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Fiscal Year 2012 Management LetterTOWN OF NANTUCKET, MASSACHUSETTS MANAGEMENT LETTER YEAR ENDED JUNE 30, 2012 The Honorable Board of Selectmen Town of Nantucket, Massachusetts In planning and performing our audit of the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the Town of Nantucket, Massachusetts (Town), as of and for the fiscal year ended June 30, 2012, in accordance with auditing standards generally accepted in the United States of America, we considered the Town’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the Town’s basic financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Town’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Town’s internal control. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or a combination of control deficiencies, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected by the entity’s internal control. A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity’s internal control. We consider the following deficiencies to constitute material weaknesses: • Inadequate design and operation of internal control over significant accounts. • Failure to comply with procurement laws and regulations. During our audit we became aware of several additional matters that are opportunities for strengthening internal controls and operating efficiency. The memorandum that accompanies this letter summarized our comments and suggestions concerning those matters. The Town of Nantucket’s written responses to the comments identified in our audit have not been subjected to the audit procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them. This communication is intended solely for the information and use of management of the Town of Nantucket, Massachusetts, and is not intended to be and should not be used by anyone other than these specified parties. We have already discussed these comments and suggestions with various Town personnel, and we will be pleased to discuss them in further detail at your convenience. October 31, 2012 TOWN OF NANTUCKET, MASSACHUSETTS MANAGEMENT LETTER JUNE 30, 2012 TABLE OF CONTENTS Page Material Weaknesses ..................................................................................................................................1  Inadequate Design and Operation of Internal Control Over Significant Accounts.......................2  Failure to Comply With Procurement Laws and Regulations.........................................................4  Other Matters ...............................................................................................................................................7  Prior Year Comments ..........................................................................................................................8  Account Activity Reconciliation.................................................................................................8  Accounting For Trust Fund Balances........................................................................................8  Fraud Risk Assessment ..............................................................................................................9  Accounting for Off-Duty Police and Fire Details ......................................................................9  Insurance Withholding Deficits................................................................................................10  Accounting Separately for Bond Proceeds.............................................................................11  Invoice Receipt Procedures......................................................................................................11  Purchase Order Dates ...............................................................................................................12  Capital Assets Land Monitoring...............................................................................................12  Current Year Comments ...................................................................................................................13  Documented Cost Allocation Plan and Indirect Charges for the 3(c) Transportation Grant....................................................................................................13  Unsupported Liability Balances ...............................................................................................14  Prior Year County Comments...........................................................................................................14  Vendor and Payroll Accounts...................................................................................................14  Unnecessary Bank Fees............................................................................................................15  Current Year County Comments......................................................................................................15  Account Reconciliations for Nantucket County .....................................................................15  1 Material Weaknesses 2 MATERIAL WEAKNESSES Inadequate Design and Operation of Internal Control Over Significant Accounts For several years control deficiencies have been identified and reported to management related to the timely reconciliation of significant accounts such as cash, interfund receivables and payables and accounts receivable. During the last few months of fiscal year 2011, and throughout fiscal year 2012, the Town has taken a systematic approach to addressing each of the previously identified weaknesses, and has made significant progress. The process of reconciling accounts such as cash and interfund receivables and payable (due to/from accounts) and accounts receivable on a monthly basis has provided the Town with greater assurance that all financial activity has been reported in the Town’s general ledger. An additional and equally important step in the process of verifying that all activity is recorded accurately is to reconcile the balances and activity in the general ledger to the supporting documentation. This process would identify activity that may have been recorded in the wrong account or fund, which could have a significant impact on management decisions and the Town’s financial position. This step is typically accomplished through monthly reconciliations of account balances with the individual departments responsible for the activity and through reconciling appropriation balances with departments. The Town has deferred the implementation of this process. Management must rely on the financial information generated through the Town’s ledgers to make decisions that affect Town strategy in developing and meeting short-term and long-term financial goals. Consequently, management must be confident that the information they base their decisions on is complete and accurate. We recognize that the Town has taken significant steps in improving controls by reconciling cash, interfund receivables and payables and accounts receivable and through addressing many of the legacy account variances that have been carried for several years. However, the Town’s internal control system must include a process for verifying that activity has been accurately recorded within the Town’s records for the system to function as intended. The status of previously reported internal control deficiencies are as follows: Prior deficiencies considered resolved: • Maintaining Zero Balance Vendor and Payroll Accounts - For several years we have recommended that the Town maintain the vendor and payroll bank accounts at what is referred to as zero balance accounts where the value of each warrant is transferred into the vendor or payroll account exactly to cover the checks issued, and the book balance remains at zero. The intent of this process is to simplify the reconciliation process since the outstanding checklist would equal the bank balance, and would be the only reconciling item. The Town has implemented a process for funding the vendor and payroll accounts with the total amounts of the warrants and has reconciled the balance in these accounts throughout fiscal year 2012. • Reconciling Enterprise Fund Cash Balances - The Town maintains separate bank accounts to account for the cash balances and investment earnings of the Enterprise Funds. All Town bills, including those of the Enterprise Funds, are initially paid from the Town’s vendor checking account. In prior years, we noted that the Town did not have a process for transferring the cash from the Enterprise Fund Accounts to reimburse the vendor account timely or accurately. In fiscal year 2012, the Town continued to improve their reconciliation process between the Enterprise funds cash accounts and any variances were identified during the monthly reconciliation process. Variances as of June 30, 2012 consisted of timing differences in reporting activity. 3 • Recording Interfund Receivables and Payables - In the prior year, the Town recorded payables from the Wannacomet Water Company to the Sewer and Siasconset Water enterprise funds without recording a corresponding receivable. This has the effect of understating revenue received during fiscal year 2011. As part of the monthly reconciliation of the “due to/due from” accounts, we recommended that other interfund receivables and payables also be reconciled. During the fiscal year 2012 audit all interfund receivables and payables were reconciled. Deficiencies considered unresolved: • Airport Capital Project Funds - The Nantucket Memorial Airport has constructed a number of capital projects which were authorized to be funded partially through state and federal grants and partially through long-term borrowing. Since grant revenue was not monitored on a project by project basis, the final Airport portion of each project was not calculated and was not borrowed. In these cases the Airport’s share of projects was paid with cash from the operating fund as the project invoices were paid. During fiscal year 2012, the Town analyzed the activity of each of the Airport projects and to determine the amount that should have been borrowed and the options available. In some cases, the Town has lost the ability to borrow the Airport’s share of these projects. The Town has segregated each of the airport projects in a capital fund on the ledger, has reallocated funds between projects, and has borrowed, funded through general fund transfers and has received grant funds to finance a portion of the projects. The Town will need to continue to take steps to close out completed projects either through funding with available funds, or through borrowing or grant proceeds. • Unspent Bond Proceeds - The Town does not have a reliable system for monitoring capital borrowing and the associated capital expenditures. The Town’s schedule of unspent bond proceeds continues to indicate that bond proceeds dating back to fiscal year 2004 have not all been expended. We have been advised that expenditures may not have all been properly charged against the bond proceeds in prior years. During fiscal year 2012 numerous projects with unspent bond proceeds were voted upon and re-allocated. However, a significant number of old borrowings remain unspent as of year-end. Although the Town has made progress in this area, we continue to recommend that the Town implement a system to monitor capital projects and the associated authorized funding mechanisms on a consistent basis throughout the year. A process for reconciling the unspent bond proceeds balances and capital project balances with departments on a regular basis would help this process. • Reconciling General Ledger Activity with Departments - As noted above, the Town does not have a reliable system both for reconciling individual fund balances with departments and for monitoring the activity of capital projects and the associated borrowing or other funding. Both of these weaknesses have contributed to variances between the Town’s operating and capital accounts of the Nantucket Memorial Airport. During fiscal year 2012 the Town underwent a project to reconcile the Airport capital and operating accounts, going back several years. However, this still remains in issue within Fiscal Year 2012. In one instance, the lack of a process for reconciling grant and other balances with individual departments has contributed to variances between the records of the Town’s Planning Department related to the planning grant and the Town’s general ledger. We continue to recommend that ledger activity and balances be reconciled with Town departments. • Unidentified Cash Adjustments - The Town has recorded approximately $165,000 and $69,000 in unidentified cash adjustments to revenue accounts in the Town and County ledgers, respectively, during fiscal year 2012. Although the Town has taken significant steps toward reconciling the ledgers to the Treasurer’s balances and to the bank balances, these adjustments reflect activity that has not been properly identified or recorded during this process. 4 Failure to Comply With Procurement Laws and Regulations In prior years, several Town departments, including the Nantucket Memorial Airport, Wannacomet Water Department, and the School Department were not following procurement laws as specified in Massachusetts General Law. Several departments lacked proper documentation of obtaining three oral or written quotes as well as not entering into signed contracts for various capital improvement projects and other services such as maintenance. Chapter 30B of the Massachusetts General Laws, the Uniform Procurement Act, establishes uniform procedures for local governments to use when contracting for supplies, services, and real property. All Chapter 30B contracts in the amount of $5,000 or more must be in writing. There are also several other key sections of the law that pertain to municipal procurement. The major laws addressing municipal procurement include: „ M.G.L. c.7 § §38A-1/2 (Design services) „ M.G.L. c. 149 (Building Construction) „ M.G.L. c. 30, §39M (Mass Highway) „ M.G.L. c. 90B, §34 (Mass Highway) „ M.G.L. c. 30B, Non Building (Local Level) „ M.G.L. c. 30B, Supplies and Services (Local Level) In fiscal year 2011, we recommended that the Town strengthen controls over procurement to ensure compliance with the proper procurement laws As part of this system, all purchases should be evaluated to determine whether, over the course of the fiscal year, the Town will spend in excess of the competitive bidding thresholds for the same or similar items or services and all departments should be required to maintain support to document procurement decisions made. If a written contract is required, a copy of the executed contract should be provided to the Town’s Finance Department. The Town made strides within fiscal year 2012 to implement procedures that would address the procurement issues. The Town has implemented a system to require departments to provide proof of contracts, as required by MGL, and has requested that all contracts be provided to the finance department where they are scanned and filed. This process allows the Town to verify a contract’s existence when purchase orders are submitted by Town departments. The Town has also drafted detailed policies and procedures related to procurement compliance, however, the document remains in draft form and has not been finalized. During fiscal year 2012, we continued to identify several instances across most departments where purchases were made without first obtaining approval in the form of an approved purchase order or having a signed contract (i.e. the purchase orders or contracts were dated after the invoice date). This increases the risk that purchases will be made that are not in compliance with the Town’s policies or state procurement laws. In September 2011 a memorandum of agreement was entered into between the Airport, Board of Selectmen and Town Manager that requires the Airport procurement function to be under supervision of the Town’s Chief Procurement Officer. Since the memorandum went into effect issues noted with Airport procurement have been minimal but have still existed nonetheless. Current year issues included contracts being entered into without proper funding being secured first, which by-passed procurement policies requiring a purchase order to be in place before entering into a contract. During fiscal year 2012 procurement issues were also noted within the School Department. Testing of contracts identified that quotes were not obtained for at least one contract over $5,000. In addition, the contract was 5 reviewed and it was further noted that it was overspent over the original contract price of $24,999. Any spending over the $25,000 threshold would require procurement in the form of a bid which was not completed as the contract was originally supposed to be under the threshold and was not properly monitored. The school department does not have a centralized system for monitoring purchasing by department heads or for maintaining support to document procurement compliance within the school department. Each department head is responsible for compliance and maintaining support within their departments. This decentralized system does not insure that the school department is obtaining the most competitive prices and puts the school department at risk of not competitively seeking quotes or bids for goods and services because the purchases are split within the school department. We continue to recommend that the Town strengthen controls over procurement to ensure compliance with the proper procurement laws. Summary In summary, the objectives of an internal control structure are to safeguard the assets of the Town and provide reasonable assurance that transactions are executed in accordance with management's authorization and recorded properly in the Town’s ledgers. The omission of one or more elements of internal control can compromise the Town’s ability to obtain these objectives. We have concluded that the deficiencies noted above, individually and collectively, represent material weaknesses in the Town’s system of internal control under standards established by the American Institute of Certified Public Accountants. These deficiencies constitute being classified as material weaknesses because they represent significant deficiencies in the design or operation of the internal control structure that, in our judgment, could adversely affect the Town’s ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements. Furthermore, we believe that the design or operation of one or more of the internal control structure elements does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Management’s Response Deficiencies considered unresolved: Airport Capital Project Funds: In Fiscal Year 2012, the Town began to institute account level internal controls that pertain to capital projects, subject to borrowing. As of April 2012, at the department level, staff can view the capital projects account; however they are unable to process any requisitions, purchase orders, or invoices against the appropriation as the account is inactive until borrowing has occurred. In addition, in the spring of Fiscal Year 2012, the Town established a separate and distinct capital projects fund for each of the enterprise funds as opposed to recording all activity in the enterprise funds operating budgets. The process of segregating the capital projects activities allows for increased transparency relating to each of the respective projects within each enterprise fund capital projects fund. The Town plans to close out completed projects and rescind authorization for prior projects not being moved forward, at the 2013 Annual Town Meeting. To ensure these weaknesses are resolved in the near future, continued co-operation is required from departments outside of Town Administration jurisdiction. 6 Unspent bond proceeds: In the winter of Fiscal Year 2013, the Town began a process of reporting capital projects account status for the general fund and enterprise funds on a monthly basis. Each specific project is detailed to include the account number, purpose, original appropriation approved at Town Meeting, if the project was subject to borrowing and the amount borrowed thus far, grants awarded, grants received, bond proceeds, expenditures, and remaining budgetary balance. We believe monitoring these accounts on a monthly basis, at the Cabinet level of Town Management, will reduce the likelihood of expending prior to borrowing, spending in excess of the authorized amount, and identify completed projects with remaining bond proceeds that can be re-appropriated at the next Annual or Special Town Meeting in accordance with the General Laws of the Commonwealth. Reconciling General Ledger Activity with Departments: The Town will develop an internal process for quarterly reconciliations of general ledger activity in the spring of Fiscal Year 2013. The intent would be to fully implement the process across all town, school, and enterprise departments in the fall of Fiscal Year 2014. Unidentified Cash Adjustments: In Fiscal Year 2012, the Town recorded $165,000 in unidentified cash adjustments to a revenue account in the Town ledger. These adjustments were made in an ongoing effort to review inactivity within balance sheet accounts that date back to the late 1990’s and early 2000’s. Many of the accounts were established as a result of prior audit adjustments in the early 2000’s that have shown no account activity since the original entry. When reviewing the old audit work papers, there was a lack of supporting documentation and/or descriptions as to why the adjustment was needed or explanation as to where the revenue was originally derived from. Every effort was made to try to locate any and all supporting information; however it simply wasn’t available. Therefore, the Town corrected these inconsistencies using the unidentified cash adjustment account to ensure the integrity of the current town balance sheets and financial reporting. The County recorded $69,000 in unidentified cash adjustments relating to a systematic issue that records Land Bank payroll and repayments to the county general fund. For the past three years, the Town has worked with the software company to address this systematic issue with little to no resolution. In Fiscal Year 2013, the County plans to establish a separate system to process Land Bank payroll as the Land Bank is not actually a county department. By establishing the new system, transactions going forward would be considered current and would ensure the systematic issues don’t carry forward into the subsequent years. Once the new system is established, the legacy issues pertaining to the Land Bank dating back to Fiscal Year 2000 will be resolved over the course of Fiscal Year 2013 and Fiscal Year 2014. Failure to Comply With Procurement Laws and Regulations The Town agrees with the Auditor’s recommendations and has devoted a significant amount of time to ensuring procurement compliance across the Town. Town Administration, including the Finance Director and Chief Procurement Officer will continue to reaffirm the importance of compliance with Procurement Laws and Regulations within the Commonwealth of Massachusetts to all departments including the town, school, enterprise departments, and respective Commissions. The Board of Selectmen adopted a Procurement Policy Manual at its meeting of December 12, 2012 which applies to all Town and County agencies. Further, the Chief Procurement Officer has spent considerable time arranging for on and off island training for personnel from many town departments and agencies. This effort will continue into the foreseeable future. It is expected that several town employees will become certified as Massachusetts Public Purchasing Officials during the remainder of FY2013 and throughout FY 2014. 7 Other Matters 8 Prior Year Comments Account Activity Reconciliation Prior Year Comment During fiscal year 2011, activity for the Town of Nantucket was not properly recorded on the general ledger throughout the year resulting in 7 adjustments which were identified several months after year end during the audit process. These late adjustments were mainly to record transfers and to correct balances at year end that were not reconciled during the fiscal year. Some of the permanent entries should have been recorded in prior fiscal years however they were not previously identified due to the lack of adequate account reconciliation between the information recorded in the Town’s general ledger and departmental records. The need for these adjustments is an indication that the Town is not performing routine account reconciliations and making corrections to accounts during the fiscal year. This puts the Town at risk of inaccurate financial reporting. We recommended that the Town implement a system to verify that balances are accurate throughout the year. Current Status – Resolved For fiscal year 2012, the Town’s audit schedule was significantly earlier than it has been in the past. The Town recorded 5 adjustments that were identified several months after year end during the audit process. Although we continue to recommend that the Town reconcile account balances and activity during the fiscal year to keep the number of late adjustments recorded subsequent to year end to a minimum, the earlier audit schedule is an indication that the majority of the Town’s balances were monitored during the fiscal year. Accounting For Trust Fund Balances Prior Year Comment For several years, we have reported that several of the Town’s trust fund balances recorded on the general ledger do not agree with the balance of the funds on deposit in the bank. Such variances can be misleading and leave the Town at risk of overspending available balances and of inaccurate financial reporting. We have recommended that the Town implement procedures to reconcile the Trust fund balances reported on the general ledger to the bank balances on a monthly basis. Lack of such a reconciliation puts the Town at risk of inaccurately reporting trust fund balances, overspending trust fund balances, and improperly allocating interest income to the individual trust fund accounts. Current Status - Resolved During fiscal year 2012, the Town implemented a monthly reconciliation process that allows the activity of the individual trust fund balances to be properly monitored and adjusted as necessary. 9 Fraud Risk Assessment Prior Year Comment The opportunity to commit and conceal fraud exists where there are assets susceptible to misappropriation and inadequate controls to prevent or detect the fraud. Risk assessment, including fraud risk assessment, is one element of internal control. Thus, ideally, the Town’s internal control should include performance of this assessment, even though our annual financial statement audits include consideration of fraud. To address this risk, we recommended that the Town perform a risk assessment to identify, analyze, and manage the risk of asset misappropriation. Current Status - Resolved During fiscal year 2012, the Town hired a consulting firm to perform fraud risk assessments on three locations per year for the next three years. Accounting for Off-Duty Police and Fire Details Prior Year Comment During the prior year we noted that the Town records payments to police and fire personnel for details in an agency account on the General Ledger. Since it is the Town’s practice to pay for details prior to receiving payments from the vendors, the agency fund typically has a negative cash and negative liability balance. The Town also records a receivable and deferred revenue when the police detail bills are sent out to vendors. The Town did not have procedures to reconcile the negative cash and the receivable balances. Although the variances could represent details paid to officers and not yet billed, this had not been determined due to a lack of procedures to reconcile the variances. We recommended that the Town document and implement procedures to address uncollectible detail receivables. The documentation should address procedures for collection and for abatement and funding for receivables that have been determined to be uncollectible. Additionally, if it is the Town’s policy to pay officers in advance, we recommended that the Town follow the guidance from MGL to provide “seed” money to fund the advance payment and the activity should be recorded in a special revenue fund, as it is not agency activity if the officers are paid in advance of the reimbursement from the vendors. Current Status – Partially Resolved During fiscal year 2012 the amounts recorded as receivables and deferred revenue related to the off-duty police and fire details were reconciled to the supporting detail. However, the negative cash and liability balances at year end remain unsupported and unreconciled. Recommendation We continue to recommend the Town implement procedures to reconcile the negative cash ledger balances to the corresponding receivable detailed records maintained by the Police Department. Additionally, once the balances have been successfully reconciled, the Town should determine the cash flow needs to continue to pay 10 officers in advance of collecting funds and consider appropriating funds for this purpose to maintain a positive cash balance as allowed by M.G.L. Chapter 44, Section 53C. Management’s Response The Town concurs with the Auditor’s recommendation. In Fiscal Year 2012, the Town appropriated “seed money” to fund the permanent deficit in the detail accounts. In FY2011 and FY2012, the Town also continued to strengthen its internal controls over the off duty detail fund by ensuring accounts receivables for off duty police and fire are reconciled on a monthly basis. At the close of June 30, 2012, the off duty detail account had $550,877 in cash and a due to/from general fund amount of $556,126, for a net balance sheet cash deficit in the amount of $4,249. During Fiscal Year 2013, the Town will explore the option of a 50% deposit requirement prior to scheduling requested 3rd party details. Insurance Withholding Deficits Prior Year Comment During the prior year we noted that the Town had deficit balances in the dental insurance and life insurance withholding accounts. The deficits in these accounts have been partially the result of employee withholdings not being matched to premiums paid, and the Town not adequately increasing employee withholdings when insurance rates were increased. The balance in these accounts should represent amounts withheld from employees that have not yet been paid to fund the employee’s share of insurance as of the end of the fiscal year. The amounts should be paid out, for their original purpose, shortly after the end of the fiscal year. Current Status - Unresolved The Town continues to report deficit balances in several of the dental insurance and life insurance withholding accounts. The Town has not yet reconciled the full reason for the deficit balances in these accounts, or determined what the correct balances should be. Recommendation We continue to recommend that the Town implement procedures to verify that employee withholdings are commensurate with premiums paid, and that the balance in the withholding accounts reflect only amounts withheld from employees that have not yet been paid. Management’s Response In Fiscal Year 2012, the Town addressed a $55,000 dental insurance withholding shortfall that dated back to Fiscal Year 2000. In addition, the Treasury division of the Finance Department instituted a monthly reconciliation process of all withholding payments to ensure town and employee portions of the withholdings were in line with their associated benefit selections. In Fiscal Year 2013, the Treasury division will continue to investigate legacy issues to address remaining life insurance and dental insurance withholding shortfalls in the amount of $39,111 and $68,367 respectively. 11 Accounting Separately for Bond Proceeds Prior Year Comment The Town accounts for bond proceeds received for major capital projects in separate funds on the general ledger. This is the recommended practice, as it allows for a clear record of what bond proceeds have been spent, and what they have been spent on. However, when the Town receives bond proceeds relating to small enterprise fund related projects, they have often been accounted for within the enterprise operating funds. This requires the bonded balances to be accounted for outside of the accounting system on spreadsheets, and increases the risk that bond proceeds could be spent for ineligible purposes. We recommended that the Town account for all bond proceeds in capital project funds on the general ledger, and that the Town account for all bond proceeds related to enterprise funds separate from those that will be repaid by the general government. Current Status – Unresolved During fiscal year 2012 the Town segregated bond proceeds related to enterprise funds into separate funds that could be monitored separately. However, the Town also recorded $3.2 million in new bond proceeds in the General Fund. These proceeds were reallocated to capital project funds during the audit. We continue to recommend that the Town account for bond proceeds separately from operating funds. Management’s Response The Town concurs with the Auditor’s recommendation. In Fiscal Year 2012, new bond proceeds of $3.2 million for Hummock Pond Bike Path were borrowed in the middle of June 2012. Bond proceeds were recorded in the general fund instead of the general fund / capital projects fund as a one-time error. The Assistant Town Accountant identified the error and reported it to the Auditors as well as the Department of Revenue. This one time error was corrected during the 2012 audit process. Invoice Receipt Procedures Comment In the prior year’s expenditure testing we noted that a number of invoices lacked the required date and time stamp documenting the receipt of the invoice. The Town’s policy to date and time stamp each invoice as it is received increases control over the processing of the invoices and the timely payment of bills. We recommended the Town date and time stamp each invoice as it is received to record the receipt of the invoice as it begins the accounts payable process. Current Status – Resolved Expenditure testing for the fiscal year 2012 audited indicated that invoices were properly stamped when received. 12 Purchase Order Dates Comment During expenditure testing we noted that a number of purchase orders were dated past their corresponding invoice dates. Creating purchase orders after the invoice is received bypasses the Town’s purchasing policies and defeats the control that a purchase order system is intended to provide. Purchase orders play a primary role as they allow the Town to ensure that budgetary funds are available and that the purchase has been properly approved before funds are expended. We recommended the Town implement a process to ensure that purchase orders are initiated prior to the procurement of goods and services. Current Status – Unresolved Expenditure testing in the current year noted that purchase orders are still being dated after their corresponding invoice dates. Out of the 30 expenditures tested, 21 of them contained invoice dates dated before the purchase order date. Management’s Response This chronic problem will continue to be addressed in FY 2013 and going forward. The Finance Department will provide each department head a monthly report of purchase orders issued after the invoice date. Capital Assets Land Monitoring Comment During the fiscal year 2011 audit, the Town identified approximately $1,200,000 of land that was sold in fiscal year 2010 and never removed from the Town’s capital assets records. This caused the land capital asset balance to be overstated in fiscal 2010, which required a restatement of the beginning land capital asset balance in fiscal year 2011. We also noted that land was again sold in fiscal 2011 and the parcels were never reported on the Town’s capital asset schedule. We recommended that the Town implement policies and procedures for to provide better assurance that the Town owned land recorded in the Town’s capital asset records is accurate and that land additions and deletions are properly recorded in the proper fiscal year. Current Status – Resolved During fiscal year 2012, the Town implemented a reconciliation process that cross-checks land purchased or sold with the Town’s fixed asset records to ensure that any activity affecting the fixed asset records is properly recorded. 13 Current Year Comments Documented Cost Allocation Plan and Indirect Charges for the 3(c) Transportation Grant Comment The Town’s lack of a process for reconciling grant and other balances with individual departments has contributed to variances between the records of the Town’s Planning Department related to the 3(c) transportation grant (3c grant) and the Town’s general ledger. These variances have resulted in past variances between the supplemental schedules reported by the Town related to the 3c grant (the Schedule of Indirect Cost Rate and Schedule of Public Support) and the federal expenditures reported by the Town on the Schedule of Expenditures of Federal Awards (SEFA) that have not been reconciled as required. We have been advised that the amounts recorded in the Town’s general ledger (and consequently on the SEFA) were not accurate because expenditures were charged to the Planning Department’s general fund budget that should have been allocated to the grant fund. In addition to the reporting variances, the Town has not documented a cost allocation plan (CAP) relating to the 3c grant as required by OMB Circular A-87 (OMB A-87). The Department of Transportation (DOT) has advised the Town on several occasions of the requirement to develop and maintain a cost allocation plan. OMB A-87 requires the Town to have a CAP on file as support for the indirect costs charged to all federal grants, including the 3c grant. For Town provided services, the CAP is required to provide an explanation as to how costs were allocated. The 3c grant has historically allocated 100% of the Transportation Planner’s salary, 10% of the Director’s salary and 5% of the Senior Planner’s salary directly to the grant. Additionally, an overhead rate of 91.82% has been consistently applied to the grant since it was calculated based on 1993 and 1994 numbers. The overhead allocation rate cannot continue to use a rate calculated on activities that are almost 20 years old. Without a CAP, the Town does not have support to document the allocation of the direct salaries or an updated calculation to support the overhead rate that has been charged. The Schedule of Indirect Cost Rate and a Schedule of Public Support are intended to represent a summary of the Town’s cost allocation plan and indirect cost rate calculation. These schedules are required to present actual costs incurred and not just costs billed to or payments received from the Massachusetts Department of Transportation. As a result of the deficiencies noted above, the Town is not in compliance with the grant requirements related to the 3c grant and is at risk of both inaccurate financial reporting and improperly charging the federal program. Recommendation We recommend that the Town develop and document a cost allocation plan and that the Town’s Planning Department follow the Town’s documented process when allocating indirect costs to the 3c grant. We also recommend that the Town’s Finance Department and Planning Department work together to verify that the planning schedules included in the Town’s financial statements are accurately reported and that they reconcile to the numbers reported by the Planning Department and the numbers reported in the Town’s Schedule of Expenditures of Federal Awards. 14 Management’s Response In Fiscal Year 2012, the Assistant Town Accountant, Director of Planning, and Transportation Planner met with representatives from the State and Audit Firm to discuss the 3C Indirect Charges process and cost allocations. The revenue and expenses for the 3C Transportation Grant in Fiscal Year 2012 totaled $224,840. In Fiscal Year 2013, an internal process will be documented and implemented. In addition, the Director of Finance and Director of Planning will establish quarterly meetings to identify and address any potential costs that may have been improperly reported in the general fund as well as identify any costs that the state has deemed as non- reimbursable. Unsupported Liability Balances Comment The Town's general ledger contained unsupported balances for warrants payable at year end totaling approximately $24,000. We were advised that ledger balance was incorrect and that the errors were caused by computer glitches that occurred during the year. The Town’s general ledger also contained old unsupported balances for abandoned property totaling approximately $22,000 and for an unidentified Airport liability totaling approximately $18,000. These unsupported account balances have not changed since the prior year. Recommendation We recommend the Town implement procedures to identify and correct inaccurate or unsupported account balances on the general ledger. Management’s Response The Town concurs with the Auditor’s recommendation and will continue to work on legacy balance sheet account issues throughout Fiscal Year 2013. In addition, the accounting division within the Finance Department will reconcile the warrants payable accounts at the completion of each warrant to ensure any systematic issues are identified and resolved in an expedient manner. Prior Year County Comments Vendor and Payroll Accounts Prior Year Comment During prior audits of the County’s cash it was noted that both payroll and vendor accounts were not maintained at a zero balance. Both accounts were reconciled at year end, however lump sum transfers were made at year end, rather than funding the exact amount of the warrants during the year. Maintaining zero balance accounts would help identify errors in the cashbook and or bank statements more timely. It would also reduce the amount of unnecessary transfers in and out of the accounts. We recommended that the County maintain both payroll and vendor accounts at a zero balance and that the exact amount of the warrant be transferred rather than year end lump sum transfers. 15 Current Status – Resolved Transfers during the current year were made timely and for the exact amounts of the warrant. In addition, the vendor account was maintained at a $0 balance. The payroll account was not maintained at a $0 balance, however the year-end balance related to a deposit in transit outstanding at the end of the year. Unnecessary Bank Fees Prior Year Comment The Town Treasurer maintains two County bank accounts that each received bank charges of $20 per month which substantially reduced the balances in the accounts. During fiscal year 2011 these accounts were reduced from $243 to $23 and $442 to $222 due to bank charges when the only activity in the accounts was bank interest. Had the funds been transferred to a bank that does not charge fees for low balance accounts, the Town would have saved $440 in bank fees over the fiscal year. We recommended that the Town monitor the bank fees assessed and work to reduce the unnecessary fees paid on low balance accounts. Current Status – Resolved The accounts were closed by the Treasurer during fiscal year 2012. Current Year County Comments Account Reconciliations for Nantucket County Comment The County did not reconcile the Due from Land Bank account balance during fiscal year 2012. As of June 30, 2012, the Due From Land Bank account balance of the County contained a $205,000 unsupported balance. The lack of timely account reconciliations and a system to monitor the balances throughout the year increases the risk that errors will occur and not be detected and corrected on a timely basis and increases the risk of inaccurate financial reporting. Recommendation We recommend that the County reconcile the balance in the Due from Land Bank account. Management’s Response The County concurs with the Auditor’s recommendation. In Fiscal Year 2013, the Finance department will establish an accounting system specifically for the Land Bank to separate it from the county ledgers as it is not a county department. Once the new accounting system is established, the Accounting division within the Finance Department will reconcile legacy issues related to the Land Bank that date back to Fiscal Year 2000 and advise the Land Bank of any outstanding balances due to the County.