1978LE TT E R'19�- 8
CITY OF BANGOR, MAINE
Management Letter
March 21, 1978
PEAT, MARWICX, MITCHELL 8c CO.
CERTIFIED PUBLIC ACCOUNTANTS
P. O. BOX 507
TWO CANAL PLAZA
PORTLAND, MAINE 04111
March 21,. 1978'
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, 1977 and have issued.our report thereon
dated March 21, 1978.
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, 1977, 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 follow-
ing conditions which we believe to be worthy of your consideration upon
which we are presenting our comments and recommendations for improvement.
Cash Receipts Batch Total Reconciliation
Cash receipts are entered into the City's computer system using a
terminal with the daily cash sheet as a source document. Input made to
the system is verified upon preparation -of the monthly bank reconcilia-
tions. Such a procedure may permit errors or irregularities to remain
undetected for as long as a month. We propose that consideration be
given to producing a batch printout of cash receipts input to the
Honorable Chairman and
Members of the City Council
March 21, 1978.
Page 2.
computer and reconciling such printout to daily cash sheets on a.weekly
basis.
Bangor City Nursing and.Health Center
We noted several weaknesses in internal controls at the Hospital. Cash
receipts are not, in all cases, deposited in a timely manner.. We suggest
that all cash received be delivered to City Hall for dep.osit.on a daily
basis. We also observed that cash received is not being promptly posted
to account receivable cards. We stress the importance of. timely posting
to ensure accurate records and rapid discovery of errors or irregularities.
Additionally,_ the City's records are not being reconciled to the Hospital's
records. This results in subsidiary records which become meaningless
when not in agreement with the City's general ledger. Our recommendation,.
therefore, is to provide regular reconciliations of Hospital and City
records. Finally, it appears that many patients are notaware that the
Hospital maintains personal cash accounts on their behalf. We urge that
all patients be periodically informed of the balance in such accounts
and that these accounts are reviewed by independent officials periodically.
WIC Program -
Our review of the Women, Infant and Children (WIC) Program indicated
that check vouchers, invoices and other supporting documents are filed
separately. .Verification of amounts paid is most practical when all
documents are cancelled and filed together. We understand that steps
have.been'taken to implement such a system and urge that all documents
be included in this system of filing.
General Fixed Assets
The purpose of the general fixed asset group of accounts is to provide a
complete and accurate accounting for fixed assets, essential to the
protective custody of governmental property. Present practice is to
capitalize only major fixed asset additions and to expense lesser valued
assets, motor vehicles, for instance. We recommend that all property
acquisitions of a tangible nature, having a life longer than the current
fiscal year and are of a significant value (perhaps $1,000), be capitalized.
Prepaid Expenses
The modified accrual method of accounting is used in the General Fund.
Under this method, expenditures are not. normally divided between years
by the recording of prepaid expenses. The City is presently recording
such prepaid expenses in the General Fund and we suggest that this
practice be changed to conform with the modified accrual method of
accounting.
ON
Honorable -Chairman and
Members of the City Council
March 21, 1978
Page 3
Encumbrances and Carryforward Balances - Enterprise Funds
Since enterprise funds are primarily self=supporting, accounting methods
should be similar in nature to those of commercial entities. At year
end we noted that the enterprise funds recorded both encumbrances and
carryforward.balances. While use of these accounts is essential for
good financial management of' General Fund, they should.not be used in
accounting for enterprise activities. Expenses in these funds should be
recorded only as goods are received or as services are rendered, and
unlike budgetary funds, should not be recorded as unexpended appropria-
tions (carryforwards) or amounts merely committed by purchase orders
(encumbrances). We, therefore,. recommend that the City consider eliminat-
ing the use of encumbrances, and carryforward balances in its enterprise
funds.
Receiving Reports
The City uses one copy of the purchase order, with quantities indicated,
as the receiving report. This procedure has the effect of partially
negating the purpose of receiving reports by disclosing the quantity
ordered and thereby eliminating the requirement for an actual count by
the person receiving the order. We recommend that if a copy of the
purchase order is to be used as a receiving report, such copy should not
show the quantity ordered.
In addition,. we noted that the receiving report isthe only document
forwarded to the purchasing department. Verification of actual goods
received can be strengthened if all shipping documents are forwarded to
the purchasing departmentand we suggest that this procedure be implemented.
Cancellation of Invoices
We noted that invoices are not always cancelled in a manner that would
prevent them from being resubmitted for payment. Such invoices are
cancelled by stapling check vouchers and purchase orders to the invoice.
Should an invoice become separated from the voucher, it could potentially
be paid again. Although such an invoice would have to be returned to
the originating department for approval, internal controls would be
improved if original invoices were effectively cancelled upon payment,
perhaps by use of a paid stamp.
Accounts Payable and Encumbrances
Our test work indicated that numerous accounts payable were included as
encumbrances outstanding at year end. To more accurately reflect the
financial position of the City, we suggest a procedure whereby all
encumbrances outstanding at year end be reviewed and a proper reclassi-
fication to accounts payable be made.
.Honorable Chairman and
Members of the. City Council
March 21, 1978
Page 4
Dating of Payroll Checks
Although mentioned.in our previous management letter-, we
payroll checks issued on Thursday continue to be.dated as
We reiterate our recommendation that all checks be dated
date of issue.
Payroll Withholding Authorizations
noted that
of Saturday.
with the actual
During our examination of the payroll system, it became apparent that in
many cases tax withholding authorizations (Form W -4's) are not current.
We suggest that a program be instituted whereby employees update all
withholding authorizations annually.
Bank Reconciliations
The City Treasurer is responsible for all-cash, cash receipts and cash
disbursements. He also prepares bank reconciliations. While cash
balances may not be material in relation to the overall financial
statements, because of the volume of transactions processed through the
cash accountsand the susceptibility of. the asset to misappropriation,
preparation of bank reconciliations should be performed by individuals
having no cash receipts or disbursements functions. While we recognize
the staffing problems of the City, we nevertheless urge that considera-
tion be given to segregating the bank reconciliation responsibility from
cash receipts and disbursements functions. Alternatively, we suggest
that monthly bank reconciliations be reviewed and approved by indepen-
dent, responsible officials..
Outstanding Checks
Controlling checks that have been outstanding for extended periods of
time become burdensome and with the passage -of time the likelihood of
cancellation is reduced. Checks issued and outstanding for more than
twelve months are presently being restored to cash. We believe that
after a reasonable period, perhaps 180 days from issue date, and after
attempting to contact payees, all checks should be voided and restored
to cash.
Capital Projects Records
The City presently maintains detail accounting records of current year
activity of all capital projects, but does not maintain records showing
cumulative revenues and expenditures of each capital project from
inception. We believe such information might improve financial manage-
ment of such projects and suggest that consideration be given to
establishment of such records.
Data Processing Controls
Internal controls within the data processing department are strengthened
under a.plan of organization which provides sufficient segregation of
Honorable Chairman and.'
Members of the City Council
March 21, 1978
Page S
duties. At a minimum, the functions of system design and programming
should be separated from computer operations. We noted that the EDP
manager and his assistant perform both programming and operating duties.
Although we realize that the City's organization does not easily allow
for the segregation of duties necessary for strongest controls, we.
mention this weakness to point out the potential for perpetration of
errors or irregularities without independent control and review of data
processing functions.
Intragovernmental Service Fund
In our previous letter to management we recommended that the City
consider the establishment of an intragovernmental service fund for the
motor pool operations. We repeat that suggestion and reiterate herein
the advantages that such fund would provide: 1
By separately indentifying the operations and net income of the
motor pool, the City could analyze billings to other departments to
ascertain their sufficiency to cover costs incurred..
Depreciation would be provided on each asset annually. Accumulated
depreciation could.then be easily determined for each vehicle.
• Fixed assets would be recorded on the balance sheet of the. intra -
governmental service fund. Although the buildings involved are
currently capitalized, on the. General Fixed Assets Group of Accounts,
motor vehicles are not.
Internal Audit Department
In view of the size and number of the City's operating components, we
recommend that consideration be given to the establishment of an inter-
nal audit department of one or more employees. While we recognize the
budgetary limitations inherent in any municipality, we believe that the
benefits derived from such a department would justify any additional
appropriation. As mentioned in our previous management letter, the
objective of an internal audit department would be to carry out a
program of tests, in depth, of the financial transactions of the City to
ensure that the accounting controls are operating effectively, and to
perform procedural audits to determine that the various components are
operating efficiently. Maximum benefits are derived from an internal
audit department under a program whereby the Internal Audit Department:
• reports directly to the City Manager/City Council and written
reports are prepared summarizing the results of work performed.
is completely independent of the accounting/finance department.
covers all areas of. City operations in the scope of its work.
utilizes from written audit.programs.
Honorable Chairman and
Members of the City Council
March 21, 1978
Page 6
We are available -to provide any assistance required to develop a sound
program of internal audit.
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 recog-
nizes 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 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 21, 1978 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,