Condition: The City does not have an internal control policy in place over the financial statements that would enable management to conclude its financial statements, related footnote disclosures, and supplementary information are complete and presented in accordance with accounting principles generally accepted in the United State of America. The City engages the audit firm to prepare drafts of its annual financial statements, related footnote disclosures, and supplementary information in accordance with accounting principal generally accepted in the United States of America based on information provided by the City. Criteria: Internal control requirements require entities to prevent or detect a material misstatement in the financial statements, footnote disclosures, and supplementary information. Cause: As a small city with limited staff, the City does not have staff trained to prepare financial statements in accordance with regulatory requirements. Effect: The potential exists that a material misstatement of the annual financial statements could occur and not be prevented or detected by the City’s internal control. Recommendation: The City could consider contracting with a separate outside accounting firm to prepare financial statements, footnote disclosures, and supporting schedules prior to the audit. However, this consideration may not have a cost benefit advantage. The City should carefully review the financial statements, footnote disclosures, and supplementary information against requirements and a disclosure checklist, and agree accounting software reports to the audited financial statements and underlying records.
Condition: Individuals at the City have responsibilities over more than one phase of a transaction. Criteria: Generally, a system of internal control contemplates separation of duties such that no one individual has responsibility to authorize approval of a transaction, have physical access to the related assets, have responsibility or authority to record the transaction in the accounting system, and perform reconciliation of accounts. Cause: The limited number of office personnel precludes a segregation of accounting functions that is necessary to ensure adequate internal accounting control. As a result, the city clerk/treasurer has access to all phases of transactions. Effect: Lack of segregation of duties could result in a financial statement misstatement, caused by error or fraud, that would not be detected or prevented by the City. Recommendation: The City should continue to evaluate its staffing in order to segregate incompatible duties whenever possible. Also, the Mayor and City Council should always be cognizant of this condition and oversee the financial operations of the City as closely as possible.
Condition: The City’s personnel maintains the accounting records using the cash basis of accounting. As a result, adjusting journal entries are required to convert the cash basis financial records to be in conformity with accounting principles generally accepted in the United States of America. Criteria: An appropriate system of internal control requires the City to maintain the accounting records in compliance with reporting requirements. Cause: As a small City with limited staff, the City does not prepare cash to accrual adjusting journal entries. Effect: The potential exists that a material misstatement of the annual financial statements could occur and not be prevented or detected by the City’s internal control system. Recommendation: The City should consider preparing cash to accrual adjusting journal entries at least on an annual basis prior to the audit.
Condition: The City’s personnel prepared bank and investment account reconciliations at year end but did not properly reflect balances at year end on the reconciliation schedule. As a result, year-end reconciled account balances were inaccurate. Criteria: An appropriate system of internal control requires the City to reconcile account balances on a regular basis. Cause: One TEDA bank account is not recorded or reconciled in the accounting system, Other bank accounts have materially significant old outstanding checks and a check over $500,000 that was voided but not reflected as such in the accounting system. False check numbers were also used leading to a duplicate item to remain outstanding for over a year. In addition, the certificates of deposit balances were not updated in the accounting system. Effect: The potential exists that a material misstatement of the annual financial statements could occur and not be prevented or detected by the City’s internal control system. Recommendation: The City should consider researching and cleaning up old outstanding bank items, create a new general ledger account for the TEDA bank account, and perform monthly reconciliations for all accounts.
Condition: The City contracted for construction improvements on several projects without providing evidence that sealed bids were obtained and did not use the alternative procurement process.Criteria: As required by Minn. Statute Sec. 471.345 for contracts estimated to be over $175,000 are required to solicit sealed bids. Cause: The City contracted for construction improvements over the $175,000 but did not solicit sealed bids. Effect: Contracts in excess of $175,000 could be improperly awarded. Recommendation: The City must solicit bids or determine weighting criteria and be trained to utilize the alternative procurement process for construction projects that are estimated to be over $175,000. Documentation should be retained on the bidding process and results of the process. Discussions should also be included in the Council meeting minutes.
Condition: There were several large construction contract bills paid after the 35/45 day requirement. Checks were issued and not sent to the vendor in a timely fashion and no interest was remitted. Criteria: Minnesota Statute Section 471.425 requires prompt payment of local government bills. The standard payment period is 35 days from receipt for city councils that meet at least once a month and 45 days from receipts of goods or services or invoice whichever is later, for city councils that do not meet at least once a month. For bills not paid in the established time period the city is to pay interest of 1.5% per month. Cause: The City was experiencing cash flow issues related to timing of payments of a large construction project. Effect: Vendors were not properly reimbursed. Recommendation: Cash flow on major projects should be better managed to allow payments to vendors be made in a timely manner.
Condition: Management was not aware of and had not been internally tracking federal expenditures and was not able to provide all information required for the Schedule of Expenditures of Federal Awards in part due to the accounting records being cash basis. Criteria: Management is responsible for identifying all federal awards received and for preparing the schedule of expenditures of federal awards including disclosures. Management is also required to arrange for a Single Audit when required. Cause: Staff turnover lead to training deficiencies in regards to federal award tracking and reporting. Effect: The potential exists that not all federal funds are properly included or reported on the Schedule of Expenditure of Federal Awards or that a Single Audit is not performed when required. Recommendation: Management should review all current and future awards to determine if there are any federal funds included, then track the federal portion by ALS number to be able to prepare the Schedule of Expenditures of Federal Awards and determine if a Single Audit is required.
Condition: Management submitted documentation for federal reimbursements that was not valid. Checks were issued to the vendor by the City for the full amount of the vendor’s invoice. These checks along with the vendors invoice were submitted as proof of payment to request federal reimbursement. The check for the full amount of the vendor invoice was not sent to the vendor but were instead voided and then once the federal reimbursement payment of 75% of the invoice total was received the vendor was issued a check for the 75% with the understanding that the remaining 25% would be paid at a later date. Criteria: Requests for reimbursement are to include documentation of the full amount of the expenses paid to the vendor prior to submission for federal reimbursement. Cause: The City was experiencing cash shortages and used this method to receive federal funds in advance of the expenses being paid to the vendor. Effect: The City did not comply with the reimbursement requirements at the time of reimbursement requests were made. Recommendation: Management should secure funding prior to beginning a project and properly manage cash flows so that reimbursement requirements will be met.