Loading...
1997RUNYON KERSTEEN OUELLETTE CITY OF BANGOR, MAINE Letter of Recommendations to Management June 30, 1997 Certified Public Accountants RUNYON KERSTEEN OUELLETTE Our consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be material weaknesses under standards established by the American Institute of Certified Public Accountants. A material weakness is a condition in which the design of one or more of the internal control components does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material 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. We have noted a matter (School Department Accounting System) involving internal control and its operation that we consider to be a material weakness. In addition to the reportable conditions noted, we have noted other matters that we feel warrant management's attention. These comments have been reported under the heading "Other Comments" below. REPORTABLE CONDITIONS MATERIAL WEAKNESS: 1. School Department Accounting S. stem The School Department general ledger is not being utilized to its full capacity. The School's financial management is relying on spreadsheets to reconcile its general ledger information to the City's general ledger. In addition, the reconciliation is including only revenues and expenses, excluding balance sheet accounts. In doing so, the overall financial condition of the School Department is omitted. In prior years the School encountered many problems during the year that could have been identified and addressed sooner if the School had reviewed the general ledger more closely and performed various reconciliations to the general ledger on a monthly basis. These problems compounded each other making it more difficult to correct the situation. Significant 20 Long Creek Drive adjustments were required to be made in the current year to resolve these problems. Adjustments South Portland, ME 04106 207-773-2986 or 1-800-486-1784 FAX 207-772-3361 or 1-800-486-1785 http://www.rko-cpas.com November 21, 1997 Certified Public Accountants To the Finance Committee of the City of Bangor, Maine Glenn S. Kersteen Carl N. Ouellette In planning and performing our audit of the financial statements of the City of Bangor for the year John J. Sullivan ended June 30, 1997, we considered its internal control in order to determine our auditing Kathleen B. Tyson procedures for the purpose of expressing our opinion on the financial statements and not to provide Alice M. Harris assurance on the internal control. However, we noted certain matters involving the internal control 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 Alexander M. Runyon coming to our attention relating to significant deficiencies in the design or operation of the Of counsel internal control that, in our judgment, could adversely affect the City of Bangor's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements. We have noted three reportable conditions below. Our consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be material weaknesses under standards established by the American Institute of Certified Public Accountants. A material weakness is a condition in which the design of one or more of the internal control components does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material 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. We have noted a matter (School Department Accounting System) involving internal control and its operation that we consider to be a material weakness. In addition to the reportable conditions noted, we have noted other matters that we feel warrant management's attention. These comments have been reported under the heading "Other Comments" below. REPORTABLE CONDITIONS MATERIAL WEAKNESS: 1. School Department Accounting S. stem The School Department general ledger is not being utilized to its full capacity. The School's financial management is relying on spreadsheets to reconcile its general ledger information to the City's general ledger. In addition, the reconciliation is including only revenues and expenses, excluding balance sheet accounts. In doing so, the overall financial condition of the School Department is omitted. In prior years the School encountered many problems during the year that could have been identified and addressed sooner if the School had reviewed the general ledger more closely and performed various reconciliations to the general ledger on a monthly basis. These problems compounded each other making it more difficult to correct the situation. Significant 20 Long Creek Drive adjustments were required to be made in the current year to resolve these problems. Adjustments South Portland, ME 04106 207-773-2986 or 1-800-486-1784 FAX 207-772-3361 or 1-800-486-1785 http://www.rko-cpas.com Finance Committee November 21, 1997 Page 2 from prior years were posted to the spreadsheets and not to the general ledger. Therefore not only did the general ledger current year activity not reconcile to the City's records, but beginning balances disagreed as well. The spreadsheets being used by the School Department are redundant to the task that the general ledger should be performing. To ensure the accuracy of recorded transactions, periodic reviews and/or reconciliation of general ledger balances must be performed. The following procedures should be performed on a monthly basis and the Director of Business Services should be charged with the responsibility of ensuring that each task is performed by the deadline established. Although we noted that monthly procedures are being performed, we suggest that a monthly check -off list be developed to assure that all necessary procedures are being performed and any problems identified are resolved in a timely manner. A monthly check -off list forlstated procedures might include: • Reconciliation of accounts receivable and accounts payable subsidiary ledgers to trial balances. • Reconcile cash accounts to the City cash reconciliation for commingled cash. • Reconciliation of amounts due to -from other funds as recorded in the School general fund with amounts due to -from the school general fund in other School funds. • Determination of the accuracy of withholding accounts recorded on the general ledger to subsequent payroll tax returns and other reports. • Reconciliation of revenue control accounts on the general ledger to the revenue control report. • Reconciliation of expenditure control accounts on the general ledger to the expenditure control report. • Ensure that each trial balance is in balance. • Fund balance accounts should be reviewed to ensure no entries have been posted to them during the year. Fund balance should always tie to last year's audit ending balance. • Analytical review of each revenue and each expenditure account to identify misclassifications or errors. • The trial balances should include no suspense accounts and any amounts posted to them should be reclassified to the account they belong. • Each month the School Department cash, accounts receivable, grants receivable, inventory, accounts payable, accrued expenses, fund balances, and revenue and expense accounts should be compared with those same accounts on the City's general ledger. In addition we identified some transactions that were not posted correctly or that should not have been posted at all. Some of the entries included: Encumbrances are posted as actual expenses. Encumbrances represent a designation of fund balance and have no effect on fund balance. This practice should be corrected. Finance Committee November 21, 1997 Page 3 An adjustment was posted to reclassify fund balance to revenue. This is an entry that could be made for budgetary purposes but should not be posted as an actual entry. Entries were posted to a suspense account during the year and by year-end over $2,000,000 had accumulated in this account. These entries probably should have affected the cash accounts for the School but an evaluation of each entry would need to be made as to each posting to identify what account should have been affected. It is our belief that no entries should be posted to this suspense account in the future. Finally the City commingles its cash accounts. For all other funds beside the School funds, a reconciliation is performed to tie those cash balances from the reconciliation to the amounts reported as cash within the fund on its general ledger. We believe that the School commingled cash accounts should be identified and taken out of the City's general fund commingled cash. This would allow the school to further test the accuracy of its balances by reconciling out to a cash account. In order for this to be accomplished the, School may need to be set up with its own funds on the City financial records. REPORTABLE CONDITIONS DEEMED TO NOT BE MATERIAL WEAKNESSES: 2. Extra Cash Drawer The City Treasury maintains an extra (fourth) cash drawer that is used and cashed up by several different clerks and supervisors. We understand the practical need for this cash drawer, however management should be aware that ideal controls are abrogated with this extra drawer. 3. Sewer System Controls Controls at the sewer utility are potentially endangered because of the utility's relationship with the Bangor Water District, which is a separate, non -City entity. The problem arises because the water and sewer utilities share many aspects of billing and collection. Specifically, sewer bills are based upon water usage data, as provided by the water districts; water and sewer bills are mailed together; sewer payments may be made at, among other places, the water district; and the water district's billing and payment software, which is incompatible with the City's general accounting software, is also employed by the sewer utility. As a result, a number of problems arise. First, where payments are made at the water district, City funds remain outside the City control for the period of time between their receipt from customers and the forwarding of payment to the City. This, combined with the increased handling of the City assets introduces the potential for diversion of City property by non -City employees. Second, the flow of funds between the two utilities and their timing often results in the "float" of relatively large amounts due the City. Third, the incompatibility of systems between the sewer utility and the rest of City government makes timely tracking of sewer utility Finance Committee November 21, 1997 Page 4 performance difficult. Further, it makes reconcilement increasingly important the time consuming. We recommend the City review its relationship with the water utility to correct these cash handling and accounting deficiencies. OTHER COMMENTS 4. Inefficiencies in the Property Tax System During our test work of the property tax systems, we noted several weaknesses and inefficiencies of the system. Management is 'aware that these inefficiencies and duplication of effort exist. For instance, interest and penalties on delinquent taxes are calculated by the computer system but must be computed manually and recorded when payment is actually received. We suggest that the City review the property tax systems simultaneously with the installation of the new tax collection software to reduce redundant efforts and to maximize efficient operations. 5. Segregation of Duties in Treasurer's Office In the Treasurer's Office, mail receipts are opened and processed in certain circumstances by the same individual. Ideal segregation of duties provides for separation of functions by different individuals, and therefore would have mail receipts opened by an employee different from the person processing the receipt. This practice provides for verification of receipts processed and prevents receipts from being diverted for unauthorized purposes. We recommend that the City consider establishing a system requiring that a person different from the employee opening the mail process all mail receipts. 6. Unrecorded Claim Judgments We observed that certain claim judgments in favor of the City are not recorded on the books and records of the City as accounts receivable. Other miscellaneous receivables (rent at Park Woods, for example) are not recorded as well. While these amounts may not be material to the financial statements, we encourage the City to consider recording these miscellaneous receivables to present a more accurate financial presentation. Finance Committee November 21, 1997 Page 5 7. Inventory Methodology Physical inventories are counted and costs are extended at numerous locations throughout the City. At some locations it appears that inventory of insignificant items is being taken which may not be an effective use of City employees' time and effort. By example, miscellaneous nuts and bolts at Bass Park were counted and these totaled only $1,000. This process appears to take a greater effort than benefit derived. While management may have other reasons for counting and costing every inventory item, we urge the City to review the need and benefit of physically inventorying these small inventory items. 8. Unrecorded Public Works Inventory During our inventory observation test work at the Public Works Department we physically observed certain inventory items with relatively high dollar values, yet these items were not included on the inventory listings. The objective in performing a physical inventory count is both to ascertain actual inventory levels for management purposes and to report inventory values on the City's financial statements. While the value of the inventory omitted from the listing was not material, exclusion of the items defeats the purpose of the inventory process. We therefore encourage the City to review its instructions for taking inventory counts, and that supervisors review both the process and final listings for reasonableness prior to submission to the Finance Department. 9. Interest and Penalties - Airport\City Receivables The airport is responsible for its billings and collections. We observed that uncollected accounts receivable are not assessed interest or penalties on delinquent accounts. The airport is established as an enterprise fund of the City, and as such, is expected to operate similar to that of a private enterprise. Customers who are not charged interest, late fees, or penalties on uncollected receivables have less incentive to remit payment. We therefore recommend that the City establish a system both for the Airport and the City receivables for assessing late charges ensuring that the City complies with the proper notification requirements upon implementation of such fees. 10. Daily Cash Sheet The Daily Cash Sheet used for account coding for the daily Treasurer's report is cumbersome in that it requires manual adjustments. The report for February 4, 1997 had to be manually adjusted for report errors in summarizing receipts by account. Not only did the report not Finance Committee November 21, 1997 Page 6 balance; credit entries were reported as debits. The time and effort required to obtain accurate posting information from this report appears to be excessive and unnecessary. We recommend that the City investigate the causes of the flaws in the Daily Cash Sheet and initiate steps to modify the computer system. We understand that the City is attempting to introduce a new software system for cash receipting, and urge its implementation. 11. Golf Course Receipts We performed a surprise cash count at the golf course and found $27 of cash in excess of recorded receipts. While this difference is not material — or unusual — we urge the Golf Course to take additional steps to ensure the accuracy of reported receipts. We also believe that the City may wish to perform other surprise cash counts at various locations on a regular basis. In addition, as part of our review of the internal control systems we were told that receipts were always given to customers paying green fees. Members of our Firm actually played the golf course during our stay in Bangor. Contrary to stated policy, two golf professionals accepted green fees at separate times and in neither case were our Firm members provided with a receipt. This experience should be a concern to the City for two reasons. First, the practice being used does not conform to stated policy. Secondly, without receipts, the opportunity for misappropriation of funds increases significantly. We believe that the City should address the internal control weakness by instituting a system requiring receipts for green fees. 12. Computer Compatibility Currently there are approximately 50 personal computers connected to the City's computer network. Other PC's that are not connected to the network also exist. During our audit we became aware that these computers were not uniform in configuration, design, or manufacturer. This has resulted in compatibility problems as well as support and service difficulties. We believe that the City should consider granting Information Services authority to approve all computer-related purchases. Further, we believe that there are benefits to be derived from selecting a single computer model for use throughout the City to improve compatibility, support and service. 13. Disaster Recovery Plan The City has not developed a complete Disaster Recovery Plan for its computer operations or user Departments. In addition, the City does not have a designated alternative back-up site to recover computer operations in the event of a disaster. Downtime occurring from a disaster would result in high risks of loss and prevent the City from serving its customers. Finance Committee November 21, 1997 Page 7 We believe that the City needs to develop a Disaster Recovery Plan for the data processing function and other user departments in the organization. This plan should contain temporary operating procedures for each user department, and specific detailed procedures necessary for contingency processing of high priority applications at an alternative site until temporary facilities can be provided locally or permanent data processing operations are restored. The plan should also address communication alternatives if dedicated communication lines are unavailable between the computer system and the remote locations. Both the user and computer recovery plans should be tested on a regularly scheduled basis, at least annually. As part of the disaster recovery planning process, management should perform a risk assessment of potential threats to City services. 14. Logical Security Settings The City's computer network system is not programmed to force users to change their passwords after a period of time. Passwords are critical to computer security, and to ensure that access is denied even to those who may have obtained a password without authorization, routine password changes are important. Data processing should set up a password aging on the system. Such system utilities can be purchased or developed internally to perform this security function. 15. Personal Computer Backup Personal computers are in use throughout the City. Data Processing has indicated that it is not responsible for the routine back up of local PC's. The importance of regular back up of data cannot be emphasized enough. Computer failures occur frequently, and loss of data can be expensive and time consuming to replicate. Rather than ignoring this issue, we recommend that the City address the topic and develop a practical system to ensure than all users have their data backed up routinely. The development of Zip drive technology has made this process less onerous than in the past, and perhaps the City can assign an employee to visit each local user at least monthly to provide minimal back up services. 16. Accrued Fringe Benefits Generally accepted accounting principles mandates that accrued wages be reported as a liability. Further, GAAP specifies that fringe benefits and payroll taxes associated with accrued wages also be reported as a liability. The City presently records accrued wages, but does not record associated payroll taxes and fringe benefits. Finance Committee November 21, 1997 Page 8 Unrecorded payroll taxes and fringe benefits are certainly not material to the City's financial statements taken as a whole. We present this observation to offer the City the opportunity to properly report these obligations in the future. 17. Sick Time Accrual During our review of the City's sick time accrual, it was noted that Firefighters were credited with an incorrect amount of time for their sick time accrual. This inconsistency was immaterial, but we comment on this matter to ensure that the City takes special care in future calculations of its sick time accrual. 18. Insurance Coverage As a result of our inquiry regarding the adequacy of fidelity bond insurance coverage, City management is evaluating it's insurance coverage and has concluded that the City may be lacking an umbrella policy/crime coverage and is considering obtaining one. We applaud this process and recommend it be completed as soon as possible. 19. Middle School Activity Funds No audit is currently performed for the middle school agency funds. There are two activity funds at the middle school. While the amount of these funds is small, we believe that all funds for which the City is responsible should be audited on a regular basis. We recommend that either responsible School or City personnel perform routine internal audits of these funds, or that the City engage independent auditors to review the activities of these funds. 20. Sewer Fund Voided Receipts The sewer fund receives cash payments at the sewer facility. Receipts are prenumbered but are not required to be given to customers as payments are collected. Voided receipts are destroyed. The City policy is to write "void" on voided receipts and to keep those voided receipts in case questions arise in the future. We recommend that the appropriate personnel be reminded of the City policy and that procedures be implemented to ensure its compliance. 21. Sewer Abatements Finance Committee November 21, 1997 Page 9 Abatements of sewer fees in excess of $500 are required to have approval from the Sewer Committee however no authorizing documentation is given to the sewer fund. Rather, the sewer superintendent simply types a letter indicating that the sewer committee approved the abatement. The superintendent is only authorized to approve abatements under $500. We suggest that the Sewer Committee or its authorized representative provide written approval of such abatements, perhaps on the superintendent's letter. 22. Sewer Fund Segregation of Duties Because there are only three individuals at the sewer fund who perform accounting relating functions, ideal segregation of duties is impractical. Because of this, we believe that the City should consider expanding the responsibilities of the internal audit functions to provide for a periodic review of sewer fund operations. 23. Year 2000 Compliance On January 1, 2000, information technology experts believe that many data processing application systems may fail as a result of erroneous calculations and data integrity problems. The situation, largely known now as the Year 2000 Issue, may occur because many application software systems cannot process date information beyond December 31, 1999. Management has informed us that the City is aware of the issue but has not yet adopted a Year 2000 project plan to assure that the City's information systems become Year 2000 compliant well before January 1, 2000. As the new millennium fast approaches, it is imperative that Bangor research the issue further and devote the necessary resources to evaluate its systems and conform them to Year 2000 standards. It is the responsibility of the City's management to ensure that its information systems are made Year 2000 compliant well in advance of January 1, 2000. We recommend that the City implement a Year 2000 compliance project plan as soon as possible. This project plan should be designed to allow the City to proceed with the necessary modification of its application systems, particularly Bangor's mission -critical applications. Because of the potential consequences if Bangor does not become Year 2000 compliant on time, we suggest the Finance Committee request that management provide frequent reports to the Committee about the progress of the City's Year 2000 compliance efforts. This report is intended solely for the use of management and should not be used for any other purposes. However, this report is a matter of public record and its distribution is not limited. Finance Committee November 21, 1997 Page 10 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 the many strong features of the City's internal control system.- We ystem: We wish to express our appreciation for the cooperation and assistance we received from the officials and employees of City during the course of our audit and to advise you that we are available to provide any assistance required to implement the above suggestions. Very truly yours, n;e� 4aLo ma.