Village of Bear Lake: Financial Statements

In prior articles we have reported that the State of Michigan Department of Treasury has declined to accept a Qualifying Statement – a request to exceed the normal % of debt through borrowing – due to an abnormally high % of delinquent property tax payments. (Village Minutes recently stated this as 25%)

Two items in the 2018 Audit Report raise questions.

Total Expenditures – $341,292
Total Revenue – $332,681

The Audit notes that the Village’s main assets are in non liquid format – infrastructure – and that a large portion of available funds fluctuate being dependent on State Revenue Sharing and Act51 Funds.

As in previous years, the Auditor raised concerns about separation of financial powers and accountability. See the final pages commencing with August 10 letter. One error noted is that the Audit states there is no contract with an outside CPA but in October 2017 the Village entered into an agreement with Baird, Cotter & Bishop PC –

Clerk McPherson and Treasurer King presented to the council the opportunity of updating & correct set up of Quick Books for both positions. Total cost would $4,900.00 which includes software & set up of Quickbooks. This would be done through Baird, Cotter & Bishop, P.C. Motion to go ahead with the updating and set up of Quickbooks with Baird, Cotter & Bishop by Bass, seconded by McPherson. Motion carried.

The Minutes do not reflect a contract or services to be performed by Baird, Cotter & Bishop PC.

By FOIA we have requested a copy of any formal agreement, Letter of Understanding of duties to be performed, Certificate of Insurance (for Errors and Omissions), a Policy governing privacy – A response indicated none exists.  

A resident asked if there had been an RFP for CPA services – the response was no. The resident asked how Baird, Cotter & Bishop PC. became the Village CPA – the response was by referral. The resident asked by whom – no response has been received.

Clearly notations of bills paid for General Ledger reconciliation indicate a book keeping not training purpose. It should also be noted that the Treasurer salary in 2017-18 was $8,408

In this FY 2018-19 it has been cut to $3000.

Is Baird, Cotter & Bishop PC. performing accounting services related to the USDA loan for water system upgrades?

The approved FY2018-19 Operating Budget is amended on a continual basis to cover exceeded expenditure amounts. To track this, by FOIA, a copy of the Profit and Loss by Budget by Line Item Report( required in order to amend the Operating Budget) is included in of our media 6 month Meeting Packet request. August was provided, but not June, July or September.

Source – Public Documents available here – https://treas-secure.state.mi.us/LAFDocSearch/tl41R01.aspx?&lu_id=3215&doc_yr=2018&doc_code=AUD

See the final 5 pages here:  tl41R01Audit2017

  • The Village’s accounting records were initially misstated by amounts material to the financial statements. In addition, the Village lacks complete internal controls over the preparation of its financial statements in accordance with GAAP, and, instead, relies, at least in part, on assistance from its external auditor for assistance with this task.

  • Reconciliation of Key Balance Sheet Accounts

    Criteria: Management is responsible for establishing and maintaining internal controls in order to safeguard the assets of the Village. A key element of internal control is the monitoring and reconciling of financial data within the accounting function.

    Condition: The Village has balance sheet accounts that are only reconciled at year end as part of the audit. These areas include cash, accounts / taxes receivable, and accounts payable. Accordingly, the Village’s ability to prepare financial statements with reconciled balance sheet accounts is based, at least in part, on its reliance on its external auditors, who cannot by definition be considered a part of the Village’s internal controls.

    Cause: This condition is a result of the lack of documented control policies and procedures at the Village.

    Effect: As a result of this condition, the Village is susceptible to misstatements (whether caused by error or fraud) that may occur and not be prevented or detected and corrected by management on a timely basis.

    Auditor’s Recommendation: We recommend developing policies and procedures for reconciling accounts receivable (at least quarterly) to the general ledger. All cash accounts (including the fiduciary funds) need to be reconciled to the general ledger monthly. These policies and procedures should require involvement of a second responsible person as part of the review/monitoring process.

    Management Response: The Village concurs with this finding. The Village will evaluate new controls to reconcile and monitor key balance sheet account balances going forward.

  • Segregation of Incompatible Duties

    Criteria: Management is responsible for establishing and maintaining internal controls in order to safeguard the assets of the Village. A key element of internal control is the segregation of incompatible duties within the accounting function.

    Condition: The Village has accounting functions which are performed by the same individual and are not subject to a documented independent review and approval.

    Cause: This condition is a result of the limited size of the Village’s accounting staff.

    Effect: As a result of this condition, the Village is exposed to an increased risk that misstatements (whether caused by error or fraud) may occur and not be prevented or detected and corrected by management on a timely basis.

    Auditor’s Recommendation: While there are, of course, no easy answers to the challenge of balancing the costs and benefits of internal controls and the segregation of incompatible duties, we would nevertheless encourage management to actively seek ways to further strengthen its internal control structure by requiring as much independent review, reconciliation, and approval of accounting functions by qualified members of management as possible.

    Management Response: The Village concurs with this finding. The Village will enhance internal control by implementing policies that require a second responsible person to cross-check key areas, such as bank account reconciliations.

    The Village’s Response to Findings

    We did not audit the Village’s response to the internal control findings described above and, accordingly, we express no opinion on it.