CITY OF DAYTON, TENNESSEELocal Government

Inadequate controls over preparation of financial statements

Improper controls over grant transactions

2022-001: Inadequate Controls over Preparation of Financial Statements Condition: The City currently does not prepare financial statements under generally accepted accounting principles. The external auditors prepare the statements and disclosures and management approves and takes responsibility for the statements after they are prepared. Criteria: Accounting standards dictate that management is responsible for preparation of the financial statements. An audit of the financial statements of an organization requires the evaluation of the internal control system?s design of controls in generating and overseeing of the financial statements to be audited. The organization must have the ability to prepare and evaluate the financial statements? format, content, and disclosures in accordance with generally accepted accounting principles and recognize any material items missing in the financial statements through the organization?s control system. This is true whether the organization prepares the financial statements or not. These controls can be established or achieved by use of a third party organization or internally, but external auditors are never considered a control element. Cause: The City believes its current reporting meets all of the City?s internal needs. While management knows their responsibility for understanding and presenting the annual financial statements, they do not believe it is currently cost beneficial to design and/or strengthen controls over the accounting departments financial reporting process. Effect: The City does not have proper controls over financial statements preparation. Recommendation: We recommend the City continue to monitor the need, costs, and benefits of developing a control structure to oversee the preparation of financial statements in accordance with generally accepted accounting principles. Management Response: The City feels we meet our internal needs and it is not cost beneficial to hire a third party to prepare the financial statements.

2022-005: Improper Controls over Grant Transactions Condition: The City does not maintain grant files in a systematic manner to identify grant activity within the City?s General Fund, Water and Sewer Fund, Electric Fund, or Sanitation funds. Grant files did not include a reconciliation of grant revenue, expenses, or related deposit and retainage accounts to the general ledger or to the Schedule of Expenditures of Federal and State Awards. This weakness in the current system resulted in grants not identified initially, necessitating numerous revisions and corrections to the Schedule of Expenditures of Federal and State Awards regarding specific identification and names of grants with the associated Catalog of Federal Domestic Assistance (CFDA) number, pass-through number and placement of the grant as a Federal or State grant. Ultimately, City personnel responsible for preparation did not adequately prepare the Schedule of Expenditures of Federal and State Awards. Criteria: Uniform Guidance requires that systematic proper supporting documentation be maintained for grant activity. The Uniform Guidance also dictates that the City is responsible for preparing the Schedule of Expenditures of Federal and State Awards. Cause: Controls do not exist which require all grant information to be documented, reconciled and maintained in an orderly fashion to support grant activity. Effect: Grants could be improperly reported without proper controls. In addition, compliance issues could arise due to lack of controls. Recommendation: We recommend proper controls be established for gathering, naming, identifying, reconciling and maintaining grant documentation. This documentation should be the basis for preparation of the Schedule of Expenditures of Federal and State Awards and support all aspects of grant reconciliation, administration and compliance. Management Response: The current process for grant controls is being re-evalutated to develop stronger controls for gathering, naming, identifying, reconciling and maintaining all grant documents.

2021-001: Inadequate Controls over Preparation of Financial Statements Condition: The City currently does not prepare financial statements under generally accepted accounting principles. The external auditors prepare the statements and disclosures and management approves and takes responsibility for the statements after they are prepared. Criteria: Accounting standards dictate that management is responsible for preparation of the financial statements. An audit of the financial statements of an organization requires the evaluation of the internal control system?s design of controls in generating and overseeing of the financial statements to be audited. The organization must have the ability to prepare and evaluate the financial statements? format, content, and disclosures in accordance with generally accepted accounting principles and recognize any material items missing in the statement through the organization?s control system. This is true whether the organization prepares the financial statements or not. These controls can be established or achieved by use of a third party organization or internally, but external auditors are never considered a control element. Cause: The City believes its current reporting meets all of the City?s internal needs. While management knows their responsibility for understanding and presenting the annual financial statements, they do not believe it is currently cost beneficial to design and/or strengthen controls over the accounting departments financial reporting process. Effect: The City does not have proper controls over financial statements preparation. Recommendation: We recommend the City continue to monitor the need, costs, and benefits of developing a control structure to oversee the preparation of financial statements in accordance with generally accepted accounting principles.

2021-005: Improper Controls over Grant Transactions Condition: The City does not maintain grant files in a systematic manner to identify grant activity within the City?s General Fund, Water & Sewer Fund and Electric Funds. Grant files did not include a reconciliation of grant revenue, expenses, or related deposit and retainage accounts to indicate amounts are reconciled to the general ledger or to the Schedule of Expenditures of Federal and State Awards. This weakness in the current system resulted in grants not being identified initially, necessitating revisions to the Schedule of Expenditures of Federal and State Awards, which further resulted in changes to the testing plan late in the audit process once all grants were identified. Ultimately, the Schedule of Expenditures of Federal and State Awards was not prepared by the City personnel responsible for preparation. Criteria: Uniform Guidance requires that systematic proper supporting documentation be maintained for grant activity. The Uniform Guidance also dictates that the City is responsible for preparing the Schedule of Expenditures of Federal and State Awards. Cause: Controls do not exist which require all grant information to be documented, reconciled and maintained in an orderly fashion to support grant activity. Effect: Grants could be improperly reported without proper controls. In addition, compliance issues could arise due to lack of controls. Recommendation: We recommend proper controls be established for gathering, reconciling and maintaining grant documentation and the preparation of the Schedule of Expenditures of Federal and State Awards.

2020-001: Inadequate Controls over Preparation of Financial Statements Condition: The City currently does not prepare financial statements under generally accepted accounting principles. The external auditors prepare the statements and disclosures and management approves and takes responsibility for the statements after they are prepared. Criteria: Accounting standards dictate that management is responsible for preparation of the financial statements. An audit of the financial statements of an organization requires the evaluation of the internal control system?s design of controls in generating and overseeing of the financial statements to be audited. The organization must have the ability to prepare and evaluate the financial statements? format, content, and disclosures in accordance with generally accepted accounting principles and recognize any material items missing in the statement through the organization?s control system. This is true whether the organization prepares the financial statements or not. These controls can be established or achieved by use of a third party organization or internally, but external auditors are never considered a control element. Cause: The City believes its current reporting meets all of the City?s internal needs. While management knows their responsibility for understanding and presenting the annual financial statements, they do not believe it is currently cost beneficial to design and/or strengthen controls over the accounting departments financial reporting process. Effect: The City does not have proper controls over financial statements preparation. Recommendation: We recommend the City continue to monitor the need, costs, and benefits of developing a control structure to oversee the preparation of financial statements in accordance with generally accepted accounting principles.

2020-005: Improper Controls over Grant Transactions Condition: The City does not maintain grant files in a systematic manner to appropriately identify grant activity. Grant files did not include a reconciliation of grant revenue, expenses, or related deposit accounts to indicate amounts are reconciled to the general ledger or to the Schedule of Federal and State Awards. The City did prepare the Schedule of Federal and State Awards, however it was incomplete, as all grants were not listed with identifying grant numbers. Criteria: Uniform Guidance requires that systematic proper supporting documentation be maintained for grant activity. The Uniform Guidance also dictates that the City is responsible for preparing the Schedule of Federal and State Awards. Cause: Controls do not exist which require all grant information to be documented and maintained in an orderly fashion to support grant activity. Effect: Grants could be improperly reported or not reported without proper controls. In addition, compliance issues could arise due to lack of controls. Recommendation: We recommend proper controls be established for gathering and maintaining grant documentation and the preparation of the Schedule of Federal and State Awards.

2019-001: Inadequate Controls over Preparation of Financial Statements Condition: The City currently does not prepare financial statements under generally accepted accounting principles. The external auditors prepare the statements and disclosures and management approves and takes responsibility for the statements after they are prepared. Criteria: Accounting standards dictate that management is responsible for preparation of the financial statements. An audit of the financial statements of an organization requires the evaluation of the internal control system?s design of controls in generating and overseeing of the financial statements to be audited. The organization must have the ability to prepare and evaluate the financial statements? format, content, and disclosures in accordance with generally accepted accounting principles and recognize any material items missing in the statement through the organization?s control system. This is true whether the organization prepares the financial statements or not. These controls can be established or achieved by use of a third party organization or internally, but external auditors are never considered a control element. Cause: The City believes its current reporting meets all of the City?s internal needs. While management knows their responsibility for understanding and presenting the annual financial statements, they do not believe it is currently cost beneficial to design and/or strengthen controls over the accounting departments financial reporting process. Effect: The City does not have proper controls over financial statements preparation. Recommendation: We recommend the City continue to monitor the need, costs, and benefits of developing a control structure to oversee the preparation of financial statements in accordance with generally accepted accounting principles.

2019-005: Improper Controls over Grant Transactions Condition: The City did not maintain grant files in a systematic manner to appropriately identify grant activity. Various grants are handled by two employees within the City in addition to the Police department handling their grants. The City does not prepare the Schedule of Federal and State Awards. Criteria: Uniform Guidance requires that systematic proper supporting documentation be maintained for grant activity. The Uniform Guidance also dictates that the City is responsible for preparing the Schedule of Federal and State Awards. Cause: Controls do not exist which require all grant information to be documented and maintained in an orderly fashion to support grant activity. Effect: Grants could be improperly reported or not reported without proper controls. In addition, compliance issues could arise due to lack of controls. Recommendation: We recommend proper controls be established for gathering and maintaining grant documentation and the preparation of the Schedule of Federal and State Awards.

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