16 Material Weaknesses and 7 Non-Compliance Issues
Beaumont City Council Agenda Item 25 Internal Controls Report and Responses: https://beaumont.civicweb.net/document/4667/Item%2025.pdf?handle=30073BB0A2A84F5BBE1FEA768242F7AB
The 2015 Financial Audit Internal Controls Report listed 16 Material Weaknesses and 7 Non-Compliance Issues within the City of Beaumont:
Finding 2015-1 Policies and Procedures – It’s five pages long.
Accounting Policies and Procedures: “The City could benefit from a more formal and comprehensive policies and procedures manual..”
Appropriate Level of Unrestricted Fund Balance in the General Fund: “It is essential that the governments maintain adequate levels of fund balances to mitigate current and future risks and to ensure a stable tax rate.”
Debt Management Policy: “It appears the City has not established a formal debt management policy.”
Code of Conduct Including Fraud Prevention and Detection Policies. “Fraud often involves concealment through falsification of documents or collusion among management, employees, or third parties.”
Capital Assets Policies: “It appears the City lacks formal policies regarding capital assets.”
Finding 2015-2 Accounting Records and Financial Reporting:
“At the start of the 2014-2015 audit process, it became apparent that significant analysis and adjustments were yet to be performed for the fiscal year ended June 30, 2015. It appears that various accounts in the City’s general ledger had not been properly analyzed and adjusted for quite some time.”
“The year-end closing process, including necessary analysis, reconciliation, and adjustments should normally be completed within a few months after year-end.”
Finding 2015-3 Segregation of Duties for Cash Receipts – City Hall
“Transactions could be voided by cashiers and amounts collected could be misappropriated without being detected.”
Finding 2015-4 Segregation of Duties for Cash Receipts – Police Department
“Receipts and payments could be collected and not properly recorded in the City’s general ledger and ultimately deposited into the City’s bank account.”
Finding 2015-5 Segregation of Duties for Cash Receipts – Community Pool
“On June 15, 2016, we observed the cash receipting and collection process at the City’s Pool Facility and noted the cash register tape was out of ink, and therefore, could not print a ‘z-tape’ for reconciliation.”
Finding 2015-6 Segregation of Duties for Business Licenses:
“Business licenses could be issued without a corresponding cash receipt being recorded in the City’s general ledger and ultimately deposited into the City’s bank account.”
Finding 2015-7 Segregation of Duties for Building Permits
“Building permits and plan checks could be issued without a corresponding cash receipt being recorded in the City’s general ledger and ultimately deposited into the City’s bank account.”
Finding 2015-8 Segregation of Duties for Bus Passes
“Bus passes could be issued without a corresponding cash receipt being recorded in the City’s general ledger and ultimately deposited into the City’s bank account.”
Finding 2015-9 Transit Occupancy Tax (TOT) and Utility Users Tax (UUT)
“Hotels and utility companies could be underreporting these taxes with no consequences, resulting in lower revenues to the City.”
Finding 2015-10 Developer Impact Fees (DIF)
“The City uses a manual system for issuing DIF invoices. Also, it appears that one individual is responsible for calculating the DIF and applying applicable fee credits, if any, with little or no oversight. In addition, the various DIF are restricted for certain purposes; however, the City has recorded all of these revenues in one fund over the years (co-mingled), without keeping track of the expenditures and remaining unspent balances of each type of DIF. IT APPEARS THE FORMER FINANCE DIRECTOR MAINTAINED EXCEL SPREADSHEETS (separate from the accounting records) EACH YEAR, AND WOULD THEN FORCE THE DIF FUND BALANCES TO MATCH ITS SPREADSHEET.”
Finding 2015-11 Lack of Competitive Bidding for Vendor Contracts and Purchases
“Lack of strong policies and procedures for competitive procedures to follow for the procurement of professional services and a lack of oversight by top management and City Council.”
Finding 2015-12 Inadequate Approvals of Cash Disbursements and Lack of Supporting Documentation.
“We found disbursements that were not properly approved. In addition, City staff were unable to locate two disbursements selected for testing; therefore, we could not review these for proper approvals and appropriateness in light of the City’s operations.”
Finding 2015-13 Lack of Controls over Payroll
“One Accounting Technician is responsible for administering all payroll related information…. Unauthorized changes could be made to the payroll database and errors in the payroll function could go undetected without sufficient review and oversight by City staff independent of payroll processing.”
Finding 2015-14 Lack of Controls over Accrued Vacation
“our review of the vacation accrual schedule found the number of hours accrued by a couple of employees exceeded the maximum number of hours per the application MOU.”
Finding 2015-15 Lack of Oversight for Fuel Credit Card Activity
“Each City vehicle has a fuel credit card inside the vehicle. The City has not established formal policies over the use of the fuel credit cards. In addition, there is no formal analysis of the fuel credit card use, on a periodic basis, to determine if the fuel costs are reasonable based on known operations of the vehicles.”
Finding 2015-16 Inadequate Budgetary Controls
“It does not appear that City management and City Council were provided meaningful financial information that included budget to actual reports generated from the general ledger accounting system.”
Finding 2015-17 Lack of Detailed Accounting for Special Property Tax Assessments.
“In accordance with the various bond indentures, tax assessments are calculated, established, and assessed on the properties in amounts needed to repay debt service on the CFD Bonds, administrative charges, and, as applicable, maintenance charges.… the amount assessed for each CFD Bond is RESTRICTED for the purpose of repaying the debt service, administrative costs, and maintenance costs FOR THE SPECIFIC CFD BOND IMPROVEMENT AREA.”
“We found the city deposited all payments, regardless of the related CFD Bond Improvement Area or purpose in one fund in the City’s general ledger. In other words, the proceeds received for the different CFD Bond assessments are commingled in one account in the City’s general ledger.”
“It is unclear if the beginning fund balance in this fund is properly stated considering the balance is made up property tax assessments that are restricted for each CFD bond. It is also unclear if the City has complied with various bond indentures for the CFD Bonds.”
Finding 2015-18 Lack of Detailed Accounting for Developer Impact Fees (DIF)
“DIFs are restricted for the purposes specifically described in the Ordinance, and based on many of the DIF Ordinances, are required to be collected and accounted for in separate funds… we found all DIF were collected and recorded in one fund in the City’s general ledger accounting system, regardless of the retracted purposes for which the fees were collected.”
“It is unclear as to the purpose restrictions of the approximately $8.7 Million residual balance in the DIF Fund. Ordinance No. 795 was established in September of 1999 for the purpose of establishing a fire station development fee. Section 6 of the Ordinance indicates the purpose of the fees is to finance the acquisition of three fire stations.”
“In addition, Section 8 of the Ordinance states that the ‘Fire Station Development Fees shall be deposited in a restricted account and accounted for in a manner that will ensure that the fees shall be expended solely for the purposes for which the Fees were collected. Any interest income earned thereon shall be retained in the restricted account’.”
“Fire Station Development Fees, along with the other 15+ DIF, were all accounted for in the same fund in the City’s general ledger. City staff were unable to provide documentation to provide detail of the purpose restrictions as of June 30, 2015.”
Finding 2015-19 Vacation Cash Outs
“The City has established liability balances in the general fund for the accrued vacation compensation for employees that have separated from the City. There amounts were not taken in the form of wage payments by the separated employees. Instead, the City is holding the fuss in a liability account and paying the separated employees’ health insurance premiums until fully liquidated.”
“Pay out of vacation accrual is earned income to employees subject to the applicable taxable income requirements established by the IRS and California FTB. However, in the situation described above, the separated employee is receiving the benefit of their health insurance premiums being paid by the city, using unpaid vacation wages, in a manner that is nontaxable to the individual receiving the benefit.”
“The City is paying health insurance benefits for several separated employees using the separated employees banked vacation earnings.”
“The City may not be in compliance with applicable payroll laws concerning the taxable payouts of accrued vacation earnings. We recommend the City consult with the appropriate attorneys to determine if the City is in compliance with the applicable payroll tax laws.”
Finding 2015-20 ERMAC General Manager Employment (City’s Self Insurance)
“The City paid the salary of the General Manager of ERMAC, including all City paid benefits for risk management services as if he was an employee of the City of Beaumont.”
“City staff represented to us that this individual was working onsite at the City approximately 1-2 days a week. In addition, while at the City, the ERMAC GM (James Gregg) was not strictly working on activity related to the City of Beaumont.”
“City may not be in compliance with applicable CalPERS eligibility requirements, and, in addition, the City is subject to providing retirement benefits for an individual that was not an employee of the City. Also, it appears that the City was paying salaries and benefits to an individual that would typically not meet the definition of a full-time “employee” of the City.”
Finding 2015 – 21 Overhead Cost Allocation
“The City allocates certain general fund costs to the Sewer Enterprise, Gas Tax, Transit Enterprise, and CFD Fund. We are not able to obtain evidence to support the actual percentages used to allocate the costs, such as a formal cost allocation study, which would formally document the methodology behind the percentages. For example, the General Fund allocated $2,750,000 in total overhead costs to the CFD Fund in the 2014-2016 fiscal year.”
“Sewer customers could potentially question the methods used to allocate costs to those funds, considering the basis for the percentages is not well documented.”
“We recommend the City perform a full cost allocation study of administrative costs in order to ensure all administrate costs are reasonable and appropriately allocated, and that the methodology is clearly defined.”
Finding 2015 – 22 CFD Fund Advance to General Fund
“The Community Facilities District (CFD) Fund has advanced $7,917,568 to the General Fund as of June 30, 2015, to cover the cash deficit in the General Fund. The City has not established a formal inter-fund loan agreement between the General Fund and the CFD Fund.”
“It is unclear if the CFD Fund is legally allowed to loan funds to the General Fund to pay for the General Fund operating activities.”
“The Restricted CFD Funds cold potentially be misused in accordance with the applicable bond indentures.”