Finding 497342 (2023-001)

Material Weakness
Requirement
L
Questioned Costs
-
Year
2023
Accepted
2024-09-19
Audit: 320057
Organization: Town of Paradise (CA)

AI Summary

  • Core Issue: The Town lacks effective internal controls, leading to 42 audit adjustments needed to align financial statements with GAAP.
  • Impacted Requirements: Key areas needing improvement include fund balance roll-forward, revenue deferral, and proper accounting for loans and interfund transactions.
  • Recommended Follow-Up: Management should review all balance sheet and income statement accounts for accuracy and classification during the closing process.

Finding Text

Finding 2023-001 – Material Weakness Condition: There were 42 audit adjustments and closing entries posted during the audit to report the Town’s financial statements in accordance with Generally Accepted Accounting Principles (GAAP). The large number of adjustments identified during the course of the audit indicates that the Town does not have internal controls in place to prevent or detect misstatements on a timely basis. Areas where accounts and transactions were not adequately reconciled and evaluated for proper recording prior to the start of the audit fieldwork and areas that require improvement included in the following: • Procedures to ensure beginning fund balance/net position roll-forward to prior year audited financial statements. • Procedures for ensuring revenue received in advance of qualifying expenditures are properly deferred. • Procedures to ensure retentions payable is properly accrued. • Procedures for tracking grant expenditures to ensure revenue is accrued to the extent of reimbursable expenditures incurred and evaluation of proper accounting treatment of transactions as earned, unearned, or unavailable revenue. • Procedures to ensure capital outlay is properly reconciled to capital asset additions. • Procedures to ensure that building permit fees not earned are properly accounted for as unearned revenue. • Procedures to ensure all loans issued by the Town are properly recorded in the general ledger. • Procedures for evaluating when entries should be posted to fund balance and whether fund balance/net position/restrictions and investment in capital assets are properly reflected. • Procedures to ensure interfund transactions, including due to and from other funds, advances to and from other funds and transfer in and out, excluding those with agency funds, are in balance. Criteria: Internal controls over financial reporting should exist to ensure the financial statements are prepared in accordance with GAAP and limit the opportunity for errors and fraud occurring. Cause: The Town’s staff did not have enough time to fully close the Town’s books before the start of the audit, including reconciling grant billings to the general ledger. Effect: The adjustments and closing entries were required to report the financial statements in accordance with GAAP. Recommendation: We recommend that management ensure all balance sheet accounts are reviewed for proper cut-off and income statement accounts are reviewed for proper classification during the closing process, including reviewing accounts receivable, grants receivable, loans receivable, accounts payable and related assets, fund balance and net position, government-wide revenue and expense adjustments and the classification of revenues and expenditures. Views of Responsible Officials and Planned Corrective Action: We agree with the finding and have implemented a new process during fiscal year 2023/24.

Corrective Action Plan

Description of Finding: There were 42 audit adjustments and closing entries posted during the audit to report the Towns’s financial statements in accordance with Generally Accepted Accounting Principles (GAAP). The large number of adjustments identified during the course of the audit indicates that the Town does not have internal controls in place to prevent or detect misstatements on a timely bases. Areas where accounts and transactions were not adequately reconciled and evaluated for proper recording prior to the start of the audit field work and areas that require improvement included in the following: • Procedures to ensure beginning fund balance/net position roll-forward to prior year audited financial statements. • Procedures for ensuring revenue received in advance of qualifying expenditures are properly deferred. • Procedures to ensure retentions payable is properly accrued. • Procedures for tracking grant expenditures to ensure revenue is accrued to the extent of reimbursable expenditures incurred and evaluation of proper accounting treatment of transactions as earned, unearned, or unavailable revenue. • Procedures to ensure capital outlay is properly reconciled to capital asset additions. • Procedures to ensure that building permit fees not earned are properly accounted for as unearned revenue. • Procedures to ensure all loans issued by the Town are properly recorded in the general ledger. • Procedures for evaluating when entries should be posted to fund balance and whether fund balance/net position/restrictions and investment in capital assets are properly reflected. • Procedures to ensure interfund transactions, including due to and from other funds, advances to and from other funds and transfer in and out, excluding those with agency funds, are in balance. Statement of Concurrence or Nonconcurrence: There was a large number of audit adjustments as the audit progressed. Some of those are standard within a yearly closing period. Corrective Action: Staff turnover contributed to the need for multiple adjustments after the fact. Of the five positions within the department five were vacated within a 12 month period. During and leading up to the closing of the FY 22/23 year, a complete turnover of staff occurred including all senior staff within the Finance Department. There were a number of journal entries that required a depth of historical knowledge to perform properly. Budgeted large transfers and project transfers complicated the process of closing projects and funds. All positions are currently filled. To reduce the need for as many audit adjustments, a new process was implemented during the FY 23/24. Payroll and invoices are being direct billed to the funds and projects to reduce the need for unnecessary transfers. This step will simplify the structure of funds. This standard accounting practice will enable staff to reconcile, evaluate, and accrue much more timely and accurately. Name of Contact Person: Aimee Beleu, Finance Director, (530) 872-6291, abeleu@townofparadise.com Projected Completion Date: 4/1/24

Categories

Cash Management Material Weakness Reporting Matching / Level of Effort / Earmarking Internal Control / Segregation of Duties

Other Findings in this Audit

  • 497343 2023-002
    Material Weakness Repeat
  • 497344 2023-003
    Material Weakness
  • 497345 2023-004
    Significant Deficiency
  • 497346 2023-005
    Significant Deficiency
  • 1073784 2023-001
    Material Weakness
  • 1073785 2023-002
    Material Weakness Repeat
  • 1073786 2023-003
    Material Weakness
  • 1073787 2023-004
    Significant Deficiency
  • 1073788 2023-005
    Significant Deficiency

Programs in Audit

ALN Program Name Expenditures
21.027 Coronavirus State and Local Fiscal Recovery Funds $1.71M
14.228 Community Development Block Grants/state's Program and Non-Entitlement Grants in Hawaii $1.18M
16.710 Public Safety Partnership and Community Policing Grants $615,000
97.083 Staffing for Adequate Fire and Emergency Response (safer) $525,612
97.036 Disaster Grants - Public Assistance (presidentially Declared Disasters) $425,027
10.766 Community Facilities Loans and Grants $256,760
11.307 Economic Adjustment Assistance $243,300
20.205 Highway Planning and Construction $179,129
14.239 Home Investment Partnerships Program $117,119
14.218 Community Development Block Grants/entitlement Grants $40,000
97.039 Hazard Mitigation Grant $25,576