Accountability Audit Report City of Republic
Transcript of Accountability Audit Report City of Republic
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Accountability Audit Report
City of Republic
For the period January 1, 2017 through December 31, 2018
Published January 23, 2020
Report No. 1025547
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Insurance Building, P.O. Box 40021 Olympia, Washington 98504-0021 (360) 902-0370 [email protected]
Office of the Washington State Auditor
Pat McCarthy
January 23, 2020
Mayor and City Council
City of Republic
Republic, Washington
Report on Accountability
Thank you for the opportunity to work with you to promote accountability, integrity and openness
in government. The State Auditor’s Office takes seriously our role of providing state and local
governments with assurance and accountability as the independent auditor of public accounts. In
this way, we strive to help government work better, cost less, deliver higher value and earn greater
public trust.
Independent audits provide essential accountability and transparency for City operations. This
information is valuable to management, the governing body and public stakeholders when
assessing the government’s stewardship of public resources.
The attached comprises our independent audit report on the City’s compliance with applicable
requirements and safeguarding of public resources for the areas we examined. We appreciate the
opportunity to work with your staff and we value your cooperation during the audit.
Sincerely,
Pat McCarthy
State Auditor
Olympia, WA
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TABLE OF CONTENTS
Audit Results ................................................................................................................................... 4
Schedule of Audit Findings and Responses .................................................................................... 5
Summary Schedule of Prior Audit Findings .................................................................................... 9
Related Reports ............................................................................................................................. 11
Information about the City ............................................................................................................ 12
About the State Auditor's Office ................................................................................................... 13
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AUDIT RESULTS
This report describes the overall results and conclusions for the areas we examined. In most of the
areas we examined, City operations complied with applicable state laws, regulations, and its own
policies, and provided adequate controls over safeguarding of public resources.
As referenced above and described in the attached finding, we identified areas in which the City
could make improvements.
These recommendations are included with our report as a finding.
About the audit
This report contains the results of our independent accountability audit of the City of Republic
from January 1, 2017 through December 31, 2018.
Management is responsible for ensuring compliance and adequate safeguarding of public resources
from fraud, loss or abuse. This includes the design, implementation and maintenance of internal
controls relevant to these objectives.
This audit was conducted under the authority of RCW 43.09.260, which requires the Office of the
State Auditor to examine the financial affairs of all local governments. Our audit involved
performing procedures to obtain evidence about the City’s uses of public resources, compliance
with state laws and regulations and its own policies and procedures, and internal controls over such
matters.
In keeping with general auditing practices, we do not examine every transaction, activity or area.
Instead, based on our risk assessment for the years ended December 31, 2018 and 2017, the areas
examined were those representing the highest risk of fraud, loss, abuse, or noncompliance. The
following areas were examined during this audit period:
Financial condition and fiscal sustainability
Interfund activities – loans and transfers
Payroll – gross wages, overtime, leave balances, accruals, and benefit deductions
Tracking and monitoring of theft sensitive assets – cell phones and fuel
Accounts receivable – utility billing, adjustments, and collections
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SCHEDULE OF AUDIT FINDINGS AND RESPONSES
2018-001 The financial condition of the City’s Garbage Fund puts it at risk
of not meeting financial obligations or maintaining current service
levels. Further, the City has not consistently complied with
requirements for interfund loans.
Background
An elected City Council and Mayor govern the City, and the Clerk/Treasurer
records and reports financial transactions. The City provides garbage services to
about 525 residents and commercial accounts on an average annual budget of
$295,000.
We reported concerns about the City’s financial condition and its use of interfund
loans in our prior audit.
Description of Condition
Financial condition
The City experienced negative cash positions in the Garbage Fund from 2014
through our 2017-2018 audit period and continuing into 2019. The City’s
expenditures in the Garbage Fund exceeded revenues from 2014 to 2017 as the
table shows below.
Garbage Fund
Year
Ending Cash and
Investments
Operating Revenues less
Operating Expenses
2014 -24,570 -30,686
2015 -68,404 -43,834
2016 -77,373 -8,939
2017 -100,832 -24,489
2018 -90,955 9,877
September 2019 -63,737 31,525
The City failed to comply with requirements for interfund loans during the prior
audit period and continuing into the current audit period, further affecting the City’s
financial condition in the Garbage Fund.
The City also did not adopt a formal comprehensive plan to address its financial
condition, as recommended in the prior audit finding.
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Interfund loans
As explained in our prior report, the Budgeting, Accounting and Reporting System
(BARS) manual allows local governments to establish interfund loans between
funds but stipulates minimum acceptable procedures for making and accounting for
loans. The legislative body must formally approve all loans, including a planned
schedule of repayment with a reasonable rate of interest. It also must review the
loan status annually at an open public meeting.
In 2014, the City Council approved a $311,122 interfund loan from the Water &
Sewer Fund to the Garbage Fund but did not adopt a resolution to formalize the
loan and set the interest rate until 2018. The City set the interest rate at 2.29 percent
based on the rate used by the State Treasurer’s Local Government Investment Pool
(LGIP). However, the City only charged the interest on the original balance one
time for $7,125 and did not charge the interest annually to compensate the Water
& Sewer Fund for ongoing lost earnings on its investment. State law
(RCW 43.09.210) prohibits one fund from benefitting another. The Garbage Fund
received a benefit of $28,190 to date because the City did not charge interest
annually.
Interfund loans related to negative fund balance
State law (RCW 43.09.210) and the BARS Manual require the City to separately
account for each of its funds, including all resources, expenditures and interfund
activity. During the audit period, the City reported negative year-end cash balances
for Garbage Fund as detailed in the table above. A negative fund balance indicates
that a fund spent more than the resources it had on hand and as such, informally
borrowed resources from other City funds to pay its claims. However, the City did
not approve, record or set up a repayment schedule for these interfund liability
amounts nor did it have enough resources in the Current Expense fund to cover the
negative balances.
Cause of Condition
Management did not adequately monitor the City’s financial activities to effectively
control costs or make sufficient efforts to reduce expenses and increase revenue. In
addition, the City lacked knowledge of negative fund balances and their effect on
other funds, interfund transfers and interfund loans.
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Effect of Condition
Not understanding the requirement for financial activities caused the City to be at
risk of not meeting financial obligations or maintaining operations at their current
levels for the Garbage Fund. Specifically,
The Garbage Fund lacks resources to repay about $205,000 of its interfund
loan in a timely manner without further cost to citizens.
Water & Sewer customers support other government costs due to the
negative fund balance and might not be able to cover necessary repairs or
other expenditures.
The Water & Sewer Fund has lost $28,190 in interest earning to date for the
established interfund loan and additional interest earnings for its resources
that covered the Garbage Funds negative fund balance.
Recommendation
We recommend the City’s elected officials and management:
Amend the Garbage interfund loan resolution to pay interest annually on the
outstanding balance, and either adopt a new interfund loan or amend the
current interfund loan to account for the resources the Water & Sewer Fund
is using to cover the Garbage Fund’s negative fund balance
Establish a formal, written comprehensive plan to address the City’s
financial condition and revise the plan as needed to resolve financial issues
Closely monitor financial operations to ensure the City can meet its
financial obligations
Provide ongoing training opportunities for the Clerk/Treasurer to increase
knowledge of City operations, transactions and reporting to prevent further
non-compliance for interfund loans.
City’s Response
The City acknowledges the deficits in the garbage fund and has been actively
working towards reducing that negative balance as well as the debt it has to the
Water/Sewer Fund. The City has renegotiated its contract with its Garbage service
to have the entire city’s waste picked up in one day rather than two days. This has
an estimated savings of $5,000 a year which will first be used to balance out the
garbage fund to remove it from its negative balance status, and then it will be used
to pay off the interfund loan sooner so that that debt fee can be removed from the
city resident’s monthly bill. Along with the increased garbage rates that the city
approved in 2018 the ending balance of the garbage fund at the end of 2019 is
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projected to be negative $86,000. Compared with the starting balance of 2019
(negative $94,802.69) the garbage fund has removed $8,802.69 of its negative
balance. Adding in the new renegotiated contract that amount should be higher
next year.
The City plans to amend the previous resolution that incorrectly set up the annual
interest for the interfund loan between the Water/ Sewer Fund and the Garbage
fund. The amended resolution will have an annual interest rate that will be applied
every year for the life of the loan instead of just on the first year of the loan. The
City is also looking into the State Auditors recommendation of amending the
current interfund loan to borrow more from the Water & Sewer Fund to fix the
Garbage Fund’s negative fund balance.
The new Clerk Treasurer is proactive in learning how these things should be done
and is actively working toward getting the city’s finances in order. The City
understands the importance of continuing education for its employees and is
proactively looking to send the clerks to trainings to keep them updated on
compliance and regulations.
Auditor’s Remarks
We appreciate the City’s commitment to resolve the issues noted and we will follow
up during the next scheduled audit.
Applicable Laws and Regulations
RCW 43.09.200 – Local government accounting- Uniform system of accounting.
Sets forth the requirements for the state auditor to develop a system of accounting
and reporting for all governments.
BARS manual 3.1 – Accounting Principles and Internal Controls sets forth the
requirements for management and the governing board to establish appropriate
internal controls, and accounting and financial reporting procedures.
BARS manual 3.9.1 – Interfund Activities sets forth the requirements for interfund
loans and repayment.
RCW 35.33.075 – Budget Final Adoption sets forth the requirements to adopt
budget limited to the estimated resources in a fund.
RCW 43.09.210 – Local Government Accounting – Separate Accounts for each
fund and activity sets forth the requirements to account for fund resources and
activity separately.
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SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS
City of Republic
January 1, 2017 through December 31, 2018
This schedule presents the status of findings reported in prior audit periods.
Audit Period:
2014 – 2016
Report Ref. No.:
1021812
Finding Ref. No.:
2016-001
Finding Caption:
The City’s financial condition puts it at risk of not meeting financial obligations or maintain
current service levels. Further, the City has not consistently complied with requirements for
interfund loans and transfers.
Background:
The City reported negative cash position in both the Garbage and Current Expense funds during
the audit period. In addition, the City:
1. Made an interfund loan from water/sewer to garbage without an ordinance, repayment
schedule or charging interest as required by the Budgeting, Accounting and Reporting
System (BARS) manual
2. Coded the debt service collections from customers’ utility billings to Current Expense
rather than the Garbage Fund and did not make the appropriate interfund loan
repayments to Water/Sewer
3. Did not take action to resolve funds with a negative balance through an interfund loan
4. Made interfund transfers without council approval, leaving a zero balance without
regards to the financial needs of the fund in the following year, transferred funds to close
funds they continued to use, and transferred the full balance of the Debt Service Reserve
fund without regard to the related bond covenants
Status of Corrective Action:
☐ Fully
Corrected
☒ Partially
Corrected ☐ Not Corrected
☐ Finding is considered no
longer valid
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Corrective Action Taken:
1. Resolution 2018-13 was passed December 17, 2018 to correct the interfund loan from
water/sewer to garbage which established a total loan amount remaining of
$231,867.14. An interest amount of 2.29% was charged on the original loan amount of
$311,122.49 but that will need to be updated by the City to have an annual interest rate
starting from the beginning of the loan until the loan is completely repaid.
2. Recoded the debt service collection to go into the Garbage Fund rather than the Current
Expense fund. Interfund loan repayments were also corrected and as of November 2017
the loan repayments are coming out of the Garbage fund.
3. Problems with having a negative balance and the process to fix negative fund balance
are now known to the City. The City plans to have the negative fund balances corrected
for the next audit period.
4. Interfund transfers are now approved by Council first. Also the full amount of the Debt
Service Reserve fund for the USDA bond covenant has been corrected as of June 19,
2018.
Audit Period:
2014 – 2016
Report Ref. No.:
1021812
Finding Ref. No.:
2016-002
Finding Caption:
The City lacked adequate controls to accurately process and support monthly payroll
expenditures.
Background:
The City paid hourly employees based on an average of 173.33 hours per month regardless of
the hours worked and did not perform a reconciliation to demonstrate employees received
appropriate compensation. In addition, the Public Works employees accrued and used extra
compensatory time tracked outside of payroll without retaining support.
Status of Corrective Action:
☒ Fully
Corrected
☐ Partially
Corrected ☐ Not Corrected
☐ Finding is considered no
longer valid
Corrective Action Taken:
All City departments now fill out timecards with daily hours broken down to the correct
departments. No more 173.33 hours or compensatory time are used.
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RELATED REPORTS
Financial
Our opinion on the City’s financial statements is provided in a separate report, which includes the
City’s financial statements. That report is available on our website,
http://portal.sao.wa.gov/ReportSearch.
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INFORMATION ABOUT THE CITY
The City of Republic serves approximately 1,000 citizens in Ferry County. The City provides an
array of services including water, sewer, police, parks and public works. The City contracts with
Ferry County Fire Protection District No. 1 to provide fire protection services to the citizens and
with Ferry County for Municipal Court services.
An elected, five-member City Council and an independently elected Mayor govern the City. The
Council appoints management to oversee the City’s daily operations as well as its eight employees.
The City also pays a stipend for the Mayor, Public Works Certification, and Building Inspector.
The City operated on a budget of $1.4 million for each of fiscal years 2017 and 2018.
Contact information related to this report
Address: City of Republic
987 S. Clark Avenue
P.O. Box 331
Republic, WA 99166
Contact: Nicolas Olsen, Clerk Treasurer
Telephone: (509) 775-3216
Website: www.cityofrepublic.org
Information current as of report publish date.
Audit history
You can find current and past audit reports for the City of Republic at
http://portal.sao.wa.gov/ReportSearch.
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ABOUT THE STATE AUDITOR’S OFFICE
The State Auditor's Office is established in the state's Constitution and is part of the executive
branch of state government. The State Auditor is elected by the citizens of Washington and serves
four-year terms.
We work with our audit clients and citizens to achieve our vision of government that works for
citizens, by helping governments work better, cost less, deliver higher value, and earn greater
public trust.
In fulfilling our mission to hold state and local governments accountable for the use of public
resources, we also hold ourselves accountable by continually improving our audit quality and
operational efficiency and developing highly engaged and committed employees.
As an elected agency, the State Auditor's Office has the independence necessary to objectively
perform audits and investigations. Our audits are designed to comply with professional standards
as well as to satisfy the requirements of federal, state, and local laws.
Our audits look at financial information and compliance with state, federal and local laws on the
part of all local governments, including schools, and all state agencies, including institutions of
higher education. In addition, we conduct performance audits of state agencies and local
governments as well as fraud, state whistleblower and citizen hotline investigations.
The results of our work are widely distributed through a variety of reports, which are available on
our website and through our free, electronic subscription service.
We take our role as partners in accountability seriously, and provide training and technical
assistance to governments, and have an extensive quality assurance program.
Contact information for the State Auditor’s Office
Public Records requests [email protected]
Main telephone (360) 902-0370
Toll-free Citizen Hotline (866) 902-3900
Website www.sao.wa.gov