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1999RUNYON KERSTEEN OUELLETTE CITY OF BANGOR, MAINE Letter of Recommendations to Management June 30, 1999 Certified - Public Accountants 0 RUNYON KERSTEEN � OUELLETTE Certified Public Accountants & Business Consultants October 12, 1999 To the Bangor City Council City of Bangor, Maine In planning and performing our audit of the financial statements of the City of Bangor for the year ended June 30, 1999, we considered its internal control 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. 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 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 (Non -material Weakness) Sewer System Controls Controls at the sewer utility are potentially weakened 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 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://www.rko-cpas.com OD The CPA. Never Underestimate The Value Bangor City Council October 12, 1999 Page 2 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 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 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. 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. Unrecorded Cash Account During fiscal year 1999, activity was not recorded in an Airport escrow account. Bank reconciliations were being performed on the account but interest revenue and transactions had Bangor City Council October 12, 1999 Page 3 not been posted to the general ledger system. The ending balance in the account as of June 30, 1999 was $259,706 which is material to the City's financial statements. Proper control cannot be exerted over cash balances unless the controls are integrated with the general accounting system. We recommend that this account be recorded on the City's general ledger, activity be recorded on a regular basis, and the cash account reconciled to the general ledger. 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. In response to our inquiries, management of the City has informed us that the City has completed a project plan to make its information systems Year 2000 compliant. We commend management for their efforts in assuring that the City's information systems are Year 2000 compliant. In addition, we encourage management to continue with its procedures to ensure that all third party organizations that the City receives/transmits information from/to are also Year 2000 compliant. We would be happy to provide further assistance with this issue if needed. Enterprise Fund Deficits The City Nursing and Bass Park Fund have incurred losses for the past several years. Recently, these funds have received additional subsidy from the City's annual budget. Even with this additional funding, the enterprises have continued to experience shortfalls. At June 30, 1999, the City Nursing's fund deficit was $1,094,666 and Bass Park's fund deficit was $1,273,062. This past year the expenditures well exceeded the revenues. We understand that the City continues to review these funds closely to identify any possible changes that could potentially reduce costs or increase revenues. Our recommendation is that the City persist in these efforts. Timeliness of Reports During 1999, some reports required by the State were not filed on a timely basis and, therefore, School funds were temporarily withheld by the State. Specifically, the fourth quarter cash management report for the school categorical grant funds had not been filed as of the due date. We recommend that these reports be filed on a timely basis in the future to avoid delays in State funding. Bangor City Council October 12, 1999 Page 4 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,