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HomeMy WebLinkAboutReport on Internal Control, Compliance & Other Matters 1 Tautges Redpath, Ltd. Certified Public Accountants and Consultants REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Honorable Mayor and Members of the City Council City of Oak Park Heights, Minnesota We have audited the financial statements of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information of the City of Oak Park Heights, Minnesota as of and for the year ended December 31, 2006, which collectively comprise the City of Oak Park Heights, Minnesota's basic financial statements and have issued our report thereon dated April 16, 2007. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we considered the City of Oak Park Heights, Minnesota's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City of Oak Park Heights, Minnesota's internal control over financial reporting. Accordingly, we do not express an opinion of the effectiveness of the City of Oak Park Heights, Minnesota's internal control over financial reporting. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and would not necessarily identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses. However, as discussed below, we identified certain deficiencies in internal control over financial reporting that we consider to be significant deficiencies. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with 4810 White Bear Parkway White Bear Lake, Minnesota 55110 I 651 426 7000 651 426 5004 Fax I www.hlbtr.com HLB Tautges Redpath, Ltd is a member of ® International, a world -wide organization of accounting firms and business advisors . r Report on Internal Control over Financial Reporting and on Compliance and Other Matters Page 2 generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented or detected by the entity's internal control over financial reporting. We consider the deficiencies described in the accompanying schedule of findings and responses as items 2006 -1 through 2006 -3 to be significant deficiencies in internal control over financial reporting. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity's internal control. Our consideration of the internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in the internal control that might be significant deficiencies and, accordingly, would not necessarily disclose all significant deficiencies that are also considered to be material weaknesses. However, we believe that none of the significant deficiencies described above is a material weakness. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City of Oak Park Heights, Minnesota's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. We also noted certain additional matters that we reported to management of the City of Oak Park Heights, Minnesota in a separate letter dated April 16, 2007. The City of Oak Park Heights, Minnesota's response to the findings identified in our audit are described in the accompanying schedule of findings and responses. We did not audit the City of Oak Park Heights, Minnesota's response and, accordingly, we express no opinion on it. Report on Internal Control over Financial Reporting and on Compliance and Other Matters Page 3 This report is intended solely for the information and use of the City of Oak Park Heights, Minnesota's City council and management and is not intended to be, and should not be, used by anyone other than these specified parties. �g - / . 4 �I. HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota April 16, 2007 CITY OF OAK PARK HEIGHTS, MINNESOTA Schedule of Findings and Responses For The Year Ended December 31, 2006 2006 -1 Lack of Segregation of Duties Within Utility Billing Criteria: Generally, a system of internal control contemplates separation of duties such that no individual has responsibility to execute a transaction, have physical access to the related assets, and have responsibility or authority to record the transaction. Condition: Utility bills are produced, payments are collected, and receipts are posted to the utility system by a single employee. Cause: The condition is due to the limited number of staff and is common to cities of this size. Effect: The lack of ideal segregation of duties subjects the City to a higher risk that errors or fraud could occur and not be detected in a timely manner. Recommendation: We recommend the Finance Director continue reviewing all utility adjustments and remain aware of this situation. Management Response: The City has established certain other safeguards to compensate for this situation, including the Finance Director's approval of all utility adjustments and storing the City's cash box in the Finance Director's office. CITY OF OAK PARK HEIGHTS, MINNESOTA Schedule of Findings and Responses For The Year Ended December 31, 2006 2006 -2 Financial Statement Preparation Criteria: Management is responsible for establishing and maintaining effective internal controls. These controls include the responsibility for preparation, or oversight of the preparation of the financial statements in accordance with generally accepted accounting principles. Condition: During this year of audit, Statement on Auditing Standards (SAS) No. 112 became effective. Basically, the main intent of SAS 112 is to have auditors report in writing more findings involving internal control. SAS 112 specifies that an organization may not rely exclusively on its auditors to perform the financial statement process. In our viewpoint, SAS 112 will result in many, if not most, small to mid -size organizations receiving a finding regarding financial statement preparation. Like many similarly sized organizations, the City has requested assistance from us, the auditors, with drafting financial statements and related notes. This is a common practice and an allowable nonaudit service under the AICPA Ethics Interpretation 101 -3. However, other than relying on the auditors, the City staff does not perform sufficient procedures to detect if there were misstatements or omission of disclosures to the financial statements. Cause: The City has not established procedures to detect misstatements or omissions of disclosures in the draft financial statements prepared by the auditors. Effect: By not having such controls, there is an increased risk that errors or omissions in draft financial statements prepared by the auditors would not be detected by City management. Recommendation: We recommend the City review this matter and determine a course of action. Any change would need to be viewed from a cost/benefit perspective. Options for the City include: 1. Remain aware of the situation, however due to the increased cost, make the choice to make no changes to current procedures. 2. Implement internal procedures as determined practical. Such procedures could include: a. Complete a disclosure checklist to ensure propriety and completeness of disclosures. b. Trace various trial balance accounts to the draft financial statements to ensure all accounts are included in the financial statements. CITY OF OAK PARK HEIGHTS, MINNESOTA Schedule of Findings and Responses For The Year Ended December 31, 2006 c. Review GASB 34 conversion entries to ensure that the draft government -wide financial statements are free of misstatement. 3. Hiring additional internal or 3` party resources to assist with the financial statement process. Management Response: The City is aware of SAS 112, but a cost/benefit analysis of the issue does not support the allocation of additional employees or resources at this time. Certain other safeguards are successfully maintained (Council oversight, Finance Director review of the draft financial statements) which provide satisfactory mitigation of the issue. - r CITY OF OAK PARK HEIGHTS, MINNESOTA Schedule of Findings and Responses For The Year Ended December 31, 2006 2006 -3 Inadequate Documentation of the Components of Internal Control Criteria: SAS 112 specifies that inadequate documentation of the components of internal control is considered a significant deficiency in the design of internal controls. Condition: Regarding the purchasing process, the City has implied purchasing policies which include department head or city administrator approval of all invoices, council approval of all disbursements and obtaining quotes and sealed bids as required by state statute. However, these policies are not in writing and therefore, under the definition of SAS 112, a finding exists. Cause: There may be an assumption that because the City's accounting system is not complex and accounting personnel have direct and easy access to the Finance Director when questions arise, there is no need for an internal control /accounting manual. Effect: An implied or verbal policy is subject to greater variation of its meaning and the likelihood of misinterpretation increases when a policy is not written. Recommendation: We recommend the City establish a written internal control manual. Written procedures, instructions, and assignments of duties will prevent or reduce misunderstandings, errors, inefficient or wasted effort, duplicated or omitted procedures, and other situations that can result in inaccurate or untimely accounting records. A well - devised accounting manual can also help to ensure that all similar transactions are treated consistently, that accounting principles used are proper, and that records are produced in the form desired by management. Management response: City staff understand this finding and will prepare written internal control documents in 2007.