1977CITY OF BANGOR, MAINE
Management Letter
March 30, 1977
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PEAT, MARIVICK, MITCHELL & CO.
CERTIFIED PUBLIC ACCOUNTANTS
P. O. BOX 507
TWO CANAL PLAZA
PORTLAND, MAINE 04111
March 30, 1977
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, 1976 and have issued our report thereon dated
March 30, 1977. As a part of our examination, we reviewed and tested the
City's systems of internal accounting control to the extent we considered
necessary to evaluate the systems as required by generally accepted auditing
standards. Under these standards, the purpose of such evaluation is to
establish a basis for reliance thereon in determining the nature, timing,
and extent of other auditing procedures that are necessary for expressing an
opinion on the financial statements.
Our study and evaluation of the City's systems of internal accounting control
for the year ended December 31, 1976, which was made for the purpose set
forth in the paragraph above, would not necessarily disclose all weaknesses
in the system. However, such study and evaluation disclosed the following
conditions that we believe to be weaknesses upon which we are presenting our
comments and recommendations for your consideration.
Purchase Cycle (Cash Disbursements
(1) Security of Unissued Checks
The area housing the City's numerous unissued checks is readily
accessible to unauthorized persons and we recommend that the.
checks,be afforded greater security. We understand that con-
struction of a partition in the present storage area to limit
access is presently anticipated.
Honorable Chairman and
Members of the City Council
March 30, 1977
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(2) Voided Checks
We noted that no log or other record is maintained to account for
unissued checks. It is, therefore, difficult to account for
missing or voided checks and checks issued out of sequence. In
particular, voided checks should be afforded the same controls as
issued checks. We suggest that a log be maintained indicating
the checks used by EDP. Further, we suggest that EDP prepare
a listing of all checks voided during processing. Voided checks
should be forwarded to the Treasurer's office and filed in
sequence. Periodic reviews of these logs by the Auditing
Department are also recommended.
Dating of Payroll Checks
Payroll checks issued on Thursdays are apparently dated as of Saturday. We urge
that this practice be corrected by dating all checks with the actual date of
issue.
Expenditure Reporting
Our test work indicated that total appropriations on the operating and outlay
report agreed to the approved budget, but appropriations on the object of
expense report did not agree with the approved budget. The difference was
immaterial and could be located. However, this situation points out the need,
in general, for the Auditing Department to reconcile all reports to appropriate
sources and to investigate any differences. In this particular case, the
object of expense report should be reconciled to the operating and outlay
report and the approved budget on a regular basis.
Outstanding Checks
We noted that several checks issued in 1975 are still outstanding. Maintaining
control over such checks becomes burdensome and the likelihood of cancellation
is reduced with.the passage of time.. After attempting to contact the payees,
we recommend that such checks be voided and restored to cash after a reasonable
period, perhaps 90 days from issue date.
Surplus (Fund Balance)
The surplus, or fund balance, account is being used to record revenues and
expenditures not included in the approved budget. This procedure tends to
distort revenues and expenditures reported on the monthly financial statements.
Honorable Chairman and
Members of the City Council
March 30, 1977
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We, therefore, recommend that additional
established as follows:
expenditure
Supplemental tax revenue supplemental tax revenue is revenue
earned in the current period and thus should be so recorded.
This procedure would inform the reader of the monthly financial
statements that such revenue is currently available for future
appropriations. Presently, supplemental taxes are credited
directly to the surplus account.
Prior years' revenues and expenditures—receipts and disburse-
ments relating to prior years' activity are recorded as surplus
transactions purportedly because no estimated revenue or
appropriation has been budgeted. We suggest that the City
appropriate an estimated net amount for such transactions
annually or alternatively to record this activity against the
contingency account.
In summary, it is our belief that the statement of revenues and expenditures
should report General Fund financial activity of the City for a given period
in such a manner that the excess (or deficiency) of revenues over expenditures
represents the only change in surplus for the period with a few extraordinary
exceptions such as the transfer of tax liens to City owned property.
Accounts Receivable
We noted that the accounts receivable master listing can be reconciled to the
sum of all City accounts receivable, but the balance of each fund's accounts
receivable per the master listing cannot be reconciled to the general ledger
balances for each fund. Apparently, correcting journal entries effectively
update general ledger balances by fund but are not entered on the accounts
receivable master listing. We, therefore, believe that procedures should be
implemented to allow the correction of the master listing as journal entries
are recorded.
Capital Projects Authorizations
Project authorization for capital improvements should be afforded the same
control by City Council as general fund appropriations. It is apparent that
the City Engineer regularly authorizes change orders for particular capital
projects without prior notification of appropriate personnel. In many
situations, such changes cause total expenditures to exceed project
authorizations which effectively results in committing the City, after the fact,
to raising revenues to cover the additional costs. We strongly suggest that
procedures be implemented to allow proper control of increases in project
authorizations by the appropriate officials.
Honorable Chairman and
Members of the City Council
March 30, 1977
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Internal Audit Department
An internal audit department in its most useful form should be concerned
primarily with an objective appraisal of the.City's operations and should
function independently of normal day-to-day accounting operations. Its
responsibilities should be to review, evaluate, and report on accounting
procedures, financial data, and the extent of compliance with management
policies.
our observation indicates that although the audit staff of the City performs
sufficient verification of certain phases of the work done by other depart-
ments, we believe that other operating areas deserve similar attention.
We also noted that the internal audit staff is under the direction of the
Finance Director and performs extensive accounting functions, thus
jeopardizing any independence and placing the Finance Director in the position
of being responsible for the audit and evaluation of his own accounting
function.
To strengthen the effectiveness of the City's internal audit department, we
suggest:
(1) The internal audit department should function under the
direction and.supervision of the City Council, perhaps through
the City Manager, and should be relieved of all normal or
recurring accounting and record-keeping responsibilities.
(2) Written reports should be submitted upon completion of all
work undertaken.
(3) All locations and operations should be visited and reviewed
periodically on a surprise basis. Procedures undertaken at
these surprise visits should include, for example, cash
counts, bank reconciliations, payroll payoffs, confirmation
of receivables, and test of inventories.
Intragovernmental Service Fund
Intragovernmental service funds are used to finance and account for the services
furnished by a designated agency of a governmental unit to other departments
of the same governmental unit. We recommend that consideration be given to
establishing such type of fund for the City's motor pool operations which are
presently incorporated as part of the general fund. The advantages would
be as follows:
Honorable Chairman and
Members of the City Council
March 30, 1977
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(1) The operations and net income of the motor pool would be
separately identified, thus affording the City to easily ascertain
if billings to other departments were sufficient to cover costs
incurred. Under the present system, intradepartmental charges are
included in the several departmental appropriations of the general
fund.
(2) Fixed assets would be recorded on the balance sheet of the
intragovernmental service fund. Although the buildings
involved are currently capitalized on the General Fixed
Assets Group of Accounts, motor vehicles are not.
(3) Depreciation (motor vehicle and bus equipment replacement
accounts) would be annually provided and easily identified.
Under the present method, such amounts are provided, although
not specifically appropriated, on the balance sheet of the
general fund.
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 judg-
ments 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 with respect either 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.
Honorable Chairman and
Members of the City Council
March 30, 1977
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Peat, Marwick, Mitchell & Co. appreciates the courtesy and assistance extended
by the administration and employees of the City of Bangor, Maine 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,