1979CITY OF BANGOR, MAINE
Management Letter
March 8, 1979
TER 1 010�
PEAT, MARWICK, MITCHELL & CO.
CERTIFIED PUBLIC ACCOUNTANTS
P. O. BOX 507
TWO CANAL PLAZA
PORTLAND, MAINE 04.112
March 8, 1979
CONFIDENTIAL
Honorable Chairman and
Members of the City Council
City Hall
City of Bangor, Maine 04401
Gentlemen:
We have examined the financial statements of the City of Bangor, Maine
for the year ended December 31, 1978 and have issued our report thereon
dated March d, 1979.
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 generally accepted
auditing standards. Under these standards, the purposes of such evalu-
ation 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 evalu-
ation of the City's system of internal accounting control for the year
ended December 31, 1978, 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
Delay in Depositing Receipts to the Central Treasury
During the course of our examination we noted on several occasions that
cash received outside the central treasury was not deposited on a timely
basis. Timely transmittal of receipts maximizes investment income
potential and reduces risk of a defalcation. Therefore, we urge the
Council and management to take appropriate action to further centralize
receipts and to assure timely deposits.
City of Bangor
March 8, 1979
Page 2
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 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 FMC 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.
Centralize Efforts for Obtaining Federal and State Aid
Responsibility for ascertaining the City's eligibility for participation
in the various available Federal and state aid programs is decentralized
among the several City departments and programs. Centralized efforts
for obtaining Federal and state aid would:
Affix authority and responsibility for obtaining Federal and
state funds with one person.
Provide for professional grantsmanship, thereby increasing the
potential for obtaining Federal and state aid.
Furthermore, we noted delays in filing requests for reimbursement on
certain grants.
A person responsible for obtaining grants could also be assigned the
responsibility of assuring timely filing for reimbursement. Timely
filing would improve cash flow and increase investment opportunities.
Protecting Assets
Internal Audit Department
As we have mentioned in previous management letters, we believe that
establishment of an Internal Audit Department would be of great benefit
City of Bangor
March 8, 1979
Page 3
to the City. The purpose of an Internal Audit Department would be to
assist the Council and management in discharging their respective
responsibilities for planning, organizing, and controlling the City's
activities. Such duties, although of importance to all managers, are of
special importance to govermental managers because of the legal and
political environment in which they operate.
Perhaps one of the most significant functions an Internal Audit Department
can perform is to obtain independent reviews, evaluations, and verifications
concerning the many diverse operating activities of the City. Indeed,
management and the Council should want independent views on the City's
financial and operational activities to monitor whether stewardship
responsibilities are being properly and effectively discharged.
Therefore, the City should consider establishing an internal audit
function that would be assigned such activities as:
Ascertaining the extent to which the City's assets are accounted
for and safeguarded from loss.
Ascertaining the reliability of management data developed
within the City.
Ascertaining the extent of compliance with established policies,
plans and procedures.
Reviewing and appraising the soundness, adequacy and application
of accounting and operating controls.
Appraising the quality of performance in carrying out assigned
responsibilities.
Recommending operating improvements.
Assisting and participating in the City's external audit.
We are available to provide any assistance required to develop a sound
internal audit program.
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. Estab-
lishing fixed asset records in those cases where none exist will yield
the following benefits:
City of Bangor
March 8, 1979
Page 4
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.
Preparation of Bank Reconciliations
The City Treasurer is responsible for all cash, cash receipts and cash
disbursements. He also prepares bank reconciliations. To provide an
independent check on the receipt and disbursement functions we recommend
that someone independent of these functions prepare the bank reconciliations.
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
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.
Other Improvements in Internal Control
Airport Revenues
In connection with our examination of airport revenue transactions we.
noted the following:
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.
City of Bangor
March 8, 1979
Page S
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 be followed for domestic flights.
Sales invoices used for international flights are not pre -
numbered. The use of prenumbered sales invoices would help
assure all revenues are recognized.
Sales invoices are being signed in blank by the pilots.
Requiring the pilots to sign after the services have been
performed would add 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 weakens 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.
We noted that on at least one occasion the rate charged did
not reflect the current contractual rate. We recommend that
procedures be instituted to ensure that employees are promptly
notified of any changes and that such changes be reflected in
the revenue computations.
Accounts Pavable and Encumbrances
Our testwork indicated that numerous accounts payable were included as
encumbrances outstanding at year end. Additionally, certain school
department encumbrances did not actually represent purchase commitments.
To more accurately reflect the financial position of the City, we suggest
a procedure be implemented whereby all encumbrances outstanding at year
end be reviewed for proper classification.
Centralized Receiving
As a means of decreasing costs, the City should consider centralizing
the receiving function. Benefits include increasing the likelihood that
purchased goods are inspected and counted, eliminating duplicate work
and simplifying the return of goods.
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.
City of Bangor
March.8, 1979
Page 6
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 segregation 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 6, 1979 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.
We wish to thank you for the cooperation we received from your employees
during our stay and to advise you that we are available to provide any
assistance required to implement the above suggestions.
Very truly yours,