Money is here somewhere? Miss Winnie trying to sniff it out!
The Audit of City Finances Dated June 30, 2015
Plante & Moran on November 17, 2015 had completed their Annual audit of City Financial Statements and issued their report to the Council. In completing the financial statements audit of the City of Wixom, Plante & Moran identified certain deficiencies in internal control that were considered to be material weaknesses.
“A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis.”
The Audit had three sections:
• Sec #1 Internal Control Related Matters
*Includes deficiencies we observed in the City’s internal control that we believe are significant.
• Sec #2 Results of the Audit Process
*Includes observations about the audit process that are relevant to those charges with governance.
• Sec. #3 Other Recommendations and Related Information
*Presents other recommendations related to internal control, procedures, and other matters noted during our current year audit, as well as legislative matters that we feel are relevant to you in your governance role.
Plant & Moran noted, “These comments are offered in the interest of helping the City in its efforts toward continuous improvements, not just in the areas of internal control and accounting procedures, but also in operational or administrative efficiency and effectiveness.”
Pt #1 Complexity of the accounting system/fund structure Section #1
• Historically more funds are maintained than necessary to account for governmental activities.
• Some Transactions are reported in more than a single fund
• Complexity creates difficulties in understanding the transactions that have taken place.
• Act 51 Major Street Funds reported a return of Act 51 money to the General Fund, which might not have been allowed under the requirements of that legislation. The noted accounting records were adjusted to retain the money in the Major Street Fund.
The Recommendation:”…beginning in the2017 Budget, the City evaluate ways to simplify its accounting and fund structure, so that it can more easily serve as a tool to understand its transactions.”
Pt. #2 Segregation of Duties Section 1
• Certain controls over access to creating use and assigning permission in amounts as budgeted. We the general ledger system, creating new vendors and issuing checks as well as initiating and authorizing bank transfers and creating new accounts are not segregated between individuals.
The Recommendation: “We recommend procedures be implemented that mitigate the risk of one person being involved In both of these transactions.”
***Is this not business accounts receivable and accounts payable basic tenant that they shall never mix with each other? Basic Accounting Course #100
Pt.#3 Review of the accounting records Section #1
“The City has implemented appropriate procedures to review accounting adjustments made during the year through the general journal system. We believe that additional accounting errors could be detected and corrected if this system was expanded to include most general ledger balances.”
“During our audit, we identified adjustments to the recording of water and sewer revenues and receivables, ACT 51 allocations, CDBG activity, and to correct interfund loan balances at the year end.”
Section 2 Results of the Audit Process
* Nine factors were reviewed as stated in the engagement letter dated September 14, 2015. “…our audit of the financial statements does not relieve you or management of your responsibilities. Our responsibilities is to plan and perform the audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatements.’ The significance accounting policies used by the City are described in NOTE 1 to the financial statements.”
*Note 13, the city adopted GASB 68, Accounting and Financial Reporting for Pensions, during the year ending June 30, 2015.As a result of this new pronouncement, the City reports the cost of pension benefits in the government-wide statements as the employees are providing employment services, rather than as it is funded. The rule change does not impact the General Fund or other government funds individually.
*There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred.
*The most sensitive estimste affecting the financial statements are the other postemployment benefit obligation and the net pension liability.
*Finally, “The disclosure in the financial statements are neutral, consistent and clear.
Section 3 Other Recommendations and Related information
Budgeting in Compliance with Generally Accepted Accounting Principles
“The city has historically budgeted for some activity in a manner inconsistent with governmental accounting principles. When preparing its annual financial statements, the City has generally modified the presentation of these activity to conform to the appropriate accounting principles.
However, this makes the annual financial statements appear different than the amounts as budgeted. We recommend the City evaluate whether these accounting differences are more appropriate and, if not, consider modifying the budget presentation to conform to generally accepted accounting principles.
* There are items a), b), c), d), e), & f) that were either transfers in from funds or transfers out that many did not meet the definition of a fund transfer.
*Plante & Moran recommended the City evaluate whether these accounting differences are more appropriate and, if not, consider modifying the budget presentation to conform to generally accepted accounting principles the differences were noted in the items a) through f) above. (November 17,2015 Letter to Council)
Unfunded Legacy Costs (Page 8, November 17, 2015 letter)
* The City is reporting a net pension liability of $ 11,516,991 as of June 30, 2015.
*The Note 9 of GASB Statement 68, provides additional insight to the costs associated with pension benefits. The required contribution of $833,137 was only 74% of the full accrual pension expense; therefore, the unfunded pension liability will continue to grow each year.
*Relative to employee healthcare, GASBE Statement No 75 will require theCity to measure its OPEB costs as the employees are providing employment services, rather than as funded. Fortunately, the City’s unfunded OPEB costs are somewhat lower…$.8 millionas of June 30, 2015. The City has been contributing to the MERS Retirement Health Funding Vehicle in excess of the minimum requirements.
The letter from Plante & Moran is a very good evaluation of the Financial statements of the City, but there is work to do. I am certain that this work will get done and the Council should ensure that the City Manager has the financial operations and management fix as a priority for the next budgeting year.
You may obtain the report on the Wixom’s web site.
City of Wixom, Michigan
with Supplemental Information
June 30, 2015
Use this link to access the report.