NOTE: A material weakness
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
MANAGEMENT REPORT AND AUDITOR’S COMMUNICATION LETTER
June 30, 2015
CURRENT YEAR RECOMMENDATIONS
Material Weakness
2015-01 Finding – Deficiencies in recording of pooled cash:
Effect:
Without proper reconciliation of pooled cash on a monthly basis, it is difficult to determine if the cash balance is correct at the end of each month. Also, a misappropriation of funds could occur and remain undetected for an extended period of time.
Recommendation:
We recommend that the City reconcile the pooled cash on a monthly basis and the reconciliation be approved by a responsible employee.
Management’s Response:
Agreed. Like all of the actual bank accounts, the pooled cash fund should be reconciled on a monthly basis. Our pooled cash accounting structure is a bit different than normal. Because of this difference, the importance of reconciling the actual bank accounts is greater than the reconciliation of the pooled accounts. As mentioned in earlier responses, the Finance Department is short staffed due to covering of the Human Resources and Risk Management areas and does not have the resources to complete in a timely manner many of the tasks that accrue to it on a monthly basis. With the implementation of the new finance system, we anticipate many of the tasks and duties that are required now will be easier to implement or will go away entirely.
Significant Deficiencies
During our review of internal controls, it was noted the cash receipting function has overlapping duties. The overlapping duties are: preparing/posting receipts, preparing deposit slips, making the deposit, maintaining custody of petty cash, replenishing petty cash, and resolving complaints.
Effect:
With overlapping duties within the cash receipting function, there is an increased risk of a misappropriation of assets to occur and remain undetected.
Recommendation:
We recommend the cash receipting function has adequate segregation of duties in order to decrease the risk of misappropriation of assets.
Management’s Response:
Agreed. As has been pointed out by other recent auditors, because of the size of the Finance Department staff, many of the financial internal controls are not as effective as they would be otherwise, were there a greater staff size. While there are certain tasks that, optimally, would be handled by multiple individuals to increase internal control, we have limited staff so that each staff member must complete more tasks in a given process, making the internal control potentially less effective. While we don’t have the staff size to maximize internal control strengths, we have analyzed the segregation of duties, and have implemented separation where the greatest risk of loss could occur.
2015-03 Finding – Payroll function has overlapping duties:
During our review of internal controls, it was noted the payroll function has overlapping duties. The overlapping duties are: maintaining personnel files, entering employees into the payroll system, making wage rate changes in the system, entering hours into the system, verifying hours input into the payroll system, reviewing the payroll register, preparing the payroll journal, and preparing payroll checks.
Effect:
With overlapping duties within the payroll function, there is an increased risk of incorrect reporting of payroll expenses or data and a misappropriation of assets to occur and go undetected.
Recommendation:
We recommend the City maintain adequate segregation of duties within the payroll function in order to decrease the risk of misreporting and/or misappropriation of assets related to payroll.
Management’s Response:Agreed. Again, as has been pointed out by other auditors in recent years, because of the size of the Finance Department staff, many of the financial internal controls are not as effective as they would be otherwise, were there a greater staff size. Especially in case of payroll, the City has been without adequate Human Resources personnel that would normally mitigate the internal control risk related to payroll activities. In this case, the staff member who has been taking care of the payroll is also processing as many of the HR tasks as possible. With the hiring of a Human Resources Manager in May, 2016, this risk should be mitigated substantially.
2015-04 Finding – Cash disbursements function has overlapping duties:
During our review of internal controls, it was noted the cash disbursements function has an overlapping duty. The overlapping duty is: preparing checks and also maintaining custody of the checks after they are signed.
Effect:
With overlapping duties within the cash disbursements function, there is an increased risk of misappropriation of assets to occur and remain undetected.
Recommendation:
We recommend the City maintain adequate segregation of duties within the cash disbursements function in order to decrease the risk of misappropriation of assets.
Management’s Response:
Agreed. Again, as has been pointed out by other recent auditors, because of the size of the Finance Department staff, many of the financial internal controls are not as effective as they would be otherwise, were there a greater staff size. While there are certain tasks that, optimally, would be handled by multiple individuals to increase internal control, we have limited staff so that each staff member must complete more tasks in a given process, making the internal control potentially less effective. While we don’t have the staff size to maximize internal control strengths, we have analyzed the segregation of duties, and have implemented separation where the greatest risk of loss could occur.
2015-05 Finding – No review or sign-off on fuel usage reports:
During our review of internal controls, it was noted appropriate management does not formally review or sign-off on fuel usage reports.
Effect:
Without proper review or sign-offs on fuel usage reports, there is an increased risk of unauthorized use of City fuel.
Recommendation:
We recommend the City implement review and sign-off procedures on fuel usage reports in order to help prevent unauthorized usage of City fuel.
Management’s Response:
Agreed. In the past, fuel reporting was not being monitored as closely as it is now. Currently, the fuel usage report is run quarterly and is reviewed for any anomalies by the Streets Supervisor and Public Works Director, signed when approved, and retained.
2015-06 Finding – No supporting receipts for numerous City credit card purchases:
During our review of credit card statements, we noted numerous purchases without receipts (check no. 129239).
Effect:
Without retention of receipts, there is no way to substantiate credit card purchases, and there is an increased risk of unauthorized/unreasonable purchases being charged on the City credit card.
Recommendation:
We recommend City employees retain and submit receipts for all credit card transactions in order to prevent unauthorized transactions from being charged on the City credit card and retain for future verification.
Management’s Response:
Agreed. The City has taken the following steps to prevent unauthorized transactions:
• A new card has been issued to Admin Services Dept. and use is strictly monitored. (The card is used only by the Finance and Planning Department if absolutely necessary).
• Receipts are mandatory, and
• The purchase order must be approved by the Director of Budgets and Contracts or the Finance Manager.
The past problem of all Finance and City Admin staff having free access to the Admin Cal-Card has been resolved.
2015-07 Finding – Excessive use of override function at refueling station and lack of vehicle number on vehicle log:
During our review of gasoline usage, we noted the override function was used 65 times in December 2014 and March 2015. Additionally, no vehicle number was logged during 18 different fuelings in December 2014 and March 2015.
Effect:
With an excessive use of the override function over gasoline usage, there is a higher likelihood of unauthorized use of the City’s refueling station. Additionally, without a vehicle number being logged, there is no way to validate that the vehicle being fueled was an authorized City vehicle.
Recommendation:
We recommend the City cease the use of or disable the override function, and require that vehicle numbers be logged each time the City’s refueling station is accessed.
Management’s Response:
Agreed. The override situation has been addressed with a new locking covering and the override switch has been disabled.
2015-08 Finding – No approved position schedule for the 2014-15 fiscal year for non-safety employees:
During our review of payroll, we noted there was no approved position schedule for the 2014-15 fiscal year for non-safety employees.
Effect:
Without an approved position schedule for the 2014-15 there is no way to verify if the employees are being paid at the correct wage rate for their step and range. Also, employee vs. employer litigation could result.
Recommendation:
We recommend the City prepare an approved position schedule every fiscal year for all employees, in accordance with employment agreements.
Management’s Response:
Agreed. The City has been without a Human Resources Manager for a number of years, and some of the duties (specifically the ones that are not required in order to get employees paid in a timely and accurate manner) were not attended to. The Finance staff that processes payroll has picked up the necessary duties in order to process payroll, but has not had the time to pick up all of the duties of the HR Manager. The good news is that we hired a new Human Resources Manager last month, and this finding is on her list of issues to address.
2015-09 Finding – Firefighters are using the same employee ID to refuel the fire vehicles:
During our review of internal controls, we noted firefighters are using the same employee ID (#4334) to refuel the vehicles rather than having one unique ID per person.
Effect:
When firefighters use the same employee ID to refuel the vehicles, there is no way to track who is accessing the refueling station. This could lead to a misappropriation of fuel to occur and remain undetected.
Recommendation:
We recommend each firefighter be assigned their own one unique ID and that each firefighter use their individual unique ID each time during refueling of vehicles.
Management’s Response:
Agreed. Every firefighter is being assigned their own unique ID and each firefighter will use that ID during refueling of the vehicles.
2015-10 Finding – Deficiencies in police cash receipts:
During our review of internal controls, we noted there was no verification by Finance that all police receipts are accounted for when brought over to the Finance department (no tracking to ensure all days are accounted for). Also, we noted the police department cash receipts are reconciled and the deposit is prepared by an employee who is also one of the employees who receives payments and issues receipts.
Effect:
Without proper review of police receipts to ensure that all days are accounted for, there is no way to verify if any days are missing. Also, there is an increased risk of a misappropriation of funds to occur and remain undetected when there is a lack of segregation of duties in the cash receipts process.
Recommendation:
We recommend the Finance Department verify that all days are accounted for at the time of receipt. We also recommend segregation of duties be implemented in the Police Department so that cash receipts are not reconciled and deposited by an employee who is also one of the employees who receives payments and issues receipts.
Management’s Response:
Agree/Disagree. Agree that someone at PD, other than anyone who processes cash receipts should at least verify the reconciliation of cash receipts. The payments recap that Finance receives now has individual receipt numbers segregated by receipt type. Currently, no one reviews that each receipt number is accounted for, and that there are no gaps or double counting. Finance will develop a sign-off sheet that a supervisor at the Police Department can use to verify the numbering sequence is not broken. Finance will double check on our end before posting and depositing.
Finance currently receives the complete packet from the PD, re-counts the cash, checks and credit card receipts, verifies the reconciliation, signs as such, then makes the actual deposits (with the exception of the credit card deposits that are automatically posted by the bank).
2015-11 Finding – Payroll deficiencies:
During our test of payroll, we noted 3 timesheets lacked an employee signature, department signature or both; one W-4 form was missing an employee signature; one employment application was not obtained/retained; one PAR contained a different wage rate than what is being paid; two vacation accrual rates appeared to be incorrect; one employee is not having Medicare tax withheld; the salary schedule for safety employees with extra pay (2.5% and 5%) was calculated incorrectly; and two I-9 forms were not obtained/retained.
Effect:
Without proper approval and retention of personnel/payroll documents, we are unable to verify whether employees are being paid for the correct hours, whether they are being paid at the correct pay rate, or if compensatory time balances are correct. Additionally, missing I-9 forms could result in fines if the City were to be audited by the Department of Justice. Lack of employee signatures on W-4 forms and lack of an employment application could indicate fictitious employees.
Recommendation:
We recommend all timesheets, W-4 forms, I-9 forms, and employment applications be signed and retained for future verification. We also recommend vacation accrual rates be correctly calculated, that Medicare tax be withheld for all employees, and the salary schedule for safety employees with extra pay (2.5% and 5%) be correctly calculated.
Management’s Response:
Agreed. We have reviewed the documents in question as well as the policy that guides them.
There were oversights made related to procuring all required signatures and paperwork. We will institute a check and balance system to make sure that all signatures and paperwork are collected.
2015-12 Finding – Lack of procurement documentation:
During our test of procurement, we noted two instances out of four where proof of advertisement was not obtained/retained (Silveira and Government Staffing) and there was no record of the bid results for these two vendors.
Effect:
Without proper procurement documentation, we were unable to verify whether the City complied with required procurement procedures.
Recommendation:We recommend the City maintain records of all procurement procedures for future verification.
Management’s Response:
Disagree. There might be some confusion regarding where the relevant documentation resides. During the purchasing process, there are several people involved, and several files that get created: the project manager has important records, a copy of the contract will reside in the eventual accounts payable with Finance, the “advertisement” or relevant noticing will reside in the official publication of notice accounts payable file, also in Finance. In the two examples noted, there are files that contain either “tear sheets” or other methods that vouch for the fact that a noticing occurred. In the case of Government Staffing, the normal noticing requirements are not used, since we use Government Staffing to secure specialized governmental staffing, in this case, an interim City Clerk.
2015-13 Finding – Master fee schedule has not been approved annually:
During our test of cash receipts, we noted the master fee schedule has not been approved annually by the City Council.
Effect:
Without proper annual approval of the master fee schedule, we were unable to verify whether the City was charging the correct fees to customers.
Recommendation:
We recommend the City Council approve a master fee schedule on an annual basis.
Management’s Response:
Agree, but with a caveat. Agree with the fact that the City Council has not approved the master fee schedule for the past two years, but disagree with the assumption that the City Council does not routinely approve the master fee schedule annually. Last year, the City Council chose to not increase the master fee schedule by the normal CPI index amount, leaving it the same as the previous year, so the prior year rates were effectively adopted by default. For FY16-17, the Council is actively engaging with the public to change a number of fees and charges, but that dialog is not yet complete, and will be updated and approved when the new rates have been agreed upon.
2015-14 Finding – Deficiencies in cash disbursements:
During our test of cash disbursements, we noted the following: one purchase order was missing an approval signature (#130878); approval signatures are not recorded on the paid invoice; one purchase order was missing the preparer’s signature (#130941); and one invoice was not obtained/retained (#129896).
Effect:
Without proper approvals on invoices and purchase orders, and without the retention of invoices, we were unable to verify if the purchases were authorized. Also, there is an increase in the risk of unauthorized expenditures to occur and go undetected.
Recommendation:
We recommend there are approvals on invoice and purchase orders prior to payment. We also recommend all applicable invoices be retained for future verification.
Management’s Response:
Agreed. There have been instances where certain documents work their way through the process without the proper authorization. The issue here is not one of lacking a policy, but making sure that it is followed 100% of the time. We have modified our process a little in that two managers from the Finance Department are currently reviewing all purchase orders and initialing.
2015-15 Finding – Deficiencies in cash receipts:
During our test of cash receipts, we noted the following: two source documents were not obtained or retained (receipt numbers 02842 and 02932); three fees appeared to be calculated incorrectly (receipt numbers 02783, 02953, and 58922); one receipt could not be traced to the deposit slip or bank statement (receipt number 02783); and two fees could not be located in the fee schedule (receipt numbers 57653 and 59610).
Effect:
Without retention of source documents, we were unable to verify if the City charged the correct fees to the customer. Incorrectly calculated fees result in mischarging of customers.
Without being able to determine if the cash receipt was deposited to the bank, there is an increased risk of misappropriation of cash receipts to occur and remain undetected. Finally, with the lack of fees listed in the fee schedule, we were unable to verify whether the City was charging appropriate amounts for the services performed.
Recommendation:
We recommend the City retain all source documents involving cash receipts. We also recommend fees be calculated correctly and all cash receipts traceable to the bank statements.
Finally, we recommend the City includes all classifications of fees on the fee schedule.
Management’s Response:
Disagree. In reviewing the cash receipts cited, the City verified that, in some instances, the retention of source documents is not necessary. For example, a simple private tree trimming (2842) or a day use parking space that is documented in a log book (2932), we feel, is sufficient to verify correct fees. The application for a fixed location sign permit (59064) was properly accounted. The Police Department cash deposit receipt (2783) was verified as deposited on a combined July-August deposit and accounting was correct. Receipts 57653 and 59610 were verified as posting correctly to GL as storage fees and ASBS Storm Drain deposit respectively. The issue of the fee schedule is addressed in a separate finding. Additionally, starting immediately, the Planning & Building Department will start recording the receipt number in their database, as a cross reference.
Other Matters
2015-16 Finding – Lack of video cameras at the Corporation Yard:
During our review of internal controls, it was noted there are no video cameras installed at the Corporation Yard.
Effect:
Without a video camera at the Corporation Yard, there is a lack of oversight over the safeguarding of assets.
Recommendation:
We recommend the City place video cameras at the Corporation Yard to help detect unauthorized activity and to decrease the risk of a misappropriation of assets.
Management’s Response:
Agreed. The Police Department has agreed to include the purchase of a Corporation Yard surveillance system when they update their current police department surveillance system this fiscal year (FY16-17).
2015-17 Finding – The Public Works building has numerous inventory supplies that are not being used and are not properly safeguarded:
During our review of internal controls, we noted the Public Works building has numerous filters, brake pads, lights, belts, fuses and other auto supplies that are not being used anymore and are not properly safeguarded.
Effect:
With numerous outdated supplies not being safeguarded properly, there is an increased risk that those assets could be misappropriated and remain undetected.
Recommendation:
We recommend the City dispose of outdated inventory supplies and properly safeguard all remaining inventory supplies.
Management’s Response:
Agreed. We have changed our process related to this supplies inventory. For the existing auto parts inventory, it now resided in a locked cabinet, within a locked room at Public Works. Only three supervisors/managers have the keys. This inventory is obsolete and will be disposed of via auction. Current small auto parts will be purchased as needed.
2015-18 Finding – Petty cash was not safeguarded
During our audit of petty cash, we noted a majority of the petty cash for Community Services ($270) was not safeguarded in the petty cash box, but rather the cash and receipts were with an employee.
Effect:
There is the potential for the petty cash and receipts to be lost or misplaced when they are not properly safeguarded.
Recommendation:
We recommend petty cash and related receipts be safeguarded in a petty cash box at all times.
Management’s Response:
Agreed. In the incident cited, the employee had withdrawn petty cash, purchased items, and hadn’t yet returned the receipt and left over petty cash to the cash box. The process has been tightened up, and now the excess cash withdrawn and receipts are immediately returned to the cash box, which is kept in a locked safe.
2015-19 Finding – The COPS grant revenue was being recorded to fund balance instead of a revenue account:
During our audit of the financial statements, we noted COPS grant money was being recorded to fund balance instead of a revenue account.
Effect:
Misposting of revenues results in misstated financial statements.
Recommendation:
We recommend the City record COPS grant money to the appropriate revenue account instead of recording the revenue in the fund balance account.
Management’s Response:
Agreed. The “auto” coding for the receipt of our COPS grant was erroneously crediting this revenue to the fund balance instead of the revenue account. We have had this same error in prior years and corrected it for the financial statements.
For this year, we have corrected that coding, and now all COPS grant revenue is being posted correctly.
2015-20 Finding – No contract with Forest Theatre Guild for storage fees:
During our test of cash receipts, we noted there is no contract with the Forest Theatre Guild for storage fees of $135.
Effect:
Without a signed contract with Forest Theatre Guild, we were unable to verify whether the storage fees of $135 are correct.
Recommendation:
We recommend the City obtain and retain a signed contract with the Forest Theatre Guild.
Management’s Response:
Agreed. The contract had expired in the early 2000s, and the Guild has vacated the storage locker.
2015-21 Finding – Lack of approval signatures on credit card statements:
During our testing of internal control over credit card statements, we noted there were five out of six statements that did not contain an approval signature.
We recommend petty cash and related receipts be safeguarded in a petty cash box at all times.
Management’s Response:
Agreed. In the incident cited, the employee had withdrawn petty cash, purchased items, and hadn’t yet returned the receipt and left over petty cash to the cash box. The process has been tightened up, and now the excess cash withdrawn and receipts are immediately returned to the cash box, which is kept in a locked safe.
2015-19 Finding – The COPS grant revenue was being recorded to fund balance instead of a revenue account:
During our audit of the financial statements, we noted COPS grant money was being recorded to fund balance instead of a revenue account.
Effect:
Misposting of revenues results in misstated financial statements.
Recommendation:
We recommend the City record COPS grant money to the appropriate revenue account instead of recording the revenue in the fund balance account.
Management’s Response:
Agreed. The “auto” coding for the receipt of our COPS grant was erroneously crediting this revenue to the fund balance instead of the revenue account. We have had this same error in prior years and corrected it for the financial statements.
For this year, we have corrected that coding, and now all COPS grant revenue is being posted correctly.
2015-20 Finding – No contract with Forest Theatre Guild for storage fees:
During our test of cash receipts, we noted there is no contract with the Forest Theatre Guild for storage fees of $135.
Effect:
Without a signed contract with Forest Theatre Guild, we were unable to verify whether the storage fees of $135 are correct.
Recommendation:
We recommend the City obtain and retain a signed contract with the Forest Theatre Guild.
Management’s Response:
Agreed. The contract had expired in the early 2000s, and the Guild has vacated the storage locker.
2015-21 Finding – Lack of approval signatures on credit card statements:
During our testing of internal control over credit card statements, we noted there were five out of six statements that did not contain an approval signature.
Effect:
Without proper approval signatures on credit card transactions, there is an increased risk of unauthorized credit card transactions occurring.
Recommendation:
We recommend responsible officials of the City review and approve all credit card transactions to ensure that the expenses are for allowable and appropriate purposes.
Management’s Response:
Agreed/Disagree. We do agree that we should have a policy where all credit card transactions are reviewed and signed by a responsible official of the City, but we do not agree that the examples do not have the above approval signatures. When we reviewed certain purchase orders/receipts, we did find that some of those receipts were signed by administrators in different places, not the designated areas. We will make sure that all approvers sign exactly where they are instructed, and that all purchases have approval signatures.
2015-22 Finding – Lack of audit committee:
During our review of policies and procedures, we noted the City does not have an audit committee.
Effect:
Lack of additional oversight occurs when there is no audit committee.
Recommendation:
We recommend the City form an audit committee for increased oversight.
Management’s Response:
Agreed. The addition of an Audit Committee to which the auditors would report would increase control and transparency to the City Council. If the City Council agrees, this could be in place for the next financial audit.
2015-23 Finding – Inconsistent use of time clocks:
During our review of internal controls, we noted only some departments, rather than all departments, were utilizing time clocks.
Effect:
Inconsistency in the reporting of hours worked could lead to misreporting of hours and incorrect payments to employees.
Recommendation:
We recommend all departments utilize time clocks in order to ensure consistent time reporting.
Management’s Response:
Agreed. In May, 2015, the City Administrator requested that time clocks be installed for use in the Public Works Department and the Library. In September, 2015 he requested they be removed. Time clocks are not currently being utilized for payroll timekeeping in any department.
2015-24 Finding – Deposit payable accounts and fee collection accounts have debit balances:
During our review of internal controls, we noted seven deposit payable accounts have debit balances and two fee collection accounts have debit balances.
Effect:
With deposit payable accounts and fee collection accounts having debit balances, the City has balances due from customers. Deposit accounts should never have balances due as the City may not be able to collect on the outstanding balances.
Recommendation:
We recommend the City attempt collection of all debit balances on deposit accounts. Fee collection accounts with debit balances should be investigated and adjusted accordingly.
Management’s Response:
Agreed. Of the seven non-fee collection accounts, one dates back to 6/30/2011, the others are more recent. We will work on figuring out what the balances represent and correct. The two fee collection accounts have had positive balances of similar balances since 6/30/2011. We will work on figuring out what that represents and correct. With the implementation of the new finance system, we will be utilizing a more proper accounts receivable system to track these types of transactions, and we should not have the same issues in the future.
2015-25 Finding – One check issued out of sequence and one outstanding check over one year old:
During our audit of cash, we noted one check was issued out of sequence (check #3140 was issued on July 2, 2015, while #3141-3142 were issued on June 30, 2015). We also noted one outstanding check that was over one year old (check #2167, dated April 23, 2013).
Effect:
Checks being issued out of sequence makes it more difficult to perform bank reconciliations as well as ensuring the accounting of all checks. Stale dated checks could cause the cash balance to be inappropriately understated.
Recommendation:
We recommend the City issue all checks in numerical sequence and all outstanding checks that are over one year old should be investigated, sent to the state as escheat property, or written off/voided.
Management’s Response:
Agreed. We will make sure that all checks are issued in sequence and that all stale dated checks have been voided and off of the bank reconciliations.
2015-26 Finding – Petty cash is listed at incorrect amount:
During our review of internal controls, we noted the petty cash is listed as $460, yet the actual petty cash count was $230.
Effect:
The petty cash is overstated in the general ledger, resulting in an incorrect balance on the financial statements.
Recommendation:
We recommend the City reconcile and count the petty cash on a regular basis, and that the petty cash be recorded in the general ledger accurately.
Management’s Response:
Agreed. The City has multiple petty cash locations: City Hall, Police Department and the Library (2 locations). The balances in each of these locations are as follows: City Hall - $250, Police Department - $100, Library #1 - $100, Library #2 - $275, for a total of $725.00. On the general ledger, the City shows two “Petty Cash” accounts. One is listed at $725.00, and the other at $150.00. In 2007, a petty cash fund was established for the Fire Department, but was discontinued in 2011. The lock box was returned to Finance, the contents (less receipts) were deposited to bank. The Petty Cash listed is now correct.
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