TOWN OF CANTON, MASSACHUSETTS MANAGEMENT LETTER YEAR ENDED JUNE 30, 2015

Transcription

1 TOWN OF CANTON, MASSACHUSETTS MANAGEMENT LETTER YEAR ENDED JUNE 30, 2015

2 Table of Contents Transmittal letter Overview....2 Informational Items.3-5 Findings and Comments 6

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, 2015, 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 4, 2015 Town of Canton, Massachusetts 1 of 6 Management Letter

4 I. OVERVIEW Fiscal year 2015 was another 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 $11.4 million in unassigned fund balance. This represented a $1.6 million increase over the prior year and was the fifth straight year that the unassigned fund balanced increased by 10% over the prior year. The increase was primarily due to positive budgetary results of $3.4 million and a $0.7 million increase in stabilization funds, offset by use of free cash of $2.5 million. In addition, the Town added over $0.5 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 10 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 14.9% which places the Town just shy of tier one and is 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. 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. 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 2 of 6 Management Letter

5 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 We alerted the Town in the prior year management letter to be aware of network security. This information item is being reported again as a reminder to remain vigilant as in the past year Massachusetts has seen significant increases in breaches in local networks and related thefts. The Town has taken a proactive approach to IT security and we recommend that the Town continue to place an emphasis on IT security and continually update its IT security procedures. An important area of emphasis is training employees in security procedures as often they are targeted by outsiders attempting to gain access to the Town s system s and sensitive data through , telephone, social media, etc. Effect of Adoption of New Accounting Principle - Pensions In fiscal year 2015, the Town and virtually all municipalities in the Commonwealth adopted new pension accounting standards. The new pension accounting standards required, for the first time, that the Town present its portion of the unfunded pension liability owed to its current and former employees in the government-wide financial statements. At June 30, 2015, the net pension liability for the Town is approximately $39.2 million. It is important to note that the new pension accounting standards do not affect the underlying regional pension system or its funding schedule. All Massachusetts pension systems are required by Massachusetts general law to be fully funded by June 30, The Norfolk County Retirement System, which is the pension system the Town participates in, is currently 60% funded based on a December 31, 2014 actuarial study and actual pension plan net assets as of that date. Town of Canton, Massachusetts 3 of 6 Management Letter

6 The new pension accounting standards will require that the Town to become a more active participant in the audit of the Norfolk County Retirement System. The Town can expect to have its retiree and employee census data tested on a rotational basis. It is therefore important that the Town promptly provide the requested documentation to the Norfolk County Retirement System and its auditors in a timely manner so as to not delay the annual process of it and all other employer units of the retirement system. New Accounting Principle - OPEB The Governmental Accounting Standards Board, or GASB, has issued a new pronouncement related to other postemployment benefits, or OPEB, that is substantially similar to the pension standard described above. OPEB typically includes health and life insurance plans and other similar benefits provided to Town retirees exclusive of pension benefits. Currently, the Town reports a net OPEB obligation in its government-wide financial statements. However, the proposed new accounting standards will require that the net OPEB liability, which can be substantially larger that the net OPEB obligation, be reported in the government-wide financial statements. Adoption of this new accounting standard is two years away for the Town. While this proposed accounting standard will likely materially affect the Town s governmentwide financial statements, the Commonwealth has not passed legislation requiring municipalities to begin setting aside monies for this unfunded obligation like it has with pensions. The Town established an OPEB trust fund and has accumulated nearly $1.2 million in assets to provide for this liability. Credit rating agencies like Standard and Poor s Financial Services LLC, or S&P, have begun to assign an allocation of the credit evaluation to the management of long-term liabilities, which includes OPEB. We recommend that the Town continue its commitment to funding this liability to assist in maintaining the Town s exemplary bond rating. Changes to Single Audit Requirements The Office of Management and Budget, or OMB, raised the threshold for OMB A-133 compliance audits (i.e., single audits) from $500,000 to $750,000. This new threshold is expected to apply to the Town in fiscal year However, the Town s federal grant awards exceed the new $750,000 threshold so it should continue to require a single audit. Also included in the new audit requirements is a requirement that the Town s internal control structure should be in compliance with recognized internal control framework such as the Green Book or COSO. At first pass, this requirement doesn t seem overly complicated. However, past experience has shown that seemingly harmless requirements similar to these can cause an entity to expend significant time and monetary resources in order to comply. Take for instance the Sarbanes-Oxley Act in 2002, which required that a public company s management assess and attest to its internal control system. Public companies of a similar size to the Town expended hundreds of hours of resources and tens of thousands of dollars to comply with this law and created a cottage industry for accountants and consultants. Adopting a formal internal control framework is new to municipalities and will likely require a good deal of evaluation, documentation, remediation and ongoing monitoring. We Town of Canton, Massachusetts 4 of 6 Management Letter

7 recommend that the Town commence this process by taking a common sense approach and tackle the areas in which the Town is most susceptible to an internal control deficiency. Over a period of time, the Town should complete the formal adoption of an internal control framework. The following 17 principles of effective internal control were extracted from the publication by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, Internal Control Integrated Framework. The entire internal control framework and implementation guides can be found online. Town of Canton, Massachusetts 5 of 6 Management Letter

8 III. FINDINGS AND RECOMMENDATIONS 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. Planning Board Escrow 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 Pre-School and Kindergarten Revolving Funds The School Department operates a tuition based pre-school and full-day kindergarten program for which it collects annual tuitions of over $150,000 and $400,000, respectively. Overall, the School Business Office has developed internal controls that are sufficient to account for and safeguard these revenues. We did note that during the year there is a lack of communication regarding participants that move out of the program. The program directors should notify the Business Office immediately when a student is removed from the program. Furthermore, each program director should provide a roster of participants on a quarterly basis so that the Business Office can ensure that all participants are properly accounted for. We also noted that the Business Office waits until after year-end to reconcile the tuition payment records to the Town s MUNIS general ledger. This reconciliation should occur periodically during the fiscal year to resolve any revenue mispostings in a timely manner. Building Department Revenues for the Building Department are largely from the issuances of building, electrical, plumbing and gas permits, which were approximately $1,100,000 for fiscal year Due to the large volume of receipts that are processed through the Department it is imperative that strong internal controls are in place and enforced. We sampled ten permits issued by the Department during the year and found that the required forms were completed and filed, the appropriate fee was calculated and charged, and the payments were deposited timely and agreed to the posting in the general ledger. We did note that the Department does not verify that the funds turned over agree to what is posted in MUNIS. We recommend that the Department reconcile the amounts turned over to the monthly revenue reports distributed by the Town Accountant. To facilitate this reconciliation, the Town Accountant may need to provide a detail of the monthly activity in addition to the monthly summary reporting. Town of Canton, Massachusetts 6 of 6 Management Letter