City finance office reports internal financial controls are effective despite public skepticism

The Department of Finance presented the city’s 2025 annual report on internal financial controls on Thursday, telling the council the city's control environment meets the threshold for producing reliable financial statements for external reporting even as councilmembers and public commenters raised concerns about operational shortcomings highlighted by a separate Mission Bay audit.

"Based on our evaluation, we have concluded that the internal financial controls are effective," said Jeff Peel, chief accountant, describing management's COSO-based assessment of control environment, risk assessment, control activities, information and communication, and monitoring activities. Finance also noted the city received a clean audit opinion for FY2025 and several professional awards for budget presentation and excellence.

Finance staff said the prior mutual moratorium on lease audits concluded in April 2025, that revenue compliance auditing has resumed, and that Economic Development Department process changes and software upgrades are intended to reduce human error and improve visibility into lease compliance.

Public commenters disputed that a controls report and professional awards reflect strong on-the-ground oversight. Several speakers pointed to the Mission Bay audit and the reported backlog of unapplied payments, saying the two items appear inconsistent. Council members similarly differentiated the report’s narrow scope — whether controls are adequate to produce materially accurate external financial statements — from operational problems such as lease management, contracting and staffing. Ben Battaglia, director of finance, reiterated that the internal controls report addresses financial-reporting controls and that materiality thresholds do not imply operational perfection.

The item was informational; no vote was required. Councilmembers asked finance staff for more detail where operational weaknesses intersect with control objectives, and asked for coordination with economic development staff on software upgrades, RFP timelines and opportunities to support backlog remediation during upcoming budget deliberations.

What happens next: Finance will continue to close outstanding recommendations related to human capital and revenue compliance, coordinate with EDD on software and process improvements, and provide updates to audit and council oversight committees as implementation proceeds.