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Financial Warning Signs for Small Cities and Towns

Financial Warning Signs for Small Cities and Towns. 2009 NCLM Annual Conference October 26, 2009 Presented by Gregory S. Allison, CPA UNC School of Government Sharon Edmundson, CPA Local Government Commission. Our Ambitious Agenda. Why do we have an Annual Audit? Purpose

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Financial Warning Signs for Small Cities and Towns

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  1. Financial Warning Signs for Small Cities and Towns 2009 NCLM Annual Conference October 26, 2009 Presented by Gregory S. Allison, CPA UNC School of Government Sharon Edmundson, CPA Local Government Commission

  2. Our Ambitious Agenda • Why do we have an Annual Audit? • Purpose • Responsibilities of elected officials • Audit concepts • Oversight responsibilities of the LGC • Audit review process • Potential warning signs and how to avoid problems

  3. Why do we have an Annual Audit? • Required by G.S. 159-34 • Performed by an independent certified public accountant • Audited financial statements are to be completed by October 31 • “Auditor shall be selected by and report directly to the governing board.” • RFPs are encouraged but not required

  4. Purposes of the Annual Audit • NC governments and public authorities are required to follow generally accepted accounting principles (GAAP) • Auditors render an opinion to determine compliance with • GAAP • other regulatory items such as budgets, grants, and debt covenants

  5. Purposes of the Annual Audit (continued) AUDIT OPINIONS DO NOT ADDRESS FINANCIAL CONDITION

  6. What should elected officials know? • Auditors should be given the opportunity to present directly to the Board, or a subset of the Board, each year. • Board members should have access to the management letter each year.

  7. What should elected officials know? • Board members should inquire as to any communication that may have occurred between the Local Government Commission and the manager, mayor, etc.

  8. The Audit Opinion In our opinion, the financial statements...present fairly, in all material respects, the financial position of the governmental activities, each major fund, and the aggregate remaining information...as of 6/30/09...for the year then ended in conformity with accounting principles generally accepted in the United States of America.

  9. Key Audit Concepts/Terms To Know • Unqualified audit opinion • Materiality • Evaluation of internal controls • Sampling • Single audit • Generally accepted government audit standards

  10. LGC Goals For Audit Review Process • Determine financial standing of unit • Determine if report in compliance with generally accepted accounting principles • Determine if unit in compliance with General Statutes, particularly GS 159 • Determine if unit complies with grant requirements (single audit)

  11. Results of Audit Review Process • Concerns about finances and internal controls communicated in writing to elected officials – “unit letter” • If unit is seeking debt approval, copy of our unit letter and the unit’s written response go to the Commission • Looking for action by council to address concerns

  12. Results of Audit Review Process • Troubled units • Assigned to individual staff members to monitor • Units with more severe troubles are more closely monitored • Unit visits • Follow up reporting

  13. What Causes Us (And You) Concern? • General Fund • Fund balance below ½ population group average • Fund balance declining over multiple years • Over-appropriations of fund balance • Fund balance propped up by large transfers from Electric, Water and/or Sewer Funds • Revenue estimates that materially miss the mark • Low tax collection rates

  14. What Causes Us (And You) Concern? • Other governmental funds • Look for large deficits that may require funds from the General Fund to eliminate • Statutory issues such as expenditures directly from Capital Reserve

  15. What Causes Us (And You) Concern? • Enterprise Funds – Big Three • Water, Sewer, Electric • Low liquidity ratio <1.0 (liquid assets/current liabilities) • Liquid assets = cash and investments + accounts receivable + due from other funds/governments • Current liabilities = all liabilities due within the next year

  16. What Causes Us (And You) Concern? • Net loss • Before capital contributions • Full and modified accrual • Cash flow from operations • Consider this if nothing else! • If cash flow from operations is negative then operation is not sustainable • Large transfers in to support operations

  17. What Causes Us (And You) Concern? • Statutory issues • Over-expending budget at legal level of control • Budget ordinance • Lack of budget for a fund • Deposits and Investments not in compliance with G.S. 159-30 • Debt not approved by LGC that should have been • Adequate bonding of finance officer and tax collector

  18. What Causes Us (And You) Concern? • Statutory issues (cont.) • Daily deposits • Dual appointment of finance officer/tax collector without annual approval by LGC • Issues with pre-audit certificate

  19. What Causes Us (And You) Concern? • Internal control weaknesses • Material weaknesses and significant deficiencies • Questioned costs on grant funds • Segregation of duties • Limited technical ability in area of financial statement preparation

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