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JUNE 30, 2010
Powers & Sullivan
Ce r zl Jie d Public Accountants
100 Qpannapowirr Parkway Suite 101 Wakefield, MA 01880 T 781-914-1700 F 781-914-1701 www.powersandsullivan.com
To the Honorable Mayor and City Council City of Lowell, Massachusetts
In planning and performing our audit of the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of lowell as of and for the fiscal year ended June 30, 2010, in accordance with auditing standards generally accepted in the United States of America, we considered the City's internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's 'internal control, Accordingly, we do not express an opinion on the effectiveness of the City of Lowell's internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be significant deficiencies or material weaknesses and, therefore, there can be no assurance that all such deficiencies have been identified. However, as discussed below, we identified a deficiency in internal control that we consider to be a material weakness. 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. We consider the following deficiency in the City of Lowell's internal control to be a material weakness. We noted that reconciliation procedures over significant cash accounts were inadequate or were not performed during fiscal year 2010. We also became aware of several matters that are opportunities for strengthening internal controls and enhancing operating efficiency. The memorandum that accompanies this letter summarizes our comments and suggestions concerning those matters. This communication is intended solely for the information and use of management of the City of Lowell, Massachusetts and others within the organization, and is not intended to be and should not be used by anyone other than these specified parties. The City of lowell's written responses to the material weaknesses and other matters identified in our audit have not been subjected to the audit procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them.
CITY OF LOWELL, MA$$ACHUSeITS MANAGEMENT LETTER JUNE 30, 2010 TABLE OF CONTE.NTS PAGE Material Weakness Material Weakness in Internal Controls Over Cash Prior Year Comments Treasurer/Collector's Office - Old Outstanding Checks Individual Fund Reconciliations Fixed Assets Fraud R.isk Assessment. Control Over Long-Term Debt Internal Audit Function Old Outstanding Receivables Deposit and Investment Poficy Police Detail Receivables Federal Grant Expenditures __ __ _ _ _ _ __ .. _ __ 1 2 4 5 5 6 __ 6 .. 7 7 8 8 8 9 9 " 10 10 11 12 _ 12
Other Post-Employment Benefit Actuarial Treasury Cash Reconciliation Position Review Function s of Bank Accounts Current Year Comments Retirement Cash Account Reconciliation Gave rnrnent Accounting Standa rds Board (GAS B) Statement #54
MATERIAL WEAKNESS IN INTERNAL CONTROLS OVER CASH Comment The Treasurer's primary role in the internal control system over cash is to ensure that all cash is deposited into the City's bank accounts and then invested and disbursed in accordance with the internal control policies and procedures of the City and laws and regulations of the Commonwealth of Massachusetts, A critical element of internal control procedures is the reconciliation of the cash book to the bank statements on a monthly basis; and reconciling cash activity and the month end balances to the general ledger. The fol.lowing deficiencies in internal controls related to cash were noted in fiscal years 2006 through 2010: • • • The Vendor, Payroll and Main Depository Accounts were not reconciled for any month. Outstanding check lists were not reviewed, or cleaned up in fiscal year 2010. Many account reconciliations include reconciling items that are between 1 and 3 years old which have not been researched to determine the nature and final disposition of them. Progress was made in this area during fiscal year 2010, however many old reconcifing items still exist.
Because of the circumstances noted above, a complete reconciliation between the Treasurer's balance and the general. ledger was unable to be performed. Without monthly reconciliations there is significant risk that errors or irregularities in amounts that would be material to the financial statements may occur and not be detected within a timely manner by City employees in the normal course of periorming their assigned functions. Furthermore, the detection of potential fraud is significantly reduced. Additionally, although old reconciling items may appear not to be material to the overall financial position of the City, it may obscure significant but offsetting items (such as bank errors or improperly recorded transactions) that would be a cause for investigation if the items were apparent. Finally, as required by Statement on Auditing Standards #112, Communicating Internal Control Related Matters Identified in an Audit, management of the City's Treasurers Office does not possess the necessary competency to implement internal controls that would reduce to a relatively low level the chance that errors or irregularities could occur in the normal course of business and not be prevented or detected by the Office's internal control structure. Recommendation • We recommend that the Treasurer, through the monthly reconciliation process, clearly identify and resolve in a timely fashion all reconciling items between the bank and book balances. The actual monthly reconciliation of an accounts should be completed no later than the end of the following month. We recommend that Treasurer's cash be reconciled to the genera.1ledger cash activity and balances each month. We recommend that old reconciling amounts be investigated and not be allowed to carry over from month to month. We also recommend that City management evaluate the competency of the Treasurer's Office staff and overall internal control structure.
Manaqement's Response Management recognizes this material weakness. Staffing issues, both with the size of the staff and the core capabilities of the existing personnel, have hindered progress. The Treasurer's office reorganized on July 1, 2010 to better address this issue, although staff vacancies remain. It may be necessary to add staff when finances allow in order to make significant progress in addressing the material weakness.
Prior Year Comments
OLD OUTSTANDING CHECKS Prior Year Comment In previous management letters we noted that the bank reconciliation's for the vendor and payroll accounts reported outstanding checks greater than three months old as reconciling items. Current Status Progress has been in cleaning up the outstanding check lists, however this process is still continuing and therefore this comment is not resolved. Continuing Hecommendation We continue to recommend the Treasurer/Collector's Offioe investigate the existing outstanding checks greater than three months old and that procedures be implemented to investigate such outstanding checks on a monthly basis. Management's Response Management concurs with the recommendation. Progress is being made on the oldest of the outstanding checks. We have also changed an internal practice of holding issued checks without mailing them. This will reduce the number of eventual outstanding checks.
INDIVIDUAL FUND CASH RECONCILIATIONS Prior Year Comment In previous management letters we noted that certain bank accounts associated with specific general ledger accounts are not individually reconciled each month. An example of this would be a trust fund that has a specific bank account assigned to it to record cash activity (i.e. not part of pool.ed cash). In situations like this, the bank account should be equal to the trust fund balance reported on the general ledger. Current Status No action to resolve this comment was taken during fiscal year 2010. Continuing Recommendati.on We continue to recommend that additional procedures be implemented to reconcile cash by fund. By adding this procedure to the reconciliation process, money transfers will occur on a timely basis and the potential for reporting an inaccurate cash balance for a City activity will be minimized. Management's Response Management concurs witlh the recommendation, however until we resolve our material weakness and fully reconcile cash on a global scale, this remains a secondary consideration.
FIXED ASSETS Pri.orYear Comment Since the implementation of GASB #34 in fiscal year 2002, the City has worked 10 compile a detailed listing of all assets owned. Maintaining this list requires the recognition of additions, deletions, disposals and transfers of fixed assets. At this time the City has implemented procedures to account for yearly fixed asset additions however, procedures stili need to be implemented to properly account for deletions, disposals or transfers. In order to maintain a complete and accurate fixed asset listing the City needs to work on developing procedures to facilitate accurate fixed asset reporting. Current Status No action to resolve this comment was taken during fiscal year 2010. Continuing Recommendation We continue to recommend that management develop and implement procedures to track deletions, disposals and transfers of fixed assets. Management's Response We are still in the process of developing procedures to track the deletions, disposals and transfer of fixed assets.
FRAUD RISK ASSESSMENT Prior Year Comment In previous management leiters we discussed the importance of preparing and implementing a comprehensive fraud risk policy that among other things addresses the risk of fraud to the City. To address this risk, we recommended that the City perform a risk assessment to identify, analyze, and manage the risk of asset misappropriation. Risk assessment, including fraud risk assessment, is one element of internal control. Thus, ideally, the City's internal control should include performance of this assessment, even though our annual financial statement audits include consideration of fraud. Current Status Management has sent questionnaires to all Department Heads and is in the process of obtaining and reviewing responses to determine where their efforts should be focused. Continuing Recommendation We continue to recommend that management develop and implement a fraud risk assessment program to identify, analyze, and manage the risk of asset misappropriation.
Management's Response Management has reviewed the policies of other municipalities, and has developed a questionnaire for Department Heads and Staff to help ito identify, analyze, and manage the risk of asset misappropriation and fraud within each Department. We have formed a committee to review each questionnalre with the appropriate employees and have begun strengthening our internal controls in FY2010 with the anticipation that this program will be kept rolling.
REPORTING lONG~TERM Prior Year Comment
In prior years we noted that the identification and reporting of the City's debt was not complete. The issues related to interim debt, Section 108 debt and MWPAT debt. For several years correcting journal entries were required to correctly report theses amounts on the financial statements. We have noted that adjustments are required to properly state principal and interest in the applicable funds and information regardi.ng drawdowns by MWPAT debt issue, amount and date was not readily available. Current Status The comprehensive debt schedule maintained by the City now incorporates the elements of debt noted above and' only minor reclassification entries between principal and interest were required for fiscal year 2010.
INTERNAL AUDIT FUNCTION Prior Year Comment In previous management letters we acknowledged the fact that the City has grown to a size and complexity that warrants consideration of an internal audit function. Internal auditing is an independent appraisal. activity within a community for the review of accounting, financial, and other operations. These functions will supplement the activities of the City Auditor's Office and the City's independent outside auditor. Current Status The City has created a City-stat Director position, this position reports directly to the City Manager's Office and the key responsibilities al"e internal audit related functions. Management's Response In FY 2010 the City hired a Data Manag.ement Analyst that answers to the City Manager, Asst. City Manager., and CFO. This position provides analytical and executive level support to the orqanlzation by collecting, monitoring and analyzing data as part of the City's new LoweliStat Program. The LoweliStat Program will help the City Manager and CFO in successful oversight of City service delIvery by using data and frequent accountability checks to monitor departmental performance, improve City operations, identify areas for cost-savings, and to identify opportunities for improvement and/or innovation
OLD OUTSTANDING RECEIVABLES Prior Year Comment In previous management letters we noted that the Collectors Office is carrying many types of receivable balances that are greater than five years old. For receivables that cannot be liened the likelihood of collection at this time is significantly diminished. Although the balances are deferred the old balances cause the reconciliation process to be more difficult. Current Status Although progress has been made in this area, there are still a large number of old receivable balances that the City should review and determine if they should be written off. Continuing Recommendation We continue to recommend that the Collectors Office work with the necessary officials to determine which receivable balances should be considered uncollectible,. are not eligible to be liened and should ultimately be written off. Management's Response The City continues to make progress in this area. In FY 2009 Motor Vehicle receivable was cleaned up, and we continue to work on the outstanding real estate and personal property accounts. In FY 2010 collection efforts focused on delinquent water and personal property.
DEPOSIT AND INVESTMENT POLICY Prior Year Comment In previous management letters we noted that GASS Statement #40 requires financial statement disclosure of key policies affecting the management of cash deposits and other long term investments of the City. Current drisclosuresindicate that there are no specific policies in place to ensure that deposits and investments are managed prudently or that such items are not subject to extraordinary risk. Current Status Management has formalized the policies that have been in place on an informal basis. These were formally voted by City Council with the FY2011 budget.
POLICE DETAIL RECEIVABLES Prior Year Comment In previous management letters we noted that there are no formal reconciliation procedure between the Police Department and the Auditor's Office for police detail receivables. The summary outstanding balance reported in the general ledger should be reconciled each month to the detail maintained by the Police Department.
Current Status During fiscal 2010 the City implemented better controls over police detail receiva tiles, Reconcil iation of the police detail balance and general ledger activity occurs on a timely basis and outstanding balances are monitored closely to maximize collections,
FEDERAL GRANT EXPENDITURES Prior Year Comment In previous management letters we explained that as part of the annual Single Audit, the City is required to prepare and file a Schedule of Expenditures of Federal Award Programs with the Federal Audit Clearinghouse and the Department of Revenue. To meet this reporting requirement the following information is necessary: • • • • Detailed information on all Federal Awards received, The agency in which the funds were received from, The Catalog of Federal Domestic Assistanoe number (CFDA #) of each grant. The amount offunds expended in the fiscal year under audit.
We noted that the City did not have a system in place to capture all the required information neoessary to file a complete and accurate Schedule of Expenditures of Federal Award Programs report, Current Status The City now has 99% funds into the appropriate areas and now includes the CFDA numbers within each fund name. With over 1,000 funds there remains only 5 more to move at the end of the Fiscal year, The Asst. City Auditor now has the complete file for all new grants.
OTHERPOSTEMPlOYMENTBENEATACTUAR~L Prior Year Comment In previous management letters we noted that the City has met the requirements for implementation of GASB Statement #45, Accounting and Financial Reporting for Postemployment Benefits Other than Pensions, and now it is time to acknowledge the requirements necessary to stay in compliance with the GASB and obtain the information necessary to complete the City's annual audit. For the City of Lowell th is means that an updated actuarial valuation dated January 1, 2010 wi II have to be obtained in order for the City to remain compliant with GA$B $tatement#45, for fiscal years 2011 and 2012, This is two years after the original January 1, 2008 val uation which can be used for the fiscal years 2009 and 2010 audits, Current Status The City performed an actuarial valuation in time for the FY 2011 audit
TREASURY CASH RECONCILIATION POSITION Prior Year Comment In previous management letters we noted that the operations of the City's Treasurers Office and the fact that the City has reported a material weakness over cash controls and reconciliations for a total of five fiscal years warrants consideration of establishing a non-union cash reconciliation position. Current Status At the beginning of fiscal year 2011, the City hired an Assistant Collector, this allowed for a restructuring of the Treasurer's Office and the splitting of employees between collection and receivable activities and cash activities. Management's Response Management agrees with this comment also, and will try to fund such a position in the FY 2011 budget. Management has instituted a reorganization of the Treasurer's Department to bring job descriptions more in line with current needs. See the material weakness response.
REVIEW FUNCTIONS OF BANK ACCOUNTS Prior Year Comment In previous management letters we noted that the City maintains over 70 bank accounts. Many of the accounts were established for narrow purposes and have few transactions (if any) and small balances. The Treasurer's Office is currently struggling with cash controls and reconciliations and reducing the number of outstanding bank accounts is another step in the right direction of gaining control over the City's cash balances. Current Status The Treasurer's Office closed some bank accounts during the fiscal year, however we feel that there are still accounts that should be reviewed and the determination made if they are necessary to maintain on an ongoing basis. Continuing Recommendation We continue to recommend that management review the functions of all bank accounts to determine whether they are necessary or can be consolidated with another account. Only the minimum number of bank accounts consistent with operating requirements should be maintained. Management's Response Management agrees with this comment, and will review all bank accounts in FY 2011.
CURRENT YEAR COMMENTS
RETIREMENT CASH ACCOUNT RECONCILIATION Current Year Comment Through our review of the Retirement Systems (System) checking account, we noted that the account is not completely reconciled. There is an unknown variance of approximately $30 thousand that has surfaced during calendar year 2009. Recom mendation We recommend the Retirement System implement procedures that will allow for a complete reconciliation of their checking account and determine the nature of the unknown variance. Management's Response Procedures have been implemented to mitigate this from happening again.
GOVERNMENT ACCOUNTING STANDARDS BOARD (GASB) STATEMENT #54 Current Year Comment In February 2009, the GASB issued Statement #54, Fund Balance Reporting and Government Fund Type Definitions, which is required to be implemented in fiscal year 2011. The objective of this Statement is to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing governmental fund type definitions. This Statement establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds. The initial distinction that is made in reporting fund balance information is identifying amounts that are considered nonspendabfe, such as fund balance associated with inventories. This Statement also provides for additional classification as restricted, committed, assigned,. and unassigned based on the relative strength of the constraints that control how specific amounts can be spent. The restricted fund balance category includes amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation. The committed fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the government's highest level of decision-rnakinq authority. Amounts in the assigned fund balance classification are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed, In governmental funds other than the general. fund, assigned fund balance represents the remaining amount that is not restricted or committed. Unassigned fund balance is the residual classification for the government's general fund and includes all spendable amounts not contained in the other classifications. In other funds, the unassigned classification should be used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed, or assigned. Governments are required to disclose information about the processes through which constraints are imposed on amounts in the committed and assigned classifications.
Governments also are required to classify and report amounts in the appropriate fund balance classifications by applying their accounting policies that determine whether restricted, committed, assigned, and unassigned amounts are considered to. have been spent. Disclosure of the policies in the notes to the financial statements is required. This Statement also. provides guidance for classifying stabilization amounts an the face of the balance sheet and requires disclosure of certain informatian about stabilization arrangements in the notes to the financial statements, The definitions of the gel1eral fund, special revenue fund types, capital projects fund types, and permanent fund types are clarified by the provisions in this Statement. Interpretations of certain terms within the definition of the special revenue fund type have been provided and, for some governments, those interpretations may affect the activities they cheose to. report in those funds. The capital projects fund type definition also was ctarified for better alignment with the needs of preparers and users .. Definitions of other gevernmental fund types also. have been medified fer clarity and consistency, Recommendation As it appears that this GASS Statement will significantly impact the fund balance classifications presently reported, we recommend that management begin to study and evaluate these changes for financial statement reporting and disclosure purposes, and to formulate plans to be used in explaining these changes to interested parties within the City and to the external users of the City's financial statements. Management's Response While GASB basically changes the names of the fund balances, we have always segregated the different balances and will, along with the audit team, determine the appropriate classification.
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