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2000RUNYON KERSTEEN OUELLETTE CITY OF :BANGOR, MAINE :Letter of Recommendations to Management June 30, 2000 RUNYON KERSTEEN OUELLETTE Certified Public Accountants & Business Consultants Oci(ober 18, 2000 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, 2000, 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 condition 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 CONDITION (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 district; 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 1-800486.1785 http://www.rko-cpas.com @0 The CPA. Never Underestimate The Value Bangor City Council October 18, 2000 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's 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's 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 related 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 18, 2000 Page 3 Segregation of Duties in the School Department In the School Department, mail receipts are opened and processed 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. In addition, the individual who opens the mail keeps no cash receipt log. The cash receipts log should detail the amount of each check, the date received, and a description of what the amount is for. Periodically, the cash receipts log should be reconciled with what has been recorded. Enterprise Fund Deficits The City Nursing and Bass Park Funds 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, 2000, the City Nursing's fund deficit was $668,578 and Bass Park's fund deficit was $1,426,264. 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. New Governmental Reporting Model The Governmental Accounting Standards Board (GASB), which is the standard setting body for governmental accounting, has recently issued GASB Statement No. 34, which establishes new financial reporting standards for state and local governments. Statement 34 is one of the most comprehensive financial reporting standards in the history of standards setting and by far the biggest change ever in governmental financial reporting. Some of the more significant requirements of Statement 34 are that governments must record and depreciate their fixed assets rather than simply account for them in an account group. Governments must also begin recording "infrastructure assets" which includes roads, bridges, dams, and other infrastructure. Additionally, there are significant changes in the presentation of your financial statements. The GASB believes that these changes will result in greater accountability by governments by providing more useful information to a wider range of users. Although the City of Bangor will not be required to implement Statement 34 until the year ended June 30, 2003, there is much work to be accomplished before the implementation date. A significant amount of time by your finance personnel and others and possibly other resources will be required to accomplish all that must be done to implement Statement 34. Our firm has begun the process of presenting seminars and providing other information to assist in this effort and will continue to do so. We feel that it is also important to inform the elected officials about the requirements of the new reporting model and alert you about the significanceof these changes. We recommend the City establish a formal Bangor City Council October 18, 2000 Page 4 implementation plan which would include a list of steps to implement, assign responsibility for the tasks involved, and establish a timetable to ensure completion by your required implementation date. . Ambulance Receipting While performing walkthrough procedures we discovered that the City is not maintaining paper backup for ambulance receivables. As run sheets are received from the drivers / EMTs, information is entered and bills are sent out every ten days. No physical copies of bills are maintained or any form of receivables listing is printed. The information is recorded in the computer system which is backed up every day. If the computer systems were to become inoperable for any reason between one of these backup periods, accounting information may be lost without recourse. We recommend that at the very least, a receivables listing be printed after each batch of bills has been entered and that the listing be maintained for a period of six months. Related Entity Tax Returns The City of Bangor has been associated with various economic development entities, such as Banair Corp. and Bangor Area Development Corp. We have not previously ascertained whether income tax returns have been filed and have not inquired of City officials regarding this subject. To avoid penalties, we recommend that City officials look into the tax filing responsibilities of these entities. Municipal Valuation Error While performing routine audit procedures, we identified an error in the City's municipal valuation return. Specifically, the taxable valuation of real estate is supposed to exclude exempt valuations from all categories. The assessor included these amounts on the form and this error resulted in an over statement of taxable building valuations of $45,240,800. However, the correct total had been reported so the property tax levy was correct. We suggest that management and the finance committee perform a cautious review of the final municipal valuation return before it is mailed to the state. Year End Taxes Receivable Reconciliation During the year, the City changed accounting programs for property tax receivables. Not knowing the new system was unable to print a detailed listing of a particular date, post to that date, employees did not print a detailed listing of outstanding property taxes receivable at year- Bangor City Council October 18, 2000 Page 5 end. The City attempted to reconcile the balance in September, and was able to come within $50,000 of the general ledger balance. It is important that responsible employees be aware of the need to print these reports at year-end and this should be included in the Finance / Treasury Departments year end procedures. Information System Issues It was noted during the audit, that several employees, who had been previously terminated, still had access privileges to network programs. We recommend that the Information System Department be notified in a timely manner of the termination of employees, so that access privileges can be eliminated for those employees. It was also noted during the audit, that Information system employees have access to sensitive areas, such as payroll functions and fund accounting. We recommend eliminating access to these areas, as they represent the potential for undue risk relating to fraud or other irregularities. 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,.