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HomeMy WebLinkAbout2008-10-29 Audit Commission Minutes Audit Committee Draft Minutes October 29, 2008 2:00pm Council Chambers 1175 East Main Street Call to Order Lee Tuneberg, Administrative Services and Finance Director called the the Audit Committee meeting to order at 2:25 p.m. on October 29, 2008 in Council Chambers, 1175 East Main Street Ashland, Oregon. Everson/Navickas ms for Nutter to be chair. All Ayes Roll Call Committee members Christensen, Emerson, Nutter, Navickas were present. Member Lemhouse was absent. Staff Present: Martha Bennett, City Administrator Lee Tuneberg, Administrative Services and Finance Director Cindy Hanks, Finance Division Manager Bryn Morrison, Account Representative Melissa Huhtala, Administrative Secretary Also Present was Kenny Allen, Partner, Pauly, Rogers, and Co. P.C. Approval of Minutes Audit Committee Minutes of October 29, 2007 Nutter requested that the committee members be given a copy of any reports and/or letters on significant deficiencies issued by the accountants, together with the staff’s responses to those significant deficiencies, in advance of the audit committee meeting. Nutter indicated that he could do a better job if he was given the accountant’s report and the staff’s response in advance of the committee meeting. Navickas/Everson ms to approve the minutes as amended. All Ayes. AUDIT COMMITTEE MEETING OCTOBER 29, 2008 - PAGE 2 OF 8 Presentation by the Auditors A. Audit 1. Component Unit Financial Report (CUFR) 2. Parks Management Letter 3. Comprehensive Annual Financial Report (CAFR) 4. City Management Letter B. Report from Staff Presentation By the Auditors: Kenny Allen presented to the Committee the purpose of the audit. He spoke to a new presentation required for audits and the responsibility under generally accepted accounting standards is to express an opinion on how the financial statements are prepared. He explained the results of the audits had a non qualified opinion. He added that as shown on page 70 in the Parks CUFR, there was one transaction found that did not comply with the regulations to obtain a bid.He explained how there were significant deficiencies noted in the Parks Management letter. These were due in part to new standards required in the letter and there will be more to come in the future. He stated that in accordance with the terms of the engagement letter, they will advise management about the appropriateness of accounting policies and their application. For both reports, the policies can be scene in Notes to the Financial Statements. The Committee discussed Investments made by the City and that they are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events. There were not any risky investments found and if there were, they would have to be disclosed. Mr. Allen spoke to the new requirements of SAS 114, see attached. Parks management letter: Mr. Allen presented the management letter. The first comment was the City and the Parks need to formalize their Intergovernmental Agreement for accounting services. There is no formal agreement between the two organizations, and this could lead to a miscommunication between the parties for who is responsible for specific financial tasks. That was the only significant deficiency in the 2007-2008 audits. Mr. Allen spoke to the deficiencies noted in the prior year audit. The first item was that the Commission does not have a written internal control policies and procedures document. In applying SAS 112 it is believed that the Commission should adopt formal policies/procedures for all accounting areas, especially as it pertains to internal controls AUDIT COMMITTEE MEETING OCTOBER 29, 2008 - PAGE 3 OF 8 and the identification of key controls. The audit did not uncover significant deficiencies pertaining to these areas other than the items noted. Second the Commission’s Recware software is not integrated into the general ledger. Segregation of duties requires the Commission to post all of their activity into the GL themselves, and then have the City’s finance department reconcile the accounts. The Auditors recommended that the Recware system be integrated into the Eden GL system. Also noted was that manual adjustments to the Recware system were not reviewed on a periodic basis. Segregation of duties requires that at least two employees review these manual changes. The auditors recommend that periodically the manual journal log be printed out and signed off and reviewed by two Parks employees. Third, the Parks shredded their golf receipts for the year. The Parks only kept three months of golf receipts at a time. The auditors recommend that the Parks keep receipts for at least five years or more depending on the records retention policy of the City and Parks and Oregon Law. Forth, the Golf Course has two cash registers, one for tracking the Golf Pro’s revenues and the other for the Commission’s revenues. The auditors recommend that there only be one cash register so that money is not moving between registers. Also recommended is to purchase computerized software that acts as a cash register as well as tracking golfer information. Last, the auditors found that the golf deposits did not have Park’s Management initials showing that they reviewed the deposit. The auditors recommend that all deposits have someone in Parks initials on it to show that the deposit has been looked over. Also if there are questions on a deposit, any resolution of the question should be fully documented somewhere on the deposit. Mr. Tuneberg spoke to the staff responses to the auditor’s letter. In the opening of the letter it stated that accounting functions were outsourced to the City based upon a suggestion from the Budget Committee in 2002. Parks and City staff has worked on an agreement of services exchanged for many years. In 2008-2009 the two will work to clarify roles. The 2006-2007 audit first noted the SAS 112 requirement on internal controls. Staff did work on it primarily in City Hall where the cash handling takes place. Procedures were written and training was given on cash handling. Mr. Tuneberg spoke to item number two, that the Recware software needs to be integrated with Eden. This also will be looked into the in next fiscal year as staff is available. Item three was addressed immediately and the golf receipts have not been shredded since. Item four has been addressed, however the two cash registers have not been replaced. Handling of cash has been changed and control of what is going into which register. Management and Parks are looking at the operation currently. AUDIT COMMITTEE MEETING OCTOBER 29, 2008 - PAGE 4 OF 8 Committee Discussion The Committee questioned the allegations made about cash handling and money at the Golf Course published in the Daily Tidings. Don Robertson, Parks Director responded to this question and commented that they did receive allegations and did investigate. They also involved the Finance Department and Auditors. They have not identified that there was anything inappropriate. Changes in procedures have been made in response to the allegations and they will continue to look at how they manage it. The Committee questioned what the allegations were. Mr. Robertson responded that there was an instance that golf was exchanged for pizza, and also an overage in a register that was not handled appropriately. They looked at all the cash handling with city recorders office and finance to see how they are doing business. The Committee questioned if there is a way to monitor cash receipts. Mr. Robertson responded that they balance them daily and if a discrepancy is found, an explanation in writing is expected. Barbara Christensen, City Recorder commented that the City is tightening up on this topic and the receipts are crossed checked by three different departments now and are pleased with the process now. The Committee asked Mr. Allen to comment on the situation. He said they looked at the procedures and most of the instances were money moving between the registers where the problem stemmed from. The Committee questioned if this is something that the auditors will catch in the future if it occurs again. Mr. Allen responded yes if it was big dollar amount however, something like exchange for a pizza isn’t as significant. The Committee questioned the substantial increase on the program revenues, in operating grants and contributions on page 5. Mr. Tuneberg responded that was revenue to the Parks itself such as payments from schools, and services that were provided outside the Youth Activity Levy. The school district went away from using City services in 2006 then came back to result in a significant portion of fees showing the increase. City Management report: Mr. Allen discusses the City Management report. The first comment for FY 2007-2008 the auditors noted is that the Information Technology (IT) department does not have a cohesive written internal control document that details out their internal controls over their internally developed utility billing system. They also noted that there was no cohesive written internal control document that details the general controls over all computers and systems City-wide. They recommended the City develop written internal control procedures for these areas. They also recommended that IT department have an external review of the processes and controls from an outside entity. Second they noted that the Community Development accounts receivable detail contained many items which were either extremely old or items that have already been paid. They recommended that the Community Development Department reconcile and review their listing of accounts receivable and either write the receivable off because the item had been paid or follow up with the customer to obtain payment. AUDIT COMMITTEE MEETING OCTOBER 29, 2008 - PAGE 5 OF 8 Response to the Management letter: Mr. Tuneberg responded to the auditor’s comments. He first pointed out that management letters are geared toward deficiencies and not what is done right. It is shown that the City has done a lot better this year. This year the City only has two comments instead of multiple comments. Although they did not clear all the comments from the prior year, they have improved the operations and staff is doing the best work in accounting in years. The first comment goes back to 2003 and the City has had this issue with documentation and controls in IT and they need to get a formalized IT plan. This is high on the City’s priority list. IT did provide some documentation to the auditors but not enough. They Finance Department needed the documentation before the review. They will continue to work with the IT department. Item number two speaks to the interface of the sub ledger from the Community Development Department. Mr. Tuneberg commented that the City has many sub ledgers that either integrate or manually integrate into the general ledger. They will work on clearing this comment this year. The Committee asked for further clarification on the first comment. Mr. Tuneberg responded that the City’s biggest receivable is the utility software that was built by city staff and is operated by city staff. It has been viewed by the auditors that the City needs good documentation on the software and compliance and the auditors cannot rely only on what the City says happens and needs it in writing. He explained that the City needs the documentation and will have an outside party go over it. The Committee asked for clarification on if the people who write the documentation and write the software are in control themselves of the whole revenue system. Martha Bennett, City Administrator responded that because it’s not documented and because the sign off policy isn’t in place, the IT staff could make changes. The Committee commented on how the individual staff members are also completely unprotected as individuals and urged this issue to be addressed as soon as possible. The Committee commented that they feel that the finance department is grossly understaffed. Mr. Tuneberg responded that the City has has people that wrote the code and could make errors that could lose the City money is what the concern is but there is not much they can do about it. Mrs. Bennett also responded that it is not just finance that is understaffed; the City has reduced the funding of its internal employees. If the City wants to get pass these exceptions, money needs to be put into overhead. The Committee questioned Mr. Allen on if this comment was taken care of, how the auditors would check the restrictions. Mr. Allen responded that the City should have a manual log that shows all changes made in the source code and also make sure that it is reviewed by the appropriate management. The Committee questioned the comment regarding Community Development and if there are other departments that are in charge of billing. Mr. Tuneberg responded they have their own system, it’s recorded and goes into that system and integrates into the GL, and the ones that need to be AUDIT COMMITTEE MEETING OCTOBER 29, 2008 - PAGE 6 OF 8 cleaned up are out of that system. He added that staff is half way there as of this meeting. The Committee asked if there were any receivables so stale that were beyond the statue. Mr. Tuneberg responded that they are not sure at that time and the issues are input errors not collection errors. The Committee asked if the City has the ability to lien a property on these issues if someone had not paid. Staff responded that it would depend on how much money it would be. The goal is to be done cleaning this up by December and they should see a better report next year.The Committee asked Mr. Allen how long they let aging items go. Mr. Allen responded that they look at things like this and the reason they made a comment this year is because it hadn’t been cleaned up from previous year. It is not a significant dollar amount, but when things haven’t been cleared in the next year after the original finding, they have to make a comment. The Committee asked Mr. Allen what his concerns were for the City. He responded developing documentation in IT, documenting internal control, and design processes to segregate duties as much as possible. Mr. Tuneberg questioned Mr. Allen on the newer SAS coming out on the risks and how it played a role in the audit. Mr. Allen informed the Committee on the new auditing standard that was implemented in the year called the risk assessment. The role it played in this years audit was auditors make sure to apply risk procedures for the City of Ashland and test those risks. This new risk assessment requires more documentation and conclusions. There will not be an increase in the cost for this implementation. Committee Reflection Questions: Guy Nutter, Committee member read in the Ashland Daily tidings that, Bonneville paid the City $652,870, $600,000, and $150,000 and was wondering if that money is reflected in the financial statement. Mr. Tuneberg responded that part of it is, and would like to clarify that they $636,000 the City received last spring, by Council’s direction was put it in the debt service fund to offset future debt service primarily related to the AFN debt. This year the City budgeted to receive $160,000 and there is not an amount of $652,870. The City however will be receiving additional credits from BPA of about $54,000 a month and this will happen in October 2008 through September 2009. The Committee questioned how the one percent is shown. Mr. Tuneberg responded that they City will see this credit in the financial reports for June 30 2009, and they might see a smaller cost in wholesale power and it will show in the electric fund. The Committee questioned the decrease of net assets on page 9 as compared to the increase in active residential meters, but reduced utility sales. Mrs. Bennett responded that was due to the weather and when the City experiences mild weather, not as much water or electricity is used. The Committee questioned the decrease in total grants and contributions by 63%. Mr. Tuneberg responded by explaining that Grants come and go and sometimes the City receives them, but they fluctuate dramatically, and the City received less this year. The AUDIT COMMITTEE MEETING OCTOBER 29, 2008 - PAGE 7 OF 8 Committee asked for clarification on page 11 and the statement under governmental activities for those who directly benefitted from the offered programs. Mr. Tuneberg responded that those amounts represent services paid directly for programs that are shown on page 20. The Committee asked Mr. Allen why the low staffing level is not shown as an audit comment. Mr. Allen explained that part of the audit is not telling the City how to spend its money. If there was a large segregation of duties issue, it would be noted in the audit. The Committee asked what the large increase was due to in the Highways and Streets on page 10 and if it will continue. Mr. Tuneberg responded that fluctuations will continue and explained how the City shows expenditures on capital intensive activities. The City had less to capitalize in FY 2008r than in FY b2007 because there was less work that we done in the street fund and have been held up on projects. The Committee questioned the bond ratings on page 15. Mr. Tuneberg responded that the City uses the 2003 ratings for the revenue bonds because that was the last time the City went out and sold bonds competitively. The Committee asked Mr. Allen to explain the Deposits and Investments on page 43, section III A. and the deposits not recovered as required by law at the end of the year. Mr. Allen responded that there is a difference between Oregon law and GAAP (Generally Accepted Accounting Principles). GAAP is what was reported. The banks require that they only have to insure 25% of a certain amount and GAAP covers 75%. The City will always have a comment showing that they are under-collateralized for GAAP purposes, but for Oregon law, they are fine. The Committee questioned the increase in unpaid claims from FY 2007 on page 56. Mr. Tuneberg explained that the City looks at the claims each year as to what is outstanding and what can be reported as actual claims and what is incurred but not accrued. The Committee questioned the post employment benefits on page 58 and the rate of return used of 6% and what it will look like next year. Mr. Tuneberg explained that by next year the City hopes that it will be lower. The amount the City pays on liabilities will fluctuate. The Committee questioned potential liabilities and possible land contamination. Mr. Allen responded that the auditors do not know if there is a liability of clean up until the study is done. If the regulators tell the City they have to clean up then that is when the auditors would look into the liability. The Committee commented that there was a decrease in the police department with physical arrests and traffic violations and yet we had an increase of 14% in the budget for the public safety. Mr. Tuneberg responded that increase costs for operating the emergency services and municipal court may not be directly related to how many tickets the City writes on the street. In the prior year, the police department was not fully staffed so that makes that percentage of personnel cost swing dramatically and the ability to write as many tickets. AUDIT COMMITTEE MEETING OCTOBER 29, 2008 - PAGE 8 OF 8 The Committee questioned uncollected taxes on page 36 of the Parks report and the possibility of placing a lien on a property. Mr. Tuneberg explained that these liens are run through the county. Christensen/Nutter ms to accept the audit as presented. All Ayes. Public Input There was no public input. Committee Discussion Mr. Tuneberg suggested that the letter that goes into the City’s financial report be signed by the chair instead of all members. Christensen/Navickas ms for the letter to be signed by the chair. All Ayes. Review of Audit Contract Fiscal Year 2008-09 is the third year of a three year contract. Next year the City will have to decide whether to extend for another year or whether they go out to bid. Next spring the Audit Committee will get together and talk about what they would like to see happen in the upcoming audit. Before closing Mr. Tuneberg thanked everyone that gave their support and time. Adjournment The meeting was adjourned at 4:40 p.m. Respectfully Submitted, Melissa Huhtala, Administrative Secretary Administrative Services Department