MANAGEMENT LETTER. Noncompliance Findings

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1 MANAGEMENT LETTER City of Richmond Heights Highland Road Richmond Heights, Ohio To the City Council: We have audited the financial statements of the City of Richmond Heights,, Ohio (the City) in accordance with Government Auditing Standards, as of and for the years ended December 31, 2012 and 2011, and have issued our report thereon dated April 1, Government Auditing Standards require us to report significant internal control deficiencies, fraud, (including noncompliance with laws and regulations), and also abuse and noncompliance with contracts and grant agreements that could directly and materially affect the determination of financial statement amounts. We have issued the required report dated April 1, 2014, for the years ended December 31, 2012 and We are also submitting the following comments for your consideration regarding the City s compliance with applicable laws, regulations, grant agreements, contract provisions, and internal control. These comments reflect matters that do not require inclusion in the report Government Auditing Standards requires. Nevertheless, these comments represent matters for which we believe improvements in compliance or internal controls or operational efficiencies might be achieved. Due to the limited nature of our audit, we have not fully assessed the cost-benefit relationship of implementing these recommendations. However, these comments reflect our continuing desire to assist your City. The items indicated with an asterisk (*) denote comments which have been previously reported on in our audit for the years ended December 31, 2010 and 2009 financial statements. If you have questions or concerns regarding these comments please contact your regional Auditor of State office. Proper Certification of Funds * Ohio Revised Code Section (D) prohibits a subdivision or taxing entity from making any contract or ordering any expenditure of money unless a certificate signed by the fiscal officer is attached thereto. The fiscal officer must certify that the amount required to meet any such contract or expenditure has been lawfully appropriated and is in the treasury, or is in the process of collection to the credit of an appropriate fund free from any previous encumbrance.

2 Page 2 Proper Certification of Funds * There are several exceptions to the standard requirement stated above that a fiscal officer s certificate must be obtained prior to a subdivision or taxing authority entering into a contract or order involving the expenditure of money. The main exceptions are: then and now certificates, blanket certificates, and super blanket certificates, which are provided for in sections (D)(1) and (D)(3), respectively, of the Ohio Revised Code. 1. Then and Now certificate If the fiscal officer can certify that both at the time that the contract or order was made ( then ), and at the time that the fiscal officer is completing the certification ( now ), that sufficient funds were available or in the process of collection, to the credit of a proper fund, properly appropriated and free from any previous encumbrance, the City can authorize the drawing of a warrant for the payment of the amount due. The City has thirty days from the receipt of the then and now certificate to approve payment by ordinance or resolution. Amounts of less than $3,000 may be paid by the fiscal officer without a resolution or ordinance upon completion of the then and now certificate, provided that the expenditure is otherwise lawful. This does not eliminate any otherwise applicable requirement for approval of expenditures by the City. 2. Blanket Certificate Fiscal officers may prepare blanket certificates for a certain sum of money not in excess of an amount established by resolution or ordinance adopted by a majority of the members of the legislative authority against any specific line item account over a period not running beyond the end of the current fiscal year. The blanket certificates may, but need not, be limited to a specific vendor. Only one blanket certificate may be outstanding at one particular time for any one particular line item appropriation. 3. Super Blanket Certificate The City may also make expenditures and contracts for any amount from a specific line-item appropriation account in a specified fund upon certification of the fiscal officer for most professional services, fuel, oil, food items, and any other specific recurring and reasonably predictable operating expense. This certification is not to extend beyond the current year. More than one super blanket certificate may be outstanding at a particular time for any line item appropriation. During our 2012 non-payroll expenditure test, we noted one disbursement out of 13 examined, or $196 out of $52,595, in which no invoice date was provided and thus we were unable to determine whether it was entered into prior to receiving the fiscal officer s certification. Failure to properly certify the availability of funds can result in overspending funds and negative cash fund balances. We also noted 23 out of 488 purchase orders encumbered in 2012, and 92 out of 482 purchase orders encumbered in 2011, in which the disbursements made on the purchase order exceeded the amount encumbered. The amounts exceeded totaled $9,640 and $204,357 in 2012 and 2011, respectively. Failure to monitor purchase order amounts resulted in overspending. We recommend the City certify the availability of funds prior to entering into any expenditure commitment. We further recommend the City create and sign purchase orders for all expenditures and ensure that expenditures do not exceed the amount on the purchase order.

3 Page 3 Outstanding Advances * Auditor of State Bulletin provides guidance on the legality and accounting treatment of inter-fund cash advances. Advances may be an effective method of resolving cash flow problems without incurring additional interest expense from short-term loans and to provide the necessary funding for reimbursable grants. Inter-fund cash advances are subject to the following requirements: 1. Advances must be clearly labeled as such and distinguished from a transfer. Advances are intended to temporarily reallocate cash from one fund to another and involve an expectation of repayment. Transfers are intended to permanently reallocate cash between funds and are governed by Ohio Rev. Code Sections to ; 2. In order to advance cash from one fund to another, there must be statutory authority to use the money in the fund advancing the cash ( creditor fund) for the same purpose for which the fund receiving the cash ( debtor fund) was established; 3. The reimbursement from the debtor fund to the creditor fund must not violate any restrictions on the use of the money to be used to make the reimbursement; and 4. Advances must be approved by formal resolution of the City Council. Prior to 2005, the City had advanced monies from the General Fund to both the Capital Improvement Fund and the Sewer improvement Fund. These advances totaled $66,768, of which $39,500 was advanced to the Sewer Improvement Fund and $27,268 was advanced to the Capital Improvement Fund. In addition, the City advanced $290,000 from the Rescue Squad Fund to the Fire Service Fund in The City also advanced $146,025 from the Street Improvement Fund to the Sewer Improvement Fund in These advances have not been repaid as of December 31, Failure to repay advances may result in less funding available in the originating fund. We recommend the City review AOS bulletin to assure that advances are properly completed and approved and also either repay the outstanding advances or convert the advances to transfers. The steps to convert an advance to a transfer are listed below. Auditor of State Bulletin states: If, after an advance is made, the taxing authority determines that the transaction should, in fact, be treated as a transfer, the following procedures should be followed: 1. The necessary formal procedures for approval of the transfer should be completed; 2. The transfer should be formally recorded on the records of the subdivision; and 3. The entries recording the cash advance should be reversed to, in effect, repay the advance with the proceeds of the transfer. Records Retention Schedule * Ohio Rev. Code Section (G) defines a record for the public records law, as any document, device, or item, regardless of physical form or characteristic, created, received by, or coming under the jurisdiction of any public office which document the organization, functions, policies, decisions, procedures, operations, or other activities of the public office.

4 Page 4 Records Retention Schedule * Ohio Rev. Code Section (A)(1) defines public record as any record that is kept by any public office, including, but not limited to, state, county, city, village, township, and school district units (including community schools), except medical records, records pertaining to adoption, probation, and parole proceedings, trial preparation records, confidential law enforcement investigatory records, records pertaining to abortions by minors (Ohio Revised Code Section ), security or infrastructure records defined under Ohio Revised Code Section adoption records (Ohio Revised Code Section (A)), and records the release of which is prohibited by state or federal law. Oho Rev. Code Section states that any application or schedule for the destruction of records must be sent to the Ohio Historical Society for review to determine whether any of the records are of historical value. Once reviewed by the Ohio Historical Society, the applications are then forwarded to the Ohio Auditor of State s Office for final approval. The City does not have a formal records retention policy. The City may improperly dispose of/destroy public records before they were supposed to be, without review by the Historical Society and approval by the Auditor of State's office. The City should formally adopt a policy for records retention that includes provisions for the application or schedule for destruction of public records, including transmission to the Ohio Historical Society and approval by the Auditor of State s Office. Expenditures Plus Encumbrances in Excess of Appropriations * Ohio Revised Code Section (B) prohibits a subdivision or taxing unit from expending money unless it has been appropriated. Budgetary expenditures as enacted by the City may not exceed appropriations at the legal level of control for all funds. During our testing, we noted the following funds/accounts had expenditures plus encumbrances exceeding appropriations for the following amounts: Fund - Object Appropriations Expenditures Plus Encumbrances Variance As of December 31, 2012: Sewer Improvement - Contractual $5,500 $5,936 $436 As of December 31, 2011: General Fund - Police - Personnel 2,274,798 2,299,699 24,901 General Fund - Service - Contractual 177, ,960 61,360 General Fund - Legal - Contractual 76,000 76, Fire Service - Personnel 2,049,930 2,057,142 7,212 Sewer Improvement - Contractual 10,000 13,493 3,493 Expending monies in excess of appropriations can lead to deficit spending. We recommend the City expend only those monies which have been properly appropriated.

5 Page 5 Appropriations in Excess of Estimated Resources Ohio Rev. Code Section states the total appropriations from each fund shall not exceed the total estimated resources. At December 31, 2011, the City had appropriations in excess of estimated resources of $27,423 in the Capital Improvement Fund. Appropriating monies in excess of estimated resources may lead to deficit spending. We recommend the City monitor the budgetary activity on a regular basis and either decrease appropriations or obtain increased amended certificates of estimated resources. Blanket Purchase Orders Ohio Rev. Code Section (D) states that fiscal officers may prepare so-called "blanket" certificates for a certain sum of money not in excess of an amount established by resolution or ordinance adopted by a majority of the members of the legislative authority against any specific line item account over a period not running beyond the end of the current fiscal year. The blanket certificates may, but need not, be limited to a specific vendor. Only one blanket certificate may be outstanding at one particular time for any one particular line item appropriation. In addition to blanket certificates, a subdivision s fiscal officer may also issue so-called super blanket certificates for any amount for expenditures and contracts from a specific line-item appropriation account in a specified fund for most professional services, fuel, oil, food items and any other specific recurring and reasonably predictable operating expense. This certification is not to extend beyond the fiscal year. More than one super blanket certificate may be outstanding at one particular time for a particular line-item appropriation account. The City used several blanket purchase orders throughout each year. The City has not passed an ordinance or resolution stating the maximum amount for which they will allow blanket purchase orders to be used. Failure to set a formal maximum amount for blanket purchase orders may lead to overspending within the City. We recommend the City pass an ordinance or resolution stating the maximum amount for which blanket purchase orders will be used by the City to comply with the above Ohio Rev. Code Section. We also recommend the City monitor its purchases against encumbered amounts prior to approval. Timely Depositing Ohio Rev. Code Section 9.38 states public money must be deposited with the treasurer of the public office or to a designated depository on the business day following the day of receipt. If the amount of daily receipts does not exceed $1,000 and the receipts can be safeguarded, a public office may adopt a policy permitting their officials who receive this money to hold it past the next business day, but the deposit must be made no later than three business days after receiving it.

6 Page 6 Timely Depositing The City was unable to locate deposit slips for several receipt transactions during 2012 and Therefore, we were unable to determine whether the following receipts were deposited on the following business day for 2012: One out of three fines, licenses and permits receipts, or $9,000 out of $32,109; and One out of two rental receipts, or $1,310 out of $19,972. We were also unable to determine whether the following receipts were deposited on the following business day for 2011: Two out of two licenses and permits fee receipts, or $30,298 out of $30,298; and One out of two rental receipts, or $1,845 out of $3,779. The failure to deposit public money with the treasurer of the public office or to a designated depository allows funds to remain on hand and increases the risk of a possibility of theft. We recommend the City deposit public money collected in accordance with the above requirements. We also recommend the City maintain appropriate documentation to ensure compliance with the above Ohio Rev. Code Section is evident. Establishing and Reporting to a Fraud Hotline According to a 2010 report published by the Association of Certified Fraud Examiners, Fraud reporting mechanisms are a critical component of an effective fraud prevention and detection system. Organizations should implement hotlines to receive tips from both internal and external sources. Such reporting mechanisms should allow anonymity and confidentiality and employees should be encouraged to report suspicious activity without fear of reprisal. Ohio Rev. Code Section (B)(1) states A public office shall provide information about the Ohio fraud-reporting system and the means of reporting fraud to each new employee upon employment with the public office. Each new employee shall confirm receipt of this information within thirty days after beginning employment. It further states, each public office shall make all its employees aware of the fraud-reporting system. The City does not require new employees to acknowledge their awareness of a fraud hotline, nor does the City make employees aware of its existence. Failure to implement a fraud hotline or informing employees that one exists may result in a lack of reporting of potential fraudulent activities within the City.

7 Page 7 Establishing and Reporting to a Fraud Hotline We recommend the City consider establishing a public fraud hotline. This will provide an avenue to those willing to communicate potential fraud to an independent party. An effective hotline must be available 24 hours a day, 365 days a year. The initial communication should be positive in its tone and include an announcement by top agency officials in order to demonstrate leadership support of the program. Employees, suppliers and other key groups should receive information that addresses the confidential nature of the hotline and that encourages them to come forward to stop unethical activities that ultimately hurt the entire organization. Placing posters in high-traffic areas help promote the hotline and offer the added benefit of being a deterrent. If the City concludes it is not cost effective to implement the hotline, then the City should consider promoting the Auditor of State s fraud hotline instead. Each year, the Auditor of State receives hundreds of tips regarding suspected fraud in government. These tips come from many sources, including public employees and concerned citizens as well as state auditors who find suspicious activity in the course of a routine financial audit. The Special Audit Task Force comprised of auditors, investigators and attorneys on the Auditor of State s staff evaluates tips and discusses the best course of action on a case-by-case basis. We also recommend the City provide information and require employee acknowledgement about fraudreporting systems to all of its employees in accordance with the above Ohio Rev. Code Section. Outstanding Checks * Recommendations During our review of outstanding checks at December 31, 2012, we noted the following: The City had 90 checks on its listings, totaling $29,512, in excess of one year old. Certain checks dated back to 2000; The City maintained multiple outstanding check listings, one on its accounting system and one manually, which totaled $165,129 and $154,936, respectively. Neither listing agreed in total to its bank reconciliation; The City recorded $8,640 in outstanding checks on its bank reconciliation as part of its Key Bank account which was not supported on any listing; and The City had 24 checks on its listings, totaling $6,043, which did not contain the name of the payee the check was paid out to, and instead was listed as "Invalid Vendor."

8 Page 8 Recommendations Outstanding Checks * During our review of the City's outstanding check listings at December 31, 2011, we noted the following: The City had 80 checks on its listings, totaling $29,205, in excess of one year old. Certain checks dated back to 2000; The City maintained multiple outstanding check listings, one on its accounting system and one manually, which totaled $170,618 and $158,935, respectively. Neither listing agreed in total to its bank reconciliation; The City recorded $8,640 in outstanding checks on its bank reconciliation as part of its Key Bank account which was not supported on any listing; and The City had 24 checks on its listings, totaling $6,043, which did not contain the name of the payee the check was paid out to, and instead was listed as "Invalid Vendor." Failure to properly maintain and record outstanding checks may result in misstatements or misrepresentations of financial position on the City's bank reconciliations. Further, accounting for stale dated checks can result in an inefficient and cumbersome bank reconciliation process. Such items may be submitted to an unclaimed monies fund in accordance with Ohio Rev. Code Section We recommend that the Director of Finance review the outstanding checks list at least once a year and remove all checks outstanding for more than a year and place them in an unclaimed monies fund in accordance with the guidelines recommended in Auditor of State Bulletin In addition, a list of all checks held in the fund should be maintained. Furthermore, we recommend the City maintain a single outstanding check list in its accounting system that agrees to its bank reconciliations, and also eliminates any unsupported outstanding checks. Updating Revenue and Expense Ledgers * Revenue and expense ledgers should be updated for any adjustments to the estimated resources and for any appropriation amendments throughout the year. At December 31, 2012 and 2011, the revenue and expense ledgers were not in agreement with the City s official amended certificate of estimated resources and appropriations for several funds/line items. By not updating the revenue and expense ledgers timely, budgetary reports from the City s system could be misleading and inaccurate. We recommend the City update their financial system's revenue and expense ledgers timely to reflect the most updated amended certificate of estimated resources and appropriation amendments. Disaster Recovery Plan * Sound business practices require that entities prepare disaster recovery plans for use in emergency situations which significantly disrupt information systems. Although the City has addressed the need for backup of software and accumulated data, the City has not addressed the need for a complete disaster recovery plan which addresses the decision making process following a disaster.

9 Page 9 Recommendations Disaster Recovery Plan * Without documented disaster recovery procedures, the City could incur substantial costs in attempting to retrieve and recreate pertinent financial information. The City should develop a disaster recovery plan which: Addresses the hardware, software and communication needs for processing at the alternate site; Includes a priority list for application processing; Identifies key personnel necessary for processing at an alternate site, establishes training for the key personnel and allows for the periodic testing of the transfer of processing to the alternate site; and Establishes a manual backup process to bide the organization over to the point when crucial systems can be recovered. The backup process should address personnel and the manual flow of paper transactions through the necessary authorization trail. In addition, the City should: Prepare a structured test of the plan, periodically test the plan, formally address the results of the test, and update the plan based on the results; and, Distribute a copy of the plan to all key employees and store the plan off-site with the back-up tapes. Recreation Department Procedures * Supporting documentation should be maintained for all receipts and activities performed by the Recreation Department. This supporting documentation, which is considered public record, should be maintained in an organized and traceable manner. Pay-ins for money received by the Recreation Department should be forwarded to the Finance Department in a timely manner. The Finance Department does not indicate pay-in numbers on the bank deposit slips, thus pay-ins generated by the Recreation Department are not readily traceable to bank deposits. The Finance Department should indicate what pay-in numbers comprise each bank deposit. Failure to forward pay-ins to the Finance Department in a timely manner and indicate what pay-ins comprise bank deposits hinders the City s ability to complete monthly bank reconciliations and may result in errors going undetected. Also, failure to maintain adequate supporting documentation that is complete, dated, numbered, and filed in an organized manner may result in supporting documentation becoming lost or destroyed. This also makes discrepancies difficult to rectify and could pose a fraud risk. We recommend the Recreation Department forward its pay-ins (receipt information) to the Finance Department in a timely manner. We also recommend the Recreation Department maintain complete supporting documentation for all activities and maintain an appropriate filing system to keep its records in an organized and retrievable manner.

10 Page 10 Recommendations Establishment of Rental and Lease Fee Schedules Fee schedules ensure that proper rates are charged for accommodations provided by the City. We noted the City had not formally approved fee schedules for the rental of its fields and facilities. This resulted in inconsistent amounts being charged in two of the two field rentals we examined possibly leading to lost receipts. In addition, we noted the City is receiving shared revenues from leased property. No contractual agreement detailing the particulars of the revenue shared has been established between the City and the leasing company. As a result, the correct amount of revenue may not be remitted to the City. Furthermore, we noted the City does not have a lease agreement in place with the Greenwood Farm Historical, Cultural & Arts Association, Inc. for use of the Greenwood Farm property in the City, as stipulated by City Ordinance As a result, the City is not receiving any revenue for the use of this property. We recommend the City establish fee schedules for the rental of its fields and facilities. In addition, we recommend a contractual agreement be established to detail the revenue sharing or receipt aspects of leased property. These schedules and agreements should be formally approved by City Council. We intend this report for the information and use of the City Council, audit committee and management. Dave Yost Auditor of State Columbus, Ohio April 1, 2014