Audit Scope and Results

Transcription

1 Board of Commissioners Tax Increment Financing Commission of Kansas City, Missouri Kansas City, Missouri As part of our audit of the financial statements of the Tax Increment Financing Commission of Kansas City, Missouri as of and for the year ended April 30, 2011, we wish to communicate the following to you. Audit Scope and Results Auditor s Responsibility Under 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 An audit performed 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 is designed to obtain reasonable, rather than absolute, assurance about the financial statements. In performing auditing procedures, we establish scopes of audit tests in relation to the financial statements taken as a whole. Our engagement does not include a detailed audit of every transaction. Our engagement letter more specifically describes our responsibilities. These standards require communication of significant matters related to the financial statement audit that are relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. Such matters are communicated in the remainder of this letter or have previously been communicated during other phases of the audit. The standards do not require the auditor to design procedures for the purpose of identifying other matters to be communicated with those charged with governance. An audit of the financial statements does not relieve management or those charged with governance of their responsibilities. Our engagement letter more specifically describes your responsibilities. Qualitative Aspects of Significant Accounting Policies and Practices Significant Accounting Policies The Commission s significant accounting policies are described in Note 1 of the audited financial statements. Alternative Accounting Treatments No matters are reportable.

2 Management Judgments and Accounting Estimates Accounting estimates are an integral part of financial statement preparation by management, based on its judgments. The following areas involve significant areas of such estimates for which we are prepared to discuss management s estimation process and our procedures for testing the reasonableness of those estimates: Accrual of developer reimbursements Revenue accruals at year end Financial Statement Disclosures The following areas involve particularly sensitive financial statement disclosures for which we are prepared to discuss the issues involved and related judgments made in formulating those disclosures: Long-term obligations, including bonds and developer reimbursements payable Restatement of prior year financial statements Audit Adjustments During the course of any audit, an auditor may propose adjustments to financial statement amounts. Management evaluates our proposals and records those adjustments which, in its judgment, are required to prevent the financial statements from being materially misstated. Areas in which adjustments were proposed include: Proposed Audit Adjustments Recorded Reduction of the State of Missouri tax receivable for amounts already received Increase Clay County tax receivable to account for the lag between receipt by the county and remittance to the Commission Increase hotel taxes receivable to account for the lag between receipt by the companies and remittance to the Commission Restatement of prior year net assets and fund balance Increase accrued interest payable for capital appreciation bonds Proposed Audit Adjustments Not Recorded Overstatement of interest expense in the government-wide financial statements for incorrect handling of capital appreciation bonds for approximately $82,000 Auditor s Judgments About the Quality of the Entity s Accounting Principles No matters are reportable. Disagreements with Management No matters are reportable. Consultation with Other Accountants No matters are reportable. 2

3 Significant Issues Discussed with Management During the Audit Process During the audit process, the following issues were discussed or were the subject of correspondence with management: Deferral of revenue under the modified accrual basis of accounting Difficulties Encountered in Performing the Audit No matters are reportable. Other Material Written Communications Listed below are other material written communications between management and us related to the audit: Management representation letter (attached) Engagement letter Internal Control Over Financial Reporting In planning and performing our audit of the financial statements of the Tax Increment Financing Commission of Kansas City, Missouri as of and for the year ended April 30, 2011, 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, we considered the Commission s internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Commission s internal control. Accordingly, we do not express an opinion on the effectiveness of the Commission 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 deficiencies, significant deficiencies or material weaknesses have been identified. However, as discussed below, we identified certain deficiencies in internal control that we consider to be material weaknesses. A 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 and correct misstatements of the Commission s financial statements on a timely basis. A deficiency in design exists when a control necessary to meet a control objective is missing or an existing control is not properly designed so that, even if the control operates as designed, a control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or competence to perform the control effectively. 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 Commission s financial statements will not be prevented or detected and corrected on a timely basis. 3

4 A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We observed the following matters that we consider to be deficiencies or material weaknesses. Material Weaknesses Restatement of Net Assets and Fund Balance We identified several instances where generally accepted accounting principles were not correctly applied in the fiscal year ended April 30, Under the modified accrual basis of accounting, revenues that are not both measurable and available to finance current expenditures are to be deferred until each requirement is met. A significant amount of revenue, approximately $25 million, recognized in the 2010 fiscal year did not meet each of the qualifications for recognition. During the course of the fiscal year 2010 audit, there were several adjustments made to the longterm bond obligations of the Commission. When these adjustments were prepared, the capitalized issuance costs related to the bonds were not correctly recorded. Certain capitalized costs were incorrectly excluded from the Commission s assets, while the Commission incorrectly capitalized other issuance costs. It was also noted that a bond principal payment was incorrectly recorded as an interest payment during fiscal year The totality of these misstatements resulted in the restatement of both the prior year fund balance and net asset amounts. Management s Response: Management understands the importance of following generally accepted accounting principles. To strengthen the knowledge base and ensure proper presentation of the financial statements, a member of the accounting staff attended a weeklong immersion course on governmental accounting standards at the offices of the Government Finance Officers Association (GFOA). The Commission s legal counsel noted several errors with respect to the bond disclosures included in the April 30, 2010 audit report shortly before the report was to be presented to the Commission by the former audit firm. Legal counsel requested that the report be held until corrections could be made. As a result of ensuing discussions, the auditors adjusted their bond disclosures, removing some bond issuances and adding another bond issuance to the disclosures. They did not, however, completely correct their errors by making all of the required adjustments to the general ledger. Tax Increment Financing Receivables When reviewing the entries to record the current year receivables from the taxing districts, we noted three instances where the original receivable estimates were incorrect. This resulted in adjustments to the financial statements to decrease one receivable by approximately $1,376,000 and increase others by approximately $709,000. Management s Response: While the accounting staff makes every effort to maintain the highest level of accuracy, occasionally mistakes are made. These accruals were made late in the audit process once the necessary information was received from the taxing jurisdictions. In the rush to make the entries timely so that the auditors would not be delayed in completing their procedures, proper care was not taken to ensure the accuracy of these entries. Staff has been reminded to carefully review calculations when making accrual entries. A more thorough review of proposed transactions will be completed by accounting management in the future. 4

5 Deficiencies Accrued Interest The interest accrual for long-term obligations did not take into account the proper accounting treatment for a capital appreciation bond. This resulted in an adjustment to the financial statements to increase the accrued interest payable by approximately $312,000. Other Matters Although not considered material weaknesses, significant deficiencies or deficiencies in internal control over financial reporting, we observed the following matters and offer these comments and suggestions with respect to matters, which came to our attention during the course of the audit of the financial statements. Our audit procedures are designed primarily to enable us to form an opinion on the financial statements and, therefore, may not bring to light all weaknesses in policies and procedures that may exist. However, these matters are offered as constructive suggestions for the consideration of management as part of the ongoing process of modifying and improving financial and administrative practices and procedures. We can discuss these matters further at your convenience and may provide implementation assistance for changes or improvements if you require. Bond Premium and Discount The Commission currently does not separate the premium and discount on long-term obligations from the capitalized bond issue costs. The current presentation method does not correctly present the flow of funds upon bond issuance. We recommend that the Commission separately present the premium or discount from the bond issue costs on any future debt issuances. Affiliate Agreement We noted the Commission does not have a written agreement with the Economic Development Corporation of Kansas City, Missouri (EDC) for providing certain administrative services. We recommend consideration be given to adopting an agreement with the EDC that outlines the specific responsibilities of each party. Current Economic Conditions The current protracted economic decline continues to present difficult circumstances and challenges for governmental organizations. As a result, governmental organizations are facing declines in the fair values of investments and other assets, declines in intergovernmental support, grant revenue and tax revenue, constraints on liquidity and difficulty obtaining financing. The values of the assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments to asset values, allowances for receivables, etc., that could negatively impact the Commission s ability to maintain sufficient liquidity. Now, more than ever, we recommend that management and the Board of Commissioners vigilantly monitor and aggressively manage all of these matters. 5

6 The Tax Increment Financing Commission of Kansas City, Missouri s written responses to the material weaknesses identified in our audit have not been subjected to the auditing procedures applied in the audit of the financial statements, and accordingly, we express no opinion on them. * * * * * * This communication is intended solely for the information and use of management, the Board of Commissioners and others within the Commission, and is not intended to be, and should not be used by anyone other than these specified parties. Kansas City, Missouri September 15,

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