Schedule of Findings and Questioned Costs 2011-FS-1 Preparation of Financial Statements (Repeated from Prior Year) Finding Type. Material Weakness in Internal Control over Financial Reporting. Criteria. All Michigan governments are required to prepare financial statements in accordance with generally accepted accounting principles (GAAP). This is a responsibility of the government s management. The preparation of financial statements in accordance with GAAP requires internal controls over both (1) recording, processing, and summarizing accounting data (i.e., maintaining internal books and records), and (2) reporting government-wide and fund financial statements, including the related footnotes (i.e., external financial reporting.) Condition. As is the case with many smaller and medium-sized entities, the government has historically relied on its independent external auditors to assist in the preparation of the government-wide financial statements and footnotes as part of its external financial reporting process. Accordingly, the government s ability to prepare financial statements in accordance with GAAP is based, in part, on its reliance on its external auditors, who cannot by definition be considered a part of the government s internal controls. Cause. This condition was caused by the government s decision that it is more cost effective to outsource the preparation of its annual financial statements to the auditors than to incur the time and expense of obtaining the necessary training and expertise required for the government to perform this task internally. Effect. As a result of this condition, the government lacks internal controls over the preparation of financial statements in accordance with GAAP, and instead relies, in part, on its external auditors for assistance with this task. Recommendation. We recommend that the County ensure that members of management responsible for the accounting and reporting function receive appropriate training to ensure that they are able to apply generally accepted accounting principles in preparing the County's financial statements, even if it intends to continue to outsource the actual preparation of these statements to its independent auditors. View of Responsible Officials. The government has evaluated the cost vs. benefit of establishing internal controls over the preparation of financial statements in accordance with GAAP, and determined that it is in the best interests of the government to outsource this task to its external auditors, and to carefully review the draft financial statements and notes prior to approving them and accepting responsibility for their content and presentation. Action: Recommend no action be taken and the county continue to allow the external auditors to assist in the preparation of the government wide financial statements and footnotes. If the county were to decide to contract for the preparation of these statements the approximate cost would be $3,000 - $5,000. Needed Resources: n/a Schedule: n/a
Schedule of Findings and Questioned Costs 2011-FS-2 Material Audit Adjustments (Repeated from Prior Year) Finding Type. Material Weakness in Internal Control over Financial Reporting. Criteria. Management is responsible for maintaining its accounting records in accordance with generally accepted accounting principles (GAAP). Condition. During our audit, we identified and proposed numerous adjustments, including a restatement of beginning equity, which were approved and posted by management. These adjustments included, but were not limited to: recording depreciation expense in proprietary funds, updating capital asset records to reflect appropriate opening balances, and recording capital asset additions; reversing prior year accruals, recording current year accruals, and writing off unsupported balances; adjusting leases receivable and the accounting for short-term notes; correcting balances for current property taxes receivable; and eliminating equity deficits. In our opinion, these adjustments had a material effect on the County s financial statements. Cause. This condition was caused by various oversights, including those in decentralized locations, in identifying relevant financial information and providing documentation to the County s finance department. Effect. As a result of this condition, the County s accounting records were initially misstated by amounts that were material to the financial statements. In addition, the County was exposed to an increased risk that misstatements (whether caused by error or fraud) may occur and not be detected and corrected by management in a timely manner. Recommendation. The adjustments noted above have been reviewed by management, posted to the County s records, and are reported correctly in the audited financial statements. View of Responsible Officials. Management has reviewed the audit adjustments recommended by the auditors and posted such entries to the County s accounting system. Given the volume of year-end adjustments needed for external financial reporting, the decentralized nature of County government, and limited staffing, management has accepted that it may, at times, need to rely on the auditors for identification of and assistance with year-end journal entries. Action: Allocate resources monthly to review and analyze general ledger and subsidiary ledger postings assuring their accuracy and that postings are made timely. This would also allow corrections to be made in the current period and thus minimizing the financial impact of the closing entries. Time would also be needed to meet with selected departments to verify procedures are being followed and postings are being kept up to date throughout the year. Needed Resources: 200 hours of additional staff time. Schedule: This action can be initiated within six weeks of additional resources being allocated. 10 to 16 hours would be allocated each month increasing to twenty hours for yearend closing and audit preparation.
Schedule of Findings and Questioned Costs 2011-FS-3 Preparation of Schedule of Expenditures of Federal Awards (Repeated from Prior Year) Finding Type. Material Weakness in Internal Control over Financial Reporting. Criteria. OMB Circular A-133,.300, requires that the County identify, in its accounts, all Federal awards received and expended and the Federal programs under which they were received. Federal program and award identification shall include, as applicable, the CFDA title and number, award number and year, name of the Federal agency, and name of the pass through entity. In addition, the County is required to prepare appropriate financial statements, including the schedule of expenditures of Federal awards in accordance with.310. Condition. While management was able to provide us with a partially complete schedule of expenditures of federal awards during our audit fieldwork, several material adjustments were ultimately required. In addition, the schedule was not provided until several weeks after the commencement of audit fieldwork. Cause. As is the case with many County governments, Allegan County administers a vast array of federal and state grants throughout its many departments. The function of grant administration is therefore very decentralized. Effect. As a result of this condition, the County s schedule of expenditures of federal awards was initially misstated. The inability to provide a complete and accurate schedule at the commencement of audit fieldwork delayed the completion of audit. While still within the required time, the delayed issuance date means that nearly six months of the next fiscal year have elapsed, making the likelihood that similar noncompliance related to current year findings has continued into the next fiscal year. Recommendation. We recommend that the County formally adopt a policy for grants administration, and clearly assign the responsibility for grant reporting and preparation of the SEFA each year. All grant financial reports should be reviewed centrally by a member of management prior to submission, and compared against the County s accounting records. Incoming grant receipts should similarly be reviewed to determine the appropriate program for coding. Differences between amounts requested, amounts received, and/or amounts reported on the County s accounting records should be promptly investigated and resolved. View of Responsible Officials. Management has developed an effective method for accumulating and reporting information on federal grants administered out of the Finance and Transportation Departments. As time permits, these procedures will be extended to the Health Department. Action: The complexity and reporting requirements of grants are increasing. County Finance Department should expand and refine its role in grant policy and grant procedure development and oversight as it relates to grant administration. A formal application/renewal procedure should be developed in conjunction with the policy. Needed Resources: 288 hours of additional staff time annually. Expanded policy and procedure development would require 30 40 hours of dedicated project time.
Schedule: Additional grant oversight would be available within four weeks of additional resources being allocated. Increased grant oversight and compliance review would occur monthly meeting with departments as necessary. Policy & procedure development would be guided by a project charter with an expected completion 60 days following initiation. Schedule of Findings and Questioned Costs 2011-FS-4 Unreconciled / Unsupported Fiduciary Liabilities (Repeated from Prior Year) Finding Type. Material Weakness in Internal Control over Financial Reporting. Criteria. The County uses agency funds to account for assets held on behalf of outside parties, including other governments. Accordingly, the County is required to keep accurate subsidiary records of the amounts held in each liability account. These accounts should be analyzed and reconciled on a regular basis (e.g., monthly or quarterly.) In addition, all balance sheet accounts of the primary government should be reviewed and reconciled periodically. Condition. During our audit, we requested support for various accounts held as part of the County s agency fund. We were able to substantiate the offsetting cash balances in their entirety; however, the following matters were noted in our testing: * The County is using an agency fund to charge other funds of the County for fringe benefits, such as health insurance and retirement. The County intends for the charges to funds to reasonably estimate the actual disbursement made for such benefits. It was noted that payments made to the County's defined benefit plan consistently exceed the related charges to the other funds. At yearend, the accumulated shortfall was approximately $98,000. * The County is accumulating funds within an agency fund for the maintenance and expansion of its employee fitness center. Inasmuch as these funds are under the administrative control of the County, it is not appropriate to account for the balance as a fiduciary liability. * Stagnant, unsupported balances netting to $16,285 (absolute value of $55,611). * Detailed subledgers were unavailable for certain liability accounts, selected on a sampling basis, in the amount of $85,075. * Unreconciled variances in accounts selected for testing netting to $63,997 (absolute value of $135,683). Cause. The County does not have an established policy requiring the periodic reconciliation of all balance sheet accounts. Despite being made aware of this condition in the audits of the past several years, the County has thus far taken limited corrective action.
Effect. As a result of this condition, the County is exposed to an increased risk that misappropriations, whether through error of fraud, may occur and not be prevented, or detected and corrected, on a timely basis. Balances in agency funds are particularly sensitive as this fund type, by its nature, is not subject to the normal budgetary oversight found in other funds. Accordingly, it is especially important that these funds be reconciled regularly. While the related cash balances were reconciled, this only confirms the amounts actually on hand, not the balances that should be on hand. Recommendation. We recommend that the County segregate any unreconciled amounts into separate general ledger accounts. Any amounts that cannot be reconciled after reasonable efforts should either be escheated to the State of Michigan, or disbursed in accordance with applicable laws and regulations. View of Responsible Officials. Management agrees that there are certain accounts that have been unreconciled for a period of several years. To the extent that the accounts are not under the control of elected officials or the court system, and as time permits, the County intends to review and reconcile all agency fund liabilities. Action: 1) A new clearing fund for transactions related to compensation (payroll) should be established with separate activities created for deductions and benefits. These accounts and activities should be reconciled monthly. 2) A separate special revenue fund should be established to account for expense and revenue transactions related to the fitness center. This fund should be reconciled annually. 3,4,5) The County should allocate time each month to reconcile the Trust & Agency accounts. Accounts which are stagnant and cannot be reconciled should be closed and any excess funds escheated to the State of Michigan or in accordance with applicable law. Other accounts should be reconciled monthly. Needed Resources: Establishing a clearing fund for item #1 would require 60 100 hours of dedicated project time and up to 72 hours annually to reconcile accounts and activities. Item 2 would require 2 to 4 hours of preparation and 4 hours of staff time annually. Items 3, 4, & 5 would require 96 hours annually to reconcile these Trust & Agency accounts. Schedule: Within two weeks of resources being allocated we would be able to begin the reconciliation process. The process of establishing a payroll clearing fund would begin the first quarter of 2013 and completed by the second quarter of 2013. Monthly reconciliations of these accounts would begin once the clearing fund is operating and would require 6 hours monthly to reconcile the accounts. Item 2 can begin and completed in the forth quarter of 2012. Item 3, 4& 5 can begin within two weeks of being allocated the necessary resources. There have been 18 Trust & Agency accounts, 20 Delinquent Tax accounts, and 1 Health department account that have been classified as stagnant. Monthly reconciliation would require an additional 6 to 8 hours each month.
Schedule of Findings and Questioned Costs 2011-FS-5 Independent Review and Approval of General Journal Entries (Repeated from Prior Year) Finding Type. Significant Deficiency in Internal Control over Financial Reporting. Criteria. Management is responsible for establishing effective internal controls to safeguard the County s assets, and to prevent or detect misstatements to the financial statements. Journal entries, while an essential part of any accounting system, represent an opportunity to enter information into the County s records in a way that bypasses normal internal controls. Accordingly, the County should have a system in place to ensure that all journal entries and similar adjustments made to the County s accounting records are reviewed and approved by an appropriate member of management (independent of the preparer). Condition. In our sample of 10 general journal entries, we noted that 5 lacked evidence of independent review and approval. We also noted that certain members of the Finance Department have the ability to both post and approve an entry in the accounting system. Cause. This condition was initially caused by management oversight in subjecting all journal entries to an independent review and approval. Despite having been informed of this control deficiency in past audits, the County has not taken corrective action. Effect. As a result of this condition, the County was exposed to an increased risk that misstatements (whether caused by error or fraud) may occur and not be prevented or detected and corrected by management on a timely basis. Recommendation. The County already has a policy in place to subject general journal entries to a documented independent review and approval. We recommend that management carefully enforce this policy. We also recommend that the accounting system be configured so that no employee has the ability to both post and approve a single entry. View of Responsible Officials: Management agrees with the finding and proposed recommendation of the auditors. The County will follow its procedure on journal entry review consistently going forward. Management will review the current accounting system setting to ensure that each employee does not have ability to both post and approve the same entry. Action: All journal entries are currently being subjected to an independent review and approval. Needed Resources: n/a Schedule: n/a Schedule of Findings and Questioned Costs
SECTION III FEDERAL AWARD FINDINGS AND QUESTIONED COSTS 2011-SA-1 - Preparation of Schedule of Expenditures of Federal Awards Programs. All Federal awards. Finding Type. Material Weakness in Internal Control over Compliance. Criteria. OMB Circular A-133,.300, requires that a recipient of federal awards subject to a single audit identify, in its accounts, all Federal awards received and expended and the federal programs under which they were received. Federal program and award identification shall include, as applicable, the CFDA title and number, award number and year, name of the federal agency, and name of the pass-through entity. In addition, the City is required to prepare appropriate financial statements, including the Schedule of Expenditures of Federal Awards in accordance with.310. Condition. We noted various errors in the initial Schedule of Expenditures of Federal Awards (SEFA) provided by management. These errors included failure to identify certain awards as being funded by the American Recovery and Reinvestment Act (ARRA), erroneously including state revenue, reporting expenditures under wrong federal department names, failure to record all expenditures within the correct time period, and not recording non-cash awards. Cause. As is the case with many County governments, Allegan County administers a vast array of federal and state grants throughout its many departments. The function of grant administration is therefore very decentralized. We have reported the need for the County to address and revise its procedures over the accumulation of information on expenditures of federal awards for several years. However, the County has taken limited corrective action. Effect. As a result of this condition, the County s schedule of expenditures of federal awards was initially misstated. The inability to provide a complete and accurate schedule at the commencement of audit fieldwork delayed the completion of audit. Questioned Costs. No costs were required to be questioned as a result of this finding as no unallowable costs were identified. Recommendation. We recommend that the County formally adopt a policy for grants administration, and clearly assign the responsibility for grant reporting and preparation of the SEFA each year. All grant financial reports should be reviewed centrally by a member of management prior to submission, and compared against the County s accounting records. Incoming grant receipts should similarly be reviewed to determine the appropriate program for coding. Differences between amounts requested, amounts received, and/or amounts reported on the County s accounting records should be promptly investigated and resolved. View of Responsible Officials. Management has developed an effective method for accumulating and reporting information on federal grants administered out of the Finance and Transportation Departments. As time periods, these procedures will be extended to the Health Department. Action: See 2011-FS-3 Needed Resources: See 2011-FS-3 Schedule: See 2011-FS-3 Schedule of Findings and Questioned Costs
SECTION III FEDERAL AWARD FINDINGS AND QUESTIONED COSTS 2011-SA-2 - Timeliness of Reporting Finding Type. Immaterial Noncompliance / Significant Deficiency in Internal Control over Compliance (Reporting). Program. Child Support Enforcement; U.S. Department of Health and Human Services; CFDA Number 93.563; Passed through the Michigan Department of Human Services; Award Number CSCOM-10-03003. Criteria. Recipients of federal awards are required to submit timely and accurate reports to the awarding agency in accordance with federal compliance requirements and/or pass-through agency grant agreements. Condition. The County did not consistently submit monthly financial status reports within the required timeframe (30 days from reporting period month-end), as specified by the grant agreement. Cause. This condition appears to be caused by a change in the method for reporting such data to the pass-through grantor agency, and limited oversight of the third-party contractor hired to accumulate the monthend data. Effect. As a result of this condition, the County did not fully comply with certain requirements of this program and was exposed to the risk that the pass-through grantor would refuse to reimburse grant expenditures for certain months. We noted no instance in which the pass-through grantor withheld reimbursement due to late report submission. Questioned Costs. No costs were required to be questioned as a result of this finding as no unallowable costs were identified. Recommendation. We recommend that the County implement controls to ensure that all necessary reports have been completed and submitted by the required due date. View of Responsible Officials. The County will contact its third-party contractor, responsible for accumulating financial information into the required format for monthly reporting, and develop a plan to ensure that information is submitted within the 30-day period specified by the grant agreement. Action: No action is necessary. This finding was due to problems with the State of Michigan s new software that was not operating properly. All Michigan counties using the software experienced the same delays. The system is currently operating correctly for 2012. Also, the guidelines for the Single Audit compliance requirements have changed which essentially does away with the 30 day reporting requirement for counties. Needed Resources: n/a Schedule: n/a