TOWN OF CANTON, MASSACHUSETTS MANAGEMENT LETTER YEAR ENDED JUNE 30, 2014

Transcription

1 TOWN OF CANTON, MASSACHUSETTS MANAGEMENT LETTER YEAR ENDED JUNE 30, 2014

2 Table of Contents Transmittal letter...1 Overview Informational Items.4-5 Findings and Comments..6-9

3 Board of Selectmen Town of Canton Canton, Massachusetts In planning and performing our audit of the financial statements of the governmental activities, business-type activities, each major fund, and the aggregate remaining fund information of the Town of Canton, Massachusetts, (the Town ) as of and for the year ended June 30, 2014, in accordance with auditing standards generally accepted in the United States of America, we considered the Town 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 Town s internal control. Accordingly, we do not express an opinion on the effectiveness of the Town s internal control. 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. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. This communication is intended solely for the information and use of management, the Board of Selectman, and others within the organization, and is not intended to be and should not be used by anyone other than these specified parties. Roselli, Clark & Associates Certified Public Accountants Woburn, Massachusetts November 26, 2014 Town of Canton, Massachusetts 1 of 9 Management Letter

4 I. OVERVIEW Fiscal year 2014 was a financially positive year for communities in Massachusetts. Many experienced increases to their reserve balances as average balances statewide increased to approximately 8% of general fund expenditures. In addition, unemployment rates have been reduced to pre-recession levels and a favorable mortgage market has bolstered home sales which have been robust over the past 2 years. The Town ended the year with approximately $9.8 million in unassigned fund balance. This represented a $1.6 million increase over the prior year. This was primarily due to positive budgetary results of $4.3 million offset by use of free cash of $2.0 million. In addition, the Town added $0.4 million to its OPEB Trust, reflecting its commitment to begin to fund this long-term obligation. These results exemplified the consistency the Town maintains in managing its reserves. More specifically, unassigned fund balances have not been below $5.1 million during any of the past 9 years. In doing so the Town has kept a reserve ratio trending over 10% while still being able to (1) balance its budget on an annual basis, (2) maintain significant unused levy capacity, and (3) attend to its capital needs. A common budgetary flexibility test used by the rating bureaus when conducting a credit evaluation is called a reserve ratio. The ratio is calculated by adding general fund assigned and unassigned fund balances presented in the financial statements and dividing this by the general fund expenditures. 15% is considered tier one and 8% - 15% is considered tier two. The Town s ratio is 12.4% which places the Town in the middle of tier two and considered healthy. This metric represents 10% of the overall credit profile. Other metrics such as the Town s demographics, proximity to Boston and first class Management Team were critical components of the S&P evaluation and decision to rate Canton AAA investment grade several years ago. The Town s consistency and delivery since, has allowed the Town to maintain this top investment grade. The Town s bond rating is important. Maximizing the Town s bond rating, will minimize the cost of future borrowing for the Town, and the Town has been successful in this endeavor. We are encouraged by this effort and support the Town s efforts to continue this trend into the future. Town of Canton, Massachusetts 2 of 9 Management Letter

5 Also, on a positive note, the Town continues to improve upon its internal control process; in part this is done through the corrective action suggested through annual management letters. During the fiscal year the Town, improved controls over Recreation department revenues, timely filing of Chapter 90 reimbursements, and maintenance of assessor s warrants. The remainder of this report is intended to provide the Town and its management with recommendations for improvement in accounting and financial operations and informational items. The Town should review these recommendations and informational items, and, if determined to be cost-effective, implement these improvements. Town of Canton, Massachusetts 3 of 9 Management Letter

6 II. INFORMATIONAL ITEMS Statement on Auditing Standards No. 115 Audit Communications The American Institute of Certified Public Accountants ( AICPA ) recently issued Statement on Auditing Standards No. 115, Communicating Internal Control Related Matters Identified in an Audit ( SAS 115 ). SAS 115 establishes standards and provides guidance on communicating matters related to an entity s internal control over financial reporting identified in an audit of financial statements. In particular, SAS 115 provides guidance on evaluating the severity of deficiencies in internal control identified in an audit of financial statements in the following order: 1. Deficiency in internal control 2. Significant deficiency 3. Material weakness Deficiencies identified as significant deficiencies or material weaknesses are required to be communicated to those charged with governance. Deficiencies in internal control are not required to be communicated; however we have chosen to also report these types of deficiencies in this report. We did not deem any of the findings in this report to be categorized as either a significant deficiency or a material weakness. Municipal Data Breaches Within the past few years, there has been an alarming increase in the number of intrusions into municipal networks throughout the United States. These breaches, many of which targeted relatively small cities and towns, have resulted in the unauthorized access of resident, student and employee data and the attempted theft of up to $4 million dollars recently. Given that most cities and towns lack a structured information security program their systems are increasingly at risk to this type of event. Recently, a select number of highly qualified companies have emerged that conduct data security audits for municipalities. This type of audit is a comprehensive examination of the administrative, technical and physical security controls that a municipality has implemented to protect personal information. The resulting audit report identifies each condition that exposes the municipality to potential unauthorized access and offers practical recommendations to remediate these conditions. The Town should evaluate its information technology security and evaluate the use of one of these specialists or use in-house resources. New Pension Accounting Standards In June 2012, the GASB issued Statements No. 67, and No. 68. Both statements will materially impact the Town s reporting of pension liabilities, effective fiscal year Because the calculations necessary to implement these statements will be generated by the Norfolk County Retirement System (the System) in which the Town participates, it is imperative that the Town work with the System to ensure that the information needed is available in sufficient time to be included in the Town s fiscal year 2015 Comprehensive Annual Financial Report (CAFR). Town of Canton, Massachusetts 4 of 9 Management Letter

7 The following areas will be impacted materially: 1) Certain actuarial methods of calculating the accrued pension liability will now be mandated, instead of optional. 2) The value of actuarially determined pension benefits that have been earned (by both active and non-active employees and pensioners) will now be reported as a liability in the Town s Statement of Net Position and the applicable accrued costs included within the Statement of Activities. 3) Enhanced and more detailed financial statement footnote disclosure relative to the pension plan will be required. 4) Enhanced and more detailed required supplementary information reporting relative to the pension plan will be required. In the event the information is not available, it will result in an adverse opinion to the financial statements; which would disqualify the Town from obtaining a Certificate of Achievement for Excellence in Financial Reporting; and potentially reduce the Town s credit rating. Therefore we urge the Town to contact the System and maintain an open line of communication regarding the timing of this information. Town of Canton, Massachusetts 5 of 9 Management Letter

8 III. FINDINGS AND RECOMMENDATIONS Fraud Prevention Measures (repeated from prior year) In these trying economic times, it is reasonable to expect that the frequency of fraud and theft by employees, customers and vendors may increase. The Town should be well aware of this increased risk and take additional measures to better safeguard the Town s cash and other assets. Fraud can include theft, the misappropriation of assets such as cash or easily marketable equipment like computers, the execution of transactions with related parties that are not disclosed and not completed at arm s length, or the modification or fabrication of financial records to protect job security. The Town must increase its focus and awareness of fraud risks throughout all areas of local government. Suspicious or unusual activity, particularly in cash handling areas, should be promptly investigated. In the prior year, we suggest the Town implement the following: Develop a Written Fraud Policy Implement a written fraud risk policy. Such a policy would direct the Town to perform a risk assessment allowing the Town to identify, analyze and manage the risk of fraud. During the fiscal year, the Town developed a fraud policy but it has yet to be formally approved. Establish a Limited Internal Audit Process The Town does not have sufficient resources to create an autonomous, internal audit function. However, under Chapter 41 of Massachusetts General Law ( MGL ), the Town Accountant or equivalent position has the ability to examine books and records of any department on a periodic basis, and at least on an annual basis. The Accounting Office has, over the past two fiscal years, required departments to submit substantial support for its revenue collections in an effort to strengthened controls over cash receipts. We suggest that the Accounting Office cycle audit the cash handling departments. A different department should be chosen each month, and the cash handling for that month should be reconciled independently. For example, in the area of dog licenses, the number of licenses issued during a given period should be checked against the amount of money turned over to the Town. Such a process would provide an excellent deterrent against fraud. The Town should be aware that our audit procedures are designed to provide reasonable assurance that the financial statements are fairly presented and free of material misstatement. Our audit includes considerations for fraud; however, no assurances can be given that we would detect fraud through our audit. Our audit cannot be relied upon to detect fraud or illegal acts that may exist. Town of Canton, Massachusetts 6 of 9 Management Letter

9 Police Details (repeated from prior year) The prior year management letter identified several deficiencies in the administration of the Town s Police Detail Fund which are summarized as follows: While the Police Department has made efforts to write-off or collect older outstanding balances, approximately $6,400 of overdue invoices remained on the accounts receivable aging report. The Police Details Revolving Fund balance was not reconciled between the Town ledgers and Police receivables aging at year end. The Town Accountant does not record the amounts owed from vendors for paid details on the general ledger. We recommend that the Town implement procedures to correct the deficiencies noted above to strengthen internal controls over the administration of Police Details. Student Activity Accounts (updated from prior year for new compliance regulations) Regulatory authority and operational responsibilities relative to student activity accounts was brought to the forefront when Chapter 66 of the Special Acts of 1996, as codified in Massachusetts General Laws, Chapter 71, Section 47, provided certain statutory directions. In addition, the law gave the Massachusetts Department of Elementary and Secondary Education (DESE) the authority to issue guidance and directives related thereto. For many years, the DESE accepted the student activities guidelines compiled by the Massachusetts Association School Business Officials as their informal policy manual and was used accordingly by many school districts. However, in fiscal year 2014, the DESE adopted a formal agreed upon procedures and audit guidelines document that established some new criteria and processes school districts must begin following starting in fiscal year The DESE has mandated that the checklist of evaluation criteria within their new guidelines must be performed annually, with the checklist being completed at least once every three years by a CPA. In the two non-cpa years, it is to be completed in-house by School or Town personnel, or the School Department can option to have a CPA perform the evaluations annually. For non-cpa years, if done in-house, DESE has requested that as part of the financial audit, the audit firms will review the checklists to verify that they were completed. The School has agreed to have the student activity accounts independently audited during fiscal year We suggest that the School and Town officials obtain the new guidelines from the DESE website and then generate a plan for when, how, and who will complete the required checklist at each school for future fiscal years. Employee Reimbursement Policy (repeated from prior year) In response to prior auditor comments regarding a policy for employee reimbursements, the Town drafted a policy for such activity. We understand that this policy has yet to be adopted and suggest the Town follow-through with these final steps to help remove any risk associated with this activity. Town of Canton, Massachusetts 7 of 9 Management Letter

10 Planning Board Surety Deposits (repeated from prior year) Prior year audits have highlighted several issues with respect to the Planning Board Accounts. These include payment of services when funds are not available and maintaining deficit account balances which are the results of a lack of monitoring developers available balances. While progress is ongoing we noted the same conditions existed during fiscal year School Athletic Revolving Fund During our audit we reviewed the financial policies and procedures of the School s Athletic Revolving Fund and noted the following areas where internal controls could be strengthened: The Athletic Director indicated that the department s internal records are not reconciled to the MUNIS ledger system. Currently, the School only utilizes one revenue account for the numerous revenue streams that are deposited to the Fund which makes reconciliations cumbersome. We recommend that the Town create multiple revenue accounts in the fund to facilitate a reconciliation of revenues to the ledger. After each event the beginning and ending ticket numbers, as well as the revenue received, are logged on to a spreadsheet. We recommend that the Athletic Director use a separate sheet for each event that is signed by the ticket taker and reconciled, reviewed and approved by the Athletic Director. The gate receipts are often locked in the Athletic Director s desk before the turnover to the Treasurer/Collector s Office is completed. We recommend that a small office safe be purchased to safeguard the cash and checks that are collected. The Athletic Director maintains $1,000 in petty cash for change purposes. This petty cash is not recorded on the general ledger, which means that at some point in the past these funds were collected and not turned over to the Treasurer/Collector. We recommend that the Athletic Director prepare a turnover to the Treasurer/Collector and formally request an amount of petty cash be maintained by the Fund. Furthermore, we recommend that the Treasurer/Collector communicate with all departments to ensure that there are no other unreported petty cash amounts. Town Clerk s Office The Town Clerk s Office collects over fifteen different types of licenses, permits and fees which total approximately $75,000 annually. While reviewing the processes used to collect and record these revenues we noted significant manual processing and duplication of effort. The Office utilizes a cash register and several manual ledgers, none of which are reconciled to monthly revenue reports issued by the Town Accountant. Town of Canton, Massachusetts 8 of 9 Management Letter

11 We recommend that the Office streamline the recording of revenues by utilizing a spreadsheet that is organized to be reconciled to the daily cash register tapes and the monthly MUNIS reports. The Office may also look into the feasibility of utilizing the MUNIS general revenue module to further streamline the revenue collection process. Recreation Revolving Fund Most communities establish Parks and Recreation revolving funds under Massachusetts General Law Chapter 44, Section 53D or Section 53E ½; however it is unclear under what Massachusetts General Law that Town s Parks and Recreation Revolving Fund was established. The Town s Recreation Revolving fund had a surplus balance of $129,337 at June 30, 2014, which would make it impractical to authorize the Fund under Section 53D due to the law restricting the undesignated year-end surplus of such a fund to $10,000. As a result, we recommend that the Town request authorization from Annual Town Meeting to operate a Parks and Recreation Revolving Fund under MGL Chapter 53E ½. The Fund would operate as it has been in the past, with the exception that investment income must be legally assigned to the General Fund and that the fringe benefits of any full-time employees paid from the Fund must be charged to the Fund. Town of Canton, Massachusetts 9 of 9 Management Letter