HomeMy WebLinkAbout1970_MANAGEMENT LETTER
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ERNS T 6 , E R N S T
FORT NORTH TEXAS 7EI02
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Llecemb~r 17, 1970 1
Honorable Mayor, City Council, and City Manager
City of Denton, Texas
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Gentlemen:
D:,ring the course of our examination of the financial statements of the City
of Denton for the year ended September 30, 1970, we reviewed existing accounting
practices and procedures. In connection therewith, we submit the following ccmments
and recoFneadations for your consideration. These are presented in the following
order:
-Purchasing and Inventory
-Property :axes
-Corporation Court
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-Investment Policies
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-General
Pl'RCHASiNG AND INvENTORY
Following is a summary of operations of the Working Cepital Fund in more detail
than is included in the City's financial statements for the year:
Shop and
Garage
Pota1 Materiala Labor Overhead
Charges to other funds $ 949,510 $ 831,664 $92,508 $25,338
Costs and expenses:
Beginning inventory 392,510 392,510 - -
Purchases 866,800 866,800 - -
Less e-:ding inventory (288,725) (288,725) - -
Salaries and wages 101,804 - 90,608 11,196
Other 17,371 - 17,371
1,089,760 970,385 90,608 28,567
Undistributed charge - (credit)$ 140,250 $ 138,721 $(1,900) $ 3,229
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the ve indic'ites tl-i t t!te 5, c;crhead factor charge on u3rehi`uFe sales
appr oNinates a~t~itl t"A'rha~: r.nd tF, -_w,tF char ed for 0,,p and garage labor i
.app rOXI r1!,7te: the 3i't'331 COV t of sV( h Iil)or. k'e F•3ggcst, he'auCcC, that it may be
app r op r is tto increase the 5'. overIt e,ad factor to to cover an nja1 obso - 1
le-c nce and breakage,
the undistribted charge of $138,9''1 applicable to materials includes
518,986 representing materials determined Lobe obsolete and therefore excluded
from the inventory at September 30, 1970. We expanded our procedures in an
attempt to determine the cause of the remaining undistributed charge amounting
to $119,935, We concluded that cxistin;; physical and accounting controls over
the inventory wire inadeq.iate in many respects, and specific weaknesses and
improvement possibilities were reviewed at length -.with several City employees.
It should be remcmhcrcd that the undistributed charge applicable to materials
may be referred to as a loss from operations; however, it may at least to some
extent be the result of many possibilities including but not neceeFarily limited
to the following:
1. Failure to report and invoice for issuances
2. Failure to report and properly record breakage and damage resulting
in abandonment
3, inventory items received direct by using departments without being
processed through the warehouse
4. Overstatement of beginning inventory (on which the City's prior
auditors did not express an opinion)
We feel that the accounting system has not been fully responsive to actual
physical events (i.e. order, receive, transfer, iss,e, abandon, etc.) occurring
within the inventory. The accounting system should generate the information
necessary to isolate problem areas within the inventory so that remedial action
<r„!d be quickly taken.
At September 30, 1970, inventory (excluding transformers which are new
carried as part of the fixed assets of the electric system) was accoi,nted for
as follows:
Warehouse, service center, and stran plant:
Electric system $184,648
Water and sewer system 67,385
Other _ 11,249
263,282
Machine shop 11,065
Central supply 12,638
$288,725
So that necessary information may begin to he generated at the earliest pos-
sible date, we recommend that the five classifications of inventory be expanded
through use of sub-accounts to break down electric system items and water and sewer
system items into several logical categories. Additionally, we recommend that
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physical inventories be taken not less often than quarterly until problem area, have
been isolated and problems resolvod. In this connection, reports on each category '
of invt ntcry should be prepared monthly. These reports should summarize transactions
by inventory category as follows: J
Beginning inventory XXXX
Add purchases XX
Deduct issuances XXX)
Computed ending inventory )OX
The computed ending inventory could therefore be verified by taking a physical
inventory at any month end. In fact, as problem areas are isolated, it may be
desirable to take physical inventories of problem categories on a monthly basis.
The preceding recommendations concerning physical inventory taking not less
often than quarterly may prove to be too expensive to continue on a long term
basis; however, with respect to overall planning as to inventory and inventory
control, we suggest that, after appropriate study, action be taken to achieve the
following objectives:
1. Physical control of Items in inventory and assignment of custodial
responsibilities to specific personnel. (This particular objective
may require improved physical facilities, and the determination of
this need should, in our opinion, be given high priority.)
2. Specific assignment of responsibility and delegation of authority for
the various phases of the purchasing and inventory handling process.
3. Requirement of compliance with procedures detailed in the City's
purchasing manual or an acceptable alternative.
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4. Assignment of numbers to all distinctive inventory items for account-
ing identification purposes.
5. Establishment and maintenance of a perpetual inventory under accounting
control as a check on the documentation of the flow of items into and
out of inventory.
6. Transfer of the responsibility for matching invoices with purchase orders
i and receiving reports from the purchasing department to the accounting
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PROPERTY TAXES
Accounting for taxes receivable and collections are unnecessarily complicated
by the method of allocation of tax revenues between the General Fund and the General
Debt Service Fund. Past allocations have been made based on a portion of taxes
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PROPF.RIY TAXFS - Cont'cl
assessed each year. Itis manner of allocation has made it necessary to account for /
collections of delinquent taxes by year and allocation of these collections between i
the two funds on the basis set in the year the tax was assessed. In the future,
tax revenues could he allocated to the General Debt Service Fund on the basis of
the dollar amount required to be placed in that fund to meet debt requirements
during the budget year. The transfer of the budgeted allocation could be made in
equal monthly amoints or a percentage of monthly collections with a year-end
adjustment.
During our interiR. review of operations, we noted a significant lack of
coordination of responsibilities between the tax department and the accounting
department. We believe responsibilities should be reassigned in a manner similar
to the guidelines below:
1. Tax Department
-Prepare valuations and information necessary for data processing to
prepare the tax bills and the tax roll.
-Verify the tax roll as prepared by data processing.
-Furnish approved monthly listings of corrections or other adjustments
to the tax ledgers to both the accounting department and data processing.
-Review the trial balance of unpaid taxes monthly for credit balances
resulting from overpayments or misapplications and for other errors.
Report the necessary corrections to accounting and data processing.
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i -Maintain tax rolls, delinquent tax rolls, and records of payment as
a part of this department's records.
2. Accounting Department
-Reconcile daily collections reported by the cashier to the daily payment
report prepared by data processing.
-Reconcile monthly listing of unpaid taxes to general ledger controls.
-Determine that adjustments to the ledgers have proper approval.
CORPORATION COURT
During our review of the operation of the Corporation Court, we noted certain
areas where procedures could be improved to strengthen the control over the issuance
of traffic tickets and collection of fines. We recommend that consideration be
given to establishing the following procedures:
1. The supply of unissued traffic tickets should be maintained by the
Corporation Court, and books of tickets issued to each policeman should
be numerically controlled.
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CORPORATION COCRI - Cont'd
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2. Telephone calls should not b.a accepted as court appearances and warrants
should be issued if mailed fines are not received within an established
time,
3. The Corporation Court should furnish, to the City Manager, an aged list-
ing of fines receivable at least monthly.
4. The "Warrant File" should be reviewed periodically to insure proper
effort and follow up in locating and arresting violators who have
failed to appear.
5. Bail bonds should be deposited in a trust or agency furd and carried
as a liability until such time as they are refunded or forfeited.
They are currently recorded as a revenue in the General Fund when
collected and as an expenditure when refunded.
INVESTMFNr POLICIES
The use of monthly cash reports, which would include forecasts of funds
available for short term (30 to 60 days) and long term (6 to 12 months) invest-
ments, could assist with optimum investment of available cash. These forecasts
would assist the City to hold it,. cash balances to the lowest possible level
without impairing operating effi.iency. Based on our estimates, optimum use of
funds could result in additional annual interest income of $50,000 to $15,000.
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During the past year, the return available from short term investments
j has increased significantly. Conpared to interest being earned by other
municipalities in the area, the City of Denton is earning between 1% and 1.5/,
less on its investments. We recomment continued negotiation for higher interest
rates on investments with local c!epositories. An additional 1% return on funds
which were invested during the pest year would have resulted in over $50,000 of
additional income.
GENERAL
All miscellaneous receivables are currently purchased by the General Fund
from all other funds. Bad debts which occur are then absorbed by the General
Fund. We recommend that individual funds retain and be responsible for the
collection of the miscellaneous receivables which they originate. This would
eliminate the monthly transfer entries now being made and the proper fund
would be charged for bad debt losses.
Revenues and expenditures should be carried in subsidiary ledgers with a
general ledger control for ease of handling and posting and to make the tran-
sition from manual system processing to electronic data processing smoother.
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Customer utility deposits should bk- reconciled to the general ledger control
monthly.
We appreciate the opportunity to submit the preceding commeuts and recom-
mendations and shall be pleased to meet with you to discuss any questions you
may have with regard thereto. Please advise when ve may be of further assis-
tance with these or other matters.
Very truly yours, +
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