Audit Analysis

In response to popular demand, I decided to go ahead and post my analysis of the Town of Oriental's preliminary audit for FY 2008. This is decidedly unofficial and represents only my own views. These views are subject to refinement (updated January 26 2010).

ORIENTAL 2008 AUDIT COMMENTS

Control Deficiencies (pp 45-46)

1. Expenditures made by the general fund (FY 2007) exceeded authorized appropriations by $1,089 (tourism board) and $692 (environmental). Comment: This comment reflects three separate problem areas: (a) The excess tourism expenditure resulted from the tourism board taking unexpended budget from FY 2006 and "rolling it over" into 2007 without budgeting it. This has been going on for years and violates budgeting 101. Each FY must be budgeted separately; (b) The $692 was a result of underestimating expense of the town's solid waste contract. In both cases, there should have been a budget amendment.

2. Petty cash: no adequate accountability and proper record keeping. Comment: the town did not even keep a petty cash ledger. This problem existed for many years. Petty cash, according to former Town Manager Wyatt Cutler, was reconciled once a month. The problem no longer exists because the former petty cash system has been replaced by the use of town credit cards and revolving accounts.

3. Invoices paid not defaced. Comment: we weren’t using a “Paid” stamp. This has been corrected.

4. Personnel files do not include the current year approved wages. Comment: the files are being updated. Not yet completed.

5. No schedule of accrued vacation hours by employee maintained. This function was available in our accounting software, and was being used, but no printout was being maintained on hand for easy verification.

6. Financial records need to be filed systematically. Comment: filing system is being revised and improved.

7. Powell bill report for June 30, 2009 does not balance. Expenses understated by $3001.10. Comment: This error in the July 15 report was corrected in an August 26 amendment to the report, as soon as it was pointed out by the auditors.

8. Budget amendments have been made only at year end. A check of official minutes in recent years shows that this is true. Budget should be monitored continuously and amended as needed. A factor in the past was that each department had a very large "miscellaneous line" in the budget. This may have contributed to lax budget discipline.

9. Town is billing approximately 63% of gallons pumped from wells monthly. Comment: In general, 12 – 15% waste is about normal. What we have is unlikely to be a billing problem. Water is leaking somewhere. Or it is being used through unrecorded and unread meters, or meters are badly out of calibration. This sounds like a problem with the physical plant, and it needs to be investigated. Good task for a reconstituted water board.

10. Late fees for water and sewer service not charged consistently. Comment: we have no late fees. What we do have is reconnect fees when water is disconnected due to non-payment or at customer request. It may be that some reconnect fees were forgiven due to disconnect being in error or other reason. In any event, reasons for forgiving reconnect fees are now being documented. The water board should review the procedure and recommend policy to the Town Board.

11. Water deposits, sewer deposits and prepaid bills all recorded in same account. Three new accounts have been established. Commingled accounts exist for the period before October, 2009. The problem will eventually go away with time.

12. The general fund charges the water fund $4,000 per month for administrative services. No documentation of how this is computed. Comment: I raised this issue during this year’s budget cycle. Turned out the amount was last calculated in 2001 and not recalculated for eight years, even though we had hired additional personnel, the water testing and other system requirements had grown, and much more public works time was spent on the water system than in 2001. There were other omissions, such as failure to estimate gasoline expense for meter reading. I calculated the general fund had subsidized the water fund about $150,000 between 2001 and 2008 and the annual charge should now be $82,000 instead of $48,000. We took steps in this budget cycle toward correcting this. Not mentioned in the list of control deficiencies, but another shortcoming in financial management of the water system is the failure to provide for system depreciation. Bottom line is that we are still losing money on water. The water board needs to review this before the Rural Water Association comes in February 2010 to assist in reviewing our rate structure.

Material Deficiencies (pp 46-47)

1. Segregation of duties is an on-going issue. Comment: I agree with auditor’s comment “this weakness is impractical to correct at this time due to a small staff.”

2. Bank reconciliations are performed by employees who are not independent of the recording duties and are not reviewed or approved by a second party. Comment: A new procedure assigns this task to Town staff, not the manager.

3. Upon examining the collections drawer it was noted there was approximately $7,000 on hand with some checks 14 days old. Comment: the auditor fails to mention there was no lock on the drawer. Delaying deposits of cash and checks costs money (loss of interest) as well as presenting a security problem. There may have been a misunderstanding on the part of some office personnel that daily deposits would cost the town additional money. Our new manager discovered that was not so. Daily deposits are now being made. We should also take a look at our office safe. There should be a safe suitable for depositing money.

4. The town does not have a purchase order system in place. Comment: The town started using the Peachtree Accounting software purchase order system in October, 2009. It had not previously been used.

5. No listing of journal entries for the year with supporting documentation. No approval process before journal entries made in the accounting software (Peachtree). Comment: this is being corrected.

6. Town does not maintain a fixed asset ledger. Comment: Office personnel insist there is such a ledger. It may be that the town manager didn't understand what the auditor was seeking. In any event, now that the ledger has been located, it turns out not to have included Police Department equipment. This is being added.

7. No computer security controls in place. Comment: Correction of this deficiency is about 50% complete.

8. No approval process for utility adjustments. Comment: Most adjustments are made by Bay River. They are the approval authority. It may be that we should formalize approval of each request to Bay River. Adjustments to water bills sometimes result from misread meters. Policy for making and approving adjustments should be based on water board recommendations.

9. Water extensions not monitored effectively. Comment: this may not be accurate. On the other hand, it might be that this and other water system issues should be addressed by our Water Board. We have had a Water Board in the past, but we seem to have no ordinance establishing it, setting terms of reference for its duties, etc. The last time the board is recorded to have met is more than two years ago.

10. There is no reconciliation process for water payments collected. Comment: This may not be accurate. Since the audit, the town has purchased a cash register module and is using it. This could be another topic for review by the water committee.

11. There is no contract in place with Bay River. Comment: The town has been negotiating with Bay River to correct this omission for several months. As a separate issue not addressed by the auditor, the town needs to negotiate a number of additional inter local agreements or memoranda of understanding with the county, including the Sheriff’s Department and Animal Control.

Bottom Line:
The list of deficiencies is nothing to lose sleep over. The most important of them (except for the cash drawer) had already been identified and were being addressed by the Town Board before the audit began. Most importantly, I think, is the apparent need to reestablish an effective Water Board.