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Home My WebLink AboutR-80-063500 RESOLUTION NO. 8 0- 6 3 5 A RESOLUTION AUTHORIZING THE CITY MANAGER TO EXTEND THE EXISTING PROFESSIONAL SERVICE AGREEMENT WITH THE FIRM OF PEAT, MARWICK, MITCHELL & COMPANY, CERTIFIED PUBLIC ACCOUNT- ANTS, FOR THE PURPOSES OF CONDUCTING THE AUDIT OF THE BOOKS, ACCOUNTING RECORDS AND FINANCES OF THE CITY OF MIAMI FOR THE FISCAL YEAR END- ING SEPTEMBER 30, 1981 AND FOR ON -GOING ACCOUNTING ASSISTANCE DURING FISCAL YEAR 1980-81, UP TO A COST OF $ 175,000 SUBJECT TO THE AVAIL- "SUPPOABILITY OF FUNDS TO BE ALLOCATED FROM FISCAL YEAR RT1VE80-81 BUDGETED SPECIAL. PROGRAMS AND ACCOUNTS. DOCUMENTS " BE IT RESOLVED BY THE COMMISSION OF THE CITY OF FOLLOW MIAMI, FLORIDA: Section 1. The City Manager is hereby authorized to extend the existing professional service agreement with the firm of Peat, Marwick, Mitchell & Company, certified public accountants, for the purposes of conducting the auriit of the books, accounting records and finances of the City of Miami for the period of the fiscal year ending September 30, 1981 and rendering on -going accounting and auditing assist- ance during Fiscal Year 1980-81 up to a cost of $ 175,000 subject to the availability of funds to be allocated from Fiscal Year 1980-81 budgeted Special Programs and Accounts. PASSED AND ADOPTED thislS day of September, 1980. MAURICE A. FERRE M A Y O R ATTEST: RALP* G. ONGIE ITY CLERK PREPARED AND APPROVED BY: _k?eZ� A 640�_ ROBERT F. CLARK ASSISTANT CITY ATTORNEY APP,1?r91f'i'4D AS ' ND CORRECTNESS: GEF'RfA F. KNOX, JR1„ CITY ATTORNEY "uUGUMLIdT INDEX ITEM N0'-�' e CITY COMMISSION MEETING OF S F. P 15 1980 80-63 RESOLUTION NO.,.....«........,�;.; I TO Richard L. Fosmoen City Manager ORA CITY OF MIAMI, FI.ORIDA INTEROFFICE MEMORANDUM FROM Howard V. Gary • Assistant City Manager Dare September 4, 1980 �ILE. SUM",; r Response to Independent Auditors Management Letter and Recommendation for 1979-80 REFERENCKS ENCLOSURES Attached is the response and commentary to the Independent Auditor's (Peat, Marwick, Mitchell & Co.) Management Letter of June 30, 1980. This response and commentary has been forwarded to Mr. Ernest Ellison, Auditor General of the State of Florida, in accordance with the re- quirements of State Law. It will be noted that many of the recommen- dations made by the Auditors have already been affected. In other cases, programs or special studies are underway to respond positively to the Auditors recommendations or comments. It is essential to the City's fiscal health and stability that additional steps now be taken to further improve the City's fiscal operations and practices. The overall goals of the recommendations set forth below are to further improve the timeliness, reliability and utility of the City's financial accounting and reporting systems. Consultant Recommends Additional Audit Assistance One June 26, 1980, the City Commission approved the engagement of Booz Allen and Hamilton, Inc., to provide "services for the improve- ment of the City's administrative services and processes." The I services are to include analysis and recommendations for the improve- ment of: Purchasing Procedures and Practices The Flow of Performance and Financial Data Audit Procedures Programs Resources Allocation This agreement with Booz, Allen and Hamilton, Inc., who commenced work on July 21, 1980, calls for a series of preliminary reports on each subject and a final "Plan of Action Report". "SUPPORTIVE' zs : s }ids ass os6 DOCUMENTS FAO L LOUD,' 80- 635 Richard L. Fosmoen City Manager As a result of their analysis thus far the consultants have recommended that: "Sufficient competent outside accounting assistance should be secured immediately to enable the City to close its financial books and records at the earliest possible date after the close of the current fiscal year." "Consideration should be given to extending the present Independent Audit Contract." The consultant's letter of recommendation on these matters is attached as Exhibit I. It more fully explains the reasoning behind these recommendations. I accept and concur with these recommendations. Accordingly, a supplemental agreement has been negotiated with our auditors (Peat, Marwick, Mitchell & Co.) to provide the recommended accounting assistance up to a cost of $25,000. It is requested that the City Commission be asked to indicate its approval of this action. In addition, it is recommended that the City Commission approve and authorize an extension of the present independent auditing contract with Peat, Marwick, Mitchell & Co. for one year up to a cost of $1700000 in accordance with the above consultant recommendations. it should be noted that the consultants characterize both recommendations a as necessary prerequisites "to establishing satisfactory audit proce- dures and programs". Detailed recommendations for new, more stringent audit procedures and programs will be submitted in the next four weeks by the consultants and will be submitted to the City Commission for its consideration. Goals of this Program In submitting these recommendations, several goals have been estab- lished and, once achieved, will substantially improve the timeliness and reliability of the City's financial operations. These goals are; The continued closing of the City's books and records for 1979-80 on a timely basis. Completion of the Independent Audit Report on or before February 28, 1981. Elimination of accounting and financial reporting back- logs with the completion of the 1979-80 Independent Audit. "SUPPORTIVE DOCUMENTS FOLLp 80-635 Richard L. Fosmoen City Manager Accurate and reliable closing of the books on a monthly basis within twenty days by the end of fiscal year 1980-81. This should be reduced to ten days thereafter. An ability to provide the City Commission with meaningful, reliable financial statements, on a quarterly basis, commencing in 1980-81, at the end of the first three month period of the coming fiscal year. Realization of these goals will strengthen the City's financial position substantially. In addition, the City Commission will have the benefit of improved and more timely financial information to guide them in the future. Full implementation of these goals, depending on future findings by our consultants, may require further changes and/or additional funds. It is suggested that the City Commission be asked to permit the City Manager to negotiate an extension of the Peat, Marwick, Mitchell & Co. contract for one year to provide accounting assistance and year end audit services. `SUPPORTIVE DOCUMENTS FOLLOW?? 8G-635 �$l�(+�jt(i�.i 16pT6yYM�f#M�iNdM(111.MYtYi�1f/iWYYiWd4M4 ��f�l�i ��.•�--.-_.. - --_ Richard L. Fosmoen City Manager Accurate and reliable closing of the books on a monthly basis within twenty days by the end of fiscal year 1980-81. This should be reduced to ten days thereafter. An ability to provide the City Commission with meaningful, reliable financial statements, on a quarterly basis, commencing in 1980-81, at the end of the first three month period of the coming fiscal year. Realization of these goals will strengthen the City's financial position substantially. In addition, the City Commission will have the benefit of improved and more timely financial information to guide them in the future. Full implementation of these goals, depending on future findings by our consultants, may require further changes and/or additional funds. It is suggested that the City Commission be asked to permit the City Manager to negotiate an extension of the Peat, Marwick, Mitchell & Co. contract for one year to provide accounting assistance and year end audit services. "SUPPORTIVE DOCUMENTS FOLLOW 80-635 September 1, 1980 Mr. Joseph R. Grassie "SUPPORTIVE City Manager City of Miami, Florida DOCUMENTS Dear Sir: r- -% t•. �A/!f I t_ y � On June 30, 1980, Peat, Marwick, Mitchell & Co., the independent auditors for the City of Miami, submitted their Management Letter containing comments and recommendations, supplementing its March 28, 1980 report on their. examination of the City's financial statements for the year ended September 30, 1979. The examination of the city's financial statements, found them to be in conformity with generally accepted accounting principals and as of September 30, 1979, to present fairly, the financial position of the various funds and account groups of the City of Miami, except for "Failure to provide depreci- ation on property plant and equipment," and the "Failure to provide for all losses incurred in the Self -Insurance fund," and the "Lack of any provision for adjustments that might have been required by pending litigation seeking to require additional pension contributions." The city has not been able to compute depreciation for its enterprise and internal service funds due to the fact that some of these facili- ties have been built or expanded over a number of years, and the identification of those specific costs would be a lengthy and expensive process. With respect to the provision for losses in the Self -Insurance fund, this is a matter of judgment. The city is pursuing the means of securing more reliable estimates of prospective loss reserves. Also, it is believed that provision of contingent reserves against possible requirements of pending litigation, is unsound policy. The June 30, 1980 Management Letter supplements the examination of financial statements with a number of comments and recommendations. As such, it is considered constructive criticism. Indeed, many of the comments and recommendations have already been accepted and imple- mented, while others are in the process of being acted upon. The P.M.M.&Co., letter of June 30, 1980, contained comments and recommendations in two broad categories of "Material weaknesses," and "Conditions that deserve consideration." Material Weaknesses Recommendation and City of Miami Comments Financial Reporting An essential element of any viable accounting and reporting system is the preparation of timely financial information on an interim and annual basis 80-635 Mr. Joseph R. Grassie City Manager September 1, 1980 Page - 2 - to aid management in evaluating current operations compared to projected or expected results. The city has experienced difficulty in producing such information. The following factors, although not all-inclusive, have contributed to this situation: . There are no formal procedures for monthly or quarterly closings. . There is no formal closing schedule, i.e., tasks to be performed, dates of completion, and personnel responsible. . Bank accounts were not reconciled on a timely basis. . Significant balances in clearing accounts were not investigated and reclassified. . Subsidiary detailed records were not reviewed for old or disputed items and reconciled with controlling accounts. . Investment balances per books were not reconciled with subsidiary reports on a timely basis. . Certain budgeted transfers and interfund charges were made only once a year instead of periodically throughout the year. The city's accounting system (FAMIS) produces I report designated "185" con- currently with each processing of an accounting cycle. This report provides valuable information on the balance or out -of -balance condition of the general ledger file as compared with various transaction, document, subsidiary and operating files. Careful review of this report as soon as it is available and timely investigation and resolution of exceptions noted would significantly reduce many of the problems discussed above. We recommend that the city adopt as I high priority project the preparation of timely financial statements for presentation to the City Manager and Commission on a quarterly basis. Such quarterly reporting requirements would increase management awareness Ind provide the City Manager and Commission with the necessary financial information to make important decisions. We would be phased to assist the city in developing a plan to accomplish this goal. In order to meet with the objective of time.l.y financial reporting, the city should carefully review the current staffing in the Finance Department. Without proper staEEing, the preparation of timely financial reports on an interim and annual. basis will be very difficult, or place undue strain on certain individuals. Personnel capabilities should be evalciated based on assigned responsibilities and the work -load distribution should be reviewed. The need for additional personnel or, for personnel with a higher degree of technical competence, could then be assessed and appropriate action taken. onve, VOC(JME T r �Fv1. LOWP , Mr. Joseph R. Grassier City Manager September 1, 1980 Page - 3 - Comments The city implemented a new computerized financial system on October 1, 1978, in order to adapt its records to the State -mandated Uniform Accounting System. The system was not completely debugged as of October. 1, 1978, which created certain out -of -balance situations among some of the subsidiary files. To remedy this situation, the city reran all. the financial data for the first months of the fiscal year 1978-79, as a brand new system, while maintaining the original version. Although the re -run process was satisfactory, those deficiencies listed under "financial Reporting" were not adjusted until the re -run system became the ongoing city system, which occurred by the end of the fiscal year. For fiscal year 1979-80, the following procedures are being followed: . There are formal procedures for the monthly closing. "SUPPORTIVE . Bank accounts are reconciled on a timely basis. DOCU M E- NTc . Clearing accounts are reconciled on a monthly basis. Fr'•r.Ls �';W71 ~ . Subsidiary detail is in agreement with G/L balances. Old items are investigated on a quarterly basis, or annual basis, depending on the account. . Investment balances are reconciled to subsidiary reports. , Budgeted transfers are prepared on a monthly basis. Report 185 is reviewed every time the accounting system is run to identify any out -of -balance situations. . Financial statements are being prepared on a monthly basis. In addition, personnel in charge of pr.ocossing receivables have been instructed again on procedures to follow to defer revenue into the following year. The city is aware of the inadequate staffing of the Finance Department which has been aggravated by budget cuts. Consideration will be given to the findings that will be made by Booze, Allen and Hamilton, a consulting firm currently engaged in an administrative study of the city on the subject. Accounts Receivable The principal. concerns in the area of accounts receivable are the propriety and collectibil.ity of: account balances, and the recording of receivables and revenues in the appropriate period. IsMile reviewing the detail of accounts receivable at the balance sheet date, we noted that payments received on accounts receivable are credited to subsidiary accounts without identifying; the invoices to which the payments relate. Several invoices and boot: detail differences with dates in excess of one year were found, without any indication of collection or investigation efforts. We also enr.ountered several instances when receivables and revenues were nk)� fi>a wFp�.i4?�.4G:J"4rawiM+.+ewP✓•••r... �.rM+.�..YyuYM1.Mlf�waN� �� 2 Mr. Joseph R. Grassie "SUPPORTIVE City Manager September 1, 1980 DOCUMENTS Page - 4 - U�VICNrS recorded in fiscal 1979, although the revenues would not be earned until fiscal 1980. We recommend that on a quarterly basis, the detail of accounts receivable be reviewed and payments received matched against invoices outstanding, to isolate old or disputed items for followup and investigation. Invoices should be care- fully reviewed to ascertain the period to which the revenues relate. Implementation of these recommendations would reduce lost revenues by identifying potential collection problems before additional services are performed by the city, and would result in the proper matching of revenues and expenses. Comments All of the outstanding accounts reveivable balances are being reviewed during fiscal year 1979-80 by city personnel that originated those accounts. Payments received are being matched to correct invoices. A quarterly review of all signifi- cant accounts receivable balances have been scheduled starting in fiscal year 1979-80. Journal Entries Proper internal controls require that all journal entries be properly authorized and supported by adequate documentation. Our review of the City's journal entries indicated that entries can be initiated by finance department personnel of various levels of responsibility and that they are not carefully reviewed and approved before being submitted for processing. This situation allowed the processing of the same journal entry (and subsequent reversal) prepared by two individuals in different departments, resulting in duplicate postings, duplicate check voidings, and duplicate corrections. We also noted that some journal entries did not include written explan- ations or supporting documentation as to their nature and purpose, and others were missing from the files. All journal entries should include written explanations as to their nature and purpose as well as copies of the dacumenLs generating the transactions. Personnel should not be permitted to remove original. journal entries from the files. Enforcing these procedures Wil.l enable the City's ,journal entries to stand alone, independent of the preparers, as evidence of the validity of recorded transactions, and signifi- canLly reduce the hours of investigation and research by city personnel. We recommend that all journal entr:i.es of a nonrecurr:i.ng nature be originated only by the person responsible for the accounts being adjusLed. All entries should be forwarded to one of a limited number of individuals who has responsibility for approving all journal entries. Departments noting errors nurst notify the department responsible for correcting the errors if this recommendation is to be sur.cessfully implemented. This practice should prevent signi.f-icanL errors due to duplicate recording of the snore transaction, and reduce the time now spent in preparing and processing transaction reversals and corrections. Comnrcrrts Responsibility for preparation of Journal Entries Ln fiscal .1979-80 has been dis- tributed among persons originating related inpuL; i.e., transfers, revenues, Mr. Joseph R. Grassie City Manager September 1, 1980 Page - 5 - expenditures, etc., to avoid duplicity of entries. A division supervisor is signing all non -repetitive entries, and explanations are reviewed for clarity and completeness. The large number of journal entries required in fiscal year 1978-79 was caused by the computer problems explained under "Financial Reporting." Fixed Asset Records The city utilizes a separate fixed asset accounting system to control its inventory of movable equipment. Purchases of equipment are recorded as expendi- tures at the time of acquisition and in many cases capitalized only on the basis of an annual physical inventory. Equipment dispositions are often times not reported to the finance department but are simply "crossed off" the fixed asset listing during the physical inventory. Fixed assets have been located through the annual physical inventory with no explanation of their source. We believe that all equipment purchases should be capitalized at the time of acquisition in the fund utilizing the equipment. In cases where other funds are subsidizing the purchase of fixed assets (e.g., the Federal Revenue Sharing Fund supporting Motor Pool vehicle purchases), the transfer of funds should be accounted for separately and distinctly in accordance with generally accepted accounting principles applicable to interfund transactions. To assure adherence to this policy, the department should be required to submit a form accompanying the approval for payment, which includes all information to be included on the fixed asset subsidiary ledger. The payment should not be processed until this form is received. The deletion of fixed assets from the inventory listing should not be permitted I without proper supporting documents. All equipment dispositions and transfers between departments should be supported by a form detailing the reason for the disposition, any proceeds received, and identification information necessary to remove the asset from the appropriate records. Department heads should be held accountable for the movable equipment assigned to their departments. This responsibility should encompass the taking of periodic physical inventories as well as exercising strict controls over equipment additions and deletions and the appropriate supporting; documentation. The police equipment inventory is not maintained in the equipment subsidiary ledger, but is maintained as a separate listing by the police department. Maintenance of this inventory by the police department reduces the accounting; department's control over this equipment inventory. We believe the accounting department should be responsible for all fixed asset inventory and recommend that the police department transfer all related records to accounting. Comments The deficiencies found in the fixed assets records are being; resolved as follows; "SUPPORTIVE DOCUMENTS Cr11 I r1liAl" 80-635 r" � _. Mr. ,Joseph R. Grassie City Manager September 1, 1980 Page - 6 - Tile automated system that recorded fixed assets was an outdated card -oriented system that was awkward to run since most of the city's data processing personnel are used to running tape -oriented systems. The City has relied on its various departments to verify the existence of the fixed assets inventory. Due to the city's operations, some of the equipment is rotated among various installations requiring numerous plc U P PO RTI ' 7es to the inventory list which is produced by location. During c ,al year 1979-80 the city has implemented an on-line computerized DOC U M ENd asset inventory system which will prevent the errors caused by k� old card -oriented system while speeding the processing of data. FOLLOW" For the next fiscal year, a reorganization of. the Purchasing Division will include a section that will be in charge of the city's fixed assets. One of the duties of this section will be to verify throughout the year the physical inventory. This procedure will ensure the re- liability of the physical inventory count. During the next fiscal year the police department's inventory will be merged with the city's inven- tory system. Data Processing General Controls Data processing general controls comprise (a) the plan of organization and operation of the electronic data processing (EDP) activity, (b) the procedures for documenting, reviewing, testing and approving systems or programs and changes thereto, (c) controls built into the equipment by the manufacturer, (d) controls over access to equipment and data files, and (e) other data and procedural controls affecting overall EDP operations, Strong; general controls over data processing are the foundation upon which a good system o.1 internal accountiig control is built when EDP :Ls used in significant accounting applications. The following are our comments and recommendations on data processing general controls: (a) Organization and Operation of: the EDP Activity A systems programming function should be established in-house and Burroughs personnel used only as techilleal support or consultants. The control of master and data fll.es should be segregated and control over the files should be placed under the direction of an appointed indiv[dual. within the department. Internal. review by EDP management of accounting internal control should be performed on a regular hasis. 1,'e believe EMP management should establish procedures to periodlca.lLy review the external controls in place and make recommendatons to improve the existing ;systems. A pnhti.shed policies and procedures manual should be written and currently maintained. Mr. Joseph R. Grassie City Manager September 1, 1980 Page - 5 - expenditures, etc., to avoid duplicity of entries. A division supervisor is signing all non -repetitive entries, and explanations are reviewed for clarity and completeness. The large number of journal entries required in fiscal year 1978-79 was caused by the computer problems explained under "Financial Reporting." Fixed Asset Records The city utilizes a separate fixed asset accounting system to control its inventory of movable equipment. Purchases of equipment are recorded as expendi- tures at the time of acquisition and in many cases capitalized only on the basis of an annual physical inventory. Equipment dispositions are often times not reported to the finance department but are simply "crossed off" the fixed asset listing during the physical inventory. Fixed assets have been located through the annual physical inventory with no explanation of their source. We believe that all equipment purchases should be capitalized at the time of acquisition in the fund utilizing the equipment. In cases where other funds are subsidizing the purchase of fixed assets (e.g., the Federal Revenue Sharing Fund supporting Motor Pool vehicle purchases), the transfer of funds should be accounted for separately and distinctly in accordance with generally accepted accounting principles applicable to interfund transactions. To assure adherence to this policy, the department should be required to submit• a form accompanying the approval for payment, which includes all information to be included on the fixed asset subsidiary ledger. Tile payment should not be processed until this form is received. The deletion of fixed assets from the inventory listing should not be permitted without proper supporting documents. All equipment dispositions and transfers between departments should be supported by a form detailing the reason for the disposition, any proceeds received, and identification information necessary to remove the asset from the appropriate records. Department heads should be held accountable for the movable equipment assigned to their departments. This responsibility should encompass the taking of periodic physical inventories as well. as exercising strict controls over equipment additions and deletions and the appropriate supporting; documentation. The police equipment inventory is not maintained in the equipment subsidiary ledger, but is maintained as a separate listing by the police department. Maintenance of this inventory by the police department reduces the accounting department's control over this equipment inventory. We believe the accounting department should be responsible for all fixed asset inventory and recommend that the police department transfer all related records to accounting. Comments The deficiencies found in the fixed assets records are "SUPPORTIVE DOCUMENTS 1m^1 1 ^ A/11 being resolved as follows; 80-635 Mr. Joseph R. Grassie City Manager "SUPPORTIVE September 1, 1980 Page - 7 - DOCUMENTS FOLLOW" Employee performance reviews should be conducted at the completion of all major projects whether or not this time coincides with the formal review process. Off premises backup for import master files, documentation and prog- rams should be established, including a disaster recovery plan, and a backup facility and testing procedures. (b) Systems Development and Maintenance Controls Since new in-house systems development is taking place, a conventional project management technique should be established. Additionallv, a project cost tracking mechanism and uniform testing standards should be established to effectively address users' needs, minimize the possi- bility of cost overruns, and limit the notential for staffing problems. S U P PO RTIV E The development of these formalized documentation standards will enhance DOCUMENTSthe uniformity of design across systems as well as the ability to in- terface systems at a later date. FOLLOif W (c) Access Controls Most emplovees in the data processing groun have access to the computer center since their badges (maenetic card keys) are coded to open the computer center doors. Proper segregation of duties requires that access to and operation of all computers be limited to computer operators. A librarian function should be establi.gher1 to ensure the protection of tapes, disks and other computer documentation. Additionally, fire proof vaults should be acquired to adequately safeguard documentation and limit access to the librarian. (d) Internal Audit Involvement The City's internal. audit department should develop the ability to review or.ganizat:i.onal and operating controls, and EDP systems under development. We believe that these recommendations will play an -important part in creating an environment where transactions can be properly recorded, processed, and reported, thereby improving, the quality of. the City's system of internal accounting; control and financial. reporting; practices. Comments We endorse the recommendations made by P.M.M.&Co., although economic constraints will not allow us to implement each of them. Some of the corrective steps already taken are: A data base administrator to control. Master and Data filed is anticipated to be budgeted *in the 1980-81 budget. S0-e35 Mr. Joseph R. Crassie City Manager September 1, 1980.. Page - 8 - A policies and procedures manual is in the process of being compiled. The City has entered into an agreement with Dade County to exchange 'S U backup master files for the purpose of maintaining off -premises back- P POI�TI V [��p master files. DOCU M E N TS Management is looking into a conventional project management technique FOLLOW" to be established within a year. A librarian function is now being operated by the Computer Department. Most of the weaknesses listed by the auditors were "growing pains" created by the acquisition of new hardware and consolidation of operations. During fiscal year 1979-80 the Acting Director and Assistant Director have concentrated their efforts on organizing the operations and strengthening internal controls. r Conditions Deserving Consideration Recotmnendations and Cif of Miami `- Comments Payroll Procedures and Controls Payroll and related costs represent the single most important expenditure of the City. Proper segregation of duties and independent review of payroll records are essential to provide adequate internal control over payroll. The following situa- tions came to our attention during our work in these areas: Tile current system of distributing paychecks permits certain employees access to payroll checks who, in many cases, are responsible for approving hours worked and making additions tb and deletions from the work force. Rubber stamps with signatures of individuals who have the authority to approve wage increases are readily accessible by all payroll personnel. These stamps are used to of sign" form 922 " Request for Personnel Action." Pension deductions are not currently updated for salary increases. Credit union and United Way deductions are not supported by signed authori- zation forms, and copies of agreements for loans paid off by employees during; the period are not retained. New employee numbers are assigned to employees as a result of name changes, while the old employee numbers remain in use. We recommend that the following procedures be implemented to improve controls over payroll: 'rhe activities of payroll distribution and payroll approval should be segregated to reduce the possibility of improper payroll disbursements and the City's internal audit division should continue to conduct surprise payroll payoffs throughout the year for randomly selected departments on a rotating basis. i Mr. Joseph R. Grassie A City Manager September 1, 1980 Page-9- The use of rubber stamp signatures to approve wage increases should be discontinued. A responsible official or his designee, independent of the payroll department, should have sole authority for such approval. All payroll deductions, other than statutory deductions for FICA and income tax should be supported by authorization forms signed by employees to prevent possible liability for unauthorized duductions. Tile employee number is an easy means of identification, given the large number of individuals employed by the City. The use of a single number to identify a particular individual, regardless of name changes, will significantly curtail processing errors and reduce the possibility of issuing duplicate paychecks to the same employee. Comments Most of the payroll problems the city has are created by the out -dated payroll system in use. This system requires to have most of the data it uses resubmitted every time a payroll is run, requiring large clerical effort. In addition, the system lacks flexibility as far as coding of expenses and number of deductions taken. The implementation of a new payroll system at the beginning of 1981 will solve most of these problems. Also, in fiscal year 1980-81 the following changes have been made: Payroll records are now signed by the paymaster; rubber stamps are not being used any longer.. SURP0RT1Vhe vast majority of city employees have their pension deductions Ctomatically updated .for snlary increases, with the exception of about O�� InJj ifteen persons that belong to an outside retirement system. Those are v M W NT�pdated by liand. FOLLO' " United Way deduction authorizations are now under the city's control. Credit Union authorizations are Ftill controlled by the credit unions, but the city is working Out a procedure to obtain the authorizations, with them. When the city tmplements its new payroll system during the first months of: 1981, the assignment of employee numbers will be reviuwed, and probably a different numbering system will. be recommended. FICA Taxes on Sick pay Rapid increases in the social securl.ty wage base and rates have focused attention on tax planning in this area. In 1.978, the IRS ruled that sick pay wakes can be excluded if the sick pay plan is part of an overall. employer .Leave plan that permits employees to be absent from work a certain number of days each year for sickness, vacation, or holiday, if the s.lck pav days can be identified. Mr. Joseph R. Grassie City Manager September 1, 1980 Page 10 This same exclusion may be applicable to governmental entities that have elected coverage under the Social Security Act. The Social Security Administration has held that if payments are made to an employee which would have been made had he not been sick, they can not be considered made "on account of sickness." The ruling further holds that this distinction is ordinarily based on the legal authority of the public authority to appropriate public funds for payments on account of sickness. Thus, the ruling concludes: "The legal authority for a governmental entity to make payments on account of sickness can only be established, if by legis- lative enactment, provision is made for "sick pay" from funds appropriated especially for that purpose and separate from salary appropriations. Therefore, payments made by a govern- mental entity to an employee on sick leave are excluded from 'wages' only if there is legal authority for the employer to make payments specifically on account of sickness as distinguished from authorization to merely continue salary payments during periods of absence due to illness." Thus, for a governmental entity to exclude sick leave taken for personal illness from wages for FICA purposes, the entity must: Appropriate sick pay separately from salaries and wages; Have the legal authority to "pay on account of sickness"; and Account for sick pay separately from salaries and wages. We recommend that the City adopt as a high priority, a plan to allow the exclusion of sick pay taken for personal illness from the computation of FICA wages. vie savings to the City and the taxpayers could be substantial. Comment The payroll system presently in use by the City does not allow for segregation of sick pay wages. When the new payroll. system is inplemented in calendar year 1981, the City will be able to take advantage of this ruling. Starting in fiscal year 1981-82 the City will start budgeting sick pay separately to qualify for this savings. "SUPPORTIVE DOCUMENTS FOLLOW" Mr. Joseph R. Grassie^ City Manager September 1, 1980 Page - 9 - The use of rubber stamp signatures to approve wage increases should be discontinued. A responsible official or his designee, independent of the payroll department, should have sole authority for such approval. All payroll deductions, other than statutory deductions for MCA and income tax should be supported by authorization forms signed by employees to prevent possible liability for unauthorized duductions. The employee number is an easy means of identification, given the large number of individuals employed by the City. The use of a single number to identify a particular individual, regardless of name changes, will significantly curtail processing errors and reduce the possibility of issuing duplicate paychecks to the same employee. Comments Most of the payroll problems the city has are created by the out -dated payroll system in use. This system requires to have most of the data it uses resubmitted every time a payroll is run, requiring large clerical effort. In addition, the system lacks flexibility as far as coding of expenses and number of deductions taken. The implementation of a new payroll system at the beginning of. 1981 will solve most of these problems. Also, in fiscal year 1980-81 the following changes have been made; Payroll records are now signed by the paymaster; rubber stamps are not being used any longer. /`Sl.!! 1 O1 \ i V ie vast majority of city employees have their pension deductions ttomatically updated for salary increases, with the exception of about ;DOCUMENTS ifteen persons that belong to an outside retirement system. 'Those are ` FOLI{�l%pdated by hand. �-^'✓ Y r Yr United Way deduction authorizations are now under the city's control. Credit Union authnrirattons are still controlled by tale credit unions, but the city is working cut a procedure to obtain the authorizations, with them. When the city itnpl.cments :Its new payroll system during the first months of 1981, the assignment of employee numbers will. be reviewed, and probably a different numbering system will. be recommended. FICA Taxes on Sick pav Rapid increases in the social. security wage base and rates have focused attention on ta:: planning; in this area. In 1.978, the IRS ruled that sick pay wages can be excluded If the sick pay plan .is part of an overall. employer .leave plan that permits employees to be absent from work a certain number of days each year for sickness, vacation, or holiday, if the sick pay days can be identified. Mr. Joseph R. Grassie^ City Manager September 1, 1980 Page -11- "SUPPORTIVE Budgetary Procedures and Controls DOCUMENTS y � FOLLOW Budgeting is an essential element of the financial planning, control, and evaluation processes of government entities. The budget serves as a valuable management tool to evaluate operations against projected results. During our audit procedures in this arcs, the following situations were noted: Items were budgeted as individual line items but actual revenue and expenditures were allocated to various departments when recorded. Little basis existed for budgeted charges by the General fund to other funds for services provided by the General Fund. We recommend that the following practices and procedures be adopted to enhance the use of the budget as a management tool and to improve controls in this area Revenues and expenditures should be budgeted on the same basis Chat they will. be recorded. By working together, the Office of Management and Budget and the Finance Department will make budget to actual comparisons more meaningful while highlighting areas of significant variances for investi- gation. A sound basis should be established for all budgeted charges by the General Fund to other funds. This will. ensure that the true cost of general governmental services is given proper consideration, We understand the City currently has a formal. cost allocation plan which will resolve this problem when fully inlplemonted, Comments Currently the offices of finance ind Budget ire meeting oft a monthly basis to assure that revenues and expenditures are recorded on a basis consistent with the budget. The Cityhas adopted in 1980 a formal cost c11.1ocation plan flint provides a sound basis for allocating; expenses canons; the various funds. Budgetary transfers in the current fiscal year are based on the indirect cost allocation plan, Purchasing - Cash Disbursements System An adequate system of internal control over cash disbursements should pl•ovi.de assurance that disbursements have been amide only for 1lllthoriV,ed City purpo;les and have been properly recorded. The following comments and recommendations pertain to the purchashig-cash cltshursements system; 1'roper internal control raClUirus that there be proper segregation of duties between the functions of ordering and receiving goods. Presently most goods are received by the department making the original requisition, WL. reconuncnd that the City consider establishing a central rucetvtng department which would include the togging in of al1 goods received together with the preparation of standard receiving reports. Mr. Joseph R. Grassie City Manager September 1, 1980 Page -12- Direct payment requests (DPR's) circumvent many of the controls of the normal purchasing system. We noted that many DPR's are not supported by underlying documentation. This procedure increases the possibility of duplicate payments and, therefore, should be used only when absolutely necessary and always be supported by underlying documentation. Due to time lags in the processing of computer checks, the City occasionally issues handwritten checks to expedite payment of certain liabilities. In these instances, the computer checks are subsequently prepared and voided to reverse the vouchers payable in the system. This practice increases the possibility of duplicate payments. We recommend that the City consider the option of processing the disburse- ments cycle twice weekly. This will permit the initial submission of input for processing, the correction of errors noted on edit listings, and the submission of the revised input during the same week, thus reducing the need for handwritten checks and limiting the possibility of duplicate payments. Utility bills received from Florida Power & Light are routinely approved by the accounts payable clerks. Because the clerks are not familiar with the day-to-day operations of the various City buildings, they would be unable to detect unusual fluctuations in the amount of power usage and billings. We recommend that utility bills be reviewed and approved by the individual departments billed. Comments 1 'Che City has considered the establishment of a central receiving department. This alternative is being studied by the management consultant firm presently engaged in a review of the City's administration. Although direct payment requests are still being used, and effort is being made to maintain them at a minimum level, and when used, backup information is requested. Due to the computer problems encountered by the City :Last year., and described under the Financial Reporting Section of this letter, large number of checks had to be written by hand while the voucher payable was being processed by the computer during 1978-79. This situation is practically non-existant in 1979-80. Utility hills are directly handled by the Accounts Payable section in order to expedite their process. On a monthly basis, all departments receive computer print- outs with analysis of charges made to their accounts for their review. If bills were to be sent to the departments, payments would be delayed, creating the possi- bility of service being discontinued. In addition, there will be no assurance that the department will. thorouc;hly .inspect the bills. Computer reports provide the information needed to maintain the utility accounts. "SUPPORTIVE DOCUMENTS FOLLOW" Mr. Joseph R. Grassie^ Oki City Manager. September 1, 1980 Page -13- "SUPPORTIVE DOCUMENTS Inventories FOLLOW" During our observation of the year-end physical count of the Internal Service Funds' inventories, we noted that salvageable parts removed from vehicles which have been irreparably damaged in accidents are not controlled by means of a written listing. Additionally, our review of the year end inventory listings revealed numerous errors in clerical accuracy which resulted in adjustments to the financial statements. We recommend that salvageable parts be controlled by a written listing to provide information on parts in stock and to safeguard the inventory. Also, we recommend that the clerical accuracy of the year end inventory listing be verified by an individual independent of the preparer to limit the possibility of misstatement of the amount of inventories and expenditures of the Internal Service Funds. Comments: Those salvageable parts stored in the Motor Pool Stockroom as of September 30, 1979, are now obsolete, and therefore, are being disposed of. The curt'ent policy is that salvageable parts are to be removed from wrecked vehicles only as needed. In addition, a new accountant is now in charge of pricing and extending those inven- tories. As of September 30, 1979, the accountant in charge had been involved in an unfortunate accident and a temporary employee was filling -:tit. Depreciation of Fixed Assets The City does not provide depreciation on property, plant and equipment of. the Internal Service Fund and Enterprise Funds. These assets comprise approximately 84% and 82%, respectively, of the aforementioned funds' total assets. The failure to provide depreciation on fixed assets of these funds is not in conformity with generally accepted accounting princip:l.es and results in a qualification of our accountants' report on the City's financial statements. 1 Considering the nature and activities of the Internal. Service and Enterprise Funds, it is important to provide depreciation on property, plant and equipment to obtain a true measure of the cost of providing the respective service, Enterprise Funds are supported princ:ipaa..ly by charges to the user public and Internal Service Funds by charges to user department of. the City. Without proper allocation of the cost of facilities and equipment through depreciation charges, the operations of these funds are distorted and pricing pollcius may not be fonmilated correctly. To provide depreci.atton on property, plant and equipment in the Internal Service and Enterprise Funds, the City must first accumulate the necessary historical fixed asset information. Once the information has been obtained ,and the details reconciled to the general .ledger halances, a simple computer program could perform the necessary calculations to reflect the cumulative and periodic depreciation changes. We recommend that tite City gave tots matter careful consideration in order to improve the income determination process and to be in conformity with generally accepted accounting principles. Comments The City is concerned with the inclus;lon of deprectation in the Enterprise and Internal Service funds. 'fhe extensive task of conlpi.l.ing the historical cost infor- mation for the nssets has been the stunibiing block oil this; project. The cost records AN Mr. Joseph R. Grassie City Manager September 1, 1980 Page -14- the City now has, in most cases, provide a lump sum cost for several facilities, In other cases, original construction and subsequent improvements are also shown as a single figure. This cost information must be broken down as to its compo- sition so that depreciation may be computed based on its life. It is believed that City forces will not be able to handle this project unless outside help is obtained. Due to budgetary constraints we have not been able to undertake this project. Self Insurance Fund The City created a Self Insurance Fund in 1975 to provide insurance against certain property and liability risks. During the first year of self insurance, these risks were substantially limited to vehicular accidents, slips and falls and police tort claims. In 1977-78, the City became self insured for group accident and health coverage (A & H), and in 1978-79 began accounting for workers' compensation claims in the self insurance fund. As a result of this expansion of self insured risks, the City's claim liability has tripled over the past two years, and will most probably continue to increase. This growth has the following implications: (a) Lack of Adequate Data Base - The sound basis of any insurance accounting system is the collection of statistical data. During the period of our examination the City had no comprehensive system to capture and aggregate the data which form the basis for establishing claim liabilities. The data for each claim should include, at a minimum: a. Type of claim, i.e., group A & H, workers' compensation, etc. b. Date of accident or loss. C. Date reported to the City. d. Initial amount of estimated loss. e. Date paid. llSf. Type of payment, i.e., loss payment to claimant, attorneys fees, U(—PO�� adjuster's expenses, etc. ' � 'g, other data, perhaps location within City, department of employee DOCU 4'� injured, etc. il,��;�+,,. FOL L O WWThe City has recently contracted for the software and necessary equipment to accomplish this goal and has already begun to capture the data. (b) Decentralization of Responsibility - The administration of the risk management function is currently the responsibility of an assistant director of finance who reports to the Finance Director. The risk management division of the Finance Department handles all workers' compensation claims and coordinates the handling of group A & H claims with an outside insurance carrier. The handling of all general liability, vehicular accidents, and police tort claims, however, has been the re- sponsibility of the legal department. The decentralization of responsi- bilities has caused unnecessary communication problems and makes the data collection process more cumbersone. We believe that most routine cases could be entirely handled by the risk management division. For the relatively few significant cases, an attor- ney from the legal department could assist, or outside counsel could be retained to expedite the assessments and settlement of the claim. Mr. Joseph R. Grassie City Manager September 1, 1980 /SUPPORTIVE Page -15- DOCUMENTS c) Establishment of Claim Liabili�L W tI the necessary data described above, the estimation of the overall claim liability is without a sound basis. As the City's self insurance claims grow, this liability will become more significant to the financial position of the City and therefore it will be essential that amounts provided for losses be determined in a manner consistent with generally accepted accounting principles. We recommend that the City institute policies to accumulate the data mentioned above. Once the data has been accumulated, the City should consider retaining a . consulting actuary to review the City's claim history and estimate the claim liability. This review would not only produce a reliable claim liability for fi- nancial statement purposes, but could be used to develop formulas for computing the "premium" charges to the insured departments. Comments We concur with the recommendations made on this subject, and as indicated in para- graph (a), "...The City has recently contracted for the software and necessary equipment to accomplish this goal, (collection of statistical data), and has al- ready begun to capture the data." Efforts are being made to coordinate the activities between the Law Department and Risk Management Office to centralize responsibility and solve the problems indicated in Paragraph (c). The City is aware of the need to establish accurate claim liability and is seriously considering retaining a consulting actuary to review the claim history and estimate the liability. Trust and Agency Funds 1 Trust and Agency Fund should be used to "account for assets held by a governmental entity as trustee or agent for individuals, private organizations and other govern- mental units." Traditional uses of Trust and Agency Funds include accounting for employee retirement systems, performance deposits and school district tax funds. The City has historically used Trust and Agency Funds for various purposes, including projects approved by the City Commission for which separate accountability is desired. These projects, which do not meet the aforementioned definition, should be accounted for as separate projects within the General Fund, whenever possible. The City accounts for most of its grants (CETA, EDA, CDBG, LEAA, etc.) in the Trust and Agency Funds. Grants are unique in that most require the establishment of several projects to maintain proper control over authorized costs and expenditures. The City's accounting system (FAMIS) has the flexibility to maintain and report on a project level and also provides a control report of all projects under the same grant. This is accomplished by identifying each project with a "sub -fund" indicator. Although the City used this feature to a great extent during fiscal 1979, several pro- jects are still being accounted for individually. We recommend that sub -fund level reporting be utilized in the future for all grants with more than one project so that financial information can be expeditiously accumulated. i - _ Mr. Joseph R. Grassie City Manager tl,N� September 1, 1980 JurrJOR" IVE Page -lb- DOCUMENTS[, Comments FOLLOW" The City has followed the policy of using trust and agency funds for accounting for grants and other projects for which separate accountability was deemed necessary. This policy was based mostly on the restrictions imposed by its antiquated payroll system. With the advent of a new payroll system, the City will be able to comply with GAAFR Statement 2, requiring that grant revenues and related expenditures be -recorded in the fund receiving the benefit of the grant. Reconciliation of Grant Receivables, Revenues and Expenditures j Most of the City's grants require the expenditure of City funds and the preparation of reimbursement requests before the granting agency disburses monies. At any given date, the amount of expenditures not reimbursed represents a receivable and revenue from the grantor. Thus, if recorded properly, expenditures should equal revenues for all reimburseable grants, unless some expenditures have been disallowed or revenue is received from other sources. In certain instances we found amounts receivable recorded in one project and the subsequent collections applied to a different project, reimbursement requests recorded twice, and other similar errors. We recommend that on at least a quarterly basis, all reimburseable grants be reviewed and the following analysis be performed: Reconciliation of all reimbursement requests to FAMIS expenditure reports. These reconciliations should be filed chronological by project. Recording of receivables for reimbursements requested but not received, and expenditures recorded but not yet requested for reimbursement. Reconciliation of revenue to expenditures and detailed explanations for any significant differences. Comments Due to the computer problems encountered in 78-79, the City fell behind in the recon- ciliation of its grants. in 79-80, the City is reconciling those grants on a monthly basis. Timeliness of Grant Reimbursements At September 30, 1979, total receivables in the Trust and Agency Funds relating to reimburseable grants aggregated in excess of $4,000,000. These receivables represent a significant non -interest bearing investment of City funds. We understand that granting a gencies are in many cases responsible for the delay in reimbursement. However, we believe that the City, through timely preparation and submission of reim- bursement requests and proper follow-up procedures, could significantly reduce these receivables and thus increase funds available for investment in interest bearing securities. Comments The City requests reimbursements on a timely basis for vast majority of its grants. The auditors neglected to point out that because reimbursements requests are on a Mr. Joseph R. Crassie City Manager September 1, 1980 Page -17- cash basis and that financials are on an accrual basis, a large amount of payables and receivables will always exist at year end. As of September 30, 1979 payables for grants were over $2,000,000, therefore, net cash receivables was approximately $2,000,000. Because most grants are reimbursed after payments have been made, negative cash flows occur. Certificate of Conformance The Municipal Finance Officers Association awards a Certificate of Conformance for financial statements which conform in presentation and format to Audits of State and Local Governmental Units, and Governmental Accounting, Auditing and Financial Reporting. Many of the above described recommendations would have to be imple- mented to obtain a Certificate of Conformance. We believe there are many benefits to be derived in striving for and obtaining a Certificate of Conformance, including recognition in the financial community of sound financial reporting. We would be pleased to assist the City developing a plan to accomplish this goal. Comments The City realizes the benefits to be derived from receiving a certificate of conformance from the t1.F.0.A. and is gearing its financial operations towards the goal of receiving one in the near future. "SUPPORTIVE DOCUMENTS FOLLOW" Mr. Joseph R. Grassie City Manager September 1, 1980 Page - 18- Financial Reporting and Current Prouncements "SUPPORTIVE DOCUMENTS FOLLOW" In March of 1979, the National Council on Governmental Accounting published Statement 1 - Governmental Accounting and Financial Reporting Principles and Statement 2 - Grant Entitlement and Shared Revenue Accounting and Reporting by State and Local Governments. The Statements are effective for fiscal years ending after June 30, 1980. The following provisions and recommendations of the Statements will affect the City's accounting and reporting practices for the fiscal year ending September 30, 1980: Grant Accounting Comprehensive Employment and Training Act (CETA) - Grant revenues and related expen- ditures should be recorded in the fund receiving the benefit of the grant. Thus, the General Fund and other funds utilizing CETA employees should reflect revenues and expenditures of an amount equal to the salaries and benefits of employees funded by CETA. Economic Development Administration (EDA) - These grants are normally capital grants and restricted by the grantor for acquisition and/or construction of capital assets. Capital grants which benefit proprietary funds should be recorded as contributed equity. The City has constructed a heavy equipment facility for the City Garage and renovated Dinner Key Auditorium with EDA monies. These monies are currently recorded in a Trust and Agency Fund initially and the construction of the capital asset is recorded in the proprietary fund as contributed equity. The use of the Trust and Agency Fund is not necessary and results in additional bookkeeping effort. We recommend that the City discontinue the use of the Trust and Agency Fund for these grants and record the proceeds directly under a separate project in the fund benefit- ted. Encumbrances Encumbrances outstanding at year-end do not constitute expenditures or liabilities and should not be reported as such. Encumbrances outstanding should be reported as reservations of fund balance for subsequent years' expenditures Comments: The City is aware of the new requirements of statements 1 and 2 and is prepared to comply with them. Interim Reporting Continual efforts should be made to produce appropriate interim financial statements and reports of financial position, operating results, and other pertinent information to facilitate management planning and control (see previous comment, "Financial Reporting"). N Mr. Joseph R. Grassie City Manager September 1, 1980 Page -19- Comments: The City is currently producing monthly financial statements, including revenue and expense reports. Reserves Use of the term "reserve" should be limited to indicate that a portion of fund balance is not available for expenditure or is legally segregated for a specific future use. Revenues which are measurable but not available (e.g., property taxes) should be recorded as deferred revenue rather than as reserves. Comments: We concur with P.M.M.& CO.'s interpretation. Number of Funds Only the minimum number of funds consistent with legal and operational requirements should be established since unnecessary funds may result in inflexibility, undue complexity, and inefficient financial administration. During the year ended September 30, 1979, the following funds established on the books had to be "eliminated" for financial statement presentation by merging their activities with other appropriate funds: Computers and Communications General Fund Communications Maintenance General Fund Dinner Key Leased Buildings Property Maintenance In addition, the operations of many other funds could be included with the General Fund or other existing funds. We believe that the City should make a concerted effort to reduce the number of funds, and utilize project codes for further control if necessary. This would reduce the complexity of the accounts and perhaps reduce accounting and administrative expenses. 1fSUPPORTIVE Comments: DOCUMENTS In Fiscal Year 1979-80: FF � L wI' - Computers and Communications Department 3sOitic'luded in General Fund Operations. - Dinner Key leased buildings is a sub -fund of the Property Maintenance fund. Communications Maintenance will be presented this year as an Internal Service fund. Mr. Joseph R. Grassie City Manager September 1, 1980 Page -20- The City's Finance, and Management and Budget Departments are making a concerted effort to reduce the number of new funds. Interfund Transactions Interfund transactions are classified as quasi -external transactions, reimburse- ments, residual equity transfers, and operating transfers. Quasi -external trans- actions are treated as if they were conducted with external organizations. Reimbursements are recorded as expenditures or expenses in the reimbursing fund and as reductions of the expenditure or expense in the fund reimbursed. Residual equity transfers are reported as additions to or reductions from the beginning fund balance, retained earnings, or contributed capital, as appropriate. operating transfers are separately disclosed when reporting the results of operations of both governmental and proprietary funds. The City experienced many of all four types of transactions during the period covered by our examination. We found, however, a lack of consistency in the recording of the transfers. The FAMIS chart of accounts includes two distinct revenue and expenditure accounts: regular and transfer. Transfer revenues and expenditures, defined above as operating transfers, are the only transactions which should be segregated from regular revenues and expenditures. We noted many instances of quasi -external trans- actions being recorded as transfer revenues and expenditures and operating transfers being recorded as regular revenues and expenditures. In addition, certain residual equity transfers which should have been recorded as direct entries to equity (fund balance or retained earnings) were recorded as revenues and expenditures. This lack of consistency in recording interfund transactions, necessitates numerous reclassification entries before financial statements can be prepared. We recommend that all transaction codes involving interfund transaction be reviewed by the chief accountant before processing, to assure proper -recording in accordance with generally accepted accounting principles defined above. We recommend that the City carefully review the provisions and recommendations of NCGA Statements 1 and 2 to ensure that its accounting and reporting practices are in compliance. Comments When FAMIS transactions were originally set up by the City and its consultants in 1977, no distinction was made as to the type of interfund transfers that were to be recorded with such transactions for interfund. In 1980-81, all the computer trans- fers will be distinctively identified as to their type. Although the computer reports have not shown the nature of the transfers, they reflect, the City's auditors were provided with manual schedules that supported the correct amounts for the different kinds of interfund transactions as described in Chapter 2 of the Industry Audit Guide for Local Governmental Units. "SUPPORTIVE DOCUMENTS FOLLOWY? Mr. Joseph R. Grassie City Manager September 1, 1980 Page -21- Capital Improvements Fund During 1976-77, the City called and fully paid all outstanding Capital Improvement j Bonds, series A-E and fully reserved all outstanding Orange Bowl Special Obligation Bonds. As a result, the bond covenants restricting the use of FP&L Franchise revenues no longer apply. In the past, principally because of the restrictive bond covenants, most of the FP&L Franchise revenue has been recorded in the Capital Improvement Fund. In addition, the expenditures of the Fund were restricted to capital improvements. Since fiscal 1977, all FP&L Franchise revenue recorded in the Capital Improvements Fund was transferred to other funds and less than 6% of the total expenditures of the fund were capital improvement purposes. We recommend that this fund be dissolved, and the receipt and expenditure or trans- fer of FP&L Franchise revenue be recorded in the General Fund. Comments: At least one-third of this fund's revenues are being used for some type of construc- tion project. Use of this fund facilitates appropriations for the various types of construction projects. In the past the auditors have indicated that although the General Fund may be used to record these transactions, the Capital Improvement Fund may also be used to record such operations. �p � 4RTj�E . - ......__._. _ ell\ Mr. Joseph R. Grassie City Manager September 1, 1980 Page -22- The following subjects addressed by Peat, Marwick, Mitchell & Co. are being studied by the Management Consulting Firm of Booz, Allen and Hamilton, which is performing an evaluation of the City's administrative operations. Upon completion of this study, recommendations will be made to the City Commission. Internal Audit Department 0 A strong and effective internal audit department can have a very positive effect on the establishment and proper functioning of good internal controls. At present the _ City's internal Audit Department has very limited involvement in verifying the ac- curacy and reliability of financial information included in the general accounting records maintained by the Finance Department. Our understanding is that the activi- ties of the Internal Audit Department consist principally of special revenue audits and special projects requested by the City Manager or Lhe Director of Management and Budget. We believe that the City should consider reorganizing its internal audit function to address the following objectives: (a) Verify the accuracy and reliability of financial data. (b) Promote operational efficiency. (c) Encourage adherence to management policies. (d) Aid in safeguarding of City assets. One of the goals of this reorganization should be to increase the department's involvement with the general accounting records. Also, we believe that to enhance the effectiveness of the internal audit function, the Director of Internal Audit should report directly to the City Manager or Assistant City Manager. Audit Committee PMM&Co. has long favored the formation of audit committees in both the public and private sectors. In the public sector most governing boards have relied on manage- ment for the preparation of financial statements and on the work of independent auditors that the information in the statements is reliable and fairly presented. Nevertheless, the ultimate responsibility for the financial statements, as with most other government activities, is the governing board's. Recent events have heightened public awareness of the importance of sound financial practices and meaningful finan- cial information. To assist in discharging their responsibility, many boards are considering the establishment of audit committees. TIVE DOCUMENTS FOLLOW Mr. Joseph R. Grassie City Manager September 1, 1980 Page -23- We recommend that the City establish an audit committee as a standing committee of the City Commission. The audit committee would assist the Commission in fulfilling its responsibilities by performing the following tasks: Reviewing significant financial information for reliability, timeliness, clarity, appropriateness of disclosure, and compliance with generally accepted accounting principles and legal requirements; Ascertaining that internal accounting controls are appropriately designed and functioning effectively; Evaluating independent audit firms and selecting one for commission approval. Overseeing the scope and performance of the independent audit functions; Overseeing the scope and performance of the internal audit function; Ensuring that the auditors' recommendations for improvements in internal controls and operating methods receive management's attention and are implemented on a timely basis; and Providing an effective communications link between the auditors and the full governing board. There are many benefits resulting from proper use of an audit committee: City Commission An audit committee enables the Commission to stretch the use of its limited time and resources. Specifically, it is more efficient to have a standing committee perform the previously described tasks than to have the full Commission expend the time. Furthermore, the audit committee's in-depth, prior review of significant data enhances the Commission's capacity to understand financial information presented by management. Similarly, the full Commission receives information and perspective from audit committee members who have an insight that enables them to properly explain the implications of the data provided by management. The better the Commission's understanding of significant financial infor- mation, the greater its capacity to exercise its stewardship responsibilities and to oversee the financial activities of the City. Another benefit results when an audit committee ascertains that internal accounting controls are effective and the auditor's recommendations for improvements receive the proper attention. This provides the Commission with additional assurance as to the status of financial operations and the related control systems. "SUPPORTIVE DocUMENTS a "I". Mr. Joseph R. Grassie City Manager September 1, 1980 Page -24- Management Management can communicate its financial plans and purposes more effectively to the Commission when certain Commissioners are desig- nated to maintain a familiarity with accounting and financial matters. In other words, complex financial issues can be discussed directly and in detail with the audit committee with confidence that meaningful summaries will be communicated to the full Commission as necessary. This enhanced dialogue can also provide management with fresh approaches to solving problems. Independent Auditors Providing the independent auditors with a high-level forum other than management enhances their independence. Furthermore, if the auditing firm is to be selected and retained as a result of audit committee involvement, the Commission has greater assurance that the auditors are shielded from inordinate management pressures. Third, active over- sight of the audit function by the committee can enhance cooperation between the auditors and the government's personnel, thus improving the efficiency of the audit. Finally, communications with the audit committee improves the auditors' knowledge of the Commission's concerns. For example, the committee may direct the auditor to give particular attention to areas where Commissioners desire additional assurance. In short, the auditors can be more responsive to the Commission's sense of its needs. Internal Auditors i Internal auditors should find that Commission and management support for their work and recommendations increases as a result of interaction with an audit committee. This increases the professionalism and independence of the Internal Audit staff. Furthermore, assurance that the internal audit results are being reviewed and considered promptly can improve the morale of the internal auditors, accelerate the implementation of recom- mendations, and encourage the cooperation of the audited departments. Taxpayers and Security Holders The public gains increased assurance that the governmental unit is func- tioning in its best interest because it can see that elected officials are directly involved in financial oversight. Ftolders and potential pur- chasers of government securities gain comfort from knowing that the governing board, through the audit committee's review of financial infor- mation and operations, is actively involved in fiscal affairs. "SUPPORTIVE DOCUMENTS FOLLOW" Mr. Joseph R. Grassie City Manager September 1, 1980 Page -25- Taxpayers and Security Holders In summary, we strongly believe all parties would benefit from a well organized and effective audit committee. Now, more than ever, the value of timely, understandable and reliable financial statements is being recognized. An audit committee would have a very positive effect on the accounting and financial practices of the City. We welcome P.M.M.&Co's suggestions or recommendations on these topics so that the City of Miami may continue to improve the quality of its internal accounting controls and procedures. ResR tfully submitted, Ca 1 Garcia Actin qDirector of Finance SOOZ - ALLEN & HAMILTONIno. Afti tutiona! Alanagement Consalting Division 4330 EAST WEST HIGHWAY BETHESDA, MARYLAND 20014 951.2200 AREA CUOE 30I September 3, 1980 Mr. Richard Fosmoen j City Manager City Hall (Dinner Key) City of Miami 3500 Pan American Drive Miami, Florida 33133 Dear Mr. Fosmoen: This will be the first of several interim "Letter Reports" to be submitted to you prior to the presentation of a final "Plan of Action Report" under the terms of our professional services agreement "to provide services for the improvement of the City's administrative services and processes" dated July 21, 1980. Under the terms of that agreement, one of the tasks to be undertaken is a "Review of Audit Procedures and Programs." Although we have not completed that review as of this date, we have performed sufficient analyses to submit the following recommendations to you: 1. Sufficient competent outside accounting assistance should be secured immediately to enable the_City to close its financial books and records at the earliest possible date after the close of the current seal y.ear -- Based upon our observation and analysis, —if is anticipated that the City will experience diffi- culty in expeditiously closing its books and preparing its records for independent audit examination after the close of the current fiscal year. Given the City's committment to quarterly independent audit reviews, which we fully support, it is vitally important that the City's financial record keeping be brought to an acceptable level of currentness and that the process of closing the books not absorb all of the City's accounting resources at the expense of meeting that currentness. Failure to do so will further strain the City's limited resources, will perpetuate tardy reporting, and will impose a costly overlapping work- load on the City's accounting personnel as quarterly audit review programs are commenced simultaneously. i r, . For these reasons, it is our recommendation that a first prerequisite to establishing satisfactory audit procedures and programs is the necessary effort to bring the City's financial records to a current status as early as possible. 2. Consideration should be given to extending the present Independent Audit Contract — The current contract for independent audit services expires with the completion of the current fiscal year's audit. Given the City's committment to a quarterly audit review program and its desire to establish new and more demanding Audit Procedures and Programs, this is not the time to change independent auditors. In our opinion, to do so would result in further delay of the production of timely and accurate financial information. In addition a change now would require City personnel to work simultaneously with two inde- pendent audit groups. Therefore, it is our opinion that this recommendation is also a necessary prere- quisite to establishment of new "Audit Procedures and Programs". We expect to complete our analysis and findings with respect to the matter of "Audit Procedures and Programs" in the next few weeks. However, it is felt that the above recommended actions are presently imperative and will in no way interfere with your freedom to deal with future recommendations regarding this subject. Indeed, it is felt that these actions will provide essential continuity for the transition into any new conditions that may occur as a result of our study for you. Very truly yours, BOOZ•ALLBN & HMILTON Inc Pester W. Homer Approved: John C . Newman Vice President cfs t^ Rum fusion dance company, incorporated August 7, 1980 o r� •r Mr. Joe Grassie City Manager 3500 Pan American Drive , Miami, F1. 33133 ca Dear Mr. Grassie, Fusion has been asked to participate in the Hispanic Heritage Festival on October S. The company has been requested to participate in the past, but was unable to do so because the date did not permit sufficient rehearsal time, nor did the company have an appropiate work in the repertoire for the Festival. As new Executive Director of the company I have determined that part of Fusion growth should include more efforts out -reaching to all communities of Miami. Thus, I have scheduled dancers to begin rehearsals earlier; made arrangements for increased studio availability; reduced dancer's teaching load; and I have commissioned Wally Lord to create a ballet specifically in honor of the Festival. in addition, Fusion would like to commit itself to being available for the Kwanga, Coconut Grove, and Arti-Gras. In order to mount a new production and participate in the Festivals the company would require assistance from the city in the amount of $10,000.00. Could you put our request on the commission's next agenda. %Sincerely, �— I J Howard Dando Executive Director HD/sp 4542 southwest 75th avenue miami, florida 33155 phone (3051264.0661 a not•for•profit corporation Fwiw,l fusion dance company, Incorporated FUSION FESTIVALS BUDGET (Hispanic Week, Coconut Grove, Kwanza) Pre -Performance Expenses; Dancer's Salaries (7 dancer's at 200,x 4 weeks) Stage Manager's Salary (200 x 2) Choreographerls Salary (200 x 4) Production Expenses (Latin Ballot): Costume & Set Designer Set Construction Costume Construction Tapes and Music Studio Rental and Utilities Transportation (3 Performances) Truck, Cars, Loaders, Technicians (400 x 3) TOTAL r to .•• � rl' - L 5,600 400 800 6,800 500 200 600 200 1,500 500 Administrative Salaries and Costs are not applied to this budget 1,200 v c� �T K 2• ro i an rn sy —.. 10,000 4542 southwest 75th avenue miami, florido 33155 phone (305) 264.0661 a not -for -profit corporation I. 1 CITY OF MIAMI COMMISSION POLICY SUBJECT : /°"N September 28, 1978 Res 78-602 A policy describing the City's participation in and., support of festivals, cultural and sports events which are planned and operated by local citizens' and business organizations. PURPOSE: The City Commission supports and encourages citizen -sponsored and citizen -run festival, cultural and sports events. These events encourage civic pride, tourism, and areawide recognition of the cultural diversity and heritage that is present in Miami. The extent to which the City of Miami will provide financial or services support for these events should be outlined in a policy statement to ensure that such support can be properly budgeted and planned. This policy will also provide for uniform and proper control of city funds. POLICY: C It is the policy of the Miami City Commission that support, both direct financial or the provision of services, may be provided to established, recurring festival, cultural and sports events and to "first time" events if funding has been identified in the annual budget and if certain specified requirements are met. Budgeted and approved funding will cover both direct financial support and services support, which is provided on an overtime basis. A. The City Commission may authorize the disbursement of cash or the provision of "billable" services only from funds specific- ally idcntifiod in the annual budget for festival support, and onl if the following conditions are met: 1. The requesting organization must be a legally constituted entity with officers clearly identified. 2. At least one-half of the total cash resources for the festival or other event must be provided from sources other than the City of Miami . 3. In order for tl:e City Manager to make a proper recommendation, t•ho requesting organization munt present the following infor- mation at least one month prior to the City Commission's con- sideration of the roquest: a. A detailed description of the proposed event, 'including dates, times, places, nature of events, type of acts, etc. N b. A complete and detailed budget for the event, showing sources and amounts of anticipated revenue, and showing OF OF CITY COMMISSION POL,:CY p, 2 Festivals, Cultural and Sports Events categories and amounts of planned expenditures, c. if the requesting organization has sponsored similar .events previously, a summary statement showing co- sponsors, revenue and expenditures must be furnished. d. An agreement, signed by the requesting organization, stating that the above requirements have been met, identifying how the City's cash contribution (if any) will be used, and specifying that an independent auditor, named by the organization and approved by the City Manager, will be engaged to provide a full and complete audit. 4. A final report and an auditor's statement (including a financial statement) must be provided to the City by the requesting organization within 60 days of the closing of • the event. B. The City's administrative requirements for these festival, cultural and sports events will be handled through the City Manager's Office or through a coordinates designated by the City Manager. This coordinator will administer this policy and provide liaison to departments affected, The sponsoring organ- ization is responsible for making all the necessary arrange- ments, secure permits, make reservations, and to ensure that all other requirements are satisfied. C. Apart from any support provided and covered in Sections A & B, !` the following City assistance may be provided without charge to organizations sponsoring festival, cultural and sports events: 1. Reduced fees for facilities and equipment as recommended by the City Manager. (For example: Bayfront Auditorium, Marine Stadium, parks, showmobiles, etc.) 2. Labor and other services provided by operating departments during regular hours as work schedules permit. 3. Permission for official closing of streets. D. Apart from any support provided and covered in Sections A & D, the following services provided must be charged to sponsoring organiza- tions: 1. Any labor or other in -kind services provided during non -routine hours and in overtime situations. 2. All labor, utilities, equipment and insurance costs related to use of City facilities must be paid by the sponsoring organization.`- • E. The City will not provide and pay for off -duty policemen required for an event. No insurance requirements will be waived. All security deposits for damage or clean-up must be paid by organizations sponsoring these events. a,