Tulsa based certified public accountants, Hinkle and Company, recently completed an audit for the City of Claremore’s fiscal year ending June 30, 2018.
This is an annual audit that all municipalities, nationwide, are required to complete each year, and is distinct from the financial audit currently being conducted by the State Auditors and Inspectors Office.
Hinkle and Company cpas serve higher education, non-profits, cities and counties, school districts, governmental authorities and small businesses.
The Scope of the Audit
Annual municipal audits done by third-party companies take the financial report created by the city’s treasurer and compare that with actual financial activity throughout the year by looking at purchase orders, bank statements and other types of receipts.
Such audits assess the risk of a material misstatement of facts, whether due to error or fraud.
In order to assess risk, auditors consider the internal control mechanisms of the city that lead to the preparation and presentation of financial statements and look for red flags.
Auditors evaluate the accounting policies that the treasurer’s department uses to create their records, the reasonableness of their department’s estimates for significant accounts and the overall presentation of the financial statements, the sum of which is called internal control.
They do not look in fine detail for actual misstatement of facts.
And they do not consider whether the money is managed efficiently.
The Findings of the Financial Record
The FY 2018 financial report, from which the audit is conducted, was created by the City of Claremore’s financial department, headed by Executive Manager of Budget and Finance Suzan Maloy.
Most noteworthy is that the City’s overall financial position improved during fiscal year 2018.
“The results of 2018 were shaped largely by a local economy enjoying a continued slightly upward trajectory,” the report states.
The following findings are highlighted throughout the report as significant:
- The total net position of the city, meaning the total of city assets minus the total liabilities, increased by $7.6 million or 7.1 percent from the prior year, which is slightly higher than the 6.1 percent increase reported the year before. The city’s assets rose from $108.2 million to $115.8 million. The financial report says this increase is likely due grants received and used for capital improvement projects. Cost and revenue both increased.
- The city’s governmental activities, meaning activities supported by taxes or grants, had a net position increase of $4.2 million or 7.9 percent which was higher than the 4.3 percent increase reported in FY 2017. The additional increase may be attributed to capital improvement grants received for airport infrastructure and lower government expenses in 2018 compared to previous years. Cost and revenue both increased.
- The net position of the business-type activities, meaning activities supported by user-fees and charges, increased by $3.4 million or 6.3 percent, which was slightly lower than the 8 percent increase reported in 2017, likely because utility margins remained essentially flat. Revenue increased while cost remained essentially flat.
- At the end of FY 2018, the City had $126.5 million invested in capital assets including police and fire equipment, buildings, park facilities, streets and drainage systems, and electric, water, and sewer infrastructure. Additions to capital assets included the purchase of land, easements, water treatment plant improvements, airport runway improvements, a park splash pad, and the purchase of several vehicles.
- At year-end, the city had $50.9 million in outstanding notes, bonds and capital leases, down 7 percent from the previous year.
- The City of Claremore expects the economy to slightly improve in the next year, permitting the absorption of a 2 percent cost in electricity with no anticipated corresponding increase in electric rates. “Management will continue to strive for fiscal conservativeness while developing plans to improve the systems and operations needed to meet citizens’ needs,” the report states.
- The FY 2019 City budget of $96.3 million is an increase of 12.8 percent over the prior year primarily due to increased capital spending for roads, a detention pond, a solid waste transfer station, and a flood mitigation project largely financed by grant funds. Personnel costs are expected to increase due to a 3 percent COLA adjustment, higher health insurance costs, and enhanced retirement benefits for non-union employees.
The Auditor’s Official Opinion
The auditor’s opinion of the financial report is that it fairly presents the financial position of governmental and business-type activities, reflects accurate balances in city funds, and accurately calculates changes in the city’s net position.
If this audit was math homework, the city got the right answer and demonstrated their math correctly.
The audit uncovered two significant deficiencies in internal control, though auditors specified, “we did not identify deficiencies in internal control that we consider to be material weakness.”
A material weakness would be a deficiency that would lead auditors to reasonably believe in a possible misstatement of fact.
A significant deficiency is not as severe as a material weakness, but is a point which merit’s attention by city leaders.
The first significant deficiency was an improper accounting of accrued payroll due to a misunderstanding of City policy regarding the timing of payments. Payroll was overstated by $493,000. Auditors recommended that management review policies and procedures. The city is working to correct the issue.
The second deficiency was a potential violation of State Law in the timing of payroll payments. Payroll was processed before the pay period was complete, leading to potential for the City to overpay an employee who terminates employment between the time payroll was processed and the end of the pay period. Auditors recommended that management review policies and procedures. The city is working to correct the issue.
Auditors found no issues with compliance to federal programs.
The City’s Response
Hinkle and Company Partner Kirk Vanderslice presented the audit to the Claremore City Council at their last regular meeting.
“The city closed the fiscal year out in the black, our undesignated fund balances are healthy, so how would you compare our health with other municipalities that you’ve worked in?” City Manager Jim Thomas asked.
“Overall the City of Claremore is in a strong position,” Vanderslice said.
Mayor Bill Flanagan asked the Council finance committee to take a closer look at the departments overseeing sewage and parks and recreation, because those two were the two departments where revenue did not cover expenses.
“All of the other departments are in a positive situation,” Flanagan said. “Other parts of government are subsidizing these two operations, but the rest of our operations are sound.”
Ward 1 Councilor Susan Kirtley recognized Maloy for providing a clean and accurate financial report.