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HomeMy WebLinkAbout2013-02-21 Audit Committee MinutesCEIVED aFR ^WN CLERK MrS . P 12:30 Audit Committee Meeting February 21, 2013 The meeting convened at 7:07 p.m. in the Conference Room, 16 Lowell Street, Reading, Massachusetts. Present were Assistant Chairman Barry Berman and Audit Committee members Camille Anthony, Rob Spadafora, Chuck Robinson and Stephen Herrick. Also present were Town Accountant Sharon Angstrom and Eric Demas, from Melanson Heath. Barry Berman called the meeting to order, and asked Eric Demas to review the annual Audit. Demas pointed out that the audit work went smoothly. Overall, the auditors were very satisfied with the audit process. There were no significant Audit Adjustments, no material weaknesses or deficiencies in Internal Controls, no disagreements with accounting standards. Key accounts such as cash, tax receivables and utility receivables were all reconciled timely. Demas went over the Management Letter which included three recommendations. The first was to enhance cutoff procedures as three invoices that were encumbered in FYI were processed on a FYI warrant. Demas pointed out that this was not a material issue as the funds were reserved in FYI but did not flow properly through the income statement. He noted that an audit adjustment was proposed to correct the statements to reduce the reserve for encumbrance and increase the expense. Demas also explained that the issues stemmed from a misunderstanding on how prior year encumbrances are treated in Munis when two years are open. Sharon thought that processing the invoice with a prior year PO would update the expenses and encumbrance in FY 12 but this is only true if the invoices are processed in a FY12 warrant and these invoices were erroneously processed on a FYI warrant. Steve Herrick inquired if the town has a policy for accruing expenses over a certain dollar threshold. The Town Accountant explained that POs are typically used to reserve the funds and had these invoices been processed on a FYI 2 warrant the problem would have been avoided. Demas stated that based on his conversations with Sharon he feels comfortable that she understands the source of the issue. He went on to comment that Sharon was easy to work with and has a strong foundation in municipal accounting. Demas also stated he was impressed with how quickly Sharon reviewed the draft financials and with the quality of the questions she asked upon her review. Demas went on to review the second recommendation to update the town's fund balance policy to comply with GASB 54, which Sharon has agreed to work on. Demas wrapped up the review of the Management Letter with the last recommendation to prepare to implement GASB 68 in FYI 5. He stated that this statement will require the unfunded pension liability to be shown in the financials. Currently, the unfunded pension liability is shown in the footnotes to the financial statements. Berman asked if the unfunded pension liability would affect the town's bond rating. Demas stated that bond agencies are aware of these figures as they are already in the footnotes. Anthony questioned what percentage of the pension liability is currently funded for the town. Demas stated that Reading is 68% funded and this is the range that the majority of towns fall into, but he has seen some communities as low as 50 %. As Demas began to review the financials Robinson inquired what level of scrutiny is applied when a key role such as the Town Accountant is transitioned to a new person. Demas stated the risk for the Town Accountant position is low due to the fact the position does not handle any cash. With a new person in the role the audit team did more extensive testing and procedures. Demas pointed out that the controls are reviewed in areas that are considered higher risk. This year the audit team reviewed the procedures surrounding compost stickers and parking fees. Both are handled by the Police department. Demas stated that no issues were found. The Police department uses Microsystems software which is not meant to be a cash collections program. There was functionality within the program to track this activity that provided a clear audit trail to the general ledger. Spadafora inquired if any other fraud testing is done in Reading. Demas stated that any area identified within the risk assessment would have additional fraud related procedures. In addition, fraud inquiries are done with management as well as with the lower level staff to access areas of concern. Spadafora inquired if there was a hotline that someone could use anonymously. Demas stated there is a fraud policy in place that the former 'Town Accountant had worked on but he was not sure if a hotline was included. Spadafora pointed out that many people don't realize that Reading has an Audit Committee so a hotline may be a good way to get tips regarding fraud. Anthony asked who would be contacted if fraud was discovered. Demas stated it would depend on who he felt was involved. The Audit Committee would be notified immediately and usually the Town Accountant and the Town Manager. Anthony pointed out there was a situation with RMLD approximately 12 years ago and it was handled between the Town Accountant and the Town Manager and the Audit Committee wasn't made aware of the situation until much later. The Town Accountant pointed out that as a result of this situation she reviews all the invoices and wires for RMLD before they are paid to ensure the expenses are reasonable and within expectations. Robinson pointed out that RMLD is currently without a General Manager and the Town Manager is retiring. He suggested that maybe these areas should be reviewed more closely during preliminary testing in the spring. The Town Accountant stated our contract with Melanson and Heath ended with this audit. The engagement letter for the next three years was provided to each Audit Committee member by email. Herrick inquired when the engagement letter needed to be signed by. Demas stated it would be nice to have it signed before May as that is when preliminary audit work begins. Anthony commented that she is comfortable accepting the three year engagement letter for FYI 3 -FY15 tonight. Berman inquired if the town was required to go to bid for the audit work. The Town Accountant stated that the town is not required to go to bid, but an RFP could be done if the Audit Committee prefers. Demas confirmed that the audit is exempt from the bid requirement. After a brief discussion, Spadafora moved to accept the three year engagement letter from Melanson and Heath. Anthony seconded the motion. The committee voted unanimously 5 -0 in favor of accepting the three year engagement letter with Melanson and Heath. Berman suggested that David Greenfield as the Chairman should be the one to sign the actual Engagement Letter. Demas continued the discussion of the financial statements. Demas pointed out the audited financials are the town's document and the only page contained that is owned by Melanson and Heath is the Independent Auditor's Report. Demas stated the audit was conducted in accordance with generally accepted auditing standards as well as Government Auditing Standards. He stated the opinion is that the financial statements present fairly in all material respects, the financial position of governmental and business -type activities of the Town of Reading. Demas then pointed out the Management Discussion and Analysis section of the financials tells the reader of the financial statements all they need to know about the financials. Demas stated the Unrestricted Net Assets on the Statement of Net Assets went from $1.4 million in the prior year to $1.3 million in FY 12, which is very consistent with prior year. Demas pointed out that this statement shows a long range view. He went on to point out that $11 million that had been held in Reserved Fund Balance in the prior year had been used in FY 12 to pay off debt. However, there is no impact on this statement because the funds were used towards paying off long term debt, which is a non - current liability that is also shown on this statement. While reviewing the Statement of Net Assets Anthony questioned why under Business - Type Activities there was $1.3 million dollars restricted for OPEB Trust. Demas explained that although RMLD adopted Chapter 32 section 20, they show the OPEB contributions as restricted instead of showing a separate OPEB trust fund. Demas pointed out the impact on the financials on page 48, which shows a chart of the annual required contributions for OPEB as calculated by the actuary f'or Governmental Funds and each of the Enterprise funds. He points out that RMLD's Annual OPEB costs were $591,685. Contributions made of $422,396 were deducted which represents the current premiums paid. The next line for additional funding to trust is shown as $0 because RMLD does not have an irrevocable trust document and shows the funds as restricted instead of as a trust. He points out two notes are included below the chart to reference that the chart does not include RMLD's FY 2011 and FY 2012 restricted OPEB contributions of $1,165,800 and $169,289. Demas points out that RMLD is fully funding their annual OPEB obligation, but it is not shown as funded due to how RMLD chose to account for the contributions and not having a trust document in place. Correcting this issue would be advantageous to the town as bonding agencies would view RMI.D's full funding of annual required OPEB contributions as very positive toward the town's bond rating. Demas points out that the last bond rating from Standards and Poor gave the Town of Reading an AA rating with a positive outlook. The Town Accountant stated that she is working with RMLD to get irrevocable trust documents prepared for both the town and RMLD by June 30, 2013. The challenge at RMLD is that the commissioners are resistant to creating the trust document because they fear they will be held responsible if the trust does not perform well. A letter provided by RMLD's counsel stated that the commissioners don't need indemnification insurance as they would not be investing the funds of the OPEB Trust. The Town Accountant went on to state that RMLD's commissioners were going to vote on creating the irrevocable trust at a meeting this week and she should be hearing what they decided soon. Demas stated that there is a lot of confusion regarding the issue as the statute is not clear whether an actual trust document is needed. Demas then went over the Governmental Funds Balance Sheet pointing out that this statement has a short term view. Demas pointed out that the Town's Unassigned Fund Balance went up about $742k from last year but as a percent of expenditures it went from 8.7% to 9.6 %. Not a large percent hike but appropriately between 5% and 10% where the bond rating agencies expect it to be. Herrick inquired if the Unassigned Fund Balance is higher because of the three invoices that were processed on a FYI warrant. Demas reassured that the Unassigned Balance was adjusted by audit adjustment and is correctly stated. Demas pointed out that the Fund Balance on this statement went down from $23 million in the prior year to $14 million in FY 12. This is due to the use of $11 million of Reserved Fund Balance to pay off long term debt. This was a planned reduction that is in no way viewed as negative. Anthony inquired what is included in the Nonmajor Governmental Funds column. Demas stated that this column contains capital projects and special revenue funds. Demas went on to point out that a sizable capital project would be broken out to a separate column to show as a major fund. Demas referred the committee to pages 72 -73 of the financials where the Nonmajor Governmental Funds are shown in more detail. Demas stated that this information is not required but Melanson Heath provides it within the statement each year in case the town opts to start CAFR reporting for which this information would be needed. Demas stated that CAFR reports are completed by the town and involve a lot of statistical data. Demas stated that sophisticated communities with a lot of buried information tend to complete the CAFR. Robinson inquired if Melanson Heath's fees would increase if the town did a CAFR. Demas stated the fees would go up if this were to occur. Demas stated that CAFR are due by December 31 each year and that he would be happy to provide an example. Demas then directed the committee tb turn to page 20 of the financial statements to review the budget versus actual report. Demas stated that revenues came in at $1 million over projection and expenses came in $1 million under projection. The town used Other Financing Sources of $1.7 to fund various activities. The net affect was the regeneration of $524,488 of free cash. Anthony pointed out that Public Works turned back over $500,000. The 'Town Accountant stated that this was largely due to the mild winter leaving the snow and ice account with a large remaining balance. In most years snow and ice is in a deficit by $200,000- 300,000 and the excess in other under spent expense accounts is moved at April town meeting to cover this deficit. Demas points out that the town's conservative budgeting allows the town to replenish the reserves and is never caught off guard. Anthony made a motion to accept the final audited financial statements for FY 12 for the Town of Reading. Spadafora seconded the motion. The Audit Committee voted unanimously (5 -0) to accept the FYI final audited financials. Motion to adjourn was made by Rob Spadafora and seconded by Camille Anthony, the _Audit Committee voted unanimous to adiourn. Respectfully submitted, Sharon Angstrom