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HomeMy WebLinkAboutAUDIT MANAGEMENT REPORT 06-30-2000 I I I I I I I I I I I I I TOWN OF NORTH ANDOVER, MASSACHUSETTS Management Report For the Year Ended June 30, 2000 TABLE OF CONTENTS Introductory Letter I. Current Year Issues 1. Improve Timeliness of Bank Reconciliations (Reportable Condition) 2. Monitor Activity in Other Funds 3. Prepare for GASB 34 Implementation I1. Follow-Up on Prior Year Unresolved Recommendations 1. Improve Timeliness of Grant Reimbursement Requests 2. Evaluate Self-Insurance Trust Fund 3. Formalize Controls Over Departmental Receipts 4. Reconcile Water Fund Receivables 5. Realign Job Responsibilities for Reconciling Cash 6. Perform Monthly Reconciliations (Reportable Condition) 7. Maintain Bond Debt Schedules 8. Improve Specific Departmental Receipts (Osgood) 9.Expand Reports Provided to Town Manager and Board of Selectmen III. Resolved Prior Year Issues 1. Improve Water Billing Function 2. Reconcile Budgeted Water Revenues with Tax Recap Sheet 3. Establish Formal Reconciling Procedures with the School Department 4. Cut Off Payroll at Year End 5. Report Abatements to Town Accountant 6. Improve Cut Off of Receipt Postings 7. Improve Specific Departmental Receipts (Recreation) 8. Streamline Accounting System PAGE 3 3 4 6 6 7 7 7 8 8 9 9 10 10 10 11 11 11 12 12 MELANSON HEATH & COMPANY, PC CERTIFIED PUBLIC ACCOUNTANTS MANAGEMENT ADVISORS Corporate Place 93 ' Suite ~ ~4 ~ oo Burtt Road Andover, MA o~Sto Tel (978)749-0005 · Fax (978) 749'0006 To the Town Manager and Board of Selectmen Town of North Andover North Andover, Massachusetts We have audited the financial statements of the Town of North Andover, Massachusetts, as of and for the year ended June 30, 2000, and have issued our report thereon dated September 7, 2000. As part of our audit, we made a study and evaluation of the Town's system of internal accounting control to the extent we considered necessary to evaluate the system as required by generally accepted auditing standards. Under these standards, the purpose of such evaluations is to establish a basis for reliance on the system of internal accounting control in deter- mining the nature, timing and extent of other auditing procedures that are necessary for expressing an opinion on the financial statements. The management of the Town of North Andover, Massachusetts is responsible for establishing and maintaining a system of internal accounting control. In fulfilling this responsibility, estimates and judgments by them are required to assess the expected benefits and related costs of control procedures. The objectives of such a system are to provide reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with required authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. Because of inherent limitations in any system of internal accounting control, errors or irregularities may still occur without being detected. Also, projection of any evalu- ation of the system to future periods is subject to the risks that procedures may Additiond Offices: Nashua, NH · Greenfield, MA · Ellsworth, ME become inadequate because of changes in conditions or that the degree of compli- ance with the procedures may deteriorate. Our study and evaluation was not designed for the purpose of expressing an opinion on the internal accounting control and would not necessarily disclose all weaknesses in the system. However, as a result of our study and evaluation, and in an effort to be of assistance to the Town, we are submitting for your consideration comments and recommendations intended to improve operations and internal accounting control. We noted certain matters involving the internal control structure and its operation that we consider to be a reportable condition under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control structure that, in our judgment, could adversely affect the Town's ability to record, process, summarize and report financial data in a manner that is consistent with the assertions of management in the financial statements. These issues are identified in the table of contents and comment headings. After you have had an opportunity to consider our comments and recommenda- tions, we would be pleased to discuss them with you. Andover, Massachusetts September 7, 2000 2 I. CURRENT YEAR ISSUES 1. Improve Timeliness of Bank Reconciliations (Reportable Condition) Throughout the fiscal year, the Treasurer's Office was several months behind in reconciling monthly bank statement balances to cash book balances. The timely reconciling of the Treasurer's cash is a critical internal control procedure necessary to assure that the Town's cash balances are properly reported and controlled. The lack of timely bank statement reconciliations makes it impossible to prove interim general ledger cash balances to the bank balances. Without this measure of checks and balances, there is an increased risk that errors or irregulari- ties could occur and go undetected. We recommend the Treasurer's Office take steps to assure a timely reconciliation of cash balances occurs throughout the year. Typically, the reconciliation of all bank statements should be completed by the third or fourth week of the subsequent month. We recommend that the bank reconciliations be documented on a preprinted form that provides for a space for the preparer and reviewer to sign and date. This will provide assurance that all cash activity was properly reported in the general ledger, thereby creating a system of checks and balances and increasing the reliability of Town-prepared financial reports. 2. Monitor Activity in Other Funds Police Detail Revolving According to the Town's general ledger, the police detail revolving account experienced a loss for the year of approximately $ 60,000, resulting in a June 30, 2000 deficit of approximately $ 80,000. We recommend the Town monitor all activity flowing through the police detail revolving account to assure postings are accurate, and up to date. The cash deficit balances should be compared with receivable records to determine whether a true fund deficit exists. If a true deficit exists, an analysis should be performed to identify the cause, and determine a corrective action plan. 3 Special Revenue Funds The Town's general ledger reflects several special revenue accounts with cash balances totaling approximately $ 40,000, that have had no activity in fiscal year 2000. We recommend the Town determine whether these accounts are still needed and, if not, close them in accordance with the requirements of Massachusetts General Laws. Capital Project Funds The Town's general ledger reflects numerous capital project funds which are funded by debt authorizations that have not yet been issued. As a result, many projects reflect deficit fund balances that will be eliminated upon the issuance of debt financing. We recommend the Town maintain records to monitor capital projects on a life-to-date basis in addition to the annual fiscal basis. This will provide improved information on the status of project expenditures to date compared with total authorized amounts. This will reduce the risk of overexpenditures occurring and going undetected. 3. Prepare for GASB 34 Implementation Effective June 30, 2003, the Town will be required to implement the Government Accounting Standards Board Statement Number 34 (GASB 34). This accounting pronouncement has a sweeping effect on the presentation and format of the year-end audited financial state- ments. Major changes include: Requiring a narrative "Management Discussion and Analysis" (MD&A) section, which describes a minimum of seven specific financial areas to help the reader understand the key financial conditions and highlights of the financial statements. Requiring "dual perspective" financial statements, that include "entity-wide" consolidated reports in addition to the "fund basis" financial reports that currently exist. · Reclassification and renaming of certain fund types. 4 · Recoding of certain revenue chart of accounts numbers. Reporting of all budget amendments and transfers in the financial statements. Reporting of "infrastructure" fixed assets (e.g., roads, bridges, etc.) effective June 30, 2007. · Revisions of required footnote disclosures and supplementary information. In addition, the most immediate issue that requires the planning of the Town involves the reporting of general fixed assets (such as buildings, land, equipment, vehicles and furnishings). The Town has always been required to report these assets (at historical cost) in the year-end audited financial statements, under generally accepted accounting principles (GAAP). However, like most Massachusetts municipalities, the Town has not maintained fixed asset records and, therefore, has not reported them in the financial statements. As a result, the Independent Auditors' Report has included an opinion qualification regarding this omission. Under GASB 34, however, the omission of fixed assets and related depreciation expense typically would now cause the auditor to issue a more serious "adverse" opinion on the financial statements instead of a "qualification". So far, the major municipal bond rating agencies have indicated that an adverse opinion (that is caused because of the lack of fixed assets) would not effect the Town's bond rating. Compliance with Statement 34 will require the Town to either value its fixed assets at net book value (historical cost less accumulated depreciation) or estimate the net book value of fixed assets and using recent bond issues, capital articles, assessor's, and insurance records to quantify the most recent acquisitions and improvements. Compliance with GASB 34 will require the Town to commit additional resources, particularly related to the maintenance of fixed asset records. Also, once implemented, whether fully or partially, the annual audit fee will also be increased. We recommend the Town begin planning and funding for the compilation of these records immediately. This will help assure that the Town is able to implement the requirements of GASB 34 within the required timetable. 5 II. FOLLOW-UP ON PRIOR YEAR UNRESOLVED RECOMMENDATIONS 1. Improve Timeliness of Grant Reimbursement Requests In the prior year management letter, we recommended that Highway Chapter 90 funds be requested from the State in a more timely manner. This would improve cash flows, investment income, and "flee cash" balances. Current Year Status Although Chapter 90 grant requests for reimbursement were made, we again recommend they be issued more frequently, particularly to avoid deficits at year end. Follow-Up Action We recommend Chapter 90 funds be requested on a quarterly basis. 2. Evaluate Self-Insurance Trust Fund In the prior year audit, we recommended the Town Accountant establish a separate fund to track the self-insurance activity. We also recommended this be reconciled monthly with the Treasurer's Office cash activity and that monthly status reports be provided to the Town Manager for oversight and review. Current Year Status The separate fund was established and status reports were provided in fiscal 2000. However, reconciliations were not performed. Follow-Up Action We again recommend the cash balance of the health trust fund be recon- ciled regularly with the Treasurer's cash activity. Also, care should be exercised to assure that claims paid are allocated properly between the Town appropriation and employee contributions. 6 3. Formalize Controls Over Departmental Receipts In the prior year audit, we recommended the Town implement a depart- mental receipt policy and, once implemented, perform internal audits of various departments to assure compliance. Current Year Status In fiscal year 2000, the Town implemented a departmental receipt policy; however, no internal audits were performed. Follow-Up Action We again recommend the Town perform internal audits of departmental receipts to assure compliance with the new policies. Reconcile Water Fund Receivables In the prior year management letter, we recommended the Town estab- lish procedures to reconcile water receivable records between the Town Accountant, Tax Collector and DPW Department. Current Year Status In fiscal year 2000, the Town began to established formal receivable reconciliation procedures. Follow-Up Action Although the process has improved over the prior year, we recommend the Town continue to "fine tune" the reconciliation process to identify minor differences that continue to surface. We understand the Town will establish formal procedures in fiscal year 2001. 5. Realign Job Responsibilities for Reconciling Cash In the prior year, we recommended that the process of bank reconciliations be performed in the Treasurer's Office instead of by the Town Accountant. We also recommended the Town Accountant position be made full time. 7 I I I I I I I I I I I I I I I I I I Current Year Status In fiscal year 2000, the responsibility for bank reconciliations was shifted to the Treasurer's Office; however, the Town Accountant position remained part time. Follow-Up Action We again recommend the Town Accountant position be full time. 6. PerfOrm Monthly Reconciliations (Reportable Condition) In the prior year audit, we recommended the Town establish formal pro- cedures to regularly reconcile general ledger balances, such as cash, receivables, warrants payable, withholding accounts, overlay and debt. Current Year Status In fiscal year 2000, the Town Accountant has established improved general ledger reconciliation procedures. However, the general ledger continued to have certain reconciliation problems. Follow-Up Action We again recommend the general ledger reconciliation procedures be formalized and that reconciliation procedures be performed regularly. 7, Maintain Bond Debt Schedules In the prior year audit, we recommended the Town maintain bond debt schedules by fund. Current Year Status This issue has not yet been resolved. Follow-Up Action We again recommend the Town maintain detailed debt schedules to properly allocate debt service between the Town, School, and various 8 enterprises. Also, schedules of unissued debt and the allocation of inside/outside debt should be maintained. 8. Improve Specific Departmental Receipts _0sgood Conference Center Bar Receipts In the prior year audit, we recommended the receipt reconciliation form be redesigned to provide a space for signatures of personnel involved in measuring alcohol quantities before and after events, as well as for the actual cash on hand. The calculations of expected revenue should be compiled by personnel other than the bartender. Finally, receipts should be placed in a secure locked safe overnight and be deposited the next day. Current Year Status This issue was not addressed. Follow-UP Action We recommend the Town address this issue in fiscal year 2001. Sm Expand Reports Provided to Town Manager and Board of Selectmen In the prior year audit, we recommended the Town establish standard financial reports to be provided to the Town Manager and Board of Selectmen. Current Year Status This area has improved, particularly in relation to status reports for revenues, enterprise operations and health trust activity. Follow-Up Action We recommend status reports be provided for the largest eight special revenue fund accounts that cumulatively total approximately $ 3.2 million. 9 II1. RESOLVED PRIOR YEAR ISSUES 1. Improve Water Billinq Function In the prior year management letter, we recommended the Town take steps to improve the water billing function, specifically: minimize estimated bills adhere to established billing schedule improve oversight Current Year Status In fiscal year 2000, the Town implemented a new utility billing system, a monitoring system, and began a new meter replacement program. This has resulted in improved controls and timeliness of the billing system. As long as the Town continues this process, this issue is resolved. 2. Reconcile Budgeted Water Revenues with Tax Recap Sheet In the prior year management letter, we recommended the Town recon- cile estimated water revenues (based on consumption) to the budget used for the tax rate setting. This should minimize the risk of future revenue deficits. Current Year Status In fiscal year 2000, the Town estimated water revenues more conserva- tively, resulting in a surplus of actual revenues over the budget. As long as the Town continues to estimate revenues conservatively, this issue is resolved. Also, we understand the Town is formalizing procedures to track and reconcile consumption in fiscal year 2001. m Establish Formal Reconcilinq Procedures with the School Department In the prior year, we recommended the Town provide additional assistance and training to the School Lunch Accountant in accessing and monitoring the Town's accounting records, in order to simplify the reconciliation process. 10 w Sm Current Year Status Adequate training has been provided. This issue is resolved. Cut Off Payroll at Year End In the prior year audit, we recommended the Town split the year-end pay- roll by fiscal year to assure proper cutoffs occur. Current Year Status This issue was fully implemented in fiscal year 2000. Report Abatements to Town Accountant In the prior year audit, we recommended that the Assessors' Office report abatements to the Town Accountant. Current Year Status This issue was implemented and resolved in fiscal 2000. 6. Improve Cut Off of Receipt Postings In the prior year audit, we recommended the Collector's Office make efforts to assure that the timing of postings to taxpayer/customer accounts be consistent with amounts reported to the general ledger. This would simplify the receivable reconciliation process. Current Year Status This issue was implemented and resolved in fiscal 2000. 11 7. Improve Specific Departmental Receipts Recreation Activities In the prior year audit, we recommended all fees (and expenses) related to recreation activities flow through the Town's accounting records and in accordance with the Town's new department receipt policies. Current Year Status This issue was implemented and resolved in fiscal year 2000. 8. Streamline Accounting System In the prior year audit, we recommended the Town Accountant streamline the chart of accounts by consolidating and purging unnecessary accounts. This would result in improved efficiency in daily maintenance and recon- ciliation. Current Year Status This issue has been implemented and resolved. 12 TOWN OF NORTH ANDOVER, MASSACHUSETTS Management Report For the Year Ended June 30, 2000 TABLE OF CONTENTS Introductory Letter I. Current Year Issues 1. Improve Timeliness of Bank Reconciliations (Reportable Condition) 2. Monitor Activity in Other Funds 3. Prepare for GASB 34 Implementation I1. Follow-Up on Prior Year Unresolved Recommendations 1. Improve Timeliness of Grant Reimbursement Requests 2. Evaluate Self-Insurance Trust Fund 3. Formalize Controls Over Departmental Receipts 4. Reconcile Water Fund Receivables 5. Realign Job Responsibilities for Reconciling Cash 6. Perform Monthly Reconciliations (Reportable Condition) 7. Maintain Bond Debt Schedules 8. Improve Specific Departmental Receipts (Osgood) 9.Expand Reports Provided to Town Manager and Board of Selectmen III. Resolved Prior Year Issues 1. Improve Water Billing Function 2. Reconcile Budgeted Water Revenues with Tax Recap Sheet 3. Establish Formal Reconciling Procedures with the School Department 4. Cut Off Payroll at Year End 5. Report Abatements to Town Accountant 6. Improve Cut Off of Receipt Postings 7. Improve Specific Departmental Receipts (Recreation) 8. Streamline Accounting System PAGE 3 3 4 6 6 7 7 7 8 8 9 9 10 10 10 11 11 11 12 12 MELANSON HEATH ~ COMPANY, PC CERTIFIED PUBLIC ACCOUNTANTS MANAGEMENT ADVISORS Corporate Place 93 ° Suite x ~4 ~ oo Burtt Road Andover, MA Tel (978)749-0005 · Fax (978) 749-0006 To the Town Manager and Board of Selectmen Town of North Andover North Andover, Massachusetts We have audited the financial statements of the Town of North Andover, Massachusetts, as of and for the year ended June 30, 2000, and have issued our report thereon dated September 7, 2000. As part of our audit, we made a study and evaluation of the Town's system of internal accounting control to the extent we considered necessary to evaluate the system as required by generally accepted auditing standards. Under these standards, the purpose of such evaluations is to establish a basis for reliance on the system of internal accounting control in deter- mining the nature, timing and extent of other auditing procedures that are necessary for expressing an opinion on the financial statements. The management of the Town of North Andover, Massachusetts is responsible for establishing and maintaining a system of internal accounting control. In fulfilling this responsibility, estimates and judgments by them are required to assess the expected benefits and related costs of control procedures. The objectives of such a system are to provide reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with required authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. Because of inherent limitations in any system of internal accounting control, errors or irregularities may still occur without being detected. Also, projection of any evalu- ation of the system to future periods is subject to the risks that procedures may Additional Offices: Nashua, NH · Greenfield, MA · Ellsworth, ME become inadequate because of changes in conditions or that the degree of compli- ance with the procedures may deteriorate. Our study and evaluation was not designed for the purpose of expressing an opinion on the internal accounting control and would not necessarily disclose all weaknesses in the system. However, as a result of our study and evaluation, and in an effort to be of assistance to the Town, we are submitting for your consideration comments and recommendations intended to improve operations and internal accounting control. We noted certain matters involving the internal control structure and its operation that we consider to be a reportable condition under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control structure that, in our judgment, could adversely affect the Town's ability to record, process, summarize and report financial data in a manner that is consistent with the assertions of management in the financial statements. These issues are identified in the table of contents and comment headings. After you have had an opportunity to consider our comments and recommenda- tions, we would be pleased to discuss them with you. Andover, Massachusetts September 7, 2000 2 I. CURRENT YEAR ISSUES 1. Improve Timeliness of Bank Reconciliations (Reportable Condition) Throughout the fiscal year, the Treasurer's Office was several months behind in reconciling monthly bank statement balances to cash book balances. The timely reconciling of the Treasurer's cash is a critical internal control procedure necessary to assure that the Town's cash balances are properly reported and controlled. The lack of timely bank statement reconciliations makes it impossible to prove interim general ledger cash balances to the bank balances. Without this measure of checks and balances, there is an increased risk that errors or irregulari- ties could occur and go undetected. We recommend the Treasurer's Office take steps to assure a timely reconciliation of cash balances occurs throughout the year. Typically, the reconciliation of all bank statements should be completed by the third or fourth week of the subsequent month. We recommend that the bank reconciliations be documented on a preprinted form that provides for a space for the preparer and reviewer to sign and date. This will provide assurance that all cash activity was properly reported in the general ledger, thereby creating a system of checks and balances and increasing the reliability of Town-prepared financial reports. 2. Monitor Activity in Other Funds Police Detail Revolving According to the Town's general ledger, the police detail revolving account experienced a loss for the year of approximately $ 60,000, resulting in a June 30, 2000 deficit of approximately $ 80,000. We recommend the Town monitor all activity flowing through the police detail revolving account to assure postings are accurate, and up to date. The cash deficit balances should be compared with receivable records to determine whether a true fund deficit exists. If a true deficit exists, an analysis should be performed to identify the cause, and determine a corrective action plan. 3 I I i I i I I I I i Special Revenue Funds The Town's general ledger reflects several special revenue accounts with cash balances totaling approximately $ 40,000, that have had no activity in fiscal year 2000. We recommend the Town determine whether these accounts are still needed and, if not, close them in accordance with the requirements of Massachusetts General Laws. Capital Project Funds The Town's general ledger reflects numerous capital project funds which are funded by debt authorizations that have not yet been issued. As a result, many projects reflect deficit fund balances that will be eliminated upon the issuance of debt financing. We recommend the Town maintain records to monitor capital projects on a life-to-date basis in addition to the annual fiscal basis. This will provide improved information on the status of project expenditures to date compared with total authorized amounts. This will reduce the risk of overexpenditures occurring and going undetected. 3. Prepare for GASB 34 Implementation Effective June 30, 2003, the Town will be required to implement the Government Accounting Standards Board Statement Number 34 (GASB 34). This accounting pronouncement has a sweeping effect on the presentation and format of the year-end audited financial state- ments. Major changes include: Requiring a narrative "Management Discussion and Analysis" (MD&A) section, which describes a minimum of seven specific financial areas to help the reader understand the key financial conditions and highlights of the financial statements. Requiring "dual perspective" financial statements, that include "entity-wide" consolidated reports in addition to the "fund basis" financial reports that currently exist. Reclassification and renaming of certain fund types. 4 · Recoding of certain revenue chart of accounts numbers. Reporting of all budget amendments and transfers in the financial statements. Reporting of "infrastructure" fixed assets (e.g., roads, bridges, etc.) effective June 30, 2007. · Revisions of required footnote disclosures and supplementary information. In addition, the most immediate issue that requires the planning of the Town involves the reporting of general fixed assets (such as buildings, land, equipment, vehicles and furnishings). The Town has always been required to report these assets (at historical cost) in the year-end audited financial statements, under generally accepted accounting principles (GAAP). However, like most Massachusetts municipalities, the Town has not maintained fixed asset records and, therefore, has not reported them in the financial statements. As a result, the Independent Auditors' Report has included an opinion qualification regarding this omission. Under GASB 34, however, the omission of fixed assets and related depreciation expense typically would now cause the auditor to issue a more serious "adverse" opinion on the financial statements instead of a "qualification". So far, the major municipal bond rating agencies have indicated that an adverse opinion (that is caused because of the lack of fixed assets) would not effect the Town's bond rating. Compliance with Statement 34 will require the Town to either value its fixed assets at net book value (historical cost less accumulated depreciation) or estimate the net book value of fixed assets and using recent bond issues, capital articles, assessor's, and insurance records to quantify the most recent acquisitions and improvements. Compliance with GASB 34 will require the Town to commit additional resources, particularly related to the maintenance of fixed asset records. Also, once implemented, whether fully or partially, the annual audit fee will also be increased. We recommend the Town begin planning and funding for the compilation of these records immediately. This will help assure that the Town is able to implement the requirements of GASB 34 within the required timetable. 5 II. FOLLOW-UP ON PRIOR YEAR UNRESOLVED RECOMMENDATIONS 1. Improve Timeliness of Grant Reimbursement Requests In the prior year management letter, we recommended that Highway Chapter 90 funds be requested from the State in a more timely manner. This would improve cash flows, investment income, and "free cash" balances. Current Year Status Although Chapter 90 grant requests for reimbursement were made, we again recommend they be issued more frequently, particularly to avoid deficits at year end. Follow-Up Action We recommend Chapter 90 funds be requested on a quarterly basis. 2. Evaluate Self-Insurance Trust Fund In the prior year audit, we recommended the Town Accountant establish a separate fund to track the self-insurance activity. We also recommended this be reconciled monthly with the Treasurer's Office cash activity and that monthly status reports be provided to the Town Manager for oversight and review. Current Year Status The separate fund was established and status reports were provided in fiscal 2000. However, reconciliations were not performed. Follow-Up Action We again recommend the cash balance of the health trust fund be recon- ciled regularly with the Treasurer's cash activity. Also, care should be exercised to assure that claims paid are allocated properly between the Town appropriation and employee contributions. 6 Formalize Controls Over Departmental Receipts In the prior year audit, we recommended the Town implement a'depart- mental receipt policy and, once implemented, perform internal audits of various departments to assure compliance. Current Year Status In fiscal year 2000, the Town implemented a departmental receipt policy; however, no internal audits were performed. Follow-Up Action We again recommend the Town perform internal audits of departmental receipts to assure compliance with the new policies. Reconcile Water Fund Receivables In the prior year management letter, we recommended the Town estab- lish procedures to reconcile water receivable records between the Town Accountant, Tax Collector and DPW Department. Current Year Status In fiscal year 2000, the Town began to established formal receivable reconciliation procedures. Follow-Up Action Although the process has improved over the prior year, we recommend the Town continue to "fine tune" the reconciliation process to identify minor differenCes that continue to surface. We understand the Town will establish formal procedures in fiscal year 2001. 5. Realign Job Responsibilities for Reconcilin~l Cash In the prior year, we recommended that the process of bank reconciliations be performed in the Treasurer's Office instead of by the Town Accountant. We also recommended the Town Accountant position be made full time. 7 Current Year Status In fiscal year 2000, the responsibility for bank reconciliations was shifted to the Treasurer's Office; however, the Town Accountant position remained part time. Follow-Up Action We again recommend the Town AccOuntant position be full time. 6. Perform Monthly Reconciliations (Reportable Condition) In the prior year audit, we recommended the Town establish formal pro- cedures to regularly reconcile general ledger balances, such as cash, receivables, warrants payable, withholding accounts, overlay and debt. Current Year Status In fiscal year 2000, the Town Accountant has established improved general ledger reconciliation procedures. However, the general ledger continued to have certain reconciliation problems. Follow-Up Action We again recommend the general ledger reconciliation procedures be formalized and that reconciliation procedures be performed regularly. Maintain Bond Debt Schedules In the prior year audit, we recommended the Town maintain bond debt schedules by fund. Current Year Status This issue has not yet been resolved. Follow-Up Action We again recommend the Town maintain detailed debt schedules to properly allocate debt service between the Town, School, and various 8 enterprises. Also, schedules of unissued debt and the allocation of inside/outside debt should be maintained. 8. Improve Specific Departmental Receipts Osgood Conference Center Bar Receipts In the prior year audit, we recommended the receipt reconciliation form be redesigned to provide a space for signatures of personnel involved in measuring alcohol quantities before and after events, as well as for the actual cash on hand. The calculations of expected revenue should be compiled by personnel other than the bartender. Finally, receipts should be placed in a secure locked safe overnight and be deposited the next day. Current Year Status This issue was not addressed. Follow-UP Action We recommend the Town address this issue in fiscal year 2001. Expand Reports Provided to Town Manager and Board of Selectmen In the prior year audit, we recommended the Town establish standard financial reports to be provided to the Town Manager and Board of Selectmen. Current Year Status This area has improved, particularly in relation to status reports for revenues, enterprise operations and health trust activity. Follow-Up Action We recommend status reports be provided for the largest eight special revenue fund accounts that cumulatively total approximately $ 3.2 million. 9 III. RESOLVED PRIOR YEAR ISSUES 1. Improve Water Billincl Function In the prior year management letter, we recommended the Town take steps to improve the water billing function, specifically: · minimize estimated bills · adhere to established billing schedule · improve oversight Current Year Status In fiscal year 2000, the Town implemented a new utility billing system, a monitoring system, and began a new meter replacement program. This has resulted in improved controls and timeliness of the billing system. As long as the Town continues this process, this issue is resolved. 2. Reconcile Budgeted Water Revenues with Tax Recap Sheet In the prior year management letter, we recommended the Town recon- cile estimated water revenues (based on consumption) to the budget used for the tax rate setting. This should minimize the risk of future revenue deficits. Current Year Status In fiscal year 2000, the Town estimated water revenues more conserva- tively, resulting in a surplus of actual revenues over the budget. As long as the Town continues to estimate revenues conservatively, this issue is resolved. Also, we understand the Town is formalizing procedures to track and reconcile consumption in fiscal year 2001. 3. Establish Formal Reconcilinq Procedures with the School Department In the prior year, we recommended the Town provide additional assistance and training to the School Lunch Accountant in accessing and monitoring the Town's accounting records, in order to simplify the reconciliation process. 10 Current Year Status Adequate training has been provided. This issue is resolved. Cut Off Payroll at Year End In the prior year audit, we recommended the Town split the year-end pay- roll by fiscal year to assure proper cutoffs occur. Current Year Status This issue was fully implemented in fiscal year 2000. Report Abatements to Town Accountant In the prior year audit, we recommended that the Assessors' Office report abatements to the Town Accountant. Current Year Status This issue was implemented and resolved in fiscal 2000. 6. Improve Cut Off of Receipt Postinqs In the prior year audit, we recommended the Collector's Office make efforts to assure that the timing of postings to taxpayer/customer accounts be consistent with amounts reported to the general ledger. This would simplify the receivable reconciliation process. Current Year Status This issue was implemented and resolved in fiscal 2000. 11 I I I I I i i I I I I 7. Improve Specific Departmental Receipts Recreation Activities In the prior year audit, we recommended all fees (and expenses) related to recreation activities flow through the Town's accounting records and in accordance with the Town's new department receipt policies. Current Year Status This issue was implemented and resolved in fiscal year 2000. 8. Streamline Accounting System In the prior year audit, we recommended the Town Accountant streamline the chart of accounts by consolidating and purging unnecessary accounts. This would result in improved efficiency in daily maintenance and recon- ciliation. Current Year Status This issue has been implemented and resolved. 12 TOWN OF NORTH ANDOVER, MASSACHUSETTS Management Report For the Year Ended June 30, 2000 I I I I I I I I I I I I I TABLE OF CONTENTS Introductory Letter I. Current Year Issues 1. Improve Timeliness of Bank Reconciliations (Reportable Condition) 2. Monitor Activity in Other Funds 3. Prepare forGASB 34 Implementation I1. Follow-Up on Prior Year Unresolved Recommendations 1. Improve Timeliness of Grant Reimbursement Requests 2. Evaluate Self-Insurance Trust Fund 3. Formalize Controls Over Departmental Receipts 4. Reconcile Water Fund Receivables 5. Realign Job Responsibilities for Reconciling Cash 6. Perform Monthly Reconciliations (Reportable Condition) 7. Maintain Bond Debt Schedules 8. Improve Specific Departmental Receipts (Osgood) 9.Expand Reports Provided to Town Manager and Board of Selectmen II1. Resolved Prior Year Issues 1. Improve Water Billing Function 2. Reconcile Budgeted Water Revenues with Tax Recap Sheet 3. Establish Formal Reconciling Procedures with the School Department 4. Cut Off Payroll at Year End 5. Report Abatements to Town Accountant 6. Improve Cut Off of Receipt Postings 7. Improve Specific Departmental Receipts (Recreation) 8. Streamline Accounting System PAGE 3 3 4 6 6 7 7 7 8 8 9 9 10 10 10 11 11 11 12 12 I I I I I I I I I I I I MELANSON HEATH ~ COMPANY, PC CERTIFIED PUBLIC ACCOUNTANTS MANAGEMENT ADVISORS Corporate Place 93 ' Suite ~ ~4 xoo Burtt Road Andover, MA o~8m Tel (978)749-ooo5 ° Fax (978)749-00o6 To the Town Manager and Board of Selectmen Town of North Andover North Andover, Massachusetts We have audited the financial statements of the Town of North Andover, Massachusetts, as of and for the year ended June 30, 2000, and have issued our report thereon dated September 7, 2000. As part of our audit, we made a study and evaluation of the Town's system of internal accounting control to the extent we considered necessary to evaluate the system as required by generally accepted auditing standards. Under these standards, the purpose of such evaluations is to establish a basis for reliance on the sYstem of internal accounting control in deter- mining the nature, timing and extent of other auditing procedures that are necessary for expressing an opinion on the financial statements. The management of the Town of North Andover, Massachusetts is responsible for establishing and maintaining a system of internal accounting control. In fulfilling this responsibility, estimates and judgments by them are required to assess the expected benefits and related costs of control procedures. The objectives of such a system are to provide reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with required authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. Because of inherent limitations in any system of internal accounting control, errors or irregularities may still occur without being detected. Also, projection of any evalu- ation of the system to future periods is subject to the risks that procedures may Additional Offices: Nashua, NH · Greenfield, MA ° Ellsworth, ME I I I I I I I I I I I become inadequate because of changes in conditions or that the degree of compli- ance with the procedures may deteriorate. Our study and evaluation was not designed for the purpose of expressing an opinion on the internal accounting control and would not necessarily disclose all weaknesses in the system. However, as a result of our study and evaluation, and in an effort to be of assistance to the Town, we are submitting for your consideration comments and recommendations intended to improve operations and internal accounting control. We noted certain matters involving the internal control structure and its operation that we consider to be a reportable condition under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control structure that, in our judgment, could adversely affect the Town's ability to record, process, summarize and report financial data in a manner that is consistent with the assertions of management in the financial statements. These issues are identified in the table of contents and comment headings. After you have had an opportunity to consider our comments and recommenda- tions, we would be pleased to discuss them with you. Andover, Massachusetts September 7, 2000 2 I. CURRENT YEAR ISSUES 1. !,mprove Timeliness of Bank Reconciliations (Reportable Condition) Throughout the fiscal year, the Treasurer's Office was several months behind in reconciling monthly bank statement balances to cash book balances. The timely reconciling of the Treasurer's cash is a critical internal control procedure necessary to assure that the Town's cash balances are properly reported and controlled. The lack of timely bank statement reconciliations makes it impossible to prove interim general ledger cash balances to the bank balances. Without this measure of checks and balances, there is an increased risk that errors or irregulari- ties could occur and go undetected. We recommend the Treasurer's Office take steps to assure a timely reconciliation of cash balances occurs throughout the year. Typically, the reconciliation of all bank statements should be completed by the third or fourth week of the subsequent month. We recommend that the bank reconciliations be documented on a preprinted form that provides for a space for the preparer and reviewer to sign and date. This will provide assurance that all cash activity was properly reported in the general ledger, thereby creating a system of checks and balances and increasing the reliability of Town-prepared financial reports. 2. Monitor Activity in Other Funds Police Detail Revolvin.cl According to the Town's general ledger, the police detail revolving account experienced a loss for the year of approximately $ 60,000, resulting in a June 30, 2000 deficit of approximately $ 80,000. We recommend the Town monitor all activity flowing through the police detail revolving account to assure postings are accurate, and up to date. The cash deficit balances should be compared with receivable records to determine whether a true fund deficit exists. If a true deficit exists, an analysis should be performed to identify the cause, and determine a corrective action plan. 3 Special Revenue Funds The Town's general ledger reflects several special revenue accounts with cash balances totaling approximately $ 40,000, that have had no activity in fiscal year 2000. We recommend the Town determine whether these accounts are still needed and, if not, close them in accordance with the requirements of Massachusetts General Laws. Capital Project Funds The Town's general ledger reflects numerous capital project funds which are funded by debt authorizations that have not yet been issued. As a result, many projects reflect deficit fund balances that will be eliminated upon the issuance of debt financing. We recommend the Town maintain records to monitor capital projects on a life-to-date basis in addition to the annual fiscal basis. This will provide improved information on the status of project expenditures to date compared with total authorized amounts. This will reduce the risk of overexpenditures occurring and going undetected. 3. Prepare for GASB 34 Implementation Effective June 30, 2003, the Town will be required to implement the Government Accounting Standards Board Statement Number 34 (GASB 34). This accounting pronouncement has a sweeping effect on the presentation and format of the year-end audited financial state- ments. Major changes include: Requiring a narrative "Management Discussion and Analysis" (MD&A) section, which describes a minimum of seven specific financial areas to help the reader understand the key financial conditions and highlights of the financial statements. Requiring "dual perspective" financial statements, that include "entity-wide" consolidated reports in addition to the "fund basis" financial reports that currently exist. · Reclassification and renaming of certain fund types. 4 · Recoding of certain revenue chart of accounts numbers. Reporting of all budget amendments and transfers in the financial statements. Reporting of "infrastructure" fixed assets (e.g., roads, bridges, etc.) effective June 30, 2007. · Revisions of required footnote disclosures and supplementary information. In addition, the most immediate issue that requires the planning of the Town involves the reporting of general fixed assets (such as buildings, land, equipment, vehicles and furnishings). The Town has always been required to report these assets (at historical cost) in the year-end audited financial statements, under generally accepted accounting principles (GAAP). However, like most Massachusetts municipalities, the Town has not maintained fixed asset records and, therefore, has not reported them in the financial statements. As a result, the Independent Auditors' Report has included an opinion qualification regarding this omission. Under GASB 34, however, the omission of fixed assets and related depreciation expense typically would now cause the auditor to issue a more serious "adverse" opinion on the financial statements instead of a "qualification". So far, the major municipal bond rating agencies have indicated that an adverse opinion (that is caused because of the lack of fixed assets) would not effect the Town's bond rating. Compliance with Statement 34 will require the Town to either value its fixed assets at net book value (historical cost less accumulated depreciation) or estimate the net book value of fixed assets and using recent bond issues, capital articles, assessor's, and insurance records to quantify the most recent acquisitions and improvements. Compliance with GASB 34 will require the Town to commit additional resources, particularly related to the maintenance of fixed asset records. Also, once implemented, whether fully or partially, the annual audit fee will also be increased. We recommend the Town begin planning and funding for the compilation of these records immediately. This will help assure that the Town is able to implement the requirements of GASB 34 within the required timetable. 5 II. FOLLOW-UP ON PRIOR YEAR UNRESOLVED RECOMMENDATIONS 1. Improve Timeliness of Grant Reimbursement Requests In the prior year management letter, we recommended that Highway Chapter 90 funds be requested from the State in a more timely manner. This would improve cash flows, investment income, and "free cash" balances. Current Year Status Although Chapter 90 grant requests for reimbursement were made, we again recommend they be issued more frequently, particularly to avoid deficits at year end. Follow-Up Action We recommend Chapter 90 funds be requested on a quarterly basis. 2. Evaluate Self-Insurance Trust Fund In the prior year audit, we recommended the Town Accountant establish a separate fund to track the self-insurance activity. We also recommended this be reconciled monthly with the Treasurer's Office cash activity and that monthly status reports be provided to the Town Manager for oversight and review. Current Year Status The separate fund was established and status reports were provided in fiscal 2000. However, reconciliations were not performed. Follow-Up Action We again recommend the cash balance of the health trust fund be recom ciled regularly with the Treasurer's cash activity. Also, care should be exercised to assure that claims paid are allocated properly between the Town appropriation and employee contributions. 6 w Formalize Controls Over Departmental Receipts In the prior year audit, we recommended the Town implement a depart- mental receipt policy and, once implemented, perform internal audits of various departments to assure compliance, Current Year Status In fiscal year 2000, the Town implemented a departmental receipt policy; however, no internal audits were performed. Follow-Up Action We again recommend the Town perform internal audits of departmental receipts to assure compliance with the new policies. Reconcile Water Fund Receivables In the prior year management letter, we recommended the Town estab- lish procedures to reconcile water receivable records between the Town Accountant, Tax Collector and DPW Department. Current Year Status In fiscal year 2000, the Town began to established formal receivable reconciliation procedures. Follow-Up Action Although the process has improved over the prior year, we recommend the Town continue to "fine tune" the reconciliation process to identify minor differences that continue to surface. We understand the Town will establish formal procedures in fiscal year 2001. 5. Reali_qn Job Responsibilities for Reconciling Cash In the prior year, we recommended that the process of bank reconciliations be performed in the Treasurer's Office instead of by the Town Accountant. We also recommended the Town Accountant position be made full time. 7 Current Year Status In fiscal year 2000, the responsibility for bank reconciliations was shifted to the Treasurer's Office; however, the Town Accountant position remained part time. Follow.Up Action We again recommend the Town Accountant position be full time. 6. Perform Monthly Reconciliations (Reportable Condition) In the prior year audit, we recommended the Town establish formal pro- cedures to regularly reconcile general ledger balances, such as cash, receivables, warrants payable, withholding accounts, overlay and debt. Current Year Status In fiscal year 2000, the Town Accountant has established improved general ledger reconciliation procedures. However, the general ledger continued to have certain reconciliation problems. Follow-Up Action We again recommend the general ledger reconciliation procedures be formalized and that reconciliation procedures be performed regularly. Maintain Bond Debt Schedules In the prior year audit, we recommended the Town maintain bond debt schedules by fund. Current Year Status This issue has not yet been resolved. Follow-Up Action We again recommend the Town maintain detailed debt schedules to properly allocate debt service between the Town, School, and various 8 enterprises. Also, schedules of unissued debt and the allocation of inside/outside debt should be maintained. 8. Improve Specific Departmental Receipts Osgood Conference Center Bar Receipts In the prior year audit, we recommended the receipt reconciliation form be redesigned to provide a space for signatures of personnel involved in measuring alcohol quantities before and after events, as well as for the actual cash on hand. The calculations of expected revenue should be compiled by personnel other than the bartender. Finally, receipts should be placed in a secure locked safe overnight and be deposited the next day. Current Year Status This issue was not addressed. Follow-UP Action We recommend the Town address this issue in fiscal year 2001. 9. Expand Reports Provided to Town Manager and Board of Selectmen In the prior year audit, we recommended the Town establish standard financial reports to be provided to the Town Manager and Board of Selectmen. Current Year Status This area has improved, particularly in relation to status reports for revenues, enterprise operations and health trust activity. Follow-Up Action We recommend status reports be provided for the largest eight special revenue fund accounts that cumulatively total approximately $ 3.2 million. I I ! I I I I I ! I i I I I I I I III. RESOLVED PRIOR YEAR ISSUES 1. Improve Water Billinq Function In the prior year management letter, we recommended the Town take steps to improve the water billing function, specifically: · minimize estimated bills · adhere to established billing schedule · improve oversight Current Year Status In fiscal year 2000, the Town implemented a new utility billing system, a monitoring system, and began a new meter replacement program. This has resulted in improved controls and timeliness of the billing system, As long as the Town continues this process, this issue is resolved. 2. Reconcile Budgeted Water Revenues with Tax Recap Sheet In the prior year management letter, we recommended the Town recon- cile estimated water revenues (based on consumption) to the budget used for the tax rate setting. This should minimize the risk of future revenue deficits. Current Year Status In fiscal year 2000, the Town estimated water revenues more conserva- tively, resulting in a surplus of actual revenues over the budget. As long as the Town continues to estimate revenues conservatively, this issue is resolved. Aisc, we understand the Town is formalizing procedures to track and reconcile consumption in fiscal year 2001. 3. Establish Formal Reconcilinq Procedures with the School Department In the prior year, we recommended the Town provide additional assistance and training to the School Lunch Accountant in accessing and monitoring the Town's accounting records, in order to simplify the reconciliation process. 10 I I I I I I I I I I I I I I Sm Current Year Status Adequate training has been provided. This issue is resolved. Cut Off Payroll at Year End In the prior year audit, we recommended the Town split the year-end pay- roll by fiscal year to assure proper cutoffs occur. Current Year Status This issue was fully implemented in fiscal year 2000. Report Abatements to Town Accountant In the prior year audit, we recommended that the Assessors' Office report abatements to the Town Accountant. Current Year Status This issue was implemented and resolved in fiscal 2000. 6. Improve Cut Off of Receipt Postings In the prior year audit, we recommended the Collector's Office make efforts to assure that the timing of postings to taxpayer/customer accounts be consistent with amounts reported to the general ledger. This would simplify the receivable reconciliation process. Current Year Status This issue was implemented and resolved in fiscal 2000. 11 7. Improve Specific Departmental Receipts Recreation Activities In the prior year audit, we recommended all fees (and expenses) related to recreation activities flow through the Town's accounting records and in accordance with the Town's new department receipt policies. Current Year Status This issue was implemented and resolved in fiscal year 2000. 8. Streamline Accountincl System In the prior year audit, we recommended the Town Accountant streamline the chart of accounts by consolidating and purging unnecessary accounts. This would result in improved efficiency in daily maintenance and recon- ciliation. Current Year Status This issue has been implemented and resolved. 12 I i I I I I I TOWN OF NORTH ANDOVER, MASSACHUSETTS Management Report For the Year Ended June 30, 2000 TABLE OF CONTENTS Introductory Letter I. Current Year Issues 1. Improve Timeliness of Bank Reconciliations (Reportable Condition) 2. Monitor Activity in Other Funds 3. Prepare for GASB 34 Implementation I1. Follow-Up on Prior Year Unresolved Recommendations 1. Improve Timeliness of Grant Reimbursement Requests 2. Evaluate Self-Insurance Trust Fund 3. Formalize Controls Over Departmental Receipts 4. Reconcile Water Fund Receivables 5. Realign Job Responsibilities for Reconciling Cash 6. Perform Monthly Reconciliations (Reportable Condition) 7. Maintain Bond Debt Schedules 8. Improve Specific Departmental Receipts (Osgood) 9. Expand Reports Provided to Town Manager and Board of Selectmen III. Resolved Prior Year Issues 1. Improve Water Billing Function 2. Reconcile Budgeted Water Revenues with Tax Recap Sheet 3. Establish Formal Reconciling Procedures with the School Department 4. Cut Off Payroll at Year End 5. Report Abatements to Town Accountant 6. Improve Cut Off of Receipt Postings 7. Improve Specific Departmental Receipts (Recreation) 8. Streamline Accounting System PAGE 3 3 4 6 6 7 7 7 8 8 9 9 10 10 10 11 11 11 12 12 I I I i I I I I I I I I I MELANSON HEATH To the Town Manager and Board of Selectmen Town of North Andover ~ COMPANY~ PC CERTIFIED PUBLIC ACCOUNTANTS MANAGEMENT ADVISORS Corporate Place 93 · Suite ~ ~4 ~oo Bum Road Andover, MA o~8~o Tel (978)749-0005 · Fax (978) 749-0006 North Andover, Massachusetts We have audited the financial statements of the Town of North Andover, Massachusetts, as of and for the year ended June 30, 2000, and have issued our report thereon dated September 7, 2000. As part of our audit, we made a study and evaluation of the Town's system of internal accounting control to the extent we considered necessary to evaluate the system as required by generally accepted auditing standards. Under these standards, the purpose of such evaluations is to establish a basis for reliance on the system of internal accounting control in deter- mining the nature, timing and extent of other auditing procedures that are necessary for expressing an opinion on the financial statements. The management of the Town of North Andover, Massachusetts is responsible for establishing and maintaining a system of internal accounting control. In fulfilling this responsibility, estimates and judgments by them are required to assess the expected benefits and related costs of control procedures. The objectives of such a system are to provide reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with required authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. Because of inherent limitations in any system of internal accounting control, errors or irregularities may still occur withoUt being detected. Also, projection of any evalu- ation of the system to future periods is subject to the risks that procedures may Additional Offices: Nashua, NH · Greenfield, MA · Ellsworth, ME become inadequate because of changes in conditions or that the degree of compli- ance with the procedures may deteriorate. Our study and evaluation was not designed for the purpose of expressing an opinion on the internal accounting control and would not necessarily disclose all weaknesses in the system. However, as a result of our study and evaluation, and in an effort to be of assistance to the Town, we are submitting for your consideration comments and recommendations intended to improve operations and internal accounting control. We noted certain matters involving the internal control structure and its operation that we consider to be a reportable condition under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control structure that, in our judgment, could adversely affect the Town's ability to record, process, summarize and report financial data in a manner that is consistent with the assertions of management in the financial statements. These issues are identified in the table of contents and comment headings. After you have had an opportunity to consider our comments and recommenda- tions, we would be pleased to discuss them with you. Andover, Massachusetts I September 7, 2000 2 I I I i I I I. CURRENT YEAR ISSUES 1. Improve Timeliness of Bank Reconciliations (Reportable Condition) Throughout the fiscal year, the Treasurer's Office was several months behind in reconciling monthly bank statement balances to cash book balances. The timely reconciling of the Treasurer's cash is a critical internal control procedure necessary to assure that the Town's cash balances are properly reported and controlled. The lack of timely bank statement reconciliations makes it impossible to prove interim general ledger cash balances to the bank balances. Without this measure of checks and balances, there is an increased risk that errors or irregulari- ties could occur and go undetected. We recommend the Treasurer's Office take steps to assure a timely reconciliation of cash balances occurs throughout the year. Typically, the reconciliation of all bank statements should be completed by the third or fourth week of the subsequent month. We recommend that the bank reconciliations be documented on a preprinted form that provides for a space for the preparer and reviewer to sign and date. This will provide assurance that all cash activity was properly reported in the general ledger, thereby creating a system of checks and balances and increasing the reliability of Town-prepared financial reports. 2. Monitor Activity in Other Funds Police Detail Revolving According to the Town's general ledger, the police detail revolving account experienced a loss for the year of approximately $ 60,000, resulting in a June 30, 2000 deficit of approximately $ 80,000. We recommend the Town monitor all activity flowing through the police detail revolving account to assure postings are accurate, and up to date. The cash deficit balances should be compared with receivable records to determine whether a true fund deficit exists. If a true deficit exists, an analysis should be performed to identify the cause, and determine a corrective action plan. 3 I I I I I I I I I I I I I I Special Revenue Funds The Town's general ledger reflects several special revenue accounts with cash balances totaling approximately $ 40,000, that have had no activity in fiscal year 2000. We recommend the Town determine whether these accounts are still needed and, if not, close them in accordance with the requirements of Massachusetts General Laws. Capital Project Funds The Town's general ledger reflects numerous capital project funds which are funded by debt authorizations that have not yet been issued. As a result, many projects reflect deficit fund balances that will be eliminated upon the issuance of debt financing. We recommend the Town maintain records to monitor capital projects on a life-to-date basis in addition to the annual fiscal basis. This will provide improved information on the status of project expenditures to date compared with total authorized amounts. This will reduce the risk of overexpenditures occurring and going undetected. 3. Prepare for GASB 34 Implementation Effective June 30, 2003, the Town will be required to implement the Government Accounting Standards Board Statement Number 34 (GASB 34). This accounting pronouncement has a sweeping effect on the presentation and format of the year-end audited financial state- ments. Major changes include: Requiring a narrative "Management Discussion and Analysis" (MD&A) section, which describes a minimum of seven specific financial areas to help the reader understand the key financial conditions and highlights of the financial statements. Requiring "dual perspective" financial statements, that include "entity-wide" consolidated reports in addition to the "fund basis" financial reports that currently exist. Reclassification and renaming of certain fund types. 4 · Recoding of certain revenue chart of accounts numbers. Reporting of all budget amendments and transfers in the financial statements. Reporting of "infrastructure" fixed assets (e.g., roads, bridges, etc.) effective June 30, 2007. · Revisions of required footnote disclosures and supplementary information. In addition, the most immediate issue that requires the planning of the Town involves the reporting of general fixed assets (such as buildings, land, equipment, vehicles and furnishings). The Town has always been required to report these assets (at historical cost) in the year-end audited financial statements, under generally accepted accounting principles (GAAP). However, like most Massachusetts municipalities, the Town has not maintained fixed asset records and, therefore, has not reported them in the financial statements. As a result, the Independent Auditors' Report has included an opinion qualification regarding this omission. Under GASB 34, however, the omission of fixed assets and related depreciation expense typically would now cause the auditor to issue a more serious "adverse" opinion on the financial statements instead of a "qualification". So far, the major municipal bond rating agencies have indicated that an adverse opinion (that is caused because of the lack of fixed assets) would not effect the Town's bond rating. Compliance with Statement 34 will require the Town to either value its fixed assets at net book value (historical cost less accumulated depreciation) or estimate the net book value of fixed assets and using recent bond issues, capital articles, assessor's, and insurance records to quantify the most recent acquisitions and improvements. Compliance with GASB 34 will require the Town to commit additional resources, particularly related to the maintenance of fixed asset records. Also, once implemented, whether fully or partially, the annual audit fee will also be increased. We recommend the Town begin planning and funding for the compilation of these records immediately. This will help assure that the Town is able to implement the requirements of GASB 34 within the required timetable. I I I I i I I I I II. FOLLOW-UP ON PRIOR YEAR UNRESOLVED RECOMMENDATIONS 1. Improve Timeliness of Grant Reimbursement Requests In the prior year management letter, we recommended that Highway Chapter 90 funds be requested from the State in a more timely manner. This would improve cash flows, investment income, and "free cash" balances. Current Year Status Although Chapter 90 grant requests for reimbursement were made, we again recommend they be issued more frequently, particularly to avoid deficits at year end. Follow-Up Action We recommend Chapter 90 funds be requested on a quarterly basis. 2. Evaluate Self-Insurance Trust Fund In the prior year audit, we recommended the Town Accountant establish a separate fund to track the self-insurance activity. We also recommended this be reconciled monthly with the Treasurer's Office cash activity and that monthly status reports be provided to the Town Manager for oversight and review. Current Year Status The separate fund was established and status reports were provided in fiscal 2000. However, reconciliations were not performed. Follow-Up Action We again recommend the cash balance of the health trust fund be recon- ciled regularly with the Treasurer's cash activity. Also, care should be exercised to assure that claims paid are allocated properly between the Town appropriation and employee contributions. 6 I I I I I I I I I I I I I ! I I 3. Formalize Controls Over Departmental Receipts In the prior year audit, we recommended the Town implement a depart- mental receipt policy and, once implemented, perform internal audits of various departments to assure compliance. Current Year Status In fiscal year 2000, the Town implemented a departmental receipt policy; however, no internal audits were performed. Follow-Up Action We again recommend the Town perform internal audits of departmental receipts to assure compliance with the new policies. 4. Reconcile Water Fund Receivables In the prior year management letter, we recommended the Town estab- lish procedures to reconcile water receivable records between the Town Accountant, Tax Collector and DPW Department. Current Year Status In fiscal year 2000, the Town began to established formal receivable reconciliation procedures. Follow-Up Action Although the process has improved over the prior year, we recommend the Town continue to "fine tune" the reconciliation process to identify minor differences that continue to surface. We understand the Town will establish formal procedures in fiscal year 2001. 5. Realign Job Responsibilities for Reconciling Cash In the prior year, we recommended that the process of bank reconciliations be performed in the Treasurer's Office instead of by the Town Accountant. We also recommended the Town Accountant position be made full time. 7' I I I i I I I I I I I I ! I I I I I Current Year Status In fiscal year 2000, the responsibility for bank reconciliations was shifted to the Treasurer's Office; however, the Town Accountant position remained part time. Follow-Up Action We again recommend the Town Accountant position be full time. 6. Perform Monthly Reconciliations (Reportable Condition) In the prior year audit, we recommended the Town establish formal pro- cedures to regularly reconcile general ledger balances, such as cash, receivables, warrants payable, withholding accounts, overlay and debt. Current Year Status In fiscal year 2000, the Town Accountant has established improved general ledger reconciliation procedures. However, the general ledger continued to have certain reconciliation problems. Follow-Up Action We again recommend the general ledger reconciliation procedures be formalized and that reconciliation procedures be performed regularly. Maintain Bond Debt Schedules In the prior year audit, we recommended the Town maintain bond debt schedules by fund. Current Year Status This issue has not yet been resolved. Follow-Up Action We again recommend the Town maintain detailed debt schedules to properly allocate debt service between the Town, School, and various 8 I I I I I I I I I I I I I I I I enterprises. Also, schedules of unissued debt and the allocation of inside/outside debt should be maintained. 8. Improve Specific Departmental Receipts Osgood Conference Center Bar Receipts In the prior year audit, we recommended the receipt reconciliation form be redesigned to provide a space for signatures of personnel involved in measuring alcohol quantities before and after events, as well as for the actual cash on hand. The calculations of expected revenue should be compiled by personnel other than the bartender. Finally, receipts should be placed in a secure locked safe overnight and be deposited the next day. Current Year Status This issue was not addressed. Follow-UP Action We recommend the Town address this issue in fiscal year 2001. 9. Expand Reports Provided to Town Manager and Board of Selectmen In the prior year audit, we recommended the Town establish standard financial reports to be provided to the Town Manager and Board of Selectmen. Current Year Status This area has improved, particularly in relation to status reports for revenues, enterprise operations and health trust activity. Follow-Up Action We recommend status reports be provided for the largest eight special revenue fund accounts that cumulatively total approximately $ 3.2 million. 9 I I I I I I I I I I I I I I I I I I III. RESOLVED PRIOR YEAR ISSUES Improve Water Billin,q Function In the prior year management letter, we recommended the Town take steps to improve the water billing function, specifically: · minimize estimated bills · adhere to established billing schedule · improve oversight Current Year Status In fiscal year 2000, the Town implemented a new utility billing system, a monitoring system, and began a new meter replacement program. This has resulted in improved controls and timeliness of the billing system. As long as the Town continues this process, this issue is resolved. 2. Reconcile Budgeted Water Revenues with Tax Recap Sheet In the prior year management letter, we recommended the Town recon- cile estimated water revenues (based on consumption) to the budget used for the tax rate setting. This should minimize the risk of future revenue deficits. Current Year Status In fiscal year 2000, the Town estimated water revenues more conserva- tively, resulting in a surplus of actual revenues over the budget. As long as the Town continues to estimate revenues conservatively, this issue is resolved. Also, we understand the Town is formalizing procedures to track and reconcile consumption in fiscal year 2001. 3. Establish Formal Reconcilincl Procedures with the School Department In the prior year, we recommended the Town provide additional assistance and training to the School Lunch Accountant in accessing and monitoring the Town's accounting records, in order to simplify the reconciliation process. 10 Current Year Status Adequate training has been provided. This issue is resolved. Cut Off Payroll at Year End In the prior year audit, we recommended the Town split the year-end pay- roll by fiscal year to assure proper cutoffs occur. Current Year Status This issue was fully implemented in fiscal year 2000. Sm Report Abatements to Town Accountant In the prior year audit, we recommended that the Assessors' Office report abatements to the Town Accountant. Current Year Status This issue was implemented and resolved in fiscal 2000. 6. !.~prove Cut Off of Receipt Postings In the prior year audit, we recommended the Collector's Office make efforts to assure that the timing of postings to taxpayer/customer accounts be consistent with amounts reported to the general ledger. This would simplify the receivable reconciliation process. Current Year Status This issue was implemented and resolved in fiscal 2000. 11 7. Improve Specific Departmental Receipts Recreation Activities In the prior year audit, we recommended all fees (and expenses) related to recreation activities flow through the Town's accounting records and in accordance with the Town's new department receipt policies. Current Year Status This issue was implemented and resolved in fiscal year 2000. 8. StreamlineAccountincl System In the prior year audit, we recommended the Town Accountant streamline the chart of accounts by consolidating and purging unnecessary accounts. This would result in improved efficiency in daily maintenance and recon- ciliation. Current Year Status This issue has been implemented and resolved. 12