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Home My WebLink About1987 1 CITY of DENTON, TEXAS MUNICIPAL BUILDING / DENTON, TEXAS 76201 / TELEPHONE {817) 566.8200 t , i 1 MLMORANUUM UATh: January 28, 1988 I '1'Ur Lloyd V, Harrell, City Manager FROM: John F, McGrane, hxecutive Director of Finance SUBJ;Z'fiSl'ONSbS 10 vhLOI'i'rb HASKINS 5 ShLLS WORT '1'0 i } kANAGEMBT FOR Tfib YLAR ENUbU SBP'1 hMBbR 303 1987 , Attached is a copy of the reponses to the year end fiscal audit management report as submitted by the accounting firm of Ueloitte haskins $ Sells, Tne attached follows the outline of the report as submitted by DH&S. We have recopied their observations, recommendations and ~ have added our responses. If you need any further information regarding our responses, i f 1 please feel free to contact me, . fi 1 n FicGrane J Y. JFMcG:af { Attachments 3136F I ~ 1 E: CITY OF DENTON AUDIT RESPONSE JANUARY 28, 1968 'r CASH RECElPT,~ i Observations The library uses a cash register when collecting cash receipts however, the cash register tape is not sent to the Cashier's office along with the deposit slips, checks and cash, Recommendations In order to maintain tighter controls over cash received at the library, the cash register tape should be forwarded to the Cashier, The Cashter should then ensure that the register tape agrees with the cash and checks collected, Reaps pnael The Finance Department staff has contacted the library ifireot;or through a personal visit and by memorandum dated January A, 1980, The Director agreed that the library will forward the cash register tapo to Cashiering at least twice a week, Cashiers will ensure that the tape agrees with the cash and checks collected, Any discrepancies will be reconciled with the library in a timely fashioN, Mail Aemittance Machine Obaeryabioni Utility Si)ls and property tax mail receipts are opened ~y manually, cash receipts • 'i totalled and recorded manually, and credits to f Customer accounts are inpu,. , UA11 y, The process is slow and does not allow for proper segregation of duties (city personnel have access to cash and ) records). Machines exist (which can be leased or purchased) which can "read" utility stubs and automatically record the credit to the customers' accounts, it is a much faster and more accurate process than manual recording, It would also act as an additional control as City personnel would be required to balance cash received to credits to customers' accounts, These or similar machines could probably also be used for property tax payments, Recommendation: i Consider leasing or f purchasing mail remittance machines for utility bill and property tax receipts, 'I .r Deloitte, Haskins & Sells Audit Response page 2. k Roe Onset we have contacted several vondors and will be receiving proposals for i potential options. However, preliminary indictions are that the equipment is f expensive and may be outside the possibilities of this year's budget. Upon review of the various alternative systems and associated costs, we anticipate this to be a budgetary item and will provide a package for consideration in the 1988/89 budget process. 3 i 5 Look box Observationt The city does not use a lock box system to deposit cash l!' receipts. Recommen_oatiopi consider opening a lock box at the City's depository bank, { A lock box system should strengthen internal accounting control and reduce the 1 City's staff time involved in processing and depositing cash receipts, i ea onset We are considering the look box possibility and have initiated 1 contact regarding such with our depository bank, Upon response from our 1 depository bank, we will review the cost/ benefit of potential implementation, 1 i j t i j j f i 3 i i, bAloitte, Haskins & Sella Audit Response page 3, Written Quotations Obse~ rv~ ationt The City has an internal policy of regu@sting bide on items ! quotations over , bids are received by telephone and written quottattions are seldom received, Recemm~end~o6j Written quotations should be received from all vendors requested to submit hide prior to the issuance of a purchase order, i Aes onsej The Wirtten policies and procedures for the finance/purchasing Department have been revised and are currently being rewritten, Written quotations and/or bids will bo received as required by the Purchasing Agent for purchased items on services between the amounts of $5,ooo and 100000, 2An kUtchaae Orders Obeervationi The City has over thirty (30) open purchase orders with various vendors, There are not written policies on utilization, purchase authorization and monetary limits, Aeoommendation~ Review all open urchase orders only those absolutely eadential for service pr visioned Written o umber the icies to utilization should be developed and incorporated in the Purchasing Policy and for Procedure manual, All open ; ~ i basis, purchase orders should be reviewed on an annual s xe-...qponael The practice of having open p will be automatically eliminated with the full aimpl mentationtofrthe(Extended Purchasing software package, It is anticipated that this package will be operational by March 15, 1988, I f vendors n gubndtt id8 itt 1 observations Vendors who do not submit a formal bid for items over X101000 are to e~ p onod by the Purchasing Division and requested to provide a verbal reason for not submitting a cost quotation, R6COmm@ndaticnt A standard written format specifying reasons for not submitting a cost quotation should be developed and incorporated in the bi,d package, These forme should be returned to the finance bitoctor, i i i I N Deloitte, Haskins & sells Audit Response Page 4, 9 I f I ResponseI We have now initiated the practice of contacting and modifying "no response" vendors, Purchasing is developing a form that will be included In tho bia packanes that"are sent out. All responses will be sent to the Finance Director and a copy forwarded to the Purchasing Department. I j Policies and Procedures Observation) The existing purchasing policies ano procedures are not i ~ current and are under revision4 j Recommendations complete the revision for approval by the City Council, i Procedures for the new automated -inventory control system, open purchase orders, written quotations for purot+aaes of Ob,000 to OIU,000 and written k guidelines for no-bid response should be incorporated, ee onsoi The staff agrees with the recommendations and is in the process of revising and updating the purchasing polioies and procedures, i I ~ I r i' i I I: t i F r A Deloitte, Haskins 6 Sells Audit Response Page 5, S S j A~~, 41NU PRCX;EDURES j Lease Accounting bcservations Lease payments are not properly recorded In the general ledg(lr, Therefore, audit adjustments must be made at year-end. Reoosnsnendations Use the lease payment/amortization schedules which the City already maintains to properly record principal reductions and interest expense i on capital lease payments, Responses The staff agrees with the recommendation and, for capital lease payments, will quarterly record principal and interest adjustments on the general ledger, cancellation of Documentation Obaeryationc several voucher packages were reviewed in which some or all of the pages wero not cancelled (stamped paio), According to the City's internal .control procedures, every page in the voucher package should be stamped as i paid, Reeommenda" tiogi The City should take appropriate steps to ensure that each page in the voucher package is stamped "pair" when the check is issued, For checks over 03,ODUO the check signer who reviews the dooumentation anu 1 initials the signed check should also note thu4 the documentation has been appropriately cancelled, Res op n$I The City's internal control procedure is established to stamp the vendor invoice "paid," In order to facilitate this process, the accounting i clerks attempt to stamp al.l documents within the package in order to expedite review procedures, We will attempt to ensure that the olerks at least stamp the invoice "paid," We are also investigating an alternative method that will deface the documents on A larger scale and thus increase productivity, We are exploring utilizing the creativeness of our Machine Shop to produce the type k of equiL>ment necessary) otherwise, the cost would be prohl itive, Initialing Checks Greater Than X3,000 t Observations Cheeks were noted which exceeded 031000 but were not initialed by an authorized check signer indicating that the support was reviewed prior to release of the check, J Deloitte, Haskins a Sells Audit Response page 6. y Recommendation: The authorized chock signer who initials cheeks exceeding 3,000 should be provided with a check register at the time he is given the checks, He should then scan the check register for all checks written over P3,000 to ensure he has reviewed every one, Responses The staff agrees with the recommendation on procedureas however, we are investigating the process of reviewing checks in excess of 10,000, which will coincide with purchasing procedures that hor a been previously amended by city council, i i { inventory observation { Obseryatloh: During the year-end utility warehouse physical inventory observation, we noted the following: 0 Numerous mathematical errors were noted on the inventory count tags, I o The inventory counts were not reviewed and tested by a second counter, o inventory instructions were not written, Reoommendationi each counter should be provided a calculator. All inventory counts should be tested and initialed by the second counter, Instructions for counting physical inventory should be printed and distributed to each counter, Reoponee: The staff agrees with the recommendations, calculators will be k furnished to counters when applicable ands if necessary, recounts on required items or sections of inventory will bo conducted, Also, instructions for counting physical inventory will be distributed prior to the actual taking of y the year-end inventory. Ii Safekeeping, Recelpts 1 Observation: The Caty does not receive original safekeeping receipts of the collateral pledged against the City's bank deposits from the custodian bank. E R i Recommendation: Request the custodian bank to forward the original safekeeping receipt to the city, This procedure would ensure that the securities belonged to the city in the event of any bank uncertainties, Responsei We have made this request to the depository bank and they have deolined to meet this request, We do receive NCR paper copies of the receipts that clearly indicate the securities are pledged to the City of Denton, We have made a second request to the bank and have not received a response as of yet, 99 1 E l i i r Deloitte, Haskins b sells Audit Response page 7, i INZ' -RtrAL AUDIT E III Observations Currently, the City relies on its system of internal accounting control and annual independent audit to provide assurance that the ~ financial statements are fairly presented, While this reliance is adequate, an internal audit function would provide an additional control leve,t and establish a system which would better monitor operations and the accounting system of the city. i Reaommenoations Consider establishing an internal audit function, internal j auditors' duties and responsibilities vary widely among cities, Frequently, internal auditors are involved with operational reviews and special projects as contrasted with the traditional role of financial auditing, The internal auditor should have no authority over, nor responsibility for, the activities examined, In order for objectivity to be maintained, we suggest that the individual performing this function report directly to the City Manager and report semi-annually to the Audit Committee of the Board, This type of arrangement should provide a level of internal control through segregation of responsibility and give the internal auditor the authority required to operate across departmental lines to best perform trio job, Res onset The staff agrees with this recommendation and will once again submit a budget package for consideration in 198b, ! l• ,f f wr, i I Deloitte, Haskins 6 Sells Audit Response Page 80 ` ~ eUUG,~.T OFFYCER Obaeryationl The City has not designated to one individual the responsibility to review and investigate compliance by all City dehsrtmente with the annual budget. Recommandationi Consider establishing a budget review function by either designating a department 0r individual with the oversight responsibility of budgetary compliance, Resppns t The staff agrees with this recommendation and has considered this item in past budget reviewsr however, due to the fiscal restraints funding was not provided, This recommendation will also be submitted as a supplemental package in the 1988/89 budget consideration, f t i ~ I 1 1 i j j I r I Deloitte, Haskins & Sells Audit Response page g, AM= Preparation of the grantee Performance Report Observations The urantee Performance Report for the period 7/18/86 7/18/87 did not reconcile to the general ledger, In aaaition, one page of the report contained mathematical errors, The report was amended by CDBG office personnel after the strors were brought to their attention during the audit. Recommendations The Grantee Performance Report should be prepared by the CDBG_ office using the accounting records/general ledger, A formal reconciliation should be prepared by CDBG and then reviewed and approved by the Finance Department. es onses The Accounting division will review, and a formal approval prooed0re will be initiated, to approve future CDBG grant reports to ensure consistency with accounting records. Any variances will be reconciled with the cDBo office prior to submission of the report, Utilizing Report.Wrlter Fuhdtion Observationt Financial statistics, taken from the LOS reports, are being input into the Wang word processing system or into Lotus spreadsheets to allow for ad hoo reporting or other changes, The American Management System's report writer function is not being utilized by the user departments, The AMS report writer is perosived to be extremely complicated to use and users have i hot been properly trained, Reopmmendations Beers should be trained to use the report writer function c or other report writing systems should be considered, E Res,ustieeI The staff agrees that some report writing/oommunioaton system is essential and will investigate alternative methods of utilizing one of the systems, f I l i 0eioitte, Haskins & Sells Audit Reepcnse page 10, i j CAFI TBHIA pLAN ObseryationI A cafeteria plan is a fringe benefit plan that receives { special tax treatment under Section 125 of the internal Revenue Code, the , plane allow employees to have qualified expenditures deducted from their earnings on a pre-tax basis, Some of the most significant qualified expenditures are group insurance deductions, child care deductions, and medical reimbursement account deductions, Recommenoationi Consider establishing a cafeteria plan, as it could be an effective and efficient tool for improving the compensation package offered city employees, it could increase employees' take-home pay and enhance their job satisfaction Responses The stuff agrees with this reconm,endation and has already implemented the cafeteria plan program for employees, i i i { J i G k ~ l 1 f t Deloitte, haskina & Sells Audit Response Page 11, i DATA PSSINU i OPERATIONS Passwords i Observations passwords are not changed oil a timely basis. Currently, passwords are protected only once a year, To provide adequate confidentiality of passworde, they should be changed more frequently. Additioiially, programmer log-on identification codes and passwords are taped on the wall in Data Processing, allowing accessibility to unauthorized personnel, Recommendati.oni Institute mandatory procedures for a more frequent and consistent change of pbaswordsi for example, evory 30 to 60 days, Protect the confidentiality of programmer log-on identifications and passwords by emphasizing to the programmersi 1) that any transaction executed using his password will be his responsibility, and 2) all log-on identifications and passwords should be memorized, A library of all passwords should be controlled by the Data Processing Director in a protected computer file or under lock and key, ResponseI At present there are approximately 175 sign-ons and passwords, and to change all passwords on a 30- or 60-day basis would be extremely j time-consuming, costly and confuaingr however, a new procedure has been li institutod to change approximately 1/6 of the sign-one and passwords each wonth, thereby changing everyone's sign-on and password twice a year, At this i time the sign-onu and passwords are stored in a computer file that can only be 1r accessed by the Director of Data Processing and key data processing staff members, Program Change control: Observations unauthor!zed changes may be made to production programs, f Prog~ rain changes are seldom made because the majority of the software is purehaaed, However, programmers have unlimited access to the source code. A transaction/activity log is produced but not reviewed on a timely basis, ReoommendatiMl Review the transaotion/activity log on a periodic basis to f determine that all programs and program change were authorized, f; Rospot]8.oi Currently all modifications to programs are initiated by a data processing programming request form that is signed by the Director or division managers of the requesting department, These programming request forms are reviewed by the Director of Data Processing or the senior Programmer L Analysts, A more frequent review of the activity log is now ocourring, but the continued direct involvement of the senior Programmer/Analyst in p `I a Deloitte, Haskins 6 Sella Audit Report page 12. { ro ramming appears to be the most effective monitoring Of Programming modifications changes, computer Room Access Obseryat_iont the operations area is accessible to all Une doorway its personnel. The operations are,% has three entrances/exits, secured by a combination lock, while the other rtwrammera,eohave knowledgeao£ key, All Data Processing personnel, including P og the combination, Access to the computer room should be allowed tampering Y or authorized operations personnel in order to prevent any accidental destruction of files and equipment. ti pey gae~ while the current practice is to have the programming staff enter ion listings the computer room to re etheicomputeratand opera ionsndstaff ar.eoYpresent programmers do not operate during normal busincar1 hours when the programmers are in to computer room. esting activities r during time frames other athangnormal business hours, staff is su major testing exception such as weekends. The reteiating of the programming staff from the oomputer rations would room would result in a loin oftproductAddiivitytifor th this computerestrirctiope staff and the programming increase the cost of testing in non-no,mal Opeamount of test overtime pay required in having computer operators sessions. Currently, funds have not been budgeted to cover this type of overtime expense. AFFLICAm10N3 Payroll Oberv_at;ion, One individual inputs the payroll data and reviews, balances { and approves the batch transaction report, Recommendai onj An individual independent of the payroll data input personnel should review, balance and approve the batch transaction report. ReI staff agrees that, in order to ensure proper oontrolso an dat approveuabatchatransactionthrepo is inpwe phavenninitiateO asvprocesslwhere na appro } r I` ii J Deloitte, Haskins & Sells Audit Response Page 13. t supervisor in the Accounting Division will verity batch totals on reports, Also, a supervisor will verify beginning and ending check sequence to Data Processing runs anc follow'up on any discrepancies. Access to Master Files j Observations The Personnel and Payroll Department personnel have unlimited access to the Payroll/Personnel master file, allowing unauthorized individuals the capability to add, change or delete master file records, The Employes information System extended security system is being approved tot implementation in the near future to control access to authorized users, Currently, both Personnel and Payroll r•voeive all transaction reporta to review each other's inputs, changes and deletions, i Response.t The implementation of the extended security system is being pureueds Under the current procedures, both the Personnel Department and the ; Finance Department perform identical functions on active employees, depending on whether they are processing a new-hire or processing an employee who is already on the Payroll/Personnel system, As long as these similar functions are performed by both departments r then each department must Conti nue to have the ability to inquire, update and correct the same data fields. The extended security system will in reality provide other user departments with inquiry ' capability to data fields that are not confidential and/or critical to secure and operate the Payroll/Personnel system, currently, the procedure for gaining access to this system requires the approval of the Dirsotor of "ersonnel prior to the Data Processing Department establishing a sign-on and -1 password, I _ I i i. f i Ii Deloitte, Haskins & sells Audit Response Page 14, I MUNICIPAL UUR`1' M Court System Implementation { Observations The new court system implementation has been significantly delayed due, in part, to lack of defined user responsibility, The role of a user champion, with appropriate authority and responsibility, is a critical h success factor for now system installations, 1hia situation has been I compounded by extensive turnover of user personnel, Recommendations Each system installation should be guided by a user steering committee with a chairperson assigned with the necessary authority f and defined responsibility for successful implementation, . a onset This observation has been addressed in a report by staff to the city Counoil, As recommended in the report, an advisory committee has been installed to guide the general direction of the Court, not only in automation, but in all areas, The acting Court Administrator has been given the authority and responsibility of implementation and operation of the system, court system Automation CbserVations The City is currently utilizing a manual system for processing Court transactions. t Reoommendationt Analyze automation of court functions, l-he City has existing software which was provided at n o cost. by another Texas E municipality, The City shoula ensure that the software meets identified user i requirements If so, the implementation of the automated system should IIh proceed, r ea onset The training of personnel on the municipal court automated system j began several months ago, The system went online as of January 25, 1988, f Lq- i.oieg_and Procedures Observations There ate no 'written transaction methodolo policies ana procedure which define prooeasingo gy, work flow, eta, Eieoommendationt Develop a written Municipal Court policy ana procedures manual, the manual should incorporate the pr,ocedutal changes which result from an automated aystem, Re._mpcneeI A written policy and procedures manual is in place and being utilized in the current operation, This manual will continually be updated, revised and amended to achere to the net searY e changes brought on by an automated system, Delaitte, Naakins & Sella Audit Response Page 15, t warrants and parking T'lckets for There is a backlog of warrants misdemeanor traffic k ObaerVatlOftl offenses and un.ollootod parking tickets- to eliminate the backlog prior to the Reconanendstions DeVOlop a strategy automated system going on-line, bdcklo for misdemeanor traffic offense tickets in the Nunicipal Court area had will personnel in the work by the be been eliminated through effective J now operation of the Departmencntoll and hardaking tickets will pa Division. A report on uected ebruary 2, 1980. r Council on F pezeonne] Changes Observations There have been significant personnel and organizational problems in the Court areal ommendations Consider conducting a high-level review to develop an Rec in ractioalo organiz ate is a iStructure rthat ationaointoea framework thatiwilisb8 pand suprt the operational and administrative environment of the City Job design and ' the operational with p related human resource issues should be reviewed ` f h ' 11m o ses Personnel has completed its review on the majority of the I positions within the Municipal Court Clerk's area and the municipal Judge's anticipatcawithattha finaleidecisionrtregarding y h6mi They aposition, 18 It process dminiositior } that position will be mode within tha next week or soy The implementation of the organization structure Will allow for career growth that adheres to the L overall praotical operation and administrative guidelines of the City, 1 I 444 1 I y i i 3132F I' 61/28/88 i i i N t Delaitte •r E Haskins- f-Sells t 1400 Lincoln Plaza LB #4 Dallns, Texas 75201 1 (214) 984.4500 Ialex 732848 Writer's Diren( Dial Nutabor: I II1 i Mr. Lloyd Harrell City Manager City of Denton 215 E. McKinney Street E Denton, Texas 76201 Dear Mr. Harrell: # We have completed our review of the major financial reporting areas at the City of Denton, During this' review, we worked closely with key managerial personnel on the City of Denton staff as well as representatives of the # City Council, I In order to identify the reporting concerns, we. Interviewed key personnel including 1 John McGrane - Director of Finance Jay Anderson - Controller Lloyd Harrell - City Mana er y Rick Svehla - Assistant Cry Manager Robert Nelson Director of Utilitea ~M Betty McKean Assistatlt City Manager Gary Collins - Director of Data Processing Ray Stevens ~ Mayor Joe Alford Council Member Bryan Stewart . General Government L Gary Matheson - Police Department Reviewed key financial management reports ' presented the findings and recommendations to the City of Denton management team and council member s r During the review, certain improvement opportunities were identified by City personnel which, if acted upon could I. improve the financial reporting function, Additionallyq, certain procedural inefficiencies were identified which require further investigation, This report documents these improvement opportunities and their associated recommendations, i Of f I E i,, 7 A overview reectives Of gerrandgthejenhancements ' This report focisandoCha city Mana the City COunCi required in order for these objectives to be met. The e able review # City Council has a major objective uaingbconciaetnarratives the City's financial position by The City Manager has the that focus on budget exceptions4 reporting tatttheldepartment same for financial adition he responsibility head level. During Chia study, DH&S reviewed the major financial to ear head reporls,wh,ich Are disc yifinencialdreportsnshouldscontain month y ent head These informatonwith handcidentify mexceptioncsituationse In order for these financial performance which require comment 10 in providing actions information wisuch th as reports to be effective in p which bud at controls ca be maintained) the data, liistorica comparisons, needs of the reports makes it very Additionall , the timing b difficult for department heads to a responsive both Co 1 the city manager and the City Council. ; should s Based on our review, we believe three actions oliciesband s taken regarding financial reporting, First, p This abtian i Procedures should be :formalized at the City should ed util would focus on ensurind, ma axrequiremeneststudys provided by the AMS sy ro ect costing system required performed regarding the p Lastly, the for the utility and associated deic rtlanls'This plan City should formalize its strategic Strategic plan which , should include he Information ing department with would provide the dataprocess direction for system development and maintenance projects, Provided below are obinerv g re quirementS6 Thesegarens related to the reporting ci to citidata segregated into three major areast reportin counoi,l members; interns reporting and (i content.I i i i a A 3 REPORTING TO CITY COUNCIL MEMBERS observation The City of Denton council members are currently provided with monthly line graphs which pictorially depict budget status. These graphs illustrate budgeted to actual amounts for each fund. The graphs are distributed by the Director of Finance. The council members also receive a weekly newsletter from the City Manager which provides a narrative of the events for the preceding week. ' Recommendation After speaking to council members, it is believed a monthly narrative would be more helpful than line graphs. This narrative should focus on only the funds with adverse ' budget variances, The narrative should include: A comparison of last-year to this-year dollar actual amounts t A comparison of this-year actual to budgeted dollar 1 amounts i The reason for the budget discrepancy Steps which are being taken to overcome the discrepancy i The timeframe for overcoming the problem k The priority of this problem so as to emphasis its overall importance Every six months, a narrative should be provided to the h council members which provides a similar analysis for all funds. t f -3~ j' 'i F t'- I t INTERNAL REPORTING s Observation Currently, there is no automated reporting of last year-to-date versus this year-to-date information, This information would be helpful in determining if budget exceptions were actual exceptions or if the exceptions are caused by seasonal fluctuations, i Recommendation Data processing is currently in the preliminary design step for this modification. The question currently being considered by data processing is whether to maintain in the computer files separate monthly total amounts and accumulate these totals to arrive at the reported year-to-date total or maintain only year-to-date total } amounts . We suggest maintaining multiple month rot audit trail and r als for e orti p ng flexibility purposes. ' This report should contain the following information, by object code for revenues and expenses; I , Object code Description Current year period-to-date encumbrance, expenditures and revenues i Prior year period--to-date expenditures and revenues Current year-to-date encumbrance, expenditures, total obligations and revenues Prior year-to-date total expenditures and revenues Current year budgeted amount and not obligated budget balance , Current year budgeted percent remaining Prior year budgeted percent remaining, Y ! Additionally, all tax revenue is currently reported as one total amount. It would be helpful in managing revenues to report sales tax separately from the other takes, r I r k I 8 g I' 4 »4- I f i Observation Currently a report is produced at year end which provides a detail listing of transactions by object code for the entire year, This report (A611D) is in the same format as the monthly Trial Balance by Accounting Distribution report, The A6J.1D cannot be used as a trial balance as it ` does not provide beginning balances for balance sheet accounts, ` Recommendation 3 The accounting department with the assistance of the data processing department should develop written zy s ecifications regarding any required changes required to ! the A611D report,_ These specifications should include a simulated report which defines each column of the report { including approppriate column descriptions and }a calculations, This procedure should be performed for gF other future report modifications so as to provide data 4i processing with a "blueprint of the requested change, Observation i Currently no project cost reporting for the Utilities department exists for construction and other maintenance. While there is a plan to purchase a project costing system, requirements have not been formalized, ` Additionally, before the implementation of a rclect 3 costing system, a work order and labor dis pp must be implemented to provide needed information~n system 5h' ` Lastly, the City is also planning to purchase an inventory > system in the next r year. Requirements should also be formalized for this system. Recommendation i Requirements should be formalized before purchasing any ' i sofftware package, The formalization process should include meetings with all affected departments a reparing detail system requirements which will moot the s objectives. The system requirements list should provide a detail listing of 411 requirements (desired and required) with their associated timing and output mode r components, This list acts as an objective measuring tool when comparing application software alternatives. While the AMS system seems to be the best choice because of integration features, the system may not ; 3 of Denton with all of the data capture andrroporting City features required, t 'IJ a s r J f OPERATIONS DATA CONTENT Observation Currently, two reports are distributed monthly to the divisional managers, These reports aret f Detail Listing of Obligations vs, Budget with Percentages for Budget Fiscal Year 19xx, Trial Balance by Accounting Distribution The Detail Listing of Obligations vs, documents the available balance of budgetgecurrenttperiod and year-to-date encumbrances, current eriod and f year-to-date expenditures, and total obligations at the object code level,- The Trial Balance report is a monthly listing of transactions by object code. This report r pprovides the detail transactions for amounts on the Detail t Listing of Obligations vs, Budget report. These reports are currently produced approximately ten days after the close of the month. The report is distributed to Accounting by the data processing department. The accounting department is responsible for bursting the report by fund and distributing the report segments to the appropriate department managers. The i department managers are then responsible for distributing the report to the divisions, i Recommendation j The data processing department should consider a program change which would sort these reports by division by I fund, Data processing could then be responsible for bursting and distributing the reports in the same manner as they currently distribute non-financial reports. If it is determined these programming changes are not coat ~ Justified) an alternative distribution method should be evaluated, This alternative consists of distributing the 1 reports to the division managers and the department managers, This would require that two reports be generated, however, it would increase the timeliness of j delivery for the reports to managers, } i, r. , 7 - r 6 r - 1 i 1 L i i ! Observation It is difficult to perform analyses of accounts. Detail transactions are not maintained on-line because of disk and computer overhead requirements, Recommendation We believe maintaining all account detail on-line would be extremely inefficient, from both a computer and personnel standpoint, Additionally, by maintaining the detail on-line it would make the nightly batch processing ;.ycle I extremely time consuming and could lead to delays in report distribution. We suggest these transactions be maintained on magnetic tape, As a part of normal month-end processing, the year-to-date detail transaction tape would be merged with the current month's detail transactions. Th i!3 process would create a new year-to-date detail transaction tape which could be used to report account detail on request, Observation Many of the departments maintain a hand-written ledger of all departmental expenses incurred during the month, j There appear to be two dominant reasons for these procedures. First, expenses from outside departments are charged to the department's accounts. The receiving department does not receive notice of these expenses before they appear on their report, Second, the manual paperflow prevents the departmo nts from determining their ` total obligations during the iaont;h. For example, } purchases orders are entered into the system only after the bide have been secured, not at requisition time, This 1 entry may occur five days after the order has left the department. Recommendation 1 ~ Procedures should be reviewed to determine if the AMS I r system is being utilized to its fullest potential, f I j I t. i I fj • 7 r g~ r ~ I Observation Financial statistics, taken from the LGFS reports, are being input into the Wang word processing system or into ~ Lotus apresdsheets to allow for ad hoc raporCing, Tho American Management System a report writer function is not ~ being utilized by the user departments, The AMS report writer is perceived to ba extremely complicated to use and users have not been properly trained, t Recommendation Report writers allow system users to define reports without requiring extensive data processing support. However, rules must be d using the report writer £uriictionyaea~t requiresnoxtensive computer overhead and could adversely affect computer ' response time. ~ Training should be provided to the user community by AMSr If it is discovered that the AMS system is indeed too difficult,. then other report writer systems such as Mark YV developed by Tnformatios or Easytrieve should be investigated, Abetter reporting solution Chan that provided by a report writer may be acqquiring a fourth generation language aueh as Natural d Aa), Mantis (developed by Cinoom Syatems)lozePro~i~oftware (developed by F'ro Computer Soiences ~ ~ alYowing the users to do report wriCingTnthesett'purth generation languages would allow the data processing int grated withetheo~S~Qyete~a screens and reports t * * * * ~ ~ We have assisted in strategic planning and requirements definition i'or various governmental and commeroial F clients, Additionally, we have assisted to policy and u prooedure writittg and have perfeoted an eaey to maintain ~ ~ and.~ollow format,. We would be pleased to asst,st the City I , of Denton in any. of the aforementioned tasks. We i appreoiate the courtesies and cooperation extended to ua 1 during this review and thank you for allowing us to f participate in this pro,~eet, Very truly yours i bELOTTTE HASKYNS & SSLT.S i f , i 8 ~ t 'e:. i i ~I rr _ Deloitte f Haskinsd -Sells Intorrirst Tower 801 Cherry Street, Suite 2340 Fort Worth, Taxes 76102.6001 (817) 336.2631 Metro: 654-2777 Telex: 758612 The Honorable Mayor and December 4, 1987 City Council and City Manager 215 }3, McKinney i City of Denton, Texas 76201 li Dear Mayor, Council Members and City Manager: ' We have examined the financial statements and supplemental schedules of the City of Denton ("City") for the fiscal year s ended September 30, 1987, and have issued our report thereon } dated December 4, 1987, As part of our examination, we made a study and evaluation of the City's system of internal ~j accounting control to the extent we considered necessary to evaluate the system as required by generally accepted auditing standards, The purpose of our study and evaluation was to determine the nature, timing, and extent of the auditing procedures necessary for expressing an opinion on the City's general purpose financial statements. Our study I. and evaluation was more limited than would be necessary to I t express an opinion on the system of internal accounting t control taken as a whole, s The observations reported herein should be considered in the context of the responsibility of management for establishing F and maintaining a system of internal accounting control, the objectives of an inherent limitations on such a system, and I ` the definition of a material weakness for purposes of this tr, report, which are described in the Appendix of this report,, } Our study and evaluation made for the limited purpose described in the first paragraph would not necessarily disclose all material weaknesses in the system. Accordingly, we do not express an opinion on the system of !t internal accounting control of the City taken as a whole. However, our study and evaluation disclosed no condition that we believe is a material weakness, i c , I t' I 1 our examination did, however, disclose the conditions as set forth in the following table of contents that, although not considered by us to be material weaknesses, aro weaknesses in internal accounting control and other matters for which corrective action might be taken, This report is intended solely for the use of the City Council and 1 management and should not be used for any other purpose. We will { be pleased to discuss these recommendations; with you further and I to assist you in implementing them. i Yoursttruly, M f i I i i ~ i r 2 N :a I r P i n~ is 4 r TABLE OF CONTE p CASH RECEIPTS 4 Library 4 4 k Mail Remittance Machine j Y.ock 'Box ~ i PURCHASING 5 Written Quntati.ons 5 open Purchase orders 5 Bids 5 c Vendors Not Submitting Policies and Procedures € ACc OUNTxNG PROCF:DURRS 6 Lease Accounting* 6 s Cancellation of Documentation 6 Initialing Checks Greater Than $3,000 7 j Inventory Observation 7 Safekeeping, Receipts ! 7 f INTERNAL AUDIT* S B1lDGF.9` OFFICER* REPORTS 8 paratioOf the Grantee Pert~ormance Report* pre 8 Utilizing Re oport Writer Function* 9 CAFFTFPIA PLAN F DATA PRoCESS1NG 9 operations I. Passwords* 10 Program change control Computer Room Access* 10 Applications j Payroll 10 Access to Piaster Files I411NICIpAL COURT 10 Court System Implementation ll Court system Automation i1 1 r polici.ea and Procedures ll WArrants and Parking Tickets personnel Changes i 1 APPENDIX *140ted in prior year f: .4 ji Loll I . + u :p i C CASH RECEIPI$ z Library Observation: The library uses a cash register when collecting cas rece pts, however, the cash register tape is not sent to the s Cashier's office along with the deposit slips, checks and cash, I: Recommendation: In order to maintain tighter controls over cash rece ve at the library, the cash register tape should be forwarded to the Cashier, The Cashier should then ensure that the register tape agrees with the cash and checks collected, Mail Remittance Machine Observation Utility bills and property. tax mail receipts ..are pene o `m`anually, cash receipts are totalled and recorded manually, ` and credits to customer accounts are input manually, The process E ie slow, and does not allow for proper segregation of duties (City personnel have access to cash and records). Machines exist (which can be leased or purchased) which can "read" utility stubs and automatically record the credit to the customer's accounts, It is a much faster and more accurate t process than manual recording. It would also act as an additional control as City personnel would be required to balance cash received to credits to customers accounts. These or similar machines could probably also be used for property tax payments, d Recommendation: Consider leasing or purchasing mail remittance mac nes or utility bill and property tax receipts, F Lock Box I 1 Observation: The City does not use a lock box system to deposit cash receipts. Recommendation: Consider opening a lock box at the City's ( k I depository~`a'rik, A lock box system should strengthen internal i accounting, control and reduce the City's staff time involved in processing and depositing cash receipts, E < f i 1 E ! j t { r4r t, PURCHASING Written Quotations Observation; The City has an internal policy of requesting bids on items non-emergency) over $6,000. Bids are received by telephone and written quotations are seldom received. Recommendation: Written quotations should be received from all ` vendors requested to submit bids prior to the issuance of a f purchase order, i Open Purchase Orders i Observation: The City has over thirty (30) open purchase orders with various vendors. There are not written policies on utilization, purchase authorization and monetary limits. Recommendation: Review all open purchase orders and limit the number to only those absolutely essential for service provision. Written policies for utilization should be developed and incorporated in the Purchasing Policy and Procedure manual. All ` open purchase orders should be reviewed on an annual basis. Vendors not Submitting; Bids Observation; Vendors who do not submit a formal bid for items over ,000 are telephoned by the Purchasing Division and requested to provide a verbal reason for not submitting a cost quotation. Recommendation; A standard written format specifying reasons for not submitting a cost quotation should be developed and incorporated in the bid package. These forms should be returned to the Finance Director. E Policies and Procedures Observation.: The existing purchasing policies and procedures are ' not current and are under revision. tt: Recommendations Complete the revision for approval by the City R i. Ceunc . PYOCedures for the new automated inventory control f system, open purchase orders, written quotations for purchases of $6,000 to 10,000 and written guidelines for no bid response should be incorporated. 4 f i. a rill "I", r M i.Y ;A 3, ACCOUNTING PROCEDURES Lease Accounting Observation: Lease payments are not properly recorded in the genera a ger, Therefore, audit adjustments must be made at 1 year-end, } Recommendation: Use the lease payment/amortization schedules which the qty already maintains to properly record principal reductions and interest expense on capital lease payments, Cancellation of Documentation Observation: Several voucher packages were reviewed in which some or a of the pa es were not cancelled (stamped paid), r According to the City s internal control procedures every page in f the voucher package should be stamped as paid, f Recommendation: The City should take appropriate steps to ensure that eac page in the voucher packa a is stamped "paid" when the check is issued. For checks over $3,000, the cheek signer who reviews the documentation and initials the signed check should also note that the documentation has been appropriately cancelled. Initialing Checks Greater Than_3,000 Observation: Checks were noted which exceeded $3,000 but were not in tia ed by an authorized check signer indicating that the support was reviewed prior to release of the :heck, j ecommendation: The authorized check signer who initials checks I f+ exceeding , 00 should he provided with a check register at the time he is given the checks, He should then scan the cheek register for all checks written over $3,000 to ensure he has reviewed every one. s r ~ I i ~t Ise'; ~ { C E 3 ~d- i r~ Inventory Observation Observation: During the year-end utility warehouse physical inventory observation, we noted the following; Numerous mathematical errors were noted on the inventory count } tags. The inventory counts were not reviewed and tested by a second counter. Inventory instructions were not written, Recommendation: Each counter should be provided a calculator, All inventory counts should be tested and initialled by the second counter. Instructions for counting physical inventory should be printed and distributed to each counter. Safekeeping Receipts ' Observation: The City dose not receive original safekeeping recpts of the collaterial pledged against the City's bank deposits from the custodian bank. i Recommendation: Request the custodian bank to forward the i original sae eeping receipt to the City. This procedure would insure that the securities belonged to the City in the event of any bank uncertainties. INTERNAL AUDIT } ` Observation: Currently, the City relies on its system of interne accounting, control and annual independent audit to provide assurance that the financial statements are farily presented. While this reliance is adequate, an internal audit function would provide an additional control level and establish a system which would better monitor operations and the accounting x system of the City, j aeeommendation: Consider establishing an internal audit unon internal auditors' duties and responsibilities vary widely among cities. Frequently, internal auditors are involved with operational reviews and special projects as contrasted with ? j the traditional role of financial auditing, The internal auditor should have no authority over nor responsibility for the activities examined, In order for objectivity to be maintained, we suggest that the individual performing this function report directly to the City Manager and report semiannually to the Audit Committee of the Board. This type of arrangement should provide a level of internal control through segregation of responsibility and give the inrenal auditor the authority required to operate across departmental lines to beat perform the ,job, 7_ J i r BUDGET OFFICER i Observation; The city has not designated to one individual the respo~itY r.o review and investigate compliance by all City departments with the annual budget. Recommendation; Consider establishing a budget review function 6y e-it er es gnating a department or individual with the I overnight responsibility of budgetary compliance. i ;E Preparation of the Grantee Performance_Report Observations The Grantee Performance Report for the period In 7=86 7/18/87 did not reconcile to the general ledgger. { addition, one page of the report contained mathematical errors. } The report wag amended by CDBG office personnel after the errors t were brought to their attention during the audit. The Grantee Performance Report should be Recommendation. { prepared by the CDBG office using the accounting records/general ledger, A formal reconciliation should be prepared by CDBG and then reviewed and approved by the Finance Department, I f Utilizing Report Writer Function Observation: Financial statistics, taken from the LGFS reports, are being input into the Wang word processing system or into Lotue r spreadsheets to allow for ad hoc reporting or other changes. The American Management System's report writer function is not being utilized by the user departments. The AMS report writer is . perceived to be extremely complicated to use and users have not been properly trained. ) y f Recommendations Users should be trained to use the report writer j unction or other report writing systems should be considered. a r ~ a - 8 r 3 9FMERIA LM j Observation A cafeteria plan is a fringe benefit plan that } receives special tax treatment under Section 125 of the Internal Revenue Code. 'the plans allow employees to have qualified expenditures deducted from their earnings on a pre-tax basis. Some of the most significant qualified expenditures are group } inaurance deductions, child care deductions, and medical reimbursement account deductions. Recommendation: Consider establishing a cafeteria plan as it coin be an -eTfective and efficient tool for improvingg the aomponsAtion package offered City employees. It could increase employees take home pay and enhance their job satisfaction. 4 )JQA PROQESSING OPRRATION5 i Passwords Observation: Passwords are not changed on a timely basis. Curren` ` tly,~passwords are protected only once a year. To provide adequate confidentiality of passwords, they should be changed more frequently. Additionally, programmer log-on identification codes and passwords are taped on the wall in Data Processing allowing accessibility to unauthorized personnel. Recommendation: Institute mandatory procedures for a more f reqquent ai consistent change of passwords, for example p every 30 to b0 days. Protect the confidentiality of. programmer log-on j identifications and passwords by emphasizing to the proggrammers 1) that any transaction' executed using his password will be his responsibility and 2) all log-on identifications and passwords should be memorized. A library of all passwords should be controlled by the Data Processing Director in a protected computer } file or under lock and key. f Proxram Change Control i E Observation: Unauthorized changes may be made to production programs, Program changes are seldom made because the majority of the software is purchased. However, programmers have unlimited access to the source code. A transaction/activity log is produced but not reviewed on a timely basis. Recommendation: Review the transaction/activity log on a ' a periodic to determine that all programs and program changes were authorized. F g. i Computer Room Access Observation: The operations area is accessible to all Data Process in personnel. The operations area has three rances$exits. One doorway is secured by a combination lock ant / while the other two are secured by lock and key. All Data _ Processing personnel, including programmers, have knowledge of the combination. Access to the computer room should be allowed only to authorized operations personnel in order to prevent any tampering or accidental destruction of files and equipment, f Recommendation: Restrict access to the computer room to authorized operations personnel. Periodically change the i combination to ensure security. APPLICATIONS Payroll Observation: One individual in uts the payroll data, and rev e ws, Salances and approves the batch transaction report, E Recommendation: An individual independent of the payroll data Input personnel should review, balance and approve the batch transaction report, F ~ Access to Master Files Observation; The Personnel and Payroll Department personnel have ! un mited access to the Pa roll/Personnel master file allowing ? unauthorized individuals the capability to add, change or delete ' master file records. The Employee Information System ("Elsti) extended security system is being approved for implementation in i 1 the near future to control access to authorized users. Currontly, both Personnel and Payroll receive all transaction reports to review each other's inputs, changes and deletons. Recommendation: Continue the implementation process for the EIS eaten ed security system to ensure that only authorized changes t are made to the master file. KUNIMAL OURT Court System Im»leroentation Observation: The new court system implementation has been t `sg cantly delayyed due, in part, to lack of defined user responsibility. 'Che role of a user champion, with appropriate t authority and responsibility, is a critical success factor for new system installations. This Situation has been compounded by extensive turnover of user personnel. r] 10 s II 1 Recommendation: Each system installation should be ggiiuided by a tiser steer 09 committ necessary authority and definedcresPYOnsibilityifordsuccesaful implementation. i f' Court System Automation Observation: The City is currently utilizing a manual system for processing court transactions. f The Recommendation: Analyze automation of court functions. qty as ex sting software which was provided at no cost by another Texas municipality, The City should ensure tha~: the i software meets identified user requirements. If so, the f implementation of the automated system should proceed. Policies and procedures Y, Observation: There are no written policies and procedures which ' e ne transaction processing, methodology, work flow, etc. Recommendation: Develop 9 written municipal court policy man procedural should incorporate the { tral. The manual ,V proce ure changes which result from an automated system. Warrants and Parkink, Tickets Observation: There is a backlog of warrants for misdemeanor tra c -Menses and uncollected parking tickets. Recommendation: Develop a strategy to eliminate the backlog. ~ prior to~the automated system going on-line.. _ personnel Changer,. fl Observation: There have been significant personnel and v or.gasonal problems in the court area. E Recommendation: Consider conducting a high-level review to develop an organizationai structure that combines required activities and supppport functions with improved operations into a framework that will be practical in the operational and E Administrative environment of the City. Job design and related t human resource issues should be reviewed. j r 1 z 1 i M t k j ~ w 1 APPENDIX ' MANAGEMENT'S RESPONSIBILITY FOR, AND THE OBJECTIVES AND I LIMITATIONS OF, INTERNAL ACCOUNTING CONTROL AND THE DEFINITION OF A MATERIAL WEAKNESS The following comments concerning managementrs responsibility for internal accounting control, the objectives of and the inherent limitations of a system of internal accounting control, and the definition of a material weakness are excerpts from Statements on i Auditing Standards of the American Institute of Certified Public Accountants, Management's Responsibility Management of the Company is responsible for establishing and ~ maintaining a system of internal accounting control, In fulfilling this responsibility, estimates and judgments by management are required to assass the expected benefits and related costs of control procedures. Ob,jeccives I The objectives of a ayystem are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles, Limitations ! Because of inherent limitations in any system of internal accounting control, errors or irregularities nevertheless may occur and not be detected, Also, projection of any evaluation of < the system to future periods is subject to the risk that procedures may become inadequate because of changes in conditions I or that the degree of compliance with the procedures may } detoriorate, Material Weakness E A material weakness for the auditor's purpose is a condition in which the sper,~ific control procedures, or the degree of compliance with them, do not (in the auditor's judgment) reduce. to a relatively low level the risk that errors or irregularities in I amounts that would be material in relation to the financial statements being audited may occur and not be detected within a r, timely period by employees in the normal course of performing their assigned functions. These criteria may be broader than those that may be appropriate for evaluating weaknesses in accounting control for management or other purposes, is t I~ ' `I a y ti OF I Y I I 11 . j 1