STATE OF NEW MEXICO CANJILON MUTUAL DOMESTIC WATER CONSUMERS AND MUTUAL SEWAGE WORKS ASSOCIATION FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR S REPORT

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1 FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR S REPORT DECEMBER 31, 2009 James L. Hartogensis, CPA LLC Certified Public Accountant

2 C O N T E N T S Page INTRODUCTORY SECTION OFFICIAL ROSTER... i FINANCIAL SECTION INDEPENDENT AUDITOR S REPORT FINANCIAL STATEMENTS STATEMENT OF NET ASSETS... 3 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS... 4 STATEMENT OF CASH FLOWS... 5 NOTES TO FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION STATEMENT OF REVENUES AND EXPENSES BUDGET AND ACTUAL NON-GAAP BASIS SUPPLEMENTAL INFORMATION INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS SCHEDULE OF FINDINGS AND RESPONSES EXIT CONFERENCE... 26

3 OFFICIAL ROSTER Board of Directors Ross Martinez Andrew Valdez Tom Montano Cipie Maez Luis Torres President Vice-President Secretary/Treasurer Director Director i

4 James L. Hartogensis, CPA LLC Certified Public Accountant INDEPENDENT AUDITOR S REPORT Board of Directors Canjilon Mutual Domestic Water Consumers and Mutual Sewage Works Association and Mr. Hector H. Balderas, Esq. New Mexico State Auditor Santa Fe, New Mexico I have audited the accompanying financial statements of the business-type activities of State of New Mexico Canjilon Mutual Domestic Water Consumers and Mutual Sewage Works Association ( Association ) as of and for the year ended, which collectively comprise the Association s basic financial statements as listed in the table of contents. I have also audited the budgetary comparison presented as supplementary information for the year ended, as listed in the table of contents. These financial statements are the responsibility of the Association s management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinions. In my opinion the financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities of State of New Mexico Canjilon Mutual Domestic Water Consumers and Mutual Sewage Works Association as of December 31, 2009, and the respective changes in financial position and cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in my opinion, the budgetary statement referred to above presents fairly, in all material respects, the budgetary comparison of the major enterprise fund for the year ended, in conformity with the budgetary basis more fully described in Note 2, which is a comprehensive basis other than accounting principles generally accepted in the United States of America

5 Board of Directors Canjilon Mutual Domestic Water Consumers and Mutual Sewage Works Association In accordance with Government Auditing Standards, I have also issued my report dated December 31, 2014 on my consideration of the Association s internal control over financial reporting and my tests of its compliance with certain provision of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of my testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of my audit. The Association has not presented the management s discussion and analysis that accounting principles generally accepted in the United States has determined is necessary to supplement, although not required to be a part of, the basic financial statements. James L. Hartogensis, CPA LLC James L. Hartogensis, CPA LLC Albuquerque, New Mexico December 31,

6 STATEMENT OF NET ASSETS ASSETS Current Assets Cash $ 25,845 Accounts receivable 3,614 Total current assets 29,459 Noncurrent Assets Non-depreciable Assets Construction in progress 25,698 Plant and water system 599, ,507 Accumulated depreciation (446,662) Total noncurrent assets 178,845 Total assets $ 208,304 LIABILITIES AND NET ASSETS Current Liabilities Accounts payable $ 83 Accrued payroll taxes 1,525 Gross receipts tax payable 1,327 Current portion of notes payable 2,230 Total current liabilities 5,165 Noncurrent Liabilities Notes payable, less current portion 87,178 Total liabilities 92,343 Net Assets Invested in capital assets, net of related debt 89,437 Unrestricted 26,524 Total net assets 115,961 Total liabilities and net assets $ 208,304 The accompanying notes are an integral part of these financial statements

7 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS Year Ended Operating Revenues Charges for services $ 50,952 Other revenue 89 Total operating revenues 51,041 Operating Expenses Salaries and payroll taxes 8,687 Operating expenses 34,279 Depreciation 25,177 Total operating expenses 68,143 Net operating income (loss) (17,102) Nonoperating Revenues (Expenses) Interest income 20 Interest expense (4,980) Total nonoperating revenues (expenses) (4,960) Change in net assets (22,062) Net assets, beginning of the year 138,023 Net assets, end of the year $ 115,961 The accompanying notes are an integral part of these financial statements

8 STATEMENT OF CASH FLOWS Year Ended Cash Flows From Operating Activities Cash received from members $ 50,057 Other cash receipts 89 Cash payments to suppliers for goods and services (35,793) Cash payments to employees (11,382) Net cash provided by operating activities 2,971 Cash Flows From Capital and Related Financing Activities Principal payments on notes payable (2,112) Interest paid on notes payable (4,980) Net cash used by capital and related financing activities (7,092) Cash flows from investing activities Interest income 20 Net cash provided by financing activities 20 Net change in cash and cash equivalents (4,101) Cash and cash equivalents, beginning of year 29,946 Cash and cash equivalents, end of year $ 25,845 Reconciliation of operating loss to net cash provided by operating activities Operating loss Adjustments to reconcile operating loss to net cash provided by operating activities: $ (17,102) Depreciation 25,176 Changes in assets and liabilities: (Increase) in accounts receivable (895) (Decrease) in accounts payable (2,481) (Decrease) in accrued payroll and payroll taxes (2,695) Increase in gross receipts tax payable 1,327 (Decrease) in accrued interest payable (359) Net cash provided by operating activities $ 2,971 The accompanying notes are an integral part of these financial statements

9 NOTE 1 ORGANIZATION NOTES TO FINANCIAL STATEMENTS Canjilon Mutual Domestic Water Consumers and Mutual Sewage Works Association (Association) is a not-for-profit mutual domestic water association established for the purpose of constructing, maintaining and operating a water and wastewater system for citizens in the community of Canjilon in Rio Arriba County, New Mexico. The Association was incorporated as a non-profit association under the Sanitary Projects Act (SPA) of the Laws of New Mexico, in Under the SPA, the Association remains a non-profit organization owned and governed by its members. It is eligible to receive certain loans and grants from the State of New Mexico. The Association is governed by a Board of Directors that consists of five (5) members who are responsible for legislative and fiscal control of the Association. The Board is also responsible for administrative control of the Association. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reporting Entity The financial statements of the Association have been prepared in accordance with general accepted accounting principles (GAAP). The Governmental Accounting Standards Board (GASB) is responsible for establishing GAAP for state and local governments through its pronouncements. Governments are also required to follow the pronouncements of the Financial Accounting Standards Board (FASB) issued after November 30, 1989 that do not conflict with or contradict GASB pronouncements. GASB Statement No. 14 established criteria for determining the governmental reporting entity and component units that should be included within the reporting entity. Under provisions of this Statement, the Association is considered a primary government, since it is a specialpurpose government that has a separately elected governing body, is legally separate, and is fiscally independent of other state or local governments. As used in GASB Statement No. 14, fiscally independent means that the Association may, without the approval or consent of another governmental entity, determine or modify its own budget, levy its own taxes or set rates or charges and issue bonded debt. The Association has no component units, defined by GASB Statement No. 14 as other legally separate organizations for which the elected Association members are financially accountable. There are no other primary governments for which the Association Board Members are financially accountable. There are no other primary governments with which the Association has a significant relationship. -6-

10 NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Reporting entity - continued For financial reporting purposes, the Association is considered a special-purpose government engaged in business-type activities. Measurement focus, basis of accounting, and financial statement presentation The financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. The accounts of the Association are organized on the basis of fund type, of which there is only one fund which is considered a proprietary fund. Proprietary fund operating revenue, such as charges for services, result from exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and gives up essentially equal values. Non-operating revenue, such as subsidies and investment earnings, results from non-exchange transactions or ancillary activities. When both restricted and unrestricted resources are available for use, it is the Association s policy to use restricted resources first, then unrestricted resources as they are needed. Assets, Liabilities, and Net Assets Cash and cash equivalents: For purposes of the statement of cash flows, the Association s cash and cash equivalents are considered to be cash on hand, demand deposits and short-term investments with original maturities of three months or less from the date of acquisition. Accounts receivable: Accounts receivable are stated at their net realizable value, or the amount management expects to collect. For the year ended, management expects to fully collect all outstanding receivables. Accordingly, no allowance for uncollectible accounts has been established. Capital assets: Capital assets, which include property, plant, and equipment, are reported in the financial statements. Capital assets are defined by the New Mexico State Auditor as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. Information technology equipment, including software is capitalized and included in office equipment in accordance with NMAC C (5). -7-

11 NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Assets, Liabilities, and Net Assets - continued The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. No interest was included as part of the cost of capital assets under construction. Property, plant, and equipment of the Association is depreciated using the straight line method over the following estimated useful lives: Office equipment Plant and water system 10 years 20 years Compensated absences: The Association does not have a policy for compensated absences. Accordingly, no liability has been accrued. Net assets: Net assets are classified as follows: Invested in capital assets, net of related debt represents the portion of the Association s net assets invested in capital assets, net of the outstanding debt associated with those assets. As of, Invested in capital assets, net of related debt amounted to $89,437. Restricted net assets represents net assets which have third-party (statutory enabling legislation or granting agency) limitation on their use, and which are legally enforceable as to their use. There were no restricted net assets as of December 31, Unrestricted net assets represents net assets that are neither restricted nor invested in capital assets, net of related debt. As of, the Association had $26,524 of unrestricted net assets. Budgetary data: The Association s budget is prepared on the non-gaap cash basis of accounting. For budgetary purposes, revenues are recognized when the cash is received and expenses are recognized when the liability is paid. The legal level of budgetary control is at the fund level. For the year ended, the Association s actual expenses exceeded budgeted amounts by $2,871. Estimates: The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. -8-

12 NOTE 3 CASH AND CASH EQUIVALENTS NOTES TO FINANCIAL STATEMENTS - CONTINUED The Association is required by New Mexico Statute (NMSA ) to collateralize 50% of any bank deposits in excess of FDIC insurance limits. The Association had no uninsured bank deposits as of. Cash and cash equivalents consisted of the following as of : Name of Name of Balance Outstanding Reconciled Depository Account per Bank Items Balance Bank of America General Operating $ 26,727 $ (882) $ 25,845 Less FDIC coverage (26,727) Uninsured amount - Pledged securities - Over (under) collateralized $ - NOTE 4 CAPITAL ASSETS Capital asset activity for the year ended was as follows: Balance Balance December 31, 2008 Additions Deletions Capital assets not depreciated: Construction in progress $ 25,698 $ - $ - $ 25,698 Capital assets being depreciated: Plant and water system 599, ,809 Total capital assets 625, ,507 Less accumulated depreciation: Plant and water system (421,486) (25,176) - (446,662) Capital assets, net $ 204,021 $ (25,176) $ - $ 178,845 Depreciation expense for the year ended was $25,

13 NOTE 5 LONG-TERM DEBT NOTES TO FINANCIAL STATEMENTS - CONTINUED Long-term debt activity for the year ended was as follows: Balance Balance Amounts Due December 31, 2008 Additions Deletions In One Year USDA Note 1 $ 78,517 $ - $ (1,762) $ 76,755 $ 1,861 USDA Note 3 13,003 - (350) 12, $ 91,520 $ - $ (2,112) $ 89,408 $ 2,230 The Association had the following long-term debt obligations as of : USDA Note 1, payable to the United States Department of Agriculture in monthly installments of $503, with an annual interest rate of 5.5%, secured by water system assets. The note matures November, USDA Note 3, payable to the United States Department of Agriculture in monthly installments of $88, with an annual interest rate of 5.5%, secured by water system assets. The note matures July, Debt service requirements to maturity is as follows: Year Ending Total Debt December 31, Principal Interest Service 2010 $ 2,230 $ 4,862 $ 7, ,356 4,736 7, ,489 4,603 7, ,629 4,463 7, ,778 4,314 7, ,420 19,040 35, ,606 13,854 35, ,011 7,035 35, , ,494 $ 89,408 $ 63,512 $ 152,

14 NOTE 6 CONTINGENCIES NOTES TO FINANCIAL STATEMENTS - CONTINUED Grants The Association receives financial assistance from various federal and state agencies in the form of grants and loans. The disbursement of these funds is subject to compliance requirements specified in grant agreements, promissory notes, and legislation. The Association believes that disallowed expenditures, if any, will not be significant. Risk Management The Association purchased insurance coverage that transfers the risk of loss to an unrelated third party. The coverage minimizes the Association s exposure to losses related to the water distribution system. The Association did not experience any losses or insurance claims during the years ended, 2008 or NOTE 7 COMMITMENTS The Association has entered into reimbursement grant agreements with the State of New Mexico Environment Department to plan, design and construct improvements to the existing water system. Under these agreements, the Association had the following commitments as of : Grant Termination Project Number Amount Expended Balance Date GF 85,000-85,000 June 30, GF 50,000-50,000 June 30, 2012 $ 135,000 $ - $ 135,000 NOTE 8 SUBSEQUENT EVENTS Subsequent events are events or transactions that occur after the balance sheet date but before the financial statements are issued or available to be issued. The Association recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the balance sheet date, including estimates inherent in the process of preparing the financial statements. The financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the balance sheet date. The Association has evaluated subsequent events through December 31, 2014, the date the financial statements are available to be issued. -11-

15 NOTES TO FINANCIAL STATEMENTS - CONTINUED NOTE 8 SUBSEQUENT EVENTS CONTINUED In June 2010 the Association implemented a major upgrade to their water system. The entire project cost $680,000. The Association received a federal grant for water system improvements under the American Recovery and Reinvestment Act in the amount of $544,000 and entered into a loan agreement with the New Mexico Finance Authority (NMFA) for $136,000. The project was completed and the grant and loan was fully disbursed by March The NMFA loan carries an interest rate of 1% and is secured by future pledged revenues. Repayment of the $136,000 loan began in May 2011 and calls for monthly payments of $527 per month. The loan fully matures in May The Association received capital outlay awards from the State of New Mexico in the form of reimbursement grants in 2011, 2012 and The grant agreements were executed with the State of New Mexico Environment Department and were for various water system improvements. The projects and amounts were awarded as follows: Project Number Grant Amount Amount Expended Completion Date GF $ 85,000 $ 49,143 Reauthorized as Project GF GF 50,000 50,000 June GF 35,857 35,857 October STB 25,000 25,000 November

16 SUPPLEMENTARY INFORMATION

17 STATEMENT OF REVENUES AND EXPENSES - BUDGET AND ACTUAL - NON-GAAP BASIS Year Ended Actual Budgeted Amounts Amount Variance Budgetary Favorable Original Final Basis (Unfavorable) REVENUES: Charges for services $ 50,000 $ 50,000 $ 50,647 $ 647 Other revenue Total revenues $ 50,000 $ 50,000 $ 50,755 $ 755 EXPENDITURES: Salaries and payroll taxes 4,100 4,100 11,858 (7,758) Operating expenses 39,900 39,900 33,921 5,979 Debt service 6,000 6,000 $ 7,092 (1,092) Total expenditures $ 50,000 $ 50,000 $ 52,871 $ (2,871) Reconciliation of budgetary basis to GAAP basis: Budget basis revenues $ 50,755 Prior year accounts receivable (3,308) Current year accounts receivable 3,614 GAAP basis revenues $ 51,061 Budget basis expenses $ 52,871 Principal payments on notes payable (2,112) Prior year accrued liabilities (4,337) Current year accrued liabilities 1,525 Depreciation 25,176 GAAP basis expenses $ 73,123 The accompanying notes are an integral part of these financial statements. -13-

18 SUPPLEMENTAL INFORMATION

19 James L. Hartogensis, CPA LLC Certified Public Accountant INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Directors Canjilon Mutual Domestic Water Consumers and Mutual Sewage Works Association and Mr. Hector H. Balderas, Esq. New Mexico State Auditor Santa Fe, New Mexico I have audited the accompanying financial statements of the business-type activities and related budgetary comparison, presented as supplementary information, of State of New Mexico Canjilon Mutual Domestic Water Consumers and Mutual Sewage Works Association ( Association ) as of and for the year ended, and have issued my report thereon dated December 31, I conducted my audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing my audit, I considered the Association s internal control over financial reporting as a basis for designing audit procedures for the purpose of expressing my opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Association s internal control over financial reporting. Accordingly, I do not express an opinion on the effectiveness of the Association s internal control over financial reporting. My consideration of internal control was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses. However, as discussed below, I identified certain deficiencies in internal control over financial reporting that I consider to be significant deficiencies. A control deficiency 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 misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity s financial statements that is more than inconsequential will not be prevented or detected by the agency s internal control. I consider the deficiencies described in the accompanying schedule of findings and responses as items , , , , and to be significant deficiencies in internal control over financial reporting

20 Board of Directors and Management Canjilon Mutual Domestic Water Consumers and Mutual Sewage Works Association A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the agency s internal control. My consideration of the internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in the internal control that might be significant deficiencies and, accordingly, would not necessarily disclose all significant deficiencies that are also considered to be material weaknesses. However of the significant deficiencies described above, I consider item to be a material weakness. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Association s financial statements are free from material misstatement, I performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of my audit, and accordingly, I do not express such an opinion. The results of my tests disclosed instances of noncompliance or other matters that are required to be reported under Government Auditing Standards and which are described in the accompanying schedule of findings and responses as items , , , and I noted a certain matter that is required to be reported under Government Auditing Standards January 2007 Revision paragraphs 5.14 and 5.16, and Section , NMSA 1978, which is described in the accompanying schedule of findings and responses as finding The agency s responses to the findings identified in my audit are described in the accompanying schedule of findings and responses. I did not audit the agency s response and, accordingly, I express no opinion on it. This report is intended solely for the information and use of management, the Board of Directors, others within the agency, the State Auditor, the New Mexico Legislature, and applicable federal grantors, and is not intended to be and should not be used by anyone other than these specified parties. James L. Hartogensis, CPA LLC James L. Hartogensis, CPA LLC Albuquerque, New Mexico December 31,

21 SCHEDULE OF FINDINGS AND RESPONSES A. SUMMARY OF AUDITOR RESULTS FINANCIAL STATEMENTS Type of auditor s report issued: Unqualified Internal control over financial reporting: Material weakness(es) identified? Significant deficiency identified not considered to be a material weakness? Noncompliance material to financial statements noted? Yes Yes Yes STATUS OF PRIOR YEAR FINDINGS Lack of segregation of accounting duties Repeated and modified Form 1099 not issued for contract labor Resolved Internal control over financial reporting Repeated and modified Failure to submit audit report on time Repeated and modified Failure to submit an operating budget Repeated and modified CURRENT YEAR FINDINGS Internal control over disbursements Violation of Per Diem and Mileage Act Internal control over receipts Capital asset inventory not completed Actual expenses in excess of budgeted expenses

22 SCHEDULE OF FINDINGS AND RESPONSES - CONTINUED CURRENT FINDINGS Lack of Segregation of Accounting Duties (Material Weakness) Condition: The Association s accountant prepared and signed checks, reconciled the bank account, received payments, made bank deposits, and posted all transactions to the general ledger. Criteria: Proper internal controls require segregation of duties between the authorization, processing, recording and reconciling of transactions. In the absence of adequate resources to segregate duties, oversight of the accounting and financial reporting cycle should be implemented by someone independent of the process. Cause: The Association did not have adequate resources or accounting and financial reporting policies in place to help prevent, detect and correct misstatements. Effect: Misstatements may occur and not be detected on a timely basis by management. Recommendation: The Association should adopt policies for the authorization, recording and processing of transactions. The policies should strengthen oversight of the accounting process. At a minimum, the policies should segregate the duties of receiving and posting member water payments from the duties of reconciling the bank account. The Board may consider using a lock box at a financial institution to receive member payments. In addition, the duties of authorizing expenses and signing checks should be segregated from reconciling the bank account. Each month the Board should review and approve the bank reconciliation, and the budget to actual income statement on a timely basis. The Board should also consider having a director receive a copy of the bank statement directly from the bank each month to review the month s activity. Management s Response: The Association has established policies and procedures which will require the Association President to review invoices, authorize payments, and sign checks. The Association President will also assist the accountant in reconciling bank statements. All Board Members will receive a copy of the monthly financial statements and budget status and make adjustments as needed

23 SCHEDULE OF FINDINGS AND RESPONSES - CONTINUED Internal Control Over Financial Reporting (Significant Deficiency) Condition: The Association did not have the necessary policies and procedures in place to prepare financial statements in accordance with generally accepted accounting principles. Criteria: Proper internal controls over financial reporting should include monthly preparation of accurate, complete and timely financial reports. Management is responsible for the fair presentation of financial and non-financial information reported in the financial statements. Cause: Management has not instituted policies and procedures to prepare and review accurate financial information. Capital projects funded by outside entities are not recorded in the accounting records. Capital assets and long-term debt balances are not reflected in the accounting records. Effect: Association management and members do not get the entire financial picture when accurate, complete financial statements are not available. Financial decisions may be reached without complete knowledge of the financial status of the organization. Recommendation: Management should institute policies and procedures for accurate and complete financial reporting. The Association should consider obtaining financial training that will enhance understanding of governmental financial statements and the necessary elements that are required to be included. Management s Response: The Association will implement policies and procedures which will result in accurate and complete financial reporting. The current Association accountant is the first employee hired by the Association with a degree in accounting and will undergo training to comply with governmental reporting requirements

24 SCHEDULE OF FINDINGS AND RESPONSES - CONTINUED Late Audit Report (Significant Deficiency, Noncompliance) Condition: The Association did not submit their 2009 audit report to the Office of the State Auditor by May 31, 2010, the due date of the report. In addition, the auditor recommendation for 2009 was not submitted to the State Auditor until July Criteria: NMAC (State Audit Rule) requires submission of auditor recommendations at least 30 days prior to year-end, or by December 1, NMAC also requires submission of audit reports within five months after year-end, or May 31, Cause: The Association did not recommend and contract with an audit firm until July, Effect: The Association was not in compliance with the State Audit Rule, which could impact their ability to receive grants from federal and state sources. Recommendation: The Association should prepare the annual auditor recommendation by December 1 of each year and submit it to the Office of the State Auditor. The Association should also institute policies and procedures that will enable it to complete their annual audit within five months after year-end. Management s Response: The Association will contract for the annual audit in sufficient time to allow for completion by the due date

25 SCHEDULE OF FINDINGS AND RESPONSES - CONTINUED Budget Approval and Quarterly Reporting (Noncompliance) Condition: The Association, designated a local public body, did not submit their approved 2009 operating budget to the New Mexico Department of Finance & Administration (DFA) Local Government Division. As a local public body, the Association is also required to submit operating results quarterly to DFA. Criteria: Section NMSA 1978 requires all local public bodies to submit their operating budget annually to DFA Local Government Division for certification. DFA also requires quarterly reporting by all agencies on prescribed forms. Cause: The Association was not aware of the reporting requirements imposed by statute and DFA. Effect: DFA Local Government Division lacked the necessary information to perform their oversight duties required by state statute. Recommendation: I recommend the Association establish contact with their DFA budget analyst to determine what reports are required and whether retroactive reporting will be required. The Association should also institute policies to ensure compliance with all reporting requirements imposed by DFA and state statute. Management s Response: The Association accountant will establish contact with a DFA Budget Analyst to obtain knowledge of required reporting. Policies will be implemented to ensure compliance

26 SCHEDULE OF FINDINGS AND RESPONSES - CONTINUED Internal Control Over Disbursements (Significant Deficiency) Condition: 5 of 22 disbursements tested, totaling $1,068, had no invoice or other supporting documentation retained by the Association. 16 of 22 disbursements tested, totaling $4,728, did not have documented approval for the disbursement. The Association s former accountant wrote and signed 2 checks for a total of $435 to herself with no documented approval by a Board member. Criteria: Proper internal controls dictate that a disbursement should only be made once the invoice is received and applicable authorizations are complete. These steps should be documented. Cause: The Association did not have a policy in place for documentation of invoices and approvals for all disbursements. Effect: Disbursements may be made that are not properly approved. The Association may be subject to fraud waste or abuse by not properly authorizing every transaction. Recommendation: The Association should adopt a policy that outlines procedures for the authorization and documentation of all disbursements. The policy should include provision that each check should be signed by someone other than the check payee. Management s Response: The Association has established policies and procedures which will require the Association President to review all invoices, authorize payment, and sign checks

27 SCHEDULE OF FINDINGS AND RESPONSES - CONTINUED Violation of Per Diem and Mileage Act (Other Matter) Condition: The Association paid a mileage reimbursement to a former contractor without obtaining the required documentation. Out of 22 general disbursements tested, one disbursement was for travel and per diem. The reimbursement tested was for $35, and was paid to the former contract accountant without requiring a mileage report. Criteria: NMAC (Per Diem and Mileage Act) section 11 requires that mileage accrued in the use of a private automobile shall be paid only in accordance with the provisions of that section. The rule include statutory mileage rates and documentation of either the actual odometer readings or use of a state-approved mileage chart. Cause: There were no policies in place for travel and per diem expenses that are reimbursed to employees and contractors of the Association. The Association did not adhere to the Per Diem and Mileage Act. Effect: Lack of verification and documentation of mileage and/or travel reimbursements could result in excess costs to the organization. Recommendation: The Association should adopt a travel and per diem policy that includes payments for reimbursement for mileage incurred while performing Association business. The policy should incorporate the Per Diem and Mileage Act or include stricter guidelines. Management s Response: The Association will adopt the State travel and per diem policy to comply with travel guidelines

28 SCHEDULE OF FINDINGS AND RESPONSES - CONTINUED Internal Control Over Cash Receipts (Significant Deficiency) Condition: Out of 22 receipts tested, 1 receipt batch did not agree with the amount actually deposited in the bank. The receipt batch totaled $3,914 and the bank deposit was for $3, of 22 receipts totaling $177, which were automatically deposited into the Association s bank account, were not recorded accurately or timely in the Association s general ledger. Criteria: Proper internal controls require accurate and timely recording of all transactions that occur. Internal controls should also include a reconciliation between the amount of cash received, the amount deposited into the bank, and the amount recorded in the accounting records. Cause: The discrepancy between the cash receipt and bank deposit was researched and corrected in a later deposit. At the time of receipt, the former accountant determined it was preferable to make the deposit timely rather than wait until the cause of the discrepancy was discovered. The 5 receipts that were not recorded accurately or timely were water payments that were received via electronic funds transaction (EFT) and were recorded properly when a new accountant was subsequently hired. Effect: The Association did not have accurate financial information until the discrepancies were corrected. Recommendation: The Association should adopt a policy of reviewing deposits each month, along with monthly financial statements, to determine whether deposits recorded are complete, accurate and timely. Management s Response: The Association has established requirements that every board member receive a copy of the financial statements showing all transactions, including deposits

29 SCHEDULE OF FINDINGS AND RESPONSES - CONTINUED Capital Asset Inventory not Completed (Noncompliance) Condition: The Association did not perform an inventory of capital assets for the year ended. Criteria: Section (A) NMSA 1978 requires each agency to conduct an annual physical inventory of movable chattels and equipment on the inventory list at the end of each fiscal year. The agency shall certify the correctness of the inventory after the physical inventory. Cause: The Association was not aware of this statutory requirement. Effect: Lack of an annual inventory of capital assets may prevent the Association from properly safeguarding their assets. Timely replacement of unusable or obsolete assets may be prevented, which could affect the overall operation of the water delivery system. Recommendation: The Association should complete an inventory of their capital assets annually, on or near year-end. The inventory should include all equipment and infrastructure owned by the Association, and it should be certified by management in accordance with state statute. Management s Response: The Association will complete an annual inventory of capital assets which will include all equipment and infrastructure owned by the Association in accordance with state statute

30 SCHEDULE OF FINDINGS AND RESPONSES - CONTINUED Actual Expenses in Excess of Budgeted Expenses (Noncompliance) Condition: The Association s expenses exceeded their approved budgeted expenses by $2,871. Criteria: P(1)(a) requires reporting a finding if actual expenditures exceed budgeted expenditures at the legal level of budgetary control, which is at the fund level for mutual domestic water associations. Cause: The Association was not able to prepare and authorize budget adjustments during the year. Effect: By not monitoring the budget, unauthorized expenditures may occur and not be detected. Recommendation: The Association should review their budgeted and actual expenses monthly. If excess expenses are necessary, the Association should prepare and approve budget adjustments in a timely manner. If required, DFA approval should also be obtained for any adjustments to the budget. Management s Response: The Association will prepare an annual budget and review financial statements monthly making budget adjustments as needed. Approval from DFA will be obtained if necessary

31 EXIT CONFERENCE The financial statements have been prepared by James L. Hartogensis, CPA LLC, with the assistance of the Association. The content in this report is the responsibility of the Canjilon Mutual Domestic Water Consumers and Mutual Sewage Works Association. * * * * * An exit conference was held on December 23, 2014 and attended by the following: For James L. Hartogensis, CPA LLC: James Hartogensis, CPA, CGFM Principal For Canjilon Mutual Domestic Water Consumers and Mutual Sewage Works Association: Cipie Maez Ross Martinez Albert Martinez Martha Montoya President Director Operator Contract Accountant