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A Review CAFR 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 952.2271160 Fax 952.227.1170 Finance Phone 952.227.1140 Fax 952.227.1110 Park & Recreation Phone 952.2271120 Fax 952.227.1110 Recreation Center 2310 Coulter Boulevard Phone 952.2271400 Fax 952.227.1404 Planning & Natural Resources Phone 952.227.1130 Fax 952.227.1110 Public Works 1591 Park Road Phone 952.2271300 Fax 952.227.1310 Senior Center Phone 952.227.1125 Fax 952.227.1110 Web Site WIVW. ci. chan hassen. mn. us A MEMORANDUM TO: Mayor City Council Members {,. ~ ' ~ FROM: Greg Sticha, Finance Director DATE: July 5,2005 SUBJECT: Review of 2004 Audit The Finance Department just finished another audit cycle. Melanie Accola, the audit manager, from HLB Tautges, Redpath will be here on Monday evening to review the financial results and audit findings of the 2004 audit. Background It should be noted that this is the second year of the required GASB 34 implementation. The statements are once again presented with information that takes into account the entire city's 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 2004, the General Fund had a small increase in fund balance of $358,008. This was the result of a surplus of revenue over expenditures, which was due to a couple of items. The first was a slightly larger than anticipated tax revenue collection for 2004, and secondly a larger than anticipated collection of state aids into the general fund. The City's enterprise funds had an increase in net assets of over two million dollars in 2004. The largest increase was in the water fund of$1,332,906. The city's sewer fund did show a small loss of$413,757 before capital contributions, this loss however did include almost a million dollars of depreciation on those related assets. In total the city's enterprise funds appear to be financially stable as of the end of the year in 2004. Audit Findings There are three reports that HLB Tautges, Repath completes for the City. The first is the Independent Auditor's Report on Compliance with Minnesota Legal The City 01 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 2004 Audit July 5, 2005 Page 2 of3 Compliance Guide for Local Government. This report is submitted to the Office of the State Auditor along with the annual report. There were three findings. 1. The first was that deposits were not fully collateralized at the end of the year. We should have had collateral of 110% of the amount deposited at our bank, but did not. It is staff's intention to invest all large deposits with our investment brokers within the same business day as receiving those deposits. This was already accomplished in 2005 when we received our first half tax settlement from Carver County in June of this year, and invested those funds on the same business day as they were received. 2. The second finding was that we had not reported property that has been unclaimed for at least three years to the State of Minnesota. Staff is continuing efforts at this point to eliminate all unclaimed property. At this point we have only one remaining unclaimed property item, and if it is not claimed by the end of the summer 200,5 the property will be submitted to the state of Minnesota. The second report is the Independent Auditor's Report on Compliance and on Internal Control over Financial Reporting. This reports list 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 two items to be noted in this report, adjusting journal entries and approval of disbursements. The documentation and approval of journal entries has been lacking a formal review process in past years. This item has already been addressed in 2005 with new procedures put in place that require proper documentation and a formalized review and input process of all journal entries that is now being followed. Some of the disbursements tested in the 2004 audit did not have evidence of the proper approval with them. The city's purchasing policy was approved in 2003, and for part of 2004 there was some confusion on who should be signing or approving certain disbursement requests. Late in 2004 the policy was reviewed with staff and Tautges, and changes were made to make sure the proper approvals are being required for the rest of 2004 and into 2005. The third report is the audit management letter. This is a longer description of summary information and charts that highlights comparisons and trends for Review of 2004 Audit July 5, 2005 Page 3 of 3 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. Ms. Accola will explain this information and will be happy to respond to your questions on Monday along with me. Enclosures: Consolidated Annual Financial Report (CAFR) Report on Compliance with Minnesota Legal Compliance Guide Report on Compliance and on Internal Control Audit Management Letter HLB 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 basic financial statements of the City of Chanhassen, Minnesota, as of and for the year ended December 31, 2004 and have issued our report thereon dated May 27, 2005. 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 we considered necessary in the circumstances. The Minnesota Legal Compliance Audit Guide for Local Government covers six main categories of compliance to be tested: contracting and bidding; deposits and investments; conflicts of interest; public indebtedness; claims and disbursements and miscellaneous provisions. 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, except as described in this report. 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 those specified parties. ;lug ~~ LiP, HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota May 27, 2005 4810 White Bear Parkway White Bear Lake, Minnesota 55110 1303 South Frontage Road Suite 13 Hastings, Minnesota 55033 651 4267000 651 4265004 Fax 651 4804990 651 4265004 Fax www.hlbtrcom HLB Tautges Redpath, Ltd is a member of 11II International. a world-wide organization of accounting firms and business advisors. City of Chanhassen, Minnesota Report on Internal Control and on Compliance and Other Matters Page 2 Criteria: Minnesota statutes require that all deposits be collateralized 110% of the deposit balance. Minnesota Statute l18A.03 subd. 3 reads as follows: IISA.03 When and what collateral required. Subd. 3. Amount. The total amount of the collateral computed at its market value shall be at least ten percent more than the amount on deposit plus accrued interest at the close of the business day, except that where the collateral is irrevocable standby letters of credit issued by Federal Home Loan Banks, the amount of collateral shall be at least equal to the amount on deposit plus accrued interest at the close of the business day. The financial institution may furnish both a surety bond and collateral aggregating the required amount. Condition: Deposits were not adequately collateralized at the end of July 2004. Cause: The City has not implemented procedures to ensure proper monitoring of the collateral required to keep all deposits adequately collateralized. Effect: The effect of non compliance is not determinable. Recommendation: We recommend that the City monitor their cash and collateral balances throughout the year to ensure their deposits are adequately collateralized. Management's Response: It is the City's intention to invest all large deposits in agency or government securities with our brokers within the same business day as receiving our deposits. City of Chanhassen, Minnesota Report on Internal Control and on Compliance and Other Matters Page 3 Criteria: Minnesota Statutes require public authorities to maintain a listing of uncashed checks and unclaimed or other intangible property that has remained unclaimed for more than three years, to be reported to the State Commissioner of Commerce annually. Minnesota Statute 345.38 subd.l and Minnesota Statute 345.41 reads as follows: 345.38 Property held by state courts and public officers and agencies. Subdivision I. All intangible personal property held for the owner by any court, public corporation, public authority or public officer of this state, or a political subdivision thereof, that has remained unclaimed by the owner for more than three years is presumed abandoned except as provided in section 524.3-914. 345.41 Report of abandoned property. (a) Every person holding funds or other property, tangible or intangible, presumed abandoned under sections 345.31 to 345.60 shall report annually to the commissioner with respect to the property as hereinafter provided. (b) The report shall be verified and shall include: (I) except with respect to traveler's checks and money orders, the name, if known, and last known address, if any, of each person appearing from the records of the holder to be the owner of any property of the value of $100 or more presumed abandoned under sections 345.31 to 345.60; (2) in case of unclaimed funds of life insurance corporations, the full name of the policyholder, insured or annuitant and that person's last known address according to the life insurance corporation's records; (3) the nature and identifying number, if any, or description of the property and the amount appearing from the records to be due, except that items of value under $100 each may be reported in aggregate; (4) the date when the property became payable, demandable or returnable, and the date of the last transaction with the owner with respect to the property; and (5) other information which the commissioner prescribes by rule as necessary for the administration of sections 345.31 to 345.60. (c) If the person holding property presumed abandoned is a successor to other persons who previously held the property for the owner, or if the holder has changed a name while holding the property, the holder shall file with the report all prior known names and addresses of each holder of the property. (d) The report shall be filed before November I of each year as of June 30 next preceding, but the report of life insurance corporations shall be filed before October I of each year as of December 31 next preceding. The commissioner may postpone the reporting date upon written request by any person required to file a report. (e) Not more than 120 days before filing the report required by this section, the holder in possession of property abandoned and subject to custody as unclaimed property under this chapter shall send written notice to the presumed owner at that owner's last known address informing the owner that the holder is in possession of property subject to this chapter and advising the owner of the steps necessary to prevent abandonment if: (I) the holder has in its records an address for the presumed owner that the holder's records do not disclose to be inaccurate; (2) the claim of the apparent owner is not barred by the statute of limitations; and (3) the property has a value of $100 or more. City of Chanhassen, Minnesota Report on Internal Control and on Compliance and Other Matters Page 4 (f) Verification, if made by a partnership, shall be executed by a partner; if made by an unincorporated association or private corporation, by an officer, and if made by a public corporation, by its chief fiscal officer. (g) Holders of property described in section 345.32 shall not impose any charges against property which is described in section 345.32, clause (a), (b) or (c). (h) Any person who has possession of property which the person has reason to believe will be reportable in the future as unclaimed property may, with the permission of the commissioner, report and deliver such property prior to the date required for reporting in accordance with this section. (i) Before the last day of each calendar year, the commissioner of revenue shall report to the commissioner as unclaimed property under this section any uncashed checks or warrants for overpayments of taxes that were issued more than two years preceding the date of the report. Condition: As of December 31, 2004, the City had not reported two uncashed checks which had been held for more than three years that totaled $700 to the State Commission of Commerce. Cause: The City has not implemented procedures to ensure that any unclaimed property, uncashed checked and other intangible property be turned over to the State Commissioner of Commerce. Effect: The effect of noncompliance is not determinable. Recommendation: We recommend that the City implement procedures to report unclaimed property to the State Commissioner of Commerce annually. Management's Response: The City is continuing efforts to forward checks to the responsible party. If we are unable to forward the check to the responsible party by the summer of 2005 we will submit unclaimed property to the State of Minnesota. HLB 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 AUDIT 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 31,2004 which collectively comprise the City of Chanhassen, Minnesota's basic financial statements, and have issued our report thereon dated May 27, 2005. 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 in order to determine our auditing procedures for the purpose of expressing our opinions on the financial statements and not to provide an opinion on the internal control over financial reporting. However, we noted certain matters involving the internal control over financial reporting and its operation that we consider to be reportable conditions. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control over financial reporting that, in our judgment, could adversely affect the City of Chanhassen, Minnesota's ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. Two reportable conditions are described below. Adiusting iournal entries. During our audit it was noted that the former finance director was preparing journal entries and posting them to the general ledger. The journal entries were lacking supporting documentation and approval. We recommend that the City modify their review and approval process to include the finance director. The formal review and approval process should include internal controls for all adjusting journal entries. This process should 4810 White Bear Parkway White Bear Lake, Minnesota 55110 1303 South Frontage Road Suite 13 Hastings, Minnesota 55033 651 426 7000 651 426 5004 Fax 651 4804990 651 4265004 Fax www.hlbtrcom HLB Tautges Redpath, Ltd, is a member of . International. a world-wide organization of accounting firms and business advisors --..J Independent Auditor's Report on Compliance and on Internal Control Page 2 include filing all journal entries with evidence of proper approval and supporting documentation. Approval of disbursements. A formal purchasing policy was approved in 2003. During the 2004 audit, when testing disbursements five of the disbursements made by check and five of the disbursements made by credit card did not have evidence of proper approval. Also, when testing disbursements made to employees for reimbursement, four of the reimbursements tested did not have evidence of proper approval. One of the employee reimbursements also lacked supporting documentation. We recommend that the City implement proper control procedures related to the current purchasing policy. A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses. However, the reportable conditions described above, are not considered to be a material weakness. 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 May 27,2005. ....J Independent Auditor's Report on Compliance and on Internal Control Page 3 This report is intended solely for the information and use of the City of Chanhassen, Minnesota's management, City council and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. /k.~ ~~ t!-ct HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota May 27, 2005