City’s 2010 state audit report shows findings
The City of Granite Falls just received their findings on the 2010 audit performed by the Washington State Auditor’s Office, which stated that the City’s internal controls over financial reporting were inadequate to ensure accurate reporting.
The state identified the following deficiencies in internal controls over financial reporting that, when taken together, represent a significant deficiency:
• The City did not perform monthly bank reconciliations on a timely basis for November and December 2010. This was noted in the prior two audits.
• The City did not perform an independent review of its financial statements after they were prepared to ensure the statements were accurate, complete and adequately supported. This was also noted in the prior two audits.
• The City did not conduct a review of journal entries prior to being input into the City’s accounting system. In addition, the City did not maintain support for the journal entries made.
“We haven’t had a full-time treasurer. We have advertised for one but are not getting qualified applicants. In the meantime we are making sure that these things don’t happen,” Granite Falls Mayor Haroon Saleem said.
The Auditor’s report stated, “The City did not make it a priority to review adjustments, complete monthly bank reconciliations and properly review financial statements prior to issuing its financial statements. City employees responsible for the preparation and review of the financial statements did not appropriately prioritize the review of financial statements after the financial statements had been prepared.”
The concern is that by not following the above guidelines the City is at risk of missing errors or not being aware if funds are being misappropriated.
The City did respond to the report saying that during the year 2010 monthly bank reconciliations were completed in a timely manner and reviewed by a Councilmember for the months of January through October. The explanation for the neglect of performing the reconciliations for November and December of 2010 was because of the termination of the City’s Treasurer.
“During the time of the preparation of the 2010 financial statements, a new Treasurer was hired and undergoing training. As a result, completion of the statements was not accomplished until near the required filing date with State Auditor Office,” the City told the Auditor’s office.
They also said the City Staff is in the process of exploring the possibility of having the annual financial statements reviewed by a neighboring agency each year after completion and prior to submittal to the State Auditor.
“City Staff will provide documentation to support journal entries and will have such journal entries reviewed and approved,” the City stated.
The Auditor’s office is also concerned that the city’s financial condition has declined over the past five years.
During fiscal year 2006 the current expense fund ending balance was $271,985; for 2007 was $659,145; 2008 was $410,008; 2009 was $61,295 and in 2010 the balance was $100,872.
As of October 31, 2011, the Current Expense Fund had a deficit cash balance of $41,451.
The Auditor reported that, “In January 2010, the City approved a $350,000 inter-fund loan from the Water Fund to the Current Expense Fund. The City amended the loan terms to extend the original loan repayment from two years to three years in July 2010 and again from three years to five years in December 2010. That exceeds the three-year guideline in the Budgeting, Accounting and Reporting Standards (BARS) manual and could be considered a permanent diversion of funds. At the time the City Council approved the loan, the City’s Current Expense Fund was not projected to have sufficient resources to repay the loan in two years.”
The biggest concern with the audit was that we are running a negative balance for certain parts of the year between the times we receive property taxes,” Mayor Saleem said. “We have come up with a formal review and had some talks with the council and have decided that this year we will borrow $50,000 from the water fund and then we will pay it back as soon as we receive the property taxes in October.”
The other concern is that the City operates an Equipment Fund which is a cumulative reserve fund used for equipment acquisition. Other City funds, including restricted funds, transfer money to this fund based on budgeted equipment costs. All equipment purchased by this fund is owned by the contributing fund.
“Through October 2011, the Equipment Fund had purchased equipment for the Current Expense Fund for $37,068; however, the Current Expense Fund had not contributed any money for these purchases as of the end of 2010. Therefore, the Current Expense Fund benefited at the expense of the restricted funds.”
According to the report, the State Auditor’s Office is concerned that the city cannot continue to provide services at current levels. When the city has to borrow money from other funds to cover expenses, it is concerning as to the financial well being of the city and its future.
“The City violated state law when its Equipment Fund used restricted resources from other funds to purchase equipment for the benefit of the Current Expense Fund,” the report states.
The City responded to the report as follows: “City Council and Staff are actively working to identify areas of operation that can be modified in order to reduce operating costs. The city is currently contracting out the treasurer position and is looking at the option of continuing with a contract employee or hiring a full time employee to fill this position in 2012.”
The City is continuing to work on long-term solutions to the financial woes they are facing. One option they are seriously contemplating is to contract with the Snohomish County Sheriff’s Department for police services.
“It could save the city around $150,000. That would help with the auditor’s concerns. The auditor is satisfied that as long as we are making payments and follow procedure then we are ok,” Saleem said.