REPORT OF INTERNAL AUDIT ACTIVITIES

Transcription

1 REPORT OF INTERNAL AUDIT ACTIVITIES PRESENTED TO AUDIT/TASK: #04-07, Financial Position / Close Out of Activities AUDIT CLIENT: Community House AUDIT DATE: June 1, 2004 REPORT DATE: July 29, 2004 AUDITOR: Steven Rehn CIA, CBA, CFSA APPROVAL: Steven Purvis CPA INTRODUCTION In accordance with Boise Municipal Code Title 1, Chapter 9; and in response to the request of members of the City Council, the Office of Internal Audit undertook a series of reviews relative to the Community House facility. The reviews completed to date were separately reported in Internal Audit Reports #04-04 and #04-05, covering cash intake processes and accounting records, respectively. Report #04-07 is a logical extension of that previous work, consisting of a reconstruction of financial activities of the entity and the creation of summary financial information for the two complete, and one partial fiscal years immediately preceding the change in control that took place on March 2, The primary motivating factor behind this phase of Internal Audit s work at Community House was to facilitate the production and filing of the required tax returns. As a nonprofit, Community House, Inc. was required to annually file IRS Form 990, Return of Organization Exempt From Income Tax. Community House, Inc. was delinquent in filing the 2002 return, and the 2003 return was currently due. Penalties were continuing to accrue in connection with the non-filing of the 2002 return.

2 The Form 990 is a relatively comprehensive report of revenues and expenditures, categorized by source and use, respectively. The 990 requires a base of sound, summarized financial information which appeared to be lacking given Internal Audit s findings during its earlier work at Community House. This Report details the results of Internal Audit s efforts to provide information sufficient to facilitate the filing of the required returns, and also details those activities undertaken with respect to resolving outstanding issues related to employer payroll taxes noted at Report # SCOPE AND METHODOLOGIES Community House, Inc. s books had last been audited as of December 31, Accordingly, Internal Audit focused its efforts on activity for Fiscal Years 2002, 2003, and through March 2 of Fiscal Year The objectives established for the work were: Reconstruct financial records for the period in question, and establish the entity s financial position to a reasonable degree of accuracy. Create basic summary financial information for the period under review. Format the financial information in a manner that is consistent with required tax returns IRS Form 990 s. Assist Community House, Inc. s Board of Directors in engaging a public accounting firm to review financial data, and to prepare and file the required tax returns with the IRS. Internal Audit utilized the last audited financial statements as the baseline starting point for the project. From that point, detailed data was extracted from the entity s accounting software. The data was reviewed, and obvious adjustments and transaction reclassifications performed in order to arrive at a more accurate statement of the various account balances. Records were then further adjusted for end-of-period accruals in order to arrive at a reasonable matching of revenues and expenses; payables and receivables. Next, summary financial information was produced. And finally, the information was formatted and placed in an order consistent with reporting required for the completion of IRS Form 990, Return of Organization Exempt from Income Tax. With respect to employer-related tax remittances and returns, Internal Audit followed the issue closely, and facilitated the completion of required Form 941 returns and payment of the outstanding liabilities. 2

3 EVALUATION AND COMMENTS The Office of Internal Audit previously reported on various aspects of Community House, Inc. s accounting records in Audit Reports #04-04, and # Both referenced reports were graded Unsatisfactory, and documented the deficient nature of accounting practices and the supporting records. Based upon the outcome of those earlier auditrelated projects, a need to reconstruct certain accounting records was evident. Satisfying that need formed the basis for the work performed and reported on in Audit Report # Audit Report #04-07 has not been assigned a grade in the sense that previous reports have been graded. However, the accounting records encountered were clearly Unsatisfactory in nature. The conditions encountered during this phase of the Community House project served to reinforce more strongly the conclusions that had been drawn previously by Internal Audit essentially, the entity s accounting records do not appear to have been maintained in a competent fashion during much of the period under review. In their existing state, the cash receipts and disbursements records were inaccurate. Numerous misclassifications were noted, many that violated Community House s own declared accounting policies. Neither had attempts been made to record the appropriate, required accrual accounting adjustments key to any accrual accounting system. A considerable investment of time and resources appeared to be needed in order to bring the records forward to the point where they could form the basis for reasonably accurate financial information. Community House, Inc. was required to produce financial information that would serve as the basis for required tax return filings. Those filings were delinquent and in need of timely completion and submission to the IRS. The Office of Internal Audit deployed its resources to the task of producing the necessary information. Due to work performed previously, the Office possessed a reasonable level of knowledge relative to Community House s financial affairs, and relative to some of the factors that could materially impact the entity. Undertaking the tasks described herein allowed Internal Audit to leverage positively on that existing knowledge base, and to assist all parties involved in the closeout and transition processes. Basic summary financial information that reasonably represented the entity s financial position for the time periods involved was created. This information was then placed in a format that would allow a public accounting firm to review the data and prepare the required tax returns in a timely fashion - with a minimal investment in billed hours. The end result was a savings to Community House, Inc., which equated to a hard-dollar savings to the City of Boise through the avoidance of contingency costs the City agreed to fund during the close-out period. Internal Audit also played a role in bringing Community House, Inc. into contact with a public accounting firm that could assist the entity with its tax and reporting related issues. 3

4 Contemporaneously, Internal Audit participated in resolving outstanding employerrelated tax issues with the IRS. As noted in earlier reports related to Community House, the entity had outstanding liabilities with respect to FIT, FICA, and Medicare withholdings; and the employer s portion of those amounts due. Those liabilities were accruing penalties and interest on a daily basis due to their delinquent status. Internal Audit served as liaison between Community House, the public accountants, and select members of the City s management team; ensuring that the issue was followed to an appropriate resolution. As of the date of this report, all delinquent amounts owing have been paid, and the associated returns have been filed in accordance with IRS requirements. Penalties and interest are under negotiation, with a view towards mitigating those amounts to the extent possible. This phase of the Community House project was also conducted as a consulting engagement. It consisted of the performance of certain tasks that might not be characteristic of normal audit activities. Internal Audit again recognizes the impact this level of involvement will have on the conduct of future audit-related activities involving the entity. However, the tasks that were undertaken were carefully selected, and were viewed as being supportive of Community House s overall mission and goals, the continuation of beneficial programs housed in the facility, and ultimately the transition of the facility to a new vendor. Through its involvement, the Office of Internal Audit helped to mitigate the costs associated with closing out financial activities conducted under previous management, and to transition the entity forward. Summaries of Internal Audit s activities, and the results of the work performed appear below. The financial information pertaining to Community House, Inc. is arranged chronologically, and presented on a fiscal period basis in Finding 1. to Finding 3. Early in Fiscal Year 2002, the entity also acquired, under a separately chartered subsidiary, a duplex unit for use as transitional-type housing. Operating expenses and revenues were included both in the parent s, and in the subsidiary s accounts. However, the asset itself, and the funding utilized to acquire it were never booked to the entity s records. A complete reconstruction of accounting records for that asset / program was performed. The results appear at Finding 4. 4

5 FINDINGS AND REPORT OF FINANCIAL POSITION 1. FINDINGS: Fiscal Year Community House, Inc. Misclassified / Improper Transactions Errant entries amounting to $44,612 were identified in the accounting records and adjusted. No particular pattern could be identified with respect to these transactions. Some were income items that had been posted to expense accounts; others were asset acquisitions that had been improperly expensed; the largest of these items consisted of proceeds from the sale of assets that had been booked into income inappropriately. Finally, one transaction that had been recognized as expense at the end of FY 01 was reversed for the FY 02 time period. The transaction in question, a $3,500 expense item, involved a contracted service which was never paid for. Accrual Entries Accrued expenses and income items were estimated for the end of the period in question. Accrual adjustments, in aggregate, totaled $59,922. FINANCIAL POSITION: Fiscal Year 2002 saw a significant decline in both operating revenues, and operating expenses. The following table summarizes both prior and current years results. Operating deficits increased, and the entity s Net Asset position suffered substantial erosion. Item FY 2002 FY 2001 Change Operating Revenues $603,294 $640,111 ($36,817) Operating Expenses $666,986 $694,273 ($27,287) Operating Surplus/(Deficit) ($63,692) ($54,162) 9,530 Net Asset Position $ 49,784 $110,611 ($60,827) 5

6 2. FINDING: Fiscal Year Community House, Inc. Misclassified / Improper Transactions: A total of $80,940 in correcting entries were made in order to prepare summary financial information for Fiscal Year Similar to the 2002 records, no particular pattern was detectable with respect to these transactions. Income items had been posted to expense accounts; asset acquisitions had been improperly expensed; and, in 2003, large donations had been improperly classified to a Miscellaneous Income line. Accrual Entries: Accrued expense and income items were estimated for the end of the period in question. Accrual adjustments, in aggregate, totaled $81,147. FINANCIAL POSITION: Fiscal Year 2003 reflected a stabilizing of the entity s Net Asset position. A small increase in operating revenues was noted, along with a corresponding decline in operating expenses. The expense decline was significant. Given these two factors, the entity s Net Asset Position improved marginally, and the Operating Deficit was reduced to a minimal amount. The following table summarizes both prior and current years results. Item FY 2003 FY 2002 Change Operating Revenues $610,192 $603,294 $6,898 Operating Expenses $610,654 $666,986 ($56,332) Operating Surplus/(Deficit) ($462) ($63,692) ($63,230) Net Asset Position $51,402 $ 49,784 $1,618 6

7 3. FINDING: Fiscal Year 2004 (As Of 3/2/04) Community House, Inc. Misclassified / Improper Transactions: A total of $31,081 in correcting entries were made in order to prepare summary financial information for the Fiscal Year 2004 partial period up to the point where change of control effectively occurred. Accrual Entries: Accrued expense and income items were estimated for the end of the period in question. Accrual adjustments, in aggregate, totaled $75,949. The size of the accrual adjustments was impacted due to the lack of income recognition / realization that occurred in early FINANCIAL POSITION: During this period, the City of Boise provided bridge funding totaling $53,825. The funds were utilized to pay operating expenses and delinquent bills incurred by Community House, Inc. prior to the change of control. The following table summarizes both the prior year, and the current period results, inclusive of the bridge funding. The table that follows on the next page illustrates the impact this source of funds had on the entity s financial position. Item FY 2004 FY 2003 Change Operating Revenues $164,566 $610,192 No Comparison Made Operating Expenses $127,467 $610,654 No Comparison Made Operating Surplus/(Deficit) $37,099 ($462) No Comparison Made Net Asset Position $94,194 $ 51,402 No Comparison Made 7

8 As noted above, the City provided an additional source of funding totaling $53,825 in early The revenues allowed Community House to meet its most immediate obligations and continue operations at a basic level. Absent this revenue source, the entity s Net Asset position would have deteriorated an additional $11,033 during the period under review. The following table summarizes the impact that the bridge funding had on Community House s financial position. The figures are derived based on the assumption that Community House had sufficient cash to replace a portion of the bridge funds, and accrued a liability for the remainder. Ultimately, the bridge funding allowed Community House to remain solvent. With the additional funds, the entity was in a position to meet its current obligations, as indicated by the positive working capital position indicated in the table below. Item Bridge Funding Included Bridge Funding Excluded Difference Current Assets $131,051 $105,369 ($25,682) Current Liabilities $84,006 $112,149 $28,143 Working Capital Surplus / (Deficit) $47,045 ($6,780) ($53,825) Operating Revenues $164,566 $110,741 ($53,825) Operating Expenses $127,467 $127,467 $0 Operating Surplus / (Deficit) $37,099 ($16,726) ($53,825) 8

9 4. FINDING: Transitional Housing Subsidiary (CHDO) Community House Support Endowment As noted earlier in this report, Community House, Inc. acquired an additional housing facility - a duplex unit through a separately chartered subsidiary organization (Community House Support Endowment). The housing unit was acquired utilizing a separate grant program (referred to as CHDO funding), with all program revenues to be retained and used for expansion of this particular type of housing opportunity. The purchase was finalized in mid-february of Both halves of the unit were occupied, and were consistently generating revenue at the time of purchase. By mid-2003, both tenants had apparently departed the facility, and it stood empty a condition that continues to exist as of the date of this report. An examination of Community House, Inc. s accounting records revealed cash balances, revenues, and expenses that were attributable to the CHDO unit. However, the asset apparently had never been booked, nor had the revenue source used to acquire the facility been recognized in the accounting records. Given that condition, Internal Audit performed a complete reconstruction of CHDO financial activities, utilizing the available records. A summarization of the resulting financial information appears below. Item FY 2004 FY 2003 FY 2002 Operating Revenues $600* $3,300 $138,218** Operating Expenses $2,351 $5,764 $11,424 Operating Surplus/(Deficit) ($1,751) ($2,464) $126,794 Net Asset Position $122,579 $124,330 $126,794 * (Note: Represents forfeiture of security deposits.) ** (Note: FY 2002 Revenues include $127,015 in initial grant and grant-related monies used to acquire the CHDO facility. Program and Other Revenues totaled $11,203 for the period.) 9

10 MANAGEMENT PARTICIPANTS Deanna L. Watson Board President / Community House, Inc. Jan P. Blickenstaff Manager / Housing and Community Development Stephanie Cloud Executive Director / Community House 10