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C. 2006 Audit Results CITY OF CHANHASSEN 7700 Market Boulevard PO Box 147 Chanhassen, MN 55317 Administration Phone: 952.227.1100 Fax: 952.227.1110 Building Inspections Phone: 952.227.1180 Fax: 952,227.1190 Engineering Phone: 952.227.1160 Fax: 952,227.1170 Finance Phone: 952.227.1140 Fax: 952,227.1110 Park & Recreation Phone: 952.227.1120 Fax: 952.227.1110 Recreation Center 2310 Coulter Boulevard Phone: 952.227.1400 Fax: 952.227,1404 Planning & Natural Resources Phone: 952.227.1130 Fax: 952.227.1110 Public Works 1591 Park Road Phone: 952.227.1300 Fax: 952.227.1310 Senior Center Phone: 952.227.1125 Fax: 952.227.1110 Web Site WIIW,ci, chan hassen.m n. us (! j MEMORANDUM TO: Mayor City Council Members Greg Sticha, Finance Director Gl,.7. July 23, 2007 fJ~ Review of 2006 Audit FROM: DA TE: SUBJ: The Finance Department just finished another audit cycle. Dave Mol, the audit partner from HLB Tautges Redpath will be here on Monday evening to review the financial results and audit findings of the 2006 audit. BACKGROUND The statements are once again presented with information that takes into account the city's entire financial picture in a format similar to a proprietary or a for-profit organization, including a statement of activities which breaks out the primary government and proprietary revenues and expenses by function type. For 2006, the General Fund had revenues in excess of expenditures of $620,705. This surplus was the result of a couple revenue items exceeding budget in 2006 including Traffic and Ordinance Violations ($85,000), and building permits ($165,000). We also had a one-time revenue generation from the taking of some SAC credits related to the demolition of the Lakeview Hills Apartment complex ($70,000). In addition the city's various departments under-spent their budgeted expenditures by $120,000. The remaining increase was from a number of smaller revenue items that exceeded budget in 2006. The presentation by HLB Tautges Redpath will also include a review of the City's enterprise operations. The Sanitary Sewer Operation did see a slight loss in operating activity income. We will discuss this item in the work session. AUDIT FINDINGS There are three reports that HLB Tautges Redpath completes for the City. The first is the Independent Auditor's Report on Compliance with Minnesota Legal Compliance Guide for Local Government. This report is submitted to the Office of the State Auditor along with the annual report. There were no findings in this report for 2006. The City of Chanhassen · A growing community with clean lakes, quality schools, a charming downtown, thriving businesses, winding trails, and beautiful parks. A great place to live, work, and play. Review of 2006 Audit July 23, 2007 Page 2 of2 The second report is the Independent Auditor's Report on Compliance and on Internal Control over Financial Reporting. This report lists conditions that could affect our ability to properly record and report transactions. These conditions do not rise to the level of a material weakness in our controls, but should be corrected to help ensure that procedures are properly followed. There were three items noted in this report. We will discuss each of these items at the work session as well as give council an update on how they already have or will be resolved. The third report is the audit management letter. This is a longer description of summary information that highlights comparisons and trends for financial results. This also reviews city policies, procedures and systems, and outside factors that may affect the city's financial operations. This is something that HLB Tautges Redpath does outside of the scope of audit requirements. There were no substantial or material findings in this report. Mr. Mol will explain this information and will be happy to respond to your questions on Monday along with me. ATTACHMENTS 1. Consolidated Annual Financial Report (CAFR) 2. Report on Compliance with Minnesota Legal Compliance Guide 3. Report on Compliance and on Internal Control 4. Audit Management Letter " III Tautges Redpath, Ltd. Certified Public Accountants and Consultants AUDIT MANAGEMENT LETTER To the Honorable Mayor and Members of the City Council City of Chanhassen, Minnesota We have audited the financial statements of the City of Chanhassen, Minnesota for the year ended December 31, 2006, and have issued our report thereon dated June 14, 2007. Professional standards require that we provide you with the following information related to our audit. REQUIRED COMMUNICATIONS Our Responsibility under U.S. Generally Accepted Auditing Standards As stated in our engagement letter dated October 2, 2006, our responsibility, as described by professional standards, is to plan and perform our audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement and are fairly presented in accordance with u.s. generally accepted accounting principles. 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. As part of our audit, we considered the internal control of the City of Chanhassen, Minnesota. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatements, we performed tests of the City of Chanhassen, Minnesota's compliance with certain provisions of laws, regulations, contracts and grants. However, the objective of our tests was not to provide an opinion on compliance with such provisions. 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 Chanhassen, Minnesota are described in Note 1 to the financial statements. For 2006, the City adopted GASB Statement No. 44, related to the statistical section of the financial statements. We noted no transactions entered into by the City of Chanhassen, 4810 White Bear Parkway White Bear Lake. Minnesota 55110 I 651 4267000 HLB Tautges Redpath, ltd. is a member of I!IIlnternational, a world-wide organization of accounting firms and business advisors 651 426 5004 Fax I www.hlbtr.com " ~ Audit Management Letter City of Chanhassen, Minnesota Page 2 REQUIRED COMMUNICATIONS Minnesota 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. The most sensitive estimate affecting the financial statements were management's estimates of depreciation and fair value of investments which are based on estimated useful lives and broker statements. We evaluated the key factors and assumptions used to develop the depreciation and fair value of investments in determining that they are reasonable in relation to the financial statements taken as a whole. 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 mayor may not indicate matters that could have a significant effect on the City of Chanhassen, Minnesota's financial reporting process (that is, cause future financial statements to be materially misstated). We proposed, and management recorded, adjustments relating to capital assets, contracts payable and the allocation of property tax revenue. In addition, we identified uncorrected misstatements of the financial statements which were communicated to management in a separate letter. Management has determined that their effects are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. 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. ... " Audit Management Letter City of Chanhassen, Minnesota Page 3 REQUIRED COMMUNICATIONS 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 governmental unit'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. 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 of Chanhassen, Minnesota'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 significant difficulties in dealing with management in performing our audit. .' .' Audit Management Letter City of Chanhassen, Minnesota Page 4 RECENTLY ISSUED ACCOUNTING STANDARDS The Governmental Accounting Standards Boards (GASB) recently approved the following statements which were not implemented for these financial statements: Statement No. 45 Accounting and Financial Reporting by Employers for Post Employment Benefits Other Than Pension Plans. The components of employee compensation not only include wages, healthcare benefits and pension benefits, but also include other postemployment benefits (OPEB). OPEBs include postemployment healthcare benefits and other postemployment benefits such as life insurance and long-term disability. Under current practice, the common method of accounting for the cost of OPEBs is on a pay-as-you-go basis. With the implementation of GASB No. 45, OPEB costs are recognized on financial statements when they are earned, not when they are paid. The provisions of this statement are effective for the City's 2008 CAFR. Statement No. 48. Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues. Provisions of this Statement are effective for periods beginning after December 15,2006. Statement No. 49. Accounting and Financial Reporting for Pollution Remediation Obligations. The provisions of this Statement are effective for periods beginning after December 15,2007. " .' Audit Management Letter City of Chanhassen, Minnesota Page 5 Closing This information is intended solely for the use of the City of Chanhassen, Minnesota's City Council and management of and is not intended to be and should not be used by anyone other than these specified parties. *~r~ ~c/1- HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota June 14,2007 l1li Tautges Redpath, Ltd. Certified Public Accountants and Consultants REPORT ON COMPLIANCE WITH MINNESOTA LEGAL COMPLIANCE AUDIT GUIDE FOR LOCAL GOVERNMENT To the Honorable Mayor and Members of the City Council City of Chanhassen, Minnesota We have audited the financial statements of the City of Chanhassen, Minnesota, as of and for the year ended December 31,2006 and have issued our report thereon dated June 14,2007. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the provisions of the Minnesota Legal Compliance Audit Guide for Local Government promulgated by the State Auditor pursuant to Minnesota Statutes Section 6.65. Accordingly, the audit included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. The Minnesota Legal Compliance Audit Guide for Local Government covers seven categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing. Our study included all of the listed categories. The results of our tests indicate that for the items tested, the City of Chanhassen, Minnesota complied with the material terms and conditions of applicable legal provisions. This report is intended solely for the information and use of the City of Chanhassen, Minnesota's City council and management and is not intended to be, and should not be, used by anyone other than these specified parties. tf?~ ~ /~I t-/:L HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota June 14,2007 4810 White Bear Parkway White Bear Lake, Minnesota 55110 I 651 4267000 651 4265004 Fax I www.hlbtr.com HLB Tautges Redpath, Ltd. is a member of nm International, a world-wide organization of accounting firms and business advisors. III Tautges Redpath. Ltd. Certified Public Accountants and Consultants REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MA TIERS BASED ON AN A UDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Honorable Mayor and Members of the City Council City of Chanhassen, Minnesota We have audited the financial statements of the governmental activities, the business-type activities, each major fund and the aggregate remaining fund information of the City of Chanhassen, Minnesota, as of and for the year ended December 31, 2006 which collectively comprise the City of Chanhassen, Minnesota's basic financial statements, and have issued our report thereon, dated June 14,2007. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we considered the City of Chanhassen, Minnesota's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City of Chanhassen, Minnesota's internal control over financial reporting. Accordingly, we do not express an opinion of the effectiveness of the City of Chanhassen, Minnesota's internal control over financial reporting. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and would not necessarily identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses. However, as discussed below, we identified certain deficiencies in internal control over financial reporting that we consider to be significant deficiencies. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to 4810 White Bear Parkway White Bear Lake, Minnesota 55110 I 651 4267000 651 426 5004 Fax I www.hlbtr.com HLB Tautges Redpath, ltd. is a member of mn International, a world-wide organization of accounting firms and business advisors. Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Page 2 initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented or detected by the entity's internal control over financial reporting. We consider the deficiencies described in the accompanying schedule of findings and responses as items 2006-1 through 2006-3 to be significant deficiencies in internal control over financial reporting. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity's internal control. Our consideration of the internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in the internal control that might be significant deficiencies and, accordingly, would not necessarily disclose all significant deficiencies that are also considered to be material weaknesses. However, we believe that none of the significant deficiencies described above are material weaknesses. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City of Chanhassen, Minnesota's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, 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 and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We also noted certain additional matters that we reported to management of the City of Chanhassen, Minnesota in a separate letter dated June 14,2007. The City of Chanhassen, Minnesota's responses to the findings identified in our audit are described in the accompanying schedule of findings and responses. We did not audit the City of Chanhassen, Minnesota's response and, accordingly, we express no opinion on it. Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Page 3 This report is intended solely for the information and use of the City of Chanhassen, Minnesota's City Council and management and is not intended to be, and should not be, used by anyone other than these specified parties. ;It~~!~( 06 HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota June 14,2007 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Page 4 2006-1 Financial Statement Preparation Criteria: Management is responsible for establishing and maintaining effective internal controls. These controls include the responsibility for preparation, or oversight of the preparation of the financial statements in accordance with generally accepted accounting principles. Condition: During this year of audit, Statement on Auditing Standards (SAS) No. 112 became effective. Basically, the main intent of SAS 112 is to have auditors report in writing more findings involving internal control. SAS 112 specifies that an organization may not rely exclusively on its auditors to perform the financial statement process. In our viewpoint, SAS 112 will result in many, if not most, small to mid-size organizations receiving a finding regarding financial statement preparation. Like many similarly sized organizations, the City has requested assistance from us, the auditors, with drafting financial statements and related notes. This is a common practice and an allowable nonaudit service under the AICPA Ethics Interpretation 101-3. However, other than relying on the auditors, the City staff does not perform sufficient procedures to detect if there were misstatements or omission of disclosures to the financial statements. Cause: The City has not established procedures to detect misstatements or omissions of disclosures in the draft financial statements prepared by the auditors. Effect: By not having such controls, there is an increased risk that errors or omissions in draft financial statements prepared by the auditors would not be detected by City management. Recommendation: We recommend the City review this matter and determine a course of action. Any change would need to be viewed from a cost/benefit perspective. Options for the City include: 1. Remain aware of the situation, however due to the increased cost, make the choice to make no changes to current procedures. 2. Implement internal procedures as determined practical. Such procedures could include: a. Complete a disclosure checklist to ensure propriety and completeness of disclosures. Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Page 5 b. Trace various trial balance accounts to the draft financial statements to ensure all accounts are included in the financial statements. c. Review GASB 34 conversion entries to ensure that the draft government-wide financial statements are free of misstatement. 3. Hiring additional internal or 3rd party resources to assist with the financial statement process. Management Response: The City is aware of SAS 112, but a costlbenefit analysis of the issue does not support the allocation of additional employees. The city is going to implement option #2 of the recommendation's listed for the 2007 audit, which should eliminate the comment in future years. These additional procedures will not be a burden to staff and will not result in additional costs to the city. Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Page 6 2006-2 Financial Statement Corrections Criteria: SAS 112 specifies that a correction of any magnitude that could occur and not be detected by the City's controls be considered a significant deficiency in internal control. Condition: During the course of our audit, audit staff detected corrections relating to capital assets, contracts payable and the allocation of property tax revenue. Cause: In our viewpoint, the guidance provided by SAS 112 regarding financial statement corrections combined with the complexity of governmental accounting will result in most local governments receiving a finding in this regard. Effect: There is an increased risk that financial statement misstatements may occur. Recommendation: We recommend City staff continue to attempt to appropriately record these types of transactions. We acknowledge City staff have made significant improvements in these areas over the past few years. Views of Responsible Officials and Corrective Action Plan: It is the intent of the City's staff to minimize the number of audit adjustments needed each year. As explained in the cause section of the audit comment, due to the complexity of some governmental accounting issues it is unlikely that the city will never have one recommended audit adjustment in any particular year. The number of audit adjustments needed in the 2006 audit was substantially less than the 2005 audit, and staff will strive to continue this trend in future years. 'T I I III Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Page 7 2006-3 Escrow Deposits Payable Criteria: The status of a project for which an escrow deposit has been collected should be known so that deposits can be returned on a timely basis. Condition: The City is holding $946,514 of escrow deposits in its Agency Funds as of December 31, 2006. Of this amount, approximately $294,000 was collected by the City during 2003 or years prior. Cause: Although a specific cause is not known for each escrow at this time, generally old escrow deposits have remained recorded as payables because the developer/owner has not requested the City return the deposit or the project is still ongoing. Effect: As time goes on, it becomes increasingly difficult to contact the party who paid the escrow and return the deposit. Recommendation: We recommend City staff "clean up" escrow deposits that have been held for longer than a certain period of time, such as three years. This can be done by reviewing the status of each project and determining if the escrow should be returned. Views of Responsible Officials and Corrective Action Plan: In the past couple years the finance department staff has made great efforts to identify all escrow deposits with the proper owner. In 2006 that goal was accomplished, and it was noted that a number of the deposits are from years prior to 2003. With the help of the City's Engineering and Community Development department's staff has already begun a process to identify and contact these escrow owners to determine if the deposits can be released. It is our hope that by the end of 2007 the majority of these deposits are returned to their owners if the work has been completed as required.