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A. Review 2012 AuditCY Of The Finance Department just finished another audit cycle. Dave Mol and Andy Fax 952.227.1190 Herring from HLB Tautges Redpath will be present to review the financial results MEMORANDUM CHANHASSEN Engineering Phone: 952.227.1160 TO: Mayor & City Council 7700 Market Boulevard Finance The financial statements take into account the city's entire financial picture and PO Box 147 FROM: Greg Sticha, Finance Director G S. Chanhassen, MN 55317 revenues and expenses by function. Park & Recreation DATE: June 10, 2013 Administration Fax: 952.227.1110 Phora 952.227.1100 SUBJ: Review 2012 Audit Fax: 952.227.1110 Phone: 952.227.1400 There are three reports that HLB Tautges Redpath completes for the city as part of Building Inspections Phone, 952.227.1180 The Finance Department just finished another audit cycle. Dave Mol and Andy Fax 952.227.1190 Herring from HLB Tautges Redpath will be present to review the financial results and audit findings for 2012. Engineering Phone: 952.227.1160 BACKGROUND Fax: 952.227.1170 Finance The financial statements take into account the city's entire financial picture and Phone: 952.2271140 are in a format similar to a proprietary or for -profit organization. This includes a Fax: 952.227.1110 statement of activities that break out the primary government and proprietary revenues and expenses by function. Park & Recreation Phone: 952.2271120 For 2012, the General Fund finished with a $617,919 increase in fund balance. Fax: 952.227.1110 Staff would recommend that this surplus be transferred to the Revolving Recreation Center Assessment Construction Fund as in years past. 2310 Coulter Boulevard Phone: 952.227.1400 There are three reports that HLB Tautges Redpath completes for the city as part of Fax: 952 227,1404 the audit. Attached are copies of all three reports and representatives from HLB Tautges Redpath will review each report with the city council. In addition, they Planning & Natural Resources g will be reviewing a PowerPoint that will give some insight on how a number of Phone 952.227.1130 various funds finished the 2012 audit year. Fax: 952.227.1110 ATTACHMENTS Public Works 7901 Park Place 1. Compliance with Minnesota Legal Compliance Guide for Local Phone: 952 2271300 Governments Report Fax: 952.2271310 2. Internal Controls over Financial Reporting Senior Center 3. Communication with Those Charged with Governance Report Phone: 952, 227.1125 Fax: 952.227.1110 Web Site www.ci. cha nhassem m m us E \gregs \audit\2012\review of 2012 audit.docx FA Chanhassen is a Community for Life - Providing for Today and Planning for Tomorrow TAuTGEs REDPATH, LTD. Certified Public Accountants MINNESOTA LEGAL COMPLIANCE REPORT To the Honorable Mayor and Members of the City Council City of Chanhassen, Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America, 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, 2012, and the related notes to the financial statements, and have issued our report thereon dated May 21, 2013. The Minnesota Legal Compliance Audit Guide for Political Subdivisions, promulgated by the State Auditor pursuant to Minn. Stat. § 6.65, contains 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 audit considered all of the listed categories. In connection with our audit, nothing came to our attention that caused us to believe that the City of Chanhassen, Minnesota failed to comply with the provisions of the Minnesota Legal Compliance Audit Guide for Political Subdivisions. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding the City of Chanhassen, Minnesota's noncompliance with the above referenced provisions. This report is intended solely for the information and use of those charged with governance and management of the City of Chanhassen, Minnesota and the State Auditor and is not intended to be and should not be used by anyone other than these specified parties. HLB TAUTGES REDPATH, LTD. May 21, 2013 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 Tames rsedperh Is a member of HLB International, a world -wlda notworx or independent accounting firms and business advisors. TAUTGEs REDPATH, LTD. Certified Public Accountants INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GO VERNMENT A UDITING. STANDARDS To the Honorable Mayor, Members of the City Council and Management City of Chanhassen, Minnesota We have audited, in accordance with the 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, 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, 2012, and the related notes to the financial statements, which collectively comprise the City of Chanhassen, Minnesota's basic financial statements and have issued our report thereon dated May 21, 2013. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the City of Chanhassen, Minnesota's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances 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. Accordingly, we do not express an opinion on the effectiveness of the City of Chanhassen, Minnesota's internal control. 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 correct, 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. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these 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 Tarried Redpath Is a member of HLB International, a wrld -wide network of Independent a000unfing firma and business advisors, City of Chanhassen, Minnesota Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Page 2 limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. We did identify a deficiency in internal control, described in the accompanying schedule of findings and responses as item 2012 -1 that we consider to be a significant deficiency. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City of Chanhassen, Minnesota's financial statements are free from 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, 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. City of Chanhassen, Minnesota's Response to Findings The City of Chanhassen, Minnesota's response to the finding identified in our audit is described in the accompanying schedule of findings and responses. The City of Chanhassen, Minnesota's response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. HLB TAUTGES REDPATH, LTD. May 21, 2013 CITY OF CHANHASSEN, MINNESOTA SCHEDULE OF FINDINGS AND RESPONSES For The Year Ended December 31, 2012 2012 -1 Financial Statement Corrections Criteria: Audit standards specify that a correction of any magnitude that could occur and not be detected by the City's controls be considered a deficiency in internal control. Condition: Audit staff detected corrections relating to accrued interest payable and the timing of revenue recognition on the TH101 Improvement project from Lyman Blvd to Pioneer Trail. Cause: In our viewpoint, the guidance provided by audit standards 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. 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. 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, 2012. 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 15, 2013. 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. No new accounting policies were adopted and the application of existing policies was not changed during 2012. 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 portion of construction projects which will be capitalized. This estimate is based on feasibility reports and estimates of the City Engineer. We evaluated the key factors and assumptions used to develop this estimate in determining that it is reasonable in relation to the financial statements taken as a whole. The financial statement disclosures are neutral, consistent and clear. 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 1118 Tautges Redpeth Is a member of HLB International, a world -wide network of independent accounting firms and business advisors, City of Chanhassen, Minnesota Communication With Those Charged With Governance Page 2 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 clearly trivial, and communicate them to the appropriate level of management. We identified one known uncorrected misstatement of the financial statements: • Certain 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 $63,000 at December 31, 2012. Management has determined that the effects of the above misstatement are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. We agree with that conclusion. Management also corrected a $342,000 material misstatement relating to the timing of revenue recognition. This amount was originally recorded as revenue when received, but was reclassified as unearned revenue. In the future, these funds will be recognized as revenue once corresponding expenditures are incurred. One additional immaterial adjustment to accrued interest payable was also recorded. Disagreements with Management For purposes of this letter, a disagreement with management is 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 May 21, 2013. 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. 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. At December 31, 2012 the related debt service fund had a cash balance of $2,119,000. 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. Sewer Charges Audit procedures found one customer who was incorrectly billed both residential and commercial sewer charges. City staff determined the customer was overbilled $9,572.57 during the period June 30, 2006 to October 31, 2012. The customer was issued a refund to their account in the form of a credit. According to City staff, a search was performed after the overbilling was identified and no additional duplicate billings were found. Other Matters 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. We also read the other information accompanying the financial statements and did not identify any material inconsistencies between the other information and the audited financial statements. City of Chanhassen, Minnesota Communication With Those Charged With Governance Page 4 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. HLB TAUTGES REDPATH, LTD. May 21, 2013