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1992City of Bangor, Maine MANAGEMENT LETTER Year ended June 30, 1992 BRANTNER TTHIBODEAU & ASSOCIATES Certified Public Accountants Bangor, Maine City of Bangor, Maine MANAGEMENT LETTER Year ended June 30, 1992 BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants CONTENTS Page Independent auditor's letter 3-4 Reportable conditions considered to be material weaknesses S Other reportable conditions 6 Other recommendations Current year 7-9 Status of unresolved prior year comments 10-14 BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants Key Plaza • 23 Water Street Post Office Box 864 Bangor, ME 04402-0864 (207) 947-3325 March 2, 1993 To Honorable Mayor and City Council City of Bangor, Maine In planning and performing our audit of the financial statements of the City of Bangor, Maine for the year ended June 30, 1992, we considered its internal control structure in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control structure. However, we noted certain matters involving the internal control structure and its operation that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control structure that, in our judgment, could adversely affect the City's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements. Those matters that we consider to be reportable conditions are described on the following pages. A material weakness is a reportable condition in which the design or operation of one or more of the internal control structure elements does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above. However, we noted reportable conditions that we believe to be material weaknesses which are identified in the following pages. In addition to the above, we became aware of several matters that are opportunities for strengthening internal controls and operating efficiency. Our comments and suggestions regarding those matters are as described in the following pages. 3 To Honorable Mayor and City Council March 2, 1993 Generally, we found the City's accounting records to be improved and we received excellent cooperation from the Finance Department and other staff. We would be pleased to discuss the above matters at your convenience, to perform any additional study, or to assist you in implementing the recommendations. This report is intended solely for the information and use of the finance committee, City Council, management and the federal cognizant agency. Yours truly, BRANTNER, THIBODEAU & ASSOCIATES Gerald E. Thibodeau, CPA 4 BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants REPORTABLE CONDITIONS CONSIDERED TO BE MATERIAL WEAKNESSES Bass Park - State Fair and Harness Racin During our audit, we noted that the supporting documentation for the 1991 and 1992 State Fair gate receipts and the Harness Racing admissions, program sales and concessions had been discarded or could not be located. As a result, it is not possible to verify the completeness of these deposits. We recommend that the City review its procedures for controlling the cash receipts at the State Fair and during Harness Racing, and that documentation supporting such receipts be retained. It was also brought to our attention that due to the lack of adequate controls being in place at Bass Park, receivables went unbilled and undetected for an extended period of time. We recommend that the City establish and implement accounts receivable billing procedures for Bass Park to ensure that billings are complete and timely. It is our understanding that the City has since implemented procedures to avoid the above problems in the future. Cash Cash represents the City's most accessible asset. Certain procedures must be followed to assure its safekeeping. One such procedure is the timely reconciliation of each bank account. We noted an instance during the year where a debt payment wire transfer which was requested in November, 1991 was not processed. Because bank reconciliations were not being reconciled on a timely basis, this omission was not detected until June, 1992. The City has since taken steps to assure that bank reconciliations are performed timely. 5 BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants OTHER REPORTABLE CONDITIONS Sewer Liens The City does not currently lien its delinquent sewer bills. As a result, when a property with sewer bill delinquencies is sold, the City must attempt to seek collection in the capacity as an unsecured creditor. We recommend the City implement lien procedures so that the City will receive delinquent sewer bill payments whenever a property is sold, thus improving collections. The City is in the process of reviewing their inhouse sewer billing program and other computer program packages for the sewer lien process. Excise Taxes During our audit, we noted that voided excise tax forms (preprinted and nonpreprinted), unused preprinted excise tax forms, and state preprinted excise receipts control sheets were being discarded - making it difficult to control and test the accountability of the excise tax receipts. We recommend that all excise tax receipts (used or unused) be kept for future accountability. Accounts Payable At June 30, 1992, an adjustment was made to record an additional $1,024,529 of accounts payable which were generally related to capital projects. We recommend that the City review its procedures for recording accounts payable at year end to ensure that transactions are recorded in the proper period. 6. BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants OTHER RECOMMENDATIONS - CURRENT YEAR Deposit/Receipting In tracing receipts to bank deposits, we noted instances of delays of several days between deposits and cash receipting. To improve the City's control of its cash balances, we recommend the City establish procedures requiring individuals who make deposits outside of the City treasurer's office to promptly transmit documentation supporting deposits to the treasurer for timely receipt. Check Countersignatures The City has a procedure in place whereby checks over $5,000 are required to be countersigned. During our testing, we noted that countersignatures were lacking on two checks dated March 13, 1992 (one in the amount of $33,765 and the other $58,620) and on one check dated June 12, 1992 in the amount of $182,110. We recommend procedures be reviewed to ensure that all checks over $5,000 have the appropriate countersignatures. Void Checks During our audit, we noted that void checks were placed in a stack in no particular sequence. We recommend that the void checks be filed numerically with canceled checks so that all checks can be accounted for expeditiously. Payroll We noted that timesheets for some City departments are not being initialed by the appropriate supervisor. We recommend that departmental supervisors review and initial all timesheets for their department. Capital Projects Because of problems in closing out 1991 capital projects and transferring cumulative balances to 1992, the City had to reconstruct current fiscal year's capital projects activity through the use of computer spreadsheets. It was difficult to trace the flow of capital projects activity through the year. We recommend that the City review the capital projects funds' revenue and expenditure account structure to determine if the detail needed for financial reporting can be achieved without having to reconstruct the year's activity. 7 BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants OTHER RECOMMENDATIONS - CURRENT YEAR (CONTINUED) Special Revenue - Loan Payment Allocation Between Principal and Interest As a result of our confirmation process, it was noted that a flaw exists in the computer loan program affecting the allocation of interest and principal for payments that are made after an account has been delinquent for one or more payments. We recommend that the City review the loans which may have been affected by this computer problem and make required adjustments to loan balances. A computer program change should also be initiated as soon as possible to avoid future errors. Sewer Fund At June 30, 1992, the City maintained a reserve for uncollectible sewer bills of $13,000. At that time, sewer bills that had been delinquent for more than one year exceeded $220,000. We recommend that the reserve be reviewed to determine if it accurately reflects the amount of sewer receivables which are unlikely to be collected. Bass Park The budgets for Bass Park have not reflected actual historical trends of revenue and expenses for its operations. While we recognize that the Bass Park budget can be affected by many unforeseen occurrences, we recommend that the budgeting process take greater account of actual operating results for prior years. Kirstein Student Loan Fund Four loans totaling $18,720 at June 30, 1992 were at least one year overdue. We recommend the City implement procedures to review the outstanding loans on a regular basis to ensure compliance with the terms of student loan funds. School Department - EFM-45 Reporting We noted that Form EFM-45 which the School Department files with the State does not reconcile with the general ledger primarily because of erroneous opening balances on the report. Also, the report omits capital projects activity which should be disclosed. We recommend that the School Department file an amended EFM-45 to properly reflect opening balances and the capital projects activity which took place during the fiscal year. 8 BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants OTHER RECOMMENDATIONS - CURRENT YEAR (CONTINUED) Assessments The City has no system in place to determine whether any properties have been omitted from its assessment rolls. We recommend that the assessing department consider methods of verifying the completeness of assessed property. 9 BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants OTHER RECOMMENDATIONS STATUS OF UNRESOLVED PRIOR YEAR COMMENTS Accounts Receivable Comment: Accounts receivable subsidiary detail was not reconciled to the general ledger. Status: During our audit, we noted that the larger departments have taken on the task of reconciling their accounts receivables. We recommend that reconciliations be done monthly for all departments and that discrepancies be identified and resolved on a timely basis. Taxes Receivable Comment: All real property, personal property, and tax lien receivables should be reconciled between the general ledger and the master file on a monthly basis. Status: At June 30, 1992, we noted that differences still exist between the master file and the general ledger in amounts ranging from $100 to $20,000. We recommend that reconciliations be performed on a monthly basis and discrepancies be identified and resolved. Inventory Comment: The perpetual inventory records do not reconcile to the general ledger. Inventory records did not include used items, several quantity variances were noted, and physical access is not adequately limited. Inventory counts are not being done annually. Status: City personnel have indicated that computer based programs to assist in the tracking of inventory will be reviewed in the near future. Inventory access and security will be improved when the construction of storage space at public works is completed as part of the Jobs Bond project. Physical counts were not performed for some inventory pools as of June 30, 1992. We recommend that physical counts be performed annually for all inventory pools and that the perpetual records and general ledger be adjusted accordingly. 10 BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants OTHER RECOMMENDATIONS STATUS OF UNRESOLVED PRIOR YEAR COMMENTS (CONTINUED) Accounts Payable/Purchasing Comment: There should be written procedures for all types of disbursements. Status: The City is currently developing a Financial Procedures Manual which will encompass the above. Accrual Basis Comment: Disbursements are being recorded on the cash basis for interim financial statements, with accounts payable recorded only at year end under the modified accrual method to comply with generally accepted accounting principles. Status: Management is now reviewing the possibility of interfacing its accounts payable and encumbrance programs. This could be a valuable tool to be used by the City to achieve optimum cash management. Truncation Comment: There are several truncation problems in various City reports. Status: This problem has been designated as a top priority for the Data Processing Department. They plan to review all computer programs to determine which ones have incompatible field sizes and to make necessary programming changes. Fixed Assets Comment: The City should consider conducting a fixed asset inventory of all departments to ensure that all assets recorded exist. A copy of which should then be stored off site along with other vital City records. Status: A Council Order was approved directing that a fixed asset inventory be completed by December 31, 1993. The City has also requested information from various vendors concerning computer based programs for tracking fixed asset inventory. 11 BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants OTHER RECOMMENDATIONS STATUS OF UNRESOLVED PRIOR YEAR COMMENTS (CONTINUED) Capital Projects Comment: The City should develop a checklist of items needed for each project to ensure that contractors have complied with all the requirements of the contract and that documentation in the file is complete. Status: A Capital Projects Policy has been developed, and the City is in the process of implementing the procedures. Special Revenue Comment: The Special Revenue Fund's subsidiary records are not being reconciled to the general ledger on a monthly basis. Status: When loan payments are received, cash is debited, revenue is credited, and the subsidiary loan detail is credited. An entry then needs to be made on the general ledger to adjust the loan receivable account and the deferred revenue account for the principal payment received. At year end, the City had to adjust the loan receivable and deferred revenue accounts to their proper balance. Such adjustments would not be necessary if the City posted the general ledger entry for the principal payments on a daily basis and performed simultaneous reconciliations of subsidiary loan receivable detail to the general ledger loan account balance. Parking Fund Comment: The City entered into an agreement in 1989 to have certain parking lots managed by a third party. It does not appear that this contract is being monitored. For example, the contract states that audited financial statements of the third party are to be received annually; but no financial statements have been received to date. The cost of such audit must be borne by the City. Status: We recommend that the City Council review the contract requirements. 12 BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants OTHER RECOMMENDATIONS STATUS OF UNRESOLVED PRIOR YEAR COMMENTS (CONTINUED) Agency Funds Comment: All agency accounts should be analyzed to determine whether they should be reported in the Trust and Agency Fund or the fund originating the transaction. The practice of accounting for payroll withholdings in the agency fund should be discontinued, because the transactions can be adequately accounted for in the originating fund. Status: The City has taken steps to record the City's payroll withholding liabilities and related activity in the originating funds, but the transition is not complete. We recommend that the City continue to review the agency fund accounts to ensure that they are in the proper fund. Data Processing Comment: The number of reports produced by data processing appears excessive. Data processing has compiled a list of all reports. Finance should now review the list of reports to determine which reports are used. Reports which are not needed should be eliminated. Status: We understand that a review is in progress, but perhaps it needs a higher priority. Grants, Contracts, Single Audit Act Comment: No one individual in City government monitors contracts and federal and state grants. There is no master listing of contracts and grants authorized, outstanding or applied for. The lack of oversight enhances the possibility that grants and contracts might be mismanaged or that compliance requirements may not be met. The City should designate one individual to monitor all federal and state contracts and grants. Status: We understand that duties in the Finance Department are being realigned to allow one staff member to serve as contract compliance officer. 13 BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants OTHER RECOMMENDATIONS STATUS OF UNRESOLVED PRIOR YEAR COMMENTS (CONTINUED) Grants, Contracts, Single Audit Act Comment: The City should acquire the compliance supplement for Single Audit of State and Local Governments issued by the OMB. All major program directors should become aware of the compliance requirements applicable to their federal grant awards to ensure that no expenditures are disallowed. Status: We recommend that the City obtain the "Compliance Supplement for Single Audits of State and Local Governments" issued by OMB. General Comment: A complete accounting procedures manual needs to be developed, distributed to all departments, implemented, and adhered to. Status: An accounting procedures manual is in the development stage. Indirect Cost Allocation Plan Comment: The City does not have a current Indirect Cost Allocation Plan. Status: The City is currently waiting for the completion of a City-wide cost allocation plan based on fiscal year 1991 audited costs and the establishment of indirect cost rate for certain departments. 14 BRANTNER THIBODEAU & ASSOCIATES Certified Public Accountants