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Internal control issues

by Alan McArthur
Landmark reporter

Results from the 2007 audit at the city of Parkville show a total of six “significant deficiencies” in the internal controls over financial reporting.

The deficiencies are identified from six material weaknesses found in the city's accounting process.

All of the six areas identified by the audit were also identified by the same auditing firm (Berberich, Trahan and Co.) in the 2006 audit and were not corrected before the 2007 audit was conducted.

Last week, The Landmark exclusively reported the termination of the employment of city collector Loretta Stevens. Sean Ackerson, assistant city administrator, said the termination was done in executive session by the board of aldermen.

Ackerson said the collector position would be changed because of recommendations made in the audit. He also said the board may make decisions about new checks and balances for the collector's office.

A repeated comment in the audit is: “An important aspect of control in any accounting system is segregation of duties. Segregating certain routine tasks, particularly in the receipts and expenditure cycles can significantly improve controls. Lack of segregation of duties can lead to increased risks of fraud, errors, or material misstatement of the financial statements.”

The first material weakness identifies the cash receipts and expenditures cycles.

“In reviewing the cash receipts and expenditures cycles during our audit, we noted certain duties which appear to be too centralized, which could create a lack of maximum control in this area. One employee receives cash, prepares the deposit, makes the deposit, prepares checks for payment, mails checks, makes the majority of the journal entries, and prepares the bank reconciliation. There is also no formal review of the bank reconciliation and the bank reconciliations are not being prepared timely. Check signers are not reviewing invoices and supporting documents prior to signing checks. We recommend that the city segregate duties in the cash receipts and expenditures cycles, implement review procedures for expenditures and that bank reconciliations be prepared timely and be reviewed by a knowledgeable employee for accuracy and completeness.”

The audit also identifies the payroll department as having a material weakness.

“We noted that the City does not have adequate segregation of duties over its payroll process. One employee is responsible for entering timesheet information, preparing and reviewing the payroll run, and cutting checks and preparing the direct deposits. This same employee also maintains all the information for the employee human resource files. The Board and Treasurer sign the checks but a process needs to be implemented to review and approve the checks and direct deposit amounts before they are mailed or submitted for payment to the payroll ledger. We recommend that the duties within the payroll function be segregated in order to safeguard the City's assets.”

The audit identifies a weakness in the city's tracking of capital assets. The city does not maintain depreciation schedules for the city's assets. The audit recommends changes be made to track the depreciation.

The fourth weakness identifies the journal entries created by city management for the audit.

“Preparation of the financial statements in accordance with generally accepted accounting principles is the responsibility of the City's management. During the course of the audit, we identified significant misstatements in the trial balance that were not initially identified by the City's internal control. We recommend that the City review its trial balance and make all necessary adjustments to ensure that the accounts on the trial balance are not materially misstated.”

The fifth weakness identified by the audit is in the accounts payable for the city.

“The City is responsible for tracking its accounts payable balances. A listing of the City's accounts payable at the end of the year was not prepared or recorded on the City's books, resulting in a misstatement of expenditures and liabilities on the City's trial balance. During test work, there was one check that was selected that no support could be obtained other then the Incode print off. Also, the City does not use its purchase order system when requesting authorization for a purchase.”

The audit recommends that the city use a purchase order system and maintain a listing of accounts payable in order to track the city's debt.

The final area where a weakness was identified was with the municipal court accounts.

“Every cash account of the City should be recorded on the City's general ledger. We noted that the year-end cash balance of the municipal court was not recorded on the City's books at the beginning or end of the current fiscal year. This resulted in a misstatement of cash on the City's general ledger. We recommend that all activities and functions of the City be recorded on the City's books so that the financial statements are complete.”


1/7/09: Collector ousted


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