Loading...
HomeMy WebLinkAbout1998-172 Audit Report - Yergen & Meyer YERGEN AND MEYER Certified Public Accountants and Consultants October 26, 1998 36 Hawthorne St. P.O. Box 879 Medford, OR 97501 Members of the Audit Committee Phone: (541) 773-8488 City of Ashland Fax: (541) 779-9601 Ashland, OR 97520 ww-w. yergen.com AUDIT SCOPE AND REPORT In compliance with the Oregon Municipal Audit Law, we were engaged to audit the fiscal affairs, accounts and financial statements of the City of Ashland for the year ended June 30, 1998. Our audit was designed to comply with the requirements of: Generally accepted auditing standards. The Oregon Municipal Audit Law and related administrative rules. - Programs funded with financial assistance Provided by the U.S. govemment, the state of Oregon or other agencies. Our audit included examining on a test basis evidence supporting the amounts and disclosures in the general purpose financial statements. We also assessed the accounting principles used by the City and evaluated the overall financial statement presentation. Portland Bellevue Audit tests performed included: Eugene Medford Reading the City Council minutes, resolutions and ordinances North Bend to understand the extent to which the City Council is advised Chehalis of budget, accounting and financial-related matters. Pendleton Astoria Confirmation of major revenues such as property taxes, franchise taxes, motel taxes, special assessments, intergovernmental revenue and grants. - Analytical review and detail tests of utility service revenue and related cash receipts. - Vouching of high dollar expenditures for materials and services, debt service and capital outlay. Reconciliation of payroll reports and records to the financial statements. Analytical review of fringe benefits. Vouching of retirement plan expenditures. In addition to these financial audit procedures, we also: Reviewed and evaluated the City's internal accounting controls over its financial affairs in general, with specific attention to those controls that assure compliance with the requirements of major federal programs. Reviewed the City's investment policy and specific investments to determine compliance with legal requirements. Reviewed bank FDIC coverage of City deposits and collateral pledges covering deposits in excess of FDIC coverage's. Reviewed the City's outstanding debt activity to determine compliance with legal and contractual requirements. Reviewed the City's budget process to determine that the budget is prepared, reviewed, adopted and executed in accordance with the requirements of the Oregon Local Budget Law. Reviewed the City's insurance program to determine if coverage's comply with state law, City Charter or other requirements. Reviewed the City's participation in programs funded by the state of Oregon. Reviewed the process used to award public contracts to ascertain compliance with the Oregon Public Contract Review Law. - Reviewed the City's expenditure of state street tax revenues for compliance with related constitutional and statutory requirements. Reviewed the City's expenditures of federal financial assistance to determine if those expenditures were for allowable purposes. Reviewed the City's compliance with the requirements of laws, regulations, grants and contracts applicable to its major federal programs. Based on our audit, we conclude and report to you: On pages 1 and 2 The financial statements are prepared in accordance with generally accepted accounting principles and City Council accounting policies. 2 The financial statements of the City's funds and account groups fairly present the financial position and results of its operation for the year ended June 30, 1998. On page 102 through 104 The City has complied with the standards and expectations of the State of Oregon regarding its fiscal affairs, budgeting and financial reporting. On pages 105 through 113 We found no instances of non-compliance with federal requirements, nor did we question any costs incurred with federal funds. However, we do believe improvement can be made in the administration and management of federal funds. OTHER MATTERS We found that the books and records of the City of Ashland were maintained in a very professional manner throughout the 1997-98 fiscal year and were in excellent condition for audit. The budget was professionally managed in accordance with Oregon Local Budget Law. The budget document is of very high quality and should prove to be an excellent tool for the budget committee and City Council in their oversight of the City's budgetary and fiscal affairs. The 1996-97 audited CAFR was prepared for submission to the GFOA review program. After review, it was judged to have achieved the highest standards in government accounting and financial reporting and was awarded a Certificate of Achievement in Financial Reporting. The 1997-98 CAFR has also been prepared for submission to the GFOA review program. We believe it continues to meet the established criteria that will result in the award of the Certificate of Achievement for Excellence in Financial Reporting. We commend the City Council for giving their support to the City's participation in the GFOA program that reviews the comprehensive annual financial report. Participation in the program not only brings the award for outstanding financial reports but also critique suggestions which, when implemented, result in a public policy document which presents extremely technical financial data in a more understandable format, allowing decisions to be made with a degree of insight not otherwise achievable. RECOMMENDATIONS Budget1GAAP basis differences For budget purposes, all City/APRC funds use the modified accrual basis as if all funds are governmental-type funds; however, for GAAP (generally accepted accounting principles) financial reporting purposes, each fund type, whether governmental, proprietary or fiduciary, must use the accounting basis most appropriate to the fund type. Governmental funds and expendable fiduciary funds use the modified accrual basis for financial reporting, as well as for budgeting. The proprietary and non-expendable trust funds use the full accrual basis for financial reporting. The differences between the budgetary basis and accounting basis include: • Basis Basis differences refer to transactions recognized on the budget basis but not on the GAAP basis, or vice versa. • Timing Timing differences refer to transactions recognized on both the budget basis and GAAP basis, but in different fiscal periods. Perspective Perspective differences exist when a fund is used for budgetary purposes; but for GAAP purposes, the same transactions are reported in a different fund. • Enti Appropriated budgets may not be necessary for all funds, but it may be necessary to include those unbudgeted funds in the GAAP financial report. The City/APRC CAFR includes basis, timing, perspective and entity differences. Each difference is unique and complicates the financial reporting aspect of our audit engagement. The determination, accounting, reconciliation, and reporting of these differences range from easy to very difficult, while impact on audit hours required ranges from none to many. To make the process easier to do each year, we recommend the procedures to do so be written and flow charted, and any necessary work sheets be developed by City staff. City staff maintains an analysis of the split-out of the General Bond Fund debt service transactions by issue. This analysis proves very helpful when preparing the GAAP-based statement, but would be even more helpful if split out by the GAAP reporting fund. Additional City-Staff-maintained documentation is necessary for identifying the expenditure source of fixed assets to make the fixed asset component of the budget to GAAP conversion easier. STATUS OF PRIOR YEAR RECOMMENDATIONS The following two recommendations were provided by your former auditors: 4 Formal documentation of key computer controls and procedures A formal written Disaster Recovery Plan, Program Change Management policy, and Security policies and procedures are crucial to ensure proper controls are being followed over the computer environment. Without formal written procedures, the following risks may occur: - Recovery from loss of computing power may not be assured. - Integrity of computer applications and data can adversely be affected. - Sensitive data could be accessed or changed by persons not authorized to alter applications and key information. The City has certain standard practices and procedures that are followed, but a formal written policy is not in place for the three key computer control policies listed above. We recommend the City implement formal written policies. Current status - open. Determine impact of the year 2000 for computer applications As the year 2000 approaches, a critical issue referred to as °Y2K" has emerged regarding how existing application software programs will be able to accommodate this date value. With two- digit year date processing logic, the year 1999 (i.e., '99) could be the maximum date value most systems will be able to process logically. When systems attempt to process a date in the twenty-first century (e.g., 2000), the system may record the year as '00 or 1900, and many IT experts believe data integrity problems and erroneous data calculations will occur and cause many application systems failure. We recommend the City examine systems to ensure that all areas are addressed, from PC and server level. The City should then assess and allocate the required resources to correct any problem. Current status - open. GASB has recently issued a technical bulletin, 98-1, which requires footnote disclosure of Y2K impacts, analysis, and corrective action plans for financial reports covered by auditor's opinion dated after October 31, 1998. The following six recommendations were provided by us, following our 1996-97 audit: Contributed capital An analysis of the contributed capital accounts in the proprietary fund types can be enhanced by the use of schedules of activity. We recommended the City maintain work schedules which indicate the beginning balances, the changes in the account and the ending balances of each fund's contributed capital account. The beginning balances should be in agreement with the prior year CAFR. The current year activity should be the amount of assets capitalized that are in excess of the capital outlay expenditures. This excess amount represents capital expenditures in other funds for assets capitalized in the proprietary fund types. The activity will 5 also include a reduction for the current year's depreciation expense allocated to contributed capital. The contributed capital account is a critical benchmark in knowing if the budget to GAAP conversion was properly done. It is important for the staff to set the benchmark because the audit staff does the actual conversion to GAAP. Current status - partially implemented. This recommendation is now part of our current year recommendation to document the entire budget/GAAP analysis. Fund structure In the process of preparing the budget presentation for the Comprehensive Annual Financial Report, we found the ledger fund structure to be different than the fund structure contained in the annual budget. As a result, certain funds required combining prior to reporting the funds on the budget basis in the CAFR. On the budget basis, the Water and the Wastewater Funds had sub-funds for accounting convenience which required combining for budget statement reporting purposes. Then, for GAAP reporting, the General Bond Fund needed to be separated into the Water Fund and the Electric Fund to account for the debt service reported in those funds. We recommended the budget be adopted as close as possible at the same fund level as the financial recording of the funds to make the GAAP presentations easier to do. Specifically, we recommend the City budget include a Water General Bond Fund and an Electric General Bond Fund. We thought this would better facilitate the combining process necessary to present the Water and Electric Funds on the GAAP basis. We also recommended the practice of using sub-funds be discontinued because the present accounting system cannot combine these sub- funds into the actual budgeted fund. If the continued use of sub-funds was determined to be absolutely necessary, we recommended the City staff evaluate new accounting software that would allow the fund structure flexibility desired. Current status - The City staff developed accounting workpapers to analyze and allocate the General Bond Fund debt service activity. It is also our understanding that City staff is currently evaluating new accounting software that will allow the desired fund structure flexibility. Our current recommendation to document the budget to GAAP reporting process is related to this prior recommendation. Fixed assets The City's General Fixed Asset Account Group should account for all of the governmental fixed assets owned by the City. We noted that the fixed assets at Ski Ashland, Ashland Hospital, and Shakespeare, which are owned by the City, were not included in the City's General Fixed Asset Account Group. We recommended that the City develop procedures to account for the changes in fixed assets of the Ski Ashland, Ashland Hospital, and Shakespeare. Current status - implemented. Future debt service In the Other Financial Schedules section of the CAFR, we included debt maturity schedules of the individual bond issues. These were necessary to show the detail of the debt maturities of the long-term debt footnote. The summarized nature of the long- term debt footnote precludes the ability to determine the maturities of the individual bond issues. We recommend the City 6 maintain these schedules and incorporate them into the budget document. In addition, these schedules are necessary to prepare Tables 9 and 10 of the CAFR Statistical Section. Current status - implemented. Controls over federal programs As noted on pages 108 of the CAFR in the Findings and Questioned Costs of Major Federal Award Programs Audit, the City does not maintain written policies and procedures for the specific administration, management, and control of federal programs. Internal controls should be in place that provide reasonable assurance that administration of federal programs is in compliance with federal rules and regulations. We recommend written policies and procedures be developed that are specific to the federal programs carried out by the City. A copy of a checklist of audit procedures used by auditors for testing controls over federal financial assistance programs has been provided to City staff for their background and to use in developing written policies and procedures. Current status - open. Statistical section tables We reviewed the unaudited statistical section tables for agreement with statements and disclosures in the audited sections of the CAFR. Several tables did not agree with related audited financial information. It is possible, that because the schedules are unaudited, they no longer conformed to the basis of presentation of the CAFR. We were specifically concerned with Tables 3, 9, and 10. We recommended City staff thoroughly review the purpose of these tables and the information presented. Current status - implemented. REPORTING ENTITY GASB No. 14, "The Financial Reporting Entity," provides guidance about which funds a governmental entity should include in the financial statements of the governmental reporting entity. The financial reporting entity should be built around the concept of financial accountability. Governmental financial reporting entities consist of the primary government and organizations for which the primary government is financially accountable. In evaluating the City as a reporting entity, all potential component units (traditionally separate reporting entities) for which the City may or may not be financially accountable must be evaluated for inclusion within the City's financial statements. Blended component units, although legally separate entities, are, in substance, part of the government's operations, and so data from these units are combined with data of the primary government. Discretely presented component units are reported in a separate column in the combined financial statements to emphasize they are legally separate from the government. In accordance with Governmental Accounting Standards Board (GASB) Statement No. 14, the City (the primary government) is financially accountable if it appoints a voting majority of the organization's governing board and (1) it is able to impose its will on the organization or (2) there is a potential for the organization to provide specific financial benefit to or impose specific financial burden on 7 the City. Additionally, the primary government is required to consider other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete. The City Council appoints the boards of director of the Ashland Community Health Service, and the Ashland Parts and Recreation Commission ("APRC") appoints the board of directors of the Ashland Parks Foundation. This appointment authority appears to be solely a ministerial duty because once appointed, the board members are free to exercise their policy judgment, consistent with the missions of each non-profit corporation, and neither the City nor the APRC has a financial responsibility for either corporation. In addition, these organizations are not financially accountable to the City or the APRC. On the other hand, the Ashland Parks and Recreation Commission is a component unit of the City because, by state law and the City Charter, the APRC's budget and tax levy must be included as part of the City's budget and tax levy. The City also must approve any debt issuance and has ultimate financial responsibility for the APRC. Both City and APRC management considered the Ashland Parks and Recreation Commission, the Ashland Parks Foundation, and the Ashland Community Health Care Service as potential component units. After consideration, management determined that the Ashland Parks and Recreation Commission is the only organization that should be included in the City's financial statements as a component unit. Management also determined the APRC should be accorded discrete presentation status. They also concluded that the Parks Foundation was not a component unit of the APRC. We concur with these determinations. IMPLEMENTATION OF NEW APPLICABLE GOVERNMENTAL ACCOUNTING STANDARDS During 1997-98, GASB No. 32 was implemented by the City. GASB No. 32, "Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans," allows for the rewording of the footnote disclosure regarding the ownership of compensation deferred under a 457 plan. As previously worded, all property and rights relating to such amounts, and all income attributable to such amounts, property, or rights was owned by the City until made available to the participant or other beneficiary. On August 20, 1996, the provisions of IRC Section 457 were amended by adding subsection (g). That subsection now requires, that to be treated as an eligible deferred compensation plan, all assets and income of the plan described in subsection (b)(6) to be held in trust for the exclusive benefit of participants and their beneficiaries. The subsection also explains, that with respect to a plan in existence on the date of the enactment of the new IRS code section, a trust need not be established to comply with the amendment before January 1, 1999. To comply with the amended IRS code section, the City established a trust for each of its deferred compensation plans. It is our understanding that all City plans have been amended. The Plan assets have been removed from the City's Agency Fund, and the footnote revised. This revised wording of the pension footnote now indicates the plan assets are owned by the participants and their beneficiaries and not by the City. 8 REQUIRED COMMUNICATIONS TO THE AUDIT COMMITTEE Statement on Auditing Standard No. 61 requires the following matters be communicated to the Audit Committee: Matters to be Communicated Comments 1. Changes in significant accounting policies. No significant changes in accounting policies were implemented in 1997. 2, Management judgments and accounting estimates. Self-Insurance: The City is currently self-insured for general liability and workers' compensation up to $50,000 and $300,000, respectively. City assesses reserves on an annual basis for adequacy. Post Retirement Benefits: During 1997-98, the City changed its account- ing policy from a pay-as-you-go basis to an advance-funded basis. This change resulted in an accrual of a $264,000 liability in the Insurance Services Fund. Future benefit payments will be charged to the accrued liability. On an annual basis, the amount of liability will be re- estimated and adjusted accordingly. Commitments and Contingencies: The City's wastewater treatment plant requires significant upgrades to meet new standards established by the Oregon Environmental Quality (DEQ) Commission based on the Federal Clean Water Act. The City had a third party evaluate options and establish costs and has submitted a plan to meet the new standards to the DEQ. Management believes the estimated costs will be approximately $26,500,000, to begin in September 1998, and complete during summer of the year 2000. This future commit- ment is disclosed in the CAFR. Matters to be Communicated 3. Significant audit adjustments. 4. Disagreements with management. 5. Management's consultation with other accountants. 6. Major issues discussed with management in connection with our retention, primarily related to accounting principles and auditing standards. 7. Difficulties in dealing with management related to performing the audit. Comments Depreciation: The City's proprietary funds (enterprise and internal service) capitalize the costs of purchased fixed assets, or estimated fair market value in the case of donated fixed assets. Once capitalized, the cost is charged against future year operations as depreciation expense. Estimated useful lives used in computing depre- ciation range from 2 to 70 years, de- pending on the fixed asset charac- teristics. The 1997-98 depreciation in the enterprise funds is $1,154,730, and in the internal service funds it is $560,199. None None None None None 8. The auditor's responsibilities in a financial Oral comment, also reference to statement audit, including their respon- auditor reports required by sibilities for testing and reporting on Government Auditing Standards. internal controls and compliance with laws and regulations. 9. The nature of any additional testing of As required by Minimum Standards for internal controls and compliance required Audits of Oregon Municipal Corpor- by laws and regulations. ations, the following items are tested: Budget Compliance Debt Requirements Collateral Requirements - Awarding of Public Contracts and Construction of Public Improvements - Investments of Public Monies 10 Matters to be Communicated Acknowledgments Comments - Uses of motor vehicle use and fuel tax revenues - Programs funded by other agencies Separate audit reports are issued in the Compliance Section of the CAFR. Such reports relate to the City's internal controls, compliance with laws and regulations, and compliance with requirements related to its major federal financial award programs. In closing I commend the City Director of Finance, Jill Turner, CPA, for her assistance, and that of her department staff, during the audit. I also thank the City Staff Accountant, Patrick Caldwell, for his advice, interest, and support during the audit. If you have any questions concerning my audit please call. GWB/mg Gerald W. Bums, CPA Partner 11