In response to popular demand, I decided to go ahead and post my analysis of the Town of Oriental's preliminary audit for FY 2008. This is decidedly unofficial and represents only my own views. These views are subject to refinement.
ORIENTAL 2008 AUDIT COMMENTS
Control Deficiencies (pp 45-46)
1. Expenditures made by the general fund (FY 2007) exceeded authorized appropriations by $1,089 (tourism board) and $692 (environmental). Comment: This comment reflects three separate problem areas: (a) The excess tourism expenditure resulted from the tourism board taking unexpended budget from FY 2006 and "rolling it over" into 2007 without budgeting it. This has been going on for years and violates budgeting 101. Each FY must be budgeted separately; (b) The $692 was a result of late unanticipated billing from contractor installing effluent system. That contract was a can of worms. The error also reflected advice from our previous auditor that we don’t have to do line-by-line balancing of the budget, but only department by department. Under NC state rules, that is incorrect.
2. Petty cash: no adequate accountability and proper record keeping. Comment: the town did not even keep a petty cash ledger. This problem existed for many years. The ledger should have been maintained in our accounting system software. The problem no longer exists because the former petty cash system has been replaced by the use of town credit cards.
3. Invoices paid not defaced. Comment: we weren’t using a “Paid” stamp. Easily correctible.
4. Personnel files do not include the current year approved wages. Comment: should be easily correctible. Being addressed.
5. No schedule of accrued vacation hours by employee maintained. Comment: this function was available in our accounting software, but wasn’t being used.
6. Financial records need to be filed systematically. Comment: filing system is being revised.
7. Powell bill report for June 30, 2009 does not balance. Expenses understated by $3001.10. Comment: This error in the July 15 report was corrected in an August 26 amendment to the report.
8. Budget amendments made only at year end. Should be monitored continuously and amended as needed. Comment: I agree.
9. Town is billing approximately 63% of gallons pumped from wells monthly. Comment: In general, 12 – 15% waste is about normal. What we have is unlikely to be a billing problem. Water is leaking somewhere. Or it is being used through unrecorded and unread meters. This sounds like a problem with the physical plant, and it needs to be investigated. Good task for a reconstituted water board.
10. Late fees for water and sewer service not charged consistently. Comment: we have no late fees. What we do have is reconnect fees when water is disconnected due to non-payment or at customer request. It may be that some reconnect fees were forgiven due to disconnect being in error or other reason. In any event, reasons for forgiving reconnect fee should be recorded and approved. A water board should recommend policy to the Town Board.
11. Water deposits, sewer deposits and prepaid bills all recorded in same account. Comment: this seems to be a longstanding procedure. Practice needs to be reviewed by the water board.
12. The general fund charges the water fund $4,000 per month for administrative services. No documentation of how this is computed. Comment: I raised this issue during this year’s budget cycle. Turned out the amount was last calculated in 2001 and not recalculated for eight years, even though we had hired additional personnel, the water testing and other system requirements had grown, and much more public works time was spent on the water system than in 2001. There were other omissions, such as failure to estimate gasoline expense for meter reading. I calculated the general fund had subsidized the water fund about $150,000 between 2001 and 2008 and the annual charge should now be $82,000 instead of $48,000. We took steps in this budget cycle toward correcting this. Not mentioned in the list of control deficiencies, but another shortcoming in financial management of the water system is the failure to provide for system depreciation. Bottom line is that we are still losing money on water. The water board needs to review this before the Rural Water Association comes in February 2010 to assist in reviewing our rate structure.
Material Deficiencies (pp 46-47)
1. Segregation of duties is an on-going issue. Comment: I agree with auditor’s comment “this weakness is impractical to correct at this time due to a small staff.”
2. Bank reconciliations are performed by employees who are not independent of the recording duties and are not reviewed or approved by a second party. Comment: our only realistic possibility of meeting this requirement is to enlist the services of a member of the town board for reconciliation. I thought we were doing that.
3. Upon examining the collections drawer it was noted there was approximately $7,000 on hand with some checks 14 days old. Comment: the auditor fails to mention there was no lock on the drawer. Delaying deposits of cash and checks costs money (loss of interest) as well as presenting a security problem. There may have been a misunderstanding on the part of some office personnel that daily deposits would cost the town additional money. Our new manager discovered that was not so. Daily deposits are now being made. We should also take a look at our office safe. There should be a safe suitable for depositing money.
4. The town does not have a purchase order system in place. Comment: I will put this as politely as I can. For years, the town has submitted an annual report to the Local Government Commission claiming to have a purchase order system in place. It never did. Now it does.
5. No listing of journal entries for the year with supporting documentation. No approval process before journal entries made in the accounting software (Peachtree). Comment: a longstanding procedural shortcoming, now being corrected.
6. Town does not maintain a fixed asset ledger. Comment: Office personnel insist there is such a ledger. None has been found.
7. No computer security controls in place. Comment: About six months ago, the town manager recommended a system replacing our existing aged computers with new ones and incorporating a network server. This proposal would have addressed the security issue as well. No action was taken, except to replace the computer used for water billing when it died last month. This project should be pursued.
8. No approval process for utility adjustments. Comment: Most adjustments are made by Bay River. They are the approval authority. It may be that we should formalize approval of each request to Bay River. Adjustments to water bills sometimes result from misread meters. Policy for making and approving adjustments should be based on water board recommendations.
9. Water extensions not monitored effectively. Comment: this may not be accurate. On the other hand, it might be that this and other water system issues should be addressed by our Water Board. We have had a Water Board in the past, but we seem to have no ordinance establishing it, setting terms of reference for its duties, etc. The last time the board is recorded to have met is more than two years ago.
10. There is no reconciliation process for water payments collected. Comment: This may not be accurate. This could be another topic for review by the water committee.
11. There is no contract in place with Bay River. Comment: The town has been negotiating with Bay River to correct this omission for several months. As a separate issue not addressed by the auditor, the town needs to negotiate a number of additional inter local agreements or memoranda of understanding with the county, including the Sheriff’s Department and Animal Control.
The list of deficiencies is nothing to lose sleep over. The most important of them (except for the cash drawer) had already been identified and were being addressed by the Town Board before the audit began. Most importantly, I think, is the apparent need to reestablish an effective Water Board.