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City - large cash reserves, administrative deficiencies

By Judith Pannebaker BCC Editor

On Thursday, June 6, CPA Kimberly Roach, with the accounting firm of Armstrong, Vaughan & Associates, PC, presented Bandera City Council with the results of the annual financial report for fiscal year ending Sept. 30, 2012.

The bottom line is that the city remains in good financial shape - despite being told for years that the municipality was bordering on going broke. That belief had resulted in minimal road repair and a virtual freeze on employee raises. The audit also identified a number of deficiencies and misstatements.

According to Roach, the city's combined net assets totaled $5.345 million, which includes not only cash reserves, but also infrastructure such as the wastewater plant, equipment, commercial wells, land and buildings, among other items. In 2011, total net assets were $5.050 million. Over time, increases or decreases in the city's net assets indicate whether its financial health is improving or deteriorating.

Throughout the year, the city's governmental expenses were $151,500 less than the $1.035 million revenue generated. The surplus occurred in spite of the fact that 12th Street underwent an unexpected major repair project to address citizens' concerns about prior roadwork they considered unacceptable.

The ending general fund balance was $1.364 million - an increase of 6 percent. "Expenditures totaled less than those approved in the budget and less than the previous year," Roach said, another indication of the city's sound finances.

Interestingly, the office of the city marshal office, which has been touted as costing the city as much, if not more, than the now-defunct police department, came in at $155,000, compared to $280,000 in 2011.

Likewise with the municipal court, which went from a cost of $95,000 in 2011 to $69,000 in 2012.

Sales taxes allocated to the city by the State of Texas increased $15,650 from the prior year and property taxes were up $4,500 -despite property taxes being frozen for residents ages 65 years and older.

In light of the city's large cash reserve, Councilman Maggie Schumacher asked if it would be beneficial for the city to pay off its current bond.

Roach responded, "That would need to be an internal decision."
According to Mae Vion Meyer, interim financial officer, the final payment on Bandera's fire truck will be made during this fiscal year. "By the next audit, it will be paid off," she said.

After the good news came the not-so-good revelations. The current audit also identified deficiencies that had been previously discussed with Mayor Don Clark. Schumacher asked that the deficiencies also be reviewed in the open session.

Most of the problems encountered centered on "internal control" - or rather a lack thereof. A discussion of significant deficiencies came with a caveat from Armstrong, Vaughan & Associates: "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."

Another disclaimer read: "We cannot be considered part of the city's internal controls (which includes the preparation of the financial statements), so the fact that we prepared the draft financial statements and related notes represents a control deficiency for the city."

In other words, an audit is only as accurate as the financial statements that prior financial administrators had presented to the auditing firm.

The auditing firm rectified the following "misstatements" identified during the audit:

• Removed long term debt from the beginning fund balance

• Corrected cash balance by removing old outstanding items entered as duplicate transactions

• Corrected amount recorded as payroll expenses for various departments and funds

• Corrected the balance of Sales Tax Revenue

• Corrected amount of salaries and payroll taxes recorded in the General and Utility funds.

Other significant detrimental findings and issues included:

• Segregation of duties - The city should not allow one employee to bill utility customers; accept and post payments for utilities, park rentals, permits, etc.; and reconcile monthly bank statements. "Allowing one employee to perform all the current functions presents an opportunity for misstatements to occur due to fraud or error that may not be discovered by management in a timely fashion.

• Reconciliation to detail - In preparation of year-end financial statements, the trial balance was not reconciled to the detailed information for payroll salaries and related taxes.

"Proper reconciliation procedures should be done as part of the review of the monthly and annual financial statement preparation."

• Budgetary control procedures - "The city is required to adopt a legally-controlling budget on an annual basis. Amendments to the budget must be approved by city council prior to expenditure of the authorized funds. The budget amendments entered into Quickbooks had one significant error causing the final budget to not be mechanically accurate. The result was the budget approved by council did not agree to the final budget in the financial statements."

This might have occurred due to a previous failure to reconcile the city's books on a monthly basis.

City Administrator Mike Cardenas indicated that all the deficiencies and misstatements had been corrected.

No other councilmen questioned Roach about the deficiencies uncovered during the audit.

In light of all the adverse items identified, Roach was asked if her firm would provide auditing services to the city the following year. "We would be happy to come back and audit if requested, but we will need to increase our fees," she said.

To a question from Councilman Jim Hannah asking if the firm could consider serving as consultants during the city's budgetary process, Roach replied the accounting firm could not serve in an "advisory capacity" and maintain its role as auditor.

"My recommendation is to have good communication. Our job is to audit the figures and that's where our role ends," she added.