R K O runyon kersteen ouellette cpa expresses opinions on financial statements. Audit was not designed to identify all deficiencies in internal control. Deficiency in internal control exists when design or operation of control does not allow management or employees to prevent, or detect and correct misstatements on a timely basis.
Original Description:
Original Title
Auditors Letter: To the Management of the City of Lewiston, Maine and the Lewiston Public Schools
R K O runyon kersteen ouellette cpa expresses opinions on financial statements. Audit was not designed to identify all deficiencies in internal control. Deficiency in internal control exists when design or operation of control does not allow management or employees to prevent, or detect and correct misstatements on a timely basis.
R K O runyon kersteen ouellette cpa expresses opinions on financial statements. Audit was not designed to identify all deficiencies in internal control. Deficiency in internal control exists when design or operation of control does not allow management or employees to prevent, or detect and correct misstatements on a timely basis.
Certified Public Accountants and Business Consultants December 9, 2011 To the Management of the City of Lewiston, Maine and Lewiston Public Schools: In planning and performing our audit of the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of City of Lewiston, Maine as of and for the year ended June 30, 2011, in accordance with auditing standards generally accepted in the United States of America, we considered City of Lewiston, Maine's internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City of Lewiston, Maine's internal control. Accordingly, we do not express an opinion on the effectiveness of City of Lewiston, Maine's internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be deficiencies, significant deficiencies, or material weaknesses and, therefore, there can be no assurance that all such deficiencies have been identified. In addition, because of inherent limitations in internal control, including the possibility of management override of controls, misstatements due to error or fraud may occur and not be detected by such controls. However, as discussed below, we identified a certain deficiency in internal control that we consider to be a significant deficiency. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency or combination of deficiencies in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. We did not identify any deficiencies in internal control that we considered to be material weaknesses. 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. We consider the deficiency in the City of Lewiston, Maine's internal control and presented in the "Schedule of Comments" attached to this letter, to be a significant deficiency. In addition, we noted other matters involving internal control and its operation that we have reported in the section "Other Comments." The City of Lewiston and the Lewiston Department of Public School' s response to the deficiency identified in our audit is described in the accompanying schedule of comments. We did not audit this response and, accordingly, we express no opinion on it. 1 To the Management of the City of Lewiston, Maine and Lewiston Public Schools: Page 2 We wish to express our appreciation for the cooperation and assistance we received from the officials and employees of the City of Lewiston, Maine and Department of Public Schools 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 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. This communication is intended solely for the information and use of management, City Council, the School Committee, and others within the organization, and is not intended to be and should not be used by anyone other than these specified parties. Very truly yours, 2 CITY OF LEWISTON, MAINE Schedule of Significant Deficiencies and Other Comments June 30, 2011 SIGNIFICANT DEFICIENCY (Non-material Weakness) School Department Audit Adjustments (repeat from 2010, 2009, and 2008) The Statement on Auditing Standards #112 requires external auditors to determine whether or not client personnel designated as having responsibility over the financial reporting process possess the expertise to identify all financial reporting matters in compliance with generally accepted accounting principles without the reliance on external auditors. From a practical standpoint, the costs of maintaining the expertise in-house to meet these requirements often exceed the benefit. As a result, it is common practice for governmental entities to rely on assistance from their auditing firm to identify and propose audit adjustments, some of which are material, during the preparation of the financial statements and the related disclosures and to assist in the preparation of financial statements. Unfortunately, when this approach is taken, the School Department is considered to have a control deficiency in the design of internal controls over the preparation of the financial statements in accordance with generally accepted accounting principles, and as a result, we are required to report this as such in this letter. We provided management with a number of audit entries as a result of our audit procedures which we feel are more than inconsequential. We recommend a more thorough review of monthly financial reports be performed to ensure that misstatements are identified and corrected throughout the year. Management's Response: The Lewiston School Department Business Office will conduct monthly reconciliations of general ledger accounts to check for variances and eliminate the need for year-end audit adjustments. All reversing entries will be made following the completion of the audit by the independent auditors. 3 CITY OF LEWISTON, MAINE Schedule of Significant Deficiencies and Other Comments, Continued June 30, 2011 OTHER COMMENTS School Department Administration During the past few years, we have noticed the School Department's difficultly in keeping up with all of its administrative requirements. Part of this is due to the increase in federal funding and the complex requirements that come with that funding. In order to improve the overall structure of the administration, the School Department should consider splitting the Business Manager position into two positions: Controller and Grant Administrator. The Controller would be directly responsible for the oversight of the accounting staff and the accounting records. The Grant Administrator would be responsible for tracking the grant balances, reconciling the accounting records with those of the grant directors, and ensuring that the School Department has met its reporting requirements. The Grant Administrator would report to the Controller and assist the Controller with the grant-related accounting records. School Department Cash Currently, the School Department has three separate bank accounts, one for its special revenue funds, one for its school lunch program, and one for its adult education program. These accounts are tracked by three separate individuals who must reconcile the accounts and track the cash receipts and cash disbursements. In order to improve efficiency, the School Department should consider consolidating cash functions. If the School Department had one checking account, it could consolidate cash receipt and cash disbursement functions, as well as reduce the amount of time it takes to reconcile all three accounts and reduce the number of warrants run during the year. The School Department should also consider assigning one of its personnel to track and record all cash receipts, and another staff person to track all cash disbursements. In addition, the bank reconciliations should be done by a staff person other than the personnel who track the cash receipts and cash disbursements and should be reviewed and signed off by the Business Manager/School Department Controller. Management's Response: The Lewiston School Deportment will consolidate the cash accounts of special revenue, school lunch, and adult education into one cash account. A staff person independent of the cash receipt and cash disbursement process will be assigned to reconcile the account. The School Department Controller will review and sign off the reconciliation. Grant Balances-School Department During our audit, we noted that the School Department has difficulty in tracking its grant balances. Part of the reason is that the Department utilizes grant tracking software that only allows tracking of revenues and expenditures, but not beginning or ending balances. In addition, all of the grants are recorded in the accounting software under one fund number, so it is difficult to determine how much of the fund balance is allocated to each grant. There is also a disconnect between the grant directors and the business office as the grant directors track their grants based on the grant year, not the fiscal year. In order to improve the tracking of individual grant balances, the School Department should consider either keeping a of the individual grants to track their balances or consider going back to using individual fund numbers in the accounting software to track grants. Management's Response: The School Department will track all special revenue fund grants with a spreadsheet for the purpose of reconciling individual grant balances. Grant directors will be given a copy of the spreadsheet monthly. All requests for reimbursement will be signed off by grant directors. 4 CITY OF LEWISTON, MAINE Schedule of Significant Deficiencies and Other Comments, Continued June 30, 2011 OTHER COMMENTS General Fund Reimbursements-School Department During our testing, we noted that the School Department continues to have issues with the timing of reimbursements from the other funds to the general .fund at year end. Checks are often cut and recorded in the other funds before June 30th, but the cash receipts are not recorded in the general fund side until after year end. This creates the need for adjusting journal entries every year to properly record the transactions. In order to eliminate the need for these adjusting entries and improve the year-end reconciliation process, the School Department should consider either doing the reimbursements after year end or doing the reimbursements as wire transfers so they would clear in the general fund in the same day as they were recorded in the other funds. In addition, we noted that many of these reimbursements are payroll-related as all payrolls are disbursed out of the general fund and then reimbursed by the other funds. To eliminate the timing differences, the School Department should consider doing the payroll reimbursements on the same day the payroll is paid, eliminating the timing difference and the need to reconcile. Management's Response: At year end reimbursements to general fund will be done after June 30th to eliminate adjusting entries between funds. Also, payroll reimbursements will be done on weekly pay dates to eliminate any timing differences. MEDMS Reconciliation-School Department During our revievy of the upload to the State's MEDMS system, we noted there were significant amounts that were not included in the upload, including some federal amounts. In addition, some of the federal amounts were reported under the correct funds as required by the State and some were reported with the local and State grants. The School Department should ensure that all of the accounts are bridged with the system and that they are bridged to the correct funds so that they upload properly. In addition, the School Department should review the upload for accuracy and correct any amounts that are excluded or not reported correctly. Management's Response: Quarterly MEDMS filings will be made and any account code errors will be corrected to ensure all amounts are reported through ME OMS. Verification of amounts will be done through an ADS report listing any amount excluded from the ME OMS report. Activity Fund Cash Disbursements-School Department During our testing of activity fund cash disbursements, we noted several instances in which back up documentation was missing as evidence of the disbursement. The School Department should consider enforcing its policy that all activity fund disbursements should be supported by an invoice or receipt prior to the actual disbursement. In addition, there was one check that cleared the bank that was not signed and there were some instances in which the checks required two signatures but only had one signature. The School Department should ensure that all checks are signed by the proper signatory. In addition, the School Department should consider revising its activity fund policy to implement procedures in all schools that are consistent (e.g. requiring two signatures on all checks; requiring disbursement vouchers, etc.). Management's Response: An updated procedure will be sent to all schools regarding proper procedure for any activity funds. A training session will be held for school personnel to implement the updated procedure. 5 CITY OF LEWISTON, MAINE Schedule of Significant Deficiencies and Other Comments, Continued June 30, 2011 OTHER COMMENTS Travel Advances/Reimbursements-School Department During our testing of the School Improvement Grant disbursements, we found several travel advances and reimbursements for which there was either no backup documentation or incomplete documentation. In order to improve internal controls over travel advances, the School Department should ensure that all backup documentation is acquired and reviewed. Management's Response: A tickler file will be maintained by accounts payable to ensure that all backup documentation is submitted before reimbursements are made to employees. Journal Entries-School Department During our review of journal entries, we noted that journal entries, including interfund transfers, do not have an approval process. Although they are periodically reviewed by the Business Manager, there is no evidence that they were reviewed. The School Department should consider implementing a system in which journal entries over a certain dollar amount are approved by the Business Manager/Controller and documented by a signature. In addition, journal entries made by the Business Manager/Controller should be periodically reviewed by the Superintendent. Management's Response: A procedure will be implemented to require the Controller to review and sign journal entries made by Business Office staff Journal entries made by the Controller will be reviewed by the Superintendent monthly. Journal Entries-City During our review, we noted that the City does not have a process in which the Finance Director's journal entries are reviewed. The City should consider implementing a process under which the Finance Director's journal entries are reviewed on a periodic basis. Capital Assets-City During our testing of capital assets, we noted that some of the assets are tracked in very cumbersome spreadsheets that are difficult to maintain and that are prone to error. In addition, the remaining capital assets are tracked in Access software, which is limited in its capacity to produce useable reports. In order to improve the accuracy of capital asset tracking and reporting, the City should consider investing in a software module specifically designed to track capital assets. This would alleviate the difficulty of tracking items and reduce the issues with error-prone spreadsheets. 6