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.