Cash Management System (CMS). This process is only done at month-end. Doing this on a daily basis should ease the month-end reconciliation process. Reconciling the deferred revenue and advances on capital purchases balances at SCRRA s fiscal year-end has historically taken six to nine months to prepare. Recommendation: We understand SCRRA is currently assessing its accounting system and will soon implement a new accounting system that will automate more accounting transactions and reduce the amount of manual reconciliations that must be performed as part of the month-end and year-end close process. We recommend that SCRRA establish policies and procedures to more timely and efficiently prepare these reconciliations when implementing the new accounting system. View of Responsible Officials and Planned Corrective Action: Staff will consider this recommendation and take appropriate actions compliant with FTA requirements and best business practices. Policies and procedures will be documented by December 31, Threshold for Capitalizing Assets Condition: Currently, SCRRA capitalizes all capital assets with a useful life greater than one year and with a cost greater than $5,000. Recommendation: Due to the significant number of capital asset additions and considering the size of SCRRA, we recommend SCRRA review its capitalization policy to determine if the current level should be increased. Increasing the capitalization level could help SCRRA reduce the amount of effort spent on capitalizing smaller dollar items that may be immaterial to SCRRA s operations. View of Responsible Officials and Planned Corrective Action: We are evaluating action plans to improve billing process resulting in immediate reimbursement. The new process and procedures will be implemented by January 31, 2013.

32 Southern California Regional Rail Authority Page 6 Timely Submission of Invoices for Reimbursement Condition: We noted in testing cash management for the Railroad Safety Technology Grant, a grant SCRRA receives from the federal Department of Transportation, that SCRRA did not timely request reimbursement for eligible expenses incurred under the grant. A request for reimbursement for approximately $1,200,000 was submitted in November 2011 for eligible expenses incurred by SCRRA through June 30, Not submitting timely requests for reimbursement results in undue cash flow constraints on SCRRA and restricts the amount of resources available to fund other operations and projects until such reimbursements are received. Recommendation: We recommend SCRRA implement policies and procedures to timely submit invoices for reimbursement to its respective grantors for eligible reimbursable expenses incurred, which should result in improved cash flow. View of Responsible Officials and Planned Corrective Action: We have initiated immediate action to address unbilled reimbursable items. Longer term process improvements will be implemented as part of the reimplementation of the FIS. Policies and procedures will be documented by January 31, Modified Approach to Reporting Infrastructure Capital Assets Condition: As a condition to using the modified approach in recording its infrastructure assets (SCRRA Railroad Network), SCRRA must annually estimate the amount needed to maintain and preserve the eligible infrastructure assets at the condition level established and disclosed by SCRRA (SCRRA adopted a condition rating of 75 points as the minimum acceptable railroad condition index for the entire Railroad Network). For each of the last three fiscal years ended June 30, 2011, 2010 and 2009, the respective District Managers responsible for the track, signals and structures have determined the minimum funding needed to maintain this condition level to be approximately $44,549,000, $50,213,000 and $49,617,000, respectively. However, actual maintenance costs incurred for each of the last three fiscal years ended June 30, 2011, 2010 and 2009 was $10,001,000, $23,802,000 and $31,103,000, respectively. Recommendation: We recommend that SCRRA re-evaluate the methods utilized to calculate the annual condition assessment funding levels to determine if these methods are reasonable and consistent with what is actually required to maintain and preserve the condition and performance of the SCRRA Railroad Network, and either adjust the condition assessment to its proper amounts or increase the amount of actual costs incurred to maintain and preserve the SCRRA Railroad Network. View of Responsible Officials and Planned Corrective Action: An internal group composed of operations, finance, and the chief auditor (once hired) will consider the recommendation and determine a future action plan.

33 Southern California Regional Rail Authority Page 7 This communication is intended solely for the information and use of the Executive Management and Audit Committee, the Board of Directors and management of SCRRA. However, this report is a matter of public record and its distribution is not limited. Los Angeles, CA February 29, 2012

34 Exhibit D Summary of Recorded Audit Adjustments

35 Southern California Regional Rail Authority Posted Adjustments June 30, 2011 Effect Debit (Credit) Description Assets Liabilities Equity Revenue Expenses Current Year Misstatement To adjust prepaid balance for inventory items that were not paid for or received as of 6/30/11 $ (1,384,336) $ 1,384,336 $ - $ - $ - To adjust the deferred revenue and capital contributions receivable for RCTC balance (9,975,000) 9,975, To adjust the deferred revenue and capital contributions receivable for OCTA balance 2,944,855 (2,944,855) Inventory valuation write-down of slow moving inventory (4,845,375) 4,845,375 - (4,845,375) 4,845,375 To adjust revenue recorded in June 2011 for monthly and 10-trip passes for July (1,977,038) - 1,977,038 - To reverse the gross up of the OCTA gas tax exchange transaction ,299,735 (10,299,735) Total effect $ (13,259,856) $ 11,282,818 $ - $ 7,431,398 $ (5,454,360) Current year effect of change in net assets $ 1,977,038 Effect on ending net assets $ 1,977,038