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HomeMy WebLinkAboutAUDIT MANAGEMENT REPORT 06-30-1980TOWN OF NORTH ANDOVER MANAGEMENT REPORT June 30, 1980 BOARD OF SELECTM~ We have examined the financial statements of the town of North Andover, Massachusetts for the year ended June 30, 198~ and have issued our report thereon dated December 4, 1980. As part of 'our examination, 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 purposes of such evaluation are to establish a basis for reliance on the system of internal accounting control in determining the nature, timing and extent of other auditing proc. ed .urns that are necessary for expressing an opinion-on~..~.the financial statements and td assist the auditor in planning and performing his examinatio~ of the financial statements. Our examination of the financial-statements made in accordance with generally' accepted auditing standards, includirig- the study and evaluation of the town,s~ system~Of ~inte~nal-accounting not necessarily disclose all weaknesses in the system because it was based on selected tests of accounting records and related data. However~ such study and evaluation disclosed the following weaknesses that we believe should be brought to your attention. Because this report deals with areas of internal control and operating procedures which need improvement~ it may appear to portray a one-sided picture of the town's operations. We wish to point out that we found many favorable aspects ..of the town's operations and accounting systems. We also were pleased Go note the high degree of dedication evident in many of the officials and employees with whom we work e d. Many of the followinE weakne'sses were previously addressed in our manaEe- ment report dated December 20~ 1979 in support of our audit report for the year ended June 30~ 1979. In most cases~ the weaknesses cited in that report were corrected or are in the processes of belnE corrected. I I I I I I I I I I I I I I I I This report deals with weaknesses that were not corrected since our last report and addresses areas that were more extensively covered in this audit period. GENERAL 1. Encumbrances Excepting major capital outlays, the town does not use the encumbrance method of accounting ~a uniform purchase order system. With both systems, a re- duction in the appropriation balance is recorded upon the issuance of an approved purchase order. The primary advantage to these methods is that expenditures for goods and services are controlled when the order is placed, thereby reducing the possibility of an overdrawn appropriation. If a purchase order system were in use, it would be possible 'to document the specific goods and services desired by the town, assuring vendor compliance, and it could be used to confirm negotiated prices and fees. A properly conceived purchasing system assures delivery of goods and ser- vices, reduces occurrences of duplicate payments to vendors, provides control over pricing arrangements, and provides documentary evidence for establishing the town's continuing liabilities at year end. Interim reports would be more meaningful be- cause budgets would be compared to actual expenditures to date plus the total pur- chase orders approved. Because of the intrinsic controls associated with these systems, we recommend that a study be made of the feasibility and the cost benefits of implementing the aforementioned system. 2. Insurance policies and coverage are kept in the selectmens' office by coverage and department. We recommend that an insurance register be installed showing the coverage of each policy and premiums so a complete review of the coverage can be made on a yearly basis by the insurance committee. I I I I I I I I I I I I I I I CONTRACTS 3. Our tests for compliance with statute and town by-laws requiring solicitation of competitive bids revealed that cohtract files were not always complete. Pursuant to Chapter 41, Section 57 of the General Laws which reads in part: "The ~own accountant shall have custody of all contracts" We recommend that every officer of the town who makes or executes a contract on behalf of the town shall furnish said contract or a copy thereof to the town accountant within one week after the execution. We also recommend that copies of bid advertisements be retained as a permanent part of the bid files. PAYROLL 4. It was noted no formal policy exists for payroll check "pick-up" from the treasurer~s~offtce.~ We reco,~end:a properly:designated persom ~hould--bel-appointe~--:-~ to "pick-up" the departments payroll checks~ sign off for such in the town tresurer's office, and return to the town treasurer's office all checks for employees not present on the day of check distribution. EMPLOYEES' OFF DUTY WORK DETAILS 5. Compensation received by town employees for off-duty work details are not re- ported to the town treasurer or recorded by the town accountant. The lack of control of such off-duty work details makes it possible that this income may not be reported as earned income by such employees, as required by various State and Federal Revenue agencies. We recommend that immediate corrective action be taken in order that the town be in compliance with Chapter 44~ Section 53 C of the General Laws which reads in part: "All money received by a city~ town~ or district as compen- sation for work performed by one of its employees on an off duty work detail which is related to the employees' regular employment shall be deposited in the treasury and shall be 3 kept in a fund separate from all other monies of such city, town or district and notwithstanding the provi- sions of Section 53, shall be expended without further appropriation in such a manner and at such times as shall, in the discrett~n of the authority authorizing such off-duty work detail, compensate the employee for such services." PUBLIC WORKS INSURANCE RECOVERY IN EXCESS OF $5,00Q 6. It was noted that the insurance reimbursement received by the town for damages to a Public Works Department truck totalling $7,320, was expended without specific appropriation for replacement of such'truck. Attention should be called to Chapter 44, Section 53 which reads in part: "Sums not in excess of $5,000 recovered under the terms of a fire or physical damage insurance policy may be used by the officer or depa~tmen( having control of the insured property for the restoration or replacement of such property without specific appropriation." We recommend that insurance ~reimbursementsrecelved by .the town tn .excess.of .... $5,000 be used only by vote of town meeting as required by General Laws. PURCHASES OF SIMILAR ITEMS BY VARIOUS DEPARTMENTS 7. The town purchases a number of items similar in nature which over the course of the year exceed $2,000, e.g., work shirts used by various departments. Bids should be advertised and contracts made for purchasing similar items which aggregate $2,000 or more. We recommend that the town should solicit bids and enter into contracts for purchase of similar items at a specified price for whatever quantity is needed during the year by the various departments utilizing such items. EXPENDITURE CYCLE 8. During our examination of expenditures the follo~weaknesses were noted: 1. Instances where payments were supported ~by copies of original invoices. ' 2. Invoices of prior years bills are being paid from current years appropriations contrary to the provisions of_Chap- ter 4~, Section 64 of the General Laws. 3. Invoices are not cancelled or mutilated when paid. 4. Contract file in town accountant's office is not com- plete. Warrants tested were not all approved by a majority of the Board of Selectme~ (3) as promulgated by Chapter 41, Section 56 of the General Laws. 6. Accounting machine check-writer does not provide a safe- guard against check alterations. Town accountant does not provide department heads with a monthly appropriation status report, in accordance with Chapter 41, Section 58 of the General Laws unless so requested by the department head. 8. Expenditures for Capital Projects were made prior to the funding of such project. In order to strengthen the internal control procedures and correct the above mentioned weaknesses, we recommend: Procedures should be implemented which permit payment of only original invoices. This procedure would pre- vent one invoice being used as support-for more than. one payment. Invoices paid should relate to the year in which the liability was incurred~ otherwise, they should be paid as "unpaid bills of previous fiscal year" which requires a four-fifths vote of approval at an annual town meet- ing or a nine-tenths vote of approval at a special town meeting. 3. All invoices should be cancelled by the town accountant's office to prevent duplicate payments. Contracts should be on file with the town accountant's office ensuring compliance with terms of the contract as to amounts and dates of payments to vendors. 5. Ail warrants must be approved by a majority of the Board of Selectmen prior to issuance of payments by the treasurer. A check protector should be used on all town checks tm- 'printing amounts payable as close to the dollar sign as possible in order to prevent alteration of the amount of such checks due to the "gap" between the dollar sign and amount payable. 5 Appropriation status reports should be submitted to all department heads on a monthly basis by the town accountant ensuring proper budget.fy control over ex- penditures on the departmental level. There is no provision in the General Laws of the Commonwealth of Massachhsetts that allows the town accountant to make any expenditures prior to the fund- ing thereof except in the cases of extreme emergency involving the health or safety of persons or property.. In addition, we recommend that the town accountant monitor all expenditures more closely in order to ensure compliance with the provision of the General Laws of the Commonwealth of Massachusetts. ANTI-RECESSION FUNDS 9. Anti-recession funds of $1,168 remain on the town's records as being uncommitted as of June 30, 1980. Federal requirements mandate the commitment of such funds within six months. We recommend--that ~these'fundsbe committed as soon as possible~ tdwnmeeting ~-~ - vote as required by the Office of Revenue Sharing. Failure to do so could jeopardize the status of these funds. The Executive Secretary of the Town of North AndoVer assured us that these monies will be committed at the next town meeting. ASSESSORS 1. The assessor's policy for valuing personal property is to utilize prior years valuation, when no form of list is returned by the taxpayer. It is recommended that an increased effort be made to obtain forms of list for personal property and that assessors establish a policy which would allow the appraising of properties, for which no form of list is received, at increasing values in an effort to raise assess- ments to a realistic amount and encourage submission of reports by taxpayers, in accordance with the provision of Chapter 59, Section 29 of the General Laws. 6 I I I I I I I I I I I I I I I I I I 2. Abatement Process No formal applications requesting an abatement of real estate taxes due to overvaluation are on file in the assessors office. Applications signed by the taxpayer and Board of Assessors would evidence the validity of the abatement process. We recommend that applicat~ons be submitted by the taxpayers for all abatement requests and signed by the board indicating their approval or denial of the request. TAX COLLECTOR Approximately $360,392 in motor vehicle taxes remained uncollected at the end of fiscal 1980. Of this amount, $93~871 relates to levies prior to 1980. Although these receivables are fully reserved until collected and therefore do not affect the town's "free cash" position, collection of a large portion of these amounts due would increase town revenues substantially. A selected number of these accounts were confirmed by direct mail. From the replies received, it appears that a large number of these accounts could not be located. While recognizing that there are some problems in collecting motor vehicle excise taxes, there are legal remedies at the town's disposal to effec~ a complete settle- ment. We recommend that a formal, plan for aggressive follow-up of the overdue amounts be prepared immediately and that adherence to this plan be continuously monitored. The situation of delinquent motor vehicle excise bills was discussed with the tax collector on December 22, 1980. He stated that this problem exists because of an in- crease in work load without added personnel enabling a more timely monitoring and prQcessing of delinquent accounts. REVENUE The town of North Andover has yet to complete a revaluation program that meets the standards of the Department of Revenue which has been charged with mandatory compliance by cities and towns with the 100% valuation requirement. The Department of Revenue so notified the Board of Assessors in its letter dated December 10, 1980. TOWN TREASURER TEMPORARY BORROWING We noted that a number of redeemed temporary notes representing borrowing of the town were not cancelled by the payor. These notes are payable to bearer and should be cancelled by the lending institutions upon presentation. It is the treasurer's responsibility to ensure that the notes are adequately mutilated to prevent furtberi~ negotiations. We recommend that the treasurer review all such securities remitted from the lendinE institution in order to ensure their proper mutilation= Treasurer's office will monitor all matured bonds and notes remitted to him by the lending institution ensuring that proper cancellation appears on the security preventing further negotiation of such securities. TOWN CLERK We recommend that the town clerk record all revenues received in the office cash book indicating the source of said receipts and reconcile to the bank statement on a monthly basis. In addition, we recommend that a turnover be made to the treasurer on a weekly or monthly basis in order to promptly and properly reflect these receipts on the town records. The town clerk stated that monthly reconciliation of his checking account will be implemented. DEPARTMENT OF PUBLIC WORKS Water and Sewer A review of the billing procedures of the water and sewer user charges as well as miscellaneous billing and consumer guarantee deposits disclosed the followin§ weaknesses: 1. Detailed lists of outstanding/unpaid accounts were not reconciled to the to%~ accountant's ledger control account. Detailed list of consumers' guarantee deposits were not reconciled to town accountant's ledger control account. Transfers and refunds of work completed from consumers' guarantee deposits were not properly reported to the town accountant. 8 Separate non-interest bearing bank accounts are ma[n- rained by the Public Works Department for the collection of water and sewer accounts and guar- antee deposits. Collections are paid to the town treasurer only once a month causing a substantial balance in the aforementioned bank accounts at the end of month. 0 An employee of the Computer Service Company picks up cash and checks at the Public Works Department and gives no receipts for such. In order to strengthen the internal control procedures and correct the above mentioned weaknesses, we recommend: Detailed lists of unpaid accounts should be requested from the Computer Service Company and reconciled to the town accountant's control ledger at least once a month. Ail variations should be thoroughly investi- gated and rectified at this time. At the close of each month the guarantee deposits should be listed in detail and compared to the town accountant's ledger control account. The non-interest bearing checking accounts maintained by the department of public works, which have a sub- stantial balance representing collections not turned over to the town treasurer should be eliminated and all collections should be made direct to the town treasurer's account. Procedures should be developed for the timely deposit (preferably daily) of all receipts which would maximize the availability of these monies to be invested by the town treasurer as soon as possible. The employee of the Computer Service Company should provide bonding to the town as a safeguard against the possibility of any loss occurin$ in the transporting of receipts from the Department of Public Works office to the depository bank. In addition, a signed receipt should be given to the responsible official of the town for the amount to be deposited to the town treasurer's account. I I I i I I I I I I GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The accounting principles followed by the Town are outlined in Chapter 44 of the General Laws of the Commonwealth of Massachusetts. These principles are incorporated in a manual commonly k~.'own as the Uniform System and promulgated by the Department of Revenue. The commonwealth is currently considering the adoption of generally a~cepted accounting principles as outlined in Governmental Accounting, Auditing and Financial Reporting (G.A.A.F.R.), a 1968 publication of the National Committee on Governmental Accounting. Systems designed in accordance with G.A.A.F.R. are arranged on a "Fund" basis. G.A.A.F.R. identifies eight t~pes of funds and tw~ groups of accounts, summarized below: 1. General Fund - A fund used to account for the ordinary operations of a governmental unit which are financed from taxes and other general revenues (all transactions which are not accounted for in another fund~. 2. Special Revenue Fund - A type of fund used to account for revenues fr~m specific taxes or other earmarked revenue sources which by law are .designated to finance particular functions or activities of government. (After the fund is established it usually continues year after year until discontinued or revised by proper legislative authority.) Debt Service Fund - A type of fund established to finance and account for the payment of interest and principal on all general obligation debt, serial and term, other than that payable exclusively from special assessments and revenue debt issued for and serviced by a governmental enterprise. Capital Proiects Fund - A type of fund created to account for all resources used for the acquisition of designated fixed assets by a governmental unit except those financed by Special Assessment and Enterprise funds. 5 Enterprise Fund - A type df fund established to finance and account for the aquisition, operation and maintenance of governmental facilities ~nd services which are entirely or predominantly self-supporting by user charges. Se Intragovernmental Service Fund - A type of fund established to finance and account for services and commodities furnished by a designated department or agency to other departmental or agencies within a single governmental unit. Amounts ~expended by the fund are restored thereto either from operating earnings or by transfers from other funds~ so that the original fund capital is kept intact. 10 7. Trust and Agency Funds. - Trust Fund - A fund consisting of resources received and held by the governmental unit as trustee to be expended or invested .in accordance with the conditions of the trust. Agency Fund - A fund consisting of resources received and held by the governmental unit as an-agent for others. 8. Special Assessment Fund - A fund set up to finance and account for the construction of improvements or provision of services which are to be paid for, wholly or in part, from Special Assessments levied against benefited property. 1. General Fixed Assets Group of Accounts - ~ self-balancing group of accounts set up to account for the general fixed assets of a governmental unit. · 2. General Long-Term Debt Group of Accounts - A self-balancing .gro,up of accounts set up to account for the general long-term debt of a governmental unit. Although the adoption of G.A.A.F.R. is still under study in the Commonwealth, we recommend that the Town·Accountant become familiar with its underlying principles to be better prepared to meet future accounting and reporting responsibilities. In addition, G.A.A.F.R. has been restated by the National Council on Governmental Accounting (N.C.G.A.) in March 1979 which is effective for fiscal years ending after June 30, 1980. This G.A.A.F.R. restatement con. stitutes a modest revision to update, clarify, amplify and reorder G.A.A.F.R. in order to provide immediate guidance for governmental accounting and financial reporting. An important objective is to incorporate pertinent aspects of "Audits of' State and Local Governmental Units" (A.S.L.G.U.), .the 1974 industry audit guide of the A.I.C.P.A. N.C.G.A. Statement ~1 supersedes N.C.G.A. interpretation ~1, "G.A.A.F.R. and the A.I'.C.P.A. Audit Guide." O~ examination uncovered other mi.nor weaknesses in the accounting internal control system that we considered to be immaterial and accordingly did not affect the nature, timing or extent of our substantive testing. ll The £ore2oing conditions were considered in determining the nature, extent and timing of audit tests we applied in our examination of the financial statements and this report does not modify our 'financial report dated Pecember 4~ 1980, Durin~ our evaluation of North Andover's internal control system, the fore- mentioned weaknesses were discuss6d with Town management personnel responsible for that particular accounting function. In this regard, we would appreciate receiving, at your earliest c~nvenfence, any thou2hts you may have with respect to implementing our recommendations and a proposed timetable for same. In conclusion, we wish to take this opportunity to thank you for your cooperation during the course of our audit and should you wish to discuss the contents of'this report, assistance.~n.the implementation phase of the financial statements, we will be pleased to meet'with you at a muthally convenient date and time. December 19, 1980 i~Tely, ' . Department of Revenue 12