HomeMy WebLinkAboutAUDIT MANAGEMENT REPORT 06-30-1986TOWN OF NORTH ANDOVER, MASSACHUSETTS
MANAGEMENT REPORT
June 30, 1986
APR 0 6 t988
STEPHEN W. KIDDER
COMMISSIONER
EDWARD J. COLLINS, JR.
DEPUTY COMMISSIONER
Board of Selectmen
Town of North Andover
North Andover, Massachusetts 01845
Honorable Selectmen:
We have examined the financial statements of the Town of North Andover,
Massachusetts for the years ended June 30, 1985 and June 30, 1986 and have
issued the fiscal 1985 report thereon dated May 30, 1986 and issued the fiscal
1986 report thereon dated February 27, 1987.
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 an evaluation are to establish a
basis for reliance on the system of internal accounting control to determine
the nature, timing and extent of other auditing procedures that are necessary
for expressing an opinion on the financial statements and to assist the
auditor in planning and performing his examination of the financial statements.
Our examination of the financial statements made in accordance with
generally accepted auditing standards, including the study and evaluation of
the town's system of internal accounting control for the year ended June 30,
1985 and June 30, 1986, would not necessarily disclose all weaknesses in the
system because it was based on selective 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 so you can
implement corrective action.
Since the date of our last report, April 8, 1985, the town has made
progress in correcting some of the identified weaknesses in the system of
internal control. Treasury warrants are now approved by the majority of
Selectmen; a record of investments is being maintained by the Treasurer;
purchases made in excess of $4,000 have formal bidding procedures;
departmental turnovers of cash are more frequent; receipts and expenditures of
trust funds are reported to the Town Accountant; and annual property
valuations are properly verified. With these problems under control, we noted
that other areas need to be addressed.
I Town Accountant
A General Ledger Posting Errors
Through our analysis of the general ledger, we discovered that ledger
entries were not properly recorded. We discovered posting problems in the
following areas:
1. recording of state assessments
2. recording of receipts in the special revenue fund
3. recording of abatements
1. Recording of State Assessments
Currently the Town Accountant maintains control of state assessments of a
particular fiscal year through one account. At year end, over and under
assessments are shown as one net figure and brought forward. Amounts
specified to be used as available funds were never utilized from this
balance. Also, the amount raised for the Regional Transit Authority was never
posted in the general ledger. When the actual expenditure was made, the
charge was made to state assessments creating an incorrect debit balance in
the state assessment account.
We recommend the Town Accountant set up individual accounts for each state
assessment raised. At year end, overassessments should be used as an
available fund for the next fiscal year while underassessments should be
raised the next fiscal year. This method of recording state assessments
allows for better control while it keeps the status of each account readily
available and ensures compliance with legal requirements.
2. Recording of Receipts in the Special Revenue Fund
During our review of the special revenue fund, we discovered a negative
balance in the Housing and Urban Development cash account. In reconciling the
cash balance between the Treasurer and Accountant, total cash of all funds
combined did balance. After further investigation, it was determined that
H. U. D. receipts were incorrectly posted to the general fund, rather than the
special revenue fund.
As provided in Chapter 41, Section 55, the Town Accountant shall possess
the powers and responsibilities of Town Auditor. One of these responsibil-
ities detailed in Chapter 41, Section 50 is to "...Verify the cash
balance...by actual count of the cash and by reconciliation of bank
balances..." of each officer at least annually. Presently, the Town
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Accountant does not review the bank reconciliations of the Treasurer on an
annual basis. We recommend the Town Accountant comply with these sections of
the law. If these procedures had been in place, posting errors in the general
ledger would have been discovered on a more timely basis and control would
have been substantially improved.
3. Recording of Abatements
Recording of abatements is another area for concern. Many abatements were
charged to the revenue account instead of properly charging the designated
Overlay account. The ultimate effect of this is an incorrect reduction of the
Surplus Revenue and "free cash" availability.
The result of incorrect entries in the general ledger is a breakdown of
sound internal control since the centralized recording system is not
reliable. We recommend the Town Accountant implement the procedure of
maintaining a monthly trial balance.
B Withholdings Payable
As of June 30, 1986, payroll withholdings resulted in a net debit balance.
The cause of this problem was due to recording receipts in the next month,
even though the actual withholding were on account of June payrolls.
This practice creates an artificial liability on the books of the town.
We recommend that payments of payroll withholdings be made only when
receipts are received.
C Encumbrances
Fiscal year appropriations for tax title, short-term borrowing and bond
issue expense were carried forward to fiscal year 1986. These amounts were
not documented in the Accountant's office by means of an encumbrance letter.
Chapter 41, Section 58 states "Each head of a department, board or committee
authorized to expend money shall furnish the town accountant at the close of
the financial year, a list of bills remaining unpaid, showing to whom and for
what due, and their amounts...". We recommend the Accountant maintain a
complete file of encumbrance letters for all amounts carried forward. When
proper documentation has not been provided to the.Accountant, the balance of
the account should be closed to Revenue.
D 9e~artmental
Our review of federal grants disclosed that the Town Accountant does not
receive all copies of federal grant agreements. The current practice makes it
difficult to determine whether or not the correct grant money was received and
that expenditures comply to the various grant provisions. The Town Accountant
has not been provided with a copy of all contracts and grant agreements by the
various departments.
This practice creates the risk that vouchers may be submitted by
department heads and paid by the Accountant which may not be in compliance
with the terms of the contract or grant. In any event it eliminates an
independent verification process by the Accountant; a process which is
required by Massachusetts General Laws Chapter 41, Section 57, which reads in
part as follows, "... The town accountant shall have custody of all contracts
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of the town, .... Section 56 of said Chapter 41 sets forth that "...The town
accountant may disallow and refuse to approve for payment, in whole or in
part, any claim as fraudulent, unlawful or excessive, and in such case he
shall file with the town treasurer a written statement of the reasons for such
refusal...".
The single audit requirement as to Federal Grants makes it imperative
that the Accountant receive a copy or all grants for audit control and legal
compliance purposes.
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We therefore recommend that each department provide the Accountant with a
copy of each contract and grant agreement.
E Payroll
The proper separation of duties is not evident in the procedures applied
for approving and disbursing payroll. A separation of duties between the
recording function and the disbursement of funds is an important element of
internal control.
This principle is supported by statutory provisions which assigns the approval
and accountability of payrolls, by warrant, to the Town Acountant and assigns
the actual disbursement of payrolls from a warrant to the Treasurer.
Presently, a clerk in the Treasurer's office genera~es payrolls through
EDP services provided by a local bank which also maintains the payroll
account. The clerk controls input data which:
· initiates and terminates employees
· inputs wage and salary rates
· inputs payroll withholdings
· controls disbursements and distribution
· controls corrections and modifications to records
The Town Accountant computes payrolls based on departmental
authorizations and establishes control totals for reconciliation purposes.
However, our audit results indicate the procedure is not effective· Errors
occur frequently which impact the cash reconciliation and the recorded payroll
data and the variances have been unresolved for several fiscal periods.
While the amounts have been immaterial and do not compromise the financial
statements, the unresolved variances indicate weak or nonexistant control.
Additionally the manual compilation of payroll is a duplication of effort.
The appropriate separation of duties, effective internal control, and
statutory compliance can be accomplished with the following procedures:
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Town Accountant - This office should...
Originate all EDP input data, properly supported by departmental
authorizations
Establish EDP input controls and reconcile to the payroll register
Prepare payroll warrant
Maintain accounting records
Treasurer - This office should...
. Physically control and safeguard payroll disbursements
. Reconcile actual disbursements and payroll deductions to payroll
register and warrant
· Distribute payroll disbursements
o Record and reconcile cash
We recommend the Town consider implementing the above noted procedures as
soon as staffing considerations can be resolved.
II Collectors' Receivable Controls
The Collector does not maintain a separate book or other independent
record of controls of the various commitments, payments, abatements and
refunds.
The failure to keep such independent controls creates the risk that
errors may occur and not be detected on a timely basis. Without such records
the Collector can not readily reconcile with the Accountant, Assessors or
outside computer firm.
We recommend that the Collector establish a book of controls and that
timely reconciliations be made with the Accountant, Assessors and outside
computer firm. The maintainence of such controls should add significantly to
the reliability of the outstanding lists.
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B Outstandin9 Taxes of Prior Years
We noted there were outstanding personal property taxes dating back to
fiscal year 1975 and outstanding motor vehicle excise dating back to fiscal
year 1972. Although motor vehicle excise receivables are fully reserved until
collected, these old outstanding taxes do restrict the town's "free cash"
position. Failure to reach settlement of these accounts either by collection
or abatement results in a loss of revenue to the Town and an overstatement of
the Town's assets. We recommend that the Collector and Assessor review the
outstanding taxes of prior years and take every legal means available to
settle these accounts.
C Abatements
There is no evidence that the abatements recorded in the Collector's
office balance with those of the Assessor's office. Abatement totals are
recorded per batch processed and are not reconciled to the Assessor's monthly
abatement report. In compiling monthly totals of abatements, we noted that
printouts generated in the Collector's office were misfiled and did not agree
with their manual spreadsheet. This breakdown in internal control jeopardizes
the reliability of accounts receivable.
We recommend the Collector's office review and modify their current
method of recording abatements to include these steps:
· reconcile by total, computer printout of abate-
ments recorded with manual input spreadsheet
· reconcile printouts for the month to the Assessor's
monthly report of abatements granted
· reconcile any differences that occur between any
abatement records as well as with the general ledger
· file printouts by fiscal year, by levy
Some of these procedures had already been implemented by the conclusion
of our examination but we expect that all recommended procedures will be put
in place.
III Treasurer's Bank Reconciliation
The Treasurer maintains two checking accounts on a wash basis. The
Arlington Trust payroll account ~0022128 as of June 30, 1986 lists outstanding
checks as far back as 1974. The vendor account ~0003320227 at the Bank of New
England lists outstanding checks as far back as 1976.
While it is true that the vendor and payroll checking accounts zero out
each month it is equally true that the municipality has a vested interest in
all outstanding checks until such a time as they have been paid. Such checks
represent a municipal obligation offset by the unexpended funds in the bank.
These checks should be adequately controlled and accounted for on a
monthly basis. To strengthen such control and simplify the reconciliation
process, we recommend that all checks outstanding for more than six months be
returned to cash and added to the tailings or unclaimed checks account,
maintaining adequate supporting documentation as to warrant number, date,
check number, payee and amount.
IV Assessors
Abatement Procedures
Our examination of abatement procedures indicates a need for
improvement. The abatement record book for real estate, personal property,
and motor vehicle excise levies did not agree with certificates issued.
Voided and adjusted abatement certificates were not noted on the abatement
record book and as a consequence numerical sequence was out of order. Posting
from the certificates to the abatement record book for fiscal year 1986 was
not complete as of our audit date.
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Although the Assessor notifies both the Accountant and Collector of monthly
abatements in the form of a letter, this process is not done on a timely
basis.
In order to increase controls in this area, we strongly recommend that
formal procedures be established for the initiation, approval and processing
of abatements. Voided certificates should be noted on the abatement record
book to maintain numerical sequence. Every effort should be made to post to
the abatement record book and balance abatements with the Collector on a
monthly basis. Compliance with these procedures should be reviewed by the
department head.
V Collector's Failure to Turnover to Treasurer
The Collector has over a period of years kept unidentified receipts in
his checking account in excess of his fees to the point that these receipts as
of June 30, 1986 amounted to $34,653.
The failure to report such receipts causes an understatement of the
municipality's assets. Such receipts further indicates a weakness in the
collection process. All receipts should be classified and reconciled on a
daily basis. Failure to identify receipts on a timely basis renders the
identification that much more difficult.
We recommend that the Collector turn over to the Treasurer all such
unidentified receipts less any fees to which he may be entitled by town
by-law, to be in compliance with Massachusetts General Laws' Chapter 60,
Section 2, which reads in part as follows, "...He shall also give to the
Treasurer an account of all charges and fees collected by him. He shall once
in each week or more often, pay over the Treasurer all money received by him
for taxes and interest during the preceeding week...".
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VI Selectmen
Procedures Manual
We noted that the Accountant's, Assessors' and Collector's office do not
maintain procedures manuals. These departments rely on one key employee for
the functioning of the department. Department heads do not establish formal
duties for the employees within their departments, creating confusion among
personnel. This manual should consist of an organizational chart of the town
and its departments with a description of job duties, responsibilities and
procedures. In developing the manual, the present responsibilities of
departmental personnel should be reviewed and practices inconsistent with
sound internal control procedures eliminated. Such a manual provides better
control, improved efficiency and a reference for new employees.
The foregoing conditions were considered in determining the nature,
extent and timing of audit tests we applied to our examination of the
financial statements and this report does not modify our financial report
dated February 27, 1987. Other minor weaknesses in internal accounting
control were identified but were considered immaterial in the circumstances
and did not affect our substantive testing.
During the course of our examination the weaknesses noted in this report
were discussed with town officials responsible for the various functions
involved. The importance of taking corrective action was stressed and we
reiterate here, that management, through an adequate system of internal
control, has the responsibility for ensuring that the Town's existing and
potential assets are properly accounted for and safeguarded against loss,
misuse or misappropriation.
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We wish to take this opportunity to thank all of the Town's officials and
personnel for their assistance and cooperation during the course of our
audit. If we can be of any further assistance in implementing any of the
recommendations made in this report, please do not hesitate to be in touch
with us.
Sincerely,
May 31, 1987
ot{ cou
Department of Revenue
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TOWN OF NORTH ANDOVER, MASSACHUSETTS
MANAGEMENT REPORT
June 30, 198~
$£P ~ 3 198~
IRA A. JACKSON
COMMISSIONER
EDWARD J. COLLINS, Jr.
DEPUTY COMMISSIONER
KENNETH A. MARCHURS
DIRECTOR OF ACCOUNTS
Board of Selectmen
Town of North Andover
North Andover, Massachusetts 01845
MAIL ADDRESS
P.O BOX 7015
BOSTON MASS 02204
Honorable Selectmen:
· We have examined the financial statements of the Town of North
Andover, Massachusetts for the year ended June 30, 1984 and have issued our
report thereon dated April 8, 1985. 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 an evaluation are to establish a basis for reliance on the system of
internal accounting control to determine the nature, timing and extent of
other auditing procedures that are necessary for expressing an opinion on the
financial statements and to assist the auditor in planning and performing his
examination of the financial statements.
Our examination of the financial statements made in accordance with '
generally accepted auditing standards, including the study and evaluation of
the town's system of internal accounting control for the year ended June 30,
1984, would not necessarily disclose all weaknesses in the system because it
was based on selective 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.
The following summary of findings defines the various weaknesses inherent
in the internal accounting control systems of the town as:
Type A - Comments - These are the weaknesses that
if not corrected quickly, can cause the
most problems. They carry with them a
high risk of error or possible
irregularity.
Type B - Comments - These are the weaknesses that
are also important, but immediate
corrective action is not as necessary
since assets are still reasonably
safeguarded. These areas, however,
once corrected will serve to strengthen
the town's internal administrative as
well as its accounting controls.
While this report may appear to portray a one-sided picture of the
town's operations, its main objective is to point out areas of concern that we
feel should be corrected.
INDEX
Pa~e
Type A Weaknesses Noted
1. General
Approval of treasury warrants
2. Investments
No record of investments being maintained
3. Assessors
Verification of annual property valuations
4. Bids
Purchases made in excess of ~4,000 ~lthout formal bid
5. Departmental turnovers
More frequent turnovers of cash needed
Type B Weaknesses Noted
1. Trust Funds
Receipts and expenditures not being reported to to~n
accountant
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3
e A Weaknesses Noted
1. General
Approval of Treasury Warrants
In our last Management Report, which accompanied the Fiscal Year 1981
aulit, we noted that some payroll and expense warrants were not signed by a
maiority of selectmen in violation of Chapter 41, Section 56 of the
Ma ~sachusetts General Laws and the North Andover Town by-laws. This practice
ha not been corrected. During the current audit period 20 warrants were
si by less than a majority of the selectmen. ~e review and approval of a
warrant by the Board of Selectmen is an integral part of the internal control
of municipal finance established by the Massachusetts General Laws. We,
, recommend that all selectmen or, at least, a majority review and
approve each warrant.
2. Investments
We noted during our examination of the cash accounts that investments
not recorded in the accounting records of the town. If investments are
t recorded, accounting errors may remain undetected and uncorrected, thereby
a severe breakdown tn internal control.
We recommend that; a) all investments be placed on warrants when the
is purchased b) entered as a receipt upon redemption, and c) the
treasurer keep a log of investments, detailing purchase date, account
rate of interest, maturity date, amount of interest earned and
d~pository.
3. Assessors
Verification of annual property valuations
The assessors do not keep a manual running total of valuation changes
r~ceived during the year from the Municipal Management Corporation Computer.
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a result, there is no verification of the annual total valuation produced
the MMC Computer and from which the town's tax rate is established.
We recommend that the assessors maintain a running total valuation
ag last year's valuation as the initial base and incorporating additions or
etions during the year as they occur.
4. Competitive Procurement
We observed two instances where the procurement practices of the town
uld be improved. They were: the lack of competitive procurement of
oline and the procurement of various paper products used by the school
ch department. Chapter 40, Section 4G of the Massachusetts General Laws
uires:
"...., no contract for the purchase of equipment,
supplies or materials, the actual or estimated
cost of which amounts to four thousand dollars or
more,.., shall be awarded unless proposals for the
same have been invited by advertisement..."
The practice of not competitively procurring gasoline, not only
rates Massachusetts General Laws, but, also, could result in the town
'lng more for gasoline than necessary.
The town competitively procured various paper products for the school
~ch department, however, the bidder only guaranteed the prices identified in
bid for four months. After the four months had expired, the bidder raised
prices on most of the paper products. The bid specifications for any
zurement should require bidders to guarantee the prices, upon which the
~rd is made, for the duration of the contract. Without such a
~cification, there is no assurance that prices, competitively selected, will
the most economical for the entire procurement of supplies; thereby
[ucing the effectiveness of the procurement process.
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We recommend:
a) the town competitively procure gasoline as required by Chapter 40,
Section 4G of the Massachusetts General Laws; and
b) include in the specifications for competitive procurement of
supplies, that the prices offered by bidders will be guaranteed for the entire
duration of the contract.
5. Departmental Turnovers - Building Department, Health Department and
Town Clerk
More frequent turnover (deposit) of cash with the treasurer is needed
Cash receipts are not being turned over to the treasurer for deposit
on a timely basis by the Building Department, Health Department and Town Clerk.
This practice increases the possibility that cash may be lost or
misplaced. Furthermore, the town could lose interest which might be earned on
these idle funds.
We recommend that turnovers be made more frequently, at least weekly.
Type B Weaknesses Noted
1. Trust Funds
The income of certain trust funds in the custody of the town
treasurer is not being reported to the town accountant. Therefore, this
income from trust funds which have a permanent dividend order is not being
reflected in the accounting records of the town. Not reporting this income
increases the likelihood that errors or omissions by external depositories may
not be detected and corrected.
We recommend that all interest, including interest from trust funds
having a permanent dividend order, be reported to the town accountant.
Uniform Municipal Accounting System
The Commonwealth has revised the accounting principles now in effect for
the municipalities, the main purpose of which was to bring these principles
into conformity with Generally Accepted Accounting Principles (GAAP).
The revised system has been designated as the "Uniform Municipal
Accounting System" (UMAS) and its main thrust is to establish a series of
funds and groups of accounts, as presented in the updated publication of
"Government Accounting, Auditing and Financial Reporting" (G.A.A.F.R.)
published by the National Committee on Governmental Reporting in 1980, in
order to facilitate the preparation of more meaningful financial statements
and reports. It is documented in a revised Accounting Manual (a new "green
book") that has been published by the Bureau of Accounts.
Currently the revised system is being adopted by some of the communities
in the Commonwealth on a voluntary basis. We recommend that you familiarize
yourself with the revised system and consider its adoption as soon as it is
feasible.
Our examination uncovered other minor 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.
The foregoing conditions were considered in determining the nature,
timing and extent of audit tests we applied in our examination of the
financial statements and this report does not modify our financial report
dated April 8, 1985.
During our evaluation of the town of North Andover's internal control
system, the forementioned weaknesses were discussed with the town's management
personnel responsible for that particular accounting function. In this
regard, we would appreciate receiving, at your earliest convenience, any
thoughts 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.
It is very important that you commence corrective action on the
aforementioned weaknesses immediately. We would be pleased to assist you in
developing such a corrective course of action should you so desire.
Sincerely,
Kenneth A. Marchurs
Director, Bureau of Accounts
Department of Revenue
May 3, 1985