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1977CITY OF BANGOR, MAINE Management Letter March 30, 1977 • ��� 6ilAWZw 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 2 (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 3 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 4 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 5 (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 6 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,