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A. Review 2010 Audit0 A CITY OF MEMORANDUM CIIA NSEN TO: Mayor & City Council 7700 Market Boulevard FROM: Greg Sticha, Finance Director PO Box 147 Tautges Redpath will be present to review the financial results and audit findings Chanhassen, MN 55317 ' Engineering DATE: June 27, 2011 V ZAI Administration SUBJ: Review 2010 Audit Phone: 952.227.1100 non - compliance noted in this report either. Fax: 952.227.1110 The financial statements take into account the city's entire financial picture and Building Inspections The Finance Department just finished another audit cycle. Dave Mol from HLB Phone: 952.227.1180 Tautges Redpath will be present to review the financial results and audit findings Fax: 952.227.1190 of the 2010 audit. Engineering BACKGROUND Phone: 952.227.1160 to help ensure that procedures are properly followed. There were no instances of Fax: 952.227.1170 non - compliance noted in this report either. Phone: 952.227.1125 The financial statements take into account the city's entire financial picture and Finance are in a format similar to a proprietary or for - profit organization. This includes a Phone: 952.227.1140 statement of activities that break out the primary government and proprietary Fax: 952.227.1110 revenues and expenses by function. Park & Recreation Phone: Recreation anon For 2010, the General Fund finished with a $395,759 increase in fund balance. Fax: 952.227.1110 Staff will make a recommendation for the surplus later on tonight's agenda. Recreation Center AUDIT FINDINGS 2310 Coulter Boulevard Phone: 952.227.1400 There are three reports that HLB Tautges Redpath completes for the city. The Fax: 952.227.1404 first is the Independent Auditor's Report on Compliance with Minnesota Legal Planning & Compliance Guide for Local Government. This report is submitted to the Office Natural Resources of the State Auditor along with the annual report. There were no findings in this Phone: 952.227.1130 report for 2010. Fax: 952.227.1110 Chanhassen is a Community for Life - Providing for Today and Planning for Tomorrow The second report is the Independent Auditor's Report on Compliance and on Public Works Internal Control over Financial Reporting. This report lists conditions that could 7901 Park Place Phone: 952.227.1300 affect our ability to properly record and report transactions. These conditions do Fax: 952.227.1310 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 no instances of Senior Center non - compliance noted in this report either. Phone: 952.227.1125 Fax: 952.227.1110 The third report is titled, "Communication with Those Charged with Web Site Governance." This is a longer description of summary information that highlights www.ci.chanhassen.mn.us comparisons and trends for financial results. This also reviews city policies, procedures and systems, and outside factors that may affect the city's financial Chanhassen is a Community for Life - Providing for Today and Planning for Tomorrow Review of 2010 Audit June 27, 2011 Page 2 of 2 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; however, there were two minor uncorrected misstatements to the financial statements that the auditors will review with the council on Monday night. The report also contains two other future audit issues for management to be aware of for audits in upcoming years. These will be reviewed with the city council on Monday night as well. ATTACHMENTS 1. Report on Compliance with Minnesota Legal Compliance Guide for Local Governments 2. Report on Internal Controls over Financial Reporting 3. Report on Communication with Those Charged with Governance fAgregs \audit\20IO\review of 2010 audit.docx TAUTGES REDPATH, LTD. Certified Public Accountants REPORT ON COMPLIANCE WITH MINNESOTA LEGAL COMPLIANCE AUDIT GUIDE FOR POLITICAL SUBDMSIONS 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, 2010 and have issued our report thereon dated June 13, 2011. 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 Political Subdivisions 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 Political Subdivisions 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. tk.4 �o4/4 - / �4 LA HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota June 13, 2011 4810 White Bear Parkway White Bear Lake, MN 55110 651.426.7000 651.426.5004 fax www.hlbtr.com Equal Opportunity Employer 100 - Percent Employee -Owned HLB Tautges Redpath, Ltd. Is an Independent member of HLB International, a world -wide organization of professional accounting firms. TAUTGEs REDPATH, LTD. Certified Public Accountants REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENTAUDITING 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, 2010 which collectively comprise the City of Chanhassen, Minnesota's basic financial statements and have issued our report thereon, dated June 13, 2011. 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 on the effectiveness of the City of Chanhassen, Minnesota's internal control over financial reporting. A deficiency in internal control 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 and convect misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. . Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. 4810 White Bear Parkway White Bear Lake, MN 55110 651.426.7000 651.426.5004 fax www.hlbtr.com Equal Opportunity Employer 100 - Percent Employee -Owned HLB Tautges Redpath, Ltd. is an independent member of HLB International, a world -wide organization of professional accounting firms. City of Chanhassen, Minnesota Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Page 2 Compliance and Other Matters As part of obtaining reasonable assurance about whether the City of Chanhassen, Minnesota's financial statements are free of out 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 noted certain matters that we reported to management of the City of Chanhassen, Minnesota in a separate letter dated June 13, 2011. This report is intended solely for the information and use of management, City Council and others within the entity and is not intended to be, and should not be, used by anyone other than these specified parties. hi A� iwII�e r C-0 HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota June 13, 2011 TAUTGES REDPATH, LTD. Certified Public Accountants COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE 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 for the year ended December 31, 2010. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards and the standards applicable to financial audits contained in Government Auditing Standards, as well as certain information related to the planning scope and timing of our audit. We have communicated such information in our letter to you dated January 4, 2011. Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Results Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the City are described in Note 1 to the financial statements. The City implemented GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets in 2010. The most significant effect of this standard is that the City is now recording easements as capital assets. We noted no transactions entered into by the City during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. 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 was management's estimate of the net OPEB obligation which is based on the OPEB actuarial study. We evaluated the key factors and assumptions used to develop the estimate for the net OPEB obligation in determining that it is reasonable in relation to the financial statements taken as a whole. 4810 White Bear Parkway White Bear Lake, MN 55110 651.426.7000 651.426.5004 fax www.hlbtr.com Equal Opportunity Employer 100 - Percent Employee -Owned HLB Tautges Redpatk Ltd. is an independent member of HW International, a world -wide organization of professional accounting firms. City of Chanhassen, Minnesota Communication With Those Charged With Governance Page 2 Certain financial statement disclosures are particularly sensitive because of the significance to financial statement users. The City does not have any particularly sensitive disclosures in its financial statements. Difficulties Encountered in Performing the Audit We encountered no difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. We identified two known uncorrected misstatements of the financial statements. Management has determined that their effects are immaterial to the financial statements taken as a whole. • Bond discounts and issuance costs are not amortized over the life of the bond, but instead are recorded during the year in which the bond was sold. As a result, assets and net assets of the business -type activities are understated by $73,400 at December 31, 2010. During 2010, City staff discovered $48,000 of expenditures relating to the 2010 Street Improvement Project were incurred in 2009 but were not capitalized. This was corrected in 2010, resulting in an understatement of the governmental activities expenses. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction 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. Management Representations We have requested certain representations from management that are included in the management representation letter dated June 13, 2011. Management 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 City of Chanhassen, Minnesota Communication With Those Charged With Governance Page 3 that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues 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. GASB Statement No. 54 GASB 54 is effective for the year ending December 31, 2011. This standard changes the reporting of fund balance from the current categories of reserved, designated and unreserved/undesignated to rive categories based on the constraint imposed on the use of the resources. We recommend that the City prepare for implementation of this standard by reviewing the current fund balance policy to ensure that the following are addressed: • Minimum fund balance • Flow assumptions • Delegation of authority to assign • Fund balance commitment GASB 54 also discusses which types of activities are to be reported in Special Revenue Funds. Each Special Revenue Fund must have a specific revenue source (excluding investment earnings and transfers in) that is restricted or committed for the specific purpose of the Fund. Restrictions are outside the City's control. Council action is required in order to commit a specific revenue source to a specific purpose. We recommend that the City review each Special Revenue Fund and reclassify funds that do not meet the GASB 54 requirements. Improvement Refunding Bonds, Series 2009A The payment schedule of 2009A bonds includes a $3,515,000 principal payment on February 1, 2014. The improvements funded by this bond issue included parcels that are expected to be developed in the future. The financing plan anticipates a special assessment prepayment related to these parcels to be collected in 2013 to fund the February 1, 2014 principal payment. We recommend the City monitor the status of these parcels and determine an action plan in the event the special assessments are not collected in the anticipated timeframe. City of Chanhassen, Minnesota Communication With Those Charged With Governance Page 4 Other Information in Documents Containing Audited Financial Statements With respect to the supplementary information accompanying the financial statements, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. Closing This information 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. A top �"���, L IY HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota June 13, 2011