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1998RUNYON KERSTEEN OUELLETTE CITY OF BANGOR, MAINE Letter of Recommendations to Management June 30, 1998 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 noted no matters involving the internal control over financial reporting 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 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. 20 Long Creek Drive South Portland, ME 04106 207-773-2986 or 1-800-486-1784 FAX 207-772-3361 or 1-800-486-1785 http://wwayrko-cpas.com October 20, 1998 Certified Public Accountants To the Bangor City Council 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, 1998, 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 � o et coming to our attention relating to significant deficiencies in the design or operation of the 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 one reportable condition 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 noted no matters involving the internal control over financial reporting 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 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. 20 Long Creek Drive South Portland, ME 04106 207-773-2986 or 1-800-486-1784 FAX 207-772-3361 or 1-800-486-1785 http://wwayrko-cpas.com Bangor City Council October 20, 1998 Page 2 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 performance difficult. Further, it makes reconcilement increasingly important and time consuming. We recommend the City review its relationship with the water utility to correct these cash handling and accounting deficiencies. OTHER COMMENTS 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 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. We understand that these problems should be fully resolved when the new tax system comes online. 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. Bangor City Council October 20, 1998 Page 3 Motor Pool Inventory The City took a physical inventory of the parts at the Motor Pool as of June 30, 1998, which was valued at $150,000 in the general purpose financial statements. At the time there was no motor pool supervisor to oversee the inventory count. Also, the new inventory system that had been installed in the previous year had not been properly maintained. The beginning balance of this inventory was not accurate and therefore could not be relied upon. As a result, we were unable to satisfy ourselves as to the balance. The inventory for the Motor Pool which is recorded as part of the General Fund is not material to the balance sheet of this fund. It is recommended that the City ensure that the physical count and valuation be performed at different times of the year, in order to ensure that the inventory listing is accurate and properly maintained. 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 time and effort required to obtain accurate posting information from this report appears to be excessive and unnecessary. We understand that the City is attempting to introduce a new software system for cash receipting and the need for daily cash sheets will be eliminated, and we urge its implementation. Disaster RecoyerPlan We understand that the City has started to develop a complete Disaster Recovery Plan for its computer operations and user Departments. Currently all networked data (i.e., accounting, payroll and budget) is backed up each evening and stored off site. Also, an informal agreement currently exists between the City of Lewiston's Data Processing Department and Bangor's Information Services Division for the use of computer hardware and peripherals in the event of a disaster. We urge that the City continue to formalize its plan and that both the user and computer recovery plans 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. 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. Bangor City Council October 20, 1998 Page 4 School and City Reconciliation On a monthly basis, the School Department and City finance personnel reconcile certain accounts (revenues and expenditures) that are used for School accounting purposes. On occasion and especially at year-end, journal entries are required on one side or the other to appropriately reflect the activity as well as necessary accruals. We noted that at year-end various entries of significant amounts were needed to reconcile the City with the School and were not communicated to the City. As a result, the City records did not reconcile to the School's. Throughout the year, all entries required to completely and accurately reconcile the two systems should be made and then the balances should be rechecked to ensure they are in agreement. We recommend that this reconciliation continue to be performed by the respective accountants but that someone separate from the process, perhaps the City's finance director and the School's business manager, also review the final amounts and approve the reconciliation on a monthly basis. This process should encompass all funds, including grants and special projects. Year 2000 Compliance As the new millennium approaches, many issues are beginning to lurk over the horizon that could potentially affect a Municipality's ability to be successful in the future. One issue that is receiving ever-increasing attention is the Year 2000 Issue. The Year 2000 Issue has been defined as the potential failure of an entity's information systems to provide accurate calculations beyond December 31, 1999 and the potential impact that this could have on an organization's ability to prepare reliable financial statements and operate successfully. Management of the City has informed us that they have already developed and implemented a Year 2000 compliance project plan and are in the process of assessing and/or modifying the City's information systems. We commend the City's progress in ensuring the accuracy of it's information systems and encourage you to continue with your Year 2000 Issue project plan to ensure that all of the City and School's information systems have been appropriately modified and tested well before January 1, 2000. In addition, we also remind the City to consider implementing procedures to ensure the accuracy of information received from all vendors, customers, and other third party organizations who also must become Year 2000 compliant. Because of the potential consequences if the City does not become Year 2000 compliant on time, we suggest the City Council insist that management of both the City and the School Department to provide frequent reports to the Council and School Board about the progress of the City's Year 2000 compliance efforts. Bangor City Council October 20, 1998 Page 5 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. 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 wish to express our appreciation for the cooperation and assistance we received from the officials and employees of the 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,