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2005CITY OF BANGOR, MAINE Letter of Reportable Conditions June 30, 2005 CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS jZu n on- `IGersteem � Ouellette )Z 14 n CPn %ar5teem Du,Wette October 7, 2005 To the Management of the City of Bangor, Maine Dear Sirs: Certified Public Accountants and Business Consultants In planning and performing our audit of the financial statements of the City of Bangor (the City) for the year ended dune 30, 2005, we considered the City's internal control in order to determine our auditing procedures for the purpose of expressing opinions on the financial statements and not to provide assurance on the internal control structure. However, during our audit we became aware of several matters that are opportunities for strengthening internal controls and operating efficiency. The attached schedule summarizes our comments and suggestions concerning those matters. This letter does not affect our report dated October 7, 2005, on the basic financial statements of the City. The accompanying comments and recommendations are intended solely for the information and use of management and others within the organization 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 of Bangor, including the Bangor School Department, during the course of our audit. We will review the status of these comments during our next audit engagement. We have already discussed them with various City and School Department personnel, and we will be pleased to discuss them in further detail at your convenience, to perform any additional study of these matters, or to assist you in implementing the recommendations. Very truly yours, CITY OF BANGOR, MAINE Schedule of Comments June 30, 2005 REPORTABLE CONDITION (Non -material Weakness) Sewer Svstem 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 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. Semi-annual Certification of Title 1A and Special Education - Grants to States Employees Our test work revealed that currently the School Department does not require semi-annual certifications of employees paid 100% through the Title 1A and Special Education - Grants to States programs. The A-133 Compliance Supplement states that "An employee whose compensation is funded solely from a Single Cost Objective must furnish a semi-annual certification that he/she has been engaged solely in activities supported by the applicable source in accordance with OMB Circular A-87, Attachment,B paragraph l Lh.3". We recommend that certificates be distributed to staff twice a year and be signed by both the employee and the grant director. OTHER COMMENTS Enterprise Fund Deficits For several years, the Bass Park fund has incurred losses. This past year, net assets decreased despite a $473,640 transfer from the City's general fund. At June 30, 2005, the Bass Park fund deficit was $1,565,629. 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. 2 CITY OF BANGOR, MAINE Schedule of Comments, Continued Seereeation 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 receipts. 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 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. Public Works At the Public Works Garage, the Inventory Manager performs inventory counts, updates computerized information, and also receives inventory. Ideal segregation of duties provides for separation of functions by different individuals and, therefore, would have each task performed by a different employee. Because of limitations of the small size of the staff, we suggest that cautious review of the financial information be performed regularly by responsible officials (such as the Public Works Director or Finance Director) in order to identify unusual activity. CITY OF BANGOR, MAINE Schedule of Comments, Continued 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. 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. 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. 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. Bangor Area Transit Cash Disbursements While conducting a cash disbursements test" for Bangor Area Transit, we noted that there were expenditures incurred on behalf of the director, which the director approved. These expenses were for a conference which the director attended and included airline tickets and registration to the conference. We would recommend that in those situations in which the director is approving his own expenditures, a third party, such as the City Manager, sign off on the purchase order. Fixed Assets Purchased with Federal Funds While conducting a cash disbursements test for the Special Education - Grants to States Program (Local Entitlement), we noted there was a $7,800 purchase of a copier which was not capitalized as a fixed asset. Per the School Departments fixed asset capitalization policy, they only capitalize and track fixed assets greater than $10,000. However, per the A-133 Compliance Supplement, the grant recipient is required to track equipment purchased with federal funds greater than $5,000. We would recommend that the school department track all equipment greater than $5,000 when the purchase has been made with federal funds. 4 CITY OF BANGOR, MAINE Schedule of Comments, Continued School Fixed Assets Upon review of the School Department fixed asset additions, we noted that many of the items capitalized were done so based on an outstanding purchase order. The corresponding assets had not yet been received or paid for, and per generally accepted accounting principals must be placed in service to meet the requirement for capitalization. In addition, when we received the updated list of fixed asset additions, there were some amounts that should not be capitalized, some that were not fully capitalized, and at least one asset that was missing from the list. We recommend that the School Department do a thorough review of its capital expenditures during the year, paying special attention to cut-off dates. It may be beneficial to set aside invoices for capitalizable fixed assets during the year, thus making it easier to report such information at year-end. Motor Pool Inventory During our inventory observation on June 30, 2005, we noted a few instances in which our count differed from those taking the inventory counts. When asked about some of the discrepancies, a few of the Motor Pool employees tried to help find the missing items. However, in a few instances, were unable to locate the missing items. We later compared our counts to the final inventory count and noted that those items for which there were discrepancies were not changed. In order to ensure that inventory counts and valuations are accurate, any discrepancies should be corrected and inventory counts should be updated when necessary. Electrical Department (Public Works) Inventory Valuation Upon testing the costs used in valuing the Electrical Department's inventory we noted a few discrepancies between the cost per unit on the inventory list and the cost per unit on the item's invoice. In one instance, the item was recorded on the index card of an existing inventory item when a new index card should have been created since it was a new item. We recommend that when inventory items are received, the person entering the items into the computer system verify the cost per unit with the invoice as well as the index card to ensure accuracy. It has also come to our attention that the Electrical Department does not consistently value its inventory items. In some circumstances, if there are only a few items of a particular item in stock and a new shipment is received, the Department will sometimes restate the existing items at the cost of the new shipment. In other circumstances, such as in the case of small inventory items (e.g. nuts, bolts, etc.), the Department uses a "blended price", which averages the prices of new and existing inventory items, while other items are priced and come out of inventory at specific cost. We recommend that Public Works determine an allowable inventory valuation method and consistently apply that method to all inventory items (e.g. FIFO, weighted - average cost, specific cost, etc.). School Lunch Inventory Upon review of the school lunch inventory, we noted that the total of the inventory recorded on the books did not agree with the supporting detail. We noted that the inventory had been adjusted twice, so that the total was actually that of last year's inventory. We also noted that the inventory count was incorrect on the June Claim Form filed with the State. We recommend that the School Department use greater diligence in preparing school lunch inventory information. �1 CITY OF BANGOR, MAINE Schedule of Comments, Continued School Activity Funds Cash disbursements -During our review of cash disbursements, we noted several instances in which back-up documentation was missing or incomplete. In addition, we noted that only the High School uses vouchers to provide authorization for expenditures and to identify the account and amount that should be charged for the expenditure. The middle schools activity fund disbursements showed no indication that they had been reviewed or approved. We recommend that each school be required to support each cash disbursement with an invoice or other form of backup and the principals at each school should review the expenditure back-up and initial the support to show approval. The middle schools should consider going to a pre -numbered voucher system to ensure that each cash disbursement has been properly documented and authorized. Cash receipts -During our review of cash receipts, we noted some instances in which back-up documentation was missing. In addition, we noted that only the High School uses cash receipt slips to document the amount of cash received and account number to which the receipt was credited. However, the cash slips were not pre -numbered and were not signed by the person receiving the cash. We recommend that each school be required to support each cash receipt with a cash receipt slip, signed by the person receiving the cash. In the case of checks received, the school should keep a copy of the actual check. Otherwise, there is no way to ensure that all cash received has been accounted for and credited to the correct activity fund. In addition, the school should consider using pre - numbered cash receipt slips to ensure that all cash receipts are reported. General funds -During our audit of the school activity funds for the high and middle schools, we noted that the High School and the William S. Cohen Middle School use general funds. The risk of using general funds is that it is difficult to track funds that are designated for certain purposes. We recommend that the schools cease using general funds and instead, set up specific accounts for cash receipts and disbursements designated for specific activities. Deficit balances- At year end, several student activity accounts have deficit balances. No individual group should be allowed to have a negative balance in their account. We recommend expenditures not be approved for a group that does not have enough money in the account to cover the expenditures. 6 SOUTH PORTLAND WATERVILLE Tel. 207-773-2986 Tel. 207-877-9397 Fax 207-772-3361 Fax 207-877-9398 1 N MS t. r H� r , , b " F e SOUTH PORTLAND WATERVILLE Tel. 207-773-2986 Tel. 207-877-9397 Fax 207-772-3361 Fax 207-877-9398