By JENNA BAILEY
On Tuesday, April 3rd, at 4:30 p.m. the DeFuniak Springs (DFS) City Council met at DFS
City Hall for an Audit Workshop to discuss the Schedule of Findings and Responses for audit findings between April of 2013 and September of 2016.
Reserve Funds Not Maintained: As of September 30, 2016, the City had not maintained reserve funds per City Ordinance #664 for the Water fund. The ordinance requires the reserves to be maintained at an established minimum balance unless provisions are made for the immediate replacement of the funds. Funds may be withdrawn from the reserve accounts for the sole purpose of replacing depreciated property, equipment, and making special purchases. Prior to utilizing any reserve funds, a provision to replace the funds must be identified. The provision for use of and replacement of the funds shall be provided by resolution of the City Council. The City is expected to implement standard accounting procedures to ensure that the reserve funds are adequately maintained and that the Council is aware of the lack of any adequately maintained reserve funds for it to properly provide for the replenishment of the funds. It was noted that the City authorized an interfund transfer near year-end that would have significantly reduced the discrepancy between the required and actual funding levels, but that transfer was not initiated by the finance department.
Also as of September of 2016, the City had not maintained replacement funds per City Ordinance #663 for the Sanitation fund’s Depreciated Property Replacement Account. The ordinance requires annual deposits to the account in the amount equal to the current period’s depreciation expense on all the vehicles and items of major equipment utilized in the proprietary function of the City’s trash and garbage collection. Funds may be withdrawn from the replacement account for the sole purpose of replacing such depreciated property. Depreciation expense for fiscal year (FY) 2016 for the Sanitation fund was $95,124.00. No deposits were made to the replacement account in FY 2016. City City Management’s response: The City has not implemented necessary procedure to ensure the reserve balances are adequately funded. Past budgets have not responded to the need of sufficient funding to maintain reserve balances per City Ordinance 664. During budget preparation of fiscal year 2019 attention to this matter will be addressed to ensure funds are replenished.
Segregation of Duties. An element of an effective internal control system is the proper segregation of duties. The basic premise of segregating duties is to prevent situations where an employee has the ability to perpetrate an error or irregularity and to conceal it as well. Proper segregation of duties provides for a system of checks and balances such that the functions of one employee are subject to the review through the performance of the interrelated functions of another employee. In January of 2014, due to turnover in the positions of Finance Director and City Manager, the City Manager performed some of the Finance Director duties during the year. Later, the Finance Director performed some of his duties without the oversight of an experienced City Manager. These items, including the reconciliation of bank statements, were performed without adequate supervision and review. It was recommended that the City review the internal control problems to ensure checks and balances always exist to the greatest extent possible.
City Management’s response: Currently, the City has contracted with an accounting firm to reconcile accounts and assist with financial reporting The City has hired a Finance Supervisor to perform the daily operational finance duties as well as a City Manager – with these hires adequate supervision review has been reestablished as deemed by the investigation findings and responses.
Fraud Prevention and Detection Program. In fulfilling its duty to establish and maintain a system of internal controls, management is responsible for the design and implementation of programs and controls to prevent and detect fraud appropriate for its size. It was noted that the City has not developed a formal fraud risk assessment and monitoring program that is appropriate for the size and complexity of the City with the aim to identify fraud risks and to take appropriate action to reduce or eliminate the risks. Although management has established a system of internal controls, there is no preliminary assessment of fraud risks and those controls do not constitute a formal fraud prevention and detection program. It was recommended that management schedule periodic meetings with the City Council to discuss the areas in which the City May be vulnerable to fraud and develop and implement processes to help mitigate these risks as they arise. Additionally, it was recommended the City Council be advised for the organization’s current accounting procedures and be involved in the oversight of the City’s fraud risk management program. Council discussions regarding their assessment of the organization’s vulnerabilities to fraudulent activity and whether any of those exposures could result in material misstatement of the financial statements should be documented in Council minutes, at least annually.
City Management’s response: The City is in the process of developing a formal fraud prevention and detection program.
Timely Reporting. Audit procedures revealed that there were instances where reports required to be filed with the State of Florida were filed after the due date. There was a lack of communication with the applicable State agencies regarding the reporting delay which resulted in the forfeiture of half-cent sales tax dollars. Approximately $115,000.00 was forfeited in FY 2016 and, subsequently, approximately $106,000.00 was forfeited in FY 2017. It was recommended that the City institute policies and procedures that stipulate that the required reports must be filed by their respective due dates. Per the report for findings, it was stated that it is critically important that timely and accurate reports be produced to ensure that the goals and purposes of the grant have been achieved and accounted for properly.
City Management’s response: In the future, the City endeavors that policies and procedures be implemented sufficiently for the required reports to be filed by their due dates.
Reconciliation of Accounts. During the period ended September 30, 2016, several general ledger accounts, including the City’s various cash accounts, were not reconciled to the detail supporting ledgers in a timely manner. Subsequently to year-end, the City contracted with an accounting firm to assist with reconciliations and financial reporting. The outsourced accounting firm was able to help correct many of the issues that developed from lack of timely reconciliations, however, material adjustments were still required in order to bring the City’s books into compliance with generally accepted accounting principles and prevent them from being materially misstated. Many of the issues encountered during the audit could be avoided if accounts are reconciled timely, according to the findings report. It was recommended that all applicable general ledger accounts be reconciled monthly to their detail supporting ledgers and that any reconciling items be promptly investigated and adjusted with adequate explanations.
City Management’s response: The City forestalls adequately consolidating bank accounts to allow reconciliation in a timely manner, updating the accounting software system and hiring a Finance Director. In interim, the City is operating under contract with an accounting firm to reconcile monthly and perform necessary duties.
Fund Transfers and Budget Approval. During the period ended September 30, 2016, the City Council approved $282,370.00 to be transferred from the gas fund to the general fund, as part of the original budget process. Actual transfers for the period from the gas fund to the general fund totaled $302,370.00, which represents a difference of $20,000.00 over budget. This overage was not approved by the City Council pursuant to Florida Statute 116.241(4)(c). A budget amendment was adopted by the City Council in September of 2016, authorizing and directing a transfer of $385,612.00 from the general fund to the water fund, from the express purpose of funding the deficient water reserve account. This fund transfer was not initiated by the finance department. It was recommended the finance department ensure that any fund transfers in excess of the approved budget before the City Council for approval. Likewise, all budget activities issued by City Council should be implemented timely.
City Management’s response: Adopting a Finance Ordinance is necessary. This ordinance will relate to all financial matters encompassing areas related to fund transfers and budget, providing guidance for situations such as this.
Voided Checks Not Reissued. During the period ended September 30, 2016, two intercompany checks related to the Health Reimbursement Account (HRA) liability were never deposited into the fund. Therefore, these checks have been voided but don’t appear to have been reissued. As management was unable to determine why these checks were voided and not reissued, the liability remains on the books for a balance due to the HRA account. It was recommended that Management should research these items to determine the reason they were never deposited and either reissue and deposit the checks or document the need for an adjustment to the liability account.
City Management’s response: In the future, the City endeavors to deposit in a timely manner and to pay accounts payable timely. As for this particular matter, the City requests that an adjustment to the liability account be made. According to council member Ron Kelley, this particular issue should be a quick fix.
By JENNA BAILEY