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2003CITY OF BANGOR, MAINE Letter of Reportable Conditions June 30, 2003 CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS jz � v� y ave -�`� ,•. `fc,ersteen -�� Ouellette -1 � 14,n 17 n lGersteevi buellette October 29, 2003 To the Bangor City Council City of Bangor, Maine Certified Public Accountants and Business Consultants In planning and performing our audit of the financial statements of the City of Bangor for the year ended . June 30, 2003, 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 a certain matter involving the internal control and its operation that we consider to be a reportable condition 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". 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 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 Bangor City Council October 29, 2003 Page 2 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 reconciliation 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 Enterprise Fund Deficits For several years, the Bass Park fund has incurred losses. This past.year, the revenues exceeded the expenditures due to an additional subsidy from the City's annual budget. At June 30, 2003, the Bass Park fund deficit was $1,226,342. We understand that the City continues to review this fund closely to identify any possible changes that could potentially reduce costs or increase revenues.. Our recommendation is that the City persist in these efforts. Monitor Ambulance Accounts Receivable and Review the Collection Policy In the past few years, the amount of ambulance accounts receivables in the 90 day and over category has increased. Management should continue to monitor the ambulance accounts receivables on a timely basis. In addition, we recommend that the City review its collection policy to determine whether additional steps could be taken to aid in collection of accounts. We believe that once a receivable is over 90 days old, it becomes increasingly difficult to collect. Uncollected accounts result in a direct decrease in net income. Segregation of Duties 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. Bangor City Council October 29, 2003 Page 3 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 Because there are only four 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. 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. Code Enforcement In Code Enforcement, the same individual that receives payments also reconciles cash received to permits issued. Ideal segregation of duties provides for separation of functions by different individuals and, therefore, would have payments received by an employee other then the employee reconciling such receipts. This practice provides for verification of permits issued and prevents receipts from being diverted for unauthorized purposes. Assessor's Office In the Assessor's Office, any employee may accept payment and any employee may perform a reconciliation of such receipts. Furthermore, cash outs occur once a week and all employees in the office have access to the cash box. Ideal segregation of duties provides for separation of functions by different individuals and, therefore, would have payments received by an employee other then the employee performing reconciliations. We also recommend that access. to the cash box be restricted to one individual who has sole responsibility for its safeguard and cash outs be performed daily. Acquire a Fixed Assets Tracking System Instead of an integrated accounting system that includes a fixed asset accounting module, the City's fixed assets are maintained on an Excel spreadsheet. Depreciation for enterprise funds is calculated using formulas, which must be created when a new asset has been acquired. We recommend that the City consider acquiring a fixed asset system to account for and monitor its physical assets and related depreciation. Bangor City Council October 29, 2003 Page 4 Additionally, we recommend that formal controls be adopted to ensure that all disposals of fixed assets are reported to the accounting department so that the accounting records can be properly updated. Related Entity Tax Returns The City of Bangorhas 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. Accrued Vacation Listing During the audit, it was noted that a year-end listing had not been printed. This is one of several reports that cannot be generated at a later time and must be printed at year-end. A listing printed on June 21 had to be relied on for year-end. audit purposes. We recommend that a detail listing be printed at year-end to have available for the audit and to have available as backup for the year-end financial statements. Periodically Review for Obsolescence During the year-end inventory testing, it was noted that the City, was holding obsolete inventory at the motor pool. A periodic evaluation throughout the year should be made to isolate slow moving and obsolete items. The timely disposal of these items, through sale at a reduced price, donation, or disposal, will eliminate the additional carrying costs associated with the inventory and help alleviate the problem of a shortage of warehouse space. Log in Cash Receipts The City usually does not make daily deposits of cash it receives in its decentralized locations (such as at the Public Works building). We recommend the employee who receive such cash be required to list all amounts received on a prescribed form before it is deposited, so that the list may be subsequently compared with the cash book and bank deposits. This comparison should be performed by someone independent of the accounting function. Arbitrage Rebate Calculations I.R.S. regulations relating to arbitrage requires tax exempt issuers of debt instruments, under certain circumstances, to perform an arbitrage rebate calculation. As a general rule, the calculation must be performed for each government obligation issued after August 15, 1986. The calculation must be made five years from the date of issue and every five years thereafter, and the final calculation is made upon retirement of the respective issue. For revenue anticipation notes and other obligations which are retired prior to five years, the rebate calculation must be performed upon retirement and not on the five year anniversary. Bangor City Council October 29, 2003 Page 5 We recommend that the City identify any such issues and perform the necessary calculations, if applicable. Continuing to accumulate the information on a timely and consistent basis and performing the calculations when due will save time and money as well as ensure a more accurate calculation. This report is intended solely for the use of the City Council and management and is not intended to be and should not be used by anyone other than these specified parties. 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, 0 SOUTH PORTLAND WATERVILLE Tel. 207-773-2986 Tei. 207-877-9397 Fax 207-772-3361 Fax 207-877-9398