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CAFR Financial ReportTHE CRY OF DuB E MEMORANDUM ~.~.`'~- January 9, 2007 TO: The Honorable Mayor and City Council Members FROM: Michael C. Van Milligen, City Manager SUBJECT: Submission of Fiscal Year Ended June 30, 2006 Comprehensive Annual Financial Report (CAFR), Parking Facilities Financial Statements, Management Letter and Responses to Management Letter Finance Director Ken TeKippe is transmitting the Fiscal Year 2006 Comprehensive Financial Report (CAFR), Parking Facilities Financial Statements, Management Letter and City Responses to the Management Letter. The City's independent auditor found no instances of material non-compliance with all applicable laws, regulations, contracts, and grants; and issued an unqualified opinion on the financial statements. The auditor's report also notes that there are no material weaknesses in the City's internal control structure. As part of the annual audit, the Auditor provides comments in a management letter for improving the financial management system of the City. The Auditor's comments are attached, as well as Finance Department responses. Michael C. Van Milligen MCVM/jh Attachment cc: Barry Lindahl, City Attorney Cindy Steinhauser, Assistant City Manager Kenneth J. TeKippe, Finance Director THE CITY OF DUB E ~-~~ Memorandum TO: Michael C. Van Milligen, City Manager FROM: Kenneth J. TeKippe, Finance Director ~~ (~ SUBJECT: Submission of Fiscal Year Ended June 30, 2006 Comprehensive Annual Financial Report (CAFR), Parking Facilities Financial Statements, Management Letter and Responses to Management Letter DATE: January 5, 2007 INTRODUCTION The purpose of this memorandum is to submit the Fiscal Year 2006 CAFR and Parking Facilities Financial Statements audited by Eide Bailly, LLP, and to enclose the Auditor's Management Letter along with the City Finance staffs response. The City's independent auditor found no instances of material non-compliance with all applicable laws, regulations, contracts, and grants; and issued an unqualified opinion on the financial statements. The auditor's report also notes that there are no material weaknesses in the City's internal control structure. BACKGROUND The City of Dubuque is required to have an annual audit in accordance with generally accepted auditing standards, Chapter 11 of the Code of Iowa, Government Auditing Standards and U.S. Office of Management and Budget (OMB) Circular A-133, Audifs of States, Local Governments, and Non-Profit Organizations. This Comprehensive Annual Financial Report is in conformance with the standards set by OMB Circular A-133. This federal regulation mandates audit standards for federal programs. The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund and fiduciary fund financial statements. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Separate financial statements are required for Parking Facilities and Dubuque Metropolitan Area Solid Waste Agency and have been received. The financial information for these entities is included in the City of Dubuque CAFR. AUDITOR'S MANAGEMENT LETTER As part of the annual audit, the Auditor provides comments in a management letter for improving the financial management system of the City. The Auditor's comments are enclosed as well as Finance Department responses. ACTION STEP It is recommended that the City Council receives and files the Fiscal Year 2006 reports identified above and receives and files this communication and related enclosures. Copies of the financial statements for the Dubuque Metropolitan Area Solid Waste Agency are available in the Finance Department if desired by Council members. KJT/jmg Enclosures: Fiscal Year 2006 CAFR Parking Facilities Financial Statements Auditor Management Letter Responses to Comments in Auditor Management Letter THE CITY OF DUB E ~~ Memorandum TO: Michael C. Van Milligen, City Manager ~ , FROM: Kenneth J. TeKippe, Finance Director ~~ ~~`~ SUBJECT: Responses to Audit Management Letter-Fiscal Year Ended June 30, 2006 DATE: January 5, 2007 INTRODUCTION Responses to the "other comments" section of the October 25, 2006 management letter issued by Eide Bailly LLP subsequent to completion of the Fiscal Year 2006 audit of the City are hereby submitted. BACKGROUND A separate section in the Comprehensive Annual Financial Report (CAFR) for Fiscal Year 2006 details specific findings. Pages 104-105 of the report provide this information. In addition to the comments in the report, a management letter dated October 25, 2006 was issued which includes more general comments relative to improving the City's overall accounting and control systems. DISCUSSION Finance Department responses to the Auditor's other comments (listed in italics) follow: Conversion of Accounting Records Auditor comment The City maintains its records using the cash basis of accounting. However, in order to comply with accounting principles generally accepted in the United States of America, the comprehensive annual financial report (CAFR) must be prepared using the modified accrual/accrual basis of accounting. Eide Bailly LLP currently posts all adjustments at year-end which are necessary to convert the City's cash-basis amounts to the amounts used in the CAFR. At this time, the City is preparing the workpapers needed to convert the accounting records to the modified accrual/accrual basis at year-end. Eide Bailly LLP posts the journal entries and prepares the financial statements. Although it may require increased staffing levels, we encourage the Finance Department to continue in their advancement of converting to the modified accrual/accrual basis and preparation of the financial statements required in the CAFR. City of Dubuque response As noted in the management letter, City staff prepared all workpapers to convert records to the modified accrual/accrual basis. City staff will continue to work towards converting records from cash to GAAP at year end and preparation of the financial statements. In order for the City to prepare its own CAFR, we would need to hire additional professional staff and provide required annual training. The cost of this would exceed the anticipated reduction in audit fees. The current audit engagement arrangement (covers FY'06-FY'10) provides for the auditing firm to convert the records and prepare the financial statements. Capital Assets Auditor comment The City has a centralized custodian in the Finance Department who maintains a record of the City's capital assets, including additions and deletions made during the year. During the 2003 fiscal year, the City adopted Govenmental Accounting Standards Board Statement No. 34. This statement increased the complexity of the capital assets by requiring governmental infrastructure and depreciation on governmental capital assets be reported. Due to this increased complexity, the City's capital assets records should be closely reviewed for errors by management with knowledge of capital asset policies. The compilation and review of all of the City's capital asset records, including department summaries, should be completed prior to the beginning of the October audit fieldwork. City of Dubuque response The Assistant Finance Director and I will continue to work closely with the individual primarily assigned to maintain capital asset records for the City to continue completing records by October audit fieldwork. Additional clarification was provided by audit firm to assist in generating capital asset/depreciation schedules. The City will prepare a comprehensive summary by department. 2 SMG as an Apent Auditor comment During the fiscal year 2005, SMG was hired as an agent to manage the Five Flags Center. Since SMG acts strictly as an agent for the City, SMG should follow all City policies. During our review of SMG expenditures, several invoices did not contain information required by City policy. It is recommended that the City Finance Department increase its review of SMG policies and transactions to ensure compliance with City policies. City of Dubuque response The Assistant Finance Director and I will work with Gil Spence, Leisure Services Director, and SMG employees to review policies relative to invoices supporting expendistures. Notes Receivable Auditor comment The notes receivable were not reconciled to the City's general ledger at the time of October audit fieldwork. The majority of the problems were related to unfunded loans being placed on the Housing Loan System before the expenditures have been made. Identification and communication of these unfunded loans must be improved for the reconciliations to be completed properly and for the correct note receivable balances. City of Dubuque response The Assistant Finance Director and I will meet with David Harris, Housing & Community Development Director, and affected department employees to develop alternate procedures relative to unfunded loans. New Governmental Accounting Standards Board (GASB) Statements Auditor comment The Governmental Accounting Standards Board (GASB) has issued four statements not yet implemented by the City of Dubuque. The statements, which might impact the City, are as follows: 3 GASB Statement No. 43 Auditor comment Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans issued Apri12004, will be effective for the City for the fiscal year ending June 30, 2008. This statement establishes uniform financial reporting standards for other postemployment benefit (OPEB) plans and supersedes the interim guidance included in Statement No. 26. This statement affects reporting by administrators or trustees of OPEB plan assets or by employers or sponsors that include OPEB plan assets as trust or agency funds in their financial reports. City of Dubuque response The City Finance Department will coordinate with the CPA audit firm and Personnel Manager information required by GASB 43. Implementation is two fiscal years away with consultant dollars budgeted in FY'08 to assist in gathering required information. GASB Statement No. 45 Auditor comment Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions issued June 2004, will be effective for the City for the fiscal year ending June 30, 2009. This statement establishes standards for the measurement, recognition, and display of OPEB expense%xpenditures and related liabilities (assets), note disclosures, and, if applicable, required supplementary information (RSI) in the financial reports of state and local governmental employers. City of Dubuque response The City Finance Department will coordinate with the CPA audit firm any information required by GASB 45. Since the implementation is three fiscal years away, time is available to research any requirements applicable to the City of Dubuque. GASB Statement No. 47 Auditor comment Accounting for Termination Benefits issued June 2005, establishes accounting standards for termination benefits. For termination benefits provided through an existing defined benefit OPEB plan, the provisions of this statement should be implemented simultaneously with the requirements of Statement No. 45. For all other termination benefits, this statement is effective for the fiscal year ending June 30, 2006. 4 City of Dubuque response The City Finance Department will coordinate with the CPA audit firm any information required by GASB 47 that will be implemented with GASB 45. Since the implementation of GASB 45 is three fiscal years away, time is available to research any requirements applicable to the City of Dubuque. A portion of GASB 47 was implemented during FY'06. GASB Statement No. 48 Auditor comment Sales and Pledoes of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues issued September 2006, will be effective for the fiscal year ending June 30, 2008. This statement establishes standards for transactions in which a government receives, or is entitled to, resources in exchange for future cash flows generated by collecting specific receivables or specific future revenues. It also establishes standards that apply to all intra-entity transfers of assets and future revenues. City of Dubuque response The City Finance Department will coordinate with the CPA audit firm any information required by GASB 48. Since the implementation is two fiscal years away, time is available to research any requirements applicable to the City of Dubuque. KJT/jmg 5 ~~1 EideBaillyM ~~ CPAs & BUSINESS ADVISORS To the Honorable Mayor and Members of the City CouncIl City of Dubuque Dubuque, Iowa We have audited the financial statements of the City of Dubuque, Iowa, for the year ended June 30, 2006, and have issued our report thereon dated October 25, 2006. Professional standards require that we provide you with the following information related to our audit. Our Responsibility under Auditine Standards Generally Accepted in the United States of America and OMB Circular A-133 As stated in our engagement letter dated May 23, 2006, our responsibility, as described by professional standards, is to plan and perform our audit to obtain reasonable, but not absolute, assurance about whether the financial statements are free of material misstatement and are fairly presented in accordance with accounting principles generally accepted in the United States of America. Because an audit is designed to provide reasonable, but not absolute, assurance and because we did not perform a detailed examination of all transactions, there is a risk that material misstatements may exist and not be detected by us. In planning and performing our audit, we considered the City's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinions on the financial statements and not to provide assurance on the internal control over financial reporting. We also considered internal control over compliance with requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133. As part of obtaining reasonable assurance about whether the City's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit. Also, in accordance with OMB Circular A-133, we examined, on a test basis, evidence about the City's compliance with the types of compliance requirements described in the US. Off ce of Management and Budget (OMB) Circular A-133 Compliance Supplement applicable to each of its major federal programs for the purpose of expressing an opinion on the City's compliance with those requirements. While our audit provides a reasonable basis for our opinion, it does not provide a legal determination on [he City's compliance with those requirements. PEOPLE. PRINCIPLES. POSSIBILITIES. www.eidebailly.com 3999 Pennsylvania Ave., SIe. 1001 Dubuque, Iowa 52002-2273 1 Phone 563.556.17901 Fax 563.557.7842 1 EOE To the Honorable Mayor and Members of the City Council City of Dubuque Page 2 Significant Accounting Policies Management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by the City of Dubuque, Iowa, are described in Note 1 to the financial statements. No new accounting policies were adopted, and the application of existing policies was not changed during the year ended June 30, 2006. We noted no transactions entered into by the City during the year that were both significant and unusual, and of which, under professional standards, we are required to inform you, or transactions for which there is a lack of authoritative guidance or consensus. Accounting Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. Audit Adjustments For purposes of this letter, professional standards define an audit adjustment as a proposed correction of the financial statements that, in our judgment, may not have been detected except through our auditing procedures. An audit adjustment may or may not indicate matters that could have a significant effect on the City's financial reporting process (that is, cause future financial statements to be materially misstated). In our judgment, none of the adjustments we proposed, whether recorded or unrecorded by the City, either individually or in the aggregate, indicate matters that could have a significant effect on the City's financial reporting process. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the City's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. To the Honorable Mayor and Members of the City Council City of Dubuque Page 3 Issues Discussed Prior to Retention of Independent Auditors We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the City's auditors. However, these discussions occurred in the normal course of our professional relationship, and our responses were not a condition to our retention. Difficulties Encountered in Performing the Audit We encountered no difficulties in dealing with management in performing and completing our audit. Other Comments We have included additional comments regarding the financial statements and operations. These comments are not a result of in-depth study of any specific areas but are based on observations made during the course of our audit. This information is intended solely for the use of the officials, employees, and citizens of the City of Dubuque, Iowa, and other parties to whom the City of Dubuque, Iowa, may report, including federal awarding agencies and pass-through entities, and is not intended to be and should not be used by anyone other than these specified parties. As always, we will be happy to discuss these or any other topics at your convenience. We would like to take this opportunity to express our appreciation to you and your staff for the fine cooperation that we received during the course of the audit. We look forward to many years of continued service to the City of Dubuque, Iowa. ~~~~ Dubuque, Iowa October 25, 2006 CITY OF DUBUQUE, IOWA YEAR ENDED JUNE 30, 2006 OTHER COMMENTS Conversion of Accountine Records The City maintains its records using the cash basis of accounting. However, in order to comply with accounting principles generally accepted in the United States of America, the comprehensive annual financial report (CAFR) must be prepared using the modified accruaUaccrual basis of accounting. Eide Bailly [.t.P currently posts all adjustments at year-end which are necessary to convert the City's cash-basis amounts to the amounts used in the CAFR. At this time, the City is preparing the workpapers needed to convert the accounting records to the modified accruaUaccrual basis at year-end. Eide Bailly t,~P posts the journal entries and prepares the financial statements. Although it may require increased staffing levels, we encourage the Finance Department to continue in their advancement of converting to the modified accrual/accrual basis and preparation of the financial statements required in the CAFR. Capital Assets The City has a centralized custodian in the Finance Department who maintains a record of the City's capital assets, including additions and deletions made during the year. During the 2003 fiscal year, the Ci[y adopted Governmental Accounting Standards Board Statement No. 34. This statement increased the complexity of the capital assets by requiring governmental infrastructure and depreciation on governmental capital assets be reported. Due to this increased complexity, the City's capital assets records should be closely reviewed for errors by management with knowledge of capital asset policies. The compilation and review of all of the City's capital asset records, including department summaries, should be completed prior to the beginning of the October audit fieldwork. SMG as an Agent During fiscal year 2005, SMG was hired as an agent to manage the Five Flags Center. Since SMG acts strictly as an agent for the City, SMG should follow all City policies. During our review of SMG expenditures, several invoices did not contain information required by City policy. It is recommended that the City Finance Department increase its review of SMG policies and transactions to ensure compliance with City policies. Notes Receivable The notes receivable were not reconciled to the City's general ledger at the time of October audit fieldwork. The majority of the problems were related to unfunded loans being placed on the Housing Loan System before the expenditures have been made. Identification and communication of these unfunded loans must be improved for the reconciliations to be completed properly and for the correct note receivable balances. New Governmental Acwuntine Standards Board (GASBI Statements The Governmental Accounting Standards Board (GASB) has issued Four statements not yet implemented by the City of Dubuque. The statements, which might impact the City, are as follows: CITY OF DUBUQUE, IOWA YEAR ENDED JiJNE 30, 2006 OTHER COMMENTS Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, issued April 2004, will be effective for the City for the fiscal year ending June 30, 2008. This statement establishes uniform financial reporting standards for other postemployment benefit (OPEB) plans and supersedes the interim guidance included in Statement No. 26. This statement affects reporting by administrators or trustees of OPEB plan assets or by employers or sponsors that include OPEB plan assets as trust or agency funds in their fmancial reports. Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, issued June 2004, will be effective for the City for the fiscal year ending June 30, 2009. This statement establishes standards for the measurement, recognition, and display of OPEB expense/expenditures and related liabilities (assets), note disclosures, and, if applicable, required supplementary information (RSI) in the financial reports of state and local governmental employers. Statement No. 47, Accounting for Termination Benefits, issued June 2005, establishes accounting standazds for temunation benefits. For termination benefits provided through an existing defined benefit OPEB plan, the provisions of this statement should be implemented simultaneously with the requirements of Statement No. 45. For all other termination benefits, this statement is effective for the fiscal yeaz ended June 30, 2006. Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues, issued September 2006, will be effective for the fiscal year ending June 30, 2008. This statement establishes standards for transactions in which a government receives, or is entitled to, resources in exchange for future cash flows generated by collecting specific receivables or specific future revenues. It also establishes standards that apply to all intra-entity transfers of assets and future revenues. The City's management has not yet determined the effect these statements will have on the City's financial statements.