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HomeMy WebLinkAbout09-1967 ~k b ti ~JJ til CITY OF CENTON, TE%1.S Report on Internal Control n and Accounting Procedures Stptembor 30, 19f37 3 r PEAT, MARWICK. MITCHELL & CO. CIR lrlffD PUIL1C ACCOUNTANTS PEAT, MARWICK, MITCHELL & CO. CERTIFIED PUBLIC ACCOUNTANTS 2U N. ERVAY BUILDING DALLAS (TEXAS 26201 February 13, 1968 Mr. Brooks Holt, City Secretary City of Denton, 'texas Munioipal Ruildi;ig Denton, Texas Dear Mr. Holt: We &7e enclosing one (1) copy of our report on internal control ;wA accounting prooedwa s of the City of Denton, Texas as of beptember 30, 1967. Pursuant to our instructions from the members of the City Council, we request that you file this report as a part of the public records of the City of Denton, Texas. Yours very truly, PEAT, MARNICX, MITCHELL do CO. ( W-"e A. H. loud, Partner AHC: f 1 Eno. 1 PEAT, MARWICK, MITCHELL & CO, CERTIFIED FUDLIC ACCOUNTANTS 2U N. ERVAY BUILDING nAI.I.AS,TEXAS 26201 December 28, 1967 COWIDENTIAL The City Council City of Lenton, Texas Gentlemen: In the course of our examination of the -ecords of the City of Denton, Texa.- foe the year ended Sep`,ember 30, 1967 we reviewed car:3in of the accounting procedures and the system of internal check and control. In connection therewith we submit the following comments and suggestions for your consideration. By the term internal check and control, we refer to the plan of organization and the methods and measures adopted within an organization to safeguard itg assets, to check the accuracy and reliability of accounting data, to promote operational efficiency, and to encourage adherence to managerial policies. Two of the basic elements of sound internal check and control are (I) a system of authorization and record procedures adequate to provide reasonable accounting control over assets, liabilities, revenue and expenses, and (2) appropriate segregation of functional responsibilities both at the departmental level and at the individual employee level. This segregation of resnonsibilities is based on the principle that no person should control all phasjs of a transaction without the interrelated func- tioning of some other person cr persons, which affords a cross-check on a routine day-to-day basis. Having regard to the test character of our examination, which did not include a detailed check of all transactions, it should be appreciated that reliance must be ,laced on adequate methods of internal, check and control as the principal safeguard against irregularities which a test examination may not disclose, i CASH RECEIPTS Cash Receipt Forms Our review of the City's procedure for "over the counter" cash receipts indicates that unissued cash receipt forms are not under the physical control of a person independent of the cashier functions therefore, accountability for issued receipt forms does not exist. 2 We suggest that the following recommendations be adopted to improve the control over cash receipts: 1. Assign the responsiblity for the physical custody of unissued cash receipt forms to an individual independent of the cashier. 2. Develop a record for issued receipt forms. This record should indicate the series of receipt form numbers issued, to whom the form was issued, and the date issued. In this manner, control over issued receipt forms can be maintained and missing or out-of-sequence receipts mny be traced to the responsible person. SSyimminQ Pool Receipts The present procedures and records for swimming pool cash receipts fail to provide adequate accountability. Accountability could be provided by a daily report which would indicate by ticket category: the beginning numbers; the ending numbers; the amount of cash to be received; the amount of cash actually received; and the amount of cash over and short. Periodically an independent check should be made to determine that the ending ticket numbers reported on the daily report for each category are correct. CASH DISBURSEMENTS Disbursement Support We observed instances in which disbursements were supported by photostatic copies of invoices. To avoid the possibility of duplicate payments, we suggest that pay- ments not be made from photostatic invoice copies, and that all vendors be requested to submit original invoices. Travel Voucher Support Travel vouchers do not always contain sufficient support to substantiate payment or reir.bursement. We suggest that support be required for hotel, transportation and other major charges for which receipts normally can be obtained and that these be attached to the voucher as support for the disbursement. GENERAL LEDGER AND JOURNAL ENTRIES Journal Entry Descriptions At present, many journal entries contain insufficient narrative to explain the purpose of the entry, and include no reference to the source of the information. We recommend that journal entries be prepared with complete descriptions. The supporting documents should be attached to the entry or the entry should contain references to appropriate supporting documents. 3 UTILITY RECEIVABLES Balancing Utility Receivables Presently there is no established procedure for balancing detail utility receiv- ables to the general ledger control account. Failure to balance the accounts periodically may allow mispostings, unapplied remittancr,n, and other errors to remain undetected for extended periods of time. We discovered during our exami- nation one instance in which penalties billed to custorn,rs were not entered in the general ledger. Errors of this nature should ce Oiscovyred by the operation of normal, routine accounting procedures. We recommend that separate control accounts be established in the general ledger for each of the three utility billing cycles now in use. Each cycle should be balanced monthly immediately subsequent to the billing date. At least annually, all cycles should be balanced to their respective control accounts simultaneousl:% Late Utility Billings At the start of our examination, utility billings were late in preparation and mailing by approximately 30 days. The billing delays increased to 60 days by the completion of our work. We were informed that the delay had occurred due to difficulties encountered in converting to computer accounting during the year. The City recently has replaced the initial computer with a different computer and another conversion process is neces3ary. The delays in billings, and subse- quently in cash receipts, have resulted in substantial cash balances being tied up in accounts receivable. Further, the delayed billings may result in the City's incurring additional losses on uncollectible accounts which can result from the lack of information necessary for collection efforts. We suggest that the City give immediate consideration to this problem. Utility Billinc Procedures The utility billing procedures in effect during our examination were inadequate in many respects. Numerous errors were noted, documentation was inadequate, and in some cases we were unable to locate basic records. These weaknesses indicate that planning for the initial computer conversion was inadequate and follow-up procedures were ineffective. We suggest that the results of the present computer study be reviewed ar.d ilr.plemented to insure that prior weaknesses in documentation, record retention and suppor', are not carried forward into the new system, TAXES RECEIVABLE Balaneine Taxes Receivable Our examination revealed that subsidiary taxes receivable records are not recon- ciled or balanced to the general ledger control accounts. It is imperative that such subsidiary records be balanced to controls periodically to maintain control over cash collections and the delinquent statements sent to taxpayers. 4 We recommend that, the detail ledgers be reconciled to the control account3 period- ically. Differences should be investigated and adjusted with proper approval. Miscellaneous 'fax Adjustments Miscellaneous tax adjustments were net adequately supported and bore no evidence of review or approval. We have been informed that steps have been taken to have these items approved by the Council monthly. Tax Payments Tax payments for the period from September 30, 1967 tc the date of the completion of our examination had not, been posted to the detail receivable records. We were also informed that tax statements due October 1, 1967 were not prepared or mailed on time. We believe steps should be taken to post and balance the detail records as soon as possible. Without the cross-check afforded by detail receivable records, con- trol over cash receipts is severely impaired. Also, little or no collection effort can be made until the receivable records are posted currently. CORPORATION COURT Traffic Tickets Our review of the City's procedures for the processing of parking and moving violation traffic tickets indicates that little or no control exists for ticket accountability. We recommend that: 1. The responsibility for the physical custody of unissued parking and moving violation traffic tickets be assigned to an individual independent of the corporation court or police department. 2. A record be developed for issued supplies of parking and moving violation traffic tickets. This record would indicate the series of ticket numbers issued, to whom the tickets were issued, and the date tickets were issued. In this manner, control over issued tickets can be maintained and missing or out-o:-sequence tickets can be traced to the responsible person and appropriate action can be taken. 3. A numerical sequence file of all moving violation tickets issued to violators be maintained, which would include both paid and unpaid tickets. Fine Differences We noted instances in which fines collected for moving violation tickets and warrants were less than the amounts published in the standard fine list and were not approved by the Corporation Court Judge. 5 We recommend that the written approval of the Corporation Court judge be obtair,ed prior to collection of fir:cs for less than standard amounts. "No Driver's License" Violations The Corporation Court clerk making cash collection3 also tins authority to dismiss traffic tlt-kets for a "no driver's license" violation upon presentation of a valid driver's license by the violator. We understand that these duties are to be segregated and a central cashier estab- lished when the new municil-;1 facilities are completed. Separation of these duties will correct this weakness. Open Tralfic Cases Our review of the Court docket indicates many cases for which no disposition has been made. We recommend that the docket be reviewed periodically during the year and appropriate action taken which will provide the City with a timely, current docket. We further recommend that an individual. with no cashiering duties post entries to the Court docket. INVENTORIES Several weaknesses were observed in the inventory controls and record-keeping procedures. These weaknesses and the lack of proper planning and supervisicn of the physical inventory necessitated a 100% recount of certain sections of the inventory. The recount required a considerable amount of time for both our staff and City personnel. Folliwing is a brief' description of our recommendations: 1. Physical taunts should be made of all items. 2. Physical inventory counts should be made by a person or persons other than inventory custodian. 3. Physical counts should be based on numbered tags or ether con- trollable system. 4. Perpetual records should be adjusted currently tc physical counts, A general ledger control account. should be maintair.ed. 6. Perpetual records should be balanced periodically to general ledger control account. 7. Perpetual inventory records should be maintained by someone other than the custodian. 8. Inventory stored ir. all locations should bo under control of the custodian. 9. Procedures for reporting slow moving or obsolete stock shouli be adopted. 10. Effective review procedure for testing Storeroom requisition com- putations should be adopted. 6 Because of the weaknesses in internal control and the lack of adequate records, we were unable tc form an cpinion as to the fairness of presentation of the statement of earnings of the Working Capital Fund, which accounts for the City's Inventories. We suggest that steps be taken to correct the weaknesses at the earliest possible opportunity. f I PURCHASING Competitive Bids We noted one instance in which the c.iarter provision requiring competitive bids on purchases over $1,000 had been avoided by the 'splitting" of purchase orders. We were advised that this was necessitated by an emergency situation. We recognize that situations may arise which require the deviation from normal procedures; however, purchases which exceed $1,000 should be brought to the council's attention for approval. Recce ivina Reports on Partial Receipts It came to our attention that in some instances receiving reports were not prepared for partial shipments received by departments. Control over receipt of goods and open accounts would be strengthened it' receiving reports were prepared for all goods received, including partial receipts. FIXED ASSETS Fixed_ Asset Detail Records and Inventory There are, at present, no detailed records in support of the fixed asset balances being maintained in General Fixed Assets, Water and Sewer Fund, Electric System Fund and Motor Pool Fund. The maintenance of fixed asset balances without sup- porting records to show the substance of such balances is of limited value or benefit in that the accuracy of' this control cannot be verified to existing assets, nor can such balances be properly relieved for trade-ins or retirements. We suggest that the City consider taking a physical inventory of all fixed assets to establish detailed records. All movable fixed assets should be tagged or other- wise 4dentified so that they can be traced in the future. Detailed records containing pertinent information, such as description, City identification number, cost, date of purchase, vendor, depreciation iatcr (where applicable) and pur- chasing fund should be prepared on all future asset acquisitions. UTILITY DEPOSITS Balancing Utility Deposits As required under present ordinances, the City collects deposits from customers to offoet losses that may be sustained because of nonpayment of utility bills. We were advised that the detail deposit records are not balanced periodically with the general ledger control account. We recon,m,end that these detail deposit records be balanced periodically to determine that all deposit transactions are properly recorded. In this respact, we suggest that subsidiary control accounts be established. If this were done the detail records could be balanced to the appropriate subsidiary control account on a cycle basis in such a manner that all deposit acccunts could be balanced at least once each y°ar. The subcontrol account totals should be bal- anced monthly with the general ledger control account maintained in the Finance Department. BONDED DEBT Bond Paving Agent Cash accounts Cash accounts held by bond paying agents are: not being reconciled with the City's rerrd of unpresented bonds and interest, coupons. These accounts represent cash assets of the City and proper control requires that they be reconciled periodi- cally. The failure to reconcile these accounts has resulted in certain paying agents' foes being charged to the cash accounts but remaining unrecorded by the City. Remittance and Cancellation of Paid Bonds and Coupons The local bank which acts as paying agent has not been remitting presented bonds and coupons on a timely basis. Also we observed that some fully negotiable bonds had been paid by the bank and returned to the City without being cancelled. We suggest that the paying agent be requested to remit presented bonds and coupons on a regular basis and that it ba informed of its failure to cancel effectively the bonds. Compliance with Bond Ordinances We noted that the City has not fully complied with requirements set forth in its revenue bond ordinances requiring the maintenance of a restricted account and the designation of a specific bank, in Dallas, as trustee. We recommend that the Director of Finance and the City Attorney review all provisions con- tained in the revenue bond ordinances and take the necessary action to comply with the requirements of the ordinances. PAYROLLS We obsert•ad that payroll procedures do not provide for rotation of persons dis- tributing the payroll checks. We suggest that distribution of payroll checks, particularly to field and plant employees, be observed periodically on a surprise basis by an employee of the Finance Department. ACCOUNTING PROCEDURES AND MANUAL We recommend that the City conduct a comprehensive review of its accounting and finance related procedures to correct the deficiencies set forth in this letter., and to improve other procedures. The weaknesses in internal control and account- ing procedures described in this letter make it difficult to detect and fix responsibility for potential losses. Such a situation places undue responsibil- a ities ou the City employees and provides them 'with insufficient protection in the event of a loss. As sound accountins and financial related procedures are developed and implemented, an accounting and finance manual should be prepared which would document the st ps required to perform particular functions. The m9nual would facilitate the training of new employees, fix responsibilities, and contribute to increased effectiveness of the City's administration. GENERAL The time required for the completion of our examination was measurably increased due to errors and conditions regarding internal control with which we were con- fronted. Considerable amounts of our time and of City employees' time were epent in reconciling differences in accounts receivable and inventories, and in analyz- ing other accounts or errors. These circumstances delayed the preparation of the annual report and the completion cf our examination. it We take this opportunity to express our appreciation for the courtesy and assist- ance received from all of the City officals and employees with whom we were in contact during the course of our examination. We shall be pleased to discuss with you at your convenience any of the matters to which we have referred in this letter. Yours truly,