1981CITY OF BANGOR, MAINE
Management Letter
March 20, 1981
L,STTF,R 19$ t
JPeat, Marwick, Mitchell &Co.
Peat, Marwick, Mitchell &Co
The Honorable Mayor, City
Council and City Manager
City Hall
City of Bangor, Maine 04401
Gentlemen:
Certified Public Accountants
P.O. Box 507
Three Canal Plaza.
Portland, Maine 04112
March 20, 1981
We have examined the financial statements of the City of Bangor, Maine
for the year ended December 31, 1980 and have issued our report thereon
dated March 20, 1981.
As a part of our examination, we made a study and evaluation of the
City's system of internal accounting control to the extent we considered
necessary to evaluate the system as required by general accepted auditing
standards. Under these standards, the purposes of such evaluation are
to establish a basis for reliance on the system of internal accounting
control in determining the nature, timing and extent of other auditing
procedures that are necessary for expressing an opinion on the financial
statements and to assist us in planning and performing our examination
of the financial statements.
Our examination of the financial statements made in accordance with
generally accepted auditing standards, including the study and evaluation
of the City's system of internal accounting control for the year ended
December 31, 1980, that was made for the purposes set forth in the
paragraph above, would not necessarily disclose all weaknesses in the
system because it was based on selective tests of accounting records and
related data. Such study and evaluation did not disclose any conditions
that we believe to be material weaknesses; however, we noted the following
conditions which we believe to be worthy of your consideration upon
which we are presenting our comments and recommendations for improvement.
Increasing Revenues
Develop a Cost Allocation Plan
The City participates in many Federal and state programs. Some of these
programs provide for reimbursement of indirect costs, i.e., costs
incurred by the City on behalf of grant programs but not specifically
identifiable to those programs. For reimbursement to occur, however,
the indirect costs must be determined in accordance with the cost principles
contained in Federal Management Circular (FMC) 74-4, "Cost Principles
Applicable to Grants and Contracts with State and Local Governments".
The Honorable Mayor, City
Council and City Manager
March 20, 1981
Page 2
The City has not been requesting reimbursement, where applicable, for
indirect costs attributable to Federal and state grant programs. A cost
allocation plan, in accordance with FDIC 74-4, should therefore be
developed to allow the City to:
Request and receive reimbursement for costs incurred on behalf of
but not specifically attributable to grant programs for which such
costs are allowable. (Typical grant programs providing for reimbursement
of such costs include the Community Development Block grants and
CETA).
Determine the true cost of participating in grant programs that do
not provide for reimbursement of indirect costs. This would help
the City to determine if its true costs for such programs are
reasonable in relation to the benefits received or if the City
should utilize its resources in a manner returning a greater
benefit.
osit of School Lunch Program Receipts
Revenue from school lunch programs is being deposited into a separate
noninterest bearing bank account and on a periodic basis is transferred
into a City bank account. In order to maximize investment oportunities
and to ensure that such receipts will be subject to the City's safeguards
over cash, we recommend that school lunch program revenues be deposited
directly into a City bank account on a daily basis.
School Tuition Billings
We noted delays in the school department's billing of tuition charges to
other towns. We recommend that towns be billed on a monthly basis for
services rendered. This would accelerate the receipt of cash and improve
investment potential.
Hospital Charges
Reimbursement of hospital charges from third -party payors such as
Medicare and Medicaid is limited to the lower of costs or charges. For
the year ended December 31, 1980, reimbursement was limited to charges,
which resulted in certain allowable costs not being reimbursed. This
loss of revenue is due to either inadequate rate charges or excessive
costs. We recommend that the City undertake a study to determine the
cause of the problem and take necessary action to either increase rates
or decrease costs.
Studies and RetainaRes on Construction Proiect
We noted instances where studies on prospective sewer line capital
projects were being expensed instead of accumulated in an asset account.
We also noted that it is the City's policy to capitalize retainages on
construction projects when paid and not when the work has been performed.
We recommend that all costs associated with a capital project be added
The Honorable Mayor, City
Council and City Manager
March 20, 1981
Page 3
to the cumulative project costs in order to accurately portray expenditures
to date and, on certain projects, to accelerate the receipt of intergovernmental
subsidies.
Decreasing Costs
Obsolete Inventory
It came to our attention that the City is holding obsolete inventory,
particularly in the Public Works and Electrical Departments. We recommend
a sale of such inventory to reduce the.carrying cost and to recoup a
portion of the funds.
Protecting Assets
Detailed Fixed Asset Records
Safeguarding the City's investment in fixed assets is of utmost importance
in the exercise of stewardship responsibilities. These responsibilities
can be effectively discharged only through adequate fixed asset accounting.
At present, the City has details supporting recent fixed asset additions,
but in most cases lacks the detail for prior years' additions. Establishing
fixed asset records in those cases where none exist will yield the
following benefits:
Fixed assets can be inventoried periodically to ensure that they
are properly controlled.
Responsibility for custody and effective use of fixed assets can be
clearly established.
Records will be .readily available to substantiate the amount of
grants used to finance expenditures for fixed assets. Furthermore,
the determination of costs for building and equipment use is
facilitated. The latter is important in obtaining reimbursement
for the use of buildings and equipment in Federal and state aid
programs.
Information is readily available to determine insurance needs and
to substantiate losses recoverable from insurance carriers.
We recommend that such records be maintained for all acquisitions of
property that have a useful life longer than the current year and that
have significant value.
Improving Operational Efficiency
Procedures Manual
The City lacks procedure manuals for many of their activities, including
the accounting function. Manuals which set forth job descriptions,
lines of authority and supervision, report formats, and descriptions of
The Honorable Mayor, City
Council and City Manager
March 20, 1981
Page 4
procedures and routines are invaluable management tools. Benefits
include reducing incidents of procedural violations, facilitating the
training of new personnel and assuring that any changes to procedures,
which will require written revision to the manuals, are subject to
approval of management.
Federal and State Aid Reimbursement
We noted delays in filing requests for reimbursement of expenditures for
the school lunch program and the sewerage facility planning project.
Timely requests minimize the need to use general resources to finance
these expenditures and would improve cash flow and increase investment
opportunities.
Implementing Management Letter Comments
The implementation of changes recommended in this letter can be facilitated
if management and Council:
Consider and establish priorities for implementing the changes.
Develop an overall plan and method of implementation that reflects
the priorities.
Assign the responsibility for carrying out each change to a specific
individual.
Establish time -frames for implementation of each change.
Schedule progress reports from the responsible City officials and
conduct progress meeting to further discuss progress and to resolve
problems that arise.
These steps should provide assurance that management and Council's
desires are carried out in a timely and responsible manner.
Consolidating Citv and School Operations
Similar operations are performed by both the City and school departments.
This duplication of effort results in inefficiencies. We recommend that
the purchasing, personnel, and accounting functions of the City and
school be consolidated. This would decrease similar costs incurred by
both departments and would improve the flow of information between the
City and school.
Bangor State Fair
Bangor State Fair assumed the debt obligation payments relating to the
Bangor Auditorium and Bangor Civic Center. At December 31, 1980, Bangor
State Fair was two years in arrears on their payments to the City for
debt retirement thereby reducing cash available for investment. This
The Honorable Mayor, City
Council and City Manager
March 20, 1981
Page 5
situation also raises questions as to whether the receivable will be
collected. To protect the City's interest in this matter, we recommend
that the City closely monitor the operations of Bangor State Fair to
determine the likelihood of repayment.
Other Improvements in Internal Control
School Purchases
We noted that purchase orders and invoices are in various locations
within the school department. Additionally, the high school occasionally
receives invoices directly from vendors. To ensure the timely and
accurate recording of expenditures and encumbrances, we recommend a
centralized filing system for invoices and purchase orders.
Misclassification of Trust and Agency Investment
We noted one instance where the purchase of an investment on behalf of
the Bangor Target Area was recorded as an expenditure on the City's
books. In order to prevent similar misclassifications of trust and
agency disbursements, we recommend that the finance director be notified
in writing of all trust and agency investment transactions.
City Hospital Patients' Cash Fund
We observed that the City hospital patients' cash fund is controlled by
the same individual who maintains the general ledger and that the detail
records of the patients' cash fund are not reconciled to the general `
ledger balance on a regular basis. We recommend that an individual
other than the bookkeeper control the patients' cash fund in order to
improve segregation of duties and to decrease the possibility of a
defalcation. In addition, detail should be reconciled to the general
ledger balance monthly and any differences resolved immediately.
Distribution of Payroll Checks
We were informed that undistributed payroll checks at the police department
are sometimes tacked to a bulletin board. This lack of internal control
over these payroll checks resulted in certain of these checks being
stolen. In order to be certain that payroll checks are received by the
appropriate employees, we recommend that undistributed payroll checks be
controlled by an individual who is independent of the payroll function.
Payroll Procedures
In connection with our examination of payroll procedures, we noted the
following for your consideration:
Department heads initial payroll summaries denoting their approval
of the information submitted. Specific changes from the preceeding
period are not initialed. To ensure that changes are properly
authorized, we recommend that department heads initial approval on
documents denoting a change in status for employees.
The Honorable Mayor, City
Council and City Manager
March 20, 1981
Page 6
Our test procedures indicated instances where taxes are being
withheld at exemption rates differing from those indicated on the
employee's W -4's. Tax regulations require an employer to maintain
accurate W-4 records. We recommend that the City require all
employees to submit new W-4 forms annually and that no changes be
made in the payroll system without revised W -4's.
WIC Record Retention
We noted several instances where supporting invoices for food nutrition
disbursements could not be located because of a disorderly filing
system maintained in the responsible department. We recommend that an
orderly filing system be developed for these state reimbursable costs to
eliminate the possibility of costs being disallowed due to a lack of
substantiation.
Airport Revenues
In connection with our examination of airport revenue transactions we
noted the following:
We noted on at least one occasion that landing fees were incorrectly
computed. The functions of computing and recording revenues is
performed by the same person. We recommend that segregation of
these duties would strengthen internal control by providing an
independent check on the revenue computations.
The log book of international flights, maintained in the,dispatcher's
office, is used to assure revenue is being properly recognized for
services performed. We believe the same procedure should\e followed
for domestic flights.
Sales invoices used for international flights are not prenumb,6red.
The use of prenumbered sales invoices would help assure all re`,enues
are recognized.
Sales invoices are being signed in blank by the pilots. Requirir`l
the pilots to.sign after the services have been performed would acid
assurance that the invoice is accurate.
Although procedures exist for checking mathematical accuracy on
revenue forms and for verifying fuel pumped, the lack of documentation
of these procedures weakness overall accounting control. Whenever
independent verification is performed the person responsible should
initial the document indicating that the procedure has been performed,
and by whom.
Monthly flight operations activity is supplied by Delta and for the
most part is not verified by airport personnel. Such information
is used as a basis for billing and should be reviewed to assure its
accuracy.
The Honorable Mayor, City
Council and City Manager
March 20, 1981
Page 7
The effective date of price changes is not noted on contract books.
In order to be certain that airlines are being assessed proper
fees, we recommend that the effective date of prices be disclosed
on all contract books.
The objective of internal accounting control is to provide reasonable,
but not absolute, assurance as to the safeguarding of assets against
loss from unauthorized use or disposition, and the reliability of
financial records for preparing financial statements and maintaining
accountability for assets. The concept of reasonable assurance recognizes
that the cost of a system of internal accounting control should not
exceed the benefits derived and also recognizes that the evaluation of
these factors necessarily requires estimates and judgments by management.
There are inherent limitations that should be recognized in considering
the potential effectiveness of any system of internal accounting control.
In the performance of most control procedures, errors can result from
misunderstanding of instructions, mistakes of judgment, carelessness, or
other personal factors. Control procedures whose effectiveness depends
upon segregating of duties can be circumvented by collusion. Similarly,
control procedures can be circumvented intentionally by management
either with respect to the execution and recording of transactions or
with respect to the estimates and judgments required in the preparation
of financial statements. Further, projection of any evaluation of
internal accounting control to future periods is subject to the risk
that the procedures may become inadequate because of changes in conditions
and that the degree of compliance with the procedures may deteriorate.
The foregoing conditions were considered in determining the nature,
timing, and extent of audit tests to be applied in our examination of
the financial statements, and this report of such conditions does not
modify our report dated March 20, 1981 on such financial statements.
It should be noted that this letter, by its nature, is critical in that
it contains only our comments and recommendations on deficiencies
observed in the course of our examination. It does not include our
observations on any strong features of the City's systems of internal
control that were observed.
The Honorable Mayor, City
Council and City Manager
March 20, 1981
Page 8
Peat, Marwick, Mitchell & Co. appreciates the courtesy and assistance extended
by the administration and employees of the City of Bangor during the course
of our examination. If you have any questions relating to the matters in
this letter, we will be pleased to discuss them with you at your convenience.
Very truly yours,