HomeMy WebLinkAbout1971 -MANAGEMENT LETTER
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DcCO;r•bcr 17, 1370
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Honorable Mayor, City Co+iccil, and City Manager
City of Denton, Texas
Gentlemen:
During the cours.n o` our examination of t1,e financial statements of the City
of Denton for the year ended S_pter)er 30, 1970, we revie•red ex'sting accounting
practices and procedures. In connection therewith, we submit the following co.rnents I
and recommendations for your ,ronsidvration. Thee are presented in the following
order:
-Purchasing and Inventory
-Prope.t. Taxes
i -Corporation Court
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-inv,2.tment Policies i
I -General
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PJRCHASING AND INY::NTORY
Following Is a summary of operations of the Working Capital Fund in more detail
than is included in the City's financial statements for the year:
Shop .nd
Garage
Total Materials Labor Overhead
Charbes to other funds 949r510 $ 831,664 ~$920508 $25,338
Costc and expenses: I
Beginning inventory 392,510 392,51C - {
Purchases 866,800 666,800 -
Less ending inventory (288,725) (288,725) -
Salaries and weges 101,804 90,603 I1,196 I
Other _ 12,371 - - 17,371
1,089,760 970,385 90,608 28,567
Qndistribuled charge - (credit) 0,250 ; 138,721 $(]_,goo) $ 3,229
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fho above indicates tliat the 54 orothcad f;,ctoi tint"8r on u;trcltouse sale: r
approximates actual overhead, and the .rr unts cl,:ugc,i for shop and g;,r.gc labor /
apprOXA motes the actual cult of such taunt. 0'.. sugg: that it may be
cat ho ever
approprinte to increase ti:( 5), ovt,nc~ad factor by 1'J, to 27 to cover annual Ouse-
le3cence and breakage.
The undistributed char.(, of $138,921 applicable to materials i:lcludes
$18,936 representing; material!. dotermin.•d to be cbsolcte and tbPrefore excluded
front the inventory at September T1, 1970. I;c expanded our procedures in an
attempt to determine the cause of t,c• remaining undistributed charge amounting
to $119,935 We concluded tl,at c:;isting physical and accounting controls over
the inventory acre inadeq.wte in wary respects, and specific weaknesses and
improvement possibilities wc;2 reviewed at 1^ngth with several City employees, j
It should be remembered that the unuistributed 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 necessarily limited
to the following: I
1, Failure to report and Invoice for issuances
2. failure to report and properly record breakage and damage resulting
in abandonment
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3. Inventory items received direct by using departments without being
processed throt'gh the warehouse
4. Overstatement of beginning inventory (on which the City's prior
auditors did not express an opinion)
We feel that the ac^ounting system has not been fully responsive to actual
physical events (i.e. or.ler, receive, transfer, issue, 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
could be quickly taken.
At September 30, 1970, inventory (ex^luding transformers which are now
carried ar part of the fixed assets of the electric system) was accounted for
as follows:
L~ Warehouse, service ;,nter, and steam plant:
Electric system $1840043
Water and sewer system 67,385
Other 11,249
63,282
Machine shop 11 065
Central supply 12,838
$288,725
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sible date, ve 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 inventoric. be taken r.at less often Ulan quarterly untiI problem areas have
been isolated and pruDlcin, irsolvod. In this colinectiun, reports on each category
of £nventorY should oc prcpored monthly. lhcsc reports should senrarize transactions
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by inventory category as falloi.s:
Beginning inventory XXXX
Add purchases XX
Deduct issuances XXX)
Computed ending inventory _XXX
The computed ending inventory could therefor. 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.
Tic pr^ceding recomcicndatIons concerning physical Inventory ta'.cing not less
often than quarterly may prove to be too expensive to continue on a lung term
'basis; however, witlt 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 assigrunent of custodial
responsibilities to siccific personnel. (This particular objective
may require improved physical facilities, and the determination of
this need should, in c.r. opinion, be given high priority.)
2. Specific assignment of responsibility and delegation of authority for
the various phases of the purchasing and inventory handling prneess.
3. Requirement of compliance with procedures detailed in the City's
j purchasing manual or an acceptable alternative.
4. Assfgnr..ent 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 documontatiou of the flow of items into and
out of inventory. l
6. Transfer of the responsibility for matcliing invoices with purchase orders
and receiving reports from the purchasing department to the accounting
'department.
PROPERTY TPXES
Accounting for taxes receivable and collections are unnecessarily complicated
by the method of allocation of tax revenues betwec.i the Ceueral Fund and the General
Debt Service Fnnd. Past allocations have been made based on a portion of taxes
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F'f 01'I:FI'i 'fA~IiS - C0111 'd
assessed each year. 'l his m uim•r of allocation has made ii necessary to nccnnnl for
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Col ICCtion9 of delimiu..nt taixcs by your ;:u ;I Ill l Ill It iolt of these Col Fc'cll,rnr; bct%rccn
the two funds on th(~ b;isis set in the year tho tI% vus assessed. In the fntnrc,
tax revenues could br ,lIocated to the Ceacral D,bt Service Fuid on the bads Of
the dollar 4u,10unt required to be pla.xd in that furl] ti) Meet debt requirco;ent,,
during the budget year. 1he transfer of the hud,,kted allocation could he made in
equal monthly amounts or a percentage of nonlhly collections with a year-end
adjustwvnt.
During our interim review of operations, we noted a significant lack of
coordination of responsibilities betn:een the ta.-; department and the accounting
department. We believe responsibilities should be reassigned in a manner similar
to the guidelines below:
1. Tax Department J1
I -Prepare valuations and information necessary fo: data processing to 1
prepare the tax bills and the tas roll.
-Verify the tax roll as prepared by data processing,
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Furnish approved monthly listings of corrections or other adjustments
to the tax ledgers to both the accounting department and data processing. i
-Review the trial balance of unpaid taxes monthly for credit balances 1
resulting from overpayments or misapplications and for other errors.
Report the necessary corrections to accounting and data processing. !
-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 f
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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CORFOiv1TIUV ClRthi' - Cont'd
2. Telephone calls should not be accepted as court nppe.i.rances and warrants
should b. issued if mailed fines are nut received ,iLhin an established
time.
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3. The Corporation Court should furnish, to the City M,inngcr, an aged list-
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ing of fines receivable at least monthly.
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4. The "Warrant File" should be reviewed periodically to insure proper
effort and follow u1 In locating and arresting violators who have
failed to appear.
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5. Sail bonds should be deposited in a trust or agency fund and carried
as a liability until such time as they arc refunded or forfeited.
They are currently recorded as a revenue in the Ceneral Fund when
1 collected and as an expenditure when refunded.
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INVESTMENT POLICIES
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The use of monthly cash reports, which would include forecasts of funds E
available for short term (30 to 60 days) and long term (6 to 12 months) invest- E
ments, could assist with optimum investment of available cash. These forecasts
would assist the City to hold its cash balances to the lowest possible level
t without impairing operating efficiency. Based on our estimates, optimum use of
funds could result in additional annual interest income of $50,000 to $75,000.
I During the pest year, the return available from short term investments
has increased significantly. Compared to interest being earned by other E
municipalities in t4he 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 depositories, An additional 1% return on funds
which were invested daring the past year would have resulted in over $50,ODO of
additional income.
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GENERAL
All miscellaneous receivables are currently purchased by the General Fund
llll from all other funds. Pad debts which occur Aro then absorbed by the General
Fund. We recommend that individual funds retain and be responsible for the
collection of ti,e miscellaneous receivables which they originate. This would
eliminate the monthly transfer entries now being made and the proper fund j
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 be recol,,:ilcd to the general ledger control
monthly.
We appreciate the opportunity to submit the preceding counents and recom-
mendations and shall be pleased to meet with you to discuss any q,estions you
may have with regard thereto. Please advise when we may be of further assis-
tance iith these or other matters.
Very truly yours,
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